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Author - Siddhant Asthana (Advocate)

Arbitration is a mutually agreed alternate dispute resolution mechanism. Thereby in the matter of adjudication by way of Arbitration party autonomy was considered to be foremost, including in matter of nominating and appointing an arbitrator of their own choice. Over the years courts recognized and respected the party autonomy in the matter of appointment of arbitrators as per the written agreement between them for alternate dispute resolution. Taking advantage of said position in law, corporations and parties in dominant position would insist and provide for arbitration agreement that allowed them the advantageous position to nominate and appoint an arbitrator of their own choice without actual mutuality in appointment of such an arbitrator. Such appointments would then be upheld on the concepts of party autonomy and so called mutuality implied on account of already having entered into a written agreement containing such a stipulation. 

In the matter of Indian Oil Corporation versus Raja Transport 2009 (8) SCC 520, the position of party autonomy was again reiterated in so far as it related to large originations and public sector enterprises. The judgment lost sight of the fact that arbitral neutrality is desirable in the matter of adjudication by way of arbitration irrespective of the size, ownership of the corporation. 

In the matter of adjudication of the disputes between the parties by way of arbitration complete non-bias and neutrality of the person adjudicating the dispute between the parties is of utmost importance. Otherwise the very concept of “adjudication” looses significance. 

The above position that prevailed required a change. That much desired change has been brought about by the Amendment dated 23.10.2015 by way of Arbitration and Conciliation Amendment Act, 2015(No. 3 of 2016) to the Arbitration and Conciliation Act, 1996 with the object of achieving neutrality in the adjudication by way of arbitration. 

With the coming into force of the amendments of 2015 the Arbitration procedure has been aimed to be made free from all sorts of biases and doubts which may creep in the appointment procedures wherein a particular party has been entrusted with the power to appoint an arbitrator and commence the arbitration proceedings. The doubts towards impartiality and justifiable doubts which may creep in by the unilateral appointments have been attempted to be completely cleared by the legislature by the said amendments. 

Significant amendments have been made in Section 12 of the Act and by insertion of Schedule 5 and 7 to the Act in this regard.  

At the outset it is amply clear that the amendment made by the 2015 act to the Section 12(5) of the act clearly postulates that once an arbitrator falls under any of the entries provided under Seventh Schedule brought in by the amending act of 2015 he suffers from an inherent ineligibility which goes to the root of the matter and cannot be done away. 

This would mean that the arbitrator cannot be an employee of the appointing party for example a manager, advisor, managing director or a person of control exercising reasonable controlling influence on the party making the appointment. The entries as have been detailed under the Seventh Schedule of the amendment act are illustrative of all such persons whose appointment shall be ineligible.  Thus the Composition of the Arbitration Tribunal would be contrary to and not in accordance with the foretasted provisions of Part-I of the Act. The Tribunal would per se be having no De-jure mandate or jurisdiction. Therefore such appointments and the proceedings undertaken in furtherance of such appointment would be subject to challenge under various provisions of the Arbitration and Conciliation Act, 1996. 

Further, Hon’ble Supreme Court while interpreting Section 12 read with Schedule 7 to the Act has held that not only the person that is ineligible as per 7th Schedule cannot be the arbitrator, but such person cannot even nominate someone to be the arbitrator. The ineligibility is extended.  Further the organisation or the appointing authority that may be interested in the outcome of the arbitration proceedings would also be ineligible to make an appointment. The object of the amending act being to bring about complete non- bias and neutrality in adjudication process. 

The clauses providing for arbitration either by CMD / Director or his nominee arbitrator is commonly found in infrastructure construction contracts entered by Public Sector Undertakings with Private Parties. 

By way of an example of such a clause may read as follows: the matter in dispute shall be referred to the arbitration of Chairman cum Managing Director,  XYZ LIMITED or his nominees and the decision of CMD (XYZ) or his nominee shall be final and binding on both the parties. The provision of Indian arbitration act,  as amended from time to time shall apply to such arbitration proceedings.”

