The Bombay High Court in the case of Naresh Kanayalal Rajwani v. Kotak Mahindra Bank Limited, while dealing with a primary question of whether a party who participates in the arbitration proceedings can challenge the arbitral award on the ground of “unilateral appointment of the arbitrator” raised in the context of Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Act”), held that, merely because a party participates in the arbitration proceedings, it does not create a bar on such party to challenge the arbitral award on the ground of Section 12(5) of the Act.

Facts in Brief: -

A home loan agreement was executed between the Respondent bank and the petitioners, in terms of which certain amounts were advanced by the respondent bank to the petitioners. The said home loan agreement contained an arbitration clause which authorised the respondent bank to appoint a sole arbitrator for resolving the disputes between the parties. During the subsistence of loan, certain disputes arose between the parties leading to initiation of arbitration proceedings by the respondent bank. An award was passed by the arbitral tribunal in favour of the respondent bank, which was challenged by the petitioners under Section 34 of the Act, before the Bombay High Court. The said award was set aside by the Bombay High Court in favour of the petitioners.

Thereafter, the respondent bank again invoked the arbitration clause and unilaterally appointed an arbitrator in respect of other disputes which subsequently arose between the parties. The petitioners participated in the arbitration proceedings and filed their statement of defence. Eventually, an award was passed by the learned arbitrator in favour of the respondent bank. The said award was challenged by the petitioners by filing a petition under Section 34 of the Act.

Issue: -

Whether a party who participates in the arbitration proceedings can challenge the arbitral award on the ground of Section 12(5) of the Act?

Submissions by the Petitioners: -

The entire arbitration proceedings stood vitiated as the learned arbitrator was unilaterally appointed by the respondent bank and such appointment was hit by Section 12(5) of the Act read with Seventh Schedule thereof.

Submissions by the Respondent: -

1. The ground pertaining to Section 12(5) of the Act was not specifically raised in the petition filed under Section 34 of the Act by which the award was sought to be challenged.
2. Since the home loan agreement was executed in the year 2006, the amendment brought in Section 12(5) with effect from October 23, 2015 was not applicable and hence, there was no substance in the ground raised under Section 12(5) of the Act.
3. Since the Petitioners failed to raise objection under Section 12(5) of the Act before the arbitrator, the petitioners ought to have waived their rights under Section 4 of the Act.

Observations by the Bombay High Court:-

1. With respect to the contention of the Respondent-Bank that the ground pertaining to Section 12(5) of the Act was not specifically raised in the petition, the Bombay High Court held that an award was challenged by the petitioners as being perverse, against settled provisions of law and public policy. Although the said ground was general in nature, it was inclusive of specific ground in the context of Section 12(5) of the Act.
2. Section 12(5) of the Act was inserted by way of amendment with effect from October 23, 2015. The said Section commences with the non-obstante clause, “Notwithstanding any prior agreement to the contrary” which indicates that if an agreement executed prior to introduction of Section 12(5) provides for appointment of an Arbitrator, the said Section 12(5) would apply in full force.
3. The Court further observed that the proviso to Section 12(5) of the Act specifies that the parties may waive the applicability of the said provision only by an express agreement in writing. Therefore, merely because the petitioners participated in the arbitration proceedings, it cannot be said that they were disentitled from raising the ground that the arbitration proceedings were vitiated due to unilateral appointment of the arbitrator.

Please find attached a copy of the judgment.

This update has been contributed by Murtaza Kachwalla (Partner) and Shreyas Lavekar (Associate).

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