Bombay High Court
Integro Finserv Private Limited vs Vineet Singh Construction Private ... on 19 January, 2024
Author: Bharati Dangre
Bench: Bharati Dangre
2024:BHC-OS:2352
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION APPLICATION (L) NO.14170 OF 2023
WITH
ARBITRATION APPLICATION (L) NO.14177 OF 2023
WITH
ARBITRATION APPLICATION (L) NO.14180 OF 2023
Integro Finserv Private Limited .. Applicant
Versus
Vineet Singh Construction Private .. Respondents
Limited & Ors.
...
Mr.Rohan Kelkar with Aaushi Doshi and Neeli Sandesana i/b
DS law for the Applicant in all the Applications.
Mr.D.Banerjee with Neha Achliya i/b Ketan Mutha i/b Sapana
Rachure for the Respondent Nos.1 and 2 in all the
Applications.
...
CORAM: BHARATI DANGRE, J.
RESERVED ON : 11th JANUARY, 2024
PRONOUNCED ON : 19th JANUARY, 2024
JUDGMENT :-
1. The three Applications are fled by the Applicant, Integro Finserv Private Limited, an NBFC, who vide Deed of M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 2/29 ARBPL-14170-23+2.odt Assignment dated 16/02/2022, was assigned the entire outstanding loans/debt against the Respondents, together with future interest on the receivables, including the underlying security interest, created thereof and all the rights with respect to the Loan Hypothecation Agreement by CFM Asset Reconstruction Private Limited, an assignee from L & T Finance Limited (for short, "L & T Finance"), vide Deed of Assignment dated 26/06/2019.
Respondent No.1 availed the loans from L & T Finance under Loan-cum-Hypothecation Agreement dated 12/03/2012, which contained an arbitration clause and as such on 14/10/2013, L & T Finance invoked arbitration and appointed an Arbitrator unilaterally.
2. On 26/09/2022, Integro applied for its substitution in place of L & T Finance in the arbitral proceedings.
3. In the present Application, purportedly fled under Section 14 read with Section 11 read with Section 15 of the Arbitration and Conciliation Act, 1996 (for short, "the Act") Integro, seeks appointment of a sole Arbitrator/substituted Arbitrator to adjudicate the disputes, differences and claims between the parties. The Application so fled, has impleaded the borrower - M/s. Vinit Singh Construction Private Limited M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 3/29 ARBPL-14170-23+2.odt and the Guarantor - Mr.Vinit Singh s/o Sunidh Singh as the Respondents.
The Application is premised on the background fact, that pursuant to the Loan-cum-Hypothecation Agreement dated 12/03/2012, the Respondents hypothecated the assets in favour of L & T Finance and created sole and exclusive charge over the said assets, as security for the due repayment of the Loan and other amounts due and payable under the Hypothecation Deed. Respondent No.1 created frst and exclusive right on the assets and agreed to secure the loan amount with additional/collateral security on other encumbered assets, as and when demanded under the Agreement. Similarly, Respondent No.2 executed personal Guarantee in terms of the Deed of Guarantee dated 12/03/2012, in his personal and individual capacity.
4. After availing the loan facility, Respondent No.1 committed breach of the Loan Agreement, since it defaulted in timely repayment of installments and L & T Finance took over possession of the hypothecated assets and appropriated the sale proceeds towards the outstanding dues, leaving defcit of Rs.43,49,469/-, due and payable under the Loan-cum- Hypothecation Agreement alongwith interest at the rate of M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 4/29 ARBPL-14170-23+2.odt 36% from foreclosure till the date of payment.
L & T Finance terminated the Loan Agreement by recalling the balance loan and the accrued charges and enforced the security created under the Agreement, with a liberty to sale the assets and called upon the Respondents to make the payment of the outstanding amount, but the Respondents neglected to make the payment.
5. As per the arbitration clause contained in the Loan-cum- Hypothecation Agreement and the Deed of Guarantee, the parties referred all the disputes, differences, claims etc. to arbitration of a sole Arbitrator, appointed by L & T Finance i.e. Advocate Bharat Jain.
