Gujarat High Court
Ahuja Classes vs Bothra Classes on 8 September, 2020
Equivalent citations: AIRONLINE 2020 GUJ 725
Author: Biren Vaishnav
Bench: Biren Vaishnav
C/IAAP/31/2020 CAV JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/PETN. UNDER ARBITRATION ACT NO. 31 of 2020
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed to see the YES
judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy of the NO
judgment ?
4 Whether this case involves a substantial question of law as to NO
the interpretation of the Constitution of India or any order made
thereunder ?
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AHUJA CLASSES
Versus
BOTHRA CLASSES
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Appearance:
DHARA P BHATT(7530) for the Petitioner(s) No. 1
MR. PARTH H BHATT(6381) for the Petitioner(s) No. 1
MR.Y.N.RAVANI, ADVOCATE for MR.N J MEVADA(9058) for the
Respondent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE BIREN VAISHNAV
Date : 08/09/2020
CAV JUDGMENT
1. This petition has been filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter to be referred to as 'the Act' for short) for the following prayers:
"(A) YOUR LORDSHIP, be pleased to admit and allow this Petition.Page 1 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
(B) YOUR LORDSHIP, be pleased to declare the appointment of the Sole Arbitrator Rajan J. Patel as illegal, null and void-ab-initio and to appoint an Arbitrator to resolve the disputes between the Parties;"
2. The facts in brief are as under:
2.1 It is the case of the petitioner that he entered into a franchisee agreement with the respondent for opening coaching classes of IIT-JEE/JEE Advance, JEE Mains, NEET and other tests. The agreement is executed in December, 2018.
2.2 It is the case of the petitioner that he abided by the Franchisee agreement for the academic year 2019-20.
However, being dissatisfied with the relationship with the respondent, the petitioner did not wish to proceed further and therefore on 29.03.2020 addressed a letter to the respondent for terminating the agreement.
2.3 In response to the letter of 29.03.2020, the respondent issued a notice under Clause 14(C) of the agreement for clearing of outstanding dues. It is the case of the petitioner that the petitioner also issued a notice on 08.06.2020 asking the respondent to vacate the premises as the petitioner did not want to oblige the franchisee agreement for the year 2020-21. Several exchange of notices followed under Section 138 of the Negotiable Instruments Act and the agreement to not compete inter-se between the parties.
Page 2 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT2.4 On 16.06.2020, one Nikunj Mewada advocate addressed an e-mail to Shri Rajan J. Patel learned Sole Arbitrator submitting a statement of claim to the arbitrator and marking a copy to the petitioner. On 17.06.2020, the petitioner received a letter from the Sole Arbitrator Mr.Rajan J. Patel intimating that the first date of arbitration proceedings was on 20.06.2020. On 20.06.2020, the representative on behalf of the petitioner, Mr. Sunil Ahuja remained present and thereafter according to the petitioner he was made to wait for four hours and the hearing was adjourned to 27.06.2020. On 27.06.2020 on a medical certificate being given that the petitioner's representative was unwell, an ex-parte mandatory injunction was passed and the proceedings were adjourned to 11.07.2020.
2.5 The petitioner issued a notice on 04.07.2020 to the respondent as well as the Sole Arbitrator stating that the appointment of the Arbitrator was illegal. In response to the notice, objections were filed by the respondent before the Arbitrator on 08.07.2020. Despite the objection of the Arbitrator's appointment, the Arbitrator fixed the hearing on 11.07.2020. It is in this context that the prayers are made in the petition.
3. Mr. Parth Bhatt, learned advocate for the petitioner would make the following submissions:
3.1 Inviting my attention to the prayer and to the provisions of Sections 12, 13 and 14 of the Act, read with Page 3 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT Schedule-VII, Mr. Parth Bhatt would submit that the sole arbitrator is disqualified in view of the de-jure relations and therefore the mandate of the Sole Arbitrator to act as an Arbitrator should be terminated. Relying on Section 80 of the Act, Mr.Bhatt would submit that by virtue of the ineligibility of the Arbitrator to Act, in view of his role as conciliator in the proceedings, the Arbitrator is disqualified to be the Arbitrator in the proceedings.
3.2 The other submission that was made by Mr. Bhatt was that in accordance with the scheme of the Act, it is mandatory for a party to issue notice invoking the arbitration whereby the disputes raised by the party to be communicated to the other side. That mandatory requirement is in accordance with Section 21 of the Act. Breach of Section 21 of the Act would amount to breach of the prescribed procedure for appointment of an Arbitrator and therefore the Arbitration Proceedings are bad.
3.3 In support of his submissions on Section 21 Mr.Bhatt relied on the decision in the case of Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd.
reported in 2017 SCC OnLine Del 7227. He would rely on para 30 of the decision which reads as under:
"30. Considering that the running theme of the Act is the consent or agreement between the parties at every stage, Section 21 performs an important function of forging such consensus on several aspects viz. the scope of the disputes, the determination of which Page 4 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT disputes remain unresolved; of which disputes are time-barred; of identification of the claims and counter-claims and most importantly, on the choice of arbitrator. Thus, the inescapable conclusion on a proper interpretation of Section 21 of the Act is that in the absence of an agreement to the contrary, the notice under Section 21 of the Act by the claimant invoking the arbitration clause, preceding the reference of disputes to arbitration, is mandatory. In other words, without such notice, the arbitration proceedings that are commenced would be unsustainable in law."
3.4 Mr.Bhatt during the course of arguments took the Court to the various pages of the paper-book, especially pages 175 to 177 to indicate that the place or the venue of the Conciliation Meeting pre-arbitration was at Shri Rajan Patel's office. The arbitrator was involved actively with the respondents and the petitioner in the conciliation proceedings and even positively affirmed that he would remain present at such conciliations. In Mr.Bhatt's submission therefore when Entry 16 of Schedule - 7 of Section 12(5) is read, since the Arbitrator in any manner is involved in the dispute, he will stand ineligible to be an Arbitrator. In support of his submissions, Mr.Bhatt relied on the decision of the Allahabad High Court in the case of Shubham Garg v. Ajay Kumar Maheshwari. passed in Civil Misc. Arbitration Application No.91 of 2018. According to Mr.Bhatt, by virtue of the ineligibility in accordance with Section 12(5) read with Section 14 of the Act, the Arbitrator becomes automatically ineligible and the fact that the petitioner participated in the Arbitral hearings Page 5 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT on two or three dates would not make it bad. The appointment of the Arbitrator being void-ab-initio, the participation of the petitioner in such proceedings cannot go against him. Mr. Bhatt also invited the attention of this Court to page 101 where the minutes of the meeting of the 20.07.2020 was drawn. He would submit that the endorsement shows that the representative of the petitioner refused to sign in the proceedings which would indicate that the reservation of the petitioner on the sole arbitrator's qualification and eligibility of appointment.
3.5 Mr.Bhatt would submit that there was strong bias on the part of the administrator. On 16.06.2020 an E-mail was addressed by the advocate for the respondent, forwarding a statement of claim to the arbitrator and the petitioner. Immediately on 17.06.2020, the Arbitrator fixed the first meeting on 20.06.2020. The petitioner was made to wait for four hours. He kept the hearing of the Section 17 application on 27.06.2020 and then when time was sought, he passed an ex-parte order which amounted to passing of an order in a mandatory nature. He would therefore submit that all these circumstances would go to show that the petitioner was right in his apprehension that the sole arbitrator was biased and therefore even on this ground the appointment of the Arbitrator ought to be terminated and this Court should appoint an independent arbitrator.
4. Mr. Y.N. Ravani learned advocate has appeared for Mr. Nikunj Mewada, learned advocate for the respondent. He would submit as Page 6 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT under:
4.1 He would invite my attention to Clause 14E of the Agreement. He would submit that once the Arbitration Agreement itself provides for an appointment of an Arbitrator, this Court in the scope of an Arbitration Petition under Section 11(6) of the Act cannot impose an independent arbitrator in view of the specific agreement arrived at. He would submit that if such a prayer is granted, it would amount to nullifying the agreement which would go against the spirit of the Arbitration Act which requires speedy disposal of disputes through private channels.
Mr.Ravani would rely on the decision in the case of State of Goa v. Praveen Enterprises reported in AIR 2011 SC 384. He would draw the attention of the Court to para 13 of the judgment which reads as under and submit that Section 21 of the Act is only in context of computing limitation as far as institution of claims and counterclaims is concerned and is not a mandatory provision as canvassed by Mr.Bhatt:
"13. Section 21 provides that unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commences on the date on which a request for that dispute to be referred to arbitration is received by the respondent. Taking a cue from the said section, the respondent submitted that arbitral proceedings can commence only in regard to a dispute in respect of which notice has been served by a claimant upon the other party, requesting such dispute to be referred to arbitration; and therefore, a counter claim can be entertained by the arbitrator only if it has been referred to him, after a notice seeking arbitration in regard to such counter claim. On a careful consideration we find no basis for such a contention. The purpose of section 21 is to specify, in Page 7 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT the absence of a provision in the arbitration agreement in that behalf, as to when an arbitral proceedings in regard to a dispute commences. This becomes relevant for the purpose of section 43 of the Act. Sub-section (1) of section 43 provides that the Limitation Act 1963 shall apply to arbitrations as it applies to proceedings in courts. Sub-section (2) of section 43 provides that for the purposes of section 43 and the Limitation Act, 1963, an arbitration shall be deemed to have commenced on the date referred to in section 21 of the Act. Having regard to section 43 of the Act, any claim made beyond the period of limitation prescribed by the Limitation Act, 1963 will be barred by limitation and the arbitral tribunal will have to reject such claims as barred by limitation."
4.2 Mr.Ravani would further submit that Section 21 of the Act would have no bearing as far as the appointment of the Arbitrator is concerned.
