Madras High Court
M/S. Clarke Energy India Pvt. Ltd vs M/S.Sas Epc Solution Private Limited on 2 December, 2021
Author: Senthilkumar Ramamoorthy
Bench: Senthilkumar Ramamoorthy
Arb.O.P.Nos.196 & 197 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE D : 02.12.2021
CORAM:
The Hon'ble Mr. Justice SENTHILKUMAR RAMAMOORTHY
Arb.O.P.Nos.196 and 197 of 2021
and
Application Nos.3880 and 3882 of 2021
M/s. Clarke Energy India Pvt. Ltd.,
Shivikiran, Plot No.160, Lane No.4,
Dhanukar Colony, Kothrud,
Pune – 411 038.
Rep. by its Authorized Signatory
Mr.M.Arun. ... Petitioner
(in both Arb.O.Ps)
Vs
1.M/s.SAS EPC Solution Private Limited,
No.1644E, H. Block, Sarayu APTS,
14th Street, 16th Main Road,
Anna Nagar West,
Chennai – 600 040.
2.Mr.Justice E.Padmanabhan(Retd)
Sole Arbitrator ... Respondents
(in both Arb.O.Ps)
PRAYER : These Petitions have been filed under Section 14 and 15 r/w
Section 11 of the Arbitration and Conciliation Act 1996 praying to terminate
the mandate of the second Respondent as the Sole Arbitrator in Arbitration
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https://www.mhc.tn.gov.in/judis
Page No.1 of 41
Arb.O.P.Nos.196 & 197 of 2021
proceedings titled as ''M/s.SAS EPC Solution Private Limited vs. M/s.
Clarke Energy India Pvt. Ltd.'' arising out of contracts dated 08.09.2011 (in
respect of Engine I and II) executed between Applicant and Respondent
No.2 and reconstitute the arbitral tribunal by substituting the Sole Arbitrator.
For Petitioner : Mr.Vijay Narayan, S.C.
for Mr.K.Gowtham Kumar
For Respondents : Mr.K.Harishankar for R-1
COMMON ORDER
Interesting questions with regard to the scope of Sections 14 and 15 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) arise for consideration in these two petitions in respect of connected but separate arbitral proceedings. As a preliminary issue, it should be noticed that the arbitral proceedings commenced after 23.10.2015 and, therefore, Act 3 of 2016 would apply.
2. The petitioner herein is the respondent in the above mentioned arbitration proceedings, which are underway before a sole arbitrator (the Arbitrator) appointed with the consent of both parties. The current stage of proceedings is that the claimant has filed its proof affidavit and the next _____________ https://www.mhc.tn.gov.in/judis Page No.2 of 41 Arb.O.P.Nos.196 & 197 of 2021 hearing is scheduled in early December 2021 for the cross examination of C.W.1.
3. The petitioner asserts that the Arbitrator is de jure unable to perform his functions. Such assertion is made partly on the basis that the petitioner has justifiable doubts as to the independence or impartiality of the Arbitrator and partly on the basis that the Arbitrator demanded exorbitant fees in contravention of the Fourth Schedule of the Arbitration Act. These contentions are refuted by the first respondent. The first respondent submits that the petitions are not maintainable under Sections 14 and 15 of the Arbitration Act. According to the first respondent, there is no basis to the assertion that the Arbitrator has become de jure unable to perform his functions. As regards the fixation of fees, the first respondent submits that the parties agreed to the fixation of fees in accordance with the Fourth Schedule of the Arbitration Act. However, the first respondent contends that the learned Arbitrator misapplied the Fourth Schedule and thereby charged much more than the amount that would be payable if the Fourth Schedule were to be applied correctly.
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4. Oral submissions were made on behalf of the petitioner by Mr.Vijay Narayan, Senior Counsel, assisted by Mr.K.Gowtham Kumar, learned counsel; and on behalf of the first respondent by Mr.K.Harishankar, learned counsel.
5. Mr.Vijay Narayan opened his submissions by contending that the present petitions are maintainable under Sections 14 and 15 of the Arbitration Act. By drawing reference to Sections 12 and 13 thereof, he submitted that a challenge to an arbitrator is permissible under Sections 12 and 13 if justifiable doubts as to the independence or impartiality of the arbitrator concerned arise in circumstances specified either in the Fifth or Seventh Schedule of the Arbitration Act. According to him, the grounds on which the present petitions are filed are outside the scope of the Fifth and Seventh Schedules. Therefore, a challenge could not have been made before the Arbitral Tribunal.
6. By contrast, he submitted that Section 14 becomes applicable if the Arbitrator becomes de jure or de facto unable to perform functions. In the case at hand, he submitted that the material on record justifies the _____________ https://www.mhc.tn.gov.in/judis Page No.4 of 41 Arb.O.P.Nos.196 & 197 of 2021 inference that the apprehension of bias on the part of the petitioner is reasonable. In support of the said submissions, reference was made to the orders passed by the learned Arbitrator. An order dated 02.11.2020 was passed by the Arbitral Tribunal on an application filed by the first respondent under Section 17 of the Arbitration Act. By such order, the first respondent was directed to pay a sum of Rs.13,72,354/- to the petitioner. This order was not complied with by the first respondent. In spite of such non-compliance, it was contended that no action was taken against the said respondent for such non-compliance, and that such non-compliance was not even questioned or highlighted by the Arbitrator.
