One Party's Arbitrator Cannot Act As Sole Arbitrator If Other Fails To Nominate: Karnataka High Court

The Karnataka High Court on 31 August held that where an arbitration agreement gives both parties the right to nominate an arbitrator, one party's nominee cannot proceed as the sole arbitrator merely because the other party failed to make its nomination. The party that has exercised its right to nominate must instead approach the Court under Section 11(6) of the Arbitration and Conciliation Act, 1996.

A Division Bench of Justices S. Sunil Dutt Yadav and K.G. Shanthi allowed Lotus Landmarks' appeal against the dismissal of its challenge to an arbitral award, holding that the nominee appointed by RVP City Owners could not have proceeded as the sole arbitrator. The judges observed:

“Where an Arbitration Clause provides for nomination of an Arbitrator by each of the parties, the exercise of such option by one of the parties and non-exercise of such option by the other party does not ipso facto lead to abandonment of procedure prescribed under Section 11(6) of the Arbitration Act and resort to proceedings by a nominee of one of the parties is impermissible.”

The dispute arose from a Joint Venture Agreement dated 17 April 2016 under which Lotus Landmarks, a land developer, undertook to develop the “RVP City” layout near Kanbargi Road, Belagavi. The developed residential plots were to be shared between the parties, with the project to be completed within 24 months and a six-month grace period.

After the death of one of the landowners, a dispute arose. Shrinivas Ramkrishna Pavuskar, one of the owners, issued a letter on 17 November 2017 stopping the development work and claiming Rs. 1.01 crore in damages.

Clause 25 of the agreement provided that the party raising a dispute would nominate an arbitrator in its notice, while the other party would have 30 days to nominate its arbitrator. The two nominees could thereafter appoint an umpire.

The owners invoked the arbitration clause on 9 January 2018 and appointed their nominee on 10 January 2018. Lotus Landmarks did not nominate an arbitrator within the stipulated period. The owners then instructed their nominee to proceed, following which he assumed the role of sole arbitrator.

The sole arbitrator passed an award on 28 January 2019 directing Lotus Landmarks to pay Rs. 2.21 crore and Rs. 25 lakh as compensation, both carrying 18% annual interest. The award also terminated the Joint Venture Agreement and General Power of Attorney.

Lotus Landmarks challenged the award under Section 34 of the Arbitration Act. The Principal District Judge, Belagavi dismissed the challenge on 22 April 2022, prompting Lotus Landmarks to approach the High Court under Section 37. It argued that the sole arbitrator's appointment was contrary to the procedure agreed between the parties and that it had not consented to the nominee acting alone.

RVP City Owners contended that Lotus Landmarks had waived its objection by participating in the arbitral proceedings and furnishing documents. They also argued that its failure to nominate an arbitrator meant that there was no need to approach the Court.

The High Court rejected this contention, holding that Lotus Landmarks' failure to nominate an arbitrator did not authorise the owners' nominee to proceed alone. It observed:

“In such circumstance, the party having exercised his power to nominate was required to approach the Court under Section 11(6) for appointment of his nominee Arbitrator.”

The Bench said the procedure agreed between the parties, under which each party had the right to nominate an arbitrator and the nominees could appoint an umpire, was intended to ensure party autonomy and fairness in constituting the arbitral tribunal. It held:

“In the present case, party autonomy and the principle of fairness is sought to be ensured in the process of the constitution of the Arbitral Tribunal by providing for both parties to be vested with the right to make a nomination and the nominees in turn could appoint an umpire”.

Further, the judges held that permitting one party's nominee to proceed alone by disregarding the other party's right to nominate would “negate the principle of fairness and party autonomy” and violate the requirement of equal treatment under Section 18 of the Arbitration Act.

The Bench rejected the plea of waiver, noting that Lotus Landmarks had objected at an early stage to the sole arbitrator continuing with the proceedings and had expressed its intention to appoint its own nominee.

Ultimately, the High Court held that the tribunal suffered from “de jure invalidity” for failure to follow Clause 25, rendering the arbitral proceedings a nullity.

Appearances for appellant (Lotus Landmarks (India) Pvt. Ltd.): Senior Advocate S.S. Naganand, for Advocate S.B. Hebballi.

Appearances for respondents (RVP City Owners & Ors.): Senior Advocate Anant Mandagi, for Advocate Mrutyunjaya Tata Bangi.