Delhi High Court: In light of the Arbitration Amendment Act, 2015, whether the appointment of an arbitrator through a party holding the position of Managing Director is null and void?

Delhi-High-Court

 In the case of Worlds Window Infrastructure & Logistics Pvt. Ltd. v. Central Warehousing Corporation, (ARB. P. 437/2018), the Delhi High Court addressed the issue of whether the appointment of an arbitrator by the Managing Director of a company  is null and void after coming into force of the Arbitration and Conciliation (Amendment) Act, 2015 (the Amendment Act) and in view of Section 12(5) of the Indian Arbitration Act (the Act). Read the case analysis given below:

Factual Matrix

Certain dispute arose between the parties and the respondent appointed the arbitrator. The petitioner claims that the dispute had already been adjudicated and an award had also been passed. Therefore, second arbitration of the same dispute is not maintainable as per the petitioner. After a round of litigation in lower courts and dismissal of incidental appeals in Allahabad High Court, the petitioner filed an application for appointment of arbitrator by Delhi High Court under Section 11(6) of the Act. At the same time, the petitioner filed another application requesting the Court to terminate the mandate of the appointed arbitrator and stay the arbitration proceedings under Section 14 read with Section 12 of the Act.

Applicable Legal Principles

Section 14 of the Act

“14 Failure or impossibility to act.—

(1) The mandate of an arbitrator shall terminate if—

(a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and

(b) he withdraws from his office or the parties agree to the termination of his mandate.

(2) If a controversy remains concerning any of the grounds referred to inclause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.

(3) If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12.”

Section 12(5) of the Act

“12 Grounds for challenge.—

…..

(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Seventh Schedule of the Act

“THE SEVENTH SCHEDULE

[See section 12 (5)]

Arbitrator’s relationship with the parties or counsel

……

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

xxxxxx

12 The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.

Arbitration Clause

“21.0 It is understood by both the parties that any dispute arising out of this Contract, not resolved by the Joint Committee, shall be referred to an Advisory Committee to be jointly appointed by the parties.

In case the parties fail to arrive at any satisfactory resolution, the dispute arising out of any matter relating to this contract shall be governed by the Arbitration and Conciliation Act, 1996. It is also a term of this contract that no person other than a person appointed by MD, Central Warehousing Corporation, New Delhi should act as an arbitrator.”

Parties’ Contentions

The petitioner claims were premised on the basis that as per the arbitration clause, the Arbitrator is to be appointed by the Managing Director of the respondent, after the coming into force of the Amendment Act and in view of Section 12(5) of the Act, the appointment of the arbitrator by the Managing Director is null and void.

The petitioner cited the case of the Supreme Court of India TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377, to contend that the Supreme Court has already held that as the Managing Director of a party to the arbitration proceedings is ineligible as being appointed as an Arbitrator, equally he cannot nominate another Arbitrator in his own place.

It is further submitted that, in any case, as the petitioner had made complaints against the Managing Director of the respondent to the Ministry of Consumer Affairs, Food and Public Distribution, the Managing Director of the respondent cannot be allowed to appoint an Arbitrator as this would be against the principle of natural justice that no person can be a judge in his own cause or appoint a judge in his own cause.

Relying on HRD Corporation(Marcus Oil and Chemical Division) v. Gail (India) Limited, (2018) 12 SCC 471, it was also contended by the petitioner that the impugned arbitrator had a close business relationship with the respondent making her ineligible to be appointed as an arbitrator invoking Entry 1 and Entry 12 of the Seventh Schedule to the Act.

Analysis

The Delhi High Court relied on its earlier dictum of Bhayana Builders Pvt. Ltd v. Oriental Structural Engineers Pvt. Ltd. and Anr., (2018) 249 DLT 619, wherein the Court had considered the effect of the amendment to the Act made by the Amendment Act and held that the amendment to the Act does not in any way take away the power vested in one of the parties to the Arbitration Agreement to appoint an Arbitrator, though in such agreements the burden of ensuring that the person so appointed shall not fall foul of any of the provisions of the Fifth or the Seventh Schedule of the Act will be even higher and open to a greater scrutiny.

With regard to the complaints made by the petitioner against the Managing Director of the respondent and for this reason the Managing Director of the respondent becoming ineligible to appoint an Arbitrator, the Court noted that the respondent has brought to its attention that the Ministry of Consumer Affairs, Food and Public Distribution, taking note of the complaints made by the petitioner against the Managing Director and the Director (Finance) of the respondent, had communicated to the respondent its decision that such disputes need to be resolved in a fair and transparent manner through an Arbitrator and had suggested names of four eminent persons from whom an Arbitrator should be appointed by the respondent. The arbitrator appointment by the respondent was one of the four names suggested by the Ministry.

Further, the Court noted that an arbitrator is not an employee, consultant or advisor of the respondent. The past relationship alleged by the petitioner is not only too remote (being divorced by a period of 32 years) but also most fanciful. Even by adopting a most fanciful “commonsensical approach”, the relationship urged by the petitioner between the respondent and the Arbitrator can by no stretch fall within the ambit of Entry 1 or Entry 12 of the Seventh Schedule.

Regarding the Supreme Court case of HRD (Supra), the Court explained that petitioner’s petition was not maintainable since in that case, the Supreme Court had clarified that where the challenge to an Arbitrator is on the grounds stated in the Fifth Schedule, the same are to be raised before the Arbitrator in accordance with Section 13 of the Act and if the challenge is not successful and the Arbitral Tribunal decides that there are no justifiable doubts to the independence or impartiality of the Arbitrator, the Arbitral Tribunal must then continue the arbitral proceedings under Section 13(4) of the Act and make an Award and the party making a challenge to the Arbitrator’s appointment may make an application for setting aside such Arbitral Award in accordance with Section 34 of the Act, including, on the grounds of purported lack of independence or impartiality of the Arbitrator.

Conclusions

The Court held that the amendment to the Act does not in any way take away the power vested in one of the parties to the Arbitration Agreement to appoint an Arbitrator, though in such agreements the burden of ensuring that the person so appointed shall not fall foul of any of the provisions of the Fifth or the Seventh Schedule of the Act will be even higher and open to a greater scrutiny.

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