7. In furtherance of the allegation of justifiable doubts as to the independence or impartiality of the Arbitrator, the direction issued by the Arbitral Tribunal on 23.10.2020 for payment of a sum of Rs.2,00,000/- by each party towards fees and a sum of Rs.15,000/- towards secretarial charges was referred to. By relying upon the statement of accounts provided by the petitioner's bank, it was contended that the said sum was duly remitted by the petitioner on 09.11.2020. In spite of such remittance, the petitioner pointed out that the Arbitral Tribunal erroneously recorded in _____________ https://www.mhc.tn.gov.in/judis Page No.5 of 41 Arb.O.P.Nos.196 & 197 of 2021 paragraph 21 of the order dated 06.09.2021 that only the first respondent/claimant therein remitted the said amount on 09.11.2020, and that the petitioner/ respondent therein did not remit such amount. The petitioner also referred to the observations of the Arbitral Tribunal at paragraphs 4, 6 and 7 of the order dated 06.09.2021 in support of the contention that the conduct of the Arbitrator justifies a reasonable apprehension of bias. In particular, the petitioner referred to the observation at paragraph 3 that the “ Claimant was ready and willing both for fixation of fees and remittances thereof to the Sole Arbitrator in terms of the Fourth Schedule. However it is the Respondent who had been dragging the matter indefinitely under one pretext or other.” The following observations were also relied upon in this regard: at paragraph 4 that the petitioner herein was not ready and willing to pay the sitting fees even after filing the counter claim; at paragraph 6 that ''....Less said is better with respect to the stand taken by the respondent and its Counsel....''; and at paragraph 7 that ''.... the respondent raised various objections, to put it mildly untenable objections....''.
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8. In the above factual context, the petitioner developed its arguments on bias by citing several judgments. The said judgments are set out below:-
(i) HRD Corporation (Marcus Oil and Chemical Division) v.
GAIL (India) Limited (2018) 12 SCC 471 (HRD Corporation), wherein, at paragraphs 11, 12 and 13, the Hon'ble Supreme Court discussed the Fifth and Seventh Schedules of the Arbitration Act in relation to Sections 12 and 14 thereof and concluded that a petition under Section 14 is maintainable if the Arbitrator concerned is ineligible in terms of the Seventh Schedule of the Arbitration Act;
(ii) Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755 (Bharat Broadband), wherein, at paragraphs 11 and 17, the Hon'ble Supreme Court concluded that a petition under Section 14 would lie in all cases to which Section 12(5) of the Arbitration Act is applicable;
(iii) Madras Fertilizers Limited v. SICGIL India Limited and another 2010 (2) CTC 357 (Madras Fertilizers), wherein, at paragraphs 23 and 24, this Court held that the mandate of an Arbitrator is liable to be terminated if there is a controversy with regard to the fixation of fees; _____________ https://www.mhc.tn.gov.in/judis Page No.7 of 41 Arb.O.P.Nos.196 & 197 of 2021
(iv) Government of Tamil Nadu v. VDB Projects Private Limited and others (2020) 4 LW 468 (VDB Projects), wherein, at paragraphs 12 and 13, the Court concluded, in the factual context set out in paragraphs 3 and 4 thereof, that the Arbitral Tribunal had become de jure unable to perform functions properly because exorbitant fees were demanded;
(v) Doshion Private Limited v. Hindustan Zinc Limited AIR 2019 Raj 54 (Doshion), wherein the Rajasthan High Court followed the judgment of this Court in Madras Fertilizers and concluded that the mandate is liable to be terminated on account of the dispute over fees;
(vi) Union of India v. Singh Builders Syndicate (2009) 4 SCC 523, wherein, at paragraphs 20 to 24, the Hon'ble Supreme Court lamented about the high costs involved in arbitral proceedings in India;
(vii) Parekh Industries Limited v. Diamond India Limited 2019 SCC Online Bom 851(Parekh Industries), wherein, at paragraphs 31 to 38, the Bombay High Court concurred with the reasoning of the Madras High Court in Madras Fertilizers by holding that the scope of Section 14(1)(a) of the Arbitration Act is wide enough to take within its ambit bias as the basis to seek a declaration that the mandate had terminated; _____________ https://www.mhc.tn.gov.in/judis Page No.8 of 41 Arb.O.P.Nos.196 & 197 of 2021
(viii) Entertainment City Limited v. ASPEK Media Private Limited AIR 2021 Delhi 51(Entertainment City), wherein, at paragraphs 18 to 21, the Delhi High Court concluded that the mandate of the Arbitrator would be determinable under Section 14(1) of the Arbitration Act if the fee charged by such Arbitrator is in contravention of the provisions of the Arbitration Act;
(ix) NTPC Limited v. Amar India Limited 276 (2021) DLT 742 (Amar India), wherein the Delhi High Court concluded that the mandate is liable to be declared as terminated in view of the Arbitral Tribunal charging a fee contrary to that specified in the relevant contract; and
(x) In re Medicaments and Related Classes of Goods( No.2) (2001) 1 WLR 700 (In re Medicaments), wherein the Court of Appeals discussed the tests for deciding whether there is real likelihood of bias.
9. In response to these submissions, learned counsel for the first respondent contended that all the judgments cited by the petitioner were rendered in a specific factual context. Consequently, such judgments cannot be applied without reference to the factual context. With this introduction, the first respondent referred to the relevant facts of the present case. By _____________ https://www.mhc.tn.gov.in/judis Page No.9 of 41 Arb.O.P.Nos.196 & 197 of 2021 turning to the written submissions of the petitioner, the first respondent pointed out that the petitioner had stated categorically in paragraph 5 of the written submissions that it is not liable or willing to pay fees as far as the claim is concerned. The first respondent pointed out that the petitioner had stated categorically, at paragraph 8 of the written submissions, that it is willing to pay one third of the fee payable on the counter claim within four weeks from the said date and the remaining fee as per the directions of the Arbitral Tribunal. The first respondent also pointed out that the petitioner stated therein that the first respondent herein should pay the fees on the claim. According to the first respondent, the order dated 06.09.2021 of the Arbitral Tribunal was issued in this factual context.
