SUBJECT: ARBITRATION AND CONCILIATION ACT 1996

TOPIC : GROUNDS FOR CHALLENGE OF AN ARBITRATOR

Submitted By: Owais Ahmad Zargar

Semester: 6th
Reg No: GU17R0837
Submitted To : Mr Abhijit Anand
Assistant Professor
Glocal Law School
S.No Table of Contents Pg No

1. Research Methodology 03

2. Introduction 04

3. Grounds for challenging the appointment of 05

Arbitrator
4. Interpretation of case laws 08

5. Conclusion 12

6. Bibliography 14

2|Page
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.

3|Page
 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.

4|Page
 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 Fift h
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.

5|Page
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.

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

1
2017 SCC OnLine SC 1024.

6|Page
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.

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

Held

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

8|Page
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 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.

3
2007 SCC OnLine Del 197: (2007) 94 DRJ 431 (DB): (2007) 138 DLT 118 (DB): AIR 2007 Del 155.

9|Page
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 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

4
Civil Appeal 6959/2001.

10 | P a g e
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.

11 | P a g e
 Conclusion.

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.

12 | P a g e
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 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.

13 | P a g e
 BIBLIOGRAPHY.

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

14 | P a g e