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This article has been written by Hemani Khadai pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

The appointment of an arbitrator is the most significant step in kick-starting the arbitral Proceedings. Arbitrators are the anchors, in the overall arbitral proceedings. It is of utmost importance that they remain unbiased throughout the proceedings to reach an amicable decision. To ensure his unbiased nature, the arbitrator must clarify his relationship with the party, counsel, or subject matter of the dispute, if any, at the time of his appointment. If it is later found out that he has any relationship with the parties, as mentioned in the Seventh Schedule of the Arbitration and Conciliation Act, 1966, the arbitrator will be considered ineligible, and the proceedings can be challenged under Section 12 (5) of the Act.

This article discusses at length the importance of section 12(5), through landmark judgment in the case of Haryana Space Application Centre (HARSAC) and Anr. v. Pan India Consultants Pvt. Ltd. and Anr, by discussing, in brief, the facts of the case, findings of the Supreme Court in the case, and conducting the overall analysis of the same.

Section 12(5) of the Arbitration and Conciliation Act, 1996

Section 12 of the Arbitration and Conciliation Act, talks about the grounds of challenging the appointment of an arbitrator. Section 12(5) clarifies that any individual whose relationship with the party, the subject matter of dispute, and counsel is found to be falling under the Seventh Schedule of the act, will not be considered eligible for the appointment as an arbitrator.

The SEVENTH SCHEDULE of the Arbitration and Conciliation Act, 1996 mentions the following relationships of arbitrator with the parties or counsel, which renders the appointment of the arbitrator ineligible: 

“1. The arbitrator is an employee, consultant, and advisor or has any other past or present business relationship with the party.

  1. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
  2. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties. 
  3. The arbitrator is a lawyer in the same law firm which is representing one of the parties. 
  4. The arbitrator is a manager, director, or part of the management, or has similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration. 
  5. The arbitrator’s law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself. 
  6. The arbitrator’s law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties. 
  7. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom. 
  8. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company. 
  9. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties. 
  10. The arbitrator is a legal representative of an entity that is a party in the arbitration. 
  11. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties. 
  12. The arbitrator has a significant financial interest in one of the parties or in the outcome of the case. 
  13. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom. Relationship of the arbitrator to the dispute 
  14. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties. 
  15. The arbitrator has previous involvement in the case. Arbitrator’s direct or indirect interest in the dispute 
  16. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held. 
  17. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute. 
  18. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.”

 In the present case, Item 5 was pointed out by the Supreme Court.

Brief facts of the case

Appellant No. 1 is HARSAC or Haryana Space Application Centre, it is a nodal agency for the state of Haryana appointed by the Ministry of Rural Development. HARSAC, in its course of employment, invited proposals from modernized vendors in September 2010 for modernizing the Land Records. 

After considering from amongst the proposals, the contract was awarded to the Respondent i.e. Pan India Consultants Pvt. Ltd., and three other vendors specified in the allotment letter vide letter dated 28.02.2011. Pursuant to which a service level agreement (SLA) was executed between the parties. The agreement (SLA), included an Arbitration clause stating that, if the parties fail at resolving the dispute within 30 days of informal negotiation, then the matter will be resolved by formal arbitration. Both the parties had the right to appoint one arbitrator each, along with a presiding arbitrator. 

As per the Appellant i.e. HARSAC, the Respondent i.e. PAN India failed to complete the work within the specified period and was delaying the project by seeking extensions one after the other. Considering the extension and delays, HARSAC invoked the Performance bank guarantee executed between them. Such an action was challenged by PAN India before the Delhi High Court. The High court disposed of the suit and directed both the parties to resolve the dispute through arbitration and ordered to keep the bank guarantee alive.

Considering this, the arbitration clause was invoked by HARSAC and meanwhile appointed   Shri. Anurag Rastogi, IAS, Principal Secretary to Government of Haryana as their nominee arbitrator. 

PAN India consultants Pvt. Ltd, also appointed Justice Rajive Bhalla (Retd.) as their nominee arbitrator, constituting the arbitral tribunal on 14.09.2016.

After the constitution of the tribunal, the Respondent i.e. PAN India filed an application requesting the appointment of a presiding arbitrator. Such request of the Respondent was declined by the tribunal, due to the later stage of seeking appointment. The tribunal also kept the right to nominate the third arbitrator alive, if in case disagreement were to occur between the two arbitrators in future.  

After considering the hearings and arguments, on 03.08.2018, the tribunal reserved the matter for passing the award. Later, concerns were raised by the Appellant on 7 January 2019, that the proceedings have been pending for 1 and half years since the date of the 1st hearing on i.e. 07.11.2016. 

Later the tribunal extended the proceedings by further 6 months and even after the extended period; the tribunal did not announce the award. Since the arbitral proceedings were not completed within the statutory period of one year or the timeline of extended 6 months, it was contended by HARSC that the proceedings should stand terminated. 

When the Respondent came to know that, they applied Section 29A(4) of the Arbitration Act, before the Additional District Judge, Chandigarh, stating that the award was ready to be announced and the entire fee has also been paid to the tribunal. The Respondent also contended that just because HARSAC has not paid the fees to the tribunal, they have erroneously tried to terminate the proceedings. The Respondent again prayed for an extension for announcing the arbitral award.

After this, HARSAC opposed the application and submitted that the Application under Section 29A (4), be dismissed, since, there was no sufficient cause for granting an extension.

