Skip to main content

Arbitration - Challenging the impartiality of the arbitrator and response to the challenge

In a recent case, the Bombay High Court has ruled that merely agreeing to allow one party to appoint arbitrators does not, in any way, forfeit the other party's right to object to the actual appointment. One valid ground for raising such an objection is questionable bias. The court ruling also establishes that once a party raises the objections, the arbitrator must give them a chance to present their case. Passing an award without hearing these objections, even if it is not addressed through a formal application, will be considered illegal. However, the arbitral tribunal itself will deal with such matters, even in cases involving a sole arbitrator. Therefore, if the tribunal is of the opinion that the appointment is fair and just, it will continue with the proceedings and pass the award.

The landmark judgement

In 2011, The Loot (India) Private Ltd took a Rs 2 crore loan from Reliance Capital. As per the signed agreement, the latter reserved the right to appoint a sole arbitrator in case of any dispute. The following year, the nonbanking financial intermediary issued a legal notice to the company on grounds of EMI defaults and invoked the arbitration clause. The arbitrator appointed by the NBFC sent two notices, a month apart, to The Loot to appear for a hearing. The second notice clearly stated that if the company officials failed to make an appearance, the matter would be decided ex parte, that is, without hearing the opposite party.

During this period, The Loot sent a letter to the arbitrator, seeking clarification regarding the proceedings and objected to the appointment. However, the arbitrator responded to only certain queries and dismissed the others as 'irrelevant'. When the company failed to appear before the arbitrator on the appointed date, the latter passed an ex parte award.

The Loot then appealed to the Bombay High Court to set aside the award, and recently won the case on the basis of its letters questioning the impartiality of the appointed arbitrator.

Though the defendants cited Section 13 of the Arbitration and Conciliation Act, it states that a party must file a written application stating the grounds of objecting to the arbitrator and pointed out the lack of any such formal application in the case, the high court held that the arbitrator should have treated The Loot's letters as such. Hence, the arbitrator had not given The Loot a fair chance to be heard. The court also ruled that the arbitrator should have first sorted out the issues raised by The Loot before proceeding to adjudicate the matter. Since the arbitrator did not hear the other party, it cannot be said that there was a consensus on the appointment of the arbitrator, and hence, an award should not have been passed.

Comment:
This judgment is important. It is evident from reading the actual judgment, Reliance did reply to some of the objections/queries raised by Loot and to others did not give any proper reply stating them to be irrelevant.
The law clearly states that each side has the right raise objections - which of course need to be justifiable and if the arbitrator continues with the triibunal has the right to decide on the objection. At that stage the objector does not have any other recourse. However, after the decree, the objector can approach the high court for setting aside the decree citing the objections.
In this matter, the important point is that, the judge has said, though by agreement one side has the absolute authority to appoint an arbitrator, it does not preclude the other side from objecting and the said objection should be properly replied to.
These laws were always there. Difference is that this judgment deals with the sole arbitrator and agreement between both parties that one of them will have the right to appoint the arbitrator.
Loan agreements of financial companies generally have these types of  arbitration clause for faster resolution. This judgment will definitely have impact on on all those agreements. Considering human nature, the finance companies will now face objection in very instance and then take the matter to the high court.
However, unfortunately that problem was always there. What the court needs to do is to dismiss the applications with heavy cost if the objections are frivolous.

Comments

Most viewed this month

Amendment of plaint under Order VI Rule 17 of the CPC explained

Cause Title :  Ganesh Prasad vs Rajeshwar Prasad, SLP (C) NO. 28377 OF 2018, Supreme Court Of India Date of Judgment/Order : 14/3/2023 Corum : J. B. Pardiwala, J. Citied:  Revajeetu Builders and Developers v. Narayanaswamy & Sons and Others reported in (2009) 10 SCC 84 North Eastern Railway Administration, Gorakhpur v. Bhagwan Das reported in (2008) 8 SCC 511 P.A. Jayalakshmi v. H. Saradha and Others reported in (2009) 14 SCC 525 B.K. Narayana Pillai v. Parameswaran Pillai and Another reported in (2000) 1 SCC 712 A.K. Gupta and Sons Ltd. v. Damodar Valley Corporation reported in AIR 1967 SC 96 Life Insurance Corporation of India v. Sanjeev Builders Private Limited and Another, Civil Appeal No. 5909 of 2022 dated 01.09.2022 Firm Sriniwas Ram Kumar v. Mahabir Prasad and Others reported in AIR 1951 SC 177 G. Nagamma and Another v. Siromanamma and Another reported in (1996) 2 SCC 25 Praful Manohar Rele v. Krishnabai Narayan Ghosalkar and Others reported in (2014...

Interim order staying the operation of an impugned order vs quashment of an impugned order

In Deific Abode LLP vs Union of India & Ors., while discussing on the issue of interim order staying the operation of an impugned order and the quashment of an impugned order, the Calcutta High Court observed that :- These salient principles emerge: i. As per the law laid down in Shree Chamundi Mopeds Ltd (supra) by the Supreme Court, the effect of an interim order staying the operation of an impugned order and the quashment of an impugned order are considerably different from one another. While the former merely ensures that the order impugned would not be operative from the date of the passing of the order of stay, without annihilating the said impugned order from existence, the latter ensures that such quashment results in the restoration of the position as it stood on the date the impugned order was passed, with the impugned order ceasing to exist in the eyes of the law. ii. Quashment of such impugned order would revive the appeal before the appellate authority and would be con...

Ruling on applicability of threshold limit for withholding obligation in relation to sale of immovable property

In Vinod Soni and others (Taxpayer) v. ITO, the issue before the Delhi Income Tax Appellate Tribunal was whether any withholding obligation triggers on the joint buyers if the cost of the immoveable property is more than specified limit of INR5M but the share of each co-owner is less than that value. Income tax laws cast an obligation on the buyer to withhold tax on payment to seller of consideration for transfer of immoveable property if value of consideration exceeds INR5M. The Tribunal held that in a case of joint acquisition of an immovable property by various co-owners, the threshold limit of withholding obligation (i.e. INR5M) is applicable with reference to share of each co-owner and not with reference to consideration of entire property. Accordingly, the Tribunal deleted tax withholding demand raised on co-owners by the Tax Authority. Article referred: https://www.ey.com/Publication/vwLUAssets/delhitrib/%24FILE/delhitrib.pdf