BHARAT BROADBAND NETWORK LIMITED versus UNITED TELECOMS LIMITED

[2019] 6 S.C.R. 97

BHARAT BROADBAND NETWORK LIMITED

UNITED TELECOMS LIMITED

(Civil Appeal No. 3972 of 2019)

APRIL 16, 2019

[R. F. NARIMAN AND VINEET SARAN, JJ.]

Arbitration and Conciliation, 1996: s.12(5) and its proviso –Applicability of the proviso – Held: The proviso to s.12(5) appliesonly if subsequent to arising of disputes between the parties, theparties waive the applicability of sub-section (5) of s.12 by an expressagreement in writing – The expression “express agreement inwriting” refers to an agreement made in words as opposed to anagreement which is to be inferred by conduct – The instant casedisclosed no such express agreement – The fact that statement ofclaim was filed before the arbitrator, would not mean that there wasan express agreement in words that both parties wished continuationof arbitrator so appointed despite his being ineligible to act as such.

Arbitration and Conciliation, 1996: s.12(5) – Interpretationof – Eligibility to be appointed as arbitrator – In the instant case,agreement provided for appointment of arbitrator by the ManagingDirector of appellant-company – Accordingly, in terms of thearbitration clause, appointment of arbitrator was made – On3.7.2017, TRF judgment of Supreme Court held that since ManagingDirector of company which was one of the parties to the arbitrationwas himself ineligible to act as arbitrator, such ineligible personcould not appoint an arbitrator, and any such appointment wouldbe null and void – In view of TRF judgment, in the instant case,validity of appointment of arbitrator challenged by the ManagingDirector himself – Held: In the instant case, appointment of thearbitrator was after the introduction of s.12(5) in the statute book– The Managing Director of the appellant himself could not haveacted as an arbitrator, being rendered ineligible to act as arbitratorunder Item 5 of the Seventh Schedule – The scheme of ss.12, 13and 14 was that where an arbitrator makes disclosure in writingwhich is likely to give justifiable doubts as to his independence orimpartiality, the appointment of such arbitrator may be challenged

Aunder ss.12(1) to 12(4) r/w s.13 – However, where such personbecomes “ineligible” to be appointed as an arbitrator, there is noquestion of challenge to such arbitrator, before such arbitrator –In such case, i.e., case which falls under s.12(5), s.14(1)(a) ofthe Act gets attracted inasmuch as the arbitrator becomes, as amatter of law (i.e., de jure), unable to perform his functions underBs.12(5), being ineligible to be appointed as an arbitrator – Thisbeing so, his mandate automatically terminates, and he shall thenbe substituted by another arbitrator under s.14(1) itself – If anarbitrator continues as such, being de jure unable to perform hisfunctions, as he falls within any of the categories mentioned inCs.12(5), r/w the Seventh Schedule, party may apply to the Court,which will then decide on whether his mandate has terminated.

Allowing the appeals, the Court

HELD: 1.1 Section 12(1), as substituted by the Arbitrationand Conciliation (Amendment) Act, 2015 makes it clear that whenDa person is approached in connection with his possibleappointment as an arbitrator, it is his duty to disclose in writingany circumstances which are likely to give rise to justifiabledoubts as to his independence or impartiality. Once this is done,the appointment of the arbitrator may be challenged on the groundEthat justifiable doubts have arisen under sub-section (3) of Section12 subject to the caveat entered by sub-section (4) of Section 12.The challenge procedure is then set out in Section 13, togetherwith the time limit laid down in Section 13(2). The arbitral tribunalmust first decide on the said challenge, and if it is not successful,the tribunal shall continue the proceedings and make an award.FIt is only post award that the party challenging the appointmentof an arbitrator may make an application for setting aside such anaward in accordance with Section 34 of the Act. [Para 14][113-E-H; 114-A-B]

1.2 Section 12(5), on the other hand, is new provisionGwhich relates to the de jure inability of an arbitrator to act assuch. Under this provision, any prior agreement to the contraryis wiped out by the non-obstante clause in Section 12(5) themoment any person whose relationship with the parties or thecounsel or the subject matter of the dispute falls under theSeventh Schedule. The sub-section then declares that suchH

person shall be “ineligible” to be appointed as arbitrator. Theonly way in which this ineligibility can be removed is by theproviso, which again is special provision which states that partiesmay, subsequentto disputes having arisen between them, waivethe applicability of Section 12(5) by an express agreement inwriting. Where, under any agreement between the parties, aperson falls within any of the categories set out in the SeventhSchedule, he is, as matter of law, ineligible to be appointed asan arbitrator. The only way in which this ineligibility can beremoved, again, in law, is that parties may afterdisputes havearisen between them, waive the applicability of this sub-sectionby an “express agreement in writing”. The “express agreementin writing” has reference to person who is interdicted by theSeventh Schedule, but who is stated by parties (after the disputeshave arisen between them) to be person in whom they havefaith notwithstanding the fact that such person is interdicted bythe Seventh Schedule. [Para 15][114-B-F]

2.1 The Law Commission Report makes it clear that thereare certain minimum levels of independence and impartiality thatshould be required of the arbitral process, regardless of theparties’ agreement. Thus, it will be seen that party autonomy isto be respected only in certain exceptional situations which couldbe situations which arise in family arbitrations or other arbitrationswhere person subjectively commands blind faith and trust ofthe parties to the dispute, despite the existence of objectivejustifiable doubts regarding his independence and impartiality.The scheme of Sections 12, 13, and 14, therefore, is that wherean arbitrator makes disclosure in writing which is likely to givejustifiable doubts as to his independence or impartiality, theappointment of such arbitrator may be challenged under Sections12(1) to 12(4) read with Section 13. However, where such personbecomes “ineligible” to be appointed as an arbitrator, there isno question of challenge to such arbitrator, before such arbitrator.In such case, i.e., case which falls under Section 12(5), Section14(1)(a) of the Act gets attracted inasmuch as the arbitratorbecomes, as matter of law (i.e., de jure), unable to perform hisfunctions under Section 12(5), being ineligible to be appointedas an arbitrator. This being so, his mandate automatically