10. As a corollary, the first respondent contended that the Arbitral Tribunal focused attention on the question whether the petitioner is liable to pay its share of fees only on the counter claim or also on the claim. The first respondent submitted that the observations in the order dated 06.09.2021 should be viewed from that perspective. The first respondent also submitted that the Arbitral Tribunal is required to accord equal treatment to parties. Therefore, even with regard to payment of fees, both parties are required to _____________ https://www.mhc.tn.gov.in/judis Page No.10 of 41 Arb.O.P.Nos.196 & 197 of 2021 share the fees equally. Even if it transpired that the claim made by the first respondent herein was exorbitant or unreasonable, the petitioner is not without remedy, in as much as the law requires apportionment of costs to be made on the basis of the outcome of the case. In this connection, the first respondent relied upon Report No.246 of the Law Commission, submitted in August 2014, on the “Amendments to the Arbitration and Conciliation Act 1996” (the Report). With specific reference to paragraphs 70 to 72 thereof, the first respondent pointed out that the Law Commission recommended that costs be allocated in a manner that reflects the parties' relative success or failure in the arbitration.
11. With regard to the contention that the learned Arbitrator had erroneously recorded observations to the effect that the petitioner had not paid the initial fee of Rs.2,00,000/-, the first respondent referred to an e-mail of 26.10.2021 from the Arbitrator to the two parties. On such basis, the first respondent pointed out that the Arbitrator acknowledged that a sum of Rs.1,98,000/- was received from the petitioner, but the Arbitrator was unable to reconcile or correlate the said payment because the credit advice did not indicate the source of payment.
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12. On the issue of bias, the first respondent submitted that the judgment of this Court in VDB Projects was in the factual context of a sum of Rs.1,00,000/- being charged per arbitrator per sitting. Thus, a sum of Rs.3,00,000/- per sitting was charged by the arbitral tribunal which aggregated to almost Rs.1 crore for 32 sittings. This amount was grossly disproportionate to the claims and counter claims in that case. The first Respondent further contended that courts have interfered when the arbitral tribunal departed from the contractual stipulation as to fees (see Amar India) or in cases where the fee fixation was arbitrary. On the contrary, it was contended that no court had interfered when fees were fixed on the basis of the Fourth Schedule of the Arbitration Act.
13. With reference to the Law Commission's recommendations on bias in the Report, the first respondent referred to paragraphs 53 to 60 thereof. The first respondent pointed out that the Law Commission recommended objective criteria to decide whether justifiable doubts exist with regard to the independence or impartiality of an arbitrator. To put it differently, the first respondent contended that the Law Commission did not recommend a challenge to an arbitrator on the basis of subjective _____________ https://www.mhc.tn.gov.in/judis Page No.12 of 41 Arb.O.P.Nos.196 & 197 of 2021 assessment of bias. With regard to the scope of Section 14 of the Arbitration Act, the first respondent contended that unless the Arbitrator is unable to function, either de jure or de facto, a petition under Section 14 of the Arbitration Act is not maintainable.
14. The first Respondent referred to and relied upon the following judgments:
(i) Government of Tamil Nadu v. Munuswamy Mudaliar and another 1988(Supp) SCC 651 (Munuswamy Mudaliar), wherein, at paragraphs 11 to 13, the Hon'ble Supreme Court concluded that a reasonable apprehension of bias must be based on cogent materials.
(ii) Ladli Construction Company (P) Ltd. v. Punjab Police Housing Corporation Ltd. and others, AIR 2012 SC 1580 (Ladli Construction), wherein the Hon'ble Supreme Court applied the test of reasonable apprehension of bias in the mind of a reasonable person.
(iii) Jewan Kumar Lohia and Others v. Durgadutt Lohia and Others (1992) 1 SCC 556, wherein the Hon'ble Supreme Court concluded that the material on record did not disclose a basis for a reasonable apprehension of bias.
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(iv) Locabali (UK) Ltd. v. Bayfield Properties Ltd & another (1999) EWCA CIV 3004, wherein the Court of Appeals concluded that conclusions of bias are entirely dependent on the facts and the nature of issue to be decided.
15. With regard to the fee fixed by the Arbitral Tribunal by the order dated 06.09.2021, the first respondent conceded that such fee was fixed by misconstruing and misapplying the Fourth Schedule of the Arbitration Act. The first Respondent produced two calculation sheets in such regard. According to the first respondent, if calculated correctly, the total fee as per the Fourth Schedule in respect of the dispute pertaining to Engine-I would be a sum of Rs.21,63,732/-. By contrast, the Arbitral Tribunal had fixed a fee of Rs.62,31,875/- on the claim and Rs.4,49,914/- on the counter claim. As regards the dispute arising out of Engine-II, if Schedule IV is applied correctly, the fee would be Rs.37,50,000/-, whereas the Arbitral Tribunal had fixed a fee of Rs.62,31,875/- for the claim and Rs.4,49,914/- for the counter claim. The first respondent submitted that it intends to raise this issue with the Arbitral Tribunal. _____________ https://www.mhc.tn.gov.in/judis Page No.14 of 41 Arb.O.P.Nos.196 & 197 of 2021
16. By way of a brief rejoinder, the Petitioner submitted that Section 14 is wider and different from Section 12 because it is not limited to the circumstances set out in the Fifth and Seventh Schedules of the Arbitration Act. The Petitioner further contended that the computational error by the Arbitral Tribunal is grave and not merely clerical. The petitioner reiterated that this Court and several other courts concluded that a dispute over fees would result in a reasonable apprehension of bias. With reference to the facts of the present case, the petitioner pointed out that the Arbitral Tribunal had recorded that the first respondent had agreed to pay the fees fixed by the Arbitral Tribunal and, therefore, as the only contesting party on such issue, it has justifiable doubts that the Arbitral Tribunal is and would continue to be biased against it.
