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High Court Refuses To Substitute Arbitrator, Emphasizing That Allowing Substitution For Disagreements Over Procedural Aspects Would Pave Way For Repeated Interventions In Arbitral Proceedings

Ifrah Murtaza ,
  12 February 2024       Share Bookmark

Court :
Hon’ble High Court of Bombay
Brief :

Citation :
Commercial Arbitration Petition (L) No. 24453 of 2023 WITH Interim Application (L) NO. 33894 of 2023

Case title: 

Shanklesha Construction & Ors v. Ashok Mohanraj Chhajed

Date of Order: 

5th January 2024

Bench: 

Hon’ble Mr. Justice Manish Pitale

Parties: 

Petitioner(s): Shankalesha Construction & Ors

Respondent(s): Ashok Mohanraj Chhajed
 

SUBJECT:

The instant case before the Hon’ble High Court of Bombay (hereinafter referred to as ‘the High Court’ or ‘the Court’) involved a dispute regarding extension of mandate and substitution of arbitrator. Both parties sought the extension through invocation of section 29A of the Arbitration Act, but only M/s Shanklecha Constructions & Ors (petitioner) sought substitution under section 14. The Court rejected the petitioner prayers citing their inability to prove their arguments and extended the arbitrator’s mandate. The High Court also opined that entertaining challenges to procedural aspects of arbitration with the likeness of the petitioner would lead to undue interferences with the arbitral proceedings and independence to the arbitrator.

IMPORTANT PROVISIONS:

The Arbitration and Conciliation Act, 1996 (the Act):

  • Section 14
  • Section 29A
  • Section 11
  • Section 17
  • Section 19
  • Section 34

The Code of Civil Procedure, 1908 (CPC)

The Indian Evidence Act, 1872 (Evidence Act)

 

OVERVIEW:

  • A partnership deal was executed between the parties on 21st July, 2017.
  • Disputes arose between the parties, prompting invocation of section 11 of the Arbitration Act, by an order dated 19.03.2019.
  • The application was disposed of by the court and a sole arbitrator was appointed (former judge of the High Court), but no specification was given regarding the fees of the arbitrator.
  • A preliminary meeting held by the arbitrator on 11.04.2019, specified that the fees would be charged as per Schedule IV of the Arbitration Act.
  • The modality for the payment of fees for counter claims was left open for discussion. Several disputes arose thereafter.
  • The arbitrator passed an order in favour of the respondent (then claimant) on 18.04.2019. A counter-claim to which was filed by the petitioners on 18.06.2019.
  • On 25th September 2019, ruled that since the capping limit of the fees had been reached, the counter-claim was non-chargeable, barring a quarter of the ad-valorem amount payable to the learned arbitrator.
  • The Supreme Court passed a judgment in Oil and Natural Gas Corporation Limited  v. Afcons Gunanusa JV wherein it was held that the computation of the fees for the claim and counter claim has to done separately from Schedule IV of the Act.
  • The learned arbitrator took note of the judgment and laid directives for the balance of the payment to be made by the parties on 19.12.2022. It was also noted that until the fees were paid, the arbitrator would be unable to proceed with the matter.
  • The mandate of the learned arbitrator expired on 15th January, 2023 by efflux of time. It was indicated by the arbitrator on 24.02.2023 that only the final hearing remained in the arbitral proceedings for which five clear days were fixed.
  • During this time, a third party filed an application which sought relief from the petitioner.
  • The application was rejected by the arbitrator, but several observations were made by the arbitrator regarding the 3rd party, including the need for extra time.
  • The respondent filed a petition on 04.08.2023, under section 29A of the Arbitration Act, seeking extension of mandate of the learned arbitrator.
  • The petitioners sought the extension of the mandate and substitution of the arbitrator by filing a petition on 01.09.2023.
  • Both petitions are being heard by the Court.

 

ISSUES RAISED:

  • Whether the parties were obligated to pay the balance of the revised fee of the arbitrator?
  • Whether continuing the proceedings with the same arbitrator ultimately result in undue delays?

