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GROUNDS AND PROCEDURE FOR CHALLENGING AN ARBITRAL TRIBUNAL OR ARBITRATOR

Author: Avimanyu Roy Chowdhury, V year of B.A.,LL.B from Shyambazar Law College.


Introduction

The judicial system in India is extremely overburdened with cases and slow in disposing them. On an average, around 1.65 lakh cases are pending in each High Court of the country and more than 2.6 crore cases are pending in the subordinate judiciary.


Due to this reason, the Arbitration and Conciliation Act, 1996 (the Act) was passed with the goal to provide a faster and effective mechanism to resolve disputes. It was an attempt to decrease the burden of the courts and promote arbitration as an alternative dispute resolution mechanism in India.


The most Commercial entities include arbitration clauses in all of the agreements that they sign with other entities or sign a separate arbitration agreement altogether. With such heavy reliance placed on arbitration, it is important that the arbitrators appointed are impartial. The Supreme Court of India has observed that the impartiality and the independence of an arbitrator is the hallmark of arbitration, and it is a fundamental principal of natural justice.


Section 12 of the Act states the grounds on which and arbitrator can be challenged. Additionally, the 2015 amendment to the Act has added a schedule to this section which lays down additional criteria that may give rise to a challenge of an arbitrator.


Grounds for Challenge (Section 12 of the Arbitration and Conciliation Act, 1996)

  • When a person has been approached for possible appointment as an arbitrator, he shall disclose in writing any circumstances which are likely to give rise to justifiable doubts about his independence or impartiality.


  • From the time of an arbitrator’s appointment and throughout the arbitral proceedings, he shall without delay willingly disclose to the parties in writing any circumstances referred to in sub-section (1) unless it has already been informed to them by him.


  • An arbitrator may be challenged only if

  • circumstances exist that give rise to justifiable doubts about his independence or impartiality, or

  • he does not possess the qualifications agreed to by the parties.


  • A party may challenge an arbitrator who has been appointed by the party himself or in whose appointment he has participated, only for reasons of which the party becomes aware after the appointment has been made.


Amendment of Section 12 in the year 2015

(i) for sub-section (1), the following sub-section shall be substituted, namely:

(1) When a person is approached in connection with his possible

appointment as an arbitrator, he shall disclose in writing any circumstances, —


such as the existence either direct or indirect, of any past or

present relationship with or interest in any of the parties or in relation to

the subject-matter in dispute, whether financial, business, professional

or other kind, which is likely to give rise to justifiable doubts as to his

independence or impartiality; and


(b) which are likely to affect his ability to devote sufficient time to

the arbitration and in particular his ability to complete the entire arbitration

within a period of twelve months.


(ii) after sub-section (4), the following sub-section shall be inserted, namely:

(5) 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:


Provided that parties may, subsequent to disputes having arisen between

them, waive the applicability of this sub-section by an express agreement in

writing.


Fifth Schedule

The fifth schedule deals with the following types of relations which may give rise to reasonable doubts:

  • Any relationship of the arbitrator with the parties or the council.

  • Relationship of the arbitrator related to the dispute.

  • Any personal interest of the arbitrator in the dispute.

  • Any past involvement of the arbitrator with the dispute

  • Relationship between the co-arbitrators

  • Relationship between arbitrators and parties as well as other who are involved in the arbitration.

  • Other Circumstances.


If a scenario of a case falls under the above headings, then the party can challenge the arbitrator. The above-mentioned points are extensive headings which various scenarios to ensure maximum impartiality. Although, ‘Explanation 3’ of this schedule states that if it is a specialized arbitration which involves niche fields, and it is custom to appoint same arbitrators from a specialized pool, then it should be noted by applying these rules. None of these heading can immediately bar an appointment of an arbitrator.


Seventh Schedule

This schedule covers most of the headings stated under the Fifth Schedule. As this list is not as exhaustive as the Fifth Schedule, it simply acts as a bar to appointment an arbitrator. This bar can be also waived by the parties by the agreement by the parties in writing.


This schedule covers:

  • Any relationship of the arbitrator with the parties or the council.

  • Relationship of the arbitrator related to the dispute.

  • Any personal interest of the arbitrator in the dispute.