17. At the outset, before embarking on a discussion and analysis of the rival contentions, Sections 12 to 15 are set out below:
''12. Grounds for challenge.— (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,
(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the _____________ https://www.mhc.tn.gov.in/judis Page No.15 of 41 Arb.O.P.Nos.196 & 197 of 2021 parties or in relation to the subject matter in dispute, whether financial, business, professional or other kind which is likely to give rise to justifiable doubts as to his independence or impartiality.
(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.
(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.
(3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
(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 persons 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 an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub- action by an express agreement in writing.'' _____________ https://www.mhc.tn.gov.in/judis Page No.16 of 41 Arb.O.P.Nos.196 & 197 of 2021 ''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.
(3) Unless the arbitrator challenged under sub-
section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.
(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.
(5) Where an arbitral award is made under sub-
section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.
(6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees.'' ''14. Failure or impossibility to act.— (1) The mandate of an arbitrator shall terminate if— _____________ https://www.mhc.tn.gov.in/judis Page No.17 of 41 Arb.O.P.Nos.196 & 197 of 2021
(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 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.
(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.'' ''15. Termination of mandate and substitution of arbitrator.— (1) In addition to the circumstances referred to in section 13 or section 14, the mandate of an arbitrator shall terminate—
(a) where he withdraws from office for any reason; or
(b) by or pursuant to agreement of the parties.
(2)Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.
(3) Unless otherwise agreed by the parties, where an arbitrator is replaced under sub-section (2), any hearings _____________ https://www.mhc.tn.gov.in/judis Page No.18 of 41 Arb.O.P.Nos.196 & 197 of 2021 previously held may be repeated at the discretion of the arbitral tribunal.
(4) Unless otherwise agreed by the parties, an order or ruling of the arbitral tribunal made prior to the replacement of an arbitrator under this section shall not be invalid solely because there has been a change in the composition of the arbitral tribunal.''
18. Against the above statutory backdrop, the first question that arises for consideration is whether these petitions are maintainable under Sections 14 and 15 of the Arbitration Act. The contention of the first respondent was that the Arbitration Act only provides for a challenge to the independence or impartiality of the Arbitrator on the basis of objective criteria. While the first respondent conceded that the criteria specified in the Fifth and Seventh Schedules are not exhaustive; nonetheless, it was contended that any criteria adopted for such purpose should be both analogous to those in the Fifth and Seventh Schedules and objective but not subjective. Therefore, this contention should be subjected to close scrutiny. On perusal of the Fifth and Seventh Schedules of the Arbitration Act, which were introduced by Act 3 of 2016, with effect from 23.10.2015, it is evident that the 34 entries in the Fifth Schedule as well as the 19 entries in the Seventh Schedule refer to forms of conflict of interest. In particular, the _____________ https://www.mhc.tn.gov.in/judis Page No.19 of 41 Arb.O.P.Nos.196 & 197 of 2021 Fifth and Seventh Schedules deal with conflicts of interest which arise out of: (i) the relationship between the arbitrator and one or more of the parties to the dispute; (ii) the relationship between the arbitrator and one or more of the counsel involved in the dispute; or (iii) the relationship of the arbitrator to the subject matter of the dispute. Thus, the common thread running through both the Fifth and Seventh Schedules, as indicated above, is conflict of interest. The contention that the criteria are objective is also self- evident on running through the Schedules. As is evident from the Report, the Fifth and Seventh Schedules were inspired by the orange and red lists, respectively, of the International Bar Association (the IBA) in its guidelines on conflict of interest. Both the Fifth and Seventh Schedule are referred to in Section 12 and not Section 14. Therefore, Sections 12 and 13 of the Arbitration Act should be examined next.
19. Sections 12 and 13 provide for a challenge to the arbitrator by a party before an arbitral tribunal. As per sub-section 3 of Section 12, such challenge is permissible only if circumstances exist that give rise to justifiable doubts as to his independence or impartiality or if he does not possess the qualifications agreed to by the parties. Sub-section 2 thereof _____________ https://www.mhc.tn.gov.in/judis Page No.20 of 41 Arb.O.P.Nos.196 & 197 of 2021 imposes an obligation on the arbitrator to make continual disclosures of the circumstances which may give rise to justifiable doubts as to his independence or impartiality. As per Section 13(4), if a challenge under Sections 12 and 13 is unsuccessful, the arbitral tribunal is empowered to continue the arbitral proceedings and pronounce an award. Section 12 was recast by Act 3 of 2016, with effect from 23.10.2015. By such amendment, sub-section (1), which was generic earlier, was amended by introducing Clauses (a) and (b) and Explanation 1 and 2 thereto. Clause (a) makes it clear that it applies to any direct or indirect conflict of interest situation, whether arising out of a financial, business, professional or any other kind of relationship, which is likely to give rise to justifiable doubts as to independence or impartiality. The use of the words “such as” at the inception of clause (a) indicates that the enumerated forms of conflict of interest are illustrative and not exhaustive. Sub-section 5 was also introduced in Section 12 by Act 3 of 2016. By such amendment, it was made clear that if the relationship of the arbitrator falls under any of the categories specified in the Seventh Schedule, he becomes ineligible to be appointed as an arbitrator.
