India: Courts Have No Freehand In Substituting Arbitrators

Last Updated: 4 March 2019
Article by Mohammad Kamran, Kshama Loya Modani and Ashish Kabra
  • Arbitration agreement cannot be ignored in appointment of substitute arbitrators
  • Conduct of parties may constitute waiver of objections
  • Supreme Court exercises powers under Article 142 to set aside an arbitral award

The Supreme Court in an unprecedented case of Rajasthan Small Industries Corporation Limited v. M/s Ganesh Containers Movers Syndicate1, set aside the arbitral award exercising powers under Article 142 of the Constitution of India. The Apex Court held that delay in passing the arbitral award does not entitle courts to replace the arbitrator who was an employee of one party, ignoring the arbitration agreement. Substitute arbitrators have to be appointed in accordance with the same arbitration agreement. The Court reaffirmed that Arbitration and Conciliation Act, 1996 ("Arbitration Act") as amended in 2015 would not apply to arbitrations commenced prior to amendment in 2015.

FACTUAL MATRIX

Rajasthan Small Industries Corporation Limited ("RSICL / Appellant") entered into an agreement with M/s Ganesh Containers Movers Syndicate ("Respondent / Contractor") on January 28, 2000 for transportation and handling of cargo at certain depots ("Contract"). Dispute arose between parties under the Contract and the Contractor requested for arbitration.

The Contract provided for settlement of disputes by arbitration. As per the clause 4.20.1, the arbitration was to be referred to a sole arbitrator which could either be Managing Director of RSICL himself or his nominee. One Mr. I. C. Shrivastava, IAS (Retd.) was appointed as the sole arbitrator in February 2005. However, due to slow progress of the arbitration, Mr. Shrivastava was removed in 2009 and Chairman-cum-Managing Director ("CMD") of RSICL was subsequently appointed as arbitrator by consent of both parties.

Initially, the Contractor protested and raised doubts on impartiality of CMD as the arbitrator. However, it finally gave its consent for CMD to arbitrate. Later on, the Contractor also declared its faith in the arbitrator and requested that the matter be decided expeditiously. However, the first arbitrator could not handover the record of arbitration to the subsequent arbitrator. As a result, Parties were directed to appear with complete records of claim and counter-claim. During such time, detailed discussions took place between parties and Contractor agreed to withdraw certain claims. Thereafter, during April and May 2011, the arbitrator sought clarifications from parties to finalise the award. However, in August 2011, the arbitral tribunal declared that chronological events need to be ascertained and the records will have to be reconstructed and no award was passed.

In 2013, the Contractor sent legal notices to RSICL claiming the amounts pursuant to earlier settlement along with interest. It stated that despite the settlement, no award was passed by the arbitrator. RSICL denied the settlement and also denied the amounts claimed.

Consequently, in December 2015, the Contractor filed an application under Section 11 of the Arbitration Act before the High Court of Rajasthan ("High Court") for appointment of an independent arbitrator to adjudicate the disputes. The Contractor requested that the arbitration proceedings be kept in abeyance till the High Court proceedings are concluded. However, the arbitral tribunal passed the final award on January 21, 2016 ("Award"). Subsequently, in April 2016 the High Court also passed the final order appointing a retired District Judge as the sole arbitrator to resolve the disputes between the parties. The said order was challenged by RSICL before the Hon'ble Supreme Court.

JUDGMENT

Contractor was not justified in filing an application under Section 11 of Arbitration Act

Supreme Court held that when parties consciously chose to refer their disputes to Managing Director himself or his nominee and having participated in the arbitral proceedings for some time, the Contractor could not turn around and seek for appointment of an independent arbitrator. In fact, the Contractor in one of his communications stated that it has full faith in the arbitrator.

The court noted that the Contractor has not placed on record any material to show that the arbitrator has not acted independently or impartially or is likely to not act independently or impartially. Accordingly, having participated in the arbitral proceedings, the Contractor was estopped from challenging the competence of the arbitrator.

CMD has not become ineligible to act as arbitrator as per Section 12(5) of Arbitration Act

In 2015, the Arbitration Act was amended and among other things, Section 12(5) and Seventh Schedule was inserted. Section 12(5) read with Seventh Schedule prohibits employees of one of the parties from being an arbitrator. The Contractor argued that by virtue of Section 12(5), CMD had become ineligible to act as arbitrator.