 

ARGUMENTS ADVANCED BY THE PETITIONER:

  • The fee of the arbitrator was agreed upon in the preliminary meeting. The arbitrator’s unilateral increment of the fee was illegal.
  • Witness summons sought by petitioner to the Income Tax Department for production of relevant documents were wrongly rejected, which had led to the filing of the petition.
  • The arbitrator’s insistence of testimonies of over a 100 vendors on project expenses was only causing delays in arbitral proceedings.
  • The arbitrator’s refusal to appoint an auditor was indicative of the fact that the proceedings would be delayed further.
  • The exercise of the power under sections 14 and 29A of the Act was justified on account of the delay caused due to the peculiar procedure of proceedings adopted by the arbitrator.
  • Reliance was placed on the case ruling in the case of Angelique International Limited v. SSJV Projects Private Limited & Anr to substantiate the argument.

 

ARGUMENTS ADVANCED BY THE RESPONDENT:

  • There is no contention regarding the extension of the arbitrator’s mandate. Only the arbitrator’s substitution is being contested.
  • A substitution would result in both parties having to pay a fresh sum to the new arbitrator, which was illogical especially the fees determined by the arbitrator on 19.12.2022 was required the parties to pay an additional amount, rather than the entire fee.
  • As far as the conduct of the arbitrator was concerned, an arbitrator needs to follow a reasonable procedure in accordance with the principles of natural justice and is not bound by the CPC or the Evidence Act. Therefore any grievance regarding the procedural aspects should be addressed under section 34 of the Act.
  • The grounds stated by the petitioner for substitution were not satisfied. Even the grounds for de facto inability of the arbitrator to perform her functions had not been satisfied by the petitioners.
  • The observations made on the third party application were merely for dialogue purposes and did not qualify as grounds for substitution.  
  • Substitution was only being sought by the petitioner as the proceedings were likely to be ruled in favour of the respondents.

 

JUDGEMENT ANALYSIS:

  • The High Court observed that both parties agreed on the need for extension of mandate of the arbitrator, and only the substitution of the arbitrator is being contested.
  • The Court relied on Schedule IV and the case of Oil and Natural Gas Corporation Limited  v. Afcons Gunanusa JV for determination of fees of the arbitrator.
  • The arbitrator was entitled to compute charge fees for the claim and counter-claim.
  • It was noted by the Court that the arbitrator’s computation of fee based on the Supreme Court’s ruling and Schedule IV was in accordance with the law, and the agreement made in preliminary meeting was in no way violated.
  • The Court clarified that the term ‘sum in dispute’ referred to the entire amount in dispute which is to be adjudicated upon.
  • The determination of the additional fees payable by the parties based on the interpretation of Schedule IV, was revealed in the minutes on the meetings of 19.12.2022.
  • It was clear from the minutes of the meeting that the computation of the fees by the arbitrator was not unilateral or in any way deviating of the tripartite agreement of 11.04.2019.
  • The learned arbitrator was entitled to the claimed fees.
  • The petitioner’s argument for substitution of the arbitrator did not satisfy the required grounds.
  • The Court also dismissed the petitioner’s claims of the arbitrator being unable to perform her functions.
  • It was noted by the Court that the learned arbitrator was not restricted by either CPC or the Evidence Act, under section 19 of the Act and was free to adopt any procedure which was in alignment with the principles of natural justice.
  • The Court stated that grievances related to the procedure and alleged delays should be raised under section 34 of the Act, if the petitioner got the arbitral award.
  • It was stated that the petitioner could not refuse to pay the balance as it was already indicated by the arbitrator that non-payment of fees would lead in her not being able to act as arbitrator. Thus accepting the petitioner’s argument would mean letting them exploit their own wrong.
  • The Court opined that permitting substitution based solely on procedural issues would result in repeated interfering in the arbitral proceedings and limit the independence of the learned arbitrator as a private tribunal.
  • The Court accepted both the parties’ prayer for extension of mandate of the arbitrator, but the prayer for substitution was rejected.

 

CONCLUSION:

The High Court held accepted the prayer of extension of mandate of the arbitrator made by both parties, and extended the mandate till 31st December 2024, but rejected the petitioner’s prayer of substitution of arbitrator. The Court was of the opinion that the petitioner was not successful in establishing the grounds on which they sought substitution and if there were any contentions regarding the procedural aspects, it should be brought before the Court under section 34 of the Act. Both petitions were disposed of and pending application, if any, stood disposed thereof accordingly.

 

 

 
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