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2004 (8) TMI 404 - HC - Companies Law

Issues Involved:
1. Jurisdiction of the Arbitral Tribunal after cancellation of membership.
2. Failure of an arbitrator to disclose potential conflicts of interest under Section 12 of the Arbitration & Conciliation Act.

Detailed Analysis:

1. Jurisdiction of the Arbitral Tribunal after Cancellation of Membership:
The core issue was whether the Arbitral Tribunal of the Bombay Stock Exchange loses jurisdiction to make an award if the membership of the party involved is canceled before the award is made. The petitioners argued that the arbitration agreement, as per bye-law No. 248(a), mandates that both parties must maintain their status as members or non-members throughout the arbitration process. They cited various bye-laws and rules, including bye-law Nos. 248(a), 252(1), 257, and rules 53 and 54, to support their contention that the membership status must be continuous for the arbitration to be valid.

The court, however, concluded that the relevant bye-laws, particularly bye-law Nos. 192, 248(a), 252(1), and 257, indicate that the arbitration clause is linked to the transaction rather than the continuous membership status. Bye-law No. 192 introduces a statutory fiction that all transactions are subject to the rules, bye-laws, and regulations of the Stock Exchange. Bye-law No. 248(a) requires that the transaction must be between a member and a non-member and be subject to the Stock Exchange's rules. Bye-law No. 252(1) allows claims against a member even after they have been declared a defaulter, suggesting that the arbitration process can continue despite changes in membership status.

The court emphasized that the settled interpretation of bye-law No. 248(a) by the Bombay Stock Exchange has been that the arbitration clause applies to transactions between members and non-members, regardless of subsequent changes in membership status. This interpretation has been in place for decades and supports the Stock Exchange's welfare schemes for creditors of defaulting members. Therefore, the court held that the Arbitral Tribunal retains jurisdiction to decide the dispute even if the respondent ceased to be a member during the arbitration process.

2. Failure of an Arbitrator to Disclose Potential Conflicts of Interest:
The second issue was whether the awards made by the Arbitral Tribunal were vitiated due to one of the arbitrators, Shri R.B. Khandelawal, failing to disclose a potential conflict of interest under Section 12 of the Arbitration & Conciliation Act. The petitioners discovered that the advocate representing the respondent in the arbitration proceedings was also acting as an advocate for the arbitrator in several personal court matters. This fact was not disclosed during the arbitration proceedings, raising doubts about the arbitrator's independence and impartiality.

Section 12 of the Arbitration & Conciliation Act mandates that an arbitrator must disclose any circumstances likely to give rise to justifiable doubts as to their independence or impartiality. The court noted that the duty to disclose such circumstances is a solemn one, intended to ensure the fairness and integrity of the arbitration process. The court referred to the Supreme Court's judgment in Ranjit Thakur v. Union of India, which emphasized that the test for bias is the reasonableness of the apprehension in the mind of the party.

In this case, it was admitted that the advocate representing the respondent was also representing the arbitrator in personal matters. The arbitrator's failure to disclose this relationship violated the duty imposed by Section 12 of the Act. Consequently, the court held that the awards made by the Arbitral Tribunal were vitiated due to this non-disclosure.

Conclusion:
The court set aside the awards made by the Arbitral Tribunal in both petitions. It directed the arbitration department of the Bombay Stock Exchange to constitute a new arbitral panel and refer the disputes for de novo consideration and decision in accordance with law. The court clarified that except for the question of arbitrability due to the cessation of membership, all other issues were left open for the new arbitrators to decide.

 

 

 

 

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