In its recent judgement in Hala Kamel Zabal and Ors. v. Arya Trading Ltd. and Ors.[1], a Single Judge Bench of the Delhi High Court upheld the applicability of the Supreme Court decision in Narayan Prasad Lohia v Nikunj Kumar Lohia[2] (hereinafter referred to as “Lohia”) and held that the appointment of a sole arbitrator by the High Court, provided under the terms of the arbitration agreement, did not vitiate the arbitral award passed by such arbitrator in an International Commercial Arbitration, on the grounds that the appointment was not in consonance with the Arbitration and Conciliation Act, 1996. (hereinafter referred to as the “Act”).
FACTS OF THE CASE
The “Petitioner no. 1” and “Petitioner no. 2” respectively were the promoters of “Petitioner no.3” (collectively referred to as “the Petitioners”). The Petitioners entered into a Shareholder Agreement with the “Respondent / “Respondent Company”, under which the Respondent acquired equity and certain management rights in Petitioner No. 3.
Dispute arose between the parties, and the Respondent Company alleged exclusion from management despite significant equity and debt contributions.
Both the Petitioners and the Respondent being situated outside India, the dispute fell within the ambit of International Commercial Arbitration as per Section 2(f) of the Act.
However, the Arbitration clause in the Shareholder Agreement, constituting the “Arbitration Agreement” between the parties, inter alia, envisaged that the arbitration be governed in accordance with the Arbitration and Conciliation Act, 1996, in Delhi and the Sole Arbitrator shall be appointed by the Delhi High Court and the Indian law shall be applicable.
The relevant clause is reproduced hereinbelow:
“28.2 In the event a dispute cannot be resolved through conciliation pursuant to Article 27.1 hereof within (15) days of such extended period as parties may agree, a party may refer the dispute or difference to binding arbitration as hereunder provided in accordance with the Arbitration and Conciliation Act, 1996. The arbitration shall be held in New Delhi. A sole Arbitrator shall be appointed by the Chief Justice of the Delhi High Court upon a reference made to him as per the provision of the Arbitration and Conciliation Act, 1996. The applicable law shall be Indian Law. The costs and expenses of such arbitration shall be borne by the concerned parties to the dispute.” (Emphasis Supplied)
A Sole Arbitrator was pointed on the application of the Respondent Company. The Ld. Arbitrator passed an Arbitral Award in favour of the Respondent, which was assailed by the Petitioner herein,
SUBMISSIONS
Petitioner’s Submissions:
The entire arbitral proceedings have taken place behind the backs of the Petitioners, and that the Petitioners had never consented to the appointment of the sole Arbitrator.
The Arbitral Award is liable to be set aside on the grounds inter alia that, the appointment of the Sole Arbitrator by the Delhi High Court was ex facie and ab initio illegal, since it is only the Supreme Court that is empowered to appoint a sole Arbitrator in an International Commercial Arbitration as per Section 11(6) of the Act.
The provision in relation to the appointment of a sole Arbitrator (i.e. Section 11(6)) in an International Commercial Arbitration by the Supreme Court is non-derogable.
The plea with respect to the right to object to the appointment of the sole Arbitrator may be raised at any stage, since the provision with respect thereto is non-derogable, and hence, the said right shall not be deemed waived on part of the Petitioners under Section 4 of the Act.
The impugned Arbitral Award is liable to be set aside under Section 34(2)(a)(v) of the Act, since the arbitral procedure was not in accordance with the agreement of the parties and that the agreement was in conflict of a non-derogable provision (i.e. Section 11(6)) in the Act.
Respondent’s Submissions:
The Petitioners never challenged the appointment of the Ld. Arbitrator during the arbitration proceedings and hence, are estopped from assailing the Arbitral Award on the grounds of invalidity of the appointment of the sole Arbitrator.
The said Arbitral Award is not liable to be set aside since the Act provides the parties the freedom to agree on the procedure to appoint the arbitrator(s) under Section 11(2) of the Act, and hence, the provision in relation to appointment of an Arbitrator in an International Commercial Arbitration by the Supreme Court is derogable.
The said Arbitral Award is not liable to be set aside since it does not satisfy any of the grounds prescribed in Section 34 of the Act.
