The Complex Judicial Mechanics in the Invocation of Section 12(5) of The Arbitration and Conciliation Act, 1996

A small portion of the Arbitration and Conciliation Act, 1996 (“the Act”) has the most curious and nuanced application. Section 12(5) read with the Seventh Schedule, introduced by the 2015 amendments, lays down grounds for discerning the ineligibility of arbitrator(s). This was added despite the presence of Section 12(1)(a), which read with its Explanation I, allowed for raising doubts on an arbitrator’s impartiality under Section 12(3)(a). That is, a provision to pre-assess any conflict of interest of any member of the arbitral tribunal was in place to begin with. However, a provision to deal with the ‘ineligibility’ of any member of the arbitral tribunal was introduced. Notably, the factors that may lead to categorise such arbitrators as impartial or ineligible do not substantially vary. The differences in application of the two, therefore, are not rich in detail as far as the statutory text goes. Furthermore, their application has been made extremely nuanced, with most of it brought about jurisprudentially. Section 12(5), in particular, requires the most nebulous of judicial checkboxes to be ticked for its proper invocation.

This article will attempt to describe the complexities surrounding Section 12(5) and the dissimilarities in its application when compared to the otherwise deceptively similar Section 12(1)(a). It will conclude with an attempt to demonstrate the illegitimacy of the very recent decision in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited and Ors. v. M/s Ajay Sales (“Jaipur Zila”), which adds an undesirable aspect to the provision’s operation.

I. A Chain of Pre-Requisites

Before dwelling upon the same, a brief description of the holding in BCCI v. Kochi (“BCCI”) is indispensable in understanding Section 12(5)’s general applicability. Therein, the Supreme Court (“the Court”) had clarified the application of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015. This provision precludes the application of these amendments to pending arbitral proceedings. That is, the provision only saved pending arbitral proceedings from the amendments’ application. Hence, the date of the arbitration agreement may well predate the 2015 amendments coming force, but it will be tested against those if it is invoked after the date of their enforcement. At the same time, pending court proceedings, which would necessarily entail those proceedings at the stage of Section 34 and 37, are exempt from the amendments’ scrutiny. Needless to state, Section 12(1)(a) does not have to face this test of pre-requisites.

However, there exist other differences between Section 12(1)(a) and Section 12(5). It is pertinent to state that two crucial and respective counterparts need to be tested for either provision’s application. These are, namely, the Fifth and Seventh Schedules to the Act. The former deals with “justifiable doubts as to the independence or impartiality of arbitrators” whereas, the latter deals with “grounds for removal of arbitrator”. The latter is less comprehensive than the former since the Fifth Schedule lists another six grounds for discerning doubts as to the impartiality of an arbitrator. This difference apart, the lists appear to overlap insofar as the grounds are similar, verbatim.

However, given the phrasing of the marginal headings of the two schedules and the texts of Section 12(1)(a) and 12(5), there exist judicially interpreted differences. The most crucial decision in this regard is the one in HRD Corp. v. GAIL (India) Ltd (“HRD”). Inexplicably holding the superficial similarity in the two schedules as misleading, it states that both doubts as to an arbitrator’s bias and ineligibility may be tested before the award is made, by the arbitrators themselves. However, the two diverge in terms of their respective procedural implications. The statutory implication of invoking Section 12(1)(a) would be the Arbitral Tribunal proceeding under Section 13 of the Act. Thereafter, at the stage of Section 34, this provision can only be invoked when the arbitral tribunal has previously made an award on this particular aspect.

Testing the effect on the jurisdiction, it states, is the domain reserved for Section 12(5) read with the Seventh Schedule. As opposed to mere bias, the ineligibility of an Arbitrator to participate denotes a de jure inability to arbitrate under Section 14(1)(a). The consequence here would be the filing of an application under Section 14(2) to terminate the concerned arbitrator’s participation. Since the Seventh Schedule and Section 14(1)(a) denote an inherent lack of jurisdiction, the proceedings under Section 13 are ruled out, according to the decision. Most notably, no such pre-requisite such as a finding on the challenge under Section 12(5) in an award for it to be raised at the stage of Section 34, were laid down. However, it is pertinent to note that Section 12(5) was not in issue before the Court, in this case, making the findings on Section 12(5) as only obiter.