It is in the context of such clauses which contain a dichotomy of sorts wherein not only a person being a CMD/ employee or advisor of one of the parties to the disputes has been entrusted to be an arbitrator but he also has a power to nominate another as an arbitrator. It is in this context the Hon’ble Supreme Court was called upon to clarify the law. The position of ineligibility of CMD / Director being though was clear legislatively by the amendment act of 2015, the position of ineligibility qua the nominee has also been clarified by the Hon’ble Supreme Court. The object of the act being to achieve complete neutrality.  

The first and foremost decision which continues to be landmark decision is the decision in TRF Ltd Vs Energo Engineering Projects Ltd. 2017(8) SCC 377 wherein the Hon’ble Supreme Court held that by virtue of Section 12(5) any person who falls in any of the categories of the Seventh Schedule of the Act shall be ineligible to be appointed as an arbitrator as the language of Seventh Schedule was amply clear.. Further the Hon’ble Supreme Court observed that the singular question which arose was when a person for example the Managing Director of the Corporation who had become ineligible by the operation of law would he be eligible to nominate it is in the said context the Hon’ble Supreme Court held “Once the Arbitrator had become ineligible by operation of law, he could not nominate another as an Arbitrator. The Arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It was inconceivable in law that person who was statutorily ineligible could nominate a person. Once the identity of the Managing Director as the sole Arbitrator was lost, the power to nominate someone else as an Arbitrator was obliterated.” Thus any appointment of the nominee would also be barred in law in terms of the Section 12(5) read with the Seventh Schedule of the Act.  Based on the said principle the Hon’ble Supreme Court in its above decision went on to set aside the appointment of the nominee of the Managing Director of the party to the dispute.  The other important aspect which the Hon’ble Supreme Court further clarified was that the nominee though may be a person of repute and respectability and integrity but the said aspect will not be an aspect of consideration thus it was held that once a person is ineligible to be an arbitrator he shall not be eligible to nominate as the nominee would suffer from the same ineligibility. 

The above decision of the Hon’ble Supreme Court being in the context of Section 11 i.e. at the stage of appointment however once such an appointment has already happened then in that particular case the recourse to challenge the ineligibility within the meaning of Section 12(5) read with seventh Schedule of the Arbitration and Conciliation ,1996 thereby his de-jure / in law inability to be and act as an arbitrator a party need not approach the arbitrator under Section 13 of the Act, but can instead approach the Court directly under Section 14 and 15 of the Arbitration and Conciliation Act, 1996. 

In this regard the Hon’ble Supreme Court in HRD Corporation Vs GAIL INDIA LIMITED 2018(12) SCC 471 has categorically observed 

“…12.  After the 2016 Amendment Act, a dichotomy is made by the Act between persons who become "ineligible" to be appointed as arbitrators, and persons about whom justifiable doubts exist as to their independence or impartiality. Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes "ineligible" to act as arbitrator. Once he becomes ineligible, it is clear that, Under Section 14(1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as "ineligible". In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal Under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed Under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground……..”

Thus a bare perusal of the above decision would show that once an arbitrator who has been appointed in contravention of the Seventh Schedule in such a situation the above decision clarifies that the party aggrieved by such an appointment will have the recourse to Section 14 of the Act. 

Further the Hon’ble Supreme Court in one of its most recent decisions in Bharat Broadband Network Limited Vs United Telecoms Limited 2019(5) SCC 755 has relied upon both its earlier decisions in TRF Ltd Vs Energo Engineering Projects Ltd. 2017(8) SCC 377  and the one mentioned above i.e. HRD Corporation Vs GAIL INDIA LIMITED 2018(12) SCC 471 and has made crucial observations with regard to ineligibility of an arbitrator and his nominee. One of the most important and relevant observations being made in Para 15 

“15. Section 12(5), on the other hand, 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 in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The Sub-section then declares that such person shall be "ineligible" to be appointed as arbitrator. 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.”

The Hon’ble Supreme Court has further clarified the meaning of an "express" agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that the arbitrator so appointed 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. Thus meaning that only an express agreement in writing as per the provisions of proviso to Section 12(5) of the Act and not by conduct in any manner can the ineligibility be waived off. The Hon’ble Supreme Court in the said decision also clarified by participating in the arbitration proceedings it would not mean that the party raising the objection to ineligibility could not do the same or has waived off the right to object the ineligibility.  

