In its recent decision in Oyo Hotels and Homes Pvt Ltd v Rajan Tewari,(1) while adjudicating a petition filed under section 11(6) of the Arbitration and Conciliation Act 1996 (the act), the Delhi High Court held that when the appointment of an arbitrator is non est (ie, not in accordance with the agreed procedure), then such an appointment can be ignored and the aggrieved party is within its rights to approach the court for the appointment of arbitrator under section 11 of the act.
The petitioner and the respondents entered into a lease agreement dated 27 May 2019 in respect of a property situated in New Delhi (the premises), which was jointly owned by the respondents. Thereafter, the premises were upgraded and used by the petitioner for its business activities as particularly provided for under the lease agreement. Subsequently, the covid-19 pandemic financially affected the petitioner's business. On 27 March 2020 the petitioner invoked the force majeure clause under the lease agreement. Accordingly, discussions were held between the parties and they decided to enter into an interim financial arrangement.
Petitioner's submissions
The petitioner argued that the disputes had arisen between the parties in relation to the building approval that was required to run the premises as a commercial establishment, which had been agreed under the lease agreement. The petitioner contended that the respondents had failed in their obligations to submit the required documents in respect thereof. Accordingly, the petitioner contended that the respondents had been in breach of the lease agreement. Instead of complying with said agreement, the respondents had claimed monies from the petitioner and, via a notice dated 23 June 2020, initiated arbitration accordingly, citing the existence of disputes between the parties arising under the lease agreement.
The respondents had nominated a retired judge as the sole arbitrator to adjudicate the disputes in accordance with the arbitration clause contained in the lease agreement. Despite there being no confirmation from the petitioner or mutual agreement, the respondents had confirmed the arbitrator's appointment. Thereafter, the arbitrator had issued to the parties a notice dated 12 August 2020 for the preliminary hearing to be held on 29 August 2020. This was the first time that the petitioner had become aware of the arbitrator's appointment. In response, the petitioner had objected and sought to cancel the preliminary hearing via a letter dated 26 August 2020. In spite of the petitioner's objections, the arbitrator had gone ahead with the hearing as scheduled on 29 August 2020. The petitioner contended that it had raised objections during the proceedings that the arbitrator had not been appointed as per the agreed procedure. The petitioner contended that the arbitrator's appointment was illegal.
Respondents' submissions
The respondents submitted that the petitioner had been delaying the payment of pending monthly rent since March 2020 and that, after repeated reminders, the respondents had been forced to initiate arbitration, to which the petitioner had failed to respond. The respondents further pleaded that the petitioner, having acquiesced to the arbitrator's appointment and attended the first hearing, had not resorted to any challenge within a reasonable time. Thus, the respondents had deemed the arbitrator's appointment to have been accepted by the petitioner.
The respondents also contended that the petition was infructuous since the arbitrator, upon reference, had already given their consent to adjudicate the disputes between the parties, as arising from the lease agreement. The respondents also objected to the maintainability of the section 11 petition. The respondents contended that under the guise of section 11 of the act, the petitioner was seeking to terminate the mandate of the arbitrator already appointed, which is neither permissible nor within the ambit of section 11(6) of the act. In any event, the respondents submitted that the petitioner would have been within its rights to challenge the arbitrator's jurisdiction under sections 12-15 of the act, but the petitioner had not done so.
The Delhi High Court examined the arbitration clause as contained in the lease agreement and observed that, as per said clause, it was clear that the arbitrator's appointment had to be made by both of the parties. In view of this, the Court held that the since the petitioner had not responded to or confirmed the arbitration invocation notice, the only recourse thereafter available to the respondents was to approach the court under section 11 of the act and seek the court's appointment of an arbitrator. Thus, the Delhi High Court concluded that in view of the arbitration clause as contained in the lease agreement, as the arbitrator's appointment had been based only on the respondents' nomination, it was non est and so could be ignored.
As to the respondents' plea regarding the maintainability of the petition, the Court, after considering the Supreme Court's findings in Walter Bau Ag, Legal Successor of the Original Contractor, Dycheroff & Widmann AG vs Municipal Corporation of Greater Mumbai(2) and other recent jurisprudence on the subject matter,(3) held that when the arbitrator's appointment is not in accordance with the agreed procedure, the petitioner is well within its rights to approach the court for the appointment of an arbitrator under section 11 of the act. The Delhi High Court also rejected the argument of the petitioner's acquiescence, considering the petitioner's objections throughout the process and during the preliminary hearing. Based on the aforementioned findings, the Court held that the arbitrator's appointment, resulting only from the respondents' nomination, was in contravention to the arbitration agreement and principles of law. Accordingly, the Court appointed another arbitrator to adjudicate the disputes between the parties under the lease agreement.
Section 11 of the act provides for the appointment of arbitrators, in the manner as agreed between the parties. Failing any agreement between the parties regarding the arbitrator's appointment within the stipulated time, section 11 allows a party to approach the court for the appointment of an arbitrator. Section 11(6) of the act, among other things, also specifically allows a party to approach the court when the appointment of an arbitrator is not per the procedure agreed between the parties. Thus, section 11(6) of the act empowers the court to take the necessary measures when a party fails to appoint an arbitrator as per the agreed procedure.
In Antrix Corpn Ltd v Devas Multimedia (P) Ltd,(4) the Supreme Court referred the issues involving the court's power under section 11(6) to interfere and constitute another tribunal to a larger bench. This larger bench's decision was passed on 13 May 2013 by a two-judge bench of the Supreme Court, which essentially held that the appointment of an arbitrator can be challenged by taking recourse under sections 12-15 of the act or thereafter under section 34 of the act, but not under section 11(6) of the act. These findings were subsequently followed by the Supreme Court's decision in Pricol Ltd v Johnson Controls Enterprise Ltd.(5)
However, the Supreme Court has subsequently taken a different view on the issue. In Walter, it held that the arbitrator's appointment must be in strict compliance with the agreed procedure, unless the arbitrator's appointment is ex facie valid and such an appointment satisfies the court when exercising its jurisdiction under section 11(6) of the act. Until then, acceptance of such an appointment cannot be countenanced in law and a court in such a situation can use its powers as per section 11(6) of the act. In Walter, the Supreme Court considered the findings in Antrix and Pricol. However, the Court distinguished these judgements based on their facts and circumstances. The legal position taken in Walter has also been subsequently followed in other judgments(6) of the Delhi High Court and the Supreme Court.
In view of the evolving case law on this matter, it would seem that the Supreme Court's findings in Antrix were largely based on the facts and circumstances of that case. The Antrix decision was also based on the doctrine of kompetenz-kompetenz, which is reflected in section 16 of the act, and provides the arbitral tribunal with the power to rule on its own jurisdiction and also on the validity of its constitution. On the other hand, the subsequent decisions of the Supreme Court and the findings of the Delhi High Court in the present case help to safeguard the sanctity of agreements between parties.
For further information on this topic please contact Aniketh Nair or Anant Tripathi at Clasis Law by telephone (+91 22 4910 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
Endnotes
(3) Naveen Kandhar v Jai Mahal Hotels Pvt Ltd, (Arb P 453/2017) and Manish Chibber v Anil Sharma (Arb P 249/2020).
(6) TRF Ltd v Energo Engg Projects Ltd (2017) 8 SCC 377; Perkins Eastman Architects DPC v HSCC (India) Ltd 2019 SCC OnLine SC 1517; Naveen Kandhar v Jai Mahal Hotels Pvt Ltd (Arb P 453/2017) and Manish Chibber v Anil Sharma (Arb P 249/2020).