Delhi HC on determining ineligibility of an arbitrator in terms of Seventh Schedule of the

Arbitration Act

By the introduction of the 2015 amendment, the standard of reviewing the independence and
impartiality of arbitrators has become more stringent under the Arbitration and Conciliation Act,
1996 (“the Act”). As it now stands, the Act contains two Schedules detailing the grounds: a) that
might give rise to justifiable doubts as regards an arbitrator’s independence and impartiality
(Fifth Schedule); and b) which could make him ineligible to be appointed as an arbitrator
(Seventh Schedule).

On 19th February 2019, the Delhi High Court in the case of Vishal Infrastructure Limited vs.
Union of India adjudicated on the ineligibility of an arbitrator by applying the amended Section
12(5) read with Entry 1 of the Seventh Schedule which de jure makes an arbitrator unable to
perform his functions due to his relationship with the parties or counsel as an employee,
consultant, advisor or any other past or present business relationship.

Facts of the case

The Petitioner (Vishal Infrastructure Limited) filed a petition under Section 14(2) of the Act for
termination of the mandate of the Arbitrator appointed by the Respondent and also for the
appointment of a Substitute Arbitrator in terms of Section 15(2) of the Act. The dispute related to
the unilateral termination of the contract for "construction of dwelling units including allied
services for officers, JCO, OR's at Kirkee (Army)" (“the Contract”) by the Respondent. Clause
60 of the General Conditions of Contract mandated the Respondent to appoint a Sole Arbitrator
for adjudicating disputes that had arisen between the parties. Pursuant to the same, Petitioner
made several requests to Respondent to appoint an Arbitrator, the first being on 08.10.2013.
These requests were invariably rejected by Respondent until on 14.03.2016 when Respondent
wrote to the Appointing Authority envisioned under the Contract giving particulars of the
appointment. However, the arbitrator appointed by the Appointing Authority soon tendered his
resignation, thereafter leaving the proceedings in abeyance. The position was filled by a
subsequent appointment by the Appointing Authority. The second appointed arbitrator allegedly
acted in favour of the Respondent by allowing it to revise its Statement of Claim and extending
the time limit to file the same, all such directions being passed without giving any opportunity of
hearing to Petitioner.

It was on these grounds that the Petitioner filed Sec. 14(2) application contending that the Sole
Arbitrator being a serving employee of the Respondent is ineligible to be appointed as an
Arbitrator in the current arbitral proceedings.

Contention of the Parties

The Petitioner argued that since the second appointed arbitrator is de jure ineligible to be
appointed as an arbitrator as per Section 12(5) read with Entry 1 of Seventh Schedule, his
mandate should terminate in terms of Section 14(1)(a) of the Act.

On the other hand, the Respondent made two submissions before the Court:

a) That since the arbitration proceedings had commenced before the coming into force of the
2015 Amendment, the provisions of the Seventh Schedule, which were introduced by the said
Amendment Act, should not apply to the present case; and

b) That the only remedy available to the Petitioner was to file an application before the arbitral
tribunal itself and not before the Court as per Section 13 of the Act.

Observations of the Court

The Court leaned in favour of the Petitioner by holding that the Amended Act applies to the
present case. While doing so, it placed reliance on two dates: firstly, the date on which the
original arbitrator was appointed (29.04.2016), and secondly, the date on which the
substituted/second arbitrator was appointed by the Appointing Authority (19.07.2018). It
observed that both the dates fall after 23rd October 2015, the date after which the Amendment
Act was made to apply prospectively.1 In view of the same, it held that the “ineligibility of the
Arbitrator has to be decided at the anvil of Section 12(5) read with the Seventh Schedule of the
Act.” In arguendo, the Court also cited the recent case of Omaxe Infrastructure v. Union of India
to hold that even if the 2015 Amendment does not apply to the facts of the present case, the
ineligibility of an Arbitrator has to be considered on the date of his appointment.

Furthermore, it relied on the case of HRD Corporation vs. Gail (India) Limited as well as TRF vs
Energo to differentiate between the two schedules introduced by the 2015 Amendment. As per
the Court, the grounds mentioned under the Fifth Schedule only give rise to justifiable doubts
regarding the independence and impartiality of an arbitrator in the eyes of a third person and
existence of any of the mentioned circumstances will not by itself make the arbitrator ineligible.
On the contrary, existence of any of the grounds mentioned under the Seventh Schedule makes
the concerned person ineligible to act as an arbitrator with an immediate effect. Since such
ineligibility is attracted by the operation of law, therefore, it can be said that the arbitrator has
become de jure unable to perform his functions in terms of Section 14(1)(a) and hence, his
mandate should be terminated. Sub-section (2) of Section 14 allows a party to apply to the Court
to decide on the question of termination of the mandate of an arbitrator. As ineligibility goes to
the root of the matter, bringing such a claim before the person who lacks inherent jurisdiction to
proceed any further would be futile. Therefore, a party relying on Section 12(5) read with
Seventh Schedule is not bound to first raise the question of impartiality before the arbitral
tribunal and then wait for the proceedings to conclude, if the challenge is not successful, to make

1
Board of Control for Cricket in India vs. Kochi Cricket Pvt. Ltd. and Ors., AIR 2018 SC 1549.
an application for setting aside the consequent award under Section 34.2 The same, however,
remains the proper course for any legal remedy had the challenge been on the grounds stated in
the Fifth Schedule.

