Unilateral Appointment, Non-Disclosure and Waiver in a Rs 310 Crore Arbitration
An EPC contractor and a state-owned utility sign a Rs 310 crore construction contract governed by Indian law, seated in Mumbai. Clause 27 provides for a sole arbitrator 'to be appointed by the Managing Director of the Utility from its panel of retired officers'. The MD appoints a retired Additional Chief Engineer who served under that MD and whose name was added to the panel six months earlier. The arbitrator's Section 12 declaration is silent on this connection. The contractor participates in three preliminary hearings, files counterclaims, and objects only after a social-media post reveals the connection. The tribunal overrules the objection and makes an award of Rs 46 crore against the contractor. The contractor files a challenge; the utility presses for enforcement.
1. Is the appointment invalid under Section 12(5) read with the Seventh Schedule?
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The analysis must separate the appointing authority from the appointee.
Appointing authority. A clause allowing one party's managing director to nominate the arbitrator is not automatically invalid. The prevailing position is that such a clause survives if the person actually appointed is independent and eligible; the vice is curable by the chosen arbitrator's independence, not fatal to the clause itself. So Clause 27 is not void merely because the MD is the utility's officer.
Appointee. The real question is the retired officer's relationship with the utility. A past employment or advisory relationship with a party is a recognised ineligibility indicator, and the Seventh Schedule lists past or present business relationships with a party as a disqualification. A person who served under the very MD who now appoints him, from a panel recently expanded to include him, falls within the mischief. He was also obliged to disclose this in his Section 12 declaration and did not.
Consequence. If the ineligibility is established, the appointment is void and the tribunal was improperly constituted - a ground that goes to jurisdiction, not merely to the merits. This is a stronger footing than a complaint about the award's reasoning.
2. Does the contractor's conduct amount to waiver under Section 4?
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Waiver requires knowledge of the non-compliance and continued participation without objection. Two facts cut against waiver here: the contractor did not know of the relationship until the social-media disclosure, and it objected promptly once it did.
More importantly, the ineligibility under Section 12(5) read with the Seventh Schedule is not an ordinary derogable provision. The proviso permits waiver only by an express written agreement after the dispute has arisen. There is no such writing. A party cannot waive this ground by conduct, and Section 4 cannot be used to convert silence into consent to an ineligible tribunal.
The utility will argue that filing counterclaims and participating in three hearings shows acceptance. That argument would be strong for a procedural irregularity - a late objection to the venue, a delayed challenge to document production - but it does not reach the composition of the tribunal. The objection should be treated as maintainable even though it came after the first hearings.
3. What is the standard for setting aside under Section 34, and would 'patent illegality' help the contractor here?
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The standard. A challenge is not an appeal. The court does not re-appreciate evidence or substitute its view on the merits. The grounds are narrow: incapacity, an invalid agreement, lack of notice, an award beyond the scope of the reference, improper composition of the tribunal, or a conflict with the public policy of India.
Composition route. The strongest ground is that the tribunal was improperly constituted because an ineligible person sat as arbitrator. That is a jurisdictional defect, not a merits error, and it survives the narrow scope of review.
Patent illegality. For a domestic award, a patent illegality appearing on the face of the award is a ground, but it is not a licence to re-decide the contract. It helps if the award applies a clause that does not exist, awards beyond the claims, or ignores a binding statutory prohibition. It does not help with a mere misreading of the evidence or a wrong finding on delay.
Realistic outcome. The contractor's best route is the composition challenge. If it succeeds, the award falls regardless of the merits, and the utility must begin again before a properly constituted tribunal. If the contractor leads only with patent illegality, it will probably fail, because the court will characterise its complaints as errors of fact dressed up as illegality.