Key Points of Section 12

Duty to disclose by the prospective arbitrator

Sub- section (1) and (2) of Section 12 of the Arbitration and Conciliation Act,1996 makes it mandatory for the prospective arbitrator to disclose to the parties in writing about any circumstances which are likely to give rise to justifiable doubts about the arbitrator’s impartiality or independency. The use of the expression “shall” connotes that these provisions are imperative. An arbitrator has to discharge his obligation “without delay” i.e., before he takes over as an arbitrator.


Significance of the word “only” in Section 12(3)

It appears that the word “only” signifies that the grounds mentioned in the said provisions are available for challenging an arbitrator, thus other grounds are not available therein. Any other flimsy grounds cannot be used to challenge an arbitrator.


The Supreme Court in Jiwan Kumar Lohia v. Durgadutt Lohia has observed that a reasonable apprehension of bias in the mind of a reasonable man can be a good ground for termination of the mandate of an arbitrator.


It is necessary that a reasonable apprehension of bias must be based on materials and also must be prima facie proved. The Supreme Court in Secretary to the Government, Transport Department, Madras v. Munnuswamy has held that any pre-disposition concerning a decision for or against one party, without giving proper regard to the true merits of the dispute amounts to bias. Any reasonable apprehension has to be based on cogent evidence. Only a mere doubt that an arbitrator is biased would not be sufficient to constitute bias on the part of an arbitrator.


An appointed arbitrator must possess qualifications agreed to by the parties

It needs to noted that the old Arbitration Act, 1940 contained no such prescribed qualification for the appointment of an arbitrator. Whereas in the present Arbitration and Conciliation Act,1996, namely, Section 12(3) states that the appointment of an arbitrator can be challenged if he does not possess the qualifications agreed to by the parties. It important addition was essential because a number of disputes could not be settled due to the lack of expertise in the field which is in dispute like mining, engineering, blasting etc., thus the appointed arbitrator must have specific knowledge in the field concerning the subject matter of the dispute.


Bombay High Court in the case of Anuptech Equipment Pvt Ltd. v. Ganpati Cooperative Housing Society Ltd has held that if by any reason the appointed arbitrator fails to possess the qualification which has been agreed by the parties in the arbitration agreement, the very appointment of such arbitrator will be void ab initio as well as the arbitration proceedings would be totally null and void including any order passed by him.


Refusal to act as an Arbitrator

When a person is offered to act as an arbitrator, such person has the choice to refuse such offer expressly or impliedly. An unwilling arbitrator cannot be compelled to act. The Apex Court in the case of State of West Bengal v. National Builder has explained the meaning of the expression “refusal” and, according to the court,“refusal” to act means denial to do something which one is obliged to do under law.

Thus, under a situation where the arbitrator has declined to grant an extension of time and close the proceedings and the parties have been directed to determine their upcoming course of action, in such circumstances a reasonable presumption would be drawn that he has declined to continue as an arbitrator any further. In such a situation the parties can substitute a new arbitrator.


Power of the court regarding appointment when an authorised person fails to appoint

The expression “without delay” stated in Section 12(2) of the Arbitration and Conciliation Act, 1996 denotes that there should not be unreasonable or undue delay on the part of the arbitrator to disclose when such person is first approached for possible appointment as an arbitrator. It needs to be noted that Sub-section 2(2) of Section 12 also provides that this duty of the arbitrator needs to be discharged from the time of the appointment and maintain it throughout the arbitral proceedings. Thus, an arbitrator needs to discharge his duty “without delay”. This provision is intended to ensure that the parties receive speedy arbitration and its adjudication.


The Delhi High Court in the case of Union of India v. Somnath Chadha has observed that the most important objective of referring any dispute to an arbitrator for adjudication is the speedy end of the strife. It was held that any unreasonable delay or negligence in the appointment of the arbitrator or the commencement of the proceedings would defeat the purpose of the arbitration. In these circumstances the court may intervene and appoint an arbitrator.


In the case of Sankar and Sankar v. State of West Bengal, it was held that if a person who is permitted to appoint an arbitrator under arbitration clause neither appoints such arbitrator not enters on the reference himself and there is silence for more than one year then it would be a case of failure and negligence and under such circumstance the court can appoint an arbitrator himself.


