Supreme Court: Ineligible Arbitrator Cannot Nominate Successor in Arbitration Cases (03 July 2017)

Introduction

Date of the Judgment: 03 July 2017
Citation: Civil Appeal No. 5306 of 2017 (@ S.L.P. (C) NO. 22912 OF 2016)
Judges: Dipak Misra, A.M. Khanwilkar, and Mohan M. Shantanagoudar
Can a person who is ineligible to be an arbitrator under the Arbitration and Conciliation Act, 1996, nominate another person to be an arbitrator? This was the core question before the Supreme Court of India in a recent judgment. The court addressed whether a Managing Director, disqualified from acting as an arbitrator, could still nominate someone else to arbitrate. The Supreme Court bench, comprising Justices Dipak Misra, A.M. Khanwilkar, and Mohan M. Shantanagoudar, delivered the judgment, with Justice Dipak Misra authoring the opinion.

Case Background

The case involves a dispute between TRF Ltd. (the appellant), a company that provides engineering services, and Energo Engineering Projects Ltd. (the respondent), a company involved in procuring bulk material handling equipment. On 10th May 2014, the respondent issued a purchase order to the appellant for the design, manufacturing, supply, and commissioning of various articles. To secure the performance of the purchase order, the appellant submitted advance and performance bank guarantees.

A dispute arose regarding the encashment of the bank guarantees. The appellant approached the High Court seeking a restraint order against the encashment. While those petitions were pending, the appellant invoked arbitration on 28th December 2015, seeking resolution of the disputes. The appellant objected to the arbitrator appointment procedure in the purchase order and requested an arbitrator be appointed outside the terms of the purchase order. The respondent rejected this and, on 27th January 2016, nominated a former Judge of the Supreme Court as the sole arbitrator, as per the purchase order’s terms.

Timeline

Course of Proceedings

The appellant filed an application under Section 11(5) and 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator under Section 11(2). The appellant argued that the Managing Director of the respondent company was ineligible to act as an arbitrator under Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015, read with the Fifth and Seventh Schedules. Consequently, the appellant contended that the Managing Director also lacked the power to nominate an arbitrator.

The High Court rejected the appellant’s arguments, stating that the amended Act did not take away a party’s right to nominate a sole arbitrator. The High Court reasoned that if the intent was to remove this right, it would have been explicitly stated in the Seventh Schedule. The High Court also noted that the nominated arbitrator had made the required disclosures under the Sixth Schedule, and therefore, there were no justifiable doubts about his independence or impartiality. The High Court then appointed the former Judge as the sole arbitrator.

Legal Framework

The case revolves around the interpretation of Section 12 of the Arbitration and Conciliation Act, 1996, as amended in 2015. Prior to the amendment, Section 12 dealt with the grounds for challenging an arbitrator, focusing on circumstances that could raise doubts about their independence or impartiality.

The amended Section 12 introduced significant changes, particularly through sub-section (5), which states:

“(5) 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.”

This section, along with the Fifth and Seventh Schedules, provides specific grounds for the ineligibility of an arbitrator. The Fifth Schedule lists circumstances that may raise justifiable doubts about an arbitrator’s independence or impartiality, while the Seventh Schedule lists categories of relationships that automatically disqualify a person from being an arbitrator.

The Court also considered Section 11(8) of the Act, which requires the Court to seek a disclosure from the prospective arbitrator and have due regard to the qualifications required by the agreement and other considerations likely to secure the appointment of an independent and impartial arbitrator.

Additionally, Section 11(6A) of the Act mandates that the Court, while considering an application under Section 11(4), (5), or (6), must confine its examination to the existence of an arbitration agreement.

Arguments

Appellant’s Arguments:

• The arbitration clause in the agreement became void under Section 12(5) of the amended Act. The Managing Director, being statutorily ineligible, cannot act as an arbitrator, and therefore, cannot nominate one either.
• Once the owner/employer is disqualified by law, a nominee by the owner to arbitrate is legally unacceptable. The appellant cited Chairman, Indore Vikas Pradhikaran v. Pure Industrial Coke & Chemicals Ltd. & others [(2007) 8 SCC 705] to support this.
• The principle of “Qui Facit Per Alium Facit Per Se” (what one does through another is done by oneself) applies. Allowing the Managing Director to nominate an arbitrator would permit an action that is prohibited by law by indirect means. The appellant cited Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons and others [(1975) 2 SCC 208].
• The nominee’s status does not negate the ineligibility of the nominator. The legal issue of the arbitrator’s appointment being ex facie invalid cannot be raised before the arbitral tribunal. The appellant cited Walter Bau AG, Legal Successor, of the Original Contractor, Dyckerhoff and Widmann A.G. v. Municipal Corporation of Greater Mumbai [(2015) 3 SCC 800].

