Delhi High Court on Determining Ineligibility of an Arbitrator

[Kishan Gupta is a 4th Year B.A.LLB (Hons.) Student at Dr. RML National Law University, Lucknow]

By the introduction of the 2015 amendment to the Arbitration and Conciliation Act, 1996, the standard of reviewing the independence and impartiality of arbitrators has become more stringent. As it now stands, the Act contains two schedules detailing the grounds: (a) that might give rise to justifiable doubts as regards an arbitrator’s independence and impartiality (Fifth Schedule); and (b) which could make him ineligible to be appointed as an arbitrator (Seventh Schedule). 

On 19 February 2019, the Delhi High Court in Vishal Infrastructure Limited v. Union of India adjudicated on the ineligibility of an arbitrator by applying the amended section 12(5) read with entry 1 of the Seventh Schedule which de jure makes an arbitrator unable to perform his functions due to his relationship with the parties or counsel as an employee, consultant, advisor or any other past or present business relationship.

Facts of the Case

Vishal Infrastructure Limited, the petitioner, filed a petition under section 14(2) of the Act for termination of the mandate of the arbitrator appointed by Union of India (UOI), the respondent, and also for the appointment of a substitute arbitrator in terms of section 15(2) of the Act. The dispute related to the unilateral termination of the Contract for “construction of dwelling units including allied services for officers, JCO, OR’s at Kirkee (Army)” by UOI. Clause 60 of the General Conditions of Contract mandated UOI to appoint a sole arbitrator for adjudicating disputes that had arisen between the parties. Pursuant to the same, Vishal Infrastructure made several requests to UOI to appoint an arbitrator, the first being on 8 October 2013. These requests were invariably rejected by UOI until 14 March 2016 when it wrote to the appointing authority envisioned under the Contract giving particulars of the appointment. However, the arbitrator appointed by the appointing authority soon tendered his resignation, thereafter leaving the proceedings in abeyance. The position was filled by a subsequent appointment by the appointing authority. The second appointed arbitrator allegedly acted in favour of UOI by allowing it to revise its statement of claim and extending the time limit to file the same, all such directions being passed without giving any opportunity of hearing to Vishal Infrastructure.

It was on these grounds that Vishal Infrastructure filed a section 14(2) application contending that the sole arbitrator, being a serving employee of UOI, is ineligible to be appointed as an arbitrator in the current arbitral proceedings.

Contention of the Parties

Vishal Infrastructure argued that since the second appointed arbitrator is de jure ineligible to be appointed as an arbitrator according to section 12(5) read with entry 1 of Seventh Schedule, his mandate should terminate in terms of section 14(1)(a) of the Act.

By contrast, UOI argued that:

(a) since the arbitration proceedings had commenced before the coming into force of the Amendment Act, the provisions of the Seventh Schedule, which were introduced by the said Amendment Act, should not apply to the present case; and

(b) the only remedy available to Vishal Infrastructure was to file an application before the arbitral tribunal itself and not before the court as per section 13 of the Act.

Observations of the Court

The Court leaned in favour of Vishal Infrastructure by holding that the Amendment Act applies to the present case. While doing so, it placed reliance on two dates: first, the date on which the original arbitrator was appointed (29 April 2016), and second, the date on which the substituted/second arbitrator was appointed by the appointing authority (19 July 2018). It observed that both the dates fall after 23 October 2015, the date after which the Amendment Act was made to apply prospectively.[1] In view of the same, it held that the “ineligibility of the Arbitrator has to be decided at the anvil of Section 12(5) read with the Seventh Schedule of the Act.” The Court also cited the recent case of Omaxe Infrastructure v. Union of India to hold that even if the 2015 Amendment Act does not apply to the facts of the present case, the ineligibility of an arbitrator has to be considered on the date of his appointment.

Furthermore, it relied on HRD Corporation v. Gail (India) Limited as well as TRF v. Energo to differentiate between the two schedules introduced by the 2015 Amendment Act. According to the Court, the grounds mentioned under the Fifth Schedule only give rise to justifiable doubts regarding the independence and impartiality of an arbitrator in the eyes of a third person, and the existence of any of the mentioned circumstances will not by itself make the arbitrator ineligible. By contrast, the existence of any of the grounds mentioned under the Seventh Schedule makes the concerned person ineligible to act as an arbitrator with an immediate effect. Since such ineligibility is attracted by the operation of law, it can be said that the arbitrator has become de jure unable to perform his functions in terms of section 14(1)(a) and, hence, his mandate should be terminated. Sub-section (2) of section 14 allows a party to apply to the court to decide on the question of termination of the mandate of an arbitrator. As ineligibility goes to the root of the matter, bringing such a claim before the person who lacks inherent jurisdiction to proceed any further would be futile. Therefore, a party relying on section 12(5) read with Seventh Schedule is not bound to first raise the question of impartiality before the arbitral tribunal and then wait for the proceedings to conclude, if the challenge is not successful, to make an application for setting aside the consequent award under section 34.[2] The same, however, remains the proper course for any legal remedy had the challenge been on the grounds stated in the Fifth Schedule.