4.3 As far as the submissions of Mr.Bhatt on the question of disqualification of the Arbitrator under Section 12(5), Mr.Ravani would draw the attention of this Court to the additional sur-rejoinder filed on behalf of the respondent and submit that for appointment of conciliators, an entire procedure is prescribed under Sections 61 to 64 of the Act and the process of conciliation is described in provisions 65 to 75 of the Act. None of these procedures were undertaken by the respondents and merely because the e-mails have been addressed by Shri Nikunj Mewada with the venue being Shri Rajan Patel's office, it cannot be presumed that Shri Rajan Patel was in any way involved with the dispute as a conciliator so as to disqualify him. He would submit that it is only in view of state of convenience that it was agreed Page 8 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT between the parties that the venue of the meeting will be Shri Rajan Patel's office. As far as the ground of bias is concerned and ineligibility in accordance with Section 12(5) of the Act, Mr. Ravani would submit that it was only for the first time in the rejoinder that such an issue is raised and therefore it is clearly an afterthought and cannot be permitted to be raised.
4.4 Mr. Ravani further submitted that once having participated in the arbitration proceedings and having not objected to the appointment of the sole arbitrator as expressly recorded in the minutes of 20.07.2020 and having handed over the cheques drawn in the name of the respondent which were realized, the applicant having suppressed these facts, it cannot be said that it is now open for the petitioner to come-forth at this stage of the arbitral proceedings to challenge the appointment of the arbitrator. According to Mr. Ravani, the relief is already implemented, the Arbitrator is already acting, is seized of the proceedings and therefore no prayer as prayed for is granted.
4.5 Mr.Ravani would further submit that the agreement was executed in December, 2018. It was again stamped on 20.02.2020. The parties accepted the agreement and therefore now at this stage it is a clear afterthought on the part of the petitioner to seek nullifying the appointment of the Sole Arbitrator.
Page 9 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT4.6 On the question of bias, Mr. Ravani would submit that there is no allegation of either official or personal bias and the Court is well aware that in absence of any such allegations merely on the grounds of apprehension, this Court should not set aside the appointment of the Arbitrator. Mr.Ravani also relied on the decision in the case of Antrix Corporation Limited v. Devas Multimedia Private Limited reported in (2014) 11 SCC 560. By placing reliance on paragraphs 22 to 24 of the judgment, he would submit that both the parties were ad-idem and once the course of action was taken, it was not open for the parties to challenge the appointment of the Arbitrator. In an application filed under Section 11(6) of the Act, it was not within the scope of powers of the nominee of the Chief Justice to inquire into the proceedings and the Court cannot replace one arbitrator already appointed in exercise of the agreement. For this submission he relied on para 31 of the decision which reads as under:
"31. The matter is not as complex as it seems and in our view, once the Arbitration Agreement had been invoked by Devas and a nominee Arbitrator had also been appointed by it, the Arbitration Agreement could not have been invoked for a second time by the Petitioner, which was fully aware of the appointment made by the Respondent. It would lead to an anomalous state of affairs if the appointment of an Arbitrator once made, could be questioned in a subsequent proceeding initiated by the other party also for the appointment of an Arbitrator. In our view, while the Petitioner was certainly entitled to challenge the appointment of the Arbitrator at the instance of Devas, it could not do so by way of an independent proceeding under Section 11(6) of the Page 10 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT 1996 Act. While power has been vested in the Chief Justice to appoint an Arbitrator under Section 11(6) of the 1996 Act, such appointment can be questioned under Section 13 thereof. In a proceeding under Section 11 of the 1996 Act, the Chief Justice cannot replace one Arbitrator already appointed in exercise of the Arbitration Agreement."
4.7 Mr.Ravani also relied on the decision in the case of S.P.Singla Constructions Private Limited v. State of Himachal Pradesh and Another reported in (2019) 2 SCC
488. Reliance was placed on this decision to submit that what was under challenge was the decision of the Himachal Pradesh High Court where the High Court has dismissed the Arbitration Petition filed by the appellant declining to appoint an arbitrator, holding that as per the terms of the agreement, the Arbitrator was already appointed. It was in this context that Mr.Ravani relied on para 14 of the judgment which reads as under:
"14. Any challenge regarding the appointment of an arbitrator as per the terms of the agreement between the parties must be viewed in the context of the agreement between the parties. As pointed out earlier, the parties have mutually agreed that there will be sole Arbitration by the person appointed by the Engineer-in-Chief and that the appellant shall have no objection to any such appointment that the Arbitrator so appointed is a Government Servant. If the appellant has any grievance that the appointment of the arbitrator is by 'post' and not by 'person', the appellant ought to have raised the challenge before the arbitrator in the first instance. Be it noted, in the petition filed before the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 on 28.12.2013, the appellant has only prayed for quashing the appointment of the Superintendent Page 11 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT Engineer, Arbitration Circle, H.P. PWD, Solan as the sole arbitrator as unconstitutional and sought for appointment of an independent and impartial sole arbitrator to adjudicate the dispute between the parties. It is fairly well settled that any challenge to the arbitrator appointed ought to have been raised before the arbitrator himself in the first instance."
4.8 He would submit that challenge to the appointment of an Arbitrator and appointment of an independent Arbitrator would not therefore fall within the powers of this Court under Section 11(6) of the Act.
4.9 Mr.Ravani also placed reliance on the decision in case of GAS Authority of India Ltd. and Another v. Keti Construction (I) Ltd. and others reported in (2007) 5 SCC 38 in support of his submission that the case or the challenge to the arbitrator and the contention of Section 21 being breached are issues which can be taken up in a challenge to the award under Section 34 of the Act and therefore this Court should not interject and replace Shri Rajan Patel's appointment as an Arbitrator and replace him by an independent arbitrator at the hands of the Court.
5. Having considered the submissions made by the learned advocates for the respective parties, the short question that arises for consideration is whether while exercising powers under Section 11(6) of the Act, the Court can grant the relief as prayed for i.e. declare the appointment of the Sole Arbitrator Rajan Patel as illegal, null and void-ab-initio and appoint an Arbitrator to resolve the disputes between the Parties.
Page 12 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT5.1 It is the specific case of the respondent that the Arbitration Agreement itself provides for an appointment of an Arbitrator and therefore this Court in the scope of an Arbitration Petition under Section 11(6) of the Act cannot impose an independent arbitrator in view of the specific agreement arrived at. In view of the said contention, let us first proceed to peruse the relevant clause of the agreement of 2018. The Franchisee Agreement of December 2018 contains the Arbitration Clause 14E which reads as under:
"14E.ARBITRATION CLAUSE:-
It is mutually agreed and understood to both the parties that;
The disputes between the parties shall be resolved by The Sole Arbitrator, MR. RAJAN. J. PATEL, ADVOCATE, under the provisions of The Arbitration and Conciliation Act, 1996 and the subsequent amendments thereto. The language of the Arbitration proceedings will be English Only. Place of the Arbitration shall be at Ahmedabad only. The award passed by The Sole Arbitrator, MR. RAJAN J. PATEL, ADVOCATE, shall be considered as final award and shall be binding to both the parties to the proceedings.
5.2 Reading the clause would indicate that it was agreed by and between the petitioner and the respondent that the disputes between the parties would be resolved by the Sole Arbitrator, Shri Rajan J. Patel. Be that as it may.
5.3 With regard to the bone of contention between the Page 13 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT parties, the case of the respondent is that, once having agreed to have the dispute resolved through Shri Rajan Patel and also having participated in the Arbitration meetings at least once, the petitioner cannot now approach this Court in an application under Section 11(6) of the Act and this Court has very limited jurisdiction under the provisions of Section 11(6) of the Act and cannot replace the Arbitrator as the agreed appointment is made and no occasion to invoke the provisions of the Section 11(6) has arisen. Moreover, assuming that the Arbitrator is biased or that the procedure under Section 21 of the Act has not been followed, the remedy would lie in challenging the Award on the grounds available under Section 34 of the Act. Such an issue cannot form the scope of adjudication in an Application under Section 11(6) of the Act.
5.4 On the other hand, the Counsel for the petitioner would submit that reading Section 12(5) with the Seventh Schedule, Section 14 of the Act would indicate that notwithstanding the prior agreement if there are circumstances to show that the Arbitrator is ineligible as there is a dejure disqualification then this Court can under the powers of Section 11(6) set aside the appointment and appoint an independent arbitrator.
5.5 Before dealing with the submission regarding the scope of inquiry and jurisdiction of the Court in context of Section 11(6) of the Act, the relevant Sections need to be Page 14 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT reproduced for a ready reference. Section 11 of the Act reads as under:
11. Appointment of arbitrators.--
(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.
(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.
[3(A) The Supreme Court and the High Court shall have the power to designate, arbitral institutions, from time to time, which have been graded by the Council under section 43-I, for the purposes of this Act.
Provided that in respect of those High Court jurisdictions, where no graded arbitral institution are available, then, the Chief Justice of the concerned High Court may maintain a panel of arbitrators for discharging the functions and duties of arbitral institution and any reference to the arbitrator shall be deemed to be an arbitral institution for the purposes of this section and the arbitrator appointed by a party shall be entitled to such fee at the rate as specified in the Fourth Schedule;
Page 15 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENTProvided further that the Chief Justice of the concerned High Court may, from time to time, review the panel of arbitrators.] (4) If the appointment procedure in sub-section (3) applies and--
(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or
(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, [the appointment shall be made, on an application of the party, by the arbitral institution designated by the Supreme Court, in case of international commercial arbitration, or by the High Court, in case of arbitrations other than international commercial arbitration, as the case may be];
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree [the appointment shall be made on an application of the party in accordance with the provisions contained in sub-section (4).
(6) Where, under an appointment procedure agreed upon by the parties,--
(a) a party fails to act as required under that procedure; or Page 16 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, [the appointment shall be made, on an application of the party, by the arbitral institution designated by the Supreme Court, in cse of international commercial arbitration, or by the High Court, in case of arbitrations other than international commercial arbitration, as the case may be] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
(6A) [***] (6B) The designation of any person or institution by the Supreme Court or, as the case may be, the High Court, for the purposes of this section shall not be regarded as a delegation of judicial power by the Supreme Court or the High Court.] (7) [***] (8) [The arbitral institution referred to in sub-sections (4), (5), and (6)], before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to--
(a) any qualifications required for the arbitrator Page 17 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT by the agreement of the parties; and
(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.] (9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, [the arbitral institution designated by the Supreme Court] may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.
