Challenges to the Appointment of

Arbitrator.
-A Project.

Subject:|ADR|

Submitted to:
Dr. Hrishikesh Manu
Faculty of Law.
Submitted By:
Raj Vardhan Singh.
6th semester(1635)
 Table of contents.

Acknowledgement……………………………………………………………3

Research Methodology……………………………………………………….4

1)Introduction…………………………………………………………………5

2)Grounds for challenging the appointment of Arbitrator……………………..8

3)Interpretation of case laws…………………….……………………………12

4)Conclusion………….………………………………………………………13

Bibliography………………………………………………………………….16

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 Acknowledgement

I record my deep sense of obligations and gratitude to Dr.Hrishikesh Manu, Faculty of

Law, Chanakya National Law University, Patna for his guidance offered with
commendable clarity and for persistent encouragement in the execution of the present
project work.

I owe a special words of gratitude to my family specially my father Justice Arun

Kumar who himself being a High court Judge was always there to provide me a
helping hand whenever I needed.

I will be failing in my duty if I don’t thank my friends who helped me immensely with
the source of research material and I would also like to thank the library staff for
working long hours to facilitate us with required material going a long way in
quenching our thirst for Knowledge.

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Research methodology.

 Whether Doctrinal or Non Doctrinal?

This Project is based upon Doctrinal method of research. Doctrinal in the sense
that that i have collected theoretical material from different sources such as text
books and Internet resources.

 Whether Primary or Secondary sources?

My research is based on secondary sources as I have totally relied upon Articles,

Books, journals and internet sources for collecting data.

 Whether Analytical or Descriptive?

The method of writing followed in the course of this research project is a blend of
analytical and descriptive method.

 Mode of Citation:

The researchers have followed a uniform mode of citation throughout the course
of this project.

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 INTRODUCTION.

The judicial system in India is overstressed and notoriously slow in disposing cases.
Around 1.65 lakh cases are pending in every High Court of the country and more than
2.6 crore cases are pending in the subordinate judiciary.

As a result, there is a need to provide a faster and effective mechanism to resolve

disputes. The Arbitration and Conciliation Act, 1996 (the Act) was passed with the
same goal in mind. It promotes arbitration as an alternate dispute resolution
mechanism in India. It was an attempt to ease the burden as well.

Commercial entities usually include arbitration clauses in any agreement that they
sign with another entity or sign a separate arbitration agreement altogether. With
heavy reliance placed on arbitration, it is of utmost importance that the arbitrators
appointed are impartial. The Supreme Court of India has observed that independence
and impartiality of an arbitrator is the hallmark of arbitration and is a fundamental
principle of natural justice.

Section 12 of the Act lays down the grounds on which an arbitrator can be challenged.
The 2015 amendment to the Act, has added a schedule to this section which lays down
additional criteria that may give rise to a challenge of an arbitrator. Section 12 of the
recently amended Arbitration and Conciliation Act 1996 requires that a person who
has been approached for a possible appointment as an arbitrator disclose in writing
the circumstances which are likely to raise justifiable doubts as to his or her
independence or impartiality to act as an arbitrator. This disclosure must be made in
the form specified in the Sixth Schedule of the act.

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 Grounds for challenging the appointment of the Arbitrator.

 Disclosure of certain circumstances

Section 12(1) of the Act, amended in 2015, compels a prospective arbitrator to

provide a written disclosure of certain circumstances which may give rise to
suspicions to his independence or impartiality. Whether a circumstance is suspicious
to the independence of an arbitrator, is to be decided by the arbitrator himself.

Section 12(1)(a) states that the arbitrator should disclose if he has any direct, indirect,
past or present relationship to the parties, or if he has any financial, business,
professional or any other kind of interest in the subject-matter of the dispute, which
would affect his impartiality in the case.

For example, Company X and Company Z while entering into a particular contract,
add an arbitration clause naming Mr. A as an arbitrator. Mr. A is the owner of
Company C. A dispute concerning payment of bills to Company X by Company Z
arose and Mr. A was approached for presiding as an arbitrator. Company Z is a client
of Company C and forms a considerable part of its income.