Aterminates, and he shall then be substituted by another arbitratorunder Section 14(1) itself. It is only if controversy occursconcerning whether he has become de jure unable to perform hisfunctions as such, that party has to apply to the Court to decideon the termination of the mandate, unless otherwise agreed bythe parties. Thus, in all Section 12(5) cases, there is no challengeBprocedure to be availed of. If an arbitrator continues as such,being de jure unable to perform his functions, as he falls withinany of the categories mentioned in Section 12(5), readwith the Seventh Schedule, party may apply to the Court, whichwill then decide on whether his mandate has terminated.C[Paras 16, 17][114-F-G; 116-A-G]

2.2 In the instant case, it is clear that the Managing Directorof the appellant could not have acted as an arbitrator himself,being rendered ineligible to act as arbitrator under Item 5 of theSeventh Schedule. Whether such ineligible person could himselfDappoint another arbitrator was only made clear by this Court’sjudgment in TRF Ltd. on 03.07.2017, in which it was held by thisCourt that an appointment made by an ineligible person is itselfvoid ab initio. There is no doubt in this case that disputes aroseonly after the introduction of Section 12(5) into the statute bookon 23.10.2015, and the arbitrator was appointed long afterE23.10.2015. The judgment in TRF Ltd. nowhere stated that itwill apply only prospectively. Section 26 of the Amendment Act,2015 makes it clear that the Amendment Act, 2015 shall apply inrelation to arbitral proceedings commenced on or after23.10.2015. The APO itself is of the year 2014, whereas theFappointment by the Managing Director is after the AmendmentAct, 2015, just as in the case of TRF Ltd. Considering that theappointment in the case of TRF Ltd. of retired Judge of thisCourt was set aside as being non-est in law, the appointment ofarbitrator in the present case must follow suit. [Para 18][116-H;117-B-G]G

3. Applicability of the proviso to Section 12(5) on the factsof this case.

Unlike Section 4 of the Act which deals with deemed waiverof the right to object by conduct, the proviso to Section 12(5) willHonly apply if subsequent to disputes having arisen between the

parties, the parties waive the applicability of sub-section (5) ofSection 12 by an express agreement in writing. For this reason,the argument based on the analogy of Section 7 of the Act mustalso be rejected. Section 7 deals with arbitration agreements thatmust be in writing, and then explains that such agreements maybe contained in documents which provide record of suchagreements. On the other hand, Section 12(5) refers to an“express agreement in writing”. It is thus necessary that therebe an “express” agreement in writing. This agreement must bean agreement by which both parties, with full knowledge of thefact that Shri Khan is ineligible to be appointed as an arbitrator,still go ahead and say that they have full faith and confidence inhim to continue as such. The facts of the instant case disclose nosuch express agreement. The appointment letter which is reliedupon by the High Court as indicating an express agreement onthe facts of the case is dated 17.01.2017. On this date, theManaging Director of the appellant was certainly not aware thatShri Khan could not be appointed by him as Section 12(5) readwith the Seventh Schedule only went to the invalidity of theappointment of the Managing Director himself as an arbitrator.Shri Khan’s invalid appointment only became clear after thedeclaration of the law by the Supreme Court in TRF Ltd. which,was only on 03.07.2017. After this date, far from there being anexpress agreement between the parties as to the validity of ShriKhan’s appointment, the appellant filed an application on07.10.2017 before the sole arbitrator, bringing the arbitrator’sattention to the judgment in TRF Ltd. and asking him to declarethat he has become de jure incapable of acting as an arbitrator.The impugned judgment is not correct when it applies Section 4,Section 7, Section 12(4), Section 13(2), and Section 16(2) of theAct to the facts of the instant case, and goes on to state that theappellant cannot be allowed to raise the issue of eligibilityof an arbitrator, having itself appointed the arbitrator.[Para 20][118-B-H; 119-A-C]

TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8SCC 377 : [2017] 7 SCR 409 ; Voestalpine SchienenGmbH v. Delhi Metro Rail Corporation Ltd. (2017) 4SCC 665 HRD Corporation v. GAIL (India) Ltd. (2018)12 SCC 471 : [2017] 11 SCR 857 – relied on.

AAll India Power Engineer Federation v. Sasan PowerLtd. (2017) 1 SCC 487 : [2016] 9 SCR 901 ; Vasu P.Shetty v. Hotel Vandana Palace (2014) 5 SCC 660 :[2014] 9 SCR 38 ; BSNL v. Motorola India (P) Ltd.(2009) 2 SCC 337 : [2008] 13 SCR 445 – heldinapplicable.B

Case Law Reference

DCIVIL APPELLATE JURISDICTION : Civil Appeal No. 3972of 2019.

From the Judgment and Order dated 22.11.2017 of the HighCourt of Delhi, New Delhi in Application OMP (T) (Comm) 84 of 2017.

WithE

Civil Appeal No. 3973 of 2019.

Vikramjeet Banerjee, ASG, Chandan Kumar, Aniruddha P. Mayee,Advs. for the Appellant.

S. B. Upadhyay, Sr. Adv., Pawan Upadhyay, S. S. Sastri, SarvjitFPratap Singh, Ms. Anisha Upadhyay, Nishant Kr., UNUC Legal LLP,C. M. Patel, Advs. for the Respondent.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. Leave granted.

G2. The present appeals raise an interesting question as to theinterpretation of Section 12(5) of the Arbitration and Conciliation Act,1996 [“Act”].