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20. Explanation 1 to Section 12(1) indicates that the grounds stated in the Fifth Schedule are a guide to determine whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Thus, it is abundantly clear that the Fifth Schedule is not exhaustive but illustrative. However, since it is intended as a guide, a corollary would be that the alleged circumstances should fall within the framework specified in the Fifth and Seventh Schedules read with Clause (a) of sub-section (1) of Section 12. While on this issue, it should be noticed that the 19 entries in the Seventh Schedule are the same as the first 19 entries in the Fifth Schedule. Therefore, the two Schedules overlap, albeit the Fifth Schedule is wider in scope. As contended by learned counsel for the first respondent, it appears that Parliament accepted the recommendations of the Law Commission on the proposed amendments to the Arbitration Act. By accepting such recommendations, the Fifth and Seventh Schedules were introduced in the Arbitration Act by way of Act 3 of 2016. In effect, Parliament adopted and prescribed objective criteria to determine whether circumstances exist that would give rise to justifiable doubts as to the independence or impartiality of the arbitrator. Given the fact that challenges under Sections 12 and 13 are made before the arbitral _____________ https://www.mhc.tn.gov.in/judis Page No.22 of 41 Arb.O.P.Nos.196 & 197 of 2021 tribunal, it stands to reason that Parliament adopted objective, albeit non- exhaustive, criteria for such purpose. To put it differently, since objective criteria are specified, it is possible for a party making a challenge before an arbitral tribunal to provide evidence of the existence of one of the circumstances enumerated in Schedule V or VII, or circumstances substantially similar or analogous thereto, as the basis to challenge the arbitrator. As long as the challenging party is able to prove the alleged conflict of interest and demonstrate that it fits into an enumerated category, the arbitral tribunal will have no choice but to allow the challenge. If the challenge is on the basis of an unenumerated but substantially similar circumstance, it could be relatively harder to succeed. On this issue, it is also pertinent to reiterate that all the circumstances enumerated in the Fifth and Seventh Schedules relate to conflict of interest. In the context of conflict of interest, it is relatively easier to formulate and fix objective criteria. By contrast, if bias de hors conflict of interest is alleged, such as bias in favour of or against a party or counsel outside the framework of a conflict of interest relationship, it is extremely difficult to arrive at objective criteria. Furthermore, it would be difficult, unpleasant and inappropriate to mount a challenge on the basis of such subjective criteria before the arbitral _____________ https://www.mhc.tn.gov.in/judis Page No.23 of 41 Arb.O.P.Nos.196 & 197 of 2021 tribunal. On the basis of the foregoing discussion, it may be concluded that a challenge under Sections 12 and 13 can be made only on the allegation that one of the three broad categories of conflict of interest, which form part of the framework of the Fifth and Seventh Schedules, exist. This leads to Section 14 which permits a challenge before court albeit in limited circumstances.
21. Section 14 deals with the termination of the mandate of an arbitrator. Sub-section 1 thereof provides for such termination in five different circumstances. Clause (b) deals with a situation where an arbitrator withdraws from his office or the parties agree to the termination of the mandate. In both the situations, it is not necessary to approach a court. Indeed, it should be noted that the legal regime for arbitration sanctifies party autonomy to the extent of permitting parties to the arbitration to agree upon the termination of the mandate of the arbitrator even after appointing such arbitrator. This leads to the three categories which are dealt with under Clause (a) of Sub-section 1. Clause (a) deals with termination because the arbitrator de jure becomes unable to perform functions; or de facto becomes unable to perform functions; or for other reasons fails to act without undue _____________ https://www.mhc.tn.gov.in/judis Page No.24 of 41 Arb.O.P.Nos.196 & 197 of 2021 delay. Given the fact that Section 29-A of the Arbitration Act specifies a time limit for the conclusion of arbitral proceedings, a petition alleging failure to act without undue delay would be maintainable if an arbitrator or the arbitral tribunal fails to conclude the arbitral proceedings within the time specified under Section 29-A without obtaining extension of time from the jurisdictional court. As regards de facto inability to perform functions, several circumstances may result in such inability. By way of illustration, if the arbitrator concerned falls seriously ill and is, therefore, unable to schedule hearings for a considerable period of time, a petition may be filed both on the ground that he is de facto unable to perform functions and on the ground that he has failed to act without undue delay. Similarly, if an arbitrator resides or carries on business at a location different from the seat of arbitration and is unable or unwilling to schedule and attend hearings, a petition on both these grounds may be maintainable. A number of other examples may be cited, including the inability of an arbitrator to travel on account of travel, including visa restrictions.
22. Turning to de jure inability to perform functions, it should be noted at the threshold that the expression is not defined in the Arbitration _____________ https://www.mhc.tn.gov.in/judis Page No.25 of 41 Arb.O.P.Nos.196 & 197 of 2021 Act. The word 'de jure' in Latin means ''as a matter of law''. It has been defined in Black's Law Dictionary, 11 Edition (2019), as ''existing by right or according to law''. Thus, it appears that the expression de jure applies undoubtedly to legal disability. One illustration of legal disability would be if the arbitrator is ineligible in terms of the Seventh Schedule. This was expressly dealt with by the Hon'ble Supreme Court in HRD Corporation as well as Bharat Broadband. In both the cases, the Hon'ble Supreme Court held that a petition would lie under Section 14 of the Arbitration Act in such circumstances and that it is not necessary to file a petition under Section 12 thereof. Hence, ineligibility under the Seventh Schedule is certainly an area of intersection between Sections 12 and 13, on the one hand, and Sections 14 and 15, on the other. However, ineligibility is only one illustration of de jure inability to function. It is conceivable that an arbitrator may be afflicted by some form of cognitive impairment. If such cognitive impairment is serious enough to lead to an inference that such arbitrator is not of sound mind, whether on account of schizophrenia, Alzheimer's disease or the like, as understood in the Indian Contract Act, 1872, it would result in de jure inability to function even if the arbitrator concerned declines to withdraw. Less serious forms of cognitive impairment, such as bipolar disorder and the _____________ https://www.mhc.tn.gov.in/judis Page No.26 of 41 Arb.O.P.Nos.196 & 197 of 2021 like, may, on the other hand, may pose greater challenges. Besides, an arbitrator may be adjudged insolvent after entering upon reference. By relying upon the applicable insolvency statute, it could be contended with a fair measure of justification that he is de jure unable to function.
