Home » Between The Lines » Supreme Court decides on authority of a person ineligible to be appointed as an arbitrator to nominate an arbitrator

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All sections and schedules cited in this case analysis, unless specified otherwise, refer to the sections and schedules of the Arbitration and Conciliation Act, 1996

In the case of Bharat Broadband Network Limited v. United Telecoms Limited (decided on April 16, 2019), the Supreme Court while upholding its own decision in TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] (“TRF Ltd.”) held that appointment of arbitrator by person ineligible to be appointed as an arbitrator is not valid. This judgement was given retrospective effect and shall be applicable to all arbitrations commencing from October 23, 2015.

FACTS
Bharat Broadband Network Limited (“Appellant”) had invited bids for a turnkey project and United Telecoms Limited (“Respondent”) was a successful bidder. The Appellant issued an Advance Purchase Order on September 30, 2014 which included an arbitration clause. Later, a dispute arose between the parties and the Respondent invoked the arbitration clause on January 3, 2017. According to the arbitration clause, it called upon the Appellant’s Chairman and Managing Director (“MD”) to appoint an arbitrator. On January 17, 2017, the MD appointed Shri K.H. Khan as the sole arbitrator.

Thereafter, the Supreme Court pronounced its judgement in TRF Ltd. on July 3, 2017, where it 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. In light of this judgement, the Appellant, despite having appointed the arbitrator itself, on October 7, 2017, made an application before the sole arbitrator to withdraw himself from the proceedings. However, the sole arbitrator rejected such application without giving any reasons.

The Appellants then filed a petition before the Delhi High Court submitting that since the arbitrator had become incapable of acting as such, as per law a substitute arbitrator should be appointed in his place. However, the Delhi High Court too rejected this petition 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. The matter was then referred to the Supreme Court.

ISSUES
The Supreme Court examined the following issues:

  1. Whether the Supreme Court judgement in TRF Ltd. can apply retrospectively to the present case
  2. Whether the Appellant, having appointed the arbitrator, can make an application for removal of the arbitrator?
  3. Whether the parties have waived their right to not allow an ineligible party to be appointed as an arbitrator by an express agreement?

Relevant provisions
For ease of reference, the sub-sections (4) and (5) of Section 12 have been reproduced below:

“Section 12 – Grounds for challenge.
(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

(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 subsection by an express agreement in writing.”

ARGUMENTS
The Appellant argued that since the appointment of Shri Khan is in respect of eligibility to be appointed as an arbitrator, his appointment should be void ab initio. Further, the judgment in TRF Ltd. is declaratory of the law and would apply to the facts of this case. Additionally, since there was no express agreement in writing between the parties subsequent to the disputes having arisen between them, the proviso to Section 12(5) would not be applicable.

The Respondent argued 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 in the statute book since October 23, 2015 (as they were introduced by way of Arbitration and Conciliation (Amendment) Act, 2015), the Appellant was fully aware that the appointment of the MD would be null and void. This being so, Section 12(4) acts as a bar to the petition filed by the Appellant. Further, Section 13(2) makes it clear that a party who intends to challenge the appointment of the arbitrator, shall, within 15 days after becoming aware of its disqualification, send a written statement of reasons for the challenge to the arbitrator. This was not done within the time frame stipulated, as a result of which, the petition filed by the Appellant should be dismissed.

Also, the proviso to Section 12(5) provides for the words “express agreement in writing” which is clearly met in the facts of the present case. This need not be in the form of a formal agreement between the parties, but can be culled out, from the appointment letter issued by Appellant as well as the statement of claim filed by the Respondent before the arbitrator leading, therefore, to a waiver of the applicability of Section 12(5).

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court held that, it was clear that the MD could not have acted as an arbitrator himself due to his ineligibility under Schedule 5. Whether such ineligible person could himself appoint another arbitrator was only made clear by Supreme Court’s judgment in TRF Ltd. on July 3, 2017 holding that an appointment made by an ineligible person is itself void ab initio. Thus, it was only on July 3, 2017, that it became clear beyond doubt that the appointment of Shri Khan would be void ab initio. There is no doubt in this case that disputes arose only after the introduction of the new Section 12(5) on October 23, 2015, and Shri Khan was appointed long after on January 17, 2017.

The judgment in TRF Ltd. nowhere states that it will apply only prospectively, that is, the appointments that have been made of persons such as Shri Khan would be valid if made before the date of the judgment. Considering that the appointment in the case of TRF Ltd. of a retired Judge of Supreme Court was set aside as being non-est in law, the appointment of Shri Khan in the present case must follow suit.

Deciding on the issue of whether Appellant can make an application for removal of the arbitrator, the Supreme Court held that 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.

Concerning the issue on whether there was a waiver under the proviso to Section 12(5), it was stated that the proviso to Section 12(5) will only apply if subsequent to the disputes having arisen between the parties, the parties waive the applicability of Section 12(5) by an express agreement in writing. 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.

The Supreme Court then referred to Section 9 of the Contract Act, 1872 which states: “In so far as a proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”. 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 appointment letter which is relied upon as indicating an express agreement on the facts of the case is dated January 17, 2017 and on this date, the Appellant was certainly not aware that Shri Khan could not be appointed by the MD as the law only became clear after the declaration of the law by the Supreme Court in TRF Ltd. on July 3, 2017. Further, the fact that a statement of claim was filed before the arbitrator, would not mean that there was an express agreement in words which would make it clear that both the parties wish Shri Khan to continue as arbitrator despite being ineligible to act as such.

DECISION OF THE SUPREME COURT
The Supreme Court overruled the decision of the Delhi High Court and held that (1) the Appellant should be allowed to file an application for terminating the mandate of the arbitrator; (2) TRF Ltd. case can be applied retrospectively; and (3) there was no express agreement between the parties to allow an ineligible party to be appointed as an arbitrator.

Vaish Associates Advocates View
The legitimacy of an arbitral proceeding hinges largely on the independence and impartiality of the appointed arbitrator. Furthering this purpose, amendments were made in October, 2015 by way of Arbitration and Conciliation (Amendment) Act, 2015 which increased the disclosure requirements of the arbitrator and inserted Fifth and Seventh Schedule which provides a guide in determining circumstances for ineligibility of the arbitrator. The TRF Ltd.

case in 2017 went further to hold that a person to be appointed as an arbitrator who also has the authority to nominate another arbitrator, on becoming ineligible will lose its authority to appoint an arbitrator as well. The present judgement went even further and held that the ratio of the TRF Ltd. case would apply to all arbitrations which commenced on or after October 23, 2015. Aside from this, the Supreme Court ensured that the sanctity attributed to the appointment of an impartial arbitrator is only waived by an express written agreement where both parties have full knowledge of the legal ineligibility of the arbitrator and not waived offhandedly by interpreting the implicit conduct of the parties.

The key takeaway for the parties is to ensure that neutrality of the arbitrator is maintained through and through and take utmost precaution when appointing an ineligible arbitrator by executing a separate written agreement post the dispute.

For more information please write to Mr. Bomi Daruwala at [email protected]

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