3. The appellant, Bharat Broadband Network Ltd. [“BBNL”],had floated tender dated 05.08.2013 inviting bids for turnkey project

for supply, installation, commissioning, and maintenance of GPONequipment and solar power equipment. The respondent was the successfulL1 bidder. The appellant issued an Advance Purchase Order [“APO”]dated 30.09.2014. Clause III.20.1 of the General (Commercial) Conditionsof Contract [“GCC”] provides for arbitration. The said clause reads asunder:

“III.20 ARBITRATION

III.20.1 In the event of any question, dispute or difference arisingunder the agreement or in connection therewith (except as to thematters, the decision to which is specifically provided under thisagreement), the same shall be referred to the sole arbitration ofthe CMD, BBNL or in case his designation is changed or hisoffice is abolished, then in such cases to the sole arbitration of theofficer for the time being entrusted (whether in addition to hisown duties or otherwise) with the functions of the CMD, BBNLor by whatever designation such an officer may be called(hereinafter referred to as the said officer), and if the CMD orthe said officer is unable or willing to act as such, then to the solearbitration of some other person appointed by the CMD or thesaid officer. The agreement to appoint an arbitrator will be inaccordance with the Arbitration and Conciliation Act 1996. Therewill be no object to any such appointment on the ground that thearbitrator is Government Servant or that he has to deal with thematter to which the agreement relates or that in the course of hisduties as Government Servant/PSU Employee he has expressedhis views on all or any of the matters in dispute. The award of thearbitrator shall be final and binding on both the parties to theagreement. In the event of such an arbitrator to whom the matteris originally referred, being transferred or vacating his office orbeing unable to act for any reason whatsoever, the CMD, BBNLor the said officer shall appoint another person to act as an arbitratorin accordance with terms of the agreement and the person soappointed shall be entitled to proceed from the stage at which itwas left out by his predecessors.”

4. Since disputes and differences arose between the parties, therespondent, by its letter dated 03.01.2017, invoked the aforesaid arbitrationclause and called upon the appellant’s Chairman and Managing Director

DEFG

Ato appoint an independent and impartial arbitrator for adjudication ofdisputes which arose out of the aforesaid APO dated 30.09.2014. By aletter dated 17.01.2017, the Chairman and Managing Director of theappellant, in terms of the arbitration clause contained in the GCC,nominated one Shri K.H. Khan as sole arbitrator to adjudicate anddetermine disputes that had arisen between the parties. He also made itBclear that the parties would be at liberty to file claims and counter-claimsbefore the aforesaid sole arbitrator.

5. On 03.07.2017, this Court, by its judgment in TRF Ltd. v.Energo Engineering Projects Ltd., (2017) 8 SCC 377 [“TRF Ltd.”],held that since Managing Director of company which was one of theCparties to the arbitration, was himself ineligible to act as arbitrator, suchineligible person could not appoint an arbitrator, and any such appointmentwould have to be held to be null and void.

6. Given the aforesaid judgment, the appellant itself havingappointed the aforesaid sole arbitrator, referred to the aforesaid judgment,Dand stated that being declaration of law, appointments of arbitratorsmade prior to the judgment are not saved. Thus, the prayer before thesole arbitrator was that since he is de jure unable to perform his functionas arbitrator, he should withdraw from the proceedings to allow the partiesto approach the High Court for appointment of substitute arbitrator inEhis place. By an order dated 21.10.2017, Shri Khan rejected the appellant’sapplication after hearing both sides, without giving any reasons therefor.This led to petition being filed by the appellant before the High Courtof Delhi dated 28.10.2017 under Sections 14 and 15 of the Act to statethat the arbitrator has become de jure incapable of acting as such andthat substitute arbitrator be appointed in his place. By the impugnedFjudgment dated 22.11.2017, this petition was rejected, stating that thevery person who appointed the arbitrator is estopped from raising pleathat such arbitrator cannot be appointed after participating in theproceedings. In any event, under the proviso to Section 12(5) of the Act,inasmuch as the appellant itself has appointed Shri Khan, and theGrespondent has filed statement of claim without any reservation, alsoin writing, the same would amount to an express agreement in writing,which would, therefore, amount to waiver of the applicability of Section12(5) of the Act.

7. Shri Vikramjit Banerjee, learned Additional Solicitor Generalappearing on behalf of the appellant, has relied upon Sections 12 to 14 ofthe Act, as also the judgment in TRF Ltd. (supra), and has argued thatthe appointment of Shri Khan goes to eligibility to be appointed as anarbitrator, as result of which the appointment made is void ab initio.Further, the judgment in TRF Ltd. (supra) is declaratory of the law andwould apply to the facts of this case. Further, since there is no expressagreement in writing between the parties subsequent to disputes havingarisen between them that Shri Khan’s appointment is agreed upon, theproviso will not be applicable in the present case.

8. Shri Sharad Yadav, learned Senior Advocate appearing on behalfof the respondent, has supported the reasoning of the impugned judgmentand has added that Section 12(4) makes it clear that party may challengethe appointment of an arbitrator appointed by it only for reasons of whichit became aware after the appointment has been made. In the facts ofthe present case, since Section 12(5) and the Seventh Schedule were onthe statute book since 23.10.2015, the appellant was fully aware that theManaging Director of the appellant would be hit by Item 5 of the SeventhSchedule, and consequently, any appointment made by him would benull and void. This being so, Section 12(4) acts as bar to the petitionfiled under Sections 14 and 15 by the appellant. Further, Section 13(2)makes it clear that party who intends to challenge the appointment ofthe arbitrator, shall, within 15 days after becoming aware of circumstancesreferred to in Section 12(3), send written statement of reasons for thechallenge to the arbitrator. Admittedly, this has not been done within thetime frame stipulated by the said Section, as result of which, theaforesaid petition filed by the appellant should be dismissed. Coming tothe proviso to Section 12(5), Shri Yadav argued that “express agreementin writing” in the proviso to Section 12(5) is clearly met in the facts ofthe present case. This need not be in the form of formal agreementbetween the parties, but can be culled out, as was rightly held by theHigh Court, from the appointment letter issued by appellant as well asthe statement of claim filed by the respondent before the arbitrator leading,therefore, to waiver of the applicability of Section 12(5).

