Employee Of Disputing Party Cannot Appoint Arbitrator After 2015 Amendment To Arbitration Act: Delhi High Court

The Delhi High Court recently reiterated that an employee of a party to a dispute cannot appoint an arbitrator on its behalf under amended Section 12(5) of the Arbitration and Conciliation Act, 1996.

Section 12(5) makes persons having certain relationships with a party or the dispute ineligible to act as arbitrators. The restriction can be waived only through an express written agreement between the parties after the dispute has arisen.

The court referred to the Supreme Court's rulings in Bhadra International (India) Pvt. Ltd. v. Airports Authority of India and Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) on the ineligibility of arbitrators and equal participation in the appointment process.

Relying on these principles, Justice Avneesh Jhingan observed, "After amendment of Section 12(5) of the Act an employee of a party in dispute can neither be appointed arbitrator nor can nominate or appoint any other person as an arbitrator. The unilateral appointment in absence of an express agreement in writing between the parties to waive applicability of Section 12(5) of the Act is void ab initio. The filing of the statement of claim or participation in the arbitral proceedings cannot be construed as waiver under the proviso to Section 12(5) of the Act."

The present ruling came in Bharat Heavy Electricals Limited's (BHEL) challenge to an arbitral award in its dispute with Fitwell Constructions over a subcontract for the Tapovan Vishnugad Hydro Electric Project in Uttarakhand.

BHEL had been awarded the main contract by National Thermal Power Corporation Limited (NTPC) and issued a Letter of Intent to Fitwell on September 27, 2010. The parties later entered into a ₹13.93 crore contract on February 21, 2011, with April 11, 2013 as the stipulated completion date.

Disputes later arose over delays in execution of the work and payment of compensation. Fitwell issued a notice on August 3, 2020 seeking reference of the disputes to arbitration.

BHEL appointed the sole arbitrator on August 16, 2021. The proceedings eventually resulted in an arbitral award dated February 8, 2023.

BHEL then approached the Delhi High Court to challenge the award.

BHEL argued that the arbitrator's appointment violated Section 12(5), read with the Seventh Schedule. It also contended that Fitwell had acknowledged in its written submissions that the arbitrator was selected from a curated panel constituted by BHEL.

Fitwell argued that the appointment was joint because BHEL had proposed three names and Fitwell had selected one of them. It also maintained that the names were not necessarily from a panel maintained by BHEL and that it was not mandatory to select an arbitrator from those names.

The court rejected Fitwell's contention that the appointment was joint. It held that BHEL had limited Fitwell's choice in selecting the arbitrator, violating Section 18 of the Act, which requires equal treatment of the parties.

The court observed, “Be that as it may, it is a case of limiting the choice of the other party in appointing the arbitrator and is violation of Section 18 of the Act.”

The court then considered whether Fitwell had waived its objection to the appointment. It held that waiver under Section 12(5) requires an express written agreement between both parties after the dispute has arisen.

The court also made clear that participation in the arbitration or filing a statement of claim cannot by itself amount to such a waiver.

Fitwell had specifically objected in its Section 21 notice to the appointment of a BHEL employee as arbitrator. The court held that this showed there had been no waiver of the protection under Section 12(5).

The court relied on the Supreme Court's ruling in Bhadra International (India) Pvt. Ltd. v. Airports Authority of India, which held that waiver cannot be inferred through conduct and must be an express written agreement.

The court also referred to the Delhi High Court Division Bench ruling in Mahavir Prasad Gupta and Sons v. Government of NCT of Delhi. It held that an ineligible arbitrator's lack of jurisdiction goes to the root of the proceedings and that an award passed by such an arbitrator is a nullity.

Finding that no valid waiver existed, the court held that BHEL's appointment of the arbitrator violated Section 12(5), read with the Seventh Schedule.

The court ruled, “In the absence of compliance of proviso to Section 12(5) of the Act by the parties, the appointment of the arbitrator by the BHEL is in violation of Section 12(5) read with Seventh Schedule of the Act.”

The court further held that the appointment was void ab initio and rendered the arbitral award a nullity. It accordingly allowed BHEL's challenge and set aside the February 8, 2023 award.

For Petitioner (Bharat Heavy Electricals Limited): Advocates Vidur Bhatia, Mrinal Gupta.

For Respondent (Fitwell Constructions): Advocates Govind Manoharan, A. Karthik, Smrithi Suresh.