REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3972 OF 2019

(Arising out of Special Leave Petition (Civil) No.1550 of 2018)

Bharat Broadband Network Limited … Appellant

Versus

United Telecoms Limited … Respondent

WITH

CIVIL APPEAL NO. 3973 OF 2019

(Arising out of Special Leave Petition (Civil) No.1644 of 2018)

JUDGMENT

R.F. NARIMAN, J.

1.Leave granted.

2. The present appeals raise an interesting question as to the

interpretation of Section 12(5) of the Arbitration and Conciliation Act,

1996 [“Act”].

3.The appellant, Bharat Broadband Network Ltd. [“BBNL”], had

floated a tender dated 05.08.2013 inviting bids for a turnkey project for

supply, installation, commissioning, and maintenance of GPON

equipment and solar power equipment. The respondent was the

1

successful L1 bidder. The appellant issued an Advance Purchase

Order [“APO”] dated 30.09.2014. Clause III.20.1 of the General

(Commercial) Conditions of Contract [“GCC”] provides for arbitration.

The said clause reads as under:

“III.20 ARBITRATION

III.20.1 In the event of any question, dispute or difference

arising under the agreement or in connection therewith

(except as to the matters, the decision to which is

specifically provided under this agreement), the same

shall be referred to the sole arbitration of the CMD, BBNL

or in case his designation is changed or his office is

abolished, then in such cases to the sole arbitration of

the officer for the time being entrusted (whether in

addition to his own duties or otherwise) with the functions

of the CMD, BBNL or by whatever designation such an

officer may be called (hereinafter referred to as the said

officer), and if the CMD or the said officer is unable or

willing to act as such, then to the sole arbitration of some

other person appointed by the CMD or the said officer.

The agreement to appoint an arbitrator will be in

accordance with the Arbitration and Conciliation Act

1996. There will be no object to any such appointment

on the ground that the arbitrator is a Government

Servant or that he has to deal with the matter to which

the agreement relates or that in the course of his duties

as a Government Servant/PSU Employee he has

expressed his views on all or any of the matters in

dispute. The award of the arbitrator shall be final and

binding on both the parties to the agreement. In the

event of such an arbitrator to whom the matter is

originally referred, being transferred or vacating his office

or being unable to act for any reason whatsoever, the

CMD, BBNL or the said officer shall appoint another

person to act as an arbitrator in accordance with terms of

the agreement and the person so appointed shall be

entitled to proceed from the stage at which it was left out

by his predecessors.”

2

4.Since disputes and differences arose between the parties, the

respondent, by its letter dated 03.01.2017, invoked the aforesaid

arbitration clause and called upon the appellant’s Chairman and

Managing Director to appoint an independent and impartial arbitrator

for adjudication of disputes which arose out of the aforesaid APO dated

30.09.2014. By a letter dated 17.01.2017, the Chairman and Managing

Director of the appellant, in terms of the arbitration clause contained in

the GCC, nominated one Shri K.H. Khan as sole arbitrator to

adjudicate and determine disputes that had arisen between the parties.

He also made it clear that the parties would be at liberty to file claims

and counter-claims before the aforesaid sole arbitrator.

5.On 03.07.2017, this Court, by its judgment in TRF Ltd. v. Energo

Engineering Projects Ltd., (2017) 8 SCC 377 [“TRF Ltd.”], held that

since a Managing Director of a company which was one of the parties

to the arbitration, was himself ineligible to act as arbitrator, such

ineligible person could not appoint an arbitrator, and any such

appointment would have to be held to be null and void.

6.Given the aforesaid judgment, the appellant itself having

appointed the aforesaid sole arbitrator, referred to the aforesaid

judgment, and stated that being a declaration of law, appointments of

3

arbitrators made prior to the judgment are not saved. Thus, the prayer

before the sole arbitrator was that since he is de jure unable to perform

his function as arbitrator, he should withdraw from the proceedings to

allow the parties to approach the High Court for appointment of a

substitute arbitrator in his place. By an order dated 21.10.2017, Shri

Khan rejected the appellant’s application after hearing both sides,

without giving any reasons therefor. This led to a petition being filed by

the appellant before the High Court of Delhi dated 28.10.2017 under

Sections 14 and 15 of the Act to state that the arbitrator has become

de jure incapable of acting as such and that a substitute arbitrator be

appointed in his place. By the impugned judgment dated 22.11.2017,

this petition was rejected, stating that the very person who appointed

the arbitrator is estopped from raising a plea that such arbitrator cannot

be appointed after participating in the proceedings. In any event, under

the proviso to Section 12(5) of the Act, inasmuch as the appellant itself

has appointed Shri Khan, and the respondent has filed a statement of

claim without any reservation, also in writing, the same would amount

to an express agreement in writing, which would, therefore, amount to

a waiver of the applicability of Section 12(5) of the Act.