23. In this case, however, the contention of the petitioner is that the Arbitrator has become de jure unable to function because of the reasonable apprehension of bias on the part of the petitioner. A reasonable apprehension of bias, in contrast to actual bias, even if established, does not constitute legal disability in a formal, statutory sense. Beyond legal disability, does the expression de jure also apply to loss of legitimacy to function as an arbitrator? Both in common parlance and otherwise, the expression de jure is used in contrast to the expression de facto which means actual or existing in fact. For instance, a de facto government which captures power by a coup d'etat is one which exists as a matter of fact, but which does not have legitimacy. On the contrary, a de jure government is one which has legitimacy because it was constituted in accordance with law, and is considered legitimate. By taking into account the following: the expression is not defined in the Arbitration Act; Sections 12 and 13 read _____________ https://www.mhc.tn.gov.in/judis Page No.27 of 41 Arb.O.P.Nos.196 & 197 of 2021 with the Fifth and Seventh Schedules cannot be activated except in a conflict of interest situation and on the basis of objective criteria; and even Explanation 1(i) to Section 34(2)(b)(ii) provides for the setting aside of an award on the ground of conflict with the public policy of India only if it is established that the making of the award was induced or affected by fraud or corruption, the expression de jure should be construed as extending beyond open-and-shut legal disability so as to take within its fold disability due to established loss of legitimacy. It is needless to say that the burden of proof should be set at a level high enough to deter derailment of arbitral proceedings except where really warranted.
24. When the present petitions are considered in the above perspective, it cannot be said that these petitions are not maintainable. As pointed out by learned senior counsel for the petitioner, in a long line of cases such as Madras Fertilizers, VDB Projects, Parekh Industries and Entertainment City, it was held that a petition under Section 14 is maintainable on the ground of bias, including bias arising out of the fixation of fees.
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25. The sustainability of the present petition is, however, distinct from the maintainability thereof. The present petitions were filed on the basis that the circumstances give rise to justifiable doubts as to the independence or impartiality of the Arbitrator. In order to test this contention, it is necessary to extract the written submissions of the petitioner, which indicate the context, and the observations of the Arbitral Tribunal on which the petition is founded. The relevant extracts from the written submissions in the arbitral proceedings relating to Engine 1 are set out below:-
“4. That as such, it is apparent that Claimant has filed unsubstantiated claim for such an astronomical and imaginary amount purely with a view to put heavy and onerous burden of Ld. Arbitrator's fee on Respondent/Counter Claimant.
5. That in view thereof and even otherwise, Respondent submits that Respondent is neither willing nor liable to pay any amount towards fees and costs of arbitration as far as claim of Claimant is concerned and submits that same may be borne solely by Claimant.
8. Respondent further submits that Respondent is willing to pay 1/3rd to fee payable on Counter Claim amounting to Rupees 1,23,310 with in _____________ https://www.mhc.tn.gov.in/judis Page No.29 of 41 Arb.O.P.Nos.196 & 197 of 2021 four weeks from today and remaining fee as per directions of this Hon'ble Tribunal, with in a reasonable time frame. It is further submitted that schedule of payment of fee fixed for Respondent / Counter Claimant on Counter Claim may be made similarly applicable to Claimant and Claimant be directed to pay fee of Rs.20,39,577 payable on claim in similar manner, instalments, time and schedule as fixed for Respondent/Counter Claimant/Applicant herein.”
26. The relevant extract from the written submissions in the arbitral proceedings relating to Engine 2 is set out below:
“5. That as already submitted by
Respondent/Counter Claimant Respondent/Counter
Claimant is neither willing nor liable to pay any amount towards fees and costs of arbitration as far as claim of Claimant is concerned and submits that same be borne solely by Claimant. It is further submitted that in case of failure or refusal on behalf of Respondent/Counter Claimant to pay its share of Arbitrator's fee on Claim, Claimant can always pay share of fee to be borne by Respondent as per provisions of The Act.” _____________ https://www.mhc.tn.gov.in/judis Page No.30 of 41 Arb.O.P.Nos.196 & 197 of 2021
27. The observations of the Arbitral Tribunal in the order dated 06.09.2021 are set out below:
(i) From paragraph 3: '' ....The Claimant was ready and willing both for fixation of fees and remittances thereof to the Sole Arbitrator in terms of Schedule IV. However, it is the respondent who had been dragging the matter indefinitely under one pretext or other.''
(ii) From paragraph 4: ''....Even with respect to the counter claim, the said learned counsel appearing for the respondent was not ready and willing to pay the sitting fees for the Sole Arbitrator even after filing the counter claim in both the arbitrations.''
(iii) From paragraph 7: '' Besides raising the above objections, the respondent raised various objections, to put it mildly, untenable objections contrary to law and the provisions of the Arbitration and Conciliation Act 1996....''.
