1. Turnkey project contract — Arbitration clause — Appointment of arbitrator by Managing Director — Challenge to eligibility under Section 12(5), Arbitration and Conciliation Act, 1996. (Para 3 , 4 )
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2019 Supreme(SC) 467
SUPREME COURT OF INDIA
R.F. NARIMAN, VINEET SARAN, JJ.
Bharat Broadband Network Limited – Appellant
Versus
United Telecoms Limited – Respondent
Civil Appeal No. 3972 of 2019 (Arising out of Special Leave Petition (Civil) No.1550 of 2018) With Civil Appeal No. 3973 of 2019 (Arising out of Special Leave Petition (Civil) No.1644 of 2018)
Decided On : 16-04-2019
Important Points
IMPORTANT POINTS
(1) 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.
(2) There are certain minimum levels of independence and impartiality that should be required of arbitral process, regardless of parties’ agreement.
(3) After incurring disqualification mandate of Arbitrator terminates automatically.
(1) 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.
(2) There are certain minimum levels of independence and impartiality that should be required of arbitral process, regardless of parties’ agreement.
(3) After incurring disqualification mandate of Arbitrator terminates automatically.
Subject
Arbitration and Conciliation Act, 1996 - Appointment and Challenge of Arbitrators
Act Referred
Headnote
(A) Arbitration and Conciliation Act, 1996 – Sections 12(5) and 34 – Appointment of substitute Arbitrator – 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 – Appointment of Arbitrator may be challenged on the ground that justifiable doubts have arisen under sub-section (3) of Section 12 subject to caveat entered by sub-section (4) of Section 12 – It is only post award that party challenging appointment of an Arbitrator may make application for setting aside such an award in accordance with Section 34 of Act. (Para 14)
(B) Arbitration and Conciliation Act, 1996 – Section 12(5) – Appointment of substitute Arbitrator – Where, under any agreement between parties, a person falls within any of categories set out in Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an Arbitrator – Only way in which this ineligibility can be removed, is that parties may after disputes have arisen between them, waive applicability of this sub-section by an express agreement in writing – There are certain minimum levels of independence and impartiality that should be required of arbitral process, regardless of parties’ agreement – Party autonomy is to be respected only in certain exceptional situations which could be situations which arise in family arbitrations or other arbitrations where a person subjectively commands blind faith and trust of parties to dispute, despite existence of objective justifiable doubts regarding his independence and impartiality. (Paras 15 and 16)
(C) Arbitration and Conciliation Act, 1996 – Sections 12(5), 13 and 14 – Arbitration – Dispute emanating from work contract – Appointment of substitute Arbitrator – Where an Arbitrator makes a disclosure in writing which is likely to give justifiable doubts as to his independence or impartiality, appointment of such Arbitrator may be challenged under Sections 12(1) to 12(4) read with Section 13 – However, where such person becomes ineligible to be appointed as an Arbitrator, there is no question of challenge to such arbitrator, before such arbitrator – In such a case which falls under Section 12(5), Section 14(1)(a) of Act gets attracted inasmuch as arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as Arbitrator – This being so, his mandate automatically terminates and he shall then be substituted by another Arbitrator under Section 14(1) itself – It is only if a controversy occurs concerning whether he has become de jure unable to perform his functions as such, that a party has to apply to Court to decide on termination of mandate unless otherwise agreed by parties – In all Section 12(5) cases, there is no challenge procedure to be availed of – If an Arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of categories mentioned in Section 12(5), read with Seventh Schedule, a party may apply to Court which will then decide on whether his mandate has terminated – Managing Director of appellant could not have acted as an Arbitrator himself being rendered ineligible to act as arbitrator – High Court may appoint a substitute Arbitrator with consent of both parties – Impugned awards set aside. (Paras 17, 18, 22 and 23)
Facts of Case:
Present appeals raise an interesting question as to interpretation of Section 12(5) of Arbitration and Conciliation Act, 1996. Prayer before sole arbitrator was that since he is de jure unable to perform his function as arbitrator, he should withdraw from proceedings to allow parties to approach High Court for appointment of a substitute arbitrator in his place.
Findings of Court:
Present case is governed by express language of proviso to Section 12(5) of Act. Mandate of Shri Khan having terminated, as he has become de jure unable to perform his function as an arbitrator, High Court may appoint a substitute arbitrator with consent of both parties.
Result : Appeals allowed.
Legal Category Hierarchy
Advocates Appeared:
For Petitioner(s): Mr. Aniruddha P. Mayee, AOR
For Respondent(s): Mr. S.B. Upadhyay, Sr. Adv. Mr. Pawan Upadhyay, Adv. Ms. Anisha Upadhyay, Adv. Mr. Sarvjit Pratap Singh, Adv. Mr. Nishant Kr., Adv. Mr. Ritik Sharma, Adv. Mr. Akash Tyagi, Adv. Ms. Vamsika Gupta, Adv. For UNUC Legal LLP, AOR
For Petitioner(s): Mr. Aniruddha P. Mayee, AOR
For Respondent(s): Mr. S.B. Upadhyay, Sr. Adv. Mr. Pawan Upadhyay, Adv. Ms. Anisha Upadhyay, Adv. Mr. Sarvjit Pratap Singh, Adv. Mr. Nishant Kr., Adv. Mr. Ritik Sharma, Adv. Mr. Akash Tyagi, Adv. Ms. Vamsika Gupta, Adv. For UNUC Legal LLP, AOR
Table of Contents
2. Validity of appointment by ineligible person — Applicability of Section 12(4) bar — Existence of express agreement in writing to waive Section 12(5) ineligibility. (Para 7 , 8 )
3. Distinction between justifiable doubts under Section 12(1)-12(4) and ineligibility under Section 12(5) — Requirement of express written agreement for waiver subsequent to disputes. (Para 14 , 15 , 16 , 17 , 19 , 20 )
4. Appointment of an arbitrator by a person ineligible under Section 12(5) is void ab initio; waiver requires an express agreement in writing after disputes arise. (Para 15 , 18 , 20 )
