The Delhi High Court has clarified that the appointment of a sole arbitrator by the Executive Committee of a trade association, pursuant to an arbitration clause in commercial invoices, does not constitute a unilateral appointment prohibited by Section 12(5) of the Arbitration and Conciliation Act, 1996, merely because one party is a member of the association and the other is not. The Court set aside a commercial court's order that had declared an arbitral award a nullity on this ground, holding that the statutory disqualification under Section 12(5) must be established by demonstrating a specific relationship falling within the Seventh Schedule, and cannot be presumed from the appointing authority's institutional affiliation alone.
Background & Facts
The Dispute
The appellant, M/s V.K. Jain & Sons, is engaged in the wholesale business of sale and purchase of paper. The respondent, Mr. Neeraj Jain, carried on business as the proprietor of M/s Sarika Enterprises. The parties maintained regular commercial dealings, during which the appellant supplied paper to the respondent. According to the appellant, an amount of Rs. 2,18,234/- remained outstanding against the respondent in terms of the running ledger account. The appellant asserted that the respondent had issued Cheque No. 000074 dated 02.03.2017 for the aforesaid amount towards discharge of the outstanding liability but failed to make payment despite acknowledging the debt.
Key Facts
- The arbitration clause relied upon was printed on invoices issued during the course of business, specifically Clauses 5 and 6 of an invoice dated 23.12.2016
- Clause 5 stipulated: "Subject to 'Delhi' Jurisdiction only."
- Clause 6 provided: "In case of any dispute including dispute of non payment in respect of this bill the same shall be referred to the 'Paper Merchants Association (Regd.) Delhi' for sole arbitration and the judgement given by the Arbitrator/Arbitrators appointed by the Executive Committee shall be final & binding on both the parties."
- In terms of this clause, the appellant approached the Paper Merchants Association (Regd.), Delhi, whereupon the Executive Committee appointed Mr. Satya Narain Gupta as the Sole Arbitrator
- Arbitral proceedings commenced in 2019; the respondent did not participate despite notices
- The Sole Arbitrator passed an award allowing the principal claim of Rs. 2,18,234/-, interest of Rs. 30,475/-, and further interest at 15% per annum until payment
- The appellant instituted Execution Petition No. 187/2022 for enforcement, which was dismissed for non-prosecution
- A fresh execution petition, Execution (Comm.) No. 14/2024, was filed before the Commercial Court
Procedural History
- 2019: Arbitral proceedings commenced before Mr. Satya Narain Gupta, Sole Arbitrator
- 31.01.2020: Arbitral award passed in favour of the appellant
- 2022: Execution Petition No. 187/2022 filed, dismissed for non-prosecution
- 2024: Execution (Comm.) No. 14/2024 instituted before the Commercial Court
- During execution proceedings: Respondent filed objections challenging the award on grounds of unilateral appointment
- 28.01.2025: Commercial Court passed the Impugned Order, accepting objections and dismissing the execution petition
- Present Appeal: Execution First Appeal (EFA (COMM) 5/2025) filed under Section 13 of the Commercial Courts Act, 2015 read with Order XXI Rule 58 CPC
- 03.11.2026: Judgment reserved
- 06.11.2026: Judgment pronounced and uploaded
The Parties' Positions
The appellant contended that the arbitration clause was accepted through the parties' conduct - receipt of invoices, regular commercial dealings, and part-payments - constituting a valid arbitration agreement under Section 7. The appointment by the Executive Committee was by an independent body, not by the appellant. The respondent argued he was never a member of the Association, never consented in writing after disputes arose to the appointment mechanism, and the award was unenforceable under Section 12(5) as interpreted in Union of India v. M/s M.V. Omni Projects (India) Ltd. and Kotak Mahindra Bank Limited v. Narendra Kumar Prajapat.
Relief Sought
The appellant sought setting aside of the Impugned Order dated 28.01.2025, rejection of the respondent's objections, restoration of the execution petition, and direction to the Commercial Court to proceed with enforcement of the award of Rs. 2,18,234/- with interest at 15% per annum.
The Legal Issue
The central questions were: (1) Whether the arbitration clause printed on invoices constitutes a valid arbitration agreement under Section 7 of the A&C Act where the recipient is not a member of the named association; (2) Whether the appointment of a sole arbitrator by the Executive Committee of a trade association, at the instance of a member, amounts to a "unilateral appointment" attracting the prohibition of Section 12(5) read with the Seventh Schedule; and (3) Whether an executing court can refuse enforcement of an arbitral award on the ground of alleged jurisdictional nullity when the respondent did not challenge the award under Section 34 within the prescribed period.
