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On April 16, 2019, the Supreme Court in Bharat Broadband Network Limited case (BBNL), dealt with the interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996 (Act) and host of other related provisions. While doing so, the Supreme Court also analysed three earlier landmark judgments dealing with Impartiality and Independence of Arbitrators.
We all know, the appointment of Arbitrator is not only starting step in an Arbitration process, but also one of the most crucial step. This is so because the whole effectiveness of the Arbitration process revolves around the fact of whether or not the Arbitration panel appointed is independent and impartial.
This Judgment gives us a brilliant opportunity not only to analyse various aspects relating to independence and impartiality of the Arbitration Process but also a privileged opportunity to analysis other landmark judgments on the issue.
Before analysing judgment passed in BBNL case, it is essential to have a close look of brief factual matrix concerning this case:
Thus this challenge before Supreme Court.
The issue before the Supreme Court concerns the correct interpretation of Section 12(5) of the Act and whether High Court was right in rejecting Petition filed by BBNL seeking the appointment of substitute Arbitrator.
Main Contentions of BBNL
Main Contentions of UTL
The Supreme Court allowed the appeal and set aside the judgment passed by Delhi High Court, thereby, terminating the mandate of Sole Arbitrator. Apex Court further directed Delhi High Court to appoint substitute arbitrator with consent of both parties.
Evaluation of Three authority judgment on the issue
We are taking a small digress in this article before coming back to the ratio and reasoning of this BBNL judgment. Interestingly, the Supreme Court passed three decisions on this issue in 2017, v.i.z;
So we are dealing with these judgments in seriatim.
In Voestalpine case, brief factual matrix relates to awarding of contract on 12.08.2013 by DMRC to Voestalpine who is an Australian entity. The dispute arose between the parties due to withholding of amount, the imposition of LD and banning to deal with Voestalpine for six months on the part of DMRC. The arbitration clause was not in dispute which provides that in case of dispute, DMRC shall forward five names of proposed Arbitrators from the list maintained by it to other side to choose from.
However, this was not acceptable to Voestalpine as this list consists of retired and serving DMRC employees, employees of PSUs and Government. Basis amendment of Section 12 of the Act a Petition was preferred for the appointment of Arbitrator under Section 11(6) r/w Section 11(8) of the Act.
Therefore, the issue before the Supreme Court is whether or not such list in violation of amended Section 12 of the Act. Supreme Court observed that in 2015 law was amended basis recommendation of law commission keeping neutrality of Arbitrator to the core. Supreme Court further observed that given non-obstante 12.5 clause if an appointment is not in confirmation with this core principle, the Court can interfere with such nomination.
The Court observed that Seventh Schedule is based on IBA’s international guidelines which are based on best practices of across jurisdictions. Finally, Court didn’t interfere in view of the fact that DMRC agreed and forwarded a complete list of 31 names which gives an ample choice to Petitioner to choose from including persons not even in employment and/or relationship with DMRC.
In TRF Limited case (supra), short facts relate to Energo issuing a purchase order against which TRF had submitted an Advance Bank Guarantee and PBG. After a dispute arose between the parties, TRF approached Court under Section 9 seeking stay against encashment and for challenged Arbitration Process. At the same time, main contention to challenge appointment of Arbitrator is that Under Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) read with the Fifth and the Seventh Schedules to the amended Act, the Managing Director had become ineligible to act as the arbitrator and as a natural corollary, he had no power to nominate.
Two crucial issues came up for consideration, viz.
While accepting such disqualification can be raised during Section 11 adjudication, Apex Court observed that if the nomination of an arbitrator by an ineligible Arbitrator is allowed, it will tantamount to carrying on the proceeding of arbitration by himself. Therefore, the Supreme Court held that once an Arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator.
In HRD Corporation (supra), besides dealing with the applicability of Section12 (5) and Seventh Schedule also deals with the interplay of Section 12 and 14 which we are going to discuss afterwards in this article. Briefly stated, a factual matrix, in this case, relates to HRD Corporation’s being successful in GAIL’s tender process, which ultimately resulted in an Arbitrable Dispute. This dispute is fourth in a series of Arbitration between the parties.
There were two issues involved in this case,
Supreme Court, while upholding the continuity of both Arbitrators held that Appointment as an Arbitrator is not a “business relationship”; hence, no prohibition to continue as an Arbitrator. Nor is the delivery of an award providing an expert “opinion” makes an Arbitrator ineligible. Court further held that since these challenges are contained in Schedule five, therefore, any challenge to appointment can be gone into only after the Arbitral Tribunal has given an Award.
Reasoning & Ratio in BBNL judgment
After going through the ratio of above three referred cases, Supreme Court summarises the chronological legal position to deal with such a situation. For easy reference following is the recapitulation of the ratio of BBNL judgment, in which the Supreme Court considered two plausible situations:
Where the challenge is on independence and impartiality of Arbitrator
De jure inability of an Arbitrator under Section 12(5)
Supreme Court observed that Section 12(5) is a non-obstante clause which should be read in conjunction with Seventh Schedule. These two provision deals with the ineligibility of an arbitrator with the only exception to be a waiver of applicability of Section 12(5) by an express agreement in writing. So in nut-shell, this situation is dealt with by the Supreme Court in the following manner:
Supreme Court, has touched upon the most sensitive cord of Arbitration Process which goes to the root of the Arbitration mechanism. In a well-articulated manner, Supreme Court provided much-needed clarity to various provisions of the Act, mainly Section 4, 12, 13, 14, Schedule 5, Schedule 6 and Schedule 7 on the one hand and three landmark judgments (as stated earlier) on the other hand. Thus providing us with a ready reckoner judgment to deal with all plausible scenarios. Of course with the noble objective to maintain impartiality and independence of Arbitration mechanism to keep the faith of people and contesting parties alive in the system.
The Author is a Corporate Commercial Litigator and is a Litigation Partner in Kapil Sapra & Associates (“KSA”). KSA is a full service corporate commercial law firm with offices in New Delhi & Bangalore. KSA focuses its practice in all major areas of corporate and commercial laws.
[Read the Judgment below]