Court holds unilateral appointment of sole arbitrator impermissible under Arbitration and Conciliation Act, 1996, leading to the invalidation of the entire arbitral proceedings and award.
In a significant ruling on October 6, 2026, the Delhi High Court (Division Bench) delivered a landmark judgment in the commercial arbitration dispute between Life Insurance Corporation of India (LIC) and N.S. Associates Pvt. Ltd. The Court set aside the entire arbitral award dated January 10, 2022, on the ground that the sole arbitrator was appointed unilaterally by an Executive Director of LIC who was legally ineligible to make such appointment. This decision clarifies the scope and impact of challenges under Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996 (A&C Act), emphasizing that invalid constitution of the arbitral tribunal renders the entire award non-est and liable to be set aside, not just the claims specifically challenged.
Background:
The dispute arose from arbitration proceedings initiated by N.S. Associates Pvt. Ltd. against LIC. The Executive Director (Engineering) of LIC appointed the sole arbitrator on November 14, 2019, who subsequently passed the arbitral award on January 10, 2022, awarding various sums on multiple claims. The Respondent challenged the award under Section 34 of the A&C Act, contending that the appointment of the arbitrator was void ab initio as the Executive Director was de jure ineligible to appoint the sole arbitrator under the statutory framework. The Single Judge of the Delhi High Court agreed that the unilateral appointment was impermissible but limited the setting aside of the award only to the specific claims challenged in the Section 34 petition.
Key Legal Issues and Court's Findings:
1. Validity of Arbitrator's Appointment:
The Court held that the Executive Director of LIC was legally ineligible to appoint the sole arbitrator due to amendments to the A&C Act in October 2015, specifically Section 12(5) read with the Seventh Schedule. This unilateral appointment violated the statutory mandate.
2. Effect of Invalid Appointment on Arbitral Award:
The Court emphasized that the defect in the appointment goes to the root of the arbitral proceedings. Therefore, the invalidity of the tribunal's constitution cannot be confined to only those claims challenged by the party in the Section 34 petition. The entire arbitral award is rendered invalid and must be set aside.
3. Challenge by Appellant Despite No Separate Section 34 Petition:
LIC had not independently filed a Section 34 petition but sought the full effect of the invalid appointment finding in appeal. The Court held that since the Respondent had challenged the appointment and the Court found it impermissible, the Appellant can seek the full consequential relief in the appeal. The absence of a separate Section 34 petition by LIC did not bar this.
4. Approving and Reprobating Position by Respondent Not Permissible:
The Court noted that the Respondent, having challenged the tribunal's constitution as void ab initio, cannot seek to preserve favorable parts of the same arbitral award. Further, payments made under the award do not validate an award that is non-est due to invalid tribunal constitution.
5. Condonation of Delay in Filing Appeal:
The Court condoned a delay of 692 days in filing the appeal by LIC, accepting the explanation that the delay was due to internal examination and obtaining approvals following the impugned judgment.
Outcome:
The appeal filed by LIC was allowed. The judgment dated October 29, 2024, by the learned Single Judge was modified to set aside the entire arbitral award dated January 10, 2022. The order dismissing the application seeking correction/modification of the operative portion of the judgment was also set aside. The Court clarified that any amount paid under the award may be recovered by the Respondent in accordance with law, but this does not confer validity on the award.
Significance:
This judgment reinforces the principle that the proper constitution of an arbitral tribunal is fundamental to the validity of arbitration proceedings. A unilateral appointment of an arbitrator by an ineligible authority under Section 12(5) of the A&C Act invalidates the entire arbitral award, not just the challenged claims. The ruling also highlights procedural flexibility, allowing parties to seek full relief in appeals even if they did not file a Section 34 petition themselves, provided the issue was adjudicated.
Legal experts opine that this judgment will have far-reaching implications on arbitration practice, ensuring stricter adherence to the eligibility criteria for arbitrator appointments and discouraging attempts to validate defective awards by partial compliance or payments.
Bottom Line:
Arbitration - Once Court holds that unilateral appointment of sole arbitrator was impermissible under Section 12(5) read with Seventh Schedule of Arbitration and Conciliation Act, 1996, arbitral tribunal becomes invalidly constituted and entire award is liable to be set aside; invalidity cannot be confined only to those claims specifically challenged in Section 34 petition.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Sections 12(5), 34; Seventh Schedule of Arbitration and Conciliation Act, 1996; Code of Civil Procedure, 1908 Sections 151, 152