Arguments Presented
For the Appellant
Learned counsel for the appellant submitted that the arbitration clause expressly vested the power of appointment in the Executive Committee, an independent body, and not in the appellant. Reliance was placed on SRF Limited v. Jonson Rubber Industries Limited (MANU/DE/2009/2024) for the proposition that an arbitration agreement can be inferred from invoices where parties maintain regular commercial dealings, invoices are received, and part-payments are made. The appellant distinguished Taipack Limited v. Ram Kishore Nagar Mal (2007 SCC OnLine Del 804) on the ground that the present clause expressly uses "sole arbitration" and identifies the Executive Committee as the appointing authority, with no contradictory purchase order. Rajesh Jain v. M/s Shiv Shakti Impex (2023:DHC:5328-DB) was cited to show the Association's mechanism has been recognised and membership is not the sole basis for a valid arbitration agreement. The appellant further argued that the executing court exceeded its jurisdiction by going behind the award, as the respondent had not participated in arbitration or challenged the award under Section 34, relying on Punjab State Civil Supplies Corporation Ltd. v. M/s Atwal Rice & General Mills ((2017) 8 SCC 116) and Sahayaraj v. Selvakumar (CRP (MD) No. 576/2024).
For the Respondent
Learned counsel for the respondent contended that the respondent was never a member of the Association and was not bound by its constitution. The appellant, being a member, could not invoke the Association's internal mechanism against a non-member. The proviso to Section 12(5) mandates an express written agreement after disputes arise, which cannot be dispensed with by mere acceptance of invoices or commercial conduct. Reliance was placed on M.V. Omni Projects (OMP (COMM.) 355/2023) and Narendra Kumar Prajapat (2023:DHC:3705-DB) for the proposition that an award pursuant to an appointment contrary to Section 12(5) is unenforceable. Taipack Limited and Rajesh Jain were cited to support that an arbitration clause on a unilaterally issued invoice cannot bind a non-member. The respondent further submitted that the executing court was competent to examine whether the award was a nullity for want of a valid arbitration agreement, and failure to challenge under Section 34 would not validate an award passed without jurisdiction.
The Court's Analysis
The Court examined three aspects: the validity of the arbitration agreement, the applicability of Section 12(5), and the scope of the executing court's jurisdiction.
I. Validity of the Arbitration Agreement
The Court held that Section 7 recognises an arbitration agreement may be contained in an exchange of communications providing a record of the agreement. The essential requirement is consensus ad idem to refer disputes to arbitration. The clause here expressly provides for "sole arbitration," identifies the Executive Committee as the appointing authority, and stipulates the decision shall be final and binding - clearly manifesting an intention to arbitrate.
"The language of the clause, therefore, clearly manifests an intention to refer disputes to arbitration. The mere fact that the clause is contained in an invoice issued by the Appellant would not, by itself, render it incapable of constituting an arbitration agreement."
The Court relied on SRF Limited for the principle that an arbitration agreement can be inferred from commercial dealings and conduct, including receipt of invoices and part-payments. However, it clarified that SRF Limited was a Section 11 proceeding requiring only a prima facie case, and does not establish that every invoice clause automatically binds the recipient. The Court rejected the Commercial Court's absolute proposition that payment against an invoice never amounts to acceptance of the arbitration clause, holding that acceptance of invoices containing an arbitration clause, in the context of a continuing commercial relationship and part-payments, is a relevant circumstance in determining consensus.
The Court distinguished Taipack Limited on facts: there, the arbitration stipulation was vague and incomplete, and parties exchanged documents with inconsistent terms. Here, the clause is clear, provides for sole arbitration, identifies the appointing authority, and no contradictory purchase order exists. Rajesh Jain was also distinguished: it concerned applicability of the Association's internal regulations where both parties were members, and did not hold that a non-member can never agree to an arbitral mechanism administered by an association.
"A party may independently agree, through a written contractual stipulation, to refer its disputes to an arbitral tribunal appointed by a specified third-party institution or body."
The Court held that the respondent's non-membership cannot be conclusive proof that no arbitration agreement existed without examining the contractual stipulation and the parties' conduct.
II. Applicability of Section 12(5)
The Court analysed Section 12(5), introduced by the 2015 Amendment, which renders ineligible any person whose relationship with the parties, counsel, or subject matter falls within the Seventh Schedule categories. The proviso permits waiver only by an express written agreement after disputes have arisen.
The Court relied on Perkins Eastman Architects DPC v. HSCC (India) Ltd. ((2020) 20 SCC 760) and Bhadra International (India) Pvt. Ltd. v. Airports Authority of India (2026 INSC 6) for the principle that a person ineligible under Section 12(5) cannot nominate another, and that an arbitrator falling within the Seventh Schedule is de jure ineligible, with the statutory waiver requirement being mandatory and not substitutable by conduct or participation.
However, the Court emphasised that these judgments proceed on the premise that the appointment is made by an ineligible person or the arbitrator has a Seventh Schedule relationship. They do not render every appointment through a contractual mechanism invalid merely because one party is a member of the appointing institution.
"The distinction between a unilateral appointment by a party and an appointment by an independent third-party body cannot be overlooked. In the former situation, the appointing party itself exercises control over the constitution of the Arbitral Tribunal. In the latter, the appointment is made by an independent body in accordance with the mechanism agreed upon between the parties."