6. Integro fled an interim application for substituting its name in place of L & T Finance and issued a letter of termination to the Arbitrator on 04/05/2023 on the ground that the proceedings have not substantially progressed and were at the stage of pleadings and, since, he was appointed unilaterally, which is against the amended provisions of the Act of 1996 and in the wake of the decision of the Apex Court in the case of Perkins Eastman Architects DPC & Ors. Vs. HSCC (India) Ltd.1.
1 AIR 2020 SC 59
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It is in these circumstances, the present Application is fled.
7. I heard the learned counsel Mr.Rohan Kelkar for the Applicant, who is opposed by learned counsel Mr.Banerjee representing Respondent No.2 who has preliminary raised an objection on the maintainability of the Application.
The objection raised is that neither Integro, the Applicant nor its assignor, CFM Assets Reconstruction Pvt. Ltd. is a party to the contract, which contains the arbitration agreement and, therefore, it is not open for it to seek the relief of substitution of the Arbitrator. On second count, the objection raised in L & T Finance has invoked the arbitration and appointed Advocate Bharat Jain as Arbitrator to adjudicate the disputes and the said arbitration proceedings are still pending before the Arbitral Tribunal and in fact, it is only on 23/05/2022, CFM Assets Construction Pvt. Ltd., an assignee from L & T Finance, has fled an application, seeking substitution in its place.
It is also asserted that the proceedings before the Arbitrator were fxed on 04/05/2023, when Integro sought termination of the arbitrator, though not yet substituted in the proceedings. The Arbitrator therefore directed the Applicants M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 6/29 ARBPL-14170-23+2.odt to fle proper application and fxed the proceedings, before him on 07/06/2023.
The learned counsel Mr.Banerjee, submit that mandate of an Arbitrator cannot be terminated by a stranger, i.e. one who is not a party to the Arbitration Proceedings and defnitely not by the Applicant whose application seeking impleadment in the arbitral proceedings is still pending. He would specifcally submit that under the garb of this Application fled under Section 11(6) of the Act, the Applicant is in fact attempting termination of the on-going proceedings before the Tribunal, which in no case can be permitted.
8. On hearing the learned counsel for the Applicant and the Respondents, two questions arise for my determination; (a) Whether Integro, as an assignee, is entitled to continue the arbitration proceedings, initiated by the original assignor, L & T Finance against the Respondents and (b) whether the unilateral appointment of an Arbitrator, effected prior to the coming in force the amended Section, 12(5) w.e.f. 23/10/2015, would affect the appointment and justify substitution of the Arbitrator, on the ground of his de jure ineligibility to continue.
9. Section 12 of the Act of 1996, which prescribes the M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 7/29 ARBPL-14170-23+2.odt ground for challenge, contemplate that when a person is approached in connection with his appointment as an Arbitrator, he shall disclose in writing any circumstances, such as the existence of either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject matter in dispute, whether fnancial,business, professional or other kind, which is likely to give rise to justifable doubts as to his independence or impartiality. Sub-section (5), which was introduced w.e.f. 23/10/2015, reads thus :-
"(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 specifed in the Seventh Schedule shall be ineligible to be appointed as an arbitrator."
10. The issue as to whether sub-section (5) introduced in Section 12 read with Schedule VII, will have prospective or retrospective effect, has been the bone of contention before the Apex Court time and again and this issue has been examined with specifc reference to the facts of each case.
Mr. Kelkar and Mr. Banerjee have placed reliance upon a catena of rulings from the Apex Court, but defnitely the fndings rendered therein will have to be read on the facts, in M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 8/29 ARBPL-14170-23+2.odt the background of which the law is laid down and, therefore, I would prefer to refer to the line of decision in seriatim.
11. Upon the amendment being introduced in Section 12 by amending Act 3 of 2016 w.e.f. 23-10-2015, which prohibits the employee of one of the parties from being an Arbitrator, on the premise that neutrality of the Arbitrator is the quint essence of the proceedings.
In Board of Control for Cricket in India vs. Kochi Cricket (P) Ltd.2, a Two-Judge Bench had an opportunity to consider Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 with reference to Sections 34 and 36, which was amended by the Amending Act, and as regards, Section 34, it is held that Applications u/s. 34 even in cases where arbitration has commenced prior to 23/10/2015 i.e. date of coming into force, the Amendment Act, 2015, would apply, since the execution of a decree pertain to realm of procedure and it was held that no substantive vested right in the judgment debtor to resist the execution. Section 36, relating to execution of an Award, attracting the provisions of Order 21 and Order 41 Rule 5 of CPC, was held to have a retrospective effect.