The District Judge, further granted an extension of 3 months, to conclude the arbitration proceedings and announce the award.

HARSAC then filed a Civil Revision Petition, before the High Court, for setting aside the order granted for extension, by the Additional District Judge.

But considering the prevailing pandemic situation, the High Court granted a four-month extension to parties (three months to conclude and one month for the tribunal to pass the arbitral award). Not satisfied by the order of the High Court, HARSAC further filed a special leave petition (SLP) before the Hon’ble Supreme Court.

Findings of the court

The Hon’ble Apex court, found out, that the appointment handed to the Principal Secretary, Government of Haryana, as the nominee arbitrator of HARSAC, which is a Nodal Agency of the Government of Haryana, is invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996 read with the Seventh Schedule of the same Act. 

Section 12(5) of the Arbitration and Conciliation Act, 1996, provides that, notwithstanding any prior agreement to the contrary, any person whose relationship with the parties, or counsel, falls within any of the categories specified in the Seventh Schedule, shall be ineligible to be appointed as an arbitrator.

The Hon’ble Supreme Court specifically pointed out Item 5 of the Seventh Schedule of the Act saying:

“5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.”

The Supreme Court also held that, when Section 12(5) is read with the Seventh Schedule, it becomes a mandatory and non-derogable provision of the Act. 

In the facts of the present case, it was held by the Supreme Court that the Principal Secretary to the Government of Haryana would not be eligible to be appointed as an arbitrator, because being a nodal agency of the state, it will have a controlling influence on HARSAC.

Subsequently, during the course of the hearing, the counsel of both parties gave their consent to the substitution of the acting tribunal, with a sole arbitrator to complete the arbitral proceedings. Adhering to which the Hon’ble Supreme Court appointed a substitute arbitrator, who would take the proceedings further from the stage where it was left and would further pass the arbitral award within six months from the date of receipt of the order.arbitration

Analysis of the judgment

The judgment of the Supreme Court, in the present case, is of great significance and attention. In the present case, the actual issues were delays in the announcement of the award leading to termination.

The appointment of an arbitrator was not a matter of dispute between the parties, but such an issue was suo-motu framed and brought up by the Hon’ble Supreme Court. The parties did not point out or object to the ineligibility of the appointment of the arbitrator under Section 12(5) of the Act throughout the Arbitral proceedings. It was rather pointed out by the Supreme Court through the SLP arising from a petition under Section 29-A. The Supreme Court took suo-motu cognizance of the invalidity and ineligibility of appointing the Principal Secretary, Government of Haryana as an arbitrator by the appellant HARSAC. 

The Supreme Court found the appointment of Principal Secretary, Government of Haryana as the nominee arbitrator of HARSAC, which is a nodal agency of the Government of Haryana invalid under Section 12(5) read with Seventh Schedule of the Arbitration & Conciliation Act, 1996. The importance of Section 12 (5) was further explained by the Supreme Court mentioning that if any person, who is appointed by the Parties as an arbitrator, has any relationship with the parties, counsel, subject matter of disputes, or any of the other categories mentioned in the Seventh Schedule, shall not be considered eligible to be appointed as an arbitrator. Out of the categories mentioned in the seventh schedule, the Apex Court found item 5 of the seventh schedule appropriate for the present case, reads as under:

“Arbitrator’s relationship with the parties or counsel. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.” (emphasis supplied) 

To conclude the prominence and significance of Section 12(5) read with the Seventh Schedule, it was announced to be a mandatory and non-derogable provision of the Act by the Apex Court. In the facts of the present case, the Principal Secretary to the Government of Haryana was announced as ineligible to be appointed as an arbitrator for the Appellant, because it will have a controlling influence on the Appellant Company being a nodal agency of the State, which could take away the independence of the parties and further lead to biases. So, the doubt of biasness and independence was eliminated.

Conclusion

Haryana Space Application Centre (HARSAC) and Anr. v. Pan India Consultants Pvt. Ltd. and Anr, has very clearly stated the importance of Section 12(5) of the Arbitration and Conciliation Act, 1996. The arbitrator’s being the most crucial part of the Arbitral Proceedings are expected to be unbiased in the decision making. If Arbitrators have the element of biasness then the whole idea of Arbitration will go into vain. 

The same idea of biasness was fought, by the Supreme Court in this case, by mentioning that, the arbitrator of the Appellant i.e. the Principal Secretary to the Government of Haryana, will have a controlling influence on HARSAC thus, making the arbitrator ineligible.

The Supreme Court followed Section 12(5) read with the seventh schedule of the Arbitration and conciliation Act, 1996. The Seventh Schedule of the Act, mentions the kinds of relationships of the arbitrator with the parties, which prove the ineligibility, to the appointment of the arbitrator. This concept of ineligibility of the appointment of arbitrator is very appropriately brought forward by the Supreme Court in this case. 

References

  1. The Arbitration and Conciliation Act, 1996.
  2. Haryana Space Application Centre (HARSAC) and Anr. v. Pan India Consultants Pvt. Ltd. and Anr. CIVIL APPEAL NO. 131 OF 2021 (ARISING OUT OF SPECIAL LEAVE PETITION (Civil) No. 13503 of 2020), 23778_2020_38_1502_25605_Judgement_20-Jan-2021.pdf (sci.gov.in).

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