28. Apart from the above observations, the petitioner relied upon the fact that the Arbitrator did not take any steps against the first respondent for failure to comply with the interim order directing payment of a sum of _____________ https://www.mhc.tn.gov.in/judis Page No.31 of 41 Arb.O.P.Nos.196 & 197 of 2021 Rs.13,72,354/-, and on the statement that the petitioner did not pay the initial fee.
29. In this factual context, the question that arises for consideration is whether the circumstances would lead to justifiable doubts as to the independence or impartiality of the Arbitrator. While the first respondent contended that the Arbitration Act only provides for objective criteria to determine the issue of bias, as discussed supra, the scope of Section 14 is distinguishable from Section 12 and it cannot be said that it is confined to objective criteria. Nonetheless, a balance has to be struck between non-interference with the arbitral process and interference when warranted so as to ensure that the time and resources invested in such arbitral process do not become infructuous because of a serious flaw in the arbitral process. Sections 12 and 13, on one hand, and Sections 14 and 15, on the other, attempt to strike such balance. Therefore, as regards the relatively less serious forms of conflict of interest, which are contained only in the Fifth Schedule, the Arbitrator concerned does not become ineligible. However, if a challenge is made, he is required to rule on such challenge. If the challenge is unsuccessful, the arbitral tribunal is permitted to proceed _____________ https://www.mhc.tn.gov.in/judis Page No.32 of 41 Arb.O.P.Nos.196 & 197 of 2021 with and conclude the arbitral proceedings. By contrast, if the flaw in the arbitral process is more serious, Sections 14 and 15 of the Arbitration Act are attracted. From this scheme, it is clear that the threshold for sustaining a petition under Sections 14 and 15 should be pegged at a high level.
30. In the specific context of justifiable doubts as to the independence or impartiality, learned senior counsel for the petitioner contended that it is not actual bias but a reasonable apprehension of bias or apparent bias. For such purpose, the judgment of the Court of Appeal in the In re Medicaments was referred to. There can be no cavil with the proposition that it is not necessary to establish actual bias. Having said that, as held in Munuswamy Mudaliar and Ladla Corporation, it is still necessary for the petitioner to establish that the circumstances would lead to an inference of reasonable apprehension of bias. The observations in the order were relied upon for such purpose. These observations were made in a specific factual context. The said factual context was the assertion by the petitioner that it is liable to pay the Arbitrator's fees only in respect of the counter claim made by it and not in respect of the claim made by the claimant. This contention was self-evidently erroneous, and in derogation of _____________ https://www.mhc.tn.gov.in/judis Page No.33 of 41 Arb.O.P.Nos.196 & 197 of 2021 the mandate of the Arbitration Act to treat parties equally. Thus, these observations of the learned Arbitrator cannot be looked at in isolation by divorcing them from the specific context, i.e. the untenable stand of the petitioner that it is liable to pay the Arbitrator's fees only on the counter claim and not on the claim. As correctly pointed out by learned counsel for the first respondent, the Arbitration Act provides for the apportionment of costs depending on the outcome of the case. Therefore, even if an inflated claim is made, the remedy is by way of apportionment of costs and not by directing only the party making the claim or counter claim, as the case may be, to make such payment. While there is basis to conclude that the learned Arbitrator was unhappy with the stand taken by the petitioner on the issue of payment of fees; on the basis of the material on record, it is not possible to conclude that a reasonable and objective third party would infer that the learned Arbitrator is biased against the petitioner. As regards the observation of the learned Arbitrator that the petitioner had not paid the initial fee of Rs.2,00,000/-, the subsequent e-mail of the Arbitrator clarifies the position. Thus, this appears to be an inadvertent error on the part of the learned Arbitrator with regard to the correlation of the remittance to the remitter. Therefore, on the facts of this case, the petitioner has failed to meet the _____________ https://www.mhc.tn.gov.in/judis Page No.34 of 41 Arb.O.P.Nos.196 & 197 of 2021 threshold for interference under Section 14.
31. Another issue was canvassed by both parties. This issue relates to the erroneous fixation of fees by the Arbitral Tribunal and, on this issue, the first respondent joined hands with the petitioner to point out that the fixation of fees was not in accordance with Schedule IV. Before delving further, it should be stated at the outset that charging of a high fee per se, if charged equally from both or all parties, cannot lead to an inference of bias. As indicated earlier, the first respondent circulated computation sheets as evidence of such erroneous calculation. In light of the conclusion that the petitioner has failed to make out a case for termination of the mandate under Sections 14 and 15 of the Arbitration Act, I do not propose to issue notice to the learned Arbitrator. Without putting the learned Arbitrator on notice, it is not appropriate to examine and enter specific findings on the computation of fees by the Arbitral Tribunal in this case. Subject to this caveat, general observations are made with regard to fixation of fees under the Arbitration Act.
