Termination of the Mandate of the Arbitrator appointed by Mutual Consent

[Megha Shaw is an Incoming Associate at S&A Law Offices and Ashish Kumar is a fourth year student at NMIMS, Bangalore]

In the recent case of Swadesh Kumar Agarwal v Dinesh Kumar Agarwal, the Supreme Court of India (“SC”) has explained the scope of section 11(6) vis-à-vis section 14(1)(a) of the Arbitration and Conciliation Act, 1996 (“Act”). Section 14(1)(a) encapsulates the termination of an arbitrator’s mandate on the grounds of delay or impossibility of the arbitrator to perform the duties and section 11 allows the parties to request the court to appoint an arbitrator in certain circumstances. In this case, the SC held that the High Court cannot terminate the mandate of the sole arbitrator appointed by mutual consent of the parties without an arbitration agreement under section 11(6) of the Act as section 11(5) read with section 11(2) is applicable.

Factual Background & Contentions

There was a family partition dispute between the parties and they agreed to appoint a sole arbitrator with mutual consent even though there was no arbitration agreement between the parties. However, due to delays in arbitral proceedings, the parties filed an application with the trial court under section 14(1)(a) of the Act to terminate the mandate of the sole arbitrator. At the same time, one of the parties filed an application before the High Court under section 11(6) of the Act for the termination of the mandate of the sole arbitrator and substitution with a new arbitrator. The High Court ruled that the sole arbitrator’s delay in concluding the arbitration proceedings was excessive and unreasonable, thus terminating his mandate. It also appointed a new arbitrator in this case by exercising its jurisdiction under section 11(6) of the Act. Being aggrieved by the High Court’s verdict, the appellant filed an appeal before the SC. The appellant contended that the High Court did not have the jurisdiction under section 11(6) to terminate the mandate of the sole arbitrator when the parties appointed the arbitrator themselves and that there was no undue delay in this case.

Issues

In this case, the SC decided the question of whether it is permissible to file an application under section 11(6) to terminate the arbitrator’s mandate and appoint a substitute in cases where the parties themselves appoint a sole arbitrator by mutual consent. It also outlined the distinction between sections 11(5) and 11(6) of the Act while answering the aforesaid question.

Supreme Court Analysis

Under section 14(1)(a), the arbitrator’s mandate may be terminated if they fail to act without undue delay and a substitute arbitrator may should be appointed in case of termination. However, if the arbitrator’s mandate is to be terminated, the party must file an application with the “court” as defined in section 2(e) of the Act. In section 2(e), the “court” is defined as the principal civil court of original jurisdiction and it includes the High Court in the exercise of its ordinary original civil jurisdiction. The said court needs to decide whether the arbitrator is de jure or de facto unable to perform his functions without undue influence and this decision of the said court will lead to disqualification of the arbitrator. Thus, the SC held that the termination can be ordered by the competent “court” as defined in section 2(e) and the substitution process of the arbitrator will be the same as the appointment process. Now, the SC moved to question whether the High Court can terminate the mandate of the sole arbitrator under section 11 (6) when there is no arbitration agreement, while an application under section 14 (2) is pending before the concerned court.

As per section 11(2) of the Act, parties are given the liberty to decide the procedure of appointment of arbitrator/arbitrators. If parties fail to appoint an arbitrator, they can approach the High Court under section 11(5) and section 11(6) of the Act. However, the SC observed that ​​there is a difference between the arbitrator to be appointed under section 11(5) and section 11(6) of the Act. It is a clear position of law that even in the absence of a written arbitration agreement, the parties may refer the dispute for arbitration by appointing a sole arbitrator/arbitrators by mutual consent and parties may agree mutually on a procedure for appointing an arbitrator or arbitrators. If the parties have an arbitration agreement and they fail to reach a mutual agreement for the appointment of an arbitrator, the parties can approach the High Court for appointment under section 11(6). On the other hand, in the absence of an arbitration agreement, if the parties fail to nominate an arbitrator by mutual consent, section 11(5) of the Act is applicable.

In the present case, the parties appointed the sole arbitrator by mutual consent as per the procedure agreed upon by them for appointment although there was no existing arbitration agreement. Therefore, the SC held that the application under section 11(6) was not maintainable in light of the facts of this case and it overruled the judgment of the High Court. The SC concluded that section 11(5) of the Act applies when there is no arbitration agreement, whereas section 11(6) applies when the parties have a contract containing an arbitration clause or an exclusive arbitration agreement. It held that the dispute of whether the mandate of the arbitrator has been terminated on the grounds set out in section 14(1)(a) of the Act can only be decided by the ​​concerned “court” as per section 14(2) of the Act. It further held that if the concerned court decides that the arbitrator’s mandate be terminated for reasons mentioned in section 14(1)(a) and the parties are not able to agree on the appointment of the new arbitrator even after such termination, an application should be filed before the High Court under section 11(5).

Conclusion

This is a landmark case where the SC has rightly clarified that challenge or termination of mandate or an application for substitution of arbitrator would not be maintainable in a section 11(6) application if there is no arbitration agreement between the parties and the arbitrator has been appointed by mutual consent of the parties. In such cases, parties have to resort to section 14(2) for termination of the mandate of the sole arbitrator followed by an application under section 11(5) for the appointment of a new arbitrator.

Megha Shaw & Ashish Kumar
 

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