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In this article, Atharv Joshi, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the grounds to challenge an Arbitrator.

Introduction

The judicial system in India is overstressed and notoriously slow in disposing cases. Around 1.65 lakh cases are pending in every High Court of the country and more than 2.6 crore cases are pending in the subordinate judiciary.

As a result, there is a need to provide a faster and effective mechanism to resolve disputes. The Arbitration and Conciliation Act, 1996 (the Act) was passed with the same goal in mind. It promotes arbitration as an alternate dispute resolution mechanism in India. It was an attempt to ease the burden as well.

Commercial entities usually include arbitration clauses in any agreement that they sign with another entity or sign a separate arbitration agreement altogether. With heavy reliance placed on arbitration, it is of utmost importance that the arbitrators appointed are impartial. The Supreme Court of India has observed that independence and impartiality of an arbitrator is the hallmark of arbitration and is a fundamental principle of natural justice.

Section 12 of the Act lays down the grounds on which an arbitrator can be challenged. The 2015 amendment to the Act, has added a schedule to this section which lays down additional criteria that may give rise to a challenge of an arbitrator.

Grounds for challenging the appointment of the Arbitrator

  • Disclosure of certain circumstances

Section 12(1) of the Act, amended in 2015, compels a prospective arbitrator to provide a written disclosure of certain circumstances which may give rise to suspicions to his independence or impartiality. Whether a circumstance is suspicious to the independence of an arbitrator, is to be decided by the arbitrator himself.

Section 12(1)(a) states that the arbitrator should disclose if he has any direct, indirect, past or present relationship to the parties, or if he has any financial, business, professional or any other kind of interest in the subject-matter of the dispute, which would affect his impartiality in the case.

For example, Company X and Company Z while entering into a particular contract, add an arbitration clause naming Mr. A as an arbitrator. Mr. A is the owner of Company C. A dispute concerning payment of bills to Company X by Company Z arose and Mr. A was approached for presiding as an arbitrator. Company Z is a client of Company C and forms a considerable part of its income.

In such a scenario, Mr. A would have an interest in the dispute and that might give rise to doubts to his impartiality.

Section 12(1)(b) similarly points to any circumstances that would affect an arbitrator’s capacity to devote enough time to finish the arbitration within twelve months.

There are two explanations given under the sub-section. The first one states that the Fifth Schedule should be referred to understand whether circumstances under Section 12(1)(a) exist. The second one states that such a disclosure should happen in the format under Sixth Schedule.

Fifth Schedule

The fifth schedule deals with following types of relations which might give rise to reasonable doubts:

  1. Arbitrator’s relationship with parties or counsel
  2. Arbitrator’s relationship to the dispute
  3. Arbitrator’s interest in the dispute
  4. Arbitrator’s past involvement with the dispute
  5. Relationship of co-arbitrator’s
  6. Relationship of the arbitrator with parties and others in the dispute
  7. Other Circumstances

If the factual scenario of a case falls under any of the above headings, then the arbitrator may be challenged. These are extensive headings which cover many scenarios to ensure maximum impartiality. However, ‘Explanation 3’ to this schedule, points out that if it’s a specialized arbitration involving niche fields, and it’s a custom to appoint same arbitrators from a small specialized pool, then this should be noted by applying these rules. None of these headings provides for an immediate bar to the appointment of an arbitrator.

Section 12(2) reinforces sub-section 1, by stating that unless a written disclosure has already been given, an appointed arbitrator should disclose any conflict of interest as soon as possible.

  • Other Grounds for Challenge

The actual grounds for challenge under this section are illustrated under Section 12(3).

If an arbitrator’s independence and impartiality are doubted due to the circumstances under Section 12(1) then he may be challenged or in the event that he doesn’t possess the necessary qualifications agreed to by the parties.

A party to the dispute which appoints an arbitrator may challenge such appointment for reasons he becomes aware only after the appointment.

Section 12(5), inserted by the 2015 amendment, automatically disqualifies any potential arbitrator who falls in any category under the Seventh Schedule of the Act.

Seventh Schedule

This schedule also covers most of the headings under the Fifth Schedule. The list isn’t as exhaustive as the Fifth Schedule but as stated above, simply acts as a bar to appointment as arbitrator. However, this bar can be waived by the parties by an agreement in writing.

The Schedule covers:

  1. Arbitrator’s relationship with the parties or counsel
  2. Relation of Arbitrator to the dispute
  3. Arbitrator’s interest in the dispute.
  • Interpretation of Section 12 in recent case laws

  • Voestalpine Schienen v. Delhi Metro Rail Corporation

This was the first case adjudicated by the Supreme Court after the 2015 amendment was passed. It is thus significant in clarifying the scope of this important section.

