In a relief to Bhadra International, the Supreme Court ruled that the words “an express agreement in writing” in the proviso to Section 12(5) of the Arbitration & Conciliation Act, 1996, mean that the right to object to the appointment of an ineligible arbitrator cannot be taken away by mere implication. The agreement referred to in the proviso must be a clear, unequivocal written agreement.
The Court clarified that the Arbitration & Conciliation Act, 1996, does not recognise the conferral of jurisdiction on an arbitral tribunal without the consent of the parties. Accordingly, by entering into an express agreement in writing as per the proviso to Section 12(5) of the 1996 Act, the parties not only waive the ineligibility of the proposed arbitrator but also consent to his appointment.
Adjudicating on the dispute that arose from License Agreements executed between the Appellants’ consortium and the Respondent (Airports Authority of India) for providing ground handling services, the Court explained that in arbitration law, the consent of parties confers subject-matter jurisdiction, i.e., the authority to decide the dispute. When an arbitral tribunal is unilaterally constituted without the consent, it divests the tribunal of subject-matter jurisdiction.
The Court also pointed out that a challenge to an arbitrator’s ineligibility could be raised at any stage because an award passed in such circumstances is non-est, i.e., it carries no enforceability or recognition in law, as an arbitrator does not possess the jurisdiction to pass an award. In arbitration, the parties vest the jurisdiction in the tribunal by virtue of a valid arbitration agreement and an appointment made in accordance with the provisions of the Act, 1996.
In this context, the Court explained that jurisdiction means the authority of an arbitral tribunal to render a decision affecting the merits of the case. An arbitrator who lacks jurisdiction cannot make an award on the merits. Thus, the jurisdiction of the arbitral tribunal is distinct from the admissibility of the dispute, i.e., the arbitrability of the claims.
A Two-Judge Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan observed that where a party is aggrieved by the ineligibility of an arbitrator under Section 12(5), it may directly approach the court under Section 14 of the Act, 1996. When an arbitrator is ineligible under Section 12(5), i.e., he lacks inherent jurisdiction to hold the position, his mandate stands automatically terminated, and the parties don’t need to challenge his appointment under Section 12 read with Section 13.
The Bench explained that an application under Section 14 is made for the purpose of terminating the mandate of the arbitrator, and, consequently, a substitute arbitrator is appointed in terms of Section 15(2). As regards where the mandate of the arbitrator has been terminated with the consent of both parties under Section 15(1)(b), it is not required for the parties to approach the court to seek termination of the mandate of the arbitrator, because it has been terminated by the parties themselves.
The Bench went on to observe that the termination of the mandate of the arbitrator does not result in the termination of arbitral proceedings. The proceedings remain intact; only the composition of the arbitral tribunal changes. The termination of the mandate of the arbitrator is distinguishable from the termination of the arbitral proceedings and of the arbitral tribunal as well.
On the issue of the effect of the invocation notice, the Bench clarified that a notice invoking arbitration under Section 21 merely sets the arbitration agreement into motion and does not operate as consent to any future appointment to be made. Further, on the issue of an express agreement in writing, the Bench analysed the proviso to Section 12(5) and held that a waiver of ineligibility must be by an “express agreement in writing” entered into after the disputes have arisen. This requires a conscious and unequivocal expression of intent to relinquish the right to object, with full knowledge of the arbitrator’s ineligibility.
The Bench explicitly held that a waiver cannot be inferred from conduct. The statutory design, which uses the term ‘express’, differentiates this waiver from the “deemed waiver” under Section 4 of the 1996 Act. The Bench elucidated certain acts as ‘deemed insufficient’ to constitute an express agreement in writing, such as the recording of “no objection” in a procedural order; filing of a statement of claim; jointly filing applications for extension of time under Section 29A; and continued participation in the arbitral proceedings.
Briefly, the dispute arose from two License Agreements executed between the Appellants’ consortium and the Respondent (Airports Authority of India) for providing ground handling services. The agreements contained an arbitration clause which stipulated that all disputes shall be referred to the sole arbitration of a person to be appointed by the Chairman of the Authority. Following the emergence of disputes in 2015, the Appellants invoked arbitration, and the sole arbitrator appointed by the Respondent passed the first procedural order with a ‘Nil’ award, rejecting the claims and counter-claims of both parties. The Appellants challenged this award by filing applications under Section 34 of the Act, 1996, and sought to amend these applications to include the ground that the arbitrator was appointed unilaterally and was therefore ineligible, rendering the award liable to be set aside.
The Single Judge rejected the Appellants’ preliminary objection, holding that the appointment was made in accordance with the agreed procedure. It was observed that the arbitrator did not suffer from any disqualification and that the Appellants had waived the applicability of Section 12(5) by not objecting, as explicitly recorded in the first procedural order. The Division Bench also affirmed the Single Judge’s order, holding that the appointment was not unilateral as it was made pursuant to the Appellants’ written request. The Court noted the Appellants’ continued participation in the proceedings without objection and concluded that by their conduct, they had submitted to the jurisdiction of the sole arbitrator.
Appearances:
Senior Advocate Navin Pahwa and Ashish Mohan, AOR Akshit Pradhan, and Advocate Akshit Mago, for the Appellant
Senior Advocate Parag Tripathi, AOR Sukanya Lal, along with Advocates Sonal K Singh, Ayan De, Shivang Singh, and Anmol Adhrit, for the Respondent