9. Pursuant to the 246[th] Law Commission Report, importantchanges were made in the Act. Insofar as the facts of this case areconcerned, sub-section (8) of Section 11 was substituted for the earlier

ASection 11(8)[1], sub-section (1) of Section 12 was substituted for theearlier Section 12(1)[2] and new Section 12(5)[3] was added after Section12(4). The opening lines of Section 14(1)[4] were also substituted.

10. Post-amendment, the aforesaid Sections are set out, as alsoSection 4 of the Act, as follows:B“

“4. Waiver of right to object.—A party who knows that—

(a) any provision of this Part from which the parties mayderogate, or

(b) any requirement under the arbitration agreement,

Chas not been complied with and yet proceeds with the arbitrationwithout stating his objection to such non-compliance without unduedelay or, if time-limit is provided for stating that objection, withinthat period of time, shall be deemed to have waived his right to soobject.”

D“11. Appointment of arbitrators.—

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(8) The Supreme Court or, as the case may be, the High Court orthe person or institution designated by such Court, before appointing

1 Subs. by Act 3 of 2016, S. 6(iv) (w.r.e.f. 23.10.2015). Prior to substitution, Section11(8) read as:

“11. Appointment of arbitrators.—

(8) The Chief Justice or the person or institution designated by him, in appointingan arbitrator, shall have due regard to—(a) any qualifications required of the arbitrator by the agreement of theFparties; and

(b) other considerations as are likely to secure the appointment of anindependent and impartial arbitrator.”

2 Subs. by Act 3 of 2016, S. 8(i) (w.r.e.f. 23.10.2015). Prior to substitution, Section12(1) read as:

“12. Grounds for challenge.—(1) When person is approached in connectionwith his possible appointment as an arbitrator, he shall disclose in writing anyGcircumstances likely to give rise to justifiable doubts as to his independence orimpartiality.”

3 Ins. by Act 3 of 2016, S. 8(ii) (w.r.e.f. 23.10.2015).

4 Subs. by Act 3 of 2016, S. 9 (w.r.e.f. 23.10.2015). Prior to substitution, Section 14(1)read as:

“14. Failure or impossibility to act.—(1) The mandate of an arbitrator shallHterminate if—”

an arbitrator, shall seek disclosure in writing from the prospectivearbitrator in terms of sub-section (1) of Section 12, and have dueregard to—

(a) any qualifications required for the arbitrator by theagreement of the parties; and

(b) the contents of the disclosure and other considerations asare likely to secure the appointment of an independent andimpartial arbitrator.

xxx xxx xxx “

“12. Grounds for challenge.—(1) When person is approachedin connection with his possible appointment as an arbitrator, heshall disclose in writing any circumstances,—

(a) such as the existence either direct or indirect, of any pastor present relationship with or interest in any of the parties orin relation to the subject-matter in dispute, whether financial,business, professional or other kind, which is likely to give riseto justifiable doubts as to his independence or impartiality; and

(b) which are likely to affect his ability to devote sufficienttime to the arbitration and in particular his ability to completethe entire arbitration within period of twelve months.

Explanation 1.—The grounds stated in the Fifth Schedule shallguide in determining whether circumstances exist which give riseto justifiable doubts as to the independence or impartiality of anarbitrator.

Explanation 2.—The disclosure shall be made by such person inthe form specified in the Sixth Schedule.

(2) An arbitrator, from the time of his appointment and throughoutthe arbitral proceedings, shall, without delay, disclose to the partiesin writing any circumstances referred to in sub-section (1) unlessthey have already been informed of them by him.

(3) An arbitrator may be challenged only if—

(a) circumstances exist that give rise to justifiable doubts as tohis independence or impartiality, or

(b) he does not possess the qualifications agreed to by theparties.

(4) party may challenge an arbitrator appointed by him, or inwhose appointment he has participated, only for reasons of whichhe becomes aware after the appointment has been made.

(5) Notwithstanding any prior agreement to the contrary, anyperson whose relationship, with the parties or counsel or theBsubject-matter of the dispute, falls under any of the categoriesspecified in the Seventh Schedule shall be ineligible to be appointedas an arbitrator:

Provided that parties may, subsequent to disputes having arisenbetween them, waive the applicability of this sub-section by anexpress agreement in writing.”

“13. Challenge procedure.—(1) Subject to sub-section (4), theparties are free to agree on procedure for challenging anarbitrator.

(2) Failing any agreement referred to in sub-section (1), partywho intends to challenge an arbitrator shall, within fifteen daysafter becoming aware of the constitution of the arbitral tribunal orafter becoming aware of any circumstances referred to in sub-section (3) of Section 12, send written statement of the reasonsfor the challenge to the arbitral tribunal.

(3) Unless the arbitrator challenged under sub-section (2)withdraws from his office or the other party agrees to the challenge,the arbitral tribunal shall decide on the challenge.

(4) If challenge under any procedure agreed upon by the partiesor under the procedure under sub-section (2) is not successful,Fthe arbitral tribunal shall continue the arbitral proceedings andmake an arbitral award.

(5) Where an arbitral award is made under sub-section (4), theparty challenging the arbitrator may make an application for settingaside such an arbitral award in accordance with Section 34.

(6) Where an arbitral award is set aside on an application madeunder sub-section (5), the Court may decide as to whether thearbitrator who is challenged is entitled to any fees.”

“14. Failure or impossibility to act.—(1) The mandate of anarbitrator shall terminate and he shall be substituted by anotherHarbitrator, if—

(a) he becomes de jure or de facto unable to perform hisfunctions or for other reasons fails to act without undue delay;and

(b) he withdraws from his office or the parties agree to thetermination of his mandate.