Comments

The author is of the opinion that the Court comprehensively and indeed correctly dealt with the
question of proper forum before which jurisdictional challenge should be brought. It however
failed to correctly deal with the question of applicability of 2015 Amendment Act and hence, has
rendered a decision which is bad in law.

As far as the question of proper forum for bringing jurisdictional challenge vis-à-vis
independence and impartiality of the arbitral tribunal is concerned, the law is settled and is
summarized by the recent SC case of SP Singla Constructions Pvt. Ltd. vs. State of Himachal
Pradesh. The Supreme Court has categorically held that any challenge to the arbitrator appointed
ought to be raised before the arbitrator himself in the first instance and thereafter by challenging
the award at the stage of enforcement under Section 34 of the Act. A party may neither bypass
this rule by approaching the SC or HCs under Section 11(6) where the Courts act as an
appointing authority nor can they rely on the grounds under Schedule Five of the Act to request
termination of mandate of the Arbitrator under Section 14. It is only when one of the grounds
mentioned under the Seventh Schedule exists that a party may approach the Courts for
termination of the mandate in accordance with Section 12(5) read with Section 14(1)(a) of the
Act.

As regards the applicability of 2015 Amendment Act, again, the law of the land is enumerated in
the much reported Supreme Court case of BCCI vs. Kochi Cricket Pvt. Ltd.3 It held that Section
26 of the Amended Act, which talks about the applicability of the 2015 Amendment Act, is
prospective in nature making the amendment applicable to:

a) Arbitral proceedings that have commenced on or after 23rd October 2015 [commencement
date of the Amendment Act]; and

b) Court proceedings which have begun after commencement of the Amendment Act.

Further, an arbitral proceeding is said to commence in accordance with Section 21 of the Act i.e.
when a request for that dispute to be referred to arbitration is received by the Respondent. There
appears no reason why the Court in the present case has referred to the appointment dates of both
the Arbitrators to determine the applicability of amended provisions of the Act. As is evident

2
Section 13(5), Arbitration and Conciliation Act, 1996.
3
The pronouncement of SC in BCCI v. Kochi Cricket remains the law of the land till the time the proposed
Arbitration Bill, 2018, which has adopted a divergent course on the said aspect, becomes a law.
from the facts, the first request for appointment of the Sole Arbitrator was made by the Petitioner
on 08.10.2013, much before coming into force of the Amended Act. What is more interesting to
note here is the fact that a tribunal is usually constituted in arbitration only after giving the notice
to the other side to refer the dispute to arbitration. Therefore, it can safely be assumed that the
arbitral proceeding commenced, in the facts of the present case, much before the coming into
force of the Amended Act. Same was the determination of the SC in the above-referred Singla
case wherein the Court referred to the date of commencement of arbitration proceedings to
determine the applicability of Section 12(5) of the Act to the said proceedings and not to the date
of appointment of concerned Arbitrators.

Moreover, the Court’s reliance on Omaxe Infrastructure case to ascertain the ineligibility of the
Arbitrator appears to be misguided. In that case, the Court determined the date of
commencement of arbitration proceedings by relying on the letter of appointment (issued by the
Appointing authority) which had no mention of any prior dates (before 23rd October 2015) when
certain requests for appointment of arbitrator was made by the concerned Petitioner. The Court
acted cautiously by clarifying that “it cannot be conclusively said that the appointment of the
Arbitrator was pursuant to the request made by the petitioner on 21st February, 2015” and that
this appointment can be a result of any other dispute between the parties. It was only because of
the peculiar facts of the case, that the Court equated the appointment date of the arbitrator with
the date of commencement of the arbitration to hold that Amended Act would apply to the
concerned arbitral proceedings. Quite surprisingly, Del HC in Vishal infrastructure has assumed
it to be a general rule to consider the date of appointment as the relevant date for ascertaining
ineligibility of the Arbitrator. If seen cautiously, the Court in Para 5 has itself accepted that the
“Respondent finally wrote to the Engineer In-Chief (Appointing Authority) making a reference to
the petitioner's letter dated 19.07.2014” which is sufficient to prove that the appointment of
arbitrator was done pursuant to a dispute which arose before 23rd October 2015 and which the
Petitioner wanted to refer to arbitration.

Hence, there was no ambiguity as to the date of commencement of the arbitral proceedings in the
present case but it was the Court’s negligence towards the applicability of 2015 Amendment Act
that has forced the concerned Arbitrator to be disqualified from the arbitral proceedings. Now
what remains to be seen is whether this case, alongwith the determination in Omaxe, will be
taken up before the SC for any clarification as to when an arbitral proceeding is said to
commence under the Act.