2 (2018) 6 SCC 287
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However, commenting upon Section 26, the general principle of an Amending Act of being prospective in operation was invoked in relation to (a) arbitral proceedings and (b) court proceedings in relation thereto.
Upon tracing the legislative history and the background in introducing the amendment in the Arbitration and Conciliation Act 1996, the relevant observations of Their Lordships are to be found in paragraphs 36 to 38, which read thus :-
"36. All the learned counsel have agreed, and this Court has found, on a reading of Section 26, that the provision is indeed in two parts. The frst part refers to the Amendment Act not applying to certain proceedings, whereas the second party affrmatively applied the Amendment Act to certain proceedings. The question is what exactly is contained in both parts. The two parts are separated by the word "but", which also shows that the two parts are separate and distinct. However, Shri Viswanathan has argued that the expression "but" means only that there is an emphatic repetition of the frst part of Section 26 in the second part of the said section. For this, he relied upon Concise Oxford Dictionary on Current English, which states :
"introducing emphatic repetition; defnitely (wanted to see nobody, but nobody)."
Quite obviously, the context of the word "but" in Section 26 cannot bear the aforesaid meaning, but serves only to separate the two distinct parts of Section 26.
37. What will be noticed, so far as the frst party is concerned, which states-
"26. Act not to apply to pending arbitral proceedings.- Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree....."
is that : (1) "the arbitral proceedings" and their commencement is mentioned in the context of Section 21 of the principal Act ; (2) the expression used is "to" and not "in relation to"; and (3) parties may M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 10/29 ARBPL-14170-23+2.odt otherwise agree. So far as the second part of Section 26 is concerned, namely, the part which reads, "...but this Act shall apply in relation to arbitral proceedings commenced on after the date of commencement of this "Act" makes it clear that the expression "in relation to" is used; and the expression "the" arbitral proceedings and "in accordance with the provisions of Section 21 of the principal Act" is conspicuous by its absence.
38. That the expression "the arbitral proceedings" refers to proceedings before an Arbitral Tribunal is clear from the heading of Chapter V of the 1996 Act, which reads as follows :
"Conduct of arbitral proceedings"
The entire chapter consists of Sections 18 to 27 dealing with the conduct of arbitral proceedings before an Arbitral Tribunal. What is also important to notice is that these proceedings alone are referred to, the expression "to" as contrasted with the expression "in relation to" making this clear. Also, the reference to Section 21 of the 1996 Act, which appears in Chapter V, and which speaks of the arbitral proceedings commencing on the date on which a request for a dispute to be referred to arbitration is received by the respondent, would also make it clear that it is these proceedings, and no others, that form the subject-matter of the frst part of Section 26. Also, since the conduct of arbitral proceedings is largely procedural in nature, parties may "otherwise agree" and apply the Amendment Act to arbitral proceedings that have commenced before the Amendment Act came into force. In stark contrast to the frst part of Section 26 is the second part, where the Amendment Act is made applicable "in relation to" arbitral proceedings which commenced on or after the date of commencement of the Amendment Act. What is conspicuous by its absence in the second part is any reference to Section 21 of the 1996 Act. Whereas the frst refers only to arbitral proceedings before an Arbitral Tribunal, the second part refers to court proceedings "in relation to" arbitral proceedings, and it is the commencement of these court proceedings that is referred to in the second part of Section 26, as the words "in relation to the arbitral proceedings" in the second part are not controlled by the application of Section 21 of the 1996 Act."
12. It is emphatically held that the frst part of Section 26, couched in the negative form is only to state, that the Amendment Act will apply even to arbitral proceedings commenced before the amendment, if parties otherwise agree.
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The intention of the legislature was clearly discerned and the pertinent observation in this regard is refected from the following pronouncement:-
"The scheme of Section 26 is thus clear; that the Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced, as understood by Section 21 of the Principal Act, on or after the Amendment Act, and to court proceedings which have commenced on or after the Amendment Act came into force."