(10) [***] [(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section (6) to different arbitral institutions, the arbitral institution to which the request has been first made under the relevant sub-section shall be competent to appoint.] [(12) Where the matter referred to in sub-sections (4), (5), (6) and (8) arise in an international commercial arbitration or any other arbitration, the reference to the arbitral institution in those sub-sections shall be construed as a reference to the arbitral institution designated under sub-section (3A).] [(13) An application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the arbitral institution within a period of thirty days from the date of service of notice on the opposite party.
Page 18 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT(14) The arbitral tribunal shall determine the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal subject to the rates specified in the Fourth Schedule.
Explanation.--For the removal of doubts, it is hereby clarified that this sub-section shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) where parties have agreed for determination of fees as per the rules of an arbitral institution.] 5.6 Considering the above sections, what needs to be assessed at the first instance is the nature of powers under Section 11(6) of the Act. Such powers have been extensively discussed by the Hon'ble Supreme Court in the case of SBP & Co. v. Patel Engineering Ltd and Anr. reported in (2005) 8 SCC 618. In a subsequent decision in the case of National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. reported in (2009) 1 SCC 267, the Apex Court has succinctly set out the parameters of the scope under Section 11(6) as under:.
"22. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under section 11, the duty of the Chief Justice or his designate is defined in SBP & Co. This Court identified and segregated the preliminary issues that may arise for consideration in an application under section 11 of the Act into three categories, that is (i) issues which the Chief Justice or his Designate is bound to decide;
(ii) issues which he can also decide, that is issues which he may choose to decide; and (iii) issues which Page 19 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT should be left to the Arbitral Tribunal to decide.
22.1 The issues (first category) which Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under section 11 of the Act, is a party to such an agreement.
22.2 The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the arbitral tribunal) are:
(a) Whether the claim is a dead (long barred) claim or a live claim.
(b) Whether the parties have concluded the contract/ transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
22.3 The issues (third category) which the Chief Justice/his designate should leave exclusively to the arbitral tribunal are :
(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).
(ii) Merits or any claim involved in the arbitration.
23. It is clear from the scheme of the Act as explained by this Court in SBP & Co., that in regard to issues falling under the second category, if raised in any application under section 11 of the Act, the Chief Justice/his designate may decide them, if necessary by taking evidence. Alternatively, he may leave those issues open with a direction to the Arbitral Tribunal to decide the same. If the Chief Justice of his Designate chooses to examine the issue Page 20 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT and decides it, the Arbitral Tribunal cannot re- examine the same issue. The Chief Justice/his designate will, in choosing whether he will decide such issue or leave it to the Arbitral Tribunal, be guided by the object of the Act (that is expediting the arbitration process with minimum judicial intervention). Where allegations of forgery/fabrication are made in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if the Chief Justice/his designate decides the issue."
5.7 Reading para 22.2 thereof would indicate that this Court can choose to decide the question as to whether despite an agreement to have Shri Rajan Patel as the Arbitrator, can this Court substitute the name by appointing an independent arbitrator by terminating the mandate of Shri Rajan Patel. The Court is inclined to answer the question in the affirmative for the reasons set out hereinafter.
5.8 The contention of Shri Ravani that once an agreement is entered into and an Arbitrator is appointed since the inception and no occasion therefore arises was first considered by the SC in the case of Ace Pipeline Contracts (P) Ltd. v. Bharat Petrolium Corporation Ltd. (2007) 5 SCC 304. Para 21 of the judgment reads as under:
"21. In the present case, in fact the appellant's demand was to get some retired Judge of the Supreme Court to be appointed as arbitrator on the ground that if any person nominated in the arbitration clause is appointed, then it may suffer from bias or the arbitrator may not be impartial or independent in taking decision. Once a party has entered into an agreement with eyes wide open it cannot wriggle out Page 21 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT of the situation that if any person of the respondent- BPCL is appointed as arbitrator he will not be impartial or objective. However, if the appellant feels that the arbitrator has not acted independently or impartially, or he has suffered from any bias, it will always be open to the party to make an application under Section 34 of the Act to set aside the award on the ground that arbitrator acted with bias or malice in law or fact."
5.9 The Supreme Court held that once a party has entered into an agreement with eyes wide open, it cannot wriggle out of that situation. In the case of Indian Oil Corporation Limited and others v. Raja Transport Private Limited reported in (2009) 8 SCC 520, the Supreme Court while considering question (ii) i.e. where the arbitration agreement names or designates the arbitrator, whether the Chief Justice or his designate could appoint any other person, set out various decisions in paras 40 to 48 as under:
"Re : Question No. (ii)
40. Where the arbitration agreement names or designates the arbitrator, the question whether the Chief Justice or his designate could appoint any other person as arbitrator, has been considered by this Court in several decisions.
41. In Ace Pipeline Contract Pvt. Ltd. (supra), a two-Judge Bench of this Court held that where the appointing authority does not appoint an arbitrator after receipt of request from the other party, a direction can be issued under section 11(6) to the authority concerned to appoint an arbitrator as far as possible as per the arbitration clause. It was held that normally the court should adhere to the terms of the arbitration agreement except in exceptional cases for reasons to be recorded or where both parties agree for a common name.
42. In Union of India v. Bharat Battery Page 22 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT Manufacturing Company Pvt. Ltd. [2007 (7) SCC 684], another two-Judge Bench of this Court held that once the notice period provided for under the arbitration clause for appointment of an arbitrator elapses and the aggrieved party files an application under section 11(6) of the Act, the right of the other party to appoint an arbitrator in terms of the arbitration agreement stands extinguished.
43. The divergent views expressed in Ace Pipeline (supra) and Bharat Battery (supra) were sought to be harmonised by a three-Judge Bench of this Court in Northern Railway Administration v. Patel Engineering Co. Ltd. [2008 (11) SCALE 500]. After examining the scope of sub-sections (6) and (8) of section 11, this Court held:
"11. The crucial expression in sub-section (6) is "a party may request the Chief Justice or any person or institution designated by him to take the necessary measures". This expression has to be read along with requirement in sub-section (8) that the Chief Justice or the person or an institution designated by him in appointing an arbitrator shall have "due regard" to the two cumulative conditions relating to qualifications and other considerations as are likely to secure the appointment of an independent and impartial arbitration.
12. A bare reading of the scheme of Section 11 shows that the emphasis is on the terms of the agreement being adhered to and/or given effect as closely as possible. In other words, the Court may ask to do what has not been done. The Court must first ensure that the remedies provided for are exhausted. It is true as contended by Mr. Desai, that it is not mandatory for the Chief Justice or any person or institution designated by him to appoint the named arbitrator or arbitrators. But at the same time due regard has to be given to the qualifications required by the agreement and other considerations.
13. The expression 'due regard' means that proper attention to several circumstances have been focused. The expression 'necessary' as a general rule can be broadly stated to be those things which are reasonably required to be done or legally ancillary to Page 23 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT the accomplishment of the intended act. Necessary measures can be stated to be the reasonable step required to be taken...
14 ... It needs no reiteration that appointment of the arbitrator or arbitrators named in the arbitration agreement is not a must, but while making the appointment, the twin requirements of sub-section (8) of section 11 have to be kept in view, considered and taken into account."
44. While considering the question whether the arbitral procedure prescribed in the agreement for reference to a named arbitrator, can be ignored, it is also necessary to keep in view clause (v) of sub- section (2) of section 34 of the Act which provides that an arbitral award may be set aside by the court if the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties (unless such agreement was in conflict with any provision of Part-I of the Act from which parties cannot derogate, or, failing such agreement, was not in accordance with the provisions of Part-I of the Act). The legislative intent is that the parties should abide by the terms of the arbitration agreement.
45. If the arbitration agreement provides for arbitration by a named Arbitrator, the courts should normally give effect to the provisions of the arbitration agreement. But as clarified by Northern Railway Administration, where there is material to create a reasonable apprehension that the person mentioned in the arbitration agreement as the Arbitrator is not likely to act independently or impartially, or if the named person is not available, then the Chief Justice or his designate may, after recording reasons for not following the agreed procedure of referring the dispute to the named arbitrator, appoint an independent Arbitrator in accordance with section 11(8) of the Act. In other words, referring the disputes to the named arbitrator shall be the rule. The Chief Justice or his designate will have to merely reiterate the arbitration agreement by referring the parties to the named Page 24 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT arbitrator or named Arbitral Tribunal. Ignoring the named Arbitrator/Arbitral Tribunal and nominating an independent arbitrator shall be the exception to the rule, to be resorted for valid reasons.
46. This takes us to the effect of the condition in the arbitration agreement that "it is also a term of this contract that no person other than the Director, Marketing or a person nominating by such Director, Marketing of the Corporation as aforesaid shall act as Arbitrator." Such a condition interferes with the power of the Chief Justice and his designate under section 11(8) of Act to appoint a suitable person as arbitrator is appropriate cases. Therefore, the said portion of the arbitration clause is liable to be ignored as being contrary to the Act.
47. But the position will be different where the arbitration agreement names an individual (as contrasted from someone referred to by designation) as the Arbitrator. An example is an arbitration clause in a partnership deed naming a person enjoying the mutual confidence and respect of all parties, as the Arbitrator. If such an arbitration agreement provides that there shall be no arbitration if such person is no more or not available, the person named being inextricably linked to the very provision for arbitration, the non- availability of the named arbitrator may extinguish the very arbitration agreement. Be that as it may.
48. In the light of the above discussion, the scope of section 11 of the Act containing the scheme of appointment of arbitrators may be summarised thus:
(i) Where the agreement provides for arbitration with three arbitrators (each party to appoint one arbitrator and the two appointed arbitrators to appoint a third arbitrator), in the event of a party failing to appoint an Arbitrator within 30 days from the receipt of a request from the other party (or the two nominated arbitrators failing to agree on the third arbitrator within 30 days from the date of the appointment), the Chief Justice or his designate will exercise power under sub-section (4) of section 11 of the Act.Page 25 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
(ii) Where the agreement provides for arbitration by a sole arbitrator and the parties have not agreed upon any appointment procedure, the Chief Justice or his designate will exercise power under sub-section (5) of section 11, if the parties fail to agree on the arbitration within thirty days from the receipt of a request by a party from the other party.
