“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 the parties to the dispute, despite the existence of objective justifiable doubts regarding his independence and impartiality.”
|Case name:||Bharat Broadband Network Limited V/s United Telecoms Limited|
|Case number:||Civil Appeal No. 3972 OF 2019|
|Court:||The Supreme Court of India|
|Bench:||Justice R.F. Nariman and Justice Vineet Saran.|
|Decided on:||April 16, 2019|
|Relevant Act/Sections:||Section 4,7, 12(5), 13 ,14, 15 and 34 of the Arbitration and Conciliation Act, 1996|
- BRIEF FACTS AND PROCEDURAL HISTORY:
- 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 1 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.
- 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
- On 03.07.2017, this Court, by its judgment in TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377, 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.
- 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 High Court for appointment of a substitute arbitrator in his place.
- By an order dated 21.10.2017, Shri Khan rejected the appellant’s application after hearing both sides, without giving any reasons therefor. This led to a petition being filed by the appellant before the High Court of Delhi dated 28.10.2017 under Sections 14 and 15 of the Act to state that the arbitrator has become de jure incapable of acting as such and that a substitute arbitrator be appointed in his place. By the impugned judgment dated 22.11.2017, this petition was rejected, stating that the very person who appointed the arbitrator is estopped from raising a plea that such arbitrator cannot be appointed after participating in the proceedings. In any event, under the proviso to Section 12(5) of the Act, inasmuch as the appellant itself has appointed Shri Khan, and the respondent has filed a statement of claim without any reservation, also in writing, the same would amount to an express agreement in writing, which would, therefore, amount to a waiver of the applicability of Section 12(5) of the Act.
- ISSUE BEFORE THE COURT:
- Whether the appointment of the arbitrator in the present matter was valid?
- When there is an express waiver as provided in the proviso to Section 12(5) of the Act?
- RATIO OF THE COURT:
- Shri Vikramjit Banerjee, learned Additional Solicitor General appearing on behalf of the appellant, has relied upon Sections 12 to 14 of the Act, as also the judgment in TRF Ltd. (supra), and has argued that the appointment of Shri Khan goes to eligibility to be appointed as an arbitrator, as a result of which the appointment made is void ab initio. Further, the judgment in TRF Ltd. (supra) is declaratory of the law and would apply to the facts of this case. Further, since there is no express agreement in writing between the parties subsequent to disputes having arisen between them that Shri Khan’s appointment is agreed upon, the proviso will not be applicable in the present case.
- Shri Sharad Yadav, learned Senior Advocate appearing on behalf of the respondent, has supported the reasoning of the impugned judgment and has added that Section 12(4) makes it clear that a party may challenge the appointment of an arbitrator appointed by it only for reasons of which it became aware after the appointment has been made. In the facts of the present case, since Section 12(5) and the Seventh Schedule were on the statute book since 23.10.2015, the appellant was fully aware that the Managing Director of the appellant would be hit by Item 5 of the Seventh Schedule, and consequently, any appointment made by him would be null and void. This being so, Section 12(4) acts as a bar to the petition filed under Sections 14 and 15 by the appellant.
- The Court held that section 12(5) is a provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non-obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be “ineligible” to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, 16 again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an “express agreement in writing”. Obviously, the “express agreement in writing” has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule.
- Thus, it will be seen that 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 the parties to the dispute, despite the existence of objective justifiable doubts regarding his independence and impartiality.
- The scheme of Sections 12, 13, and 14, therefore, is that where an arbitrator makes a disclosure in writing which is likely to give justifiable doubts as to his independence or impartiality, the 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, i.e., a case which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted inasmuch as the 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 an 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 the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. Thus, 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 the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate has terminated. Questions which may typically arise under Section 14 may be as to whether such person falls within any of the categories mentioned in the Seventh Schedule, or whether there is a waiver as provided in the proviso to Section 12(5) of the Act. As a matter of law, it is important to note that the proviso to Section 12(5) must be contrasted with Section 4 of the Act. Section 4 deals with cases of deemed waiver by conduct; whereas the proviso to Section 12(5) deals with waiver by express agreement in writing between the parties only if made subsequent to disputes having arisen between them.
- On the facts of the present case, it is clear that the Managing Director of the appellant could not have acted as an arbitrator himself, being rendered ineligible to act as arbitrator under Item 5 of the Seventh Schedule, which reads as under:
“Arbitrator’s relationship with the parties or counsel”
The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration”
- Whether such ineligible person could himself appoint another arbitrator was only made clear by this Court’s judgment in TRF Ltd. (supra) on 03.07.2017, this Court holding that an appointment made by an ineligible person is itself void ab initio. Thus, it was only on 03.07.2017, that it became clear beyond doubt that the appointment of Shri Khan would be void ab initio. Since such appointment goes to “eligibility”, i.e., to the root of the matter, it is obvious that Shri Khan’s appointment would be void. There is no doubt in this case that disputes arose only after the introduction of Section 12(5) into the statute book, and Shri Khan was appointed long after 23.10.2015. The judgment in TRF Ltd. (supra) nowhere states that it will apply only prospectively, i.e., the appointments that have been made of persons such as Shri Khan would be valid if made before the date of the judgment.
- However, the learned Senior Advocate appearing on behalf of the respondent has argued that Section 12(4) would bar the appellant’s application before the Court. Section 12(4) will only apply when a challenge is made to an arbitrator, inter alia, by the same party who has appointed such arbitrator. This then refers to the challenge procedure set out in Section 13 of the Act. Section 12(4) has no applicability to an application made to the Court under Section 14(2) to determine whether the mandate of an arbitrator has terminated as he has, in law, become unable to perform his functions because he is ineligible to be appointed as such under Section 12(5) of the Act.
- This then brings us to the applicability of the proviso to Section 12(5) on the facts of this case. Unlike Section 4 of the Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5) will only apply if subsequent to disputes having arisen between the parties, the parties waive the applicability of sub-section (5) of Section 12 by an express agreement in writing. For this reason, the argument based on the analogy of Section 7 of the Act must also be rejected.
- 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 facts of the present case disclose no such express agreement.
- The judgment under appeal is also incorrect in stating that there is an express waiver in writing from the fact that an appointment letter has been issued by the appellant, and a statement of claim has been filed by the respondent before the arbitrator. 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.
- DECISION HELD BY COURT:
- We thus allow the appeals and set aside the impugned judgment. The mandate of Shri Khan having terminated, as he has become de jure unable to perform his function as an arbitrator, the High Court may appoint a substitute arbitrator with the consent of both the parties.
- Vide order dated 25.01.2018, we had issued notice in the Special Leave Petition as well as notice on the interim relief prayed for by the appellant. Since there was no order of stay, the arbitral proceedings continued even after the date of the impugned judgment, i.e., 22.11.2017, and culminated in two awards dated 11.07.2018 and 12.07.2018. We have been informed that the aforesaid awards have been challenged by the appellant by applications under Section 34 of the Act, in which certain interim orders have been passed by the Single Judge of the High Court of Delhi.
- These awards, being subject to the result of this petition, are set aside. Consequently, the appellant’s Section 34 proceedings have been rendered infructuous. It will be open to the appellant to approach the High Court of Delhi to reclaim the deposit amounts that have been made in pursuance of the interim orders passed in the Section 34 petition filed in the High Court of Delhi.