Under what circumstances is the composition or the procedure of the Arbitral Tribunal challengeable?

The Supreme Court in the case Narayan Prasad v. Nikunj Lohia & Ors, held that when the composition or the procedure of the arbitral tribunal is not in accordance with the agreement of the parties, it can be challenged. Under such circumstances the parties get a right to challenge the award but only if the agreement of the parties is in conflict with a provision of Part I which the parties cannot derogate. In other words, if the composition of the tribunal or the procedure is not in accordance with the agreement of the parties, the parties have the right to challenge, but if such composition or procedure is in accordance with the provisions of the Arbitration and Conciliation Act, 1996, then the party cannot challenge the award.

Procedure for Challenging an Arbitrator (Section 13 of the Arbitration and Conciliation Act, 1996)

1. Subject to sub-section (4), the parties have the liberty to agree on a procedure for challenging an arbitrator.


2. If the parties fail to reach an agreement which has been referred to in sub-section (1), a party who intends to challenge an arbitrator shall within fifteen days after becoming aware of any circumstances which have been mentioned under sub-section (3) of Section12 send a written statement of the reasons for the challenge to the arbitral tribunal.


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


4. In case of the failure of the challenge under any procedure which has been agreed by the parties or under procedure mentioned under sub-section (2), the arbitral tribunal will continue with the proceedings as well as make an arbitral award.


5. In such circumstances when an arbitral award has already been made under sub-section (4), the party who is challenging the arbitrator may make an application in accordance with section 34 for setting aside such an arbitral award.

6. When an arbitral award has already been set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who has been challenged is entitled to any fees.


Failure or impossibility to act (Section 14 of the Arbitration and Conciliation Act, 1996)

Section 14 of the Arbitration and Conciliation Act,1996 has been modelled on Article 14 of the Model Law which provides various circumstances in which the mandate of an arbitrator fails or becomes impossible to act. In these kind of situations, the mandate of an arbitrator shall be terminated and/or the arbitrator’s authority shall be terminated.


1. The mandate of the arbitrator shall terminate and he shall be substituted by another arbitrator if–


a) The arbitrator becomes de facto or de jure unable to perform his functions or for any other reasons fails to act without undue delay; and


b) The arbitrator withdraws from his office or the parties agree to the termination of his mandate.


2. If there are any controversies regarding any of the grounds referred to in clause (a) of sub-section 1, then a party may, if not otherwise agreed by the parties, apply to the court to decide on the termination of the mandate.


3. Under this section or sub-section (3) of section 13, if an arbitrator withdraws from his office or the parties agree to the termination of the mandate of an arbitrator, it does not imply any acceptance of the validity of any ground which is referred to in this section or sub-section (3) of section 12.


Termination of mandate and substitution of an arbitrator (Section 15 of the Arbitration and Conciliation Act, 1996)

1. In addition to the circumstances referred to in section 13 and 14, the mandate made by an arbitrator shall be terminated if-

a) If the arbitrator withdraws from his office for any reason; or

b) The parties have an agreement to terminate the arbitrator’s authority.


2. When the mandate of the arbitrator has been terminated, a substitute arbitrator will be appointed by the rules which were applicable to the appointment of the arbitrator who was replaced.


3. If not otherwise agreed, when an arbitrator has been replaced under sub-section (2), any hearing which has been held previously may be repeated at the discretion of the arbitral tribunal.


4. If not otherwise agreed, any order or ruling of the arbitral tribunal which has been made prior to the replacement of the arbitrator under this section shall be held invalid because there has been a change in the composition of the arbitral tribunal.



Conclusion

The Amendment of the Act which was made in 2015 was aimed to promote arbitration in India and to provide utmost transparency and reliability on the same. Section 12 has gained much more importance with the amendment, and hopefully, it will make arbitration a much popular recourse than judicial courts. Section 13 has mentioned the procedure which needs to be followed when the grounds mentioned in Section 12 give rise to challenging an arbitrator. Section 14 and 15 has mentioned various circumstances in which the mandate of an arbitrator can be terminated. All these sections are the backbone of arbitration as it helps the parties get justice when the arbitrator is at fault.