SC: S.4 of Arbitration & Conciliation Act doesn’t apply to proviso of S.12(5)

On 16thApril 2019, the Hon’ble Supreme Court, in the matter of Bharat Broadband Network Limited v. United Telecoms Limited pronounced that Section 4 of the Arbitration and Conciliation Act, 1996 does not apply to cases falling under proviso of Section 12(5)  as the proviso to Section 12(5) specifically refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct.

The Hon’ble Supreme Court observed 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, 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. (Para 15)

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.  (Para 16)

The scheme of Sections 12, 13, and 14 of the Arbitration and Conciliation Act, 1996 , 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. (Para 17)

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. (Para 17)

In all Arbitration and Conciliation Act’s Section 12(5) cases, there is no challenge procedure to be availed of. If an arbitrator continues as such, beingde 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. (Para 17)

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. (Para 17)

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. (Para 19)

Unlike Section 4 of the Arbitration and Conciliation Act, 1996 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. 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. 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 a person 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 fact that a statement of claim may have been filed before the arbitrator, would not mean that there is an express agreement in words which would make it clear that both parties wish such person to continue as arbitrator despite being ineligible to act as such.(Para 20)

Copy of judgement: Judgement_16-Apr-2019

-Tushar Kaushik

Leave a Reply

Your email address will not be published. Required fields are marked *