India: Between The Lines... May 2019

Last Updated: 29 May 2019
Article by Vaish Associates Advocates

Key Highlights

  1. Supreme Court decides on authority of a person ineligible to be appointed as an arbitrator to nominate an arbitrator
  2. Delhi High Court: Provisions of Recovery of Debts and Bankruptcy Act, SARFAESI and IBC do not prevail over provisions of the PMLA
  3. Supreme Court holds that courts cannot appoint an arbitrator basis an inadequately stamped agreement containing the arbitration clause
  4. NCLAT holds that shareholders can file application to approve settlement with creditors even after appointment of official liquidator

I. SUPREME COURT DECIDES ON AUTHORITY OF A PERSON INELIGIBLE TO BE APPOINTED AS AN ARBITRATOR TO NOMINATE AN ARBITRATOR

All sections and schedules cited in this case analysis, unless specified otherwise, refer to the sections and schedules of the Arbitration and Conciliation Act, 1996.

In the case of Bharat Broadband Network Limited v. United Telecoms Limited (decided on April 16, 2019), the Supreme Court while upholding its own decision in TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] ("TRF Ltd.") held that appointment of arbitrator by person ineligible to be appointed as an arbitrator is not valid. This judgement was given retrospective effect and shall be applicable to all arbitrations commencing from October 23, 2015.

Facts

Bharat Broadband Network Limited ("Appellant") had invited bids for a turnkey project and United Telecoms Limited ("Respondent") was a successful bidder. The Appellant issued an Advance Purchase Order on September 30, 2014 which included an arbitration clause. Later, a dispute arose between the parties and the Respondent invoked the arbitration clause on January 3, 2017. According to the arbitration clause, it called upon the Appellant's Chairman and Managing Director ("MD") to appoint an arbitrator. On January 17, 2017, the MD appointed Shri K.H. Khan as the sole arbitrator.

Thereafter, the Supreme Court pronounced its judgement in TRF Ltd. on July 3, 2017, where it held that since a managing director of a company which was one of the parties to the arbitration, was himself ineligible to act as arbitrator, such ineligible person could not appoint an arbitrator, and any such appointment would have to be held to be null and void. In light of this judgement, the Appellant, despite having appointed the arbitrator itself, on October 7, 2017, made an application before the sole arbitrator to withdraw himself from the proceedings. However, the sole arbitrator rejected such application without giving any reasons.

The Appellants then filed a petition before the Delhi High Court submitting that since the arbitrator had become incapable of acting as such, as per law a substitute arbitrator should be appointed in his place. However, the Delhi High Court too rejected this petition stating that the very person who appointed the arbitrator is estopped from raising a plea that such arbitrator cannot be appointed after participating in the proceedings. The matter was then referred to the Supreme Court.

Issues

The Supreme Court examined the following issues:

  1. Whether the Supreme Court judgement in TRF Ltd. can apply retrospectively to the present case?
  2. Whether the Appellant, having appointed the arbitrator, can make an application for removal of the arbitrator?
  3. Whether the parties have waived their right to not allow an ineligible party to be appointed as an arbitrator by an express agreement?

Relevant provisions

For ease of reference, the sub-sections (4) and (5) of Section 12 have been reproduced below:

"Section 12 - Grounds for challenge.

(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 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 subsection by an express agreement in writing."

Arguments

The Appellant argued that since the appointment of Shri Khan is in respect of eligibility to be appointed as an arbitrator, his appointment should be void ab initio. Further, the judgment in TRF Ltd. is declaratory of the law and would apply to the facts of this case. Additionally, since there was no express agreement in writing between the parties subsequent to the disputes having arisen between them, the proviso to Section 12(5) would not be applicable.