It is in the context of Section 36, it is held that under Section 36, both pre and post amendment, such Award shall be "enforced in accordance with the provisions of the Code of Civil Procedure" and being a procedural provision, it was held that the context of Section 36 is that the expression "has been"
would refer to Section 34 Petitions fled before the commencement of the Amendment Act and would indeed apply in its substituted form, even to such Petitions.
13. In the case of Rajasthan Small Industries Corporation Limited Vs. Ganesh Containers Movers Syndicate 3, the question of the Amendment Act of 2015 once again surfaced with reference to Sections 11(6), 14 and 15(2).
Following the law laid down in the case of Kochi Cricket (P) Ltd. (supra), in the backdrop facts, that the agreement between the parties was entered into on 28/01/2000 and the 3 (2019) 3 SCC 282 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 12/29 ARBPL-14170-23+2.odt arbitration proceedings commenced way back in 2009, and in absence of anything to suggest that the parties had agreed that the provisions of the new Act shall apply in relation to the arbitral proceedings, it was held that the Respondent could not invoke Section 12(5).
The question which fell for consideration, as to whether, in the light of Section 12, as amended by the Amendment Act, the Managing Director who was appointed to act as an Arbitrator has become ineligible, the conclusion, is to be found in paragraphs 23 and 24, which read as under :-
"23. After the amendment to the Arbitration and Conciliation Act, 1996 in 2015, Section 12(5) prohibits the employee of one of the parties from being an arbitrator. In the present case, the agreement between the parties was entered into on 28-1-2000 and the arbitration proceedings commenced way back in 2009 and thus, the respondent cannot invoke Section 12(5) of the Arbitration and Conciliation (Amendment) Act 2015 . As per Section 26 of the Amendment Act, the provisions of the Amendment Act, 2015 shall not apply to the arbitral proceedings commenced in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree.
24. In BCCI v. Kochi Cricket (P) Ltd., this Court held that the provisions of the Amendment Act, 2015 (with effect from 23-10-2015) cannot have retrospective operation in the arbitral proceedings already commenced unless the parties otherwise agree. In the present case, there is nothing to suggest that the parties have agreed that the provisions of the new Act shall apply in relation to the arbitral proceedings."
14. In an attempt to distinguish the judgment on facts, Mr. Rohan Kelkar would urge, that the clause, which was considered by the Apex Court in the said decision was quite M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 13/29 ARBPL-14170-23+2.odt distinct from the clause in the present case and according to him, clause No. 4.20.1 of Schedule IV, which provided for arbitration, and which is found to be reproduced in paragraph 11 of the Law Report, it was a simplicitor clause, of referring all disputes and differences arising out of or in any way concerning to the contract, to the Managing Director himself/herself or his or her nominees for the sole arbitration, with fnality and binding effect being attached to the same. However, according to him, the clause is distinct from the one, which was considered in Rajasthan Small Industries Corporation Ltd. (supra) as clause 18.1 of the subject agreement contemplate reference of disputes to the sole Arbitration, to be appointed by the lender according to the provisions of the Arbitration and Conciliation Act, 1996 and the rules thereunder and the peculiar feature of the clause, which is distinguishable from all the cases, cited, before the Court, according to Mr. Kelkar, is "any amendment thereto from time to time".
Laying his emphasis on this part of the clause, it is the argument of Mr.Kelkar that the arbitration clause itself contemplated that the arbitration shall be conducted according to the provisions of the Act of 1996 as amended M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 14/29 ARBPL-14170-23+2.odt from time to time, necessarily making the arbitration proceedings subject to the Amendment Act of 2015 amending Section 12(5) w.e.f. 23/10/2015, which has now created an embargo upon any person, whose relationship with the parties or counsel, or the subject matter of the dispute falls under any of the categories specifed in Schedule VII and rendering him ineligible to be appointed as Abitrator, notwithstanding any prior agreement.
Mr. Kelkar has, therefore, submitted, that in Rajasthan Small Industries Corporation Ltd. (supra), the Court had held that an Arbitrator appointed prior to the amending Act coming into force shall not suffer ineligibility after its coming into force.