The Commercial Court had not identified any specific relationship of the appointed arbitrator with either party falling within the Seventh Schedule. There was no finding that the arbitrator was an employee, consultant, advisor, or had any business relationship with the appellant, or was a member of the appellant's management, or otherwise interested in the outcome. The Court held that the Commercial Court conflated the question of membership and applicability of the Association's internal regulations with the distinct statutory question of the arbitrator's eligibility under Section 12(5).
The Court further held that the proviso to Section 12(5) arises only where the arbitrator is otherwise ineligible under the substantive provision; it cannot be invoked independently to invalidate an appointment where no Seventh Schedule relationship has been established. The appellant's contention that the respondent's failure to participate or challenge under Section 34 amounted to waiver was rejected, following Bhadra International, which reiterated that the statutory requirement of an express written agreement cannot be substituted by acquiescence or conduct.
III. Scope of Interference by an Executing Court
The Court affirmed that an executing court ordinarily cannot go behind a decree or award but retains limited power to examine jurisdictional issues going to the root of the decree and rendering it a nullity, per Punjab State Civil Supplies. This principle applies to arbitral awards under Section 36. The respondent's objection went to the constitution of the Arbitral Tribunal and the arbitrator's authority - a jurisdictional objection that the executing court was entitled to examine. However, such examination must remain confined to the alleged jurisdictional defect.
The Court held that the expiry of the Section 34 limitation period cannot confer jurisdiction on a tribunal that inherently lacked authority. The question is whether the objection establishes the award was a nullity. Since the respondent failed to establish the Section 12(5) disqualification, the award could not be declared a nullity on this ground.
The Verdict
The appellant succeeded. The Court set aside the Impugned Order dated 28.01.2025 passed by the District Judge (Commercial) in Execution (Comm.) No. 14/2024. The respondent's objections challenging the enforceability of the arbitral award solely on the ground of an alleged unilateral appointment attracting Section 12(5) were rejected. The execution petition was restored to its original number and remitted to the Commercial Court for proceeding further in accordance with law. The Commercial Court was directed to proceed with execution of the award (principal Rs. 2,18,234/-, interest Rs. 30,475/-, further interest at 15% per annum until payment) without reopening the question of the validity of the appointment on the grounds decided. The Commercial Court shall consider any other permissible objections, if surviving, strictly within the limited jurisdiction available to an executing court. The Appeal was allowed and the pending application (CM APPL. 31472/2025) stands closed.
What This Means For Similar Cases
Third-Party Appointment Mechanism Insulated from Section 12(5) Presumption
The judgment establishes that an arbitration clause designating a trade association's Executive Committee as the appointing authority creates a third-party appointment mechanism that is structurally distinct from a unilateral appointment by a party. Practitioners should note that the mere fact that one party is a member of the association and invokes the clause does not, without more, render the appointment "unilateral" under Section 12(5). The statutory disqualification requires proof of a specific relationship between the arbitrator (or the appointing authority) and the parties falling within the Seventh Schedule - not merely institutional affiliation.
- Drafting takeaway: Arbitration clauses in commercial invoices or contracts that name a reputable third-party institution (trade association, arbitral institution, professional body) as the appointing authority are more resilient against Section 12(5) challenges than clauses vesting appointment power in a party or its nominee.
- Litigation takeaway: A party challenging an award on Section 12(5) grounds in execution proceedings must lead evidence demonstrating the arbitrator's specific disqualifying relationship under the Seventh Schedule; bare allegations of institutional bias or membership asymmetry will not suffice.
Executing Court's Jurisdictional Review Remains Narrow but Real
The Court reaffirmed that an executing court can examine whether an award is a nullity for want of jurisdiction, even if the respondent did not file a Section 34 petition. However, this power is strictly limited to jurisdictional defects going to the root of the award - such as the absence of a valid arbitration agreement or an inherently ineligible arbitrator. It does not extend to re-evaluating the merits or procedural irregularities that do not affect jurisdiction.
- Practical implication: A respondent who misses the Section 34 limitation period is not entirely remediless if the award suffers from a fundamental jurisdictional defect, but the burden of proving such defect is high and must be established on the record before the executing court.
- Strategic note: Parties should not rely on the executing court's limited review as a substitute for timely Section 34 challenges; the threshold for "nullity" is exacting and rarely met.
Commercial Conduct Can Evidence Consensus to Arbitrate
The judgment reinforces that in ongoing commercial relationships, the exchange of invoices containing arbitration clauses, coupled with acceptance of goods/services and part-payments, constitutes relevant evidence of consensus ad idem under Section 7. This is particularly significant for businesses that operate on invoice-based terms rather than formal signed contracts.
- Advisory takeaway: Businesses should ensure arbitration clauses on invoices are clear, specific (naming the appointing authority and seat), and consistently used across transactions. Parties receiving such invoices should object promptly in writing if they do not accept the arbitration clause, as silence coupled with continued dealings and payments may be construed as acceptance.
