EFFECT OF NON-DISCLOSURE BY ARBITRATOR UNDER SECTION 12 OF ARBITRATION AND CONCILIATION ACT, 1996
Author: Ishita Chandra, II Year of B.A.,LL.B from Dr. B. R. Ambedkar National Law University, Sonepat, Haryana.
Arbitration is the dispute settlement procedure between two parties to designate an arbitrator to deliver a binding solution to the dispute. It is a mode to settle disputes outside the courts thus conserving time as well as resources. It can be termed as a legal mechanism that encourages the settlement of disputes between two or more parties mutually by the appointment of a third party whose decision is binding on the parties referring to the given dispute. It also poses as an effective way of expediting the resolution of disputes in these modern times when time is scarce. Advancement, liberalisation and globalisation of international business relations necessitated the fabrication of a flexible, reasonable, favourable and time saving method of dispute resolution without making the parties go through the rigorous, time taking and resource-exhausting process of the conventional justice delivery system. Some advantages of arbitration include minimalization of court intervention, lowering costs of dispute resolution and expeditious and timely disposal of cases.
ARBITRATION IN INDIA
In India, arbitration cases are dealt under the Arbitration and Conciliation Act 1996. Section 2(a) of the Arbitration and Conciliation Act states that “arbitration” means any arbitration whether or not administered by permanent arbitral institution and Section 2(d) of the Act states that an “arbitral tribunal” means a sole arbitrator or a panel of arbitrators. The principal characteristics of an equitable and impartial arbitration are freedom and neutrality. The Arbitration and Conciliation (Amendment) Act, 2015 came into force on 23rd October 2015. Its intent is to improve the quality of commercial arbitration in the nation. The 2015 amendment placed a strong emphasis on freedom and impartiality. It emphasises on an unbiased judgement and a fair outlook towards arbitral proceedings. The integrity, virtue and impartiality of arbitrators form the basis of a fair arbitral proceeding.
The reforms to the Arbitration and Conciliation Act 1996 in 2015, aimed at improving not just the neutrality of arbitrators but also the rendition of neutrality. Section 12 of Arbitration and Conciliation Act, 2015 essentially deals with the neutrality/impartiality of the arbitrators. This section does not allow an arbitrator to conduct an arbitration proceeding, if the arbitrator is prejudiced towards the party or parties in that particular proceeding. The appointment of an arbitrator's appointment is one of the most influential steps in initiating the arbitral Proceedings as they act as the anchors in the overall arbitral proceedings. It is extremely imperative for the arbitrators to remain unbiased throughout the proceedings in order to arrive at an amicable and fair conclusion. To assure his unbiased nature, the arbitrator must elucidate his relationship with the party, counsel, or subject matter of the dispute, if any, at the time of his appointment. If later it is found out that he has any relationship with the parties as mentioned in the Seventh Schedule of the Arbitration and Conciliation Act, 1966, or if he has any personal interest involved, the arbitrator will be considered ineligible, and the proceedings can be challenged as per Section 12 (5) of the Act.
The 2015 amendment in the Arbitration and Conciliation Act led to the introduction of a special provision. This provision was inserted into Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015 and it stated that every person who has been contacted by the parties to select an arbitrator shall report in writing, expressly or indirectly, all the details of the past or current relationship with the parties, the lawyer or the subject-matter concerned and also the outcome of the arbitration, which could be financial, professional, commercial or some other kind likely to produce tenable concerns as to impartiality and freedom. As per the rules and regulations of 6th Schedule of this Act, every arbitrator must disclose all the facts before the commencement of the Arbitration proceedings.
GROUNDS OF CHALLENGING THE APPOINTMENT OF AN ARBITRATOR
Section 12(5) of the Arbitration and Conciliation Act, 1996 talks about the grounds for challenging the appointment of an arbitrator. It clarifies that "Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator".
The Seventh Schedule of the Arbitration and Conciliation Act, 1996 cites the relationships of the arbitrator with the parties or counsel, which yields the appointment of the arbitrator ineligible. Some of the relationships that yield the arbitrator ineligible are :
The arbitrator is an employee, consultant, and advisor or has any other past or present business relationship with the party.
The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
The arbitrator is a lawyer in the same law firm which is representing one of the parties.