Respondent’s Arguments:

• The Fifth and Seventh Schedules guide in determining circumstances that raise doubts about an arbitrator’s independence and impartiality. The schedules apply to the arbitrator, not the appointing authority.
• The appellant failed to show how the sole arbitrator’s appointment violated the Seventh Schedule. The Fifth Schedule serves as a guide, and the appellant abandoned any such claim before the High Court.
• The grounds in the Fifth and Seventh Schedules pertain to the appointed arbitrator, not the appointing authority. Each ground must be considered vis-à-vis the appointed arbitrator.
• An appointed arbitrator is not automatically disqualified because the named arbitrator is ineligible. The named arbitrator always has the right to nominate an independent arbitrator.
• The purchase order does not require the Managing Director to be qualified to act as an arbitrator to nominate one. The roles of acting as an arbitrator and nominating one are independent.
• Challenges to an arbitrator’s appointment under Section 13 of the Act must be made before the Arbitral Tribunal. The procedure cannot be bypassed by raising objections under Section 11. The respondent cited Antrix Corporation Limited v. Devas Multimedia Private Limited [(2014) 11 SCC 560].
• The authority in Walter Bau AG is not a precedent as it dealt with a challenge to an order of a judicial authority and was distinguished in State of West Bengal v. Associated Contractors [(2015) 1 SCC 32].

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the High Court, while dealing with applications under Section 11(6) of the Arbitration and Conciliation Act, 1996, is justified in rejecting the argument that a person ineligible to arbitrate cannot nominate an arbitrator.
2. Whether a plea regarding the statutory disqualification of a nominated arbitrator can be raised before the court in an application under Section 11(6) of the Act.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

Judgment

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

How each authority was viewed by the Court?

The Court relied on Chairman, Indore Vikas Pradhikaran v. Pure Industrial Coke & Chemicals Ltd. & others [(2007) 8 SCC 705] and Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons and others [(1975) 2 SCC 208] to establish that a delegate cannot further delegate a power that has been delegated to him, and that what one cannot do directly, one cannot do indirectly. The Court approved the principle in Walter Bau AG, Legal Successor, of the Original Contractor, Dyckerhoff and Widmann A.G. v. Municipal Corporation of Greater Mumbai [(2015) 3 SCC 800] that the appointment of an arbitrator must be ex facie valid.

The Court distinguished Antrix Corporation Limited v. Devas Multimedia Private Limited [(2014) 11 SCC 560], stating that it pertained to ICC rules and was factually distinguishable.

The Court referred to Northern Railway Administration, Ministry of Railways, New Delhi v. Patel Engineering Company Limited [(2008) 10 SCC 240], Datar Switchgears Ltd. v. Tata Finance Ltd. and another [(2000) 8 SCC 151], Newton Engineering and Chemicals Limited v. Indian Oil Corporation Limited and others [(2013) 4 SCC 44], Deep Trading Company v. Indian Oil Corporation and others [(2013) 4 SCC 35], and Municipal Corpn., Jabalapur and others v. Rajesh Construction Co [(2007) 5 SCC 344] to highlight the circumstances under which a court can intervene in the appointment of an arbitrator.

The Court also referred to State of Orissa and others v. Commissioner of Land Records & Settlement, Cuttack and others [(1998) 7 SCC 162] to emphasize that an order passed by a delegate is treated as an order of the delegating authority.

What weighed in the mind of the Court?

The Supreme Court emphasized that once an arbitrator becomes ineligible by operation of law, they cannot nominate another arbitrator. The court reasoned that the ineligibility of the Managing Director, as per Section 12(5) of the Arbitration and Conciliation Act, 1996, strikes at the root of their power to arbitrate or nominate an arbitrator. The court highlighted that an ineligible arbitrator cannot indirectly do what they are prohibited from doing directly.

