Court’s Power to Terminate Arbitrator’s Mandate: SC Settles Long Outstanding Debate

[Guest post by Sumit Rai, who is an independent counsel in Mumbai, practicing with special focus on international and domestic arbitration as well as arbitration related litigation]

In HRD Corporation v Gail (India) Ltd. (decided on August 31, 2017), the Supreme Court held that for any infraction of section 12(5) read with the Seventh Schedule of the amended Arbitration and Conciliation Act, 1996 (the “Act”), recourse to section 14 of the Act would be available and the court would have the power to terminate the mandate of the arbitrator in such cases. It clarified that this remedy would be available only with respect to the question as to whether the arbitrator was “ineligible” under any ground listed in the Seventh Schedule. As to the grounds relating to independence and impartiality listed in the Fifth Schedule, the Court held that the challenge procedure under section 13 of the Act would be the exclusive remedy.

Sections 12 to 14 are part of Chapter III of the Act dealing with composition of arbitral tribunal. Section 12 provides the grounds for challenge, which now includes the grounds for ineligibility to act as an arbitrator as well. Section 13 provides the procedure for such challenge, which parties are free to agree upon – failing which the challenge must be made to the arbitral tribunal itself. Section 14 provides certain situations in which the mandate of an arbitrator may be terminated because he becomes de facto or de jure incapable of performing his functions.   

The decision settles a long outstanding issue under the Act. There were multiple views of various High Courts on the scope of section 14 of the Act. Following the amendments made in 2015 to the Act, a few decisions of the Delhi High Court had read the power to terminate an arbitrator’s mandate on grounds listed in the Seventh Schedule. The Supreme Court has now approved that approach.

The Problem

Under the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), the default procedure for challenging an arbitrator is to make an application to the arbitration tribunal itself. If the application fails, a right to appeal to the court is provided – cautioning at the same time that the arbitration would continue unhindered despite pendency of any such court proceeding. 

While adapting the Model Law to India, the legislature consciously chose to exclude the option of appealing a decision of challenge in court. Parties were instead given the right to challenge the award on this ground. The rationale was to restrict potential court actions during the pendency of arbitration. Given the unique problems with litigation delays in India, it was a deviation that was necessary and has generally worked well. 

However, a legislation can never foresee and provide for all potential situations – something common law acknowledges fully. In an evidently black-and-white situation, this restriction felt unjust. For instance, if a party appointed someone who had very close financial ties with that party as an arbitrator, or appointed someone who did not have the qualification mentioned in the agreement, or appointed say its own CEO. Such cases, many felt, ought to be rectified right away. In such situations, to ask parties to continue with arbitration and challenge the award would be far from ideal.

The Confusion

Need is not just the mother of all inventions, it is also the genesis of all innovative contentions in courts of law. Given that the option to appeal to court was consciously removed from the statute, it was an uphill task to read that very option through some other route. The challenge was accepted and section 14 of the Act was invoked to contend that in a clear case of lack of independence and impartiality, the person so appointed should be considered de jure incapable of performing the functions of an arbitrator.

Hard cases make bad law. For pragmatic reasons, some courts (and only some of the times) yielded to the temptation and agreed to exercise powers under section 14 in such cases. Eventually, a plethora of decisions of various High Courts gave rise to at least three different views on the subject:

– one view, as should be obvious, was that on no pretext could an issue relating to independence and impartiality be a ground for de jure inability under section 14.  

– the second view was that in specific circumstances the court could intervene under section 14 but only if no recourse to sections 12 and 13 had been taken – effectively taking a fork in the road view.

– the third view was the exact opposite of the second, considering sections 12, 13 and 14 as waterfall provisions rather than fork in the road, effectively holding that section 14 would be available only after one raised the issue in section 13 and failed.

While the first of the three views did come to be the dominant view, it was far from ideal to have such confusion with respect to the jurisprudence on appointment and removal of arbitrators. This caught the attention of the 20^th Law Commission of India.

Law Commission’s Solution

One of the focal points of the 246^th Report of the Law Commission of India (“Report”) was to address the issue of neutrality of arbitrators. The practice of appointing existing employees as arbitrator by the public sector enterprises having received the blessing from the Supreme Court, it became a glaring aberration which could only be corrected legislatively. For this reason, the Report proposed a substantial change in the scheme of sections 12 to 14 and inter alia introduced what became the Seventh Schedule to the Act. It proposed section 12(5) which made people with such relationship ineligible to be arbitrators. Being conscious of the controversy surrounding the scope of the term “de jure” in section 14, the Report had proposed adding an Explanation to section 14 clarifying that a person ineligible under section 12(5) would be deemed de jure incapable of performing his functions.

The Amendment: Half-a-Step Short

The 246^th Report of the Law Commission was an extremely well-researched and balanced piece of law reform recommendation. Unfortunately, in the journey from the incubator to birth, certain provisions were tinkered with without any ostensibly good reason. While adopting almost all recommendations for amendment to sections 12 to 14, the proposed Explanation to section 14 was omitted. This made section 12(5) look like a dog that could bark but not bite.

HRD Corporation: SC Adds the Bite

The Supreme Court considered the Law Commission’s report, the IBA Guidelines, and the amended provisions to conclude that anyone ineligible to be appointed under section 12(5) would be de jure incapable – effectively arriving at the conclusion that the Law Commission had recommended adding as an Explanation.

Settling the long debate, the Court expressly held that “[a]fter the 2016 Amendment Act, dichotomy is made by the Act between persons who became “ineligible” to be appointed as arbitrators, and persons about whom justifiable doubts exist as to their independence and impartiality”. For the former, the court held the remedy lies in section 14 and for the latter in section 13 respectively.

In the process of arriving at this conclusion, the court laid down some helpful principles to be adopted in interpreting the entries in Fifth and Seventh Schedules to the Act. An interesting argument before the court was that since the final result, i.e., the award is to be challenged on narrower grounds, the bias test to be applied at the initiation of the process should be stronger. Therefore, the entries must be interpreted in more expansive manner. The Court rejected the contention and relying on the origin and purpose of the IBA Guidelines held that a broad common-sensical approach must be taken. The court held that “[t]his approach would, therefore, require a fair construction of the words used therein, neither tending to enlarge or restrict them unduly”.

What Next?

No doubt the apex court’s decision is welcome and settles the law on this issue in a manner that is likely to be beneficial to litigants. One consideration that is mysteriously absent in the discussion both of the High Court and the Supreme Court is – what implication should, if any, the non-acceptance of Law Commission’s recommendation to include the Explanation in section 14 have on the interpretation of these amendments? While it would be permissible to reach the same result by interpretation, surely taking into account that omission would have been sound approach.

To end on an interesting note, an aside arising out of court’s obiter in this decision: the Court observes that both Saw Pipes and Western Geco have been “expressly done away with” by the amendments. The Court also notes that both sections 34 and 48 have been brought back to the position of law contained in Renusagar. This would be radically different from the understanding that is commonly held. It will be interesting to see how Justice Nariman’s observations in this regard are interpreted by lower courts in the months to come.

– Sumit Rai