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32. By Act 3 of 2016, the Fourth Schedule was introduced, on the basis of recommendations of the Law Commission, primarily to deal with allegations that arbitrations are both expensive and time consuming. The Fourth Schedule provides for ad valorem fees depending on the sum in dispute. The expression “sum in dispute” is not defined in the Arbitration Act. If construed as applying separately on the claim and counter claim, in an arbitration with a three member panel, depending on the sum in dispute, the consolidated fee of the arbitral tribunal could increase up to a maximum of Rs.1,80,00,000. Likewise, in a sole arbitrator scenario, the fee could be as much as Rs.75,00,000. In most cases, this would far exceed the fee payable if the erstwhile per sitting fee even with a lump sum fee for drafting and pronouncing the award were used. The amendment was clearly not designed with this object in mind. Besides, if an analogy is drawn from the practice of credible domestic and international arbitral institutions such as the Indian Council of Arbitration Rules of Domestic Commercial Arbitration, the Mumbai Centre for International Arbitration, the Construction Industry Arbitration Council, the Delhi International Arbitration Centre, the Singapore International Arbitration Centre, the Hong Kong International Arbitration Centre and the European Court of Arbitration, the sum in dispute _____________ https://www.mhc.tn.gov.in/judis Page No.36 of 41 Arb.O.P.Nos.196 & 197 of 2021 has been consistently used to refer to both the claim and counter claim. The judgment of the Delhi High Court in Delhi State Industrial Infrastructure Development Corporation Ltd. v. Bawana Infra Development (P) Ltd. 2018 (4) Arb.L.R.168(Del) deals elaborately with this issue and I concur with the views expressed therein.
33. Another aspect of the Fourth Schedule, which was subject to interpretation by other courts, demands attention. The 6 rows (Serial Nos. 1 to 6) in the Fourth Schedule deal with a sum in dispute up to or above the amounts specified therein. Serial No.1 deals with cases where the sum in dispute is up to Rs.5,00,000/- and the fee of Rs.45,000 is fixed in respect thereof. Serial No.2 deals with cases where the sum in dispute is above Rs.5,00,000/- and up to Rs.20,00,000/-, and a minimum fee of Rs.45,000, which is the maximum fee under Serial No.1, is fixed in respect thereof. While the maximum fee is not expressly specified, if computed for the sum of Rs.20,00,000/-, the maximum would be Rs.97,500, which is the minimum fee under Serial No.3. This pattern of the maximum fee permissible in the band in respect of disputes falling within the preceding Serial No. being the minimum fee in respect of disputes falling within the succeeding Serial No. _____________ https://www.mhc.tn.gov.in/judis Page No.37 of 41 Arb.O.P.Nos.196 & 197 of 2021 repeats across the remaining Serial Nos. Thus, Serial No. 6 deals with cases where the sum in dispute is above Rs.20,00,00,000/-. The minimum fee prescribed for this category is Rs.19,87,500/-, which is the maximum fee under the preceding category if the sum in dispute is about Rs.20,00,00,000. Thus, except for Serial No.1, a scale of fees with a range from minimum to maximum is prescribed for each category. Except in Serial No.6, no firm number is prescribed as the ceiling or cap on fee. The reason for not specifying a firm number as the ceiling in Serial Nos.1-5 is that even if the maximum sum in dispute of Rs.20,00,00,000 under Serial No.5 is claimed in an arbitration, the fee would not exceed Rs.19,87,500 per arbitrator. On the contrary, since Serial No.6 encompasses any sum in dispute above Rs.20,00,00,000 without a ceiling on such sum in dispute, a ceiling or cap on fees at Rs.30,00,000 is prescribed therein. In other words, irrespective of the total sum in dispute, the object of the Fourth Schedule is to cap the fees at Rs.30,00,000/- per arbitrator, albeit subject to the qualification that a sole arbitrator may charge 25% in addition. Although not expressly specified, construing it as a cap on the arbitral tribunal would be anomalous and, indeed, patently erroneous because if a sole arbitrator is entitled to charge up to Rs.37,50,000, a three member panel cannot be confined to _____________ https://www.mhc.tn.gov.in/judis Page No.38 of 41 Arb.O.P.Nos.196 & 197 of 2021 Rs.10,00,000 each. Needless to say, this ceiling would apply separately to each arbitral proceeding if there are separate proceedings between the same parties. For these reasons, I do not agree with the views in NTPC Limited v. Afcons R.N.Shetty and Co. Pvt. Ltd. O.M.P.(T) (COMM)37/2021 or Rail Vikas Nigam Ltd. v. Simplex Infrastructures Ltd. O.M.P.(T)(COMM)28/2020. All the above conclusions are subject, however, to the significant caveat that the Fourth Schedule is a model schedule of fees, which is intended for use until the jurisdictional high court frames rules in this regard. Moreover, under extant law, except where a court orders otherwise, party autonomy, which is the bedrock of the arbitral process, enables and empowers all the parties to an ad hoc arbitration to agree expressly and collectively to any fee, whether in consonance with the Fourth Schedule or otherwise.
34. A few suggestions are made in view of the steadily increasing stream of cases where the fees charged by the arbitral tribunal is the focal point of attack. In order to avert such challenges, arbitral tribunals should fix the fees at the earliest. Even if the claims and/or counter claims are unknown at the outset and it is proposed to charge subsequently on the basis _____________ https://www.mhc.tn.gov.in/judis Page No.39 of 41 Arb.O.P.Nos.196 & 197 of 2021 of the Fourth Schedule, fees may be fixed initially on per sitting basis subject to subsequent adjustment. Instead of merely recording such fees in the minutes of proceedings, parties may be directed to provide written consent to the fixation of fees, be it towards advance or firm fees. Once written consent is provided, the likelihood of subsequent challenges on this sensitive issue would be considerably minimised although it may never be completely eliminated.
35. In conclusion, since both parties submit that grave computation errors have been made by the Arbitral Tribunal, it is open to both parties to re-agitate this issue before the Arbitral Tribunal especially in view of the fact that neither party had pointed out to the Arbitral Tribunal earlier that the computation was not in consonance with the Fourth Schedule.
36. With the above observations, Arbitration O.P.Nos.196 & 197 of 2021 are disposed of without any order as to costs. Consequently, connected a pplications are closed.
02.12.2021
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Arb.O.P.Nos.196 & 197 of 2021
SENTHILKUMAR RAMAMOORTHY J.,
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