The Respondent argued that Section 12(4) makes it clear that a party may challenge the appointment of an arbitrator appointed by it only for reasons of which it became aware after the appointment has been made. In the facts of the present case, since Section 12(5) and the Seventh Schedule were in the statute book since October 23, 2015 (as they were introduced by way of Arbitration and Conciliation (Amendment) Act, 2015), the Appellant was fully aware that the appointment of the MD would be null and void. This being so, Section 12(4) acts as a bar to the petition filed by the Appellant. Further, Section 13(2) makes it clear that a party who intends to challenge the appointment of the arbitrator, shall, within 15 days after becoming aware of its disqualification, send a written statement of reasons for the challenge to the arbitrator. This was not done within the time frame stipulated, as a result of which, the petition filed by the Appellant should be dismissed. Also, the proviso to Section 12(5) provides for the words "express agreement in writing" which is clearly met in the facts of the present case. This need not be in the form of a formal agreement between the parties, but can be culled out, from the appointment letter issued by Appellant as well as the statement of claim filed by the Respondent before the arbitrator leading, therefore, to a waiver of the applicability of Section 12(5).

Observations of the Supreme Court

The Supreme Court held that, it was clear that the MD could not have acted as an arbitrator himself due to his ineligibility under Schedule 5. Whether such ineligible person could himself appoint another arbitrator was only made clear by Supreme Court's judgment in TRF Ltd. on July 3, 2017 holding that an appointment made by an ineligible person is itself void ab initio. Thus, it was only on July 3, 2017, that it became clear beyond doubt that the appointment of Shri Khan would be void ab initio. There is no doubt in this case that disputes arose only after the introduction of the new Section 12(5) on October 23, 2015, and Shri Khan was appointed long after on January 17, 2017. The judgment in TRF Ltd. nowhere states that it will apply only prospectively, that is, the appointments that have been made of persons such as Shri Khan would be valid if made before the date of the judgment. Considering that the appointment in the case of TRF Ltd. of a retired Judge of Supreme Court was set aside as being non-est in law, the appointment of Shri Khan in the present case must follow suit.

Deciding on the issue of whether Appellant can make an application for removal of the arbitrator, the Supreme Court held that Section 12(4) has no applicability to an application made to the court under Section 14(2) to determine whether the mandate of an arbitrator has terminated as he has, in law, become unable to perform his functions because he is ineligible to be appointed as such under Section 12(5) of the Act.

Concerning the issue on whether there was a waiver under the proviso to Section 12(5), it was stated that the proviso to Section 12(5) will only apply if subsequent to the disputes having arisen between the parties, the parties waive the applicability of Section 12(5) by 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. The Supreme Court then referred to Section 9 of the Contract Act, 1872 which states: "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 as indicating an express agreement on the facts of the case is dated January 17, 2017 and on this date, the Appellant was certainly not aware that Shri Khan could not be appointed by the MD as the law only became clear after the declaration of the law by the Supreme Court in TRF Ltd. on July 3, 2017. Further, the fact that a statement of claim was filed before the arbitrator, would not mean that there was an express agreement in words which would make it clear that both the parties wish Shri Khan to continue as arbitrator despite being ineligible to act as such.

Decision of the Supreme Court

The Supreme Court overruled the decision of the Delhi High Court and held that (1) the Appellant should be allowed to file an application for terminating the mandate of the arbitrator; (2) TRF Ltd. case can be applied retrospectively; and (3) there was no express agreement between the parties to allow an ineligible party to be appointed as an arbitrator.

VA View

The legitimacy of an arbitral proceeding hinges largely on the independence and impartiality of the appointed arbitrator. Furthering this purpose, amendments were made in October, 2015 by way of Arbitration and Conciliation (Amendment) Act, 2015 which increased the disclosure requirements of the arbitrator and inserted Fifth and Seventh Schedule which provides a guide in determining circumstances for ineligibility of the arbitrator. The TRF Ltd. case in 2017 went further to hold that a person to be appointed as an arbitrator who also has the authority to nominate another arbitrator, on becoming ineligible will lose its authority to appoint an arbitrator as well. The present judgement went even further and held that the ratio of the TRF Ltd. case would apply to all arbitrations which commenced on or after October 23, 2015. Aside from this, the Supreme Court ensured that the sanctity attributed to the appointment of an impartial arbitrator is only waived by an express written agreement where both parties have full knowledge of the legal ineligibility of the arbitrator and not waived offhandedly by interpreting the implicit conduct of the parties. The key takeaway for the parties is to ensure that neutrality of the arbitrator is maintained through and through and take utmost precaution when appointing an ineligible arbitrator by executing a separate written agreement post the dispute.

To read this Newsletter in full, please click here.

© 2018, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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