(2) If controversy remains concerning any of the grounds referredto in clause (a) of sub-section (1), party may, unless otherwiseagreed by the parties, apply to the Court to decide on the terminationof the mandate.

(3) If, under this section or sub-section (3) of Section 13, anarbitrator withdraws from his office or party agrees to thetermination of the mandate of an arbitrator, it shall not implyacceptance of the validity of any ground referred to in this Sectionor sub-section (3) of Section 12.”

11. Section 12(5) has been earlier dealt with in three SupremeCourt judgments. In Voestalpine Schienen GmbH v. Delhi MetroRail Corporation Ltd., (2017) 4 SCC 665, this Court went into therecommendations of the aforesaid Law Commission Report, and referredin great detail to the law before the amendment made in Section 12 andthen held:

“23. It also cannot be denied that the Seventh Schedule is basedon IBA guidelines which are clearly regarded as representationof international based practices and are based on statutes, caselaw and juristic opinion from cross-section on jurisdiction. It isso mentioned in the guidelines itself.”

xxx xxx xxx

“25. Section 12 has been amended with the objective to induceneutrality of arbitrators viz. their independence and impartiality.The amended provision is enacted to identify the “circumstances”which give rise to “justifiable doubts” about the independence orimpartiality of the arbitrator. If any of those circumstances asmentioned therein exists, it will give rise to justifiable apprehensionof bias. The Fifth Schedule to the Act enumerates the groundswhich may give rise to justifiable doubts of this nature. Likewise,the Seventh Schedule mentions those circumstances which wouldattract the provisions of sub-section (5) of Section 12 and nullify

any prior agreement to the contrary. In the context of this case, itis relevant to mention that only if an arbitrator is an employee, aconsultant, an advisor or has any past or present businessrelationship with party, he is rendered ineligible to act as anarbitrator. Likewise, that person is treated as incompetent toperform the role of arbitrator, who is manager, director or partof the management or has single controlling influence in anaffiliate of one of the parties if the affiliate is directly involved inthe matters in dispute in the arbitration. Likewise, persons whoregularly advised the appointing party or affiliate of the appointingparty are incapacitated. comprehensive list is enumerated inSchedule 5 and Schedule 7 and admittedly the persons empanelledby the respondent are not covered by any of the items in the saidlist.”

12. In HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC471, this Court, after setting out the amendments made in Section 12 andDthe Fifth, Sixth, and Seventh Schedules to the Act, held as follows:

“12. After the 2016 Amendment Act, dichotomy is made by theAct between persons who become “ineligible” to be appointed asarbitrators, and persons about whom justifiable doubts exist as totheir independence or impartiality. Since ineligibility goes to theroot of the appointment, Section 12(5) read with the SeventhSchedule makes it clear that if the arbitrator falls in any one of thecategories specified in the Seventh Schedule, he becomes“ineligible” to act as arbitrator. Once he becomes ineligible, it isclear that, under Section 14(1)(a), he then becomes de jure unableto perform his functions inasmuch as, in law, he is regarded as“ineligible”. In order to determine whether an arbitrator is de jureunable to perform his functions, it is not necessary to go to theArbitral Tribunal under Section 13. Since such person wouldlack inherent jurisdiction to proceed any further, an applicationmay be filed under Section 14(2) to the Court to decide on thetermination of his/her mandate on this ground. As opposed to this,in challenge where grounds stated in the Fifth Schedule aredisclosed, which give rise to justifiable doubts as to the arbitrator’sindependence or impartiality, such doubts as to independence orimpartiality have to be determined as matter of fact in the factsof the particular challenge by the Arbitral Tribunal under Section

13. If challenge is not successful, and the Arbitral Tribunal decidesthat there are no justifiable doubts as to the independence orimpartiality of the arbitrator/arbitrators, the Tribunal must thencontinue the arbitral proceedings under Section 13(4) and makean award. It is only after such award is made, that the partychallenging the arbitrator’s appointment on grounds contained inthe Fifth Schedule may make an application for setting aside thearbitral award in accordance with Section 34 on the aforesaidgrounds. It is clear, therefore, that any challenge contained in theFifth Schedule against the appointment of Justice Doabia andJustice Lahoti cannot be gone into at this stage, but will be goneinto only after the Arbitral Tribunal has given an award. Therefore,we express no opinion on items contained in the Fifth Scheduleunder which the appellant may challenge the appointment of eitherarbitrator. They will be free to do so only after an award is renderedby the Tribunal.”

xxx xxx xxx

“14. The enumeration of grounds given in the Fifth and SeventhSchedules have been taken from the IBA Guidelines, particularlyfrom the Red and Orange Lists thereof. The aforesaid guidelinesconsist of three lists. The Red List, consisting of non-waivableand waivable guidelines, covers situations which are “moreserious” and “serious”, the “more serious” objections being non-waivable. The Orange List, on the other hand, is list of situationsthat may give rise to doubts as to the arbitrator’s impartiality orindependence, as consequence of which the arbitrator has aduty to disclose such situations. The Green List is list of situationswhere no actual conflict of interest exists from an objective pointof view, as result of which the arbitrator has no duty of disclosure.These Guidelines were first introduced in the year 2004 and havethereafter been amended, after seeing the experience of arbitrationworldwide. In Part 1 thereof, general standards regardingimpartiality, independence and disclosure are set out.”

xxx xxx xxx

“17. It will be noticed that Items 1 to 19 of the Fifth Schedule areidentical with the aforesaid items in the Seventh Schedule. Theonly reason that these items also appear in the Fifth Schedule is

for purposes of disclosure by the arbitrator, as unless the proposedarbitrator discloses in writing his involvement in terms of Items 1to 34 of the Fifth Schedule, such disclosure would be lacking, inwhich case the parties would be put at disadvantage as suchinformation is often within the personal knowledge of the arbitratoronly. It is for this reason that it appears that Items 1 to 19 alsoappear in the Fifth Schedule.”

