Section 12(5) of the Arbitration and Conciliation Act, 1996 (act), prescribes that a person whose relationship with the parties or the counsel or the subject matter of dispute falls under any of the categories specified in the seventh schedule to the act, is ineligible to be appointed as an arbitrator. The exception to such prescription is that (i) an express waiver is given by parties of the applicability of the disqualification; (ii) such waiver is agreed to only after the dispute has arisen, and (iii) such waiver is expressed in writing.
In the 2017 case of TRF Ltd v Energo Engineering Projects, the Supreme Court had ruled that a person disqualified by operation of seventh schedule, could not also nominate an arbitrator. The court had ruled that nomination of an arbitrator by an ineligible arbitrator would be tantamount to the proceedings being heard by the ineligible arbitrator himself. In the same way that ineligibility strikes at the root of the power to arbitrate, it also removes the power to nominate an arbitrator.
A similar dispute to that in the case of TRF Ltd. arose in the case of Bharat Broadband Network Limited v United Telecoms Limited (2019). Bharat had invited bids for a turnkey project and United was successful. An advance purchase order issued in 2014 included an arbitration clause. After disputes arose, United invoked arbitration and called on the managing director of Bharat, to appoint an arbitrator. In January 2017, the managing director appointed a sole arbitrator.
In July 2017, the Supreme Court made its ruling in TRF Ltd. case. In the light of that judgement, Bharat in October 2017, made an application to the arbitrator calling upon the latter to recuse himself from the proceedings. The sole arbitrator rejected the application, without giving reasons. Bharat filed a petition before the Delhi High Court under sections 14 and 15 of the Act, for appointment of a substitute arbitrator as the current arbitrator had become de jure (by operation of law) unable to act in that capacity.
However, the high court rejected the petition on the grounds that Bharat was estopped from challenging the appointment made by itself and that the pleadings filed in the arbitration had raised no objection to the appointment of the sole arbitrator. As these matters were in writing, there was an implicit waiver and the requirement of the proviso to section 12(5), was satisfied.
Bharat challenged the Delhi High Court’s order in the Supreme Court and argued that the judgment in TRF Ltd. was declaratory of the law and would apply to all cases. Additionally, the parties had not expressly agreed in writing to waive the disqualification under the proviso to section 12(5), as required.
United argued that in accordance with section 12(4), as Bharat had appointed the arbitrator, it could challenge the appointment only on grounds of which it became aware after the appointment. In the present dispute, as section 12 (5) and the seventh schedule were introduced by amendment in October 2015, Bharat was aware of the disqualification at the time of the appointment itself. Further, Bharat should have challenged the appointment of the arbitrator, within 15 days after becoming aware of the disqualification. The requirement that the waiver to the disqualification be an “express agreement in writing” need not be a formal agreement but could be inferred from the appointment letter as well as from the statement of claim, filed in the arbitration.
The Supreme Court rejected United’s contentions. If an appointment was in contravention of section 12(5) read with the seventh schedule, such person was rendered de jure ineligible. The mandate would terminate automatically, and he could be substituted by the parties under section 14(1), without the need for an application challenging his appointment. Similarly, the appointment of an arbitrator by such a person is also void ab initio (from the beginning).
While it was possible for the parties to overcome the prohibition in section 12(5) by an express agreement in writing after the disputes had arisen, it had not happened in this instance. Absent knowledge of the implications of section 12(5) read with the seventh schedule, the parties could not have entered into an agreement to negate the disqualification. It was only when the Supreme Court made a declaration of law in July 2017, effective from the date of the amendments in October 2015, that the arbitrator became de jure ineligible to act. Bharat had acted immediately on becoming aware of the disqualification. Therefore, the filing of the statement of claim before the disqualification could not imply that there was an express agreement between the parties to disregard the arbitrator’s disqualification.
Karthik Somasundram is a partner and Shreya Gupta is a senior associate at Bharucha & Partners.
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