In such a scenario, Mr. A would have an interest in the dispute and that might give
rise to doubts to his impartiality.

Section 12(1)(b) similarly points to any circumstances that would affect an arbitrator’s
capacity to devote enough time to finish the arbitration within twelve months.

There are two explanations given under the sub-section. The first one states that the
Fifth Schedule should be referred to understand whether circumstances under Section
12(1)(a) exist. The second one states that such a disclosure should happen in the
format under Sixth Schedule.

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Fifth Schedule

The fifth schedule deals with following types of relations which might give rise to
reasonable doubts:

1. Arbitrator’s relationship with parties or counsel

2. Arbitrator’s relationship to the dispute
3. Arbitrator’s interest in the dispute
4. Arbitrator’s past involvement with the dispute
5. Relationship of co-arbitrator’s
6. Relationship of the arbitrator with parties and others in the dispute
7. Other Circumstances

If the factual scenario of a case falls under any of the above headings, then the
arbitrator may be challenged. These are extensive headings which cover many
scenarios to ensure maximum impartiality. However, ‘Explanation 3’ to this schedule,
points out that if it’s a specialized arbitration involving niche fields, and it’s a custom
to appoint same arbitrators from a small specialized pool, then this should be noted by
applying these rules. None of these headings provides for an immediate bar to the
appointment of an arbitrator1.

Section 12(2) reinforces sub-section 1, by stating that unless a written disclosure has
already been given, an appointed arbitrator should disclose any conflict of interest as
soon as possible.

 Other Grounds for Challenge

The actual grounds for challenge under this section are illustrated under Section 12(3).

If an arbitrator’s independence and impartiality are doubted due to the circumstances

under Section 12(1) then he may be challenged or in the event that he doesn’t possess
the necessary qualifications agreed to by the parties.
1
2017 SCC OnLine SC 1024.

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A party to the dispute which appoints an arbitrator may challenge such appointment
for reasons he becomes aware only after the appointment.

Section 12(5), inserted by the 2015 amendment, automatically disqualifies any

potential arbitrator who falls in any category under the Seventh Schedule of the Act.

Seventh Schedule

This schedule also covers most of the headings under the Fifth Schedule. The list isn’t
as exhaustive as the Fifth Schedule but as stated above, simply acts as a bar to
appointment as arbitrator. However, this bar can be waived by the parties by an
agreement in writing.

The Schedule covers:

1. Arbitrator’s relationship with the parties or counsel

2. Relation of Arbitrator to the dispute
3. Arbitrator’s interest in the dispute.

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 Interpretation of Section 12 in recent case laws.

 Voestalpine Schienen v. Delhi Metro Rail Corporation2

This was the first case adjudicated by the Supreme Court after the 2015 amendment
was passed. It is thus significant in clarifying the scope of this important section.

Facts: The Delhi Metro Rail Corporation (DMRC), a public sector undertaking, had
entered into a contract with M/s Voestalpine. Due to some disputes that arose in the
course of business, the arbitration clause was invoked and as per the contract. In the
contract, it was provided that, arbitration proceedings should be done in compliance of
Clause 9.2 of the DMRC General Conditions of Contract (DMRC GCC) and Clause
9.2 of the special conditions of the contract (DMRC SCC).

According to these clauses, DMRC was to make a list of arbitrators consisting of

serving or retired engineers with requisite qualifications and professional experience.
These engineers were to be from ‘government departments or public sector
undertakings’. Furthermore, DMRC and Voestalpine were to choose one arbitrator
each from this list and both of these arbitrators shall choose the third arbitrator from
the same list.

The petitioner, Voestalpine challenged this provision under Sections 11(6) and 11(8)
of the Act.

Issues

 Whether in light of the 2015 Amendment, the above-mentioned clauses

become invalid by virtue of Section 12(5)?
 Whether DMRC being a public sector undertaking cannot appoint former or
retired employees of the government as arbitrators?

2
2000 SCC OnLine Del 773: (2001) 57 DRJ 154 (DB): (2000) 88 DLT 242 (DB): (2000) 3 Arb LR 674).

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  Whether such a clause destroys the very foundation and spirit behind the
amendment?

