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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.

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