(iii) Where the arbitration agreement specifies the appointment procedure, then irrespective of whether the arbitration is by a sole arbitrator or by a three-
member Tribunal, the Chief Justice or his designate will exercise power under sub-section (6) of section 11, if a party fails to act as required under the agreed procedure (or the parties or the two appointed arbitrators fail to reach an agreement expected of them under the agreed procedure or any person/institution fails to perform any function entrusted to him/it under that procedure).
(iv) While failure of the other party to act within 30 days will furnish a cause of action to the party seeking arbitration to approach the Chief Justice or his designate in cases falling under sub-sections (4) & (5), such a time bound requirement is not found in sub-section (6) of section 11. The failure to act as per the agreed procedure within the time limit prescribed by the arbitration agreement, or in the absence of any prescribed time limit, within a reasonable time, will enable the aggrieved party to file a petition under Section 11(6) of the Act.
(v) Where the appointment procedure has been agreed between the parties, but the cause of action for invoking the jurisdiction of the Chief Justice or his designate under clauses (a), (b) or (c) of sub-section (6) has not arisen, then the question of Chief Justice or his designate exercising power under sub-section (6) does not arise. The condition precedent for approaching the Chief Justice or his designate for taking necessary measures under sub-section (6) is that
(i) a party failing to act as required under the agreed appointment procedure; or Page 26 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
(ii) the parties (or the two appointed arbitrators), failing to reach an agreement expected of them under the agreed appointment procedure; or
(iii) a person/institution who has been entrusted with any function under the agreed appointment procedure, failing to perform such function.
(vi) The Chief Justice or his designate while exercising power under sub-section (6) of section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.
(vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else."
[Emphasis Supplied] 5.10 In para 48 of the decision, the Supreme Court has held that the Chief Justice or his designate while exercising powers under sub-section (6) of Section 11 shall endeavor to give effect to the appointment procedure as prescribed in the arbitration clause, however the Apex Court added that if circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may for reasons to be recorded, ignore the designated arbitrator and appoint someone else.
5.11 In the case of Union of India and others v. Uttar Pradesh State Bridge Corporation Limited reported in Page 27 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT (2015) 2 SCC 52, the Court considered its powers under Section 11(6) to take remedial measures by overriding procedure prescribed in the agreement. Noticing the scheme of the Act the Supreme Court observed as under:
"11. At this stage, we may take note of the scheme of the Act as well, by noticing those provisions which would be attracted to deal with such a situation. Relevant provisions are extracted below for ready reference:
"14. Failure or impossibility to act -(1) The mandate of an arbitrator shall terminate if-(a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and
(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 or 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) ............
(4) ............
32. Termination of proceedings-(1) the arbitral Page 28 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT proceedings shall be terminated by the final arbitral award or by an order of the arbitral tribunal under subsection (2).
(2) the arbitral tribunal shall issue an order for the termination of the arbitral proceedings where-
(a) the claimant withdraws his claim, unless the respondent objects to the order and the arbitral tribunal recognises a legitimate interest on his part in obtaining a final settlement of the dispute,
(b) the parties agree on the termination of the proceedings, or
(c) the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible.
(3) Subject to section 33 and sub-section (4) of section 34, the mandate of the arbitral tribunal shall terminate with the termination of the arbitral proceedings."
12. As is clear from the reading of Section 14, when there is a failure on the part of the Arbitral Tribunal to act and it is unable to perform its function either de jure or de facto, it is open to a party to the arbitration proceedings to approach the Court to decide on the termination of the mandate. Section 15 provides some more contingencies when mandate of an arbitrator can get terminated. In the present case, the High Court has come to a categorical finding that the Arbitral Tribunal failed to perform its function, and rightly so. It is a clear case of inability on the part of the members of the Tribunal to proceed in the matter as the matter lingered on for almost four years, without any rhyme or justifiable reasons. The members did not mend their ways even when another life was given by granting three months to them. Virtually a pre-emptory order was passed by the High Court, but the Arbitral Tribunal remained unaffected and took the directions of the High Court in a cavalier manner. Therefore, the order of the High Court terminating the mandate of the arbitral tribunal is flawless. This aspect of the impugned order is not even questioned by the Appellant at the time of hearing of the present appeal. However, the contention of the Appellant is that even if it was so, as Page 29 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT per the provisions of Section 15 of the Act, substitute arbitrators should have been appointed "according to the rules that were applicable to the appointment of the arbitrator being replaced". On this basis, it was the submission of Mr. Mehta, learned ASG, that High Court should have resorted to provision contained in Clause 64 of the GCC."
13. No doubt, ordinarily that would be the position. The moot question, however, is as to whether such a course of action has to be necessarily adopted by the High Court in all cases, while dealing with an application under Section 11 of the Act or is there room for play in the joints and the High Court is not divested of exercising discretion under some circumstances? If yes, what are those circumstances? It is this very aspect which was specifically dealt with by this Court in TrippleEngg. Works [North Eastern Railway v. TrippleEngg. Works, 2014(4) R.C.R.(Civil) 176 : (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. Taking note of various judgments, the Court pointed out that the notion that the High Court was bound to appoint the arbitrator as per the contract between the parties has seen a significant erosion in recent past. In paras 6 and 7 of the said decision, those judgments wherein departure from the aforesaid "classical notion" has been made are taken note of. It would, therefore, be useful to reproduce the said paragraph along with paras 8 and 9 hereinbelow: (SCC pp. 291-
93) "6. The `classical notion' that the High Court while exercising its power under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter for short `the Act') must appoint the arbitrator as per the contract between the parties saw a significant erosion in ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., 2007(2) R.C.R.(Civil) 407 :
2007(2) Recent Apex Judgments (R.A.J.) 335 :
(2007) 5 SCC 304 , wherein this Court had taken the view that though the contract between the parties must be adhered to, deviations therefrom in exceptional circumstances would be permissible. A more significant development had come in a decision Page 30 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT that followed soon thereafter in Union of India v. Bharat Battery Mfg. Co. (P) Ltd., 2007(3) R.C.R. (Civil) 858 : (2007) 7 SCC 684 wherein following a three-Judge Bench decision in Punj Lloyd Ltd. v.
Petronet MHB Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., 2006(3) R.C.R.(Civil) 836 : (2006) 2 SCC 638], it was held that once an aggrieved party files an application under Section 11(6) of the Act to the High Court, the opposite party would lose its right of appointment of the arbitrator(s) as per the terms of the contract. The implication that the Court would be free to deviate from the terms of the contract is obvious.
7. The apparent dichotomy in ACE Pipeline, 2007(2) R.C.R.(Civil) 407 : 2007(2) Recent Apex Judgments (R.A.J.) 335 : (2007) 5 SCC 304 and Bharat Battery Mfg. Co. (P) Ltd., 2007(3) R.C.R.(Civil) 858 : (2007) 7 SCC 684 was reconciled by a three-Judge Bench of this Court in Northern Railway Admn., Ministry of Railway v. Patel Engg. Co. Ltd. [Northern Railway Admn., Ministry of Railway v. Patel Engg. Co. Ltd., 2009(1) R.C.R.(Civil) 306 : 2009(1) Recent Apex Judgments (R.A.J.) 238 : (2008) 10 SCC 240] , wherein the jurisdiction of the High Court under Section 11(6) of the Act was sought to be emphasised by taking into account the expression `to take the necessary measure' appearing in sub-section (6) of Section 11 and by further laying down that the said expression has to be read along with the requirement of sub-section (8) of Section 11 of the Act. The position was further clarified in Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., 2009(4) R.C.R. (Civil) 705 : (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460 Para 48 of the Report wherein the scope of Section 11 of the Act was summarised may be quoted by reproducing sub-paras (vi) and (vii) hereinbelow:
(Indian Oil case, 2009(4) R.C.R.(Civil) 705 : (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460 , SCC p. 537) '48.(vi) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.Page 31 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
(vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded, ignore the designated arbitrator and appoint someone else.'
8. The above discussion will not be complete without reference to the view of this Court expressed in Union of India v. Singh Builders Syndicate [Union of India v. Singh Builders Syndicate, 2009(2) R.C.R. (Civil) 636 : (2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246] , wherein the appointment of a retired Judge contrary to the agreement requiring appointment of specified officers was held to be valid on the ground that the arbitration proceedings had not concluded for over a decade making a mockery of the process. In fact, in para 25 of the Report in Singh Builders Syndicate [Union of India v. Singh Builders Syndicate, 2009(2) R.C.R.(Civil) 636 : (2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246] this Court had suggested that the Government, statutory authorities and government companies should consider phasing out arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration.
9. A pronouncement of late in Deep Trading Co. v. Indian Oil Corpn., 2013(2) R.C.R.(Civil) 953 :
2013(3) Recent Apex Judgments (R.A.J.) 454 :
(2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449 followed the legal position laid down in Punj Lloyd Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., 2006(3) R.C.R. (Civil) 836 : (2006) 2 SCC 638] which in turn had followed a two-Judge Bench decision in Datar Switchgears Ltd. v. Tata Finance Ltd., 2001(1) R.C.R.(Civil) 267 : (2000) 8 SCC 151 The theory of forfeiture of the rights of a party under the agreement to appoint its arbitrator once the proceedings under Section 11(6) of the Act had commenced came to be even more formally embedded in Deep Trading Co., 2013(2) R.C.R. (Civil) 953 : 2013(3) Recent Apex Judgments Page 32 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT (R.A.J.) 454 : (2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449 subject, of course, to the provisions of Section 11(8), which provision in any event, had been held in Northern Railway Admn. [Northern Railway Admn., Ministry of Railway v. Patel Engg. Co. Ltd., 2009(1) R.C.R.(Civil) 306 : 2009(1) Recent Apex Judgments (R.A.J.) 238 : (2008) 10 SCC 240] not to be mandatory, but only embodying a requirement of keeping the same in view at the time of exercise of jurisdiction under Section 11(6) of the Act."
(emphasis in original)
14. Speedy conclusion of arbitration proceedings hardly needs to be emphasised. It would be of some interest to note that in England also, Modern Arbitration Law on the lines of UNCITRAL Model Law, came to be enacted in the same year as the Indian law which is known as the English Arbitration Act, 1996 and it became effective from 31-1-1997. It is treated as the most extensive statutory reform of the English arbitration law. Commenting upon the structure of this Act, Mustill and Boyd in their Commercial Arbitration, 2001 companion volume to the 2nd Edn., have commented that this Act is founded on four pillars. These pillars are described as:
(a) The first pillar: Three general principles.