Held

The Supreme Court pointed that the main purpose of amending Section 12 was to
maintain a higher level of arbitrator impartiality. In light of this, it stated that in the
event that the arbitration clause was in contradiction to Section 12 (5), the latter would
prevail. In such a case the court would appoint an arbitrator and a party cannot claim
appointment as per the agreement.

However, in the case, the Court held that only because of the fact that the suggested
arbitrators were former or current government employees they won’t be automatically
disqualified from being arbitrators. If they didn’t have any relation to any of the
parties, they were not barred under Section 12(5).

The court differentiated between the concepts of ‘impartiality’ and ‘independence’.

Thus, the court held, any question on impartiality or independence would surface
when the arbitrator discloses any interest in writing. The Court declined jurisdiction in
the case.

The Court directed DMRC to delete the clauses from SCC and GCC and asked it to
constitute a broader panel.

 DBM Geotechnics v. Bharat Petroleum Ltd3

Facts: In 2003, the respondent BPCL had issued an e-tender for construction works.
In 2014, DBM Geotechnics, the applicant was given the letter of intent and
subsequently, an agreement was concluded.

In October 2015, BPCL abruptly terminated the agreement by alleging performance

delays and appointed another contractor. In June 2016, BPCL initiated arbitration
3
2007 SCC OnLine Del 197: (2007) 94 DRJ 431 (DB): (2007) 138 DLT 118 (DB): AIR 2007 Del 155.

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proceedings under the Agreement. As per the terms of the agreement, the Director of
Marketing (DM) was to be the sole arbitrator or he was to appoint another person as
an arbitrator.

Issues  

 Whether such a clause in the arbitration agreement would be rendered

ineffective in light of Section 12 (5) of the Arbitration Act.

Held

The applicants argued that the nomination procedure would be unlawful in light of
Section 12. The Court rejected this argument and held that in spite of the fact that the
DM was barred from presiding as the arbitrator, he could still nominate someone else
as the presiding arbitrator.

 TRF Ltd v. Energo Engineering Projects4

Facts: Energo Engineering Projects, the respondent-company dealt in the

procurement, handling and installation of equipment in thermal power plants, for
various clients like NTPC, Moser Baer etc.

In 2014, the respondent issued a purchase order to the appellant for various articles.
The appellant had also given an advance bank and performance guarantee. The
dispute arose with the enforcement of the bank guarantee. The appellant approached
the High Court to restrain the encashment of the guarantee.

In the meanwhile, the appellant invoked the arbitration clause of the General Terms
and Conditions of the Purchase Order (GTCPO). It also argued that the HC should
appoint the arbitrator under Section 11 (6) because in light of Section 12 (5) the
Managing Director was ineligible to act as an arbitrator and thus ineligible to arbitrate
as well. The High Court rejected this argument and stated that merely because the MD
4
Civil Appeal 6959/2001.

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is disqualified to act as an arbitrator, he isn’t devoid of his power to nominate. The
nominated arbitrator will have his own independent views. This ruling was challenged
in the Supreme Court.

Issues

 Whether the High Court had rightfully rejected the applications under Section
11(6)?
 Whether a statutory disqualification also meant a disqualification of the power
to nominate?

Held

The Supreme Court analyzed the clause under GTCPO which mentioned the MD as
the sole arbitrator or any of his nominees. It arrived at the conclusion that, although
the MD may be a respectable person and otherwise eligible to arbitrate, he is ineligible
in the present case. Thus, that makes him ineligible to nominate anyone else as an
arbitrator as well. The Court said, once the infrastructure collapses, the superstructure
collapses as well.

Conclusion.

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The 2015 Amendment to the Act is aimed to promote arbitration in India and to
provide for greater transparency and reliability on the same. Section 12 gains more
importance in light of the new amendment and hopefully, it contributes to making
arbitration a more popular recourse than judicial courts.

Section 12 of the recently amended Arbitration and Conciliation Act 1996 requires
that a person who has been approached for a possible appointment as an arbitrator
disclose in writing the circumstances which are likely to raise justifiable doubts as to
his or her independence or impartiality to act as an arbitrator. This disclosure must be
made in the form specified in the Sixth Schedule of the act.

