India: Supreme Court Of India Demystifies The Procedure For Challenge Of Arbitrator Under The Amended Act

Last Updated: 15 September 2017
Article by Shreyas Edupuganti

Introduction

A person entrusted with a duty to adjudicate must be independent and impartial. This two fold requirement becomes increasingly relevant in the context of arbitrations wherein the appointment of the adjudicator is left to the parties to a dispute or sometimes to only one of the parties. However, the words "independence" and "impartial" can mean different things to different people. This in turn can lead to judicial subjectivism and lack of certainty in the outcome. To avoid these issues, the provisions of Arbitration and Conciliation Act, 1996 (hereinafter "Act") concerning the grounds of challenge of an arbitrator were amended substantially in the Amending Act of 2016.1 Most importantly, changes were made to Section 12 of the Act along with insertion of Fifth, Sixth and Seventh Schedules.

As per the amended Section 12, the person who is approached in connection with his possible appointment as an arbitrator should make a disclosure.2 This disclosure should be in the format prescribed in the Sixth Schedule which requires the person to disclose:-

  1. whether there are any circumstances that may give rise to justifiable doubts as to his independence or impartiality; and
  2. whether the person can devote sufficient time to complete the entire arbitration within a period of twelve months.

The circumstances that can give rise to justifiable doubts are illustrated in Fifth Schedule. The Seventh Schedule lays down a list of circumstances which are more serious. If a person attracts any of the items in the Seventh Schedule he / she shall be disqualified from the position of an arbitrator. This is in contrast to Fifth Schedule as attraction of any one of the items therein does not necessarily disqualify the mandate of an arbitrator.

The interpretation of these Schedules and the procedure for challenge of arbitrator as mentioned in Section 12, 13 and 14 of the Act were presented before the Hon'ble Supreme Court in the case of HDR Corporation v. GAIL (India) Limited SLP (C) No. 20679 of 2017. This Article aims to analyze the findings of the Court in the said case and how its interpretation of the Schedules and the challenge procedure can shape the future of arbitration in India.

Background to the Dispute

HRD and GAIL entered into a long term contract for exclusive supply of wax generated at GAIL's plant at Uttar Pradesh. Certain disputes arose between the parties and previously three arbitrations took place. The current dispute before the Court was with respect to fourth such arbitration.

For the first arbitration, an Arbitral Tribunal comprising of Justice A.B. Rohatgi, Justice J.K. Mehra and Justice N.N. Gowamy was constituted. The second arbitration had the same panel. Even in the third arbitration the same panel was constituted, however, Justice N.N. Goswamy expired and Justice T.S. Doabia was appointed in his place. Subsequently, Justice A.B. Rohatgi resigned and in his place justice S.S. Chadha was appointed. The third arbitration proceedings culminated in the year 2015.

In respect of the fourth arbitration, HRD nominated Justice K. Ramamoorthy whereas GAIL nominated Justice Doabia. The said two Judges then appointed Justice K.K. Lahoti to be the presiding arbitrator. Subsequently, Justice K. Ramamoorthy withdrew and in his place HRD appointed Justice Mukul Mudgal.

HRD challenged the appointment of Justice K.K. Lahoti and Justice Doabia before the Arbitral Tribunal. The challenge was dismissed. Thereafter, HRD challenged the appointment of the said two arbitrators before the Hon'ble Delhi High Court which was also dismissed the challenge petitions. The dispute was then appealed before the Hon'ble Supreme Court.

Grounds for Challenge

HRD argued that the appointment of Justice K.K. Lahoti is bad because he has previously given a legal opinion to GAIL in an unrelated manner and thus attracts Item 20 of the Fifth schedule and Items 1, 8 and 15 of the Seventh Schedule. Further, the appointment of Justice Doabia was assailed for the reasons that Justice Doabia was an arbitrator in the previous rounds of arbitration in the same dispute and thus attracts Items 1, 15 and 16 of the Seventh Schedule.

Outcome of the Case

At the outset, the Court held that a challenge against attraction of any items under Fifth Schedule is not permissible before the Court until and unless an award is issued by the Arbitral Tribunal. This is so because Section 13 of the Act only allows the parties to raise the issues of "independence" and "impartiality" before the Arbitral Tribunal. However, parties are free to raise issues attracting Seventh Schedule before the Court directly. This is so because the items in Seventh Schedule, when attracted, can make the arbitrator de jure ineligible to act as an arbitrator. Hence, the Court proceeded in the dispute only upon the allegations raised against the two arbitrators against the items mentioned in the Seventh Schedule.

With regard to the appointment of Justice K.K. Lahoti, the Court ruled that merely providing a legal opinion in an unrelated matter will not attract Items 1, 8 and 15 of the Seventh Schedule. The Court held that to attract these items the advice should be "regular" and the opinion should be "qua the dispute at hand". Further the advice should also be related to business relationships and a legal opinion on a matter only constitutes a professional relation and not a business relation. Hence, the challenge against Justice K.K. Lahoti was dismissed.

As to the appointment of Justice Doabia the Court ruled that his involvement in a previous arbitration between the same parties would not, by itself, render him ineligible to be an arbitrator in a subsequent arbitration. What is required is that the involvement should be in the very dispute contained in the present arbitration. Consequently, the challenge against Justice Doabia was also dismissed.

Key Takeaways

The decision in HDR Corporation v. GAIL (India) Limited SLP (C) No. 20679 of 2017 will be considered as a reference point for adjudication of any future disputes on the appointment of arbitrators. The major takeaways of this judgment are:

  • Challenge against items in Fifth Schedule can only be made before the Arbitral Tribunal. It can be subsequently raised before the Court only after issuance of the Award.
  • Challenge against items in Seventh Schedule need not before the Arbitral Tribunal and can be directly addressed before the Court.

Footnotes

1. Arbitration and Conciliation (Amendment) Act, 2015.

2. Section 12(1) of the Arbitration and Conciliation Act, 2015 [hereinafter "Act"].

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.

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