India: The Arbitration And Conciliation Act, 1996 - Person Ineligible To Be An Arbitrator Under Section 12(5) Of The Act

Last Updated: 7 May 2019
Article by AMLEGALS  

IN THE SUPREME COURT OF INDIA AT NEW DELHI
Bharat Broadband Network Limited. v United Telecoms Limited
[C.A. No. 3973 of 2019]
Arising out of Special Leave Petition (Civil) No.1644 of 2018) dated: 16.04.2019

FACTS

The Appellant had floated a tender dated 05.08.2013 inviting bids for a turnkey project for supply, installation, commissioning and maintenance of GPON equipment and solar power equipment.

The Respondent was the successful L1 bidder for the tender and hence the Appellant issued an Advance Purchase Order dated 30.09.2014.

The contractual relationship between the parties was governed by the Genaral (Commercial) Conditions of Contract (hereinafter referred to as GCC) which contained an Arbitration Clause.

Disputes arose between the parties and hence, by a letter dated 03.01.2017, the Respondent invoked the Arbitration Clause in GCC and as per the said clause, called upon the Appellant's Chairman to appoint an independent and impartial arbitrator for adjudication of disputes between the parties.

Vide letter dated 17.01.2017, the Chairman and Managing Director of the Appellant, in terms of the Arbitration Clause, nominated one Shri K.H. Khan as the sole arbitrator to adjudicate and determine disputes between the parties.

On 03.07.2017 the Hon'ble Supreme Court in TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377, held that since a Managing Director of a company which was one of the parties to the Arbitration proceedings, was himself ineligible to act as the Arbitrator, such ineligible person could not appoint an Arbitrator and any such Appointment would be null and void.

In the light of above judgment, the Appellant, who had itself appointed Shri K.H. Khan as the sole arbitrator, made a prayer before the sole Arbitrator that since he was de jure unable to perform his function as Arbitrator, he should withdraw from the proceedings and allow the parties to approach the High Court for Appointment of a substitute arbitrator in his place.

However, by an order dated 21.10.2017, Shri K.H. Khan, the sole arbitrator, rejected the Appellant's prayer after hearing both the parties, without giving any reason thereof.

Hence, the Appellant filed a petition in the Hob'ble Delhi High Court, under Section 14 and 15 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act'), to substitute a new Arbitrator in the place of Shri K.H. Khan since he was de jure incapable of acting as an Arbitrator.

The said petition was rejected vide order dated 22.11.2017 while stating that the person who has appointed an Arbitrator is stopped from raising a plea that such an Arbitrator cannot be appointed after participating in the proceedings.

Further, the Hon'ble Court also referred to the proviso to Section 12(5) of the Act and stated that filing of statement of claim by the Appellant herein amounted to waiver of the applicability of Section 12(5) of the Act.

Hence, the Appellant had filed the present Civil Appeal before the Hon'ble Supreme Court of India against the impugned order of the Hon'ble Delhi High Court dated 22.11.2017.

This appeal was heard by a division bench comprising of Hon'ble Justice R.F. Nariman and Hon'ble Justice Vineet Saran.

ISSUES BEFORE SUPREME COURT

The following issues were considered by the Hon'ble Division Bench:

  1. Whether Section 12(4) would bar the Appellants application under Section 14 of the Act?
  2. Whether the proviso to Section 12(5) of the Act would apply to the present case?
  3. Whether the judgment of this Hon'ble Court in TRF Ltd. v. Energo Engineering Projects Ltd. would apply to the present case?

OBSERVATION

FIRST ISSUE

With regard to the first issue, the Hon'ble Court observed that Section 12(4) of the Act would only apply when a challenge is made to an Arbitrator by the same party who has appointed such an arbitrator.

Section 12(4) of the Act has no applicability to an application made to the Hon'ble Court under Section 14(2) of the Act in order to determine whether the mandate of an Arbitrator has terminated since he has de jure, i.e., in law become unable to perform his functions due to his ineligibility for such an appointment under Section 12(5) of the Act.

SECOND ISSUE

Pertaining to the second issue, the Hon'ble Court observed that the proviso to Section 12(5) of the Act would apply only if, subsequent to the disputes having arisen between the parties, the parties waive the applicability of Section 12(5) of the Act by an express agreement in writing, to that effect.