Another decision relied upon by Mr.Kelkar is in the case of Aravali Power Company Private Limited Vs. Era Infra Engineering Limited4 and even in this decision, the arbitration clause, according to Mr. Kelkar, is not similar to the one, with which I am concerned, but still a conclusion is drawn that in the cases governed by the Act of 1996, after the Amendment Act coming into force, if the arbitration clause falls foul of the amended provisions, the appointment of the arbitrator, even if 4 (2017) 15 SCC 32 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 15/29 ARBPL-14170-23+2.odt apparently in conformity with the arbitration clause in the agreement, would be illegal and thus the Court would be within its powers to appoint such arbitrator(s) as may be permissible.
15. Subsequent to the decision, in the case of Rajasthan Small Industries Corporation Limited (supra), another decision involving Section 12(5) and its effect in the backdrop of Section 11(6) is in the case of S.P. Singla Constructions Private Limited Vs. State of Himachal Pradesh & Anr. 5, which arose in the background fact, where a Construction Work Contract, was entered between the parties on 19/12/2006 and upon completion of the work, with the extension granted, disputes arose between the parties, as regards the payment.
An appointment of an Arbitrator was sought vide letter dated 18/10/2013 and the Chief Engineer, H.P. PWD appointed the "Superintendent Engineer, Arbitration Circle, H.P. PWD, Solan" as the Arbitrator on 30/10/2013, the appointment was made in terms of Clause (65) of the General Conditions of contract. The Arbitrator entered reference on 11/11/2013 and as the facts reveal, the Appellant either remained absent from the proceedings or sought adjournments on the ground that he intended to challenge the appointment of the Arbitrator. Since 5 (2019) 2 SCC 488 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 16/29 ARBPL-14170-23+2.odt no statement of claim was fled by the appellant, the arbitration proceedings were terminated on 06/08/2014, under Section 25(a) of the Arbitration and Conciliation Act, 1996.
The appellant then fled a petition under Section 11(6) of the Act of 1996 before the High Court, seeking appointment of an independent Arbitrator and the High Court, by holding that the remedy open to the appellant was a petition under Section 13 of the Act, held that the appointment of the Arbitrator, being in terms of Clause (65) of the agreement, Section 11(6) of the Act cannot be invoked and even the appointment of the Arbitrator could not be challenged by an application under Section 11(6) and, the arbitration petition was dismissed.
Once again the Apex Court was confronted with identical arguments on behalf of the appellant that the Arbitrator appointed by offce is an employee in services of H.P. PWD which, Section 12(5) bars at the threshold.
The State relied upon the decision in the case of Kochi Cricket (P) Ltd.(supra), by submitting that the amended provision shall not apply to the arbitral proceedings commenced prior to Act of 2015, unless the parties otherwise agree.
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Worth it to note that Clause (65) of general conditions of contract is on similar lines with the contract, which I am dealing and it reads thus :-
"Subject as aforesaid the provision of the Arbitration Act, 1940 or any statutory modifcation or re-enactment thereof and the rules made thereunder and for the time being shall apply to arbitration proceeding under this clause"
16. Repelling the contention advanced on behalf of the applicant/contractor, that the Arbitrator is an employee in service of H.P. PWD and by referring to the precedents, where the Government contract, contemplates an employee of the Department to be a sole Arbitrator, is held neither to be void nor enforceable, it was concluded that merely because a named Arbitrator is an employee of one of the parties is not by itself, ipso facto, a ground to raise a presumption of bias or lack of independence on his part.
As regards the specifc wordings in the clause quoted above, the attention of the Apex Court was drawn to a decision of the Delhi High Court in the case of Ratna Infrastructure Projects (P) Ltd. Vs. Meja Urja Nigam (P) Ltd. 6, wherein interpreting the similar words in the contract, Delhi High Court held that these words satisfy the requirement of Section 26 (Amending Act of 2015), of there being an agreement 6 2017 SCC OnLine Del 7808 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 18/29 ARBPL-14170-23+2.odt between the parties that the Act as amended w.e.f. 23/10/2015 will apply and a fnding was rendered that once the amendment to the clause stated that all statutory modifcations and re-enactments would apply, then there is no need for further agreement in that respect after 23/10/2015. However, Their Lordships refrained from examining the correctness the view adopted by Delhi High Court, but reiterated that as per Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015, the provisions of the amended 2015 Act shall not apply to the arbitral proceedings commenced in accordance with the provisions of Section 21 of the Principal Act, before the commencement of the Amending Act unless the parties otherwise agree.