(b) The second pillar: The general duty of the Tribunal.
(c) The third pillar: The general duty of the parties.
(d) The fourth pillar: Mandatory and semi
-mandatory provisions.
Insofar as the first pillar is concerned, it contains three general principles on which the entire edifice of the said Act is structured. These principles are mentioned by an English Court in its judgment in Deptt. of Economics, Policy and Development of the City of Moscow v. Bankers Trust Co. [2005 QB 207 :
(2004) 3 WLR 533 : (2004) 4 All ER 746 : 2004 EWCA Civ 314] In that case, Mance, L.J. succinctly Page 33 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT summed up the objective of this Act in the following words: (QB p. 228, para 31) "31. ... Parliament has set out, in the Arbitration Act, 1996, to encourage and facilitate a reformed and more independent, as well as private and confidential, system of consensual dispute resolution, with only limited possibilities of court involvement where necessary in the interests of the public and of basic fairness."
Section 1 of the Act sets forth the three main principles of arbitration law viz. (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimum court intervention. This provision has to be applied purposively. In case of doubt as to the meaning of any provision of this Act, regard should be had to these principles."
5.12 What is evident from the above is that considering earlier decisions categorically in paragraph 13, the Apex Court answered the moot question whether while dealing with an application under Section 11 of the Act is there a room for play in the joints for the High Court while dealing with an application. It appropriately quoted the ratio of Indian Oil Corporation Limited (supra) which is reproduced already.
5.13 In case of Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, reported in (2017) 4 SCC 665, the Supreme Court considered the question of ineligibility of Arbitrators being appointed in terms of the agreement in context of the newly added sub-section (5) of Section 12 of the Act. All the decisions referred earlier were considered and the Supreme Court reproduced the relevant paras of the Law Commission's report as under:
Page 34 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT"15. It is a well known fact that the Arbitration and Conciliation Act, 1996 was enacted to consolidate and amend the law relating to domestic arbitration, inter alia, commercial arbitration and enforcement of foreign arbitral awards etc. It is also an accepted position that while enacting the said Act, basic structure of UNCITRAL Model Law was kept in mind. This became necessary in the wake of globalization and the adoption of policy of liberlisation of Indian economy by the Government of India in the early 90s. This model law of UNCITRAL provides the framework in order to achieve, to the maximum possible extent, uniform approach to the international commercial arbitration. Aim is to achieve convergence in arbitration law and avoid conflicting or varying provisions in the arbitration Acts enacted by various countries. Due to certain reasons, working of this Act witnessed some unpleasant developments and need was felt to smoothen out the rough edges encountered thereby. The Law Commission examined various shortcomings in the working of this Act and in its first Report, i.e, 176th Report made various suggestions for amending certain provisions of the Act. This exercise was again done by the Law Commission of India in its Report No. 246 in August, 2004 suggesting sweeping amendments touching upon various facets and acting upon most of these recommendations, Arbitration Amendment Act of 2015 was passed which came into effect from October 23, 2015.
16. Apart from other amendments, Section 12 was also amended and the amended provision has already been reproduced above. This amendment is also based on the recommendation of the Law Commission which specifically dealt with the issue of 'neutrality of arbitrators' and a discussion in this behalf is contained in paras 53 to 60 and we would like to reproduce the entire discussion hereinbelow:
"NEUTRALITY OF ARBITRATORS Page 35 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
53. It is universally accepted that any quasi-judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators, viz. their independence and impartiality, is critical to the entire process.
54. In the Act, the test for neutrality is set out in section 12(3) which provides - "An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality..."
55. The Act does not lay down any other conditions to identify the "circumstances" which give rise to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias.
56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See Executive Engineer, Irrigation Division, Puri v. Gangaram Chhapolia, 1984 (3) SCC 627; Secretary to Government Transport Department, Madras v. Munusamy Mudaliar, 1988 (Supp) SCC 651; International Authority of India v. K.D. Bali and Anr, 1988 (2) SCC 360; S. Rajan v. State of Kerala, 1992 (3) SCC 608; M/s. Indian Drugs & Pharmaceuticals v. M/s. Indo-Swiss Synthetics Germ Manufacturing Co.Ltd., 1996 (1) SCC 54; Union of India v. M.P. Gupta, (2004) 10 SCC 504; Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd., 2007 (5) SCC 304) that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Page 36 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT Supreme Court, in Indian Oil Corp. Ltd. v. Raja Transport (P) Ltd., 2009 8 SCC 520 carved out a minor exception in situations when the arbitrator "was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute", and this exception was used by the Supreme Court in Denel Propreitory Ltd. v. Govt. of India, Ministry of Defence, AIR 2012 SC 817 and Bipromasz Bipron Trading SA v. Bharat Electronics Ltd., (2012) 6 SCC 384, to appoint an independent arbitrator under section 11, this is not enough.
57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles
- even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr. PK Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and Page 37 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous - and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes.
58. Large scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to sections 11, 12 and 14 of the Act.
59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed section 12 (5) of the Act and the Fifth Schedule which incorporates the categories from the Red list of the IBA Guidelines (as above), the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed explanation to section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the Fourth Schedule, and as based on the Red and Orange lists of the IBA Guidelines), the ineligibility to be appointed as an arbitrator (and the consequent de jure inability to so act) follows from a smaller and Page 38 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the Red list of the IBA Guidelines).
60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective "justifiable doubts" regarding his independence and impartiality. To deal with such situations, the Commission has proposed the proviso to section 12 (5), where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed section 12 (5) by an express agreement in writing. In all other cases, the general rule in the proposed section 12 (5) must be followed. In the event the High Court is approached in connection with appointment of an arbitrator, the Commission has proposed seeking the disclosure in terms of section 12 (1) and in which context the High Court or the designate is to have "due regard" to the contents of such disclosure in appointing the arbitrator."
Paragraphs 18 to 25 read as under:
"18. Keeping in mind the afore-quoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an Page 39 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT arbitrator. In such an eventuality, i.e., when the arbitration clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of non-obstante clause contained in sub- section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of arbitration agreement.
19. We may mention here that there are number of judgments of this Court even prior to the amendment of Section 12 where courts have appointed the arbitrators, giving a go-by to the agreed arbitration clause in certain contingencies and situations, having regards to the provisions of unamended Section 11(8) of the Act which, inter alia, provided that while appointing the arbitrator, Chief Justice, or the person or the institution designated by him, shall have regard to the other conditions as are likely to secure the appointment of an independent and impartial arbitrator. See Datar Switchgears Ltd. v. Tata Finance Ltd. & Anr., 2001(1) R.C.R.(Civil) 267 :
(2000) 8 SCC 151 Punj Lloyd Ltd. v. Petronet MHB Ltd., 2006(3) R.C.R.(Civil) 836 : (2006) 2 SCC 638 Union of India v. Bharat Battery Manufacturing Co. (P) Ltd., 2007(3) R.C.R.(Civil) 858 : (2007) 7 SCC 684 Deep Trading Co. v. Indian Oil Corporation, (2013) 4 SCC 35 Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523 and Northern Eastern Railway v. Tripple Engineering Works, (2014) 9 SCC
288. Taking note of the aforesaid judgments, this Court in Union of India and others v. Uttar Pradesh State Bridge Corporation Limited, 2015(3) R.C.R. (Civil) 131 : 2015(3) Recent Apex Judgments (R.A.J.) 303 : (2015) 2 SCC 52 summed up the position in the following manner:
"13. No doubt, ordinarily that would be the position. The moot question, however, is as to whether such a course of action has to be necessarily adopted by the High Court in all cases, while dealing with an application under Section Page 40 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT 11 of the Act or is there room for play in the joints and the High Court is not divested of exercising discretion under some circumstances? If yes, what are those circumstances? It is this very aspect which was specifically dealt with by this Court in Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works, 2014(4) R.C.R.(Civil) 176 : (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. Taking note of various judgments, the Court pointed out that the notion that the High Court was bound to appoint the arbitrator as per the contract between the parties has seen a significant erosion in recent past. In paras 6 and 7 of the said decision, those judgments wherein departure from the aforesaid "classical notion" has been made are taken note of. It would, therefore, be useful to reproduce the said paragraph along with paras 8 and 9 hereinbelow: (SCC pp. 291-93) "6. The `classical notion' that the High Court while exercising its power under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter for short `the Act') must appoint the arbitrator as per the contract between the parties saw a significant erosion in ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., 2007(2) R.C.R.(Civil) 407 : 2007(2) Recent Apex Judgments (R.A.J.) 335 : (2007) 5 SCC 304 , wherein this Court had taken the view that though the contract between the parties must be adhered to, deviations therefrom in exceptional circumstances would be permissible. A more significant development had come in a decision that followed soon thereafter in Union of India v. Bharat Battery Mfg. Co. (P) Ltd., 2007(3) R.C.R.(Civil) 858 :
(2007) 7 SCC 684 wherein following a three-Judge Bench decision in Punj Lloyd Ltd. v. Petronet MHB Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., 2006(3) R.C.R.(Civil) 836 : (2006) 2 SCC 638], it was held that once an aggrieved party files an application under Section 11(6) of the Act to the High Court, the opposite party would lose its right of appointment of the arbitrator(s) as per the terms of the contract. The implication that the Court would be free to deviate from the terms of the contract is obvious.
7. The apparent dichotomy in ACE Pipeline, 2007(2) R.C.R.(Civil) 407 : 2007(2) Recent Apex Judgments (R.A.J.) 335 : (2007) 5 SCC 304 and Bharat Battery Mfg.
