Supreme Court of India: Whether A Party Is Barred To Raise The Issue Of Ineligibility Of An Arbitrator, Having Itself Appointed The Arbitrator

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Section 12(5) of the Indian Arbitration Act (‘Act’), under Seventh Schedule, set out the categories of persons which are ineligible to be appointed as an Arbitrator. Further, the proviso to Section 12(5) inter alia states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) of the Act by an express agreement in writing. In Bharat Broadband Network Limited v. United Telecoms Limited Civil Appeal No. 3972 of 2019 decided on 16 April 2019, the Supreme Court dealt with the issue of whether a party is barred to raise the issue of ineligibility of an arbitrator, having itself appointed the arbitrator. The Court also dealt with whether the appointment letter given by such party to the arbitrator read with the statement of claim filed by the opposite party before the arbitrator can be termed as “express agreement in writing” within the terms of the proviso to Section 12(5) waiving the ineligibility of such arbitrator as provided under Section 12(5) of the Act. Detailed case analysis given below:

Factual Matrix

Dispute arose out of a solar power project granted to the Respondent by a bidding process. The Appellant issued an Advanced Purchase Order which contained an arbitration clause. The Respondent invoked the arbitration and called upon Appellant’s Chairman and Managing Director to appoint an independent and impartial arbitrator for adjudication of disputes as mentioned in the arbitration clause. Accordingly, in 2017, the Chairman and Managing Director of the Appellant appointed a Sole Arbitrator for this purpose.

Thereafter, the Supreme Court in TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377 (“TRF Ltd.”) ruled out that since a Managing Director of a company which was one of the parties to the arbitration, was himself ineligible to act as arbitrator under Schedule Seventh of the Act, such ineligible person could not appoint an arbitrator, and any such appointment would have to be held to be null and void.

Relying on this verdict, the Appellant prayed before the Sole Arbitrator that since he is de jure unable to perform his function as arbitrator, he should withdraw from the proceedings to allow the parties to approach the High Court for appointment of a substitute arbitrator in his place.

The Sole Arbitrator rejected this prayer without assigning any reasons. This led Appellant to file a petition in the High Court for the appointment of a substitute arbitrator under Section 14 & 15 of the Act. This application was rejected by the High Court on the grounds that the very person who appointed the arbitrator is estopped from raising a plea that such arbitrator cannot be appointed after participating in the proceedings. Further, the High Court also observed that filing of statement of claim filed by the Respondent amounts to an express agreement in writing within the terms of proviso to Section 12(5) of the Act which would, therefore, amount to a waiver of the applicability of Section 12(5) of the Act.

Applicable Legal Principles

Section 12(5) of the Act

“Section 12 – Grounds for challenge

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

(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.”

Item 5 of the Seventh Schedule, reads as under:

Arbitrator’s relationship with the parties or counsel xxx xxx xxx

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

Section 13 of the Act

13. Challenge procedure

(1) Subject to sub-section (4), the parties are free to agree on a procedure for challenging an arbitrator.

(2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of Section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

Section 14 of the Act

“14. Failure or impossibility to act.—(1) The mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, 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

(2) If a controversy remains concerning any of the grounds referred to in clause (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.

Parties Contentions

Appellant contended

  • that the appointment of the Sole Arbitrator goes to eligibility to be appointed as an arbitrator, as a result of which the appointment made is void ab initio [Relying on Sections 12-14 of the Act read with TRF Ltd.];
  • that TRF Ltd. is declaratory of the law and would apply to the facts of this case;
  • since there is no express agreement in writing between the parties subsequent to disputes having arisen between them that Sole Arbitrator’s appointment is agreed upon, the proviso to Section 12(5) of the Act will not be applicable in the present case.

Respondent contended

  • that Section 12(4) makes it clear that a party may challenge the appointment of an arbitrator appointed by it only for reasons of which it became aware after the appointment has been made. In the facts of the present case, since Section 12(5) and the Seventh Schedule came into effect on 23.10.2015, the Appellant, at the time of making the appointment of the Sole Arbitrator in 2017, was fully aware that the Managing Director of the Appellant would be hit by Item 5 of the Seventh Schedule, and consequently, any appointment made by him would be null and void. This being so, Section 12(4) acts as a bar to the petition filed under Sections 14 and 15 for the appointment of a substitute Arbitrator by the Appellant;
  • that a party who intends to challenge the appointment of the arbitrator, shall, within 15 days after becoming aware of circumstances referred to in Section 12(3), send a written statement of reasons for the challenge to the arbitrator. Admittedly, this has not been done within the time frame stipulated by the said Section, as a result of which, the petition for the appointment of a substitute Arbitrator filed by the Appellant should be dismissed;
  • that the “express agreement in writing” under proviso to Section 12(5) need not be in the form of a formal agreement between the parties, but can be culled out from the appointment letter issued by Appellant as well as the statement of claim filed by the Respondent before the Sole Arbitrator leading, therefore, to a waiver of the applicability of Section 12(5).

Judgement

The Court held

  • that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule of the Act, he is, as a matter of law, ineligible to be appointed as an arbitrator;
  • the only way in which this ineligibility can be removed, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an “express agreement in writing”;
  • that party autonomy in proviso to Section 12(5) of the Act is to be respected only in certain exceptional situations which could be situations which arise in family arbitrations or other arbitrations where a person subjectively commands blind faith and trust of the parties to the dispute, despite the existence of objective justifiable doubts regarding his independence and impartiality;
  • a case which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted for the appointment of a Substitute Arbitrator inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator. This being so, his mandate automatically terminates, and he shall then be substituted by another arbitrator under Section 14(1) itself.
  • that the Managing Director of the Appellant could not have acted as an arbitrator himself, being rendered ineligible to act as arbitrator under Item 5 of the Seventh Schedule. Thus, by virtue of TRF Ltd. the appointment of the Sole Arbitrator would be void ab initio. The disputes arose only after the introduction of Section 12(5) i.e. (23.10.2015), and the Sole Arbitrator was appointed long after 23.10.2015;
  • Section 12(4) of the Act has no applicability to an application made to the Court under Section 14(2) to determine whether the mandate of an arbitrator has terminated as he has, in law, become unable to perform his functions because he is ineligible to be appointed as such under Section 12(5) of the Act;
  • The expression “express agreement in writing” in the proviso to Section 12(5) of the Act refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct;
  • This agreement must be an agreement by which both parties, with full knowledge of the fact that the Sole Arbitrator is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him to continue as such;
  • The facts of the present case disclose no such express agreement. The appointment letter which is relied upon by the High Court as indicating an express agreement on the facts of the case is dated 17.01.2017. On this date, the Managing Director of the Appellant was certainly not aware that the Sole Arbitrator could not be appointed by him as Section 12(5) read with the Seventh Schedule only went to the invalidity of the appointment of the Managing Director himself as an arbitrator;
  • that a statement of claim may have been filed before the arbitrator, would not mean that there is an express agreement in words which would make it clear that both parties wish the Sole Arbitrator to continue as arbitrator despite being ineligible to act as such.

Thus, the Supreme Court set aside the decision of the High Court and held that the mandate of the Sole Arbitrator having terminated, as he has become de jure unable to perform his function as an arbitrator.

The Court also observed that the High Court was wrong in holding that the Appellant cannot be allowed to raise the issue of eligibility of an arbitrator, having itself appointed the arbitrator. The High Court was also incorrect in stating that there is an express waiver in writing from the fact that an appointment letter has been issued by the Appellant, and a statement of claim has been filed by the Respondent before the arbitrator.

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