The last factor before dealing with the alleged ambiguity central to this article is one more nuance involved in the applicability of Section 12(5). Decisions such as Bharat Broadband Network Limited v. United Telecoms Limited (“Bharat Broadband”),Union of India v. Tantia Constructions Limited (“Tantia”) and Voestalpine Schienen GmbH v. Delhi Metro Rail Corp. Ltd. (“Voestalpine”)have held the provision amenable to waiver by mutual and prior agreement in writing, as per the proviso to Section 12(5). The waiver may occur only if the party appointing a ‘biased’ arbitrator had the contractual freedom for electing to do so. Furthermore, Bharat Broadband and Tantia extend the test under the Seventh Schedule allowing a party chosen by the agreement to merely nominate arbitrators (who may / not be susceptible to the same test). The rationale of the decisions appears to be able to prioritise party autonomy, simultaneously avoiding an extremely literal interpretation that may keep domain experts outside of arbitral proceedings. In the absence of such a waiver, Section 12(5) becomes mandatory and non-derogable, as decided in Haryana Space Application Centre v. Pan India Consultants (P) Ltd. Reading Section 12(5) in such a fashion was based on the reasoning that the legislative intent of the 2015 amendments was to eliminate partiality and all its effects on the arbitrators’ functioning, regardless of the stage unfolding under the Act. Section 12(1)(a) has not been read to possess this nature of being ‘waivable’, suggesting it to be an indispensable requirement.

II. A Thread of Oddity in the Web of Nuances: Stage of Invocation

It is to this web of nuances engulfing Section 12(5), to which the decisions in TRF Limited v. Energo Engineering Projects Limited (“TRF”) and Jaipur Zila introduce another perplexity. These cases deal with deciding applications under Section 11 of the Act, wherein an appointed arbitrator gets tested vis-à-vis the disqualifications in Section 12(5) read with the Seventh Schedule. The difference in facts is that while TRF saw a challenge to a nominating arbitrator losing eligibility, the latter saw an agreed upon sole arbitrator becoming ineligible (due to the 2015 amendments coming into force). However, the more significant difference between the two cases is that TRF saw a challenge of ineligibility before the commencement of arbitral proceedings. In Jaipur Zila, Section 11 was resorted to in both by approaching a Court of law to test the appointment under Section 12(5) when arbitral proceedings were underway.

This difference between the two cases is crucial. Notably, Section 11 deals with the appointment of an arbitrator in the absence of a contractually envisaged procedure, or failure in adhering to one. Proposedly, this is a dangerous expansion of a window for court intervention. Both these decisions were contradicting a division bench decision of the Court in Antrix Corpn. Ltd. v. Devas Multimedia (P) Ltd. Therein, it was stated that removal of an arbitrator by a court of law is only provided in Section 12-15. By reading such a power in Section 11, the text of the law was refused to be changed to add another window of court intervention in arbitral proceedings. This was an agreeable view because it forecloses another window for judicial interference. However, this is proposed as an agreeable position for yet another important reason. If the ineligibility is raised at the stage of the arbitral proceedings or thereafter under Section 14, Section 15(3) envisages substitution of arbitrators who have the discretion to continue from the last stage of hearing.

Similarly, the Court in HRD was dealing with prior findings on applications under Section 29A. This is another provision that may only be invoked after the commencement of arbitral proceedings. Under the statutory mandate of its sub-section 6, the court exercised the power of substitution without hitting the reset button on arbitral proceedings.

However, when such a replacement occurs after discerning ineligibility at the stage of Section 11, there appears to be no such mandate on the tribunal. That is, it is submitted that by way of a petition under Section 11 to invoke Section 12(5), a petitioner gets to hit the reset button, as there is no discretion on tribunal to continue the progress made in a particular proceeding.

III. Conclusion

The Court needs to streamline the conditions for the application of Section 12(5), read with the Seventh Schedule, in a way that minimises judicial intervention. It is suggested that the invocation of it may be restricted to post-commencement of arbitral proceedings for two reasons. Firstly, that would give the arbitrator an opportunity to be heard on such a challenge. Secondly and demonstrably, this ensures a possibility for the progress made by a tribunal to remain intact in case of a consequential substitution.

An efficient arbitral framework shall remedy the impropriety in a tribunal/arbitrator’s jurisdiction with little or no effect on the pace of the arbitration. The prevailing judicial standards for successfully invoking Section 12(5), to a great degree, are conducive for achieving this aim, in spite of the complex appearance they may bear. However, the carving of yet another stage for judicial intervention in the name of testing an arbitrator’s ineligibility, in the middle of arbitral proceedings, is retrograde in this regard.

This article is authored by Yash Sinha, advocate at the Supreme Court of India, New Delhi.

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