FINDINGS
The Delhi High Court primarily referred to and relied upon the decision of the Hon’ble Supreme Court of India in Narayan Prasad Lohia v Nikunj Kumar Lohia (2002) 3 SCC 57 which dealt with the issue concerning the interpretation of a “derogable provision” within the context of the Act. In re Lohia, the Supreme Court held that Section 10 of the Act, which deals with the composition of the arbitral tribunal, was a derogable provision.
Per the Supreme Court, to qualify as a “derogable provision” two elements were required to be present:
[1] whether the party had the right under the said law to complain of the breach of the said provision ;
[2] whether the party exercises the option to exercise it, and if yes, at what stage?
In the context of Section 10, the Supreme Court noted that the composition of the arbitral tribunal can be challenged before the arbitral tribunal itself, which is competent to rule on its own jurisdiction under Section 16 of the Act. Hence, if the party chooses to exercise its right to challenge the composition of the arbitral tribunal, it must do so not later than the submission of the statement of defence before the arbitral tribunal under Section 16(2) of the Act. The Supreme Court pertinently noted in this regard that the right available under the law may be exercised at the option of the party, and if the same were not exercised at the prescribed stage, then the party shall be deemed to have waived its right under Section 4 of the Act.
Applying the ratio derived in re Lohia, the Delhi High Court ruled in favour of the Respondent with respect to the validity of the appointment of the arbitrator on the basis of the following:
At the outset, the Delhi High Court noted that the procedure laid down in the arbitral clause of the Shareholders’ Agreement was contrary to the law. However, notwithstanding the same, the Delhi High Court held that the Petitioners could have pleaded the defect in the appointment of the Arbitrator before the Ld. Arbitrator himself under Section 16 of the Act, since the Ld. Arbitrator is competent to rule in his own jurisdiction, including issues raised with respect to the validity of the appointment of such arbitrator. The Delhi High Court noted that the term “jurisdiction” is of wide import, and generally encompasses “all considerations which affect the authority of the tribunal”. On the basis thereof, the Delhi High Court held that the Ld. Arbitrator was competent to rule on the validity of the appointment of the arbitrator. The Petitioners had failed to exercise their right to challenge the said appointment on or before the stage of submission of defence before the Ld. Arbitrator. Hence, they were deemed to have waived their right under Section 4 of the Act.
Furthermore, the arbitral award in the present matter was not liable to be set aside on the grounds of Section 34(2)(a)(v) of the Act. The Delhi High Court held that even when the arbitral procedure was not in accordance with the agreement of the parties, it was necessary to priorly demonstrate that the agreement “itself was in conflict with a non-derogable provision in Part I of the 1996 Act”.
The Delhi High Court vivisected the terms of the arbitration clause in the Shareholders’ Agreement and observed that the arbitration clause comprised two competing requirements: firstly, the requirement of the appointment of the arbitrator being in consonance with the “agreement between the parties” and secondly, the requirement of the arbitration agreement itself being in consonance with the Act. Relying on Lohia, the Delhi High Court held that “precedence was to be accorded to the former consideration rather than the latter”, on the basis that the requirement of the arbitration agreement to be in consonance with the Act does not by itself constitute the sole ground to challenge the arbitral award. In the present case, wherein the Delhi High Court had held Section 11(6) of the Act as a derogable provision, there arose no ground for challenge of the arbitral award where the arbitral procedure was in accordance with the agreement of the parties, but prima facie was not in consonance with the Act.
CONCLUSION
The Delhi High Court has reaffirmed the narrow scope envisaged by the Legislature for setting aside the arbitral award under Section 34 of the Act. Notwithstanding the “unhappily worded” nature of the arbitration clause, the Delhi High Court has endeavoured to accord primacy to the intention of the parties in the agreement over legal technicalities resulting from the unusual procedure laid down for the appointment of the arbitrator. The instant judgement underscores the need to be vigilant about one’s rights arising from the arbitration agreement, which, if not exercised at the right stage, may result in severe detriment to the concerned party.
However, the instant judgment may give rise to questions over the extent to which an arbitration agreement can be upheld when the procedure set out therein appears to be directly in conflict with the statute. The said judgement may have the effect of restricting the remedies available to those aggrieved by such agreements that allow the operation of the Arbitration and Conciliation Act, 1996 with respect to the determination of arbitral procedure.
Authors:
Managing Partner
Mr. Aditya Hawaldar
Associate
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OMP (Comm) 252/2016 and Connected Matters
(2002) 3 SCC 57
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