The other aspect the Hon’ble Supreme Court further clarified was that it was only after 03.07.2017 i.e. after the decision of the Hon’ble Supreme Court in TRF that the position of the nominee arbitrator was crystallized and it was clear that the arbitrator who is interdicted as being ineligible by virtue of Section 12(5) read with the Seventh Schedule of the Act could not nominate another thus all objections to nominee arbitrators could only have been raised by aggrieved parties after 03.07.2017 i.e. after the declaration of the law by the Hon’ble Supreme Court. 

The Hon’ble Supreme Court further went on to terminate the mandate and also set aside the awards which had been passed by the ineligible nominee arbitrator. 

Therefore after the perusal of the abovementioned decisions of the Hon’ble Supreme Court in the captioned matters would mean that the ineligibility being an issue which goes to the root of the matter can be challenged at three stages pre appointment under Section 11 by the party who does not have power under the agreement to nominate or appoint. Thereafter once an appointment of an ineligible arbitrator is made by the party having been empowered by the agreement either the arbitrator and himself is ineligible in terms of the Section 12(5) read with Seventh Schedule of the Act or he discharges the function of nominating another in the said circumstance the remedy would be by way of a petition under Section 14 and 15 of the Arbitration and Conciliation Act, 1996. Further in case the award is passed by the ineligible arbitrator or an ineligible nominee in the said circumstance the recourse could be taken under Section 34 as Section 34(2) (v) specifically provides for such a challenge and ineligibility of an arbitrator being a question of law can be challenged at any stage including at the stage of Section 34 within the meaning of Section 34 (2) (v) and the award may become liable to be set aside on the said ground as being one of the grounds provided for setting aside of the award under Section 34 of the Act. Section 34(2) (V) of the Act which reads as under:

34(2)….. ( v ) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate or, failing such agreement, was not in accordance with this Part;.

This herein would mean that the award passed by an ineligible arbitrator can be challenged under Section 34 as the above sub-section specifically provides for a challenge to the award on the basis of the composition of the tribunal being conflict with part I of the Act and thus rendering the award open to a challenge. Accordingly it can be asserted that the award is by a Coram Non-Judice. 

The latest decision of the Hon’ble Supreme Court in Perkins Eastman Architects DPC and Orss. Vs HSCC (India) Ltd 2019 SCC Online SC 1517 wherein both the decisions of the Hon’ble Supreme Court in TRF  and Bharat Broadband have been discussed and relied. The Hon’ble Supreme Court has completely clarified the law with its findings and has held that in a situation like TRF which deals with the case where the Managing Director is the nominated arbitrator as well as possesses the additional power to appoint/nominate an arbitrator, the Managing Director and his nominee are found to be ineligible then in a second type of situation where the Managing Director is not to act as an arbitrator himself but is empowered or authorized to appoint any other person of his choice or discretion as an arbitrator the said appointment will also be ineligible. It was categorically observed that if in the situations like the one in TRF where the Managing Director was found incompetent, it was because of the interest that he would be having in the outcome and that is the test then in a situation where he only has a power to nominate in that circumstance he would suffer from the same ineligibility and apprehension of bias as there would be an element of exclusivity in the nomination that he may make. Thus relying upon the decision in TRF the Hon’ble Supreme Court held that the clauses where the party has given a power to nominate only shall also fall under Section 12(5) read with the seventh schedule and the arbitrator shall be ineligible to act. Such appointments shall suffer from the ineligibility owing to the operation of law. 

The Hon’ble Supreme Court also observed that the intention behind the 2015 amendments was to create a healthy environment for arbitration.  

“Not only must Justice be done; it must also be seen to be done." ... The undesirable position that prevailed in the name of party autonomy in the matter of nominating and appointing an arbitrator for adjudication of dispute, now stands corrected and rectified. By the amendments to the Arbitration and Conciliation Act, 1996 and to their interpretation as to what they actually provide the most desired position between adversaries getting their disputes settled by way of arbitration has been achieved. That is the satisfaction that at least they are in the hands of an adjudicator who is neutral having no bias towards a particular party and thereby they would receive justice without bias or favor.