Supreme Court Clarifies Waiver of Arbitrator Ineligibility under Section 12(5) of the Arbitration Act: Bharat Broadband Network Ltd. vs. United Telecoms Ltd. (2019)

Date of the Judgment: 16 April 2019

Citation: (2019) INSC 351

Judges: R.F. Nariman, J. and Vineet Saran, J.

Can an arbitrator’s ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996, be waived by the parties involved? The Supreme Court of India recently addressed this critical question in a case concerning a dispute between Bharat Broadband Network Limited and United Telecoms Limited. The court clarified the requirements for a valid waiver, emphasizing the need for an express agreement in writing after disputes have arisen. This judgment clarifies the circumstances under which an arbitrator, initially ineligible, can continue to preside over a case. The majority opinion was authored by Justice R.F. Nariman.

Case Background

Bharat Broadband Network Ltd. (BBNL) issued a tender on 05.08.2013 for a turnkey project involving the supply, installation, commissioning, and maintenance of GPON and solar power equipment. United Telecoms Limited was the successful bidder, leading to an Advance Purchase Order (APO) dated 30.09.2014. The General (Commercial) Conditions of Contract (GCC) included an arbitration clause. Disputes arose, and United Telecoms invoked the arbitration clause on 03.01.2017, requesting the appointment of an independent arbitrator. The Chairman and Managing Director of BBNL nominated Shri K.H. Khan as the sole arbitrator on 17.01.2017.

Timeline

Course of Proceedings

Following the Supreme Court’s judgment in TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, which stated that an ineligible Managing Director cannot appoint an arbitrator, BBNL argued that Shri Khan’s appointment was void. BBNL applied to the sole arbitrator, Shri Khan, to withdraw from the proceedings, which was rejected on 21.10.2017. Subsequently, BBNL filed a petition before the High Court of Delhi under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996, seeking the appointment of a substitute arbitrator. The High Court rejected this petition on 22.11.2017, stating that BBNL was estopped from raising the issue and that the proviso to Section 12(5) of the Act was applicable due to BBNL’s appointment of Shri Khan and United Telecoms’ filing of a claim without reservation.

Legal Framework

The case primarily revolves around the interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996, which states:

“Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Other relevant provisions include:

• Section 4 of the Arbitration and Conciliation Act, 1996: Deals with the waiver of the right to object to non-compliance with provisions of the Act or the arbitration agreement.
• Section 12(1) of the Arbitration and Conciliation Act, 1996: Requires a person approached for appointment as an arbitrator to disclose circumstances that might raise doubts about their independence or impartiality.
• Section 12(4) of the Arbitration and Conciliation Act, 1996: States that a party may challenge an arbitrator they appointed only for reasons they became aware of after the appointment.
• Section 13 of the Arbitration and Conciliation Act, 1996: Outlines the procedure for challenging an arbitrator.
• Section 14 of the Arbitration and Conciliation Act, 1996: Specifies the circumstances under which an arbitrator’s mandate terminates.
• Section 7 of the Arbitration and Conciliation Act, 1996: Deals with arbitration agreements that must be in writing.
• Section 9 of the Indian Contract Act, 1872: Defines express and implied promises.

The Seventh Schedule of the Arbitration and Conciliation Act, 1996, lists categories of relationships that render a person ineligible to be an arbitrator. Item 5 of the Seventh Schedule specifies that an arbitrator is ineligible if they are a manager, director, or part of the management of an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute.

Arguments

Appellant’s Submissions:

• The appointment of Shri Khan was void ab initio because the Managing Director of BBNL, who appointed him, was ineligible under the Seventh Schedule, as per the judgment in TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377.
• The judgment in TRF Ltd. (supra) is declaratory of law and applies retrospectively.
• There was no express agreement in writing between the parties after the disputes arose to waive the ineligibility of Shri Khan under Section 12(5) of the Arbitration and Conciliation Act, 1996.
• Section 12(4) of the Arbitration and Conciliation Act, 1996 does not apply to applications under Section 14(2) regarding the termination of an arbitrator’s mandate due to ineligibility.