Page 41 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENTCo. (P) Ltd., 2007(3) R.C.R.(Civil) 858 : (2007) 7 SCC 684 was reconciled by a three-Judge Bench of this Court in Northern Railway Admn., Ministry of Railway v. Patel Engg. Co. Ltd. [Northern Railway Admn., Ministry of Railway v. Patel Engg. Co. Ltd., 2009(1) R.C.R.(Civil) 306 : 2009(1) Recent Apex Judgments (R.A.J.) 238 :
(2008) 10 SCC 240] , wherein the jurisdiction of the High Court under Section 11(6) of the Act was sought to be emphasised by taking into account the expression `to take the necessary measure' appearing in sub-section (6) of Section 11 and by further laying down that the said expression has to be read along with the requirement of sub-section (8) of Section 11 of the Act. The position was further clarified in Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., 2009(4) R.C.R.(Civil) 705 : (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460 Para 48 of the Report wherein the scope of Section 11 of the Act was summarised may be quoted by reproducing sub-paras (vi) and (vii) hereinbelow: (Indian Oil case, 2009(4) R.C.R. (Civil) 705 : (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460 , SCC p. 537) '48. (vi) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.
(vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded, ignore the designated arbitrator and appoint someone else.'
8. The above discussion will not be complete without reference to the view of this Court expressed in Union of India v. Singh Builders Syndicate [Union of India v. Singh Builders Syndicate, 2009(2) R.C.R.(Civil) 636 : (2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246] , wherein the appointment of a retired Judge contrary to the agreement requiring appointment of specified officers was held to be valid on the ground that the arbitration proceedings had not concluded for over a decade making a mockery of the process. In fact, in para 25 of the Report in Singh Builders Syndicate [Union of India v. Singh Builders Syndicate, 2009(2) R.C.R.(Civil) 636 : (2009) 4 SCC 523 : (2009) 2 Page 42 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT SCC (Civ) 246] this Court had suggested that the Government, statutory authorities and government companies should consider phasing out arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration.
9. A pronouncement of late in Deep Trading Co. v. Indian Oil Corpn., 2013(2) R.C.R.(Civil) 953 : 2013(3) Recent Apex Judgments (R.A.J.) 454 : (2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449 followed the legal position laid down in Punj Lloyd Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., 2006(3) R.C.R.(Civil) 836 : (2006) 2 SCC 638] which in turn had followed a two-Judge Bench decision in Datar Switchgears Ltd. v. Tata Finance Ltd., 2001(1) R.C.R. (Civil) 267 : (2000) 8 SCC 151 The theory of forfeiture of the rights of a party under the agreement to appoint its arbitrator once the proceedings under Section 11(6) of the Act had commenced came to be even more formally embedded in Deep Trading Co., 2013(2) R.C.R.(Civil) 953 : 2013(3) Recent Apex Judgments (R.A.J.) 454 : (2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449 subject, of course, to the provisions of Section 11(8), which provision in any event, had been held in Northern Railway Admn. [Northern Railway Admn., Ministry of Railway v. Patel Engg. Co. Ltd., 2009(1) R.C.R.(Civil) 306 : 2009(1) Recent Apex Judgments (R.A.J.) 238 : (2008) 10 SCC 240] not to be mandatory, but only embodying a requirement of keeping the same in view at the time of exercise of jurisdiction under Section 11(6) of the Act."
(emphasis in original)
14. Speedy conclusion of arbitration proceedings hardly needs to be emphasised. It would be of some interest to note that in England also, Modern Arbitration Law on the lines of UNCITRAL Model Law, came to be enacted in the same year as the Indian law which is known as the English Arbitration Act, 1996 and it became effective from 31-1-1997. It is treated as the most extensive statutory reform of the English arbitration law. Commenting upon the structure of this Act, Mustill and Boyd in their Commercial Arbitration, 2001 companion volume to the 2nd Edn., have commented that this Act is founded on four pillars. These pillars are described as:
(a) The first pillar: Three general principles.Page 43 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT
(b) The second pillar: The general duty of the Tribunal.
(c) The third pillar: The general duty of the parties.
(d) The fourth pillar: Mandatory and semi -mandatory provisions.
Insofar as the first pillar is concerned, it contains three general principles on which the entire edifice of the said Act is structured. These principles are mentioned by an English Court in its judgment in Deptt. of Economics, Policy and Development of the City of Moscow v. Bankers Trust Co. [2005 QB 207 : (2004) 3 WLR 533 : (2004) 4 All ER 746 : 2004 EWCA Civ 314] In that case, Mance, L.J. succinctly summed up the objective of this Act in the following words: (QB p. 228, para 31) "31. ... Parliament has set out, in the Arbitration Act, 1996, to encourage and facilitate a reformed and more independent, as well as private and confidential, system of consensual dispute resolution, with only limited possibilities of court involvement where necessary in the interests of the public and of basic fairness."
Section 1 of the Act sets forth the three main principles of arbitration law viz. (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimum court intervention. This provision has to be applied purposively. In case of doubt as to the meaning of any provision of this Act, regard should be had to these principles.
15. In the book O.P. Malhotra on the Law and Practice of Arbitration and Conciliation (3rd Edn. revised by Ms Indu Malhotra), it is rightly observed that the Indian Arbitration Act is also based on the aforesaid four foundational pillars.
16. First and paramount principle of the first pillar is "fair, speedy and inexpensive trial by an Arbitral Tribunal". Unnecessary delay or expense would frustrate the very purpose of arbitration. Interestingly, the second principle which is recognised in the Act is the party autonomy in the choice of procedure. This means that if a particular procedure is prescribed in the arbitration agreement which the parties have agreed to, that has to be generally resorted to. It is because of this reason, as a normal practice, the court will insist the parties to adhere Page 44 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT to the procedure to which they have agreed upon. This would apply even while making the appointment of substitute arbitrator and the general rule is that such an appointment of a substitute arbitrator should also be done in accordance with the provisions of the original agreement applicable to the appointment of the arbitrator at the initial stage. [See Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd., 2006(3) R.C.R. (Civil) 592 : 2007(4) Recent Apex Judgments (R.A.J.) 656 : (2006) 6 SCC 204 However, this principle of party autonomy in the choice of procedure has been deviated from in those cases where one of the parties have committed default by not acting in accordance with the procedure prescribed. Many such instances where this course of action is taken and the Court appoint the arbitrator when the persona designata has failed to act, are taken note of in paras 6 and 7 of Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works, 2014(4) R.C.R.(Civil) 176 : (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30] . We are conscious of the fact that these were the cases where appointment of the independent arbitrator made by the Court in exercise of powers under Section 11 of account of "default procedure". We are, in the present case, concerned with the constitution of substitute Arbitral Tribunal where earlier Arbitral Tribunal has failed to perform. However, the above principle of default procedure is extended by this Court in such cases as well as is clear from the judgment in Singh Builders Syndicate [Union of India v. Singh Builders Syndicate, 2009(2) R.C.R.(Civil) 636 : (2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246].
17. In the case of contracts between government corporations/State-owned companies with private parties/contractors, the terms of the agreement are usually drawn by the government company or public sector undertakings. Government contracts have broadly two kinds of arbitration clauses, first where a named officer is to act as sole arbitrator; and second, where a senior officer like a Managing Director, nominates a designated officer to act as the sole arbitrator. No doubt, such clauses which give the Government a dominant position to constitute the Arbitral Tribunal are held to be valid. At the same time, it also casts an onerous and responsible duty upon the persona designata to appoint such persons/officers as the arbitrators who are not only Page 45 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT able to function independently and impartially, but are in a position to devote adequate time in conducting the arbitration. If the Government has nominated those officers as arbitrators who are not able to devote time to the arbitration proceedings or become incapable of acting as arbitrators because of frequent transfers, etc., then the principle of "default procedure" at least in the cases where Government has assumed the role of appointment of arbitrators to itself, has to be applied in the case of substitute arbitrators as well and the Court will step in to appoint the arbitrator by keeping aside the procedure which is agreed to between the parties. However, it will depend upon the facts of a particular case as to whether such a course of action should be taken or not. What we emphasise is that Court is not powerless in this regard."
20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator's appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and non- impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration. The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial. The United Kingdom Supreme Court has beautifully highlighted this aspect in Jivraj v. Hashwani, (2011) UKSC 40, in the following words:
"45. ...the dominant purpose of appointing an arbitrator is the impartial resolution of dispute Page 46 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties."
21. Similarly, Cour de cassation, France, in a judgment delivered in 1972 in the case of Consorts Ury), underlined that "an independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator."
22. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.
23. It also cannot be denied that the Seventh Schedule is based on IBA guidelines which are clearly regarded as a representation of international based practices and are based on statutes, case law and juristic opinion from a cross-section on jurisdiction. It is so mentioned in the guidelines itself.
24. Keeping in view the aforesaid parameters, we advert to the facts of this case. Various contingencies mentioned in the Seventh Schedule render a person ineligible to act as an arbitrator. Entry no. 1 is highlighted by the learned counsel for the petitioner which provides that where the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with the party, would not act as an arbitrator. What was argued by the learned senior counsel for the petitioner was that the Page 47 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT panel of arbitrators drawn by the respondent consists of those persons who are government employees or ex-government employees. However, that by itself may not make such persons ineligible as the panel indicates that these are the persons who have worked in the railways under the Central Government or Central Public Works Department or public sector undertakings. They cannot be treated as employee or consultant or advisor of the respondent - DMRC. If this contention of the petitioner is accepted, then no person who had earlier worked in any capacity with the Central Government or other autonomous or public sector undertakings, would be eligible to act as an arbitrator even when he is not even remotely connected with the party in question, like DMRC in this case. The amended provision puts an embargo on a person to act as an arbitrator, who is the employee of the party to the dispute. It also deprives a person to act as an arbitrator if he had been the consultant or the advisor or had any past or present business relationship with DMRC. No such case is made out by the petitioner.
25. Section 12 has been amended with the objective to induce neutrality of arbitrators, viz., their independence and impartiality. The amended provision is enacted to identify the 'circumstances' which give rise to 'justifiable doubts' about the independence or impartiality of the arbitrator. If any of those circumstances as mentioned therein exists, it will give rise to justifiable apprehension of bias. The Fifth Schedule to the Act enumerates the grounds which may give rise to justifiable doubts of this nature. Likewise, Seventh Schedule mentions those circumstances which would attract the provisions of sub-section (5) of Section 12 and nullify any prior agreement to the contrary. In the context of this case, it is relevant to mention that only if an arbitrator is an employee, a consultant, an advisor or has any past or present business relationship with a party, he is rendered ineligible to act as an arbitrator. Likewise, that person is treated as incompetent to perform the role of arbitrator, who is a manager, director or part Page 48 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT of the management or has a single controlling influence in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration. Likewise, persons who regularly adviosed the appointing party or affiliate of the appointing party are incapacitated. A comprehensive list is enumerated in Schedule 5 and Schedule 7 and admittedly the persons empanelled by the respondent are not covered by any of the items in the said list."
