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09 November 2017
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.
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 false information.(6)
However, it is interesting to note that the Supreme Court in HRD Corporation refused to give the items mentioned in the Fifth and Seventh Schedules an expansive or a narrow interpretation while requiring a fair construction of words used therein. The Supreme Court indicated that doubts as to the independence and impartiality of an arbitrator are justifiable only if a reasonable third person having knowledge of the relevant facts and circumstances would reach the conclusion that there is a likelihood that the arbitrator may be influenced by factors other than the merits of the case in reaching his or her decision.
The courts are yet to encounter a situation where an award is challenged on any of the grounds or circumstances mentioned under the Fifth Schedule raising justifiable grounds on the independence or impartiality of the arbitrator(s). In HRD Corporation the Supreme Court held that such cases will be decided by applying the test of objectivity. It will be interesting to see how this test will be applied by the courts when faced with such a situation.
For further information on this topic please contact Rajat Jariwal or Sahil Narang at Khaitan & Co by telephone (+91 11 4151 5454) or email (email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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