Respondent’s Submissions:

• Section 12(4) of the Arbitration and Conciliation Act, 1996, bars BBNL from challenging the appointment since they were aware of the ineligibility under the Seventh Schedule from the beginning.
• BBNL did not challenge the appointment within 15 days as required by Section 13(2) of the Arbitration and Conciliation Act, 1996.
• The “express agreement in writing” requirement under the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996, is met by the appointment letter issued by BBNL and the statement of claim filed by United Telecoms, implying a waiver.
• The principle of waiver under Section 4 of the Arbitration and Conciliation Act, 1996, applies, as BBNL participated in the proceedings without objection.

[TABLE] of Submissions:

Innovativeness of the Argument: The appellant innovatively argued that the ineligibility of the arbitrator was a matter of law, not just a procedural irregularity, and therefore, Section 12(4) and the principle of waiver did not apply. The respondent’s argument that the appointment letter and statement of claim constituted an “express agreement in writing” was a novel interpretation of the proviso to Section 12(5).

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the appointment of Shri K.H. Khan as the sole arbitrator was void ab initio, given the ineligibility of the Managing Director of BBNL to appoint an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, as interpreted in TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377.
2. Whether the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996, which allows parties to waive the ineligibility of an arbitrator by an express agreement in writing, was applicable in the present case.
3. Whether the High Court was correct in applying Section 4, Section 7, Section 12(4), Section 13(2), and Section 16(2) of the Arbitration and Conciliation Act, 1996, to the facts of the present case.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases:

• Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, Supreme Court of India: The court discussed the recommendations of the Law Commission Report and the amendments made to Section 12 of the Arbitration and Conciliation Act, 1996, emphasizing the need for neutrality, independence, and impartiality of arbitrators. The court also noted that the Seventh Schedule is based on IBA guidelines.
• HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC 471, Supreme Court of India: The court clarified the distinction between persons ineligible to be arbitrators under Section 12(5) and those about whom justifiable doubts exist regarding their independence. The court also explained the purpose of the Fifth and Seventh Schedules and their relation to the IBA Guidelines.
• TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, Supreme Court of India: The court held that an ineligible Managing Director cannot nominate an arbitrator. This case was crucial in determining that the appointment of Shri Khan was void ab initio. This judgment also clarifies that once an arbitrator becomes ineligible by operation of law, he cannot nominate another arbitrator.
• All India Power Engineer Federation v. Sasan Power Ltd., (2017) 1 SCC 487, Supreme Court of India: This case discussed the concept of waiver in contract law, stating that it requires an intentional relinquishment of a known right. However, the Supreme Court held that this case did not apply to the express language of the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996.
• Vasu P. Shetty v. Hotel Vandana Palace, (2014) 5 SCC 660, Supreme Court of India: This case was cited by the respondent but was held to be inapplicable to the present case due to the specific language of the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996.
• BSNL v. Motorola India (P) Ltd., (2009) 2 SCC 337, Supreme Court of India: This case dealt with Section 4 of the Arbitration and Conciliation Act, 1996, and the concept of deemed waiver by conduct. The Supreme Court held it was not applicable to the present case, which is governed by the express language of the proviso to Section 12(5).

Legal Provisions:

• Section 4 of the Arbitration and Conciliation Act, 1996: Deals with the waiver of the right to object.
• Section 7 of the Arbitration and Conciliation Act, 1996: Deals with arbitration agreements that must be in writing.
• Section 9 of the Indian Contract Act, 1872: Defines express and implied promises.
• Section 11(8) of the Arbitration and Conciliation Act, 1996: Specifies the duty of the Supreme Court or High Court to seek a disclosure from the prospective arbitrator.
• Section 12(1) of the Arbitration and Conciliation Act, 1996: Requires disclosure of circumstances that might raise doubts about an arbitrator’s independence or impartiality.
• Section 12(3) of the Arbitration and Conciliation Act, 1996: Specifies grounds for challenging an arbitrator.
• Section 12(4) of the Arbitration and Conciliation Act, 1996: States that a party may challenge an arbitrator they appointed only for reasons they became aware of after the appointment.
• Section 12(5) of the Arbitration and Conciliation Act, 1996: States that a person falling under the categories of the Seventh Schedule is ineligible to be an arbitrator, unless waived by an express agreement in writing.
• Section 13(2) of the Arbitration and Conciliation Act, 1996: Specifies the time limit for challenging an arbitrator.
• Section 14(1) of the Arbitration and Conciliation Act, 1996: Specifies the circumstances under which an arbitrator’s mandate terminates.

