The dispute arose from an agreement between the Petitioners and the Respondent, which was a Used Car Dealer / DSA Agreement dated July 24, 2013. The Agreement had an arbitration clause (Clause 22), which stipulated that any disputes would be referred to a Sole Arbitrator nominated by the Respondent-Bank. The controversy ensued when the Respondent invoked arbitration after sending a demand letter to the Petitioners in September 2018, claiming that certain monies were due under the Agreement.

The Petitioners denied the debt and requested the Respondent to provide a copy of the Agreement. Despite the objections, the Respondent proceeded with appointing Dr. D.K. Sonawane as the Sole Arbitrator, with the appointment confirmed in correspondence dated September 26, 2018. Dr. Sonawane disclosed that he had received multiple appointments from the Respondent in the past, raising potential issues of impartiality.

The main legal issue at hand was whether the unilateral appointment of the Sole Arbitrator by the Respondent-Bank violated the provisions of Section 12(5) of the Arbitration and Conciliation Act, which came into effect in October 2015. This provision explicitly prohibits the unilateral appointment of an arbitrator by one party in certain circumstances, especially when there is a conflict of interest or when the arbitrator has previously had multiple dealings with the appointing party.

Section 12(5) mandates that any person whose relationship with the parties or the subject matter of the dispute falls under the categories specified in the Seventh Schedule shall be ineligible to serve as an arbitrator, unless the parties have expressly waived this provision in writing.

The Petitioners argued that the unilateral appointment of the arbitrator by the Respondent was impermissible, citing the landmark judgment in Perkins Eastman Architects DPC vs. HSCC India Ltd. (2020) 20 SCC 620, where the Supreme Court had held that such unilateral appointments violate the principles of fairness in arbitration. The Petitioners contended that the Award was vitiated on this ground alone.

The Court examined the facts and found that the appointment of the Sole Arbitrator was indeed unilateral, in contravention of Section 12(5) of the Act. Although the Respondent contended that the Petitioners had implicitly consented to the arbitrator’s appointment by participating in the arbitration proceedings, the Court rejected this argument. It emphasized that merely participating in the proceedings does not waive the right to challenge the validity of the arbitrator’s appointment if the objection is raised at the appropriate time.

The Court also referred to its previous judgment in Naresh Kaniyalal Rajwani vs. Kotak Mahindra Bank Ltd., which reaffirmed that participation in the arbitral proceedings does not preclude a party from challenging the appointment of an arbitrator based on Section 12(5). The Court clarified that such a challenge was a pure question of law, going to the root of the matter, and could be raised even if not explicitly mentioned during the arbitral proceedings.

This ruling further solidifies the legal principle that any unilateral appointment of an arbitrator, in the absence of a written waiver by both parties, is not only impermissible but also renders the entire arbitral process and any resulting Award invalid. The decision echoes the importance of adhering to the provisions of Section 12(5), especially in light of its purpose to maintain impartiality and fairness in arbitration.

The Court’s interpretation reinforces that such objections can be raised at any stage, including in the judicial review of an arbitration award, and participation in the arbitration process does not preclude a party from challenging the arbitrator’s appointment on legal grounds.

In conclusion, the Court set aside the impugned Award dated February 24, 2019, passed by the Sole Arbitrator, Dr. D.K. Sonawane, on the grounds of the unilateral appointment. The case underscores the necessity for both parties to agree to the appointment of an arbitrator and for any waiver of Section 12(5) to be expressed in writing, as stipulated by law.

This judgment is a significant reminder of the importance of fairness in arbitration and the need to comply with the statutory provisions that ensure impartiality and transparency in the arbitration process. The case also highlights the Court’s readiness to intervene when arbitration procedures are compromised, thus safeguarding the integrity of dispute resolution mechanisms.