13. In TRF Ltd. (supra), this Court referred to Section 12(5) ofthe Act in the context of appointment of an arbitrator by ManagingDirector of corporation, who became ineligible to act as arbitratorunder the Seventh Schedule. This Court held:

“50. First, we shall deal with Clause (d). There is no quarrel thatby virtue of Section 12(5) of the Act, if any person who fallsunder any of the categories specified in the Seventh Scheduleshall be ineligible to be appointed as the arbitrator. There is nodoubt and cannot be, for the language employed in the SeventhSchedule, the Managing Director of the Corporation has becomeineligible by operation of law. It is the stand of the learned SeniorCounsel for the appellant that once the Managing Directorbecomes ineligible, he also becomes ineligible to nominate.Refuting the said stand, it is canvassed by the learned SeniorCounsel for the respondent that the ineligibility cannot extend to anominee if he is not from the Corporation and more so whenthere is apposite and requisite disclosure. We think it appropriateto make it clear that in the case at hand we are neither concernedwith the disclosure nor objectivity nor impartiality nor any suchother circumstance. We are singularly concerned with the issue,whether the Managing Director, after becoming ineligible byoperation of law, is he still eligible to nominate an arbitrator. At thecost of repetition, we may state that when there are two parties,one may nominate an arbitrator and the other may appoint another.That is altogether different situation. If there is clause requiringthe parties to nominate their respective arbitrator, their authorityto nominate cannot be questioned. What really in that circumstancecan be called in question is the procedural compliance and theeligibility of their arbitrator depending upon the norms providedunder the Act and the Schedules appended thereto. But, here is acase where the Managing Director is the “named sole arbitrator”

and he has also been conferred with the power to nominate onewho can be the arbitrator in his place. Thus, there is subtledistinction……”

xxx xxx xxx

“54. In such context, the fulcrum of the controversy would be,can an ineligible arbitrator, like the Managing Director, nominatean arbitrator, who may be otherwise eligible and respectableperson. As stated earlier, we are neither concerned with theobjectivity nor the individual respectability. We are only concernedwith the authority or the power of the Managing Director. By ouranalysis, we are obligated to arrive at the conclusion that once thearbitrator has become ineligible by operation of law, he cannotnominate another as an arbitrator. The arbitrator becomes ineligibleas per prescription contained in Section 12(5) of the Act. It isinconceivable in law that person who is statutorily ineligible cannominate person. Needless to say, once the infrastructurecollapses, the superstructure is bound to collapse. One cannothave building without the plinth. Or to put it differently, once theidentity of the Managing Director as the sole arbitrator is lost, thepower to nominate someone else as an arbitrator is obliterated.Therefore, the view expressed by the High Court is not sustainableand we say so.”14. From conspectus of the above decisions, it is clear thatSection 12(1), as substituted by the Arbitration and Conciliation(Amendment) Act, 2015 [“Amendment Act, 2015”], makes it clearthat when person is approached in connection with his possibleappointment as an arbitrator, it is his duty to disclose in writing anycircumstances which are likely to give rise to justifiable doubts as to hisindependence or impartiality. The disclosure is to be made in the formspecified in the Sixth Schedule, and the grounds stated in the FifthSchedule are to serve as guide in determining whether circumstancesexist which give rise to justifiable doubts as to the independence orimpartiality of an arbitrator. Once this is done, the appointment of thearbitrator may be challenged on the ground that justifiable doubts havearisen under sub-section (3) of Section 12 subject to the caveat enteredby sub-section (4) of Section 12. The challenge procedure is then set outin Section 13, together with the time limit laid down in Section 13(2).

AWhat is important to note is that the arbitral tribunal must first decide onthe said challenge, and if it is not successful, the tribunal shall continuethe proceedings and make an award. It is only post award that the partychallenging the appointment of an arbitrator may make an applicationfor setting aside such an award in accordance with Section 34 of theAct.B

15. Section 12(5), on the other hand, is new provision whichrelates to the de jure inability of an arbitrator to act as such. Under thisprovision, any prior agreement to the contrary is wiped out by the non-obstante clause in Section 12(5) the moment any person whoserelationship with the parties or the counsel or the subject matter of theCdispute falls under the Seventh Schedule. The sub-section then declaresthat such person shall be “ineligible” to be appointed as arbitrator. Theonly way in which this ineligibility can be removed is by the proviso,which again is special provision which states that parties may,subsequentto disputes having arisen between them, waive the applicabilityDof Section 12(5) by an express agreement in writing. What is clear,therefore, is that where, under any agreement between the parties, aperson falls within any of the categories set out in the Seventh Schedule,he is, as matter of law, ineligible to be appointed as an arbitrator. Theonly way in which this ineligibility can be removed, again, in law, is thatparties may afterdisputes have arisen between them, waive theEapplicability of this sub-section by an “express agreement in writing”.Obviously, the “express agreement in writing” has reference to personwho is interdicted by the Seventh Schedule, but who is stated by parties(after the disputes have arisen between them) to be person in whomthey have faith notwithstanding the fact that such person is interdictedFby the Seventh Schedule.

16. The Law Commission Report, which has been extensivelyreferred to in some of our judgments, makes it clear that there are certainminimum levels of independence and impartiality that should be requiredof the arbitral process, regardless of the parties’ agreement. This beingGthe case, the Law Commission then found:

“59. The Commission has proposed the requirement of havingspecific disclosures by the arbitrator, at the stage of his possibleappointment, regarding existence of any relationship or interest ofany kind which is likely to give rise to justifiable doubts. TheCommission has proposed the incorporation of the Fourth Schedule,

which has drawn from the Red and Orange lists of the IBAGuidelines on Conflicts of Interest in International Arbitration, andwhich would be treated as “guide” to determine whethercircumstances exist which give rise to such justifiable doubts. Onthe other hand, in terms of the proposed section 12 (5) of the Actand the Fifth Schedule which incorporates the categories fromthe Red list of the IBA Guidelines (as above), the person proposedto be appointed as an arbitrator shall be ineligible to be soappointed, notwithstanding any prior agreement to the contrary.In the event such an ineligible person is purported to be appointedas an arbitrator, he shall be de jure deemed to be unable to performhis functions, in terms of the proposed explanation to section 14.Therefore, while the disclosure is required with respect to abroader list of categories (as set out in the Fourth Schedule, andas based on the Red and Orange lists of the IBA Guidelines), theineligibility to be appointed as an arbitrator (and the consequentde jure inability to so act) follows from smaller and more serioussub-set of situations (as set out in the Fifth Schedule, and as basedon the Red list of the IBA Guidelines).

