Executing Court Cannot Reject Award Where Parties Mutually Nominated Arbitrator: Kerala High Court

The Kerala High Court on 4 August held that an executing court cannot refuse to enforce an arbitral award on the ground of unilateral appointment of the arbitrator when the parties themselves had mutually nominated the arbitrator in their agreement.

Justice Easwaran set aside an order of the Additional District Court, Kozhikode, which had dismissed an execution petition filed by Hedge Finance Limited to enforce an arbitral award for Rs. 3.47 lakh with 18% interest against Sangeetha A.V. The Bench held:

“In the scheme of the Arbitration and Conciliation Act, 1996, the opposite party, if aggrieved by the award, has to apply for setting aside the same by filing an application under Section 34 of the Act. If the party has not moved any application for setting aside the award, the enquiry under Section 47 of the CPC cannot be enlarged to such an extent, so as to obliterate the award itself unless the award is found to be a nullity.”

Hedge Finance Limited had secured an arbitral award declaring it entitled to recover Rs. 3.47 lakh along with interest at 18% per annum from Sangeetha A.V. The award arose from a loan agreement executed between the parties on 16 December 2019.

When Hedge Finance sought to execute the award, the District Court dismissed the execution petition, holding that the arbitrator's unilateral appointment could not be sustained in view of the Kerala High Court's decision in Hedge Finance Private Ltd. v. Bijish Joseph.

Justice Easwaran noted that the execution petition had been dismissed without even hearing the respondent, indicating that the objection regarding the executability of the award had been raised by the executing court itself. Hedge Finance challenged the dismissal before the High Court.

The High Court first considered whether an executing court could raise an objection regarding the executability of an arbitral award. It observed that an executing court's power to examine the executability of a decree is traceable to Section 47 of the Code of Civil Procedure.

However, considering the scheme of the Arbitration and Conciliation Act, 1996, the Bench held that where a party had not challenged the award under Section 34 of the Act, the enquiry under Section 47 could not be expanded to effectively invalidate the award unless it was a nullity.

On whether the arbitrator's appointment was unilateral, it perused the loan agreement and found that the parties had themselves agreed to nominate the arbitrator. The arbitration clause specifically recorded that all the parties mutually agreed to appoint S. Nidheesh, Advocate, as the independent and impartial sole arbitrator. The Court observed:

“The parties have themselves agreed to nominate a person as an arbitrator. If the parties chose to reduce their bargain in writing and agreed on a particular person as arbitrator, then his appointment cannot be termed as unilateral and can only be construed as one by consent.”

It further held that the nomination of an arbitrator by both parties does not attract the bar under Section 12(5) of the Arbitration and Conciliation Act, 1996, which restricts the appointment of certain persons as arbitrators. Such nomination, the Court said, can be made either before a dispute arises or after the dispute has arisen.

The Bench noted that the executing court had relied on Hedge Finance Private Limited v. Bijish Joseph to conclude that the arbitral award could not be executed. However, in Bijish Joseph, the arbitration clause provided for appointment of the arbitrator by the financier, whereas in the present case, the parties themselves had mutually nominated the arbitrator. It noted:

“In the above backdrop, this Court finds that reliance placed on by the executing court in the decision in Bijish Joseph (supra) is totally misconceived and amounts to judicial impropriety.”

However, the Bench clarified that its ruling should not be construed as giving approval to arbitral awards passed pursuant to unilateral nomination by one party. It also cautioned District Courts against mechanically dismissing execution petitions on the ground of unilateral appointment without examining the factual circumstances of each case.

Accordingly, the High Court set aside the District Court's order and directed it to proceed with the execution petition in accordance with law.

For Petitioner: Advocate Shiju Varghese