Participation In Arbitration Cannot Validate Tribunal Not Constituted As Per Law: Calcutta High Court

Participation in arbitration proceedings cannot validate proceedings before a tribunal that was not constituted in accordance with law, the Calcutta High Court has held while setting aside an arbitral award in a dispute between Tata Steel Limited and MSP Sponge Iron Limited.

“The participation of the petitioner before a forum which was not constituted as per law and did not have the jurisdiction to decide the dispute is inconsequential. A party who cannot act as an arbitrator, cannot also choose an arbitrator," Justice Shampa Sarkar held.

The dispute arose out of an agreement dated October 31, 2014 between Tata Steel and MSP Sponge Iron. The arbitration clause provided that disputes would first be attempted to be resolved through consensus, failing which they would be referred to an arbitrator appointed by the seller or its nominee in accordance with the Rules of Arbitration of the Indian Council of Arbitration.

In March 2017, MSP Sponge Iron invoked arbitration and unilaterally sought to appoint a senior advocate as sole arbitrator.

Tata Steel objected to the appointment in a letter dated April 17, 2017, saying it was contrary to the Arbitration and Conciliation Act, 1996.

The arbitration, however, went ahead. Tata Steel questioned the tribunal's jurisdiction, but that challenge failed. Both sides then went on to lead evidence and make their final submissions before the sole arbitrator delivered the award on January 5, 2023.

Tata Steel then moved the High Court, arguing that because the arbitrator had been appointed unilaterally, the entire process was legally unsustainable from the outset, making the award itself a nullity.

It contended that participation in the proceedings could not cure the defect, as there can be no estoppel against statute.

MSP Sponge Iron opposed the plea, arguing that Tata Steel had knowingly participated in the arbitration, examined witnesses, and allowed the proceedings to continue till the award was passed. It also contended that Tata Steel had waived its objection by not opposing the extension of the arbitrator's mandate before the High Court under Section 29A.

Rejecting the contention, the court held that waiver of statutory ineligibility could only be through an express written agreement after disputes had arisen.

“There was no express agreement between the parties, agreeing to waive any objection with regard to applicability of Section 12(5) of the said Act,” the court held.

The court further held that participation in the arbitration or filing applications relating to extension of the arbitrator's mandate could not amount to waiver.

“Participation in an arbitration proceeding per se does not qualify as an express agreement in writing to waive the objection under Section 12(5) of the said Act. The appointment of an arbitrator being bad in law, the agreement to waive theapplicability of the said section was required to be declared so. ,” the court held.

The court also rejected the argument that Tata Steel was barred from raising the objection at the stage of challenging the award.

Relying on Supreme Court decisions including Bhadra International, it held that an award passed by an ineligible arbitrator is void, non-est and contrary to public policy.

“Under such circumstances, nothing prevents the petitioner from challenging the award passed by a unilaterally appointed arbitrator, by filing an application under Section 34 of the said Act. The constitution of the arbitral tribunal was itself invalid,” the court held.

Accordingly, the court set aside the arbitral award.