The Hon'ble Court further explained that this "express agreement in writing" referred in Section 12(5) of the Act means an agreement made in words and not an agreement which is to be inferred by conduct.

Section 12(5) of the Act relates to "de jure" inability of an Arbitrator to act as such. The moment any party's relationship with the Arbitrator or the counsel or the subject matter of the dispute falls within the ambit of Schedule VII of the Act, any prior agreement to the contrary is wiped off.

The only way in which such ineligibility can be removed is by virtue of an express agreement; waiving the applicability of Section 12(5), SUBSEQUENT to the disputes having arisen between the parties.

Hence, it must be an agreement by which both parties, with full knowledge of the fact that the Arbitrator is ineligible to be appointed, still go forward with such an appointment and state that they have full faith and confidence in such an arbitrator to continue as such.

The Hon'ble Court also referred to Section 9 of the Indian Contract Act, 1872 to explain the difference between 'express promise' and 'implied promise'.

Merely filing of statement of claim before the Arbitrator would not mean that there was an express agreement in words and hence would not amount to waiver of the right to file an application under Section 12(5) of the Act.

THIRD ISSUE

The Hon'ble Court, in TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377, held that an ineligible person could not himself appoint an Arbitrator since such an appointment would be void ab initio. Further, it was also held that such an appointment goes to the "eligibility", that is, the root of the matter, it would be void.

The appointment of the Arbitrator, in the present case is that of after the implementation of the Arbitration and Conciliation (Amendment) Act, 2015. In the case of TRF Ltd. as well, the appointment of the Arbitrator, which was non-est in law due to his incapacity to be appointed as an Arbitrator in the said case, was after the said Amendment Act.

Hence, the Hon'ble Court observed that TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377 would apply to the current case, thereby making the appointment of the Arbitrator by the Managing Director of the Respondent herein, and therefore is liable to be set aside and is void ab initio.

CONCLUDING VIEW

The Hon'ble Court held:

"We thus allow the appeals and set aside the impugned judgment. The mandate of Shri Khan having terminated, as he has become de-jure unable to perform his function as an arbitrator, the High Court may appoint a substitute arbitrator with the consent of both the parties.

... ... ...

Since there was no order of stay, the arbitral proceedings continued even after the date of the impugned judgment, i.e., 22.11.2017, and culminated in two awards dated 11.07.2018 and 12.07.2018. We have been informed that the aforesaid awards have been challenged by the appellant by applications under Section 34 of the Act, in which certain interim orders have been passed by the Single Judge of the High Court of Delhi. These awards, being subject to the result of this petition, are set aside. Consequently, the appellant's Section 34 proceedings have been rendered infructuous. It will be open to the appellant to approach the High Court of Delhi to reclaim the deposit amounts that have been made in pursuance of the interim orders passed in the Section 34 petition filed in the High Court of Delhi."

JUDGMENTS RELIED UPON

The Hon'ble Court put reliance upon the following decisions in forming the view:

  1. TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377.
  2. HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC 471.
  3. Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665.

AMLEGALS REMARKS

The Hon'ble Court has given a judgment backed by precedents of Apex Court and the written word of the statute.

The Hon'ble Court has interpreted the provisions of Section 12(5), as amended by the 2015 Amendment Act in harmony with Sections 13, 14, 15 and 16 of the Arbitration and Conciliation Act, 1996.

Further, it has been made abundantly clear that where such situation arises then the said provisions enable a party to an arbitration proceeding to directly approach the High Court under Section 11(6) read with Section 14(2) of the said Act.

This judgment has come as a welcome clarification for the provisions pertaining to Section 12(5) of the Act and the correct procedure that may be adopted by the parties, the adjudicatory authority and the Hon'ble Courts while deciding on such matters.

Most importantly, this judgment has firmly established that the provisions of Section 12(5) of the said Act can only be waived by the parties through an express and written agreement to that effect. Thus no amount of implied conduct shall amount to a waiver of the applicability of the provisions of Section 12(5).

Conclusively, this judgment of the Apex Court has established that intention of the legislation is only inclined toward the appointment of independent, fair and impartial arbitrators who can conduct the Arbitration proceedings in all fairness and in consonance with the principles of natural justice as well as the said Act, so that the object of the legislation always remains paramount.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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