Facts: The Delhi Metro Rail Corporation (DMRC), a public sector undertaking, had entered into a contract with M/s Voestalpine. Due to some disputes that arose in the course of business, the arbitration clause was invoked and as per the contract. In the contract, it was provided that, arbitration proceedings should be done in compliance of Clause 9.2 of the DMRC General Conditions of Contract (DMRC GCC) and Clause 9.2 of the special conditions of the contract (DMRC SCC).

According to these clauses, DMRC was to make a list of arbitrators consisting of serving or retired engineers with requisite qualifications and professional experience. These engineers were to be from ‘government departments or public sector undertakings’. Furthermore, DMRC and Voestalpine were to choose one arbitrator each from this list and both of these arbitrators shall choose the third arbitrator from the same list.

The petitioner, Voestalpine challenged this provision under Sections 11(6) and 11(8) of the Act.

Issues

  • Whether in light of the 2015 Amendment, the above-mentioned clauses become invalid by virtue of Section 12(5)?
  • Whether DMRC being a public sector undertaking cannot appoint former or retired employees of the government as arbitrators?
  • Whether such a clause destroys the very foundation and spirit behind the amendment?

Held

The Supreme Court pointed that the main purpose of amending Section 12 was to maintain a higher level of arbitrator impartiality. In light of this, it stated that in the event that the arbitration clause was in contradiction to Section 12 (5), the latter would prevail. In such a case the court would appoint an arbitrator and a party cannot claim appointment as per the agreement.

However, in the case, the Court held that only because of the fact that the suggested arbitrators were former or current government employees they won’t be automatically disqualified from being arbitrators. If they didn’t have any relation to any of the parties, they were not barred under Section 12(5).

The court differentiated between the concepts of ‘impartiality’ and ‘independence’. Thus, the court held, any question on impartiality or independence would surface when the arbitrator discloses any interest in writing. The Court declined jurisdiction in the case.

The Court directed DMRC to delete the clauses from SCC and GCC and asked it to constitute a broader panel.

  • DBM Geotechnics v. Bharat Petroleum Ltd

Facts: In 2003, the respondent BPCL had issued an e-tender for construction works. In 2014, DBM Geotechnics, the applicant was given the letter of intent and subsequently, an agreement was concluded.

In October 2015, BPCL abruptly terminated the agreement by alleging performance delays and appointed another contractor. In June 2016, BPCL initiated arbitration proceedings under the Agreement. As per the terms of the agreement, the Director of Marketing (DM) was to be the sole arbitrator or he was to appoint another person as an arbitrator.

Issues  

  • Whether such a clause in the arbitration agreement would be rendered ineffective in light of Section 12 (5) of the Arbitration Act.

Held

The applicants argued that the nomination procedure would be unlawful in light of Section 12. The Court rejected this argument and held that in spite of the fact that the DM was barred from presiding as the arbitrator, he could still nominate someone else as the presiding arbitrator.

  • TRF Ltd v. Energo Engineering Projects

Facts: Energo Engineering Projects, the respondent-company dealt in the procurement, handling and installation of equipment in thermal power plants, for various clients like NTPC, Moser Baer etc.

In 2014, the respondent issued a purchase order to the appellant for various articles. The appellant had also given an advance bank and performance guarantee. The dispute arose with the enforcement of the bank guarantee. The appellant approached the High Court to restrain the encashment of the guarantee.

In the meanwhile, the appellant invoked the arbitration clause of the General Terms and Conditions of the Purchase Order (GTCPO). It also argued that the HC should appoint the arbitrator under Section 11 (6) because in light of Section 12 (5) the Managing Director was ineligible to act as an arbitrator and thus ineligible to arbitrate as well. The High Court rejected this argument and stated that merely because the MD is disqualified to act as an arbitrator, he isn’t devoid of his power to nominate. The nominated arbitrator will have his own independent views. This ruling was challenged in the Supreme Court.

Issues

  • Whether the High Court had rightfully rejected the applications under Section 11(6)?
  • Whether a statutory disqualification also meant a disqualification of the power to nominate?

Held

The Supreme Court analyzed the clause under GTCPO which mentioned the MD as the sole arbitrator or any of his nominees. It arrived at the conclusion that, although the MD may be a respectable person and otherwise eligible to arbitrate, he is ineligible in the present case. Thus, that makes him ineligible to nominate anyone else as an arbitrator as well. The Court said, once the infrastructure collapses, the superstructure collapses as well.

Conclusion

The 2015 Amendment to the Act is aimed to promote arbitration in India and to provide for greater transparency and reliability on the same. Section 12 gains more importance in light of the new amendment and hopefully, it contributes to making arbitration a more popular recourse than judicial courts.

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