Union of India’s unilateral arbitrator appointment void without express waiver; Delhi HC sets aside awardરની

The Union of India invited bids for the supply of malted milk food with cocoa for defence procurement.

M/s Goodrich Foodtech Ltd. was awarded five contracts for a total quantity of 1,390 MT and furnished performance bank guarantees amounting to approximately ₹2.49 crore.

Disputes arose when the Union alleged that the supplied product contained soya protein and non-milk fat in violation of the contractual specifications.

The Union subsequently terminated four contracts, forfeited and encashed the bank guarantees, and debarred the respondent from participating in Army procurement.

After withdrawing a writ petition with liberty to pursue alternative remedies, the respondent invoked arbitration under the contractual arbitration clause.

The arbitrator was appointed by the Competent Financial Authority of the Ministry of Defence, an official of the Union of India.

The sole arbitrator awarded the respondent amounts towards finished stock, unpaid supplies, refund of bank guarantees and interest, and also quashed the termination, forfeiture and debarment orders.

The Union challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.

1. Whether the unilateral appointment of the sole arbitrator by the Competent Financial Authority of the Union of India was invalid under Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996?

2. Whether the respondent’s invocation of arbitration and participation in the arbitral proceedings constituted a valid waiver of the disqualification under the proviso to Section 12(5)?

3. Whether the Union of India was entitled to challenge the award under Section 34 on the ground of the arbitrator’s ineligibility, notwithstanding that the Union had itself appointed the arbitrator and had not raised the objection earlier?

Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, renders a person having the specified relationship with a party or the dispute ineligible to be appointed as an arbitrator; such ineligibility can be waived only through an express written agreement made after the disputes have arisen.

Section 18 requires equal treatment of parties, including equality in the constitution of the arbitral tribunal.

The Court relied on Bharat Broadband Network Ltd. v. United Telecoms Ltd., holding that participation in proceedings or filing pleadings cannot amount to an “express agreement in writing” waiving Section 12(5).

TRF Ltd. v. Energo Engineering Projects Ltd., recognising the invalidity of an appointment made by an ineligible appointing authority.

Bhadra International (India) (P) Ltd. v. Airports Authority of India, reiterating that waiver must be clear, unequivocal, express and in writing after the dispute arises.

Mahavir Prasad Gupta & Sons v. State (NCT of Delhi), holding that unilateral appointment is void ab initio, that conduct cannot constitute waiver, and that even the appointing party may challenge the award under Section 34.

An award rendered by an ineligible arbitrator is a nullity and may be set aside under Section 34(2)(b).

The contractual clause authorised the Competent Financial Authority—an official of the Union of India, which was itself a party to the dispute—to appoint the arbitrator.

Applying Section 12(5), the Seventh Schedule and the principle of equal treatment under Section 18, the Court held that the Union’s official was disqualified from unilaterally appointing the sole arbitrator.

The respondent’s invocation letter requesting appointment under the contractual clause and its participation in the arbitration did not amount to a valid waiver because the proviso to Section 12(5) requires a conscious, express and written agreement made after the dispute has arisen; waiver cannot be inferred from conduct or procedural participation.

The Court further held that the Union was not precluded from raising the objection merely because it had appointed the arbitrator or had not raised the issue earlier.

Since the tribunal’s constitution was void ab initio, the defect went to the arbitrator’s inherent jurisdiction and rendered the entire arbitral proceedings and award legally unsustainable.

It held that the appointment of the sole arbitrator by the Competent Financial Authority violated Section 12(5) read with the Seventh Schedule, that no valid waiver had been established, and that the Union could challenge the award on this ground under Section 34.

The arbitral award dated 27 April 2022, as modified on 6 May 2022, was declared a nullity and set aside.

The petition was accordingly allowed, and all pending applications were disposed of.