The Fifth and Seventh Schedules of the act have been inspired, albeit not fully, by the
three internationally recognised lists provided under the International Bar Association
guidelines on conflicts of interest (ie, the Green List, Orange List and the waivable
and non-waivable Red List).

The grounds stated in the Fifth Schedule serve as a guide to determine whether
circumstances exist which could raise justifiable doubts as to the independence or
impartiality of the potential arbitrator. On the other hand, the grounds specified under
the Seventh Schedule render a person ineligible to be appointed as an arbitrator.

In the recent decision in HRD Corporation (Marcus Oil and Chemical Division) v
GAIL (India) Limited(1) the Supreme Court set out the legal position regarding
challenges to a person's possible appointment as an arbitrator. The position under the
act is that a disclosure must be made by a person approached as a possible arbitrator.
If he or she discloses circumstances which fall under any of the categories specified in
the Seventh Schedule, then that person cannot be appointed as an arbitrator. Since
such person would lack the inherent jurisdiction to proceed as an arbitrator, the court
of appropriate jurisdiction can terminate the mandate of such person under Section
14(2) of the act. The Supreme Court has held that since ineligibility goes to the root of
the appointment, Section 12(5), read with the Seventh Schedule, clarifies that if the
arbitrator falls under any of the categories specified in the Seventh Schedule, he or
she becomes ineligible to act as an arbitrator.

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However, if the circumstances fall under the Fifth Schedule, giving rise to justifiable
doubts as to the person's independence or impartiality, it would not make the person
de jure ineligible for appointment as an arbitrator. Any challenge to his or her
independence or impartiality would lie only before the arbitral tribunal under Section
13 of the act. If such challenge is unsuccessful and the arbitral tribunal decides that
there are no justifiable doubts as to the independence or impartiality of the arbitrator,
it must continue the proceedings and make an award. No challenge to the
appointment of the arbitrator would lie before a court of law at that stage. It is only
after such award is made that the party challenging the arbitrator's appointment on
the grounds contained in the Fifth Schedule may apply to set aside the arbitral award
in accordance with Section 34 of the act on the aforesaid grounds. This position of law
was succinctly laid down by the Supreme Court in HRD Corporation.

However, a party may argue that an arbitrator cannot be a judge in his or her own
cause and only a court of law can examine whether he or she is biased or impartial. In
addition, it may be contended that Section 13 provides no remedy for a party to
challenge the appointment of an arbitrator on the grounds of bias before a court of
law. Notably, Section 13 of the act has already passed muster before the courts in
India. The Division Bench of the Delhi High Court in Bharat Heavy Electricals Ltd v
CN Garg (BHEL),(2) while upholding the constitutional validity of Section 13, held
that a challenge on account of bias and prejudice on the part of the arbitrator would
be covered under Section 34(2)(b)(ii) of the act. If the court is satisfied that there is
merit in such allegations, the award must be set aside. The Delhi High Court decision
was challenged before the Supreme Court,(3) but was dismissed by a February 13
2008 order. Another challenge to the constitutional validity of Section 13 was raised
before the Delhi High Court in Dharam Prakash v Union of India;(4) however, that
too was rejected by the Delhi High Court and then by the Supreme Court(5) on appeal
following its earlier decision in BHEL.

While it is now well settled that the courts will not interfere in a challenge to the
appointment of an arbitrator, barring the reasons stated in the Seventh Schedule, the
Delhi High Court had (before the decision in HRD Corporation) entertained a petition

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challenging the appointment of an arbitrator on the grounds set out in the Fifth
Schedule and exercised its powers under Section 14 of the act to appoint another
arbitrator because the arbitrator in question had withheld information and
disclosed.

BIBLIOGRAPHY.

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Books:

 Outlines Of Indian Legal & Constitutional History 8th Edition, Published

by UNIVERSAL LAW PUBLISHING CO.(2008).

Websites:
 www.manupatra.com
 www.lexisnexis.com
 www.historyindia.com
 www.Legallyindia.com
 www.indiankanoon.org

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