5.14 The Supreme Court on reproduction of Law Commission's recommendations of amending Section 12 adding sub-section (5) would indicate that Section 12(3) and 12(5) of the Act do not lay down any other conditions to identify the "circumstances" which give rise to "justifiable doubts". The test is not whether, given the circumstances, there is "actual" bias for that is setting the bar too high. Only what is to be seen is, are there justifiable apprehensions of bias. Let us therefore consider the relevant sections in this regard. For a better understanding of the issues involved in the present petition, it shall be pertinent to record Sections 12 and 14 of the Arbitration Act and the Seventh Schedule and the same read as under:
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 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 Page 49 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT independence or impartiality; and
(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.
Explanation 1.--The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.
Explanation 2.--The disclosure shall be made by such person in the form specified in the Sixth Schedule.] (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 person whose relationship, with the Page 50 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.] ...
14. Failure or impossibility to act.--(1) [The mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, if]--
(a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and
(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.
5.15 Section 12 of the Act states that when a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in Page 51 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT 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. Sub-clause (5) of Section 12 also records that notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing. It shall therefore be also useful to peruse what does the Seventh Schedule say. The Seventh Schedule is therefore reproduced as under:
THE SEVENTH SCHEDULE [See section 12(5)] Arbitrator's relationship with the parties or counsel
1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.
4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.
5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the Page 52 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT arbitration.
6. The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.
7. The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.
8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.
9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.
11. The arbitrator is a legal representative of an entity that is a party in the arbitration.
12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom. Relationship of the arbitrator to the dispute
15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
16. The arbitrator has previous involvement in the case. Arbitrator's direct or indirect interest in the dispute
17. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of Page 53 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT the parties that is privately held.
18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.
19. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.
Explanation 1.--The term "close family member"
refers to a spouse, sibling, child, parent or life partner. Explanation 2.--The term "affiliate" encompasses all companies in one group of companies including the parent company.
Explanation 3.--For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or commodities arbitration, to draw arbitrators from a small, specialised pool. If in such fields it is the custom and practice for parties frequently to appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the rules set out above.]
6. Let us now consider the position of law set out hereinabove in context of facts.
(i) The franchisee agreement is of December 2018 i.e. post the amendment where Section 12(5) was added.
(ii) On 16.06.2020, Mr.Nikunj Mevada advocate of the respondent party addressed a letter filing a statement of claim before the Sole Arbitrator Shri Rajan Patel.
(iii) Shri Rajan Patel, the Sole Arbitrator, fixed a hearing on 20.06.2020, by his letter dated Page 54 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT 17.06.2020.
(iv) True, that minutes of the meeting of 20.06.2020 record that the authorized person of the petitioner has no objection to the Sole Arbitrator's so acting.
(v) On a request made for time by petitioner for 30 days, adjournment is granted for a week and hearing kept on 27.06.2020. The petitioner refused to sign the minutes.
(vi) On 27.06.2020 the Sole Arbitrator grants status-quo qua the subject matter.
6.1 The declaration of the arbitrator Shri Rajan Patel needs to be reproduced to have a better understanding of the dispute between the parties.
V. Circumstances No I have no relationship either disclosing any past or direct or indirect with the parties to present relationship the dispute.
with
However, it may be take note that,
Or Mr.N.J.Mevada, have filed his
appearance as the advocate for
Bothra Classes.
Interest in any of the I and Mr.N.J.Mevada had worked
parties together in some other cases, but not
for these specific clients, who are
Or parties in this Arbitration dispute.
In relation with the As the advocates are professional, all
subject matter in the advocates are connected with
dispute, whether each other, in one or another
financial, business, manner. We Advocates used to
professional appear and provide our professional
services either for the same parties or
Page 55 of 68
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C/IAAP/31/2020 CAV JUDGMENT
opponent parties, because it is our
Or profession. But, it dosen't means to
affects our honesty and professional
valuable ethics.
Other kind, which is Again I declare that, I have direct or
likely to give rise to indirect relationship with NEITHER
justifiable doubts as to Bothra Classes NOR Ahuja Classes. your independent or impartiality So that, there is nothing likely to give rise to justifiable doubts as to my independent or impartiality in this Arbitration Proceedings.
6.2 The Performa indicates that Shri Rajan Patel and Shri N.J.Mevada - lawyer of the claimant are professionally associated having worked together but not for these specific parties. Emails of Shri Mevada for conciliation meetings for 01.06.2020 (page 176) read with email suggesting that the venue chosen by Shri Mevada was Shri Patel's office and he was to be present. Mere defense that it was agreed by all that it was a convenient venue is no explanation. Reading of the Seventh Schedule to the Act, though only item 16 is invoked by Shri Bhatt suggesting that the arbitrator had previous involvement in the case as a conciliator, however reading item 3 of the Seventh Schedule indicates that even if the arbitrator is a lawyer in the same firm which is representing one of the parties, more or less applies. Shri N.J.Mevada and the Sole Arbitrator have a professional association as is evident from the declaration. This itself could be a justifiable reason circumstancing the Sole Arbitrator's ineligibility to act as a Sole Arbitrator.
6.3 The decisions relied upon by the respective counsel need to be considered in light of these Page 56 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT circumstances. In the judgment of Shubham Garg (supra) the Allahabad High Court considering the recent judgment of the Supreme Court in case of Bharat Broadband Network Limited v. United Telecoms Ltd. passed in Civil Appeal No.3972 of 2019 decided on 16.04.2019 held as under:
"25. A similar question arose before the Supreme Court again regarding the interpretation of Section 12(5) of the Act.
26. In a recent judgment passed by the Apex Court in Civil Appeal No.3972 of 2019, Bharat Boradband Network Limited vs United Telecoms Limited, decided on 16.4.2019, justice Nariman in depth considered the effect of 2016 amendment in Section 12 of the Act, held in paragraph nos.14, 15, 17 and 20, which are extracted as under:
"14. From a conspectus of the above decisions, it is clear that Section 12 (1), as substituted by the Arbitration and Conciliation (Amendment) Act, 2015 ["Amendment Act, 2015"], makes it clear that when a person is approached in connection with his possible appointment as an arbitrator, it is his duty to disclose in writing any circumstances which are likely to give rise to justifiable doubts as to his independence or impartiality. The disclosure is to be made in the form specified in the Sixth Schedule, and the grounds stated in the Fifth Schedule are to serve as a guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Once this is done, the appointment of the arbitrator may be challenged on the ground that justifiable doubts have arisen under sub-section (3) of Section 12 subject to the caveat entered by sub- section (4) of Section 12. The challenge procedure is then set out in Section 13, together with the time limit laid down in Section 13 (2). What is important to note is that the arbitral tribunal must first decide on the said challenge, and if it is not successful, the tribunal shall continue the proceedings and make an Page 57 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT award. It is only post award that the party challenging the appointment of an arbitrator may make an application for setting aside such an award in accordance with Section 34 of the Act.
15. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non- obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be "ineligible" to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule.
17. The scheme of Section 12, 13 and 14, therefore, is that where an arbitrator makes a disclosure in writing which is likely to give justifiable doubts as to his independence or impartiality, the appointment of such arbitrator may be challenged under Sections 12 (1) to 12(4) read with Section 13. However, where such person becomes "ineligible" to be appointed as an arbitrator, there is no question of challenge to such arbitrator, before such arbitrator. In such a case, i.e., a case which falls under Section Page 58 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT 12(5), Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator. This being so, his mandate automatically terminates, and he shall then be substituted by another arbitrator under Section 14(1) itself. It is only if a controversy occurs concerning whether he has become de jure unable to perform his functions as such, that a party has to apply to the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. Thus, in all Section 12(5) cases, there is no challenge procedure to be availed of. If an arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate has terminated. Questions which may typically arise under Section 14 may be as to whether such person falls within any of the categories mentioned in the Seventh Schedule, or whether there is a waiver as provided in the proviso to Section 12(5) of the Act. As a matter of law, it is important to note that the proviso to Section 12(5) must be contrasted with Section 4 of the Act. Section 4 deals with cases of deemed waiver by conduct; whereas the proviso to Section 12(5) deals with waiver by express agreement in writing between the parties only if made subsequent to disputes having arisen between them.
20. This then brings us to the applicability of the proviso to Section 12(5) on the facts of this case. Unlike Section 4 of the Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5)will only apply if subsequent to disputes having arisen between the parties, the parties waive the applicability of sub-section (5) of Section 12 by an express agreement in writing. For this reason, the argument based on the analogy of Section 7 of the Act must also be rejected. Section
7 deals with arbitration agreements that must be in writing, and then explains that such agreements may be contained in documents which provide a record of Page 59 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT such agreements. On the other hand, Section 12(5) refers to an "express agreement in writing". The expression "express agreement in writing"
refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct. Here, Section 9 of the Indian Contract Act, 1872 becomes important. It states:
"9. Promises, express and implied.--In so far as a proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied."
It is thus necessary that there be an "express" agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that Shri Khan is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him to continue as such. The facts of the present case disclose no such express agreement. The appointment letter which is relied upon by the High Court as indicating an express agreement on the facts of the case is dated 17.01.2017. On this date, the Managing Director of the appellant was certainly not aware that Shri Khan could not be appointed by him as Section 12(5) read with the Seventh Schedule only went to the invalidity of the appointment of the Managing Director himself as an arbitrator. Shri Khan's invalid appointment only became clear after the declaration of the law by the Supreme Court in TRF Ltd. (supra) which, as we have seen hereinabove, was only on 03.07.2017. After this date, far from there being an express agreement between the parties as to the validity of Shri Khan's appointment, the appellant filed an application on 07.10.2017 before the sole arbitrator, bringing the arbitrator's attention to the judgment in TRF Ltd. (supra) and asking him to declare that he has become de jure incapable of acting as an arbitrator. Equally, the fact that a statement of claim may have been filed before the arbitrator, would not mean that there is an express agreement in words which would make it clear that both parties wish Shri Khan to continue as arbitrator despite being Page 60 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT ineligible to act as such. This being the case, the impugned judgment is not correct when it applies Section 4, Section 7, Section 12(4), Section 13(2), and Section 16(2)) of the Act to the facts of the present case, and goes on to state that the appellant cannot be allowed to raise the issue of eligibility of an arbitrator, having itself appointed the arbitrator. The judgment under appeal is also incorrect in stating that there is an express waiver in writing from the fact that an appointment letter has been issued by the appellant, and a statement of claim has been filed by the respondent before the arbitrator. The moment the appellant came to know that Shri Khan's appointment itself would be invalid, it filed an application before the sole arbitrator for termination of his mandate.