In the facts and circumstances of the case, in the wake of the proviso in clause (65) of the general conditions, it was specifcally held that the arbitration proceedings commenced way back in 2013, much prior to coming into force of the amended Act and hence the provisions of the amended Act cannot be invoked.
17. One more illustrative pronouncement on this very aspect is the decision of the Apex Court in the case of Union of India M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 19/29 ARBPL-14170-23+2.odt Vs. Parmar Construction Company7. Once again it is emphatically held that a conjoint reading of Section 21 of the Act read with Section 26 of the Amendment Act, leaves no manner of doubt that the provisions of the Amendment Act, of 2015 shall not apply to such of the arbitral proceedings which have commenced in terms of the provisions of Section 21 of the Principal Act, unless the parties otherwise agree.
In the case before the Apex Court, the request by the Respondent/Contractor for referring the dispute to the arbitration was made and received by the Appellant much before the Amendment Act, 2015 came into force and, hence, it was held that the High Court was not justifed in appointing an independent Arbitrator, without resorting to the procedure prescribed under clause 64(3) of the Contract under the inbuilt mechanism as agreed by the parties. By specifcally referring to the various aspects of Railway Contract and by setting aside the appointment of the independent Arbitrators, the General Manager of the Railways was directed to appoint the Arbitrator in terms of clause 64(3) of the agreement.
18. The latest decision in the case of Shree Vishnu Constructions Vs. Engineer in Chief Military Engineering 7 (2019) 15 SCC 682 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 20/29 ARBPL-14170-23+2.odt Service & Ors.8 has considered the rulings in the case of Pradeep Vinod and Parmar Constitution Company and on noticing the ambit of the power of the 2015 Amendment Act, in the backdrop of Section 11(6-A) confning the power of the court in examining the existence of the arbitration agreement, it is clearly pronounced that in a case, where notice invoking arbitration is issued prior to coming into force of the 2015 Amendment Act, but the application under Section 11 for the appointment of an Arbitrator is made, after it has come into force then the provisions of the 1996 Act, as they stood prior to coming into force of the 2015 Amendment Act shall be applicable Act.
The said verdict also refers to the earlier decision, in case of S.P. Singla Constructions Private Limited (supra) and the decision in Kochi Cricket (P) Ltd. (supra), is clarifed, to have understood and construed with respect to the court proceedings, which had commenced on or after the Amending Act came into force, namely, the proceedings under Sections 34 and 36.
The position of law on this point is put to rest with the following observations :-
8 2023(8) SCC 329 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 21/29 ARBPL-14170-23+2.odt "23. It is required to be noted that in BCCI, application under Section 11(6) was not the subject-matter and there was no issue before the Court that even in a case where the notice invoking the arbitration is issued prior to the 2015 Amendment Act, but the application under Section 11(6) is fled post Amendment Act, 2015, what will be the position and whether the old Act will be applicable or the amended Act. On the other hand, the decisions in Parmar Construction Co. is directly on the point, namely, the application under Section 11(6) of the Act.
24. In Parmar Construction Co., it is specifcally observed and held that in a case where notice invoking arbitration is issued prior to the 2015 Amendment Act and the application under Section 11(6) is fled post amendment, as per Section 21 of the principal Act, the date of issuance of the notice invoking arbitration shall be considered as commencement of the arbitration proceedings and therefore as per Section 26 of the 2015 Amendment Act, the Amended Act, 2015 shall not be applicable and the parties shall be governed by the pre-Amendment Act, 2015.
25. The submission on behalf of the appellant, as above, cannot be accepted for the simple reason that this Court in BCCI was considering the Court proceedings under Sections 34 and 36. To that, this Court interpreted Section 26 in paras 37 to 39, reproduced hereinabove, and held that the Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced as understood by Section 21 of the principal Act, on or after the 2015 Amendment Act and to Court proceedings which have commenced on or after the 2015 Amendment Act came into force. Therefore, any observations made by this Court in paras 37 to 39 in BCCI shall be understood and construed with respect to Court proceedings which have commenced on or after the Amendment Act coming into force, namely, the proceedings under Sections 34 and 36. Therefore, the decisions of this Court in Parmar Construction Co. and Pradeep Vinod Construction Co. cannot be said to be per incuriam and/or in confict with the decision of this Court in BCСI.