60. The Commission, however, feels that real and genuine partyautonomy must be respected, and, in certain situations, partiesshould be allowed to waive even the categories of ineligibility asset in the proposed Fifth Schedule. This could be in situations offamily arbitrations or other arbitrations where person commandsthe blind faith and trust of the parties to the dispute, despite theexistence of objective “justifiable doubts” regarding hisindependence and impartiality. To deal with such situations, theCommission has proposed the proviso to section 12 (5), whereparties may, subsequent to disputes having arisen betweenthem, waive the applicability of the proposed section 12 (5) by anexpress agreement in writing. In all other cases, the general rulein the proposed section 12 (5) must be followed. In the event theHigh Court is approached in connection with appointment of anarbitrator, the Commission has proposed seeking the disclosure interms of section 12 (1), and in which context the High Court orthe designate is to have “due regard” to the contents of suchdisclosure in appointing the arbitrator.”

(emphasis in original)

AThus, it will be seen that party autonomy is to be respected only incertain exceptional situations which could be situations which arise infamily arbitrations or other arbitrations where person subjectivelycommands blind faith and trust of the parties to the dispute, despite theexistence of objective justifiable doubts regarding his independence andimpartiality.B

17. The scheme of Sections 12, 13, and 14, therefore, is that wherean arbitrator makes disclosure in writing which is likely to give justifiabledoubts as to his independence or impartiality, the appointment of sucharbitrator may be challenged under Sections 12(1) to 12(4) read withSection 13. However, where such person becomes “ineligible” to beCappointed as an arbitrator, there is no question of challenge to sucharbitrator, before such arbitrator. In such case, i.e., case which fallsunder Section 12(5), Section 14(1)(a) of the Act gets attracted inasmuchas the arbitrator becomes, as matter of law (i.e., de jure), unable toperform his functions under Section 12(5), being ineligible to be appointedDas 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 controversy occurs concerning whether he has becomede jure unable to perform his functions as such, that party has to applyto the Court to decide on the termination of the mandate, unless otherwiseagreed by the parties. Thus, in all Section 12(5) cases, there is no challengeEprocedure to be availed of. If an arbitrator continues as such, being dejure unable to perform his functions, as he falls within any of thecategories mentioned in Section 12(5), read with the Seventh Schedule,a party may apply to the Court, which will then decide on whether hismandate has terminated. Questions which may typically arise underFSection 14 may be as to whether such person falls within any of thecategories mentioned in the Seventh Schedule, or whether there is awaiver as provided in the proviso to Section 12(5) of the Act. As amatter of law, it is important to note that the proviso to Section 12(5)must be contrasted with Section 4 of the Act. Section 4 deals with cases

of deemed waiver by conduct; whereas the proviso to Section 12(5)Gdeals with waiver by express agreement in writing between the partiesonly if made subsequent to disputes having arisen between them.

18. On the facts of the present case, it is clear that the ManagingDirector of the appellant could not have acted as an arbitrator himself,being rendered ineligible to act as arbitrator under Item 5 of the SeventhHSchedule, which reads as under:

“Arbitrator’s relationship with the parties or counsel

xxx xxx xxx

5. The arbitrator is manager, director or part of the management,or has similar controlling influence, in an affiliate of one of theparties if the affiliate is directly involved in the matters in disputein the arbitration”

Whether such ineligible person could himself appoint anotherarbitrator was only made clear by this Court’s judgment in TRF Ltd.(supra) on 03.07.2017, this Court holding that an appointment made byan ineligible person is itself void ab initio. Thus, it was only on 03.07.2017,that it became clear beyond doubt that the appointment of Shri Khanwould be void ab initio. Since such appointment goes to “eligibility”,i.e., to the root of the matter, it is obvious that Shri Khan’s appointmentwould be void. There is no doubt in this case that disputes arose onlyafter the introduction of Section 12(5) into the statute book, and ShriKhan was appointed long after 23.10.2015. The judgment in TRF Ltd.(supra) nowhere states that it will apply only prospectively, i.e., theappointments that have been made of persons such as Shri Khan wouldbe valid if made before the date of the judgment. Section 26 of theAmendment Act, 2015 makes it clear that the Amendment Act, 2015shall apply in relation to arbitral proceedings commenced on or after23.10.2015. Indeed, the judgment itself set aside the order appointingthe arbitrator, which was an order dated 27.01.2016, by which theManaging Director of the respondent nominated former Judge of thisCourt as sole arbitrator in terms of clause 33(d) of the Purchase Orderdated 10.05.2014. It will be noticed that the facts in the present case aresomewhat similar. The APO itself is of the year 2014, whereas theappointment by the Managing Director is after the Amendment Act,2015, just as in the case of TRF Ltd. (supra). Considering that theappointment in the case of TRF Ltd. (supra) of retired Judge of thisCourt was set aside as being non-est in law, the appointment of ShriKhan in the present case must follow suit.

