Unilateral Appointment of an Ineligible Arbitrator and Participation in Hearings
Supplier and Buyer entered into a contract with an arbitration clause: 'All disputes shall be referred to a sole arbitrator to be appointed by the Managing Director of Buyer.' A dispute arose over unpaid invoices. The Managing Director appointed a former General Manager (Legal) of Buyer as sole arbitrator. Supplier participated in two hearings, filed its statement of defence and counterclaim, and then discovered the arbitrator's former employment. It objected under Section 12(5) read with Schedule VII. The arbitrator rejected the objection and proceeded; the award, passed six months later, rejected Supplier's claims and allowed Buyer's counterclaim. Supplier files a petition under Section 34 before the Commercial Court, seeking setting aside on the ground of ineligibility and unilateral appointment. Buyer argues that Supplier waived the objection by participating and that Section 34 cannot review the merits.
1. Is the appointment invalid, and does Supplier's participation cure the defect?
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The appointment is invalid. Section 12(5) read with the Seventh Schedule makes a person ineligible if he is an employee, consultant, or has a specified relationship with a party. A former General Manager (Legal) of Buyer falls within the broad category of a person connected with the party, and the unilateral appointment by Buyer's Managing Director is also contrary to the principles in Perkins Eastman and TRF. Such ineligibility is not a mere irregularity; it goes to the root of the arbitrator's jurisdiction.
Section 4 of the Arbitration Act waives only objections to non-compliance with a derogable provision. Section 12(5) is a non-derogable mandate, and it can be waived only by an express written agreement after the dispute arises. Supplier's participation in two hearings does not cure the defect, because it objected promptly after discovering the former employment. The objection is maintainable.
2. What is the scope of Section 34 in these circumstances?
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Section 34 is not an appeal on merits. The court cannot set aside the award merely because it disagrees with the arbitrator's findings of fact or law. But the grounds include composition of the tribunal not being in accordance with the agreement, incapacity, and a violation of the fundamental policy of Indian law. An award rendered by an ineligible arbitrator is vulnerable because the tribunal lacked authority.
The court can set aside the award, and the ineligibility is a jurisdictional defect that survives the limited scope of Section 34. The court should not re-appreciate the invoices or the counterclaim; it should confine itself to the composition and ineligibility grounds. If the award is set aside, the court may permit the parties to appoint a fresh arbitrator in accordance with the Act, unless the arbitration agreement itself is unworkable.