The Court noted that the High Court had erred in concluding that the Managing Director’s ineligibility did not extend to his power to nominate an arbitrator. The Supreme Court emphasized that the right to nominate is contingent upon the eligibility to act as an arbitrator.

The Court also noted that the High Court had not followed the correct procedure by exercising its power under Section 11(6) without properly considering the ineligibility of the nominating authority.

Logical Reasoning

Judgment

The Supreme Court held that the Managing Director, having become ineligible to act as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, also loses the power to nominate an arbitrator. The Court reasoned that the power to nominate is contingent upon the eligibility to act as an arbitrator. The Court stated:

“It is inconceivable in law that person who is statutorily ineligible can nominate a person.”

The Court set aside the High Court’s order appointing the arbitrator. However, the Court clarified that Clause (c) of the arbitration agreement, which states that all disputes shall be referred to arbitration as per the Act, is independent of Clause (d), which deals with the appointment of the Managing Director or his nominee as the arbitrator. Therefore, the arbitration clause survives, and the Court can appoint an arbitrator. The Court stated:

“once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated.”

The Supreme Court remanded the matter to the High Court for fresh consideration of the prayer for the appointment of an arbitrator. The Court also stated:

“We are singularly concerned with the issue, whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator.”

Key Takeaways

• An individual who is ineligible to act as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, cannot nominate another person to be an arbitrator.
• The ineligibility of the appointing authority affects their power to nominate an arbitrator.
• Courts can scrutinize the qualifications of the arbitrator at the initial stage under Section 11(6) of the Act, especially if the appointment is ex facie invalid.
• The arbitration clause survives even if the named arbitrator is ineligible, and the court can appoint an arbitrator.

Directions

The Supreme Court set aside the order of the High Court and remanded the matter back to the High Court for fresh consideration of the appointment of an arbitrator.

Development of Law

The Supreme Court clarified that an arbitrator’s ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996, extends to their power to nominate a successor. This decision reinforces the principle that a person who is disqualified from acting directly cannot circumvent the law by acting indirectly through a nominee. This ruling also clarifies the scope of judicial intervention under Section 11(6) of the Act, allowing courts to scrutinize the validity of arbitrator appointments at the initial stage.

Conclusion

The Supreme Court’s judgment in TRF Ltd. vs. Energo Engineering Projects Ltd. clarifies that an arbitrator who is statutorily ineligible cannot nominate another arbitrator. This decision ensures that the arbitration process is fair and impartial, and that the provisions of the Arbitration and Conciliation Act, 1996, are strictly adhered to. The matter was remanded to the High Court for fresh consideration of the appointment of an arbitrator.

Category

Parent Category: Arbitration Law
Child Categories: Appointment of Arbitrator, Section 12, Arbitration and Conciliation Act, 1996, Ineligibility of Arbitrator, Nomination of Arbitrator

Parent Category: Arbitration and Conciliation Act, 1996
Child Category: Section 12, Arbitration and Conciliation Act, 1996

FAQ

Q: What does this judgment mean for arbitration proceedings?
A: This judgment means that if an arbitrator is ineligible under the law, they cannot nominate another arbitrator. This ensures fairness and impartiality in the arbitration process.

Q: Can a court intervene if an ineligible arbitrator is appointed?
A: Yes, the court can intervene under Section 11(6) of the Arbitration and Conciliation Act, 1996, if the appointment of an arbitrator is ex facie invalid.

Q: What happens if the named arbitrator in an agreement becomes ineligible?
A: The arbitration clause will still survive, and the court can appoint a new arbitrator to resolve the disputes.

Q: What is the principle of “Qui facit per alium facit per se”?
A: It means that what one does through another is done by oneself. This principle was used to argue that an ineligible arbitrator cannot nominate another to do what they cannot do directly.

Q: What are the Fifth and Seventh Schedules of the Arbitration and Conciliation Act, 1996?
A: The Fifth Schedule lists circumstances that may raise doubts about an arbitrator’s independence, while the Seventh Schedule lists categories of relationships that automatically disqualify a person from being an arbitrator.