The arbitrator is a manager, director, or part of the management, or has similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
In July 2022, the Delhi High Court has ruled that any right under Section 12(5) of the Arbitration and Conciliation Act, 1996, that deals with the ineligibility of certain persons to be assigned as an arbitrator, can be waived of only by an express agreement in writing entered into after the disputes had arisen between the parties. The Single Bench of Justice Vibhu Bakhru dismissed the argument, saying that since the petitioner had partaken in the arbitral proceedings, it was precluded from raising any objections towards the appointment of the Arbitrator. The Court also restated that a person who is ineligible to function as an arbitrator would also be ineligible to designate an arbitrator.
CASE LAWS IN THIS REGARD
Comparative Citations: 2018 LAWPACK(Del) 65391: 2018(6) R.A.J. 190
In this case, the Presiding Arbitrator in his initial disclosure did not disclose his relationship with the respondent and his appointment as an Independent External Monitor (IEM) for the respondent. This fact was disclosed only after hearing the application of the petitioner contesting the appointment to the Arbitral Tribunal. This itself casts a doubt on the neutrality of the Presiding Arbitrator and his continuance as a Presiding Arbitrator. The petitioner had also continually oppugned the appointment of the Arbitral Tribunal and thus, it cannot be said that the petitioner, in any manner, expressly agreed to waive the ineligibility of the Presiding Arbitrator.
HELD : The appointment of the nominee Arbitrator for the petitioner, cannot be maintained and their mandate to act as an Arbitrator and the Presiding Arbitrator respectively, is terminated. He shall give his disclosure under Section 12 of the Act before proceeding with the reference.
Comparative Citations: 2016 LAWPACK(Del) 60700: 2017(3) R.A.J. 579
In this case, Mr. Basant Kumar was appointed as an Arbitrator by NHAI (National Highway Authority of India) by the letter dated 30th March 2005. The proceedings in the case were initiated on 9th July, 2005. The Award was made on 5th January, 2008 after 19 sittings. The fact that Mr. Basant Kumar had during this term, taken up an assignment with NHAI as its technical advisor was not disclosed under Section 12 of the Act. By not disclosing his assignment with NHAI, Mr. Basant Kumar violated Section 12 of the Act.
HELD : Section 12(2) of the Act requires an Arbitrator from the time of his appointment and throughout the arbitral proceedings, to compulsorily disclose to the parties, ‘without delay’ and ‘in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him’. The possibilities under sub-section (1) of Section 12 of the Act as it stood before 23rd October, 2015 were ‘any circumstances likely to give rise to justifiable doubts as to his independence or impartiality’. The Court is satisfied that the challenged Award dated 5th January, 2008 is unsustainable in law.
Comparative Citations: 2012 LAWPACK(R.A.J.) 3878: 2013(3) R.A.J. 158
In this case, respondent no.2 was the Arbitrator and he failed to disclose the fact that he was the Director of respondent no.1 - Company. Accordingly, respondent no.2 is de jure incompetent to perform his function as arbitrator, and thus, his mandate is liable to termination as per Section 14 of the Act. Bias or lack of independence or impartiality on the part of respondent no.2 is obvious because respondent no.2 is Director of respondent no.1 - Company.
HELD : It is uncontested that respondent no.2 is Director of respondent no.1- Company. This is clearly a material circumstance likely to give rise to justifiable suspicions as to his independence or neutrality as arbitrator. At no stage, did respondent no.2 inform the parties in writing that respondent no.2 is the Director of respondent no.1. Accordingly, because of violation of aforesaid mandatory provisions of sub-sections (1) and (2) of Section 12 of the Act and also in view of probable bias and justifiable doubt as to his independence and impartiality, the mandate of respondent no.2 as Arbitrator is liable to termination under Sections 12 and 14 of the Act.
4) M/S. JV Engineering Associate Civil Engineering Contractors Represented By Its Partner, Mr.S. Jaikumar Versus General Manager, Core, Allahabad, Represented By Deputy Chief Engineer, Railway Electrification, Chennai, Egmore 2020(4) R.A.J. 240(Mad)
Comparative Citations: 2020(4) R.A.J. 240: 2020 LAWPACK(R.A.J.) 5361
Here, the arbitrator was an employee of the respondent railways who fell within the ambit Clause 1 of VII Schedule of the 1996 Act and the person appointing the arbitrator also came within the mischief of Section 12 (5) read with VII Schedule. The Arbitrator had failed to make a compulsory declaration as is said under Section 12 (3) of the 1996 Act.
HELD : The Award in question having been passed by an arbitrator who is ineligible to be an arbitrator deserves to be set aside since there is no express waiver in writing as contemplated under the proviso to Section 12 (5).