Delhi High Court sets aside Arbitral Award Over Arbitrator’s Conflict of Interest and Failure to provide documents

Legal Brief: Delhi High Court sets aside Arbitral Award Over Arbitrator’s Conflict of Interest and Failure to provide documents

Case Name: FLFL Travel Retail Lucknow Pvt. Ltd. v. Airports Authority of India

Court: Hon’ble High Court of New Delhi

Date of Judgment: 08.10.2024
By- Aakanksha Bhatia

 Facts:

FLFL Travel Retail Lucknow Private Limited (“the petitioner”) entered into a Concession Agreement (“the Agreement”) on March 23, 2018, with Airports Authority of India (“respondent No. 1”) to develop, market, set up, operate, maintain, and manage retail outlets at various Category A and Category B airports, including the Chaudhary Charan Singh Airport at Lucknow (“Lucknow Airport”).

Disputes arose between the parties, leading the petitioner to invoke arbitration under Clause 22 of the Agreement on August 25, 2020. On 02.02.2021, the respondent, considering the amended Arbitration and Conciliation Act, 1996 (“the Act”), sought and received consent from the petitioner to nominate Mr. Rajesh Bhandari, a retired Executive Director (Finance) of the respondent, as the arbitrator.

The learned arbitrator, upon appointment, disclosed his prior experience with the respondent and his previous role as an arbitrator in a dispute between the respondent and a third party, but declared having no other ongoing arbitrations. The arbitration proceedings commenced, with hearings concluding on 04.06.2022.

While the award was reserved, on June 13/15, 2022, the respondent appointed the same arbitrator in another arbitration, unrelated to the petitioner. This appointment was not formally disclosed to the petitioner.

On 11.08.2022, the learned arbitrator issued the award, granting the petitioner approximately Rs. 20 lakhs with interest, a significantly smaller sum than claimed.

The petitioner challenged the award under Section 34 of the Act, citing two primary grounds:

Violation of Section 12 of the Act: Failure of the arbitrator to disclose his appointment in another arbitration by the respondent during the pendency of the current proceedings.

Violation of Section 24 of the Act: The arbitrator received documents and clarifications from the respondent after reserving the order without giving the petitioner an opportunity to respond.

Issues:

  1. Whether the arbitrator violated Section 12 of the Act by failing to disclose his subsequent appointment by the respondent in another arbitration while the award in the present case was reserved?
  2. Whether the arbitrator violate Section 24 of the Act by receiving and relying on documents from the respondent after reserving the order without providing the petitioner an opportunity to respond?

Arguments Advanced:

  • Petitioner:

○The arbitrator’s failure to disclose his subsequent appointment by the respondent in another arbitration constitutes a violation of Section 12 of the Act, jeopardizing his impartiality.

○The late submission and consideration of documents by the arbitrator without affording the petitioner sufficient time to respond is a violation of natural justice principles enshrined in Section 24(3) of the Act.

  • Respondent:

○ The petitioner was verbally informed about the arbitrator’s second appointment, fulfilling the disclosure obligation under Section 12(2) of the Act.

○ The petitioner failed to challenge the arbitrator within the stipulated 15-day period after becoming aware of the grounds for challenge as per Section 13(2) of the Act.

○ The subsequent appointment was made by a different department of the respondent, and the department handling the present case was unaware of it.

○ The petitioner’s apprehension of bias is unfounded, and the arbitrator acted with impartiality throughout the proceedings.

Legal Analysis:

  • Section 12 of the Act: This section emphasizes the arbitrator’s duty to maintain independence and impartiality, requiring disclosure of any circumstances that could raise justifiable doubts. The Fifth Schedule lists specific grounds for justifiable doubts, including multiple appointments by the same party or its affiliate within a three-year period. Continuous disclosure is mandated “throughout the arbitral proceedings.” The Supreme Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd. highlighted the importance of independence and impartiality in arbitration, stating that even contractual appointments must adhere to these principles.
  • Section 24(3) of the Act: This provision ensures fairness by mandating that all documents and information provided to the arbitrator by one party be communicated to the other. This principle of natural justice, allowing both sides to present their case fully, has been upheld by the Supreme Court in cases like Ssangyong Engg. & Construction Co. Ltd. v. NHAI and PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin.

Judgment:

The High Court of Delhi, in its judgment dated October 8, 2024, ruled in favor of the petitioner and set aside the arbitral award.35 The Court found merit in both grounds of challenge raised by the petitioner:

  1. Violation of Section 12 of the Act: The Court held that the arbitrator’s undisclosed subsequent appointment by the respondent violated Section 12. The court dismissed arguments regarding verbal disclosure and the 15-day challenge period, emphasizing the mandatory requirement for written disclosure throughout the proceedings. The Court also rejected the argument of departmental separation within the respondent organization, stating that the duty of disclosure lies with the arbitrator, not the parties.
  2. Violation of Section 24(3) of the Act: The Court found that the late submission of documents and the inadequate time given to the petitioner for response violated Section 24(3). The Court deemed this a breach of natural justice principles, rendering the award unsustainable.

Conclusion:

The Court’s decision emphasizes the paramount importance of transparency and adherence to natural justice principles in arbitration proceedings. The arbitrator’s failure to disclose relevant information and the denial of a fair opportunity to respond to crucial evidence led to the annulment of the award. The judgment reinforces the statutory safeguards designed to ensure fairness and impartiality in arbitration, vital for upholding its legitimacy as an alternative dispute resolution mechanism.

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