Comments

The author is of the opinion that the Court comprehensively and indeed correctly dealt with the question of proper forum before which jurisdictional challenge should be brought. It however failed to correctly deal with the question of applicability of Amendment Act.

As far as the question of proper forum for bringing jurisdictional challenge vis-à-vis independence and impartiality of the arbitral tribunal is concerned, the law is settled and is summarized by the recent Supreme Court case of SP Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh. The Court has categorically held that any challenge to the arbitrator appointed ought to be raised before the arbitrator himself in the first instance and thereafter by challenging the award at the stage of enforcement under section 34 of the Act. A party may neither bypass this rule by approaching the Supreme Court or High Courts under section 11(6) where the courts act as an appointing authority nor can they rely on the grounds under Schedule Five of the Act to request termination of mandate of the arbitrator under section 14. It is only when one of the grounds mentioned under the Seventh Schedule exists that a party may approach the courts for termination of the mandate in accordance with section 12(5) read with section 14(1)(a) of the Act.

As regards the applicability of 2015 Amendment Act, again, the law of the land is enumerated in the much discussed Supreme Court case of BCCI v. Kochi Cricket Pvt. Ltd.[3] It held that section 26 of the Amendment Act, which addresses the applicability of the amendment, is prospective in nature making the 2015 Amendment Act applicable to:

(a) arbitral proceedings that have commenced on or after 23 October 2015 (commencement date of the Amendment Act); and

(b) court proceedings which have begun after commencement of the Amendment Act.

Further, an arbitral proceeding is said to commence in accordance with section 21 of the Act, i.e., when a request for that dispute to be referred to arbitration is received by UOI. There appears no reason why the Court in the present case has referred to the appointment dates of both the arbitrators to determine the applicability of amended provisions of the Act. As is evident from the facts, the first request for appointment of the sole arbitrator was made by Vishal Infrastructure on 08 October 2013, much before coming into force of the Amendment Act. What is more interesting to note here is the fact that a tribunal is usually constituted in arbitration only after giving the notice to the other side to refer the dispute to arbitration. Therefore, it can safely be assumed that the arbitral proceeding commenced, in the facts of the present case, much before the coming into force of the Amendment Act. This was also the determination of the Supreme Court in the above-referred SP Singla Constructions wherein the Court referred to the date of commencement of arbitration proceedings to determine the applicability of section 12(5) of the Act to the said proceedings and not to the date of appointment of concerned arbitrators.

Moreover, the Court’s reliance on Omaxe Infrastructure to ascertain the ineligibility of the arbitrator appears to be misguided. In that case, the Court determined the date of commencement of arbitration proceedings by relying on the letter of appointment (issued by the appointing authority) which had no mention of any prior dates (before 23 October 2015) when certain requests for appointment of arbitrator was made by Vishal Infrastructure. The Court acted cautiously by clarifying that “it cannot be conclusively said that the appointment of the Arbitrator was pursuant to the request made by the petitioner on 21st February, 2015” and that this appointment can be a result of any other dispute between the parties. It was only because of the peculiar facts of the case that the Court equated the appointment date of the arbitrator with the date of commencement of the arbitration to hold that the 2015 Amendment Act would apply to the concerned arbitral proceedings. Quite surprisingly, Delhi High Court in Vishal Infrastructure has assumed it to be a general rule to consider the date of appointment as the relevant date for ascertaining ineligibility of the arbitrator. If seen cautiously, the Court in paragraph 5 has itself accepted that the “Respondent finally wrote to the Engineer In-Chief (Appointing Authority) making a reference to the petitioner’s letter dated 19.07.2014” which is sufficient to prove that the appointment of arbitrator was carried out pursuant to a dispute which arose before 23 October 2015 and which Vishal Infrastructure wanted to refer to arbitration.

Hence, there was no ambiguity as to the date of commencement of the arbitral proceedings in the present case but it was the Court’s erroneous approach to the applicability of Amendment Act that resulted in the concerned arbitrator being disqualified from the arbitral proceedings. Now, what remains to be seen is whether this case, alongwith the determination in Omaxe Infrastructure, will be taken up before the Supreme Court for any clarification as to when an arbitral proceeding is said to commence under the Act.

– Kishan Gupta

[1] Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Ors., AIR 2018 SC 1549.

[2] Section 13(5), Arbitration and Conciliation Act, 1996.

[3] The pronouncement of Supreme Court in this case remains the law of the land until the time the proposed 2018 Arbitration Bill, which has adopted a divergent course on the said aspect, becomes a law.

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