26. As observed hereinabove, in Parmar Construction Co. which is directly on the point, it is specifcally observed and held that the 2015 Amendment Act, which came into force w.e.f. 23-10-2015 shall not apply to the arbitral proceedings which are commenced in accordance with the provisions of Section 21 of the principal Act, 1996 before the coming into force of the 2015 Amendment Act, unless parties otherwise agree (para 27). Similar view has been expressed in S.P. Singla Constructions."
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19. Recently the decision in the case of Ellora Paper Mills Limited Vs. State of Madhya Pradesh9, the Apex Court once again pronounced upon the effect of the amended provision, Section 12(5) read with Seventh Schedule and the issue involved in the Appeal was whether the Stationary Purchase Committee-Arbitral Tribunal consisting of offcers of the respondent has lost the mandate, considering Section 12(5) read with Seventh Schedule of the Act of 1996.
Noticing the fact that the constitution of the Arbitral Tribunal was in the year 2001, but no steps were taken in the arbitration proceedings, as from 04/05/2001 to 24/01/2017, there was a stay granted by the High Court and it was only in the year 2019, the application was preferred before the High Court, invoking Section 14 r/w Sections 11 and 15 of the Act of 1996, seeking termination of the mandate of the originally constituted Arbitral Tribunal and to appoint new Arbitrator, this aspect was specifcally taken into consideration, by drawing an inference, that technically it cannot be said that the arbitration proceedings before the Arbitral Tribunal had commenced and in these facts, pronouncing upon the principle of neutrality of the Arbitrator, which was the guiding factor in introduction of sub-section (5) of Section 12, 9 (2022) 3 SCC 1 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 23/29 ARBPL-14170-23+2.odt a conclusion was reached, that the order passed by the High Court was contrary to the law laid down in the case of TRF Ltd. Vs. Energo Engineering Projects Ltd.10 and in the case of Bharat Broadband Network Ltd. Vs. United Telecoms Ltd.11 and a fnding is returned, that the members of the Arbitral Tribunal, comprising of high ranking offcers of the Government, had lost mandate by operation of law and a fresh Arbitrator was appointed, by setting aside the judgment of the High Court.
Worth it to note that in Ellora Paper Mills Limited (supra), the facts were somehow peculiar as though the Tribunal was constituted in the year 2001, till the year 2019, when the application was taken out seeking substitution of the Arbitrator, no progress had taken place and the proceedings before the Arbitral Tribunal had not commenced.
20. There can be no second opinion on the universally accepted principle that any quasi-judicial process, including arbitration process, must adhere to the principles of natural justice and in the context of arbitration, neutrality of the Arbitrator, their independence and impartiality, is critical to the entire process and the amendment introduced in the 10 (2017) 8 SCC 377 11 2017 SCC OnLine Del 11905 M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 24/29 ARBPL-14170-23+2.odt Arbitration Act of 1996 was based on the recognition of the Law Commission's report, which specifcally focused on the issue of "neutrality and impartiality of arbitrator", as the likelihood of the Arbitrator, in any manner not acting independently would render him ineligible to conduct arbitration. The genesis underlying the process of Arbitration is well acknowledged and even though the Arbitrator is appointed in terms of the contract and by the parties to the contract, amongst the parties, he must act independently and impartially.
21. The only question, which is posed for consideration before me is, whether an Arbitrator, who is appointed prior to the Amendment Act 2015, coming into force where the arbitration proceedings have already commenced, whether such an Arbitrator would incur ineligibility only in the wake of provisions introduced and such a person who may be either unilaterally appointed or who would fall within the ambit of Schedule VII, is forbidden from continuing as an Arbitrator and deserve to be substituted.
22. The Arbitration and Conciliation (Amendment) Act, 2015 is deemed to have come into force from 23/10/2015 and the amending Act, apart from bringing about the changes in M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 25/29 ARBPL-14170-23+2.odt various provisions, sub-section (1) is substituted and sub- section(5) is added to the following effect :-
"(i) for sub-section (1), the following sub-section shall be substituted, namely :-
(1) Where 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 parties or in relation to the subject-matter in dispute, whether fnancial, business, professional or other kind, which is likely to give rise to justifable doubts as to his independence or impartiality; and
(b) which are likely to affect his ability to devote suffcient time to the arbitration and in particularly his ability to complete the entire arbitration within a period of twelve months.