[TABLE] of Authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665*: The court referred to this case to emphasize the importance of neutrality, independence, and impartiality of arbitrators.
• HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC 471*: The court relied on this case to distinguish between ineligibility and justifiable doubts about independence of arbitrators.
• TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377*: The court followed this judgment, which held that an ineligible Managing Director cannot nominate an arbitrator, and applied it to the facts of the present case, stating that the appointment of Shri Khan was void ab initio.
• All India Power Engineer Federation v. Sasan Power Ltd., (2017) 1 SCC 487*: The court held that this case did not apply as the present case was governed by the express language of the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996.
• Vasu P. Shetty v. Hotel Vandana Palace, (2014) 5 SCC 660*: The court held that this case was not applicable due to the specific language of the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996.
• BSNL v. Motorola India (P) Ltd., (2009) 2 SCC 337*: The court held that this case was not applicable as it dealt with Section 4, which was contrasted with the language of the proviso to Section 12(5).

The Supreme Court held that the appointment of Shri Khan was void ab initio due to the ineligibility of the Managing Director of BBNL to appoint an arbitrator, as per the judgment in TRF Ltd. (supra). The court also clarified that the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996, requires an express agreement in writing between the parties after the disputes have arisen to waive the ineligibility of an arbitrator. The court rejected the High Court’s reasoning that the appointment letter and the filing of a claim constituted such an agreement. The court emphasized that an express agreement must be made in words, not inferred from conduct.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to maintain the integrity of the arbitration process and to ensure that arbitrators are independent and impartial. The court emphasized the importance of the express language of Section 12(5) of the Arbitration and Conciliation Act, 1996, and its proviso, which requires a clear and intentional waiver of ineligibility by the parties. The court was also concerned about upholding the principle that an ineligible person cannot appoint an arbitrator, as established in TRF Ltd. (supra). The court’s reasoning was primarily driven by legal interpretation and the need to adhere to the statutory provisions.

[TABLE] of Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The court’s reasoning was predominantly based on legal considerations, with a lesser emphasis on the specific facts of the case. This indicates that the court was primarily concerned with interpreting and applying the law correctly.

Logical Reasoning:

The court considered alternative interpretations, such as the respondent’s argument that the appointment letter and statement of claim constituted an express agreement in writing, but rejected them. The court emphasized that the proviso to Section 12(5) requires an express agreement made in words, not inferred from conduct. The court also rejected the application of Section 4 of the Arbitration and Conciliation Act, 1996, stating that it deals with deemed waiver by conduct, not express waiver.

The court’s decision was that the appointment of Shri Khan was void ab initio, and that the mandate of Shri Khan had terminated, as he had become de jure unable to perform his function as an arbitrator. The court set aside the impugned judgment and the arbitral awards. The court also stated that the High Court may appoint a substitute arbitrator with the consent of both parties.

“The expression “express agreement in writing” refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct.”

“It is thus necessary that there be an “express” agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that Shri Khan is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him to continue as such.”

“The moment the appellant came to know that Shri Khan’s appointment itself would be invalid, it filed an application before the sole arbitrator for termination of his mandate.”

There was no minority opinion in this case. The decision was unanimous.

Key Takeaways

• An arbitrator’s ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996, cannot be waived by conduct or by implication. It requires an express agreement in writing between the parties after disputes have arisen.
• An appointment of an arbitrator by an ineligible person is void ab initio.
• The judgment in TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, applies retrospectively to appointments made before the date of the judgment.
• Section 12(4) of the Arbitration and Conciliation Act, 1996, does not apply to applications under Section 14(2) regarding the termination of an arbitrator’s mandate due to ineligibility.

Potential Future Impact: This judgment clarifies the strict requirements for waiving an arbitrator’s ineligibility, ensuring that such waivers are intentional and explicit. It reinforces the importance of independence and impartiality in arbitration proceedings, and may lead togreater scrutiny of arbitrator appointments. This may also lead to more parties seeking to terminate the mandate of an ineligible arbitrator in the light of this judgment.