19. However, the learned Senior Advocate appearing on behalfof the respondent has argued that Section 12(4) would bar the appellant’sapplication before the Court. Section 12(4) will only apply when achallenge is made to an arbitrator, inter alia, by the same party who hasappointed such arbitrator. This then refers to the challenge procedureset out in Section 13 of the Act. Section 12(4) has no applicability to an

Aapplication made to the Court under Section 14(2) to determine whetherthe mandate of an arbitrator has terminated as he has, in law, becomeunable to perform his functions because he is ineligible to be appointedas such under Section 12(5) of the Act.

20. This then brings us to the applicability of the proviso to SectionB12(5) on the facts of this case. Unlike Section 4 of the Act which dealswith deemed waiver of the right to object by conduct, the proviso toSection 12(5) will only apply if subsequent to disputes having arisenbetween the parties, the parties waive the applicability of sub-section(5) of Section 12 by an express agreement in writing. For this reason,the argument based on the analogy of Section 7 of the Act must also beCrejected. Section 7 deals with arbitration agreements that must be inwriting, and then explains that such agreements may be contained indocuments which provide record of such agreements. On the otherhand, Section 12(5) refers to an “express agreement in writing”. Theexpression “express agreement in writing” refers to an agreement madeDin words as opposed to an agreement which is to be inferred by conduct.Here, Section 9 of the Indian Contract Act, 1872 becomes important. Itstates:

“9. Promises, express and implied.—In so far as proposalor acceptance of any promise is made in words, the promise isEsaid to be express. In so far as such proposal or acceptance ismade otherwise than in words, the promise is said to be implied.”

It is thus necessary that there be an “express” agreement inwriting. This agreement must be an agreement by which both parties,with full knowledge of the fact that Shri Khan is ineligible to be appointedFas an arbitrator, still go ahead and say that they have full faith andconfidence in him to continue as such. The facts of the present casedisclose no such express agreement. The appointment letter which isrelied upon by the High Court as indicating an express agreement on thefacts of the case is dated 17.01.2017. On this date, the Managing Directorof the appellant was certainly not aware that Shri Khan could not beGappointed by him as Section 12(5) read with the Seventh Schedule onlywent to the invalidity of the appointment of the Managing Director himselfas an arbitrator. Shri Khan’s invalid appointment only became clear afterthe declaration of the law by the Supreme Court in TRF Ltd. (supra)which, as we have seen hereinabove, was only on 03.07.2017. After thisHdate, far from there being an express agreement between the parties as

to the validity of Shri Khan’s appointment, the appellant filed an applicationon 07.10.2017 before the sole arbitrator, bringing the arbitrator’s attentionto the judgment in TRF Ltd. (supra) and asking him to declare that hehas become de jure incapable of acting as an arbitrator. Equally, thefact that statement of claim may have been filed before the arbitrator,would not mean that there is an express agreement in words whichwould make it clear that both parties wish Shri Khan to continue asarbitrator despite being ineligible to act as such. This being the case, theimpugned judgment is not correct when it applies Section 4, Section 7,Section 12(4), Section 13(2), and Section 16(2) of the Act to the facts ofthe present case, and goes on to state that the appellant cannot be allowedto raise the issue of eligibility of an arbitrator, having itself appointed thearbitrator. The judgment under appeal is also incorrect in stating thatthere is an express waiver in writing from the fact that an appointmentletter has been issued by the appellant, and statement of claim hasbeen filed by the respondent before the arbitrator. The moment theappellant came to know that Shri Khan’s appointment itself would beinvalid, it filed an application before the sole arbitrator for termination ofhis mandate.

21. The learned Additional Solicitor General appearing on behalfof the appellant has relied upon All India Power Engineer Federationv. Sasan Power Ltd., (2017) 1 SCC 487, and referred to paragraph 21thereof, which reads as follows:

“21. Regard being had to the aforesaid decisions, it is clear thatwhen waiver is spoken of in the realm of contract, Section 63 ofthe Contract Act, 1872 governs. But it is important to note thatwaiver is an intentional relinquishment of known right, and that,therefore, unless there is clear intention to relinquish right thatis fully known to party, party cannot be said to waive it. Butthe matter does not end here. It is also clear that if any element ofpublic interest is involved and waiver takes place by one of theparties to an agreement, such waiver will not be given effect to ifit is contrary to such public interest. This is clear from readingof the following authorities.”

This judgment cannot possibly apply as the present case is governedby the express language of the proviso to Section 12(5) of the Act.Similarly, the judgments relied upon by the learned Senior Advocateappearing on behalf of the respondent, namely, Vasu P. Shetty v. Hotel

ABCD

AVandana Palace, (2014) 5 SCC 660, and BSNL v. Motorola India(P) Ltd., (2009) 2 SCC 337 [“BSNL”], for the same reason, cannot besaid to have any application to the express language of the proviso toSection 12(5). It may be noted that BSNL (supra) deals with Section 4of the Act which, as has been stated hereinabove, has no application,and must be contrasted with the language of the proviso to Section 12(5).

22. We thus allow the appeals and set aside the impugned judgment.The mandate of Shri Khan having terminated, as he has become de jureunable to perform his function as an arbitrator, the High Court may appointa substitute arbitrator with the consent of both the parties.

C23. Vide order dated 25.01.2018, we had issued notice in the SpecialLeave Petition as well as notice on the interim relief prayed for by theappellant. Since there was no order of stay, the arbitral proceedingscontinued even after the date of the impugned judgment, i.e., 22.11.2017,and culminated in two awards dated 11.07.2018 and 12.07.2018. Wehave been informed that the aforesaid awards have been challenged byDthe appellant by applications under Section 34 of the Act, in which certaininterim orders have been passed by the Single Judge of the High Courtof Delhi. These awards, being subject to the result of this petition, areset aside. Consequently, the appellant’s Section 34 proceedings havebeen rendered infructuous. It will be open to the appellant to approachEthe High Court of Delhi to reclaim the deposit amounts that have beenmade in pursuance of the interim orders passed in the Section 34 petitionfiled in the High Court of Delhi.

Devika Gujral

Appeals allowed.