Explanation 1.- The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifable doubts as to the independence or impartiality of an Arbitrator.
Explanation 2.- The disclosure shall be made by such person in the form specifed in the Sixth Schedule";
(ii) after sub-section (4), the following sub-section shall be inserted, namely (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 specifed 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."
23. The Amending Act also inserted Schedule IV, V, VI and VII, the Vth Schedule enlisting the grounds, giving rise to justifable doubts, as to the independence or impartiality of the Arbitrators and the VIIth Schedule enlisting the Arbitrator's M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 26/29 ARBPL-14170-23+2.odt relationship of the parties with the counsel, which would incur a disqualifcation and prevent him from acting as an Arbitrator and by virtue of it, he is deemed to be unable to discharge his functions as an Arbitrator, independently and with the adage of neutrality. However Section 26 of the Amendment Act thus specifcally provided thus: -
"26. Act not to apply to pending arbitral proceedings. - Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act."
The above provision in form of Section 26 of the Amendment Act, is clearly indicative that the provisions sought to be introduced by the Amendment Act shall not apply to the arbitration proceedings that have commenced in accordance with the provision of Section 21 of the principal Act, before the commencement of the amending Act.
24. In light of the above and the series of decisions, to which a reference is made, I see no diffculty in arriving at a conclusion that the Application preferred by Integro Finserv Private Limited, under Section 11 of the Arbitration and Conciliation Act, seeking appointment of an M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 27/29 ARBPL-14170-23+2.odt Arbitrator/substituted Arbitrator, by relying upon Section 12(5) do not deserve any consideration, as the facts of the case clearly reveal that the Loan-cum-Hypothecation Agreement was entered by the Defendants/Respondents in favour of L & T Finance on 29/05/2012 and even the Respondent No.2, executed a Deed of Guarantee.
L & T Finance Co. was compelled to terminate the Loan Agreement by recalling the loan balance, with accrued charges and enforce the security created under the said Agreement on 05/10/2013 and in the wake of the arbitration clause in the Loan-Cum-Hypothecated Agreement and Deed of Guarantee, appointed an Advocate as a sole Arbitrator to adjudicate the disputes.
The arbitration proceedings are pending before the Arbitrator, on he having entered the reference and as could be seen from the exhibits annexed with the reply fled by the Respondents, that the assignor of the present Applicant, CFM ARC Private Limited has taken out an application before the Arbitrator, seeking its substitution, in the arbitration proceedings, initialled by L & T Finance, in the wake of the Deed of Assignment dated 26/06/2019. At a subsequent point of time i.e. on 08/08/2022, CFM ARC Private Limited, sought M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 ::: 28/29 ARBPL-14170-23+2.odt withdrawal of the Application, indicating that on 16/02/2022, it has assigned its debt in favour of Integro the Applicant and, hence, now Integro is entitled to all receivable arising under the Loan Agreement and other transaction documents.
Apart from this, an application is also fled by Integro seeking its substitution as claimant, in the arbitration proceedings in place of L & T Finance and for permitting it to continue with the said proceedings.
25. As far as the aforesaid applications, which are pending before the Arbitrator are concerned, in the wake of the view taken by me in the case of M/s Siemens Factoring Pvt. Ltd. Vs. Future Enterprises Pvt. Ltd. (CARAP/174/22 decided on 01/03/2023), I fnd no merit in the said objection and leave it open to the Arbitrator to permit the substitution as per law.
However, for the reasons recorded above, since the appointment of an Arbitrator or his substitution on the ground, of his ineligibility, by applying Section 12(5) retrospectively, as the Arbitrator has entered reference prior to the Amendment Act and the proceedings are ongoing before him, I am not inclined to grant the relief of substituting him on the ground of his de jure ineligiblity, in the light of the amended provison.
M.M.Salgaonkar
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Necessarily the Arbitration Applications are dismissed for want of any merits and substance.
The Arbitration shall continue and conclude the references before him expeditiously.
No order as to costs.
( SMT. BHARATI DANGRE, J.) M.M.Salgaonkar ::: Uploaded on - 13/02/2024 ::: Downloaded on - 17/02/2024 15:48:36 :::