Lotus Landmarks (India) Pvt. Ltd. v. RVP City Owners & Ors

What happened

Lotus Landmarks (India) Pvt. Ltd., a land developer, entered into a Joint Venture Agreement on 17 April 2016 with the owners of land on Kanbargi Road, Belagavi, for developing the layout RVP City, with the developed residential plots to be shared and the project to be completed within 24 months of the agreement with a grace period of six months. After the death of one of the landowners a dispute arose, and by a letter of 17 November 2017 one of the landowners asked the developer to stop the development work and to pay damages of ₹1,01,83,435, relying on an inspection report of a local engineering institute. Clause 25 of the agreement required the party raising a dispute to serve a notice naming its own arbitrator, the other party to name its arbitrator within 30 days of the notice, and the two arbitrators to appoint an umpire if necessary.

The landowners served notice on 9 January 2018 and appointed their nominee on 10 January 2018. The developer did not nominate an arbitrator in terms of clause 25, and the landowners' nominee took up the reference as sole arbitrator and made a final award on 28 January 2019, directing the developer to pay ₹2,21,58,000 with interest at 18% a year until realisation and ₹25,00,000 as compensation with interest at 18%, terminating the agreement and the power of attorney, and giving directions to clear encumbrances, settle dues, comply with RERA requirements and hand over original documents. The Principal District Judge, Belagavi, dismissed the developer's petition under section 34 (A.P. No. 2/2021) by an order of 22 April 2022, holding among other things that the developer, having not named its arbitrator within 30 days, had lost the right, that a sole arbitrator could be appointed under section 10, and that by appearing before the arbitrator on 5 March 2018 without raising the point it had waived it.

In the appeal under section 37(1)(b) the developer argued that the nominee's taking over as sole arbitrator was contrary to clause 25 and vitiated the whole proceedings, that it had not consented, that the section 4 finding on waiver was wrong, and that the award of interest and compensation exceeded the agreement. The landowners argued that the scope of sections 34 and 37 is limited and does not permit re-appraisal of evidence, that the developer had consented by participating and furnishing documents and was deemed to have waived its objection, that its inaction in nominating pre-empted any need to approach the court under section 11(6), and that it had given up the ground of disqualification under section 12(5).

Questions before the court

• Where a joint venture agreement lets each party nominate an arbitrator and one party does not, can the other party's nominee proceed as sole arbitrator without an application under section 11(6), and does an award so made survive a challenge under sections 34 and 37?

Why the court ruled this way

The Court confined its decision to the invalid constitution of the tribunal, saying that proceedings of a tribunal not constituted as the agreement provides would be invalidated, and it framed the point for consideration accordingly (paragraphs 12 and 14). Clause 25 lets both parties nominate an arbitrator, and the landowners' nominee took on the role of sole arbitrator when the developer did not nominate (paragraphs 15-17). Where each party may nominate, the other's inaction does not allow the nominee of one to proceed as sole arbitrator, and the party that has nominated had to approach the court under section 11(6) for the appointment of its nominee, a position consistent with Datar Switchgears v. Tata Finance and Deep Trading Co. v. Indian Oil Corporation, under which the right to appoint is not forfeited merely because 30 days pass (paragraphs 19-22). The procedure for appointment is an aspect of party autonomy and of equal treatment under section 18, and Bhadra International v. Airports Authority of India says that parties must have an equal say in constituting the tribunal, so that a nominee of one side made sole arbitrator without section 11(6) amounts to a unilateral appointment (paragraphs 23-26 and 31-33).

The developer had sought time to appoint its nominee by letters of 8 March, 26 March and 12 April 2018, and the nominee should have deferred the proceedings and called on the parties to follow clause 25 or to approach the court (paragraphs 27-30). Dharma Prathishthanam v. Madhok Construction treats a unilateral appointment and reference as illegal, though a party that submits to the arbitrator and waives its rights may be estopped (paragraph 34). The violation goes to jurisdiction and makes the arbitrator de jure unable to perform the function, so that the proceedings are a nullity, as Bhadra says of an award by an arbitrator without jurisdiction, which can be challenged at any stage (paragraphs 35-40). The ground in section 34(2)(a)(v), that the composition of the tribunal was not in accordance with the agreement, was made out, and the failure to follow section 11(6) is also a violation of the fundamental policy of Indian law, a conclusion not confined to section 12(5) (paragraphs 44-49).

On waiver under section 4, the first hearing was on 5 March 2018 and the developer's letter of 8 March 2018 sought time to appoint its arbitrator, so the objection was taken at the earliest point, and it was repeated by letters of 26 March, 12 April, 3 May and 8 May 2018 and 4 January 2019, the letter of 8 May 2018 also saying that its representative had attended the first meeting believing it to be an informal mediation (paragraphs 41-43 and 50-54). Vidyawati Construction v. Union of India concerned a court-appointed arbitrator and an objection raised after the statement of defence, and does not help the landowners (paragraphs 55-56). The District Judge erred in applying section 10, which operates where the procedure results in an even number of arbitrators, and his finding that the developer consented was contrary to its letters of 24 March, 12 April, 3 May and 8 May 2018 (paragraphs 57-59). Because the invalid constitution was decisive, the other grounds under section 34 were not examined (paragraph 60).

Controlling point

A nominee of one party cannot proceed as sole arbitrator under a clause giving each party a nomination right merely because the other party has not nominated, and the party must apply under section 11(6); a tribunal so constituted is de jure unable to act, its award is a nullity that can be set aside under section 34(2)(a)(v) and as against the fundamental policy of Indian law, and there is no waiver under section 4 where the objection was raised at the earliest stage and kept up.

Order and next steps

The Division Bench answered the point for consideration in the affirmative and set aside the order of 22 April 2022 passed by the Principal District Judge, Belagavi, in A.P. No. 2/2021 under section 34 and the final arbitration award of 28 January 2019. It reserved liberty to the respondents to take out appropriate proceedings afresh under the Joint Venture Agreement of 17 April 2016 for the redress of their grievance as is permissible in law, and disposed of the appeal.

Practical implications

Parties to a clause that gives each side a nomination should follow it, and a party that has nominated and finds the other side silent should apply under section 11(6) instead of treating its nominee as sole arbitrator. A party facing such an appointment should object in writing at the first opportunity and keep objecting, and should ask for time to nominate, because attending a hearing with a simultaneous objection will not by itself be treated as waiver.

Limits of this ruling

• The Court decided only the invalid constitution of the tribunal and did not examine the other grounds raised under section 34, including those on the inspection report, the interest and compensation and the merits of the award. It applied observations of the Supreme Court in Bhadra International that were made in the context of section 12(5) to the different defect of a unilateral appointment, and recorded that they are not limited to section 12(5). It did not decide the merits of the dispute between the developer and the landowners, which the landowners may pursue under the agreement, and the finding on waiver rests on the objections recorded in the developer's letters.