India: The Mandatory And Non-Derogable Nature Of Section 12(5) Of The Arbitration & Conciliation Act, 1996:

A Case Study of Haryana Space Application Centre & Ors V. Pan India Consultants Pvt. Ltd

INTRODUCTION

The attributes of the decision-making person is of paramount importance in any dispute resolution process. This person in arbitration proceedings is an arbitrator. The appointment of the arbitrators at the choice of the parties to an arbitration agreement is the quintessence of arbitration as an alternate dispute resolution procedure. Ergo the independence and impartiality of the arbitrator is of the utmost significance. Section 12(5) read with the VII Schedule of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act' deals with the impartiality and independence of arbitrator and prescribes ineligibility of a person to be appointed as an arbitrator.

A three judges bench comprising of Justice L. Nageswara Rao, Justice Indu Malhotra and Justice Ajay Rastogi of the hon'ble Supreme Court of India in the case of Haryana Space Application Centre (HARSAC) and another V. M/s Pan India Consultants Pvt. Ltd.¹ ruled that Section 12(5) read with the VII Schedule of the Act is a mandatory and non-derogable provision.

The top court was considering an appeal filed by HARSAC (appellate) against an order of the Punjab and Haryana High Court which granted an extension of four months for concluding the argument within three months and reserving one month for the tribunal to pass the arbitral award. During the proceedings the attention of the apex court was arrested by the ineligibility of the nominee arbitrator appointed in the matter, prompting the court to exercise jurisdiction in the light of non-derogable prescriptions of the Act.

FACTUAL MATRIX

The Ministry of Rural Development, Department of Land Resources designated HARSAC as the nodal agency for the State of Haryana inviting tenders in September 2010 for modernisation of land records. Pan India Consultants Pvt. Ltd along with three other vendors secured the tender and allotment letter dated 28.02.2011 was issued to them for carrying out the work in the stipulated time. The parties entered into a Service Level Agreement on 29.03.2011.

Pan India Pvt. Ltd (the contractor) failed to complete the work within the time stipulated in the agreement. Two extensions were given but to no avail. HARSAC invoked the performance bank guarantee through letter dated 18.03.2014.

Against the invocation of the bank guarantee, the contractors approached the Delhi High Court.² The hon'ble court directed HARSAC not to encash the bank guarantee before the settlement of the dispute. HARSAC then invoked the arbitration clause and appointed Shri. Anurag Rastogi, IAS, Principal Secretary to the Haryana Government as their nominee arbitrator. The contractor, on the other hand, appointed Justice Rajive Bhalla (Retd.) as its nominee arbitrator. The contractor filed an application under Section 10(1) of the Arbitration Act before the Arbitral Tribunal for appointment of the third arbitrator. The arbitration tribunal declined the request and reserved their right to appoint the third arbitrator only in the case of disagreement between the two arbitrators.

The Arbitration Tribunal recorded the pleadings of both the parties on 03.08.2018 and reserved the matter for passing of arbitral award. However, the tribunal failed to pass the award within the prescribed period of one year. Even after an extension of six months, the tribunal did not pass the award.

The contractor filed an application under Section 29A(4) of the Act before the Additional District Judge, Chandigarh, for the extension of time for passing of award as HARSAC failed to give their share of fees to the arbitrators. The extension of three months was granted to the tribunal to pronounce the judgement. Aggrieved by the decision, HARSAC filed a Civil Revision Petition under Article 227 of the Constitution before the Punjab and Haryana High Court for setting aside the order for extension of time.

The High Court granted an extension of 4 months owing to the COVID-19 pandemic and asked the tribunal to finish the arguments within 3 months and pass an award within one month after the conclusion of arguments. Aggrieved by the order, HARSAC filed a SLP before the Supreme Court.

DECISION OF THE COURT

The hon'ble Supreme Court was of the view that the appointment of the appellants' nominee arbitrator, who is a Principle Secretary of the Haryana Government would be invalid under Section 12(5)  of the Act read with the VII Schedule³ which prescribes that notwithstanding any prior agreement to the contrary, any arbitrator whose relationship with the parties, or their counsel,  falls within any of the categories stipulated in the VII Schedule, shall be ineligible to be appointed as an arbitrator.

The apex court held that section 12(5) read with the VII Schedule is a mandatory and non-derogable provision of the Arbitration & Conciliation Act, 1996. Thus, the mandate of the nominee arbitrator shall be terminated because the arbitrator appointed by HARSAC was falling under Item no. 5 of schedule VII which deals with the Arbitrator's relationship with the parties or counsel :-

"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 arbitration."⁴

The nominee arbitrator appointed by HARSAC who was a Principle Secretary of the Government of Haryana in itself demonstrated that the arbitrator was in affiliation with HARSAC which was also a part of government and thus, cannot be said to be an independent arbitrator.

In the facts of the case, the apex court held that the Principal Secretary of the Haryana Government cannot be an arbitrator as he would have a controlling influence on the appellant company which is a Nodal Agency of the State.

Over the course of the hearing, the counsel of both the parties agreed to the appointment of a Sole Arbitrator to conclude the arbitration proceedings and pass an arbitration award. Consequently, the hon'ble Supreme Court appointed a substitute arbitrator in exercise of its power under section 29A (6). The Sole Arbitrator has to take over the proceedings from the stage arrived at and pass an award within a period of six months from the date of receipt of this order.

CONCLUDING REMARKS

The hon'ble Supreme Court in the present case declared the non-derogable prescriptions with respect to the ineligibility of a person to be appointed as an arbitrator. It is relevant to note here that even when the validity or eligibility of the arbitrator was not disputed by the parties, the non-derogable prescription of the Act was held to be bound to apply. This demonstrates the gravity of Section 12(5) read with the Seventh Schedule of the Act, and any deviation/derogation from the said provisions is liable to be rendered as invalid/void.

Footnotes

1 Haryana Space Application Centre (HARSAC) and Anr. V. Pan India Consultants Pvt. Ltd. and Anr. Civil Appeal No. 131 OF 2021 (Arising Out Of Special Leave Petition (Civil) No. 13503 of 2020).

2 CS (OS) No. 886 of 2014.

3 Amended by the Arbitration & Conciliation (Amendment) Act of 2015.

4 Item 5, VII Schedule, the Arbitration and Conciliation Act, 1996.

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