5. Appeals allowed — Impugned judgment set aside — Arbitrator's mandate terminated — Awards set aside. (Para 22 , 23 )
6. What is the difference between a challenge under Section 12(3) and ineligibility under Section 12(5)?
Section 12(3) concerns justifiable doubts about independence or impartiality, requiring a challenge procedure under Section 13. Section 12(5) concerns ineligibility based on the Seventh Schedule, which renders an arbitrator de jure unable to act, leading to automatic termination of the mandate under Section 14(1)(a). (Para 14 , 15 , 17 )
7. Can a person who is ineligible to be an arbitrator nominate another arbitrator?
No. If a person, such as a Managing Director, is ineligible to be appointed as an arbitrator under Section 12(5) and the Seventh Schedule, they lack the authority to nominate another person. Such an appointment is void ab initio. (Para 13 , 18 )
8. What constitutes a valid waiver of ineligibility under the proviso to Section 12(5)?
A waiver requires an express agreement in writing made subsequent to the disputes having arisen. This must be an agreement in words, not one inferred from conduct, such as issuing an appointment letter or filing a statement of claim. (Para 15 , 17 , 20 )
9. Does Section 12(4) prevent a party from applying to the Court under Section 14(2) regarding an arbitrator they appointed?
No. Section 12(4) applies to challenges made under the Section 13 procedure. It does not bar an application under Section 14(2) to determine if an arbitrator's mandate has terminated because they are de jure unable to perform their functions due to ineligibility under Section 12(5). (Para 19 )
JUDGMENT :
R.F. NARIMAN, J.
1. Leave granted.
2. The present appeals raise an interesting question as to the interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996 [“Act”].
3. The appellant, Bharat Broadband Network Ltd. [“BBNL”], had floated a tender dated 05.08.2013 inviting bids for a turnkey project for supply, installation, commissioning, and maintenance of GPON equipment and solar power equipment. The respondent was the successful L1 bidder. The appellant issued an Advance Purchase Order [“APO”] dated 30.09.2014. Clause III.20.1 of the General (Commercial) Conditions of Contract [“GCC”] provides for arbitration. The said clause reads as under:
“III.20 ARBITRATION
III.20.1 In the event of any question, dispute or difference arising under the agreement or in connection therewith (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration of the CMD, BBNL or in case his designation is changed or his office is abolished, then in such cases to the sole arbitration of the officer for the time being entrusted (whether in addition to his own duties or otherwise) with the functions of the CMD, BBNL or by whatever designation such an officer may be called (hereinafter referred to as the said officer), and if the CMD or the said officer is unable or willing to act as such, then to the sole arbitration of some other person appointed by the CMD or the said officer. The agreement to appoint an arbitrator will be in accordance with the Arbitration and Conciliation Act 1996. There will be no object to any such appointment on the ground that the arbitrator is a Government Servant or that he has to deal with the matter to which the agreement relates or that in the course of his duties as a Government Servant/PSU Employee he has expressed his views on all or any of the matters in dispute. The award of the arbitrator shall be final and binding on both the parties to the agreement. In the event of such an arbitrator to whom the matter is originally referred, being transferred or vacating his office or being unable to act for any reason whatsoever, the CMD, BBNL or the said officer shall appoint another person to act as an arbitrator in accordance with terms of the agreement and the person so appointed shall be entitled to proceed from the stage at which it was left out by his predecessors.”
4. Since disputes and differences arose between the parties, the respondent, by its letter dated 03.01.2017, invoked the aforesaid arbitration clause and called upon the appellant’s Chairman and Managing Director to appoint an independent and impartial arbitrator for adjudication of disputes which arose out of the aforesaid APO dated 30.09.2014. By a letter dated 17.01.2017, the Chairman and Managing Director of the appellant, in terms of the arbitration clause contained in the GCC, nominated one Shri K.H. Khan as sole arbitrator to adjudicate and determine disputes that had arisen between the parties. He also made it clear that the parties would be at liberty to file claims and counter-claims before the aforesaid sole arbitrator.
5. On 03.07.2017, this Court, by its judgment in TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377 [“TRF Ltd.”], held that since a Managing Director of a company which was one of the parties to the arbitration, was himself ineligible to act as arbitrator, such ineligible person could not appoint an arbitrator, and any such appointment would have to be held to be null and void.
6. Given the aforesaid judgment, the appellant itself having appointed the aforesaid sole arbitrator, referred to the aforesaid judgment, and stated that being a declaration of law, appointments of arbitrators made prior to the judgment are not saved. Thus, the prayer before the sole arbitrator was that since he is de jure unable to perform his function as arbitrator, he should withdraw from the proceedings to allow the parties to approach the