However, in the present case the arbitration proceedings were commenced in 2009. Application for appointment of the arbitrator was also filed prior to 2015. Therefore, the Court held that the amended Arbitration Act would not be applicable. It opined that amended Arbitration Act cannot have retrospective operation unless the parties agreed.2

High Court was not right in terminating the mandated of CMD as arbitrator

The Contractor argued that the arbitrator failed to conclude the proceedings even after four years and therefore, appointment of substitute arbitrator was justified. To support this argument, it relied upon the judgment of Supreme Court in Union of India & Ors. v. Uttar Pradesh State Bridge Corporation Limited3 ("UPSB Case"). In this case, the arbitral tribunal was unable to proceed in the matter for almost four years without any justifiable reason despite specific orders of High Court to complete the proceedings within three months. Hence, it was held that the termination of mandate of the arbitral tribunal and appointment of substitute tribunal was justified.

The Supreme Court however, distinguished the present case with the UPSB Case. It held that in the present case, proceedings continued till August 2011. It was apparent that arbitration papers were incomplete and accordingly, chronological events needed to be ascertained and records had to be reconstructed. Owing to this, the Award could not be passed till 2013. The Contractor also never filed any application to expedite the proceedings nor did it file an application under Section 14 of the Arbitration Act for terminating the mandate of the arbitrator because of failing to act without undue delay.

Supreme Court held that mere neglect of an arbitrator to act or delay in passing the award by itself cannot be the ground to appoint another arbitrator disregarding the terms of arbitration agreement. Section 15 of Arbitration Act deals with termination and substitution of an arbitrator. As per Section 15(2), after the termination, the appointment of substitute arbitrator has to be in accordance with rules applicable to the appointment of arbitrator who was first appointed. The said rules also include contractual provisions for such appointment.4 Thus, even appointment of substitute arbitrator has to be done in accordance with the original agreement. In view of the above, the Supreme Court held that High Court was not right in appointing an independent arbitrator without giving due regard to the terms of the Contract.

Exercise of power under Article 142

Interestingly, the Supreme Court remarked that the arbitral tribunal should not have passed the Award when the High Court was seized of the matter. The proceedings were pending for a long time. The arbitrator hastily passed the Award after the proceedings in High Court were commenced. The record of arbitration had to be reconstructed and it is not clear whether it was done before the Award. The Contractor was also not given an opportunity to substantiate its claims. Hence, in order to do complete justice, the Supreme Court set aside the Award in exercise of its powers under Article 142 of the Constitution. The court held that it would also save parties much time if they were to challenge the Award by way of fresh proceedings under Section 34 of Arbitration Act.

CONCLUSION

The present judgment throws light on the termination and substitution of the arbitrators. It emphasizes the importance of terms of arbitration agreement which cannot be brushed aside by courts even when substituting the arbitrators under Section 15 of Arbitration Act. After the amendment in 2015, arbitration proceedings have to be concluded in a time bound manner (within twelve months with an extension of six months by consent of parties). Consequences such as reduction in fees and substitution of arbitrators are also now provided in case the tribunals are unable to meet the required timelines. The amended Arbitration Act also prohibits certain persons who are listed in the Seventh Schedule from acting as arbitrators, one category of them being "employees of one of the parties". Accordingly, if a similar fact situation arose in the present day circumstances, the results could have been entirely different.

Interestingly, exercise of powers under Article 142 to set aside the Award also raises certain questions. The power was exercised only to save parties the trouble of filing fresh proceedings to challenge the Award under Arbitration Act. The court should therefore, have considered the thresholds provided under Section 34 to set aside the award. The question whether the Award was liable to be set aside because Contractor was actually unable to present its case, does not appear to have been dealt with. Accordingly, it is only but hoped that the present case is a one off exercise of power, given the peculiarity of the facts and will not be widely used as a precedent.

Footnotes

1. Civil Appeal No. 1039 of 2019 arising out of SLP (C) No. 22809 of 2016

2. BCCI v. Kochi Cricket Private Limited & Ors. (2018) 6 SCC 287

3. (2015) 2 SCC 52

4. Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India & anr., (2006) 6 SCC 204

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Link Legal India Law Services
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Link Legal India Law Services
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions