2019 (4) TMI 983 - SC - Indian Laws

Eligible person to be appoint as an arbitrator - Section 12(5) of the Arbitration and Conciliation Act, 1996 - appointment of an arbitrator - HELD THAT - Section 12(1), as substituted by the Arbitration and Conciliation (Amendment) Act, 2015, makes it clear that when a person is approached in connection with his possible appointment as an arbitrator, it is his duty to disclose in writing any circumstances which are likely to give rise to justifiable doubts as to his independence or impartiality. The disclosure is to be made in the form specified in the Sixth Schedule, and the grounds stated in the Fifth Schedule are to serve as a guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Once this is done, the appointment of the arbitrator may be challenged on the ground that justifiable doubts have arisen under sub-section (3) of Section 12 subject to the caveat entered by subsection (4) of Section 12. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the nonobstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be ineligible to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. Thus, the Managing Director of the appellant could not have acted as an arbitrator himself, being rendered ineligible to act as arbitrator under Item 5 of the Seventh Schedule. Appeal allowed.

Issues Involved:
1. Interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996.
2. Validity of the appointment of an arbitrator by an ineligible person.
3. Applicability of the proviso to Section 12(5) regarding waiver by express agreement in writing.
4. Impact of the Supreme Court's judgment in TRF Ltd. v. Energo Engineering Projects Ltd. on the present case.
5. Application of Sections 12(4), 13, and 14 of the Act to the challenge of an arbitrator's appointment.

Detailed Analysis:

1. Interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996:
The judgment primarily deals with the interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996, which was introduced by the Arbitration and Conciliation (Amendment) Act, 2015. Section 12(5) states that 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. This provision overrides any prior agreement to the contrary.

2. Validity of the appointment of an arbitrator by an ineligible person:
The appellant, Bharat Broadband Network Ltd. (BBNL), had appointed Shri K.H. Khan as the sole arbitrator based on an arbitration clause in the General (Commercial) Conditions of Contract (GCC). However, following the Supreme Court's judgment in TRF Ltd. v. Energo Engineering Projects Ltd., it was established that a Managing Director of a company, who is ineligible to act as an arbitrator, cannot appoint another arbitrator. This rendered the appointment of Shri Khan void ab initio as the CMD of BBNL was ineligible to make such an appointment.

3. Applicability of the proviso to Section 12(5) regarding waiver by express agreement in writing:
The proviso to Section 12(5) allows parties to waive the ineligibility of an arbitrator by an express agreement in writing, provided such agreement is made after the disputes have arisen. The respondent argued that the appellant's issuance of the appointment letter and the respondent's filing of a statement of claim constituted an express agreement in writing. However, the court held that an express agreement must be made in words and not inferred by conduct. In this case, there was no such express agreement after the disputes had arisen.

4. Impact of the Supreme Court's judgment in TRF Ltd. v. Energo Engineering Projects Ltd. on the present case:
The judgment in TRF Ltd. clarified that an ineligible person cannot appoint an arbitrator, and any such appointment would be void. This judgment applied to the present case as the appointment of Shri Khan was made after the introduction of Section 12(5) and was therefore void. The court emphasized that the judgment in TRF Ltd. did not apply prospectively but was declaratory of the law, affecting appointments made after 23.10.2015.

5. Application of Sections 12(4), 13, and 14 of the Act to the challenge of an arbitrator's appointment:
The respondent argued that Section 12(4) barred the appellant's application as it challenged the appointment of an arbitrator it had itself appointed. However, the court clarified that Section 12(4) pertains to the challenge procedure under Section 13, which does not apply to cases under Section 12(5). Section 14(1)(a) states that the mandate of an arbitrator shall terminate if he becomes de jure unable to perform his functions. Since Shri Khan was ineligible under Section 12(5), his mandate automatically terminated, and the High Court was directed to appoint a substitute arbitrator.

Conclusion:
The Supreme Court allowed the appeals, set aside the impugned judgment, and directed the High Court to appoint a substitute arbitrator with the consent of both parties. The awards dated 11.07.2018 and 12.07.2018 were set aside, and the appellant's Section 34 proceedings were rendered infructuous. The appellant was allowed to approach the High Court of Delhi to reclaim the deposit amounts made in pursuance of interim orders passed in the Section 34 petition.

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