27. Thus, after the judgment of the Apex Court in Bharat Broadband Network Ltd. (supra) no doubt remains as regard the Arbitrator becoming de jure unable to perform his function in terms of sub section (5) of Section 12 of the Act, once he is covered under the Seventh Schedule, and the very objection being raised regarding the Arbitrator Tribunal by the party. Further, the mandate of such Arbitrator will terminate.
28. Supreme Court in the case of Bharat Broadband Network Ltd.(supra) had distinguished between a situation arising where an Arbitrator makes a disclosure in writing which is likely to give justifiable doubt as to his independence or impartiality. Such appointment can be challenged under Section 12(1) to 12(4) read with Section 13 of the Act, but where such a person becomes "inelligible" to be appointed as an Arbitrator, there is no question of challenge to such appointment before such Arbitrator. In such a case, which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted and the Arbitrator becomes, as a matter of law (i.e. de jure) unable to perform his function, meaning thereby that his mandate automatically terminates and he shall be substituted by another Arbitrator under Section 14(1) of the Act."
Page 61 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT6.4 It is, at this stage, that it would be relevant to reproduce paras 11 and 12 of the above decision as under:
"11. Further, preliminary objections filed by applicants before the sole Arbitrator challenging his jurisdiction to enter into reference and having not issued any declaration in accordance with Section 12 of the Act has also been placed before the Court during the course of argument, which has been taken on record.
12. The question, which arises for consideration is, as to whether the sole Arbitrator Sri B.S. Mahesh, Advocate, so appointed, has become de jure unable to perform his function as an Arbitrator under Section 12(5) of the Act be substituted by an Arbitrator in terms of Section 14 of the Act."
6.5 Relying on the decision of Supreme Court in the case of HRD Corporation v. GAIL (India) Ltd. reported in (2018) 12 SCC the Court observed that in order to determine whether an Arbitrator is unable to perform his functions it is not necessary to go to the Arbitral Tribunal under Section
13. The Court held as under:
"12. In HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC 471, this Court, after setting out the amendments made in Section 12 and the Fifth, Sixth, and Seventh Schedules to the Act, held as follows:
"12. After the 2016 Amendment Act, a dichotomy is made by the Act between persons who become "ineligible" to be appointed as arbitrators, and persons about whom justifiable doubts exist as to their independence or impartiality. Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes "ineligible" to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1) (a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is Page 62 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT regarded as "ineligible". In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13.
Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground. As opposed to this, in a challenge where grounds stated in the Fifth Schedule are disclosed, which give rise to justifiable doubts as to the arbitrator's independence or impartiality, such doubts as to independence or impartiality have to be determined as a matter of fact in the facts of the particular challenge by the Arbitral Tribunal under Section 13. If a challenge is not successful, and the Arbitral Tribunal decides that there are no justifiable doubts as to the independence or impartiality of the arbitrator/arbitrators, the Tribunal must then continue the arbitral proceedings under Section 13(4) and make an award. It is only after such award is made, that the party challenging the arbitrator's appointment on grounds contained in the Fifth Schedule may make an application for setting aside the arbitral award in accordance with Section 34 on the aforesaid grounds. It is clear, therefore, that any challenge contained in the Fifth Schedule against the appointment of Justice Doabia and Justice Lahoti cannot be gone into at this stage, but will be gone into only after the Arbitral Tribunal has given an award. Therefore, we express no opinion on items contained in the Fifth Schedule under which the appellant may challenge the appointment of either arbitrator. They will be free to do so only after an award is rendered by the Tribunal." xxx xxx xxx "14. The enumeration of grounds given in the Fifth and Seventh Schedules have been taken from the IBA Guidelines, particularly from the Red and Orange Lists thereof. The aforesaid guidelines consist of three lists. The Red List, consisting of non-waivable and waivable guidelines, covers situations which are "more serious" and "serious", the "more serious" objections being non-waivable. The Orange List, on the other hand, is a list of situations that may give rise to doubts as to the arbitrator's Page 63 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT impartiality or independence, as a consequence of which the arbitrator has a duty to disclose such situations. The Green List is a list of situations where no actual conflict of interest exists from an objective point of view, as a result of which the arbitrator has no duty of disclosure. These Guidelines were first introduced in the year 2004 and have thereafter been amended, after seeing the experience of arbitration worldwide. In Part 1 thereof, general standards regarding impartiality, independence and disclosure are set out." xxx xxx xxx "17. It will be noticed that Items 1 to 19 of the Fifth Schedule are identical with the aforesaid items in the Seventh Schedule. The only reason that these items also appear in the Fifth Schedule is for purposes of disclosure by the arbitrator, as unless the proposed arbitrator discloses in writing his involvement in terms of Items 1 to 34 of the Fifth Schedule, such disclosure would be lacking, in which case the parties would be put at a disadvantage as such information is often within the personal knowledge of the arbitrator only. It is for this reason that it appears that Items 1 to 19 also appear in the Fifth Schedule."
13. In TRF Ltd. (supra), this Court referred to Section 12(5) of the Act in the context of appointment of an arbitrator by a Managing Director of a corporation, who became ineligible to act as arbitrator under the Seventh Schedule. This Court held:
"50. First, we shall deal with Clause (d). There is no quarrel that by virtue of Section 12(5) of the Act, if any person who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as the arbitrator. There is no doubt and cannot be, for the language employed in the Seventh Schedule, the Managing Director of the Corporation has become ineligible by operation of law. It is the stand of the learned Senior Counsel for the appellant that once the Managing Director becomes ineligible, he also becomes ineligible to nominate. Refuting the said stand, it is canvassed by the learned Senior Counsel for the respondent that the ineligibility cannot extend to a nominee if he is not from the Corporation and more so when there is apposite and requisite disclosure. We think it appropriate to make it clear that in the case at hand we Page 64 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT are neither concerned with the disclosure nor objectivity nor impartiality nor any such other circumstance. We are singularly concerned with the issue, whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator. At the cost of repetition, we may state that when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto. But, here is a case where the Managing Director is the "named sole arbitrator" and he has also been conferred with the power to nominate one who can be the arbitrator in his place. Thus, there is subtle distinction......" xxx xxx xxx "54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so."
14. From a conspectus of the above decisions, it is clear that Section 12(1), as substituted by the Arbitration and Conciliation (Amendment) Act, 2015 ["Amendment Act, 2015"], makes it clear that when a person is approached Page 65 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT in connection with his possible appointment as an arbitrator, it is his duty to disclose in writing any circumstances which are likely to give rise to justifiable doubts as to his independence or impartiality. The disclosure is to be made in the form specified in the Sixth Schedule, and the grounds stated in the Fifth Schedule are to serve as a guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Once this is done, the appointment of the arbitrator may be challenged on the ground that justifiable doubts have arisen under sub-section (3) of Section 12 subject to the caveat entered by sub- section (4) of Section 12. The challenge procedure is then set out in Section 13, together with the time limit laid down in Section 13(2). What is important to note is that the arbitral tribunal must first decide on the said challenge, and if it is not successful, the tribunal shall continue the proceedings and make an award. It is only post award that the party challenging the appointment of an arbitrator may make an application for setting aside such an award in accordance with Section 34 of the Act.
15. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non- obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be "ineligible" to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, Page 66 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule."
6.6 The decisions of Voestalpine Schienen GMBH (supra) and Bharat Broadband Network Limited (supra), answer the issues and the judgments relied upon by Shri Ravani in Antrix Corporation Limited (supra) and S.P.Singla Constructions Private Limited (supra) do not deal with the issue of the circumstances of invoking Section 12(5) of the Act.
7. From the above propositions of law, it is thus clear that Sections 12, 13 and 14, enunciate that where an arbitrator makes a disclosure in writing which is likely to give justifiable doubts as to his independence or impartiality, the appointment of such arbitrator may be challenged under Sections 12 (1) to 12(4) read with Section 13. Further, if there is a dispute between the parties as to whether he has become de jure unable to perform his functions as such, a party has to apply to the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. If an arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate has terminated. Questions which may typically arise under Section 14 may be as to whether such Page 67 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020 C/IAAP/31/2020 CAV JUDGMENT person falls within any of the categories mentioned in the Seventh Schedule, or whether there is a waiver as provided in the proviso to Section 12(5) of the Act. In the present case, thus the court has come to the conclusion that Shri N.J.Mevada and the Sole Arbitrator since have a professional association as is evident from the declaration, the sole arbitrator is ineligible under Section 12(5) of the Act and therefore cannot continue with the arbitration proceedings.
8. I have not gone into the question of assessing the arguments with regard to Section 21 of the Act inasmuch as having found that the Arbitrator Shri Patel was ineligible under Section 12(5) of the Act, it was not necessary for this Court to delve into the issue of compliance of the mandatory provisions of Section 21.
9. The petition is accordingly allowed. The appointment of the Sole Arbitrator Shri Rajan Patel is held bad in light of his ineligibility under Section 12(5) read with Section 14 of the Act. The mandate in favour of Shri Patel would stand terminated.
(BIREN VAISHNAV, J) Further order:
After the aforesaid judgement and order was pronounced, Mr. Ravani, learned advocate appearing for the respondent has sought stay of the present order for a period of four weeks. Request is accepted and the stay is granted till 29.09.2020.
(BIREN VAISHNAV, J) ANKIT SHAH Page 68 of 68 Downloaded on : Tue Sep 08 23:12:44 IST 2020