Appointment of Arbitratros in Light of Recent Amendments and Judicial Pronouncements

The Arbitration and Conciliation Act, 1996 (the Act) was brought into place to consolidate and amend the law relating to Arbitration on the structured lines and in

The Arbitration and Conciliation Act, 1996 (the Act) was brought into place to consolidate and amend the law relating to Arbitration on the structured lines and in realm with the UNCITRAL Model Law. The object is to bring the provisions of Arbitration in India in parlance with that in the foreign countries. Arbitration in India had been crippling with problems including excessive cost, protracted proceedings leading to extensive delays and other issues frustrating the very object of the Arbitration Act. One of the pressing issues was relating to independence and impartiality of the Arbitrators. In order to remedy such issues and bring in pace with the changing trends, the amendments have been and still are being introduced, to bring in significant changes with the Act to make the process effective and expeditious

The main cerebration through this article is to analyze the scope of Section 12(5), introduced by the Arbitration and Conciliation (Amendment) Act, 2015 (‘Amendment Act’) relating to the neutrality of the Arbitrators in the light of the recent and relevant judicial pronouncements.

Independence and impartiality of arbitrators are the touchstones of arbitration. The fear of the parties with respect to the transparency and impartiality has been taken care of with the Amendment Act. The Amendment Act mentions the de jure and de facto ineligibility clauses for the purpose of the appointment of the arbitrator.

Section 12 of the Act as amended by the Amendment Act inserted a new Fifth Schedule, which lists the grounds that would guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Also, the following sub-section after sub-section (4) was inserted:-

"(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.”

The main difference between the Fifth and the Seventh schedule is that while the Fifth Schedule lists the grounds and circumstances giving justifiable doubts as to the independency and impartiality of an arbitrator, on the other hand, the Seventh Schedule lists the instances which directly make a person ineligible to be appointed as an arbitrator provided the parties agree to contrary after the arisen of disputes.  

The Seventh Schedule enlists the relationship under three categories which are

  • Arbitrator's relationship with the parties or counsel;
  • Relationship of the arbitrator to the dispute; and
  • Arbitrator's direct or indirect interest in the dispute.

Effect of Seventh Schedule is that it breaks the monotony of so called standard Arbitration Agreements or clauses inserted into any agreements  which would propose to appoint or nominate a arbitrator any interested party like its Director, Managing Director, Partner, Consultants, Manager, Engineer, Chief Engineer or for that matter any official/ employee within the organization or the management. Such appointments are hit by Section 12(5) of the Amended Act and such arbitrators are de-jure disqualified.

The Law Commission, however, felt that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective "justifiable doubts" regarding his independence and impartiality. To deal with such situations, the Commission proposed the proviso to Section 12(5), where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed Section 12(5) by an express agreement in writing.

CASE LAW ANALYSIS

The Indian Supreme Court through various pronouncements has held that a broad commonsensical approach shall be adopted while interpreting Section 12 along with Schedules. Section 12(5) is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non-obstante clause. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing.

What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, 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". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule.

In the case, Aravalli Power Company Ltd. v Era Infra Engineering Ltd, The Supreme Court has reiterated the law by stating that, although prior to the Amendment Act the arbitrator being a current employee of any of the parties was ipso facto not a ground for disqualification, pursuant to the Amendment Act, such appointments would be illegal.

In the case, HRD Corporation v GAIL, the Indian Supreme Court dealt with the appointment of former judges as arbitrators, who may be associated in previous disputes involving one or more parties to the arbitration. It was held that the arbitrator’s previous involvement in the case meant involvement in some other capacity and not as an arbitrator. Also, that previous involvement must be in the very dispute in arbitration where he is appointed as an arbitrator and not a different dispute/arbitration as any other interpretation would render Item 24 of the Fifth Schedule largely ineffective.

In the case, DBM Geotechnics & Constructions Pvt. Ltd. Vs. Bharat Petroleum Corporation Ltd, The Bombay High Court had drawn a distinction between the power to nominate an arbitrator and the choice of the nominee. The arbitration clause allowed an employee of a company to nominate another employee as an arbitrator. The Court held that the power to nominate continued to remain valid even if statutory bars now meant that another employee could not be an arbitrator.

Another important aspect is whether an ineligible arbitrator can further validly nominate any other arbitrator? The Supreme Court in the case TRF Ltd v. Energo Engineering Projects, ruled out on the proposition in following words:

Para 57 “In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so.”

 Another issue that has been addressed vide this judgment is that the arbitration clauses are independent of each other, and irrespective of invalidity of one clause,  another arbitration clause survives. Hence, in such matters the parties can get the appointment of arbitrator with the aid of court under Section 11 of the Arbitration & Conciliation Act.

In another case, Bharat Broadband Network Limited vs. United Telecoms Limited, it has been reiterated by the Supreme court that when Managing Director of a company, one of the parties to the arbitration, was himself ineligible to act as arbitrator, such ineligible person could not appoint an arbitrator, and any such appointment would have to be held void.

REMEDIES AVAILABLE TO THE PARTIES AGAINST DE-JURE DISQUALIFICATION OF THE ARBITRATORS

In such cases, the parties have the following remedies available to them:

  1. Waiver- Taking recourse to Proviso of Section 12(5), the parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.
  2. Substitution - Once an arbitrator is de jure disqualified, he can be substituted in accordance with Section 14(1) of the Act.
  3. Appointment by the High Court - When the arbitration Clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. The High Court may appoint a substitute arbitrator with the consent of both the parties.

CONCLUSION

Where the person as appointed pursuant to the Arbitration agreement become ineligible then the same ineligible person cannot further appoint or nominate as this would lead to an anomalous situation. This is based on the maxim Qui Facit Per Alium Facit Per Se , which embarks that what one does through another is done by oneself, which cannot be sustained in lieu of the amendment. The ineligibility strikes at the root of the power to arbitrate or get it arbitrated upon by a nominee. The statistics shows that foreign investment is being boosted with having efficient and sound legal framework to cater the needs of the industry in cases of disputes, thus enlarging the scope of business in India. For the said reason, the amendments are brought to the act keeping in mind the changing trends and development in the legal industry to keep in pace with the various other countries. The amendments along with the judicial interpretations clearly embark the fact that India has enveloped arbitration as one of the essentials modes for settlement of commercial disputes.