Disqualification of an Arbitrator under section 12(5) and remedy
The Law Commission had inter alia recommended insertion of section 12(5) to the Act along with Seventh Schedule. The Law Commission of India in its 246th report in August, 2004 recommended an amendment to Section 12 of the Act, specifically dealing with the issue of 'neutrality of arbitrators'. Paragraphs 53 to 60 of this report would be necessary to show the intent of the legislature in amending the Act and are reproduced here in below:-
"NEUTRALITY OF ARBITRATORS
53. It is universally accepted that any quasi- judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators viz. their independence and impartiality, is critical to the entire process.
54. In the Act, the test for neutrality is set out in Section 12(3) which provides--
'12. (3) An arbitrator may be challenged only if--
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality....'
55. The Act does not lay down any other conditions to identify the "circumstances" which give rise to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any-actual-bias for that is setting the bar too high; but, whether the circumstances in question give rise to any- justifiable apprehensions-of bias.
56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See Executive Engineer, Irrigation Division v.Gangaram Chhapolia, (1984) 3 SCC 627, Transport Deptt. v. Munuswamy Mudaliar 1988 Supp SCC 651, International Airports Authority v. K.D. Bali (1988) 2 SCC 360, S. Rajan v. State of Kerala (1992) 3 SCC 608, Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mfg. Co. Ltd. (1996) 1 SCC 54, Union of India v. M.P. Gupta (2004) 10 SCC 504 and ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd.(2007) 5 SCC 304 that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in Indian Indian Oil Corpn.Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460, carved out a minor exception in situations when the arbitrator 'was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject-matter of the dispute' (SCC p. 533, para 34) and this exception was used by the Supreme Court in Denel (Proprietary) Ltd. v. Ministry of Defence, (2012) 2 SCC 759 : (2012) 2 SCC (Civ) 37 : AIR 2012 SC 817] and Bipromasz Bipron Trading Sa v. Bharat Electronics Ltd., (2012) 6 SCC 384 : (2012) 3 SCC (Civ) 702, to appoint an independent arbitrator under Section 11, this is not enough.
57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr P.K. Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes.
58. Large-scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to Sections 11, 12 and 14 of the Act.
59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his-possible-appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the red and orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed Section 12(5) of the Act and the Fifth Schedule which incorporates the categories from the red list of the IBA Guidelines (as above), the person proposed to be appointed as an arbitrator shall be -ineligible- to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed Explanation to Section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the Fourth Schedule, and as based on the red and orange lists of the IBA Guidelines), the- ineligibility- to be appointed as an arbitrator (and the consequent de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the red list of the IBA Guidelines).
60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective "justifiable doubts" regarding his independence and impartiality. To deal with such situations, the Commission has proposed the proviso to Section 12(5), where parties may, subsequent to disputes having arisen between them-, waive the applicability of the proposed Section 12(5) by an express agreement in writing. In all other cases, the general rule in the proposed Section 12(5) must be followed. In the event the High Court is approached in connection with appointment of an arbitrator, the Commission has proposed seeking the disclosure in terms of Section 12(1) and in which context the High Court or the designate is to have "due regard" to the contents of such disclosure in appointing the arbitrator."
Section 12(5) of the Arbitration and Conciliation Act, 1996 explicitly states that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an Arbitrator. The appointing authority or the persona designate must have due regard to the contents of the disclosure made by the proposed appointee.
The relationships mentioned in Seventh Schedule (a subset of the fifth Schedule) of the Act renders the Arbitrator ineligible and disqualified under section 12(5), whereas the Fifth Schedule of the Act contains the ground which give rise to justifiable doubts as to the independence and impartiality of arbitrators and are required to be covered by the disclosure issued by the Arbitrator.
In the context of section 12(5) of the Act, Antrix Corporation Ltd v Devas Multimedia Pvt Ltd (2014) 11SCC560 is no more an authority to the extent it held that the only remedy that is available is under section 13 before the Arbitrator or under section 34 after the award and not under section 14. It reflects the position of law as it stood prior to the enactment of the Arbitration and Conciliation (Amendment) Act, 2015 i.e. prior to the enactment of the present section 12(5) of the Arbitration and Conciliation Act, 1996.
After the amendments were made in tandem with the recommendations of the Law Commission, any ineligibility under section 12(5) which goes to the root of the jurisdiction of the Arbitrator cannot be decided by the Arbitrator at all after the amendments have come into force. Once the ineligibility under section 12(5) is attracted the Arbitrator becomes dejure and defacto unable to perform his functions and hence the only remedy available is a petition under section 14(2) of the said Act.