7.Shri Vikramjit Banerjee, learned Additional Solicitor General

appearing on behalf of the appellant, has relied upon Sections 12 to 14

4

of the Act, as also the judgment in TRF Ltd. (supra), and has argued

that the appointment of Shri Khan goes to eligibility to be appointed as

an arbitrator, as a result of which the appointment made is void ab

initio. Further, the judgment in TRF Ltd. (supra) is declaratory of the

law and would apply to the facts of this case. Further, since there is no

express agreement in writing between the parties subsequent to

disputes having arisen between them that Shri Khan’s appointment is

agreed upon, the proviso will not be applicable in the present case.

8.Shri Sharad Yadav, learned Senior Advocate appearing on behalf

of the respondent, has supported the reasoning of the impugned

judgment and has added that Section 12(4) makes it clear that a party

may challenge the appointment of an arbitrator appointed by it only for

reasons of which it became aware after the appointment has been

made. In the facts of the present case, since Section 12(5) and the

Seventh Schedule were on the statute book since 23.10.2015, the

appellant was fully aware that the Managing Director of the appellant

would be hit by Item 5 of the Seventh Schedule, and consequently, any

appointment made by him would be null and void. This being so,

Section 12(4) acts as a bar to the petition filed under Sections 14 and

15 by the appellant. Further, Section 13(2) makes it clear that a party

who intends to challenge the appointment of the arbitrator, shall, within

5

15 days after becoming aware of circumstances referred to in Section

12(3), send a written statement of reasons for the challenge to the

arbitrator. Admittedly, this has not been done within the time frame

stipulated by the said Section, as a result of which, the aforesaid

petition filed by the appellant should be dismissed. Coming to the

proviso to Section 12(5), Shri Yadav argued that “express agreement in

writing” in the proviso to Section 12(5) is clearly met in the facts of the

present case. This need not be in the form of a formal agreement

between the parties, but can be culled out, as was rightly held by the

High Court, from the appointment letter issued by appellant as well as

the statement of claim filed by the respondent before the arbitrator

leading, therefore, to a waiver of the applicability of Section 12(5).

9.Pursuant to the 246

th

Law Commission Report, important

changes were made in the Act. Insofar as the facts of this case are

concerned, sub-section (8) of Section 11 was substituted for the earlier

Section 11(8)

1

, sub-section (1) of Section 12 was substituted for the

1

Subs. by Act 3 of 2016, S. 6(iv) (w.r.e.f. 23.10.2015). Prior to substitution, Section 11(8) read as:

“11. Appointment of arbitrators.—

(8) The Chief Justice or the person or institution designated by him, in appointing an

arbitrator, shall have due regard to—

(a) any qualifications required of the arbitrator by the agreement of the parties; and

(b) other considerations as are likely to secure the appointment of an independent

and impartial arbitrator.”

6

earlier Section 12(1)

2

and a new Section 12(5)

3

was added after

Section 12(4). The opening lines of Section 14(1)

4

were also

substituted.

10.Post-amendment, the aforesaid Sections are set out, as also

Section 4 of the Act, as follows:

“4. Waiver of right to object.—A party who knows that

—

(a) any provision of this Part from which the

parties may derogate, or

(b) any requirement under the arbitration

agreement,

has not been complied with and yet proceeds with the

arbitration without stating his objection to such non-

compliance without undue delay or, if a time-limit is

provided for stating that objection, within that period of

time, shall be deemed to have waived his right to so

object.”

“11. Appointment of arbitrators.—

xxx xxx xxx

(8) The Supreme Court or, as the case may be, the High

Court or the person or institution designated by such

Court, before appointing an arbitrator, shall seek a

disclosure in writing from the prospective arbitrator in

terms of sub-section (1) of Section 12, and have due

regard to—

(a) any qualifications required for the arbitrator

by the agreement of the parties; and

2

Subs. by Act 3 of 2016, S. 8(i) (w.r.e.f. 23.10.2015). Prior to substitution, Section 12(1) read as:

“12. Grounds for challenge.—(1) When a person is approached in connection with his

possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to

give rise to justifiable doubts as to his independence or impartiality.”

3

Ins. by Act 3 of 2016, S. 8(ii) (w.r.e.f. 23.10.2015).

4

Subs. by Act 3 of 2016, S. 9 (w.r.e.f. 23.10.2015). Prior to substitution, Section 14(1) read as:

“14. Failure or impossibility to act.—(1) The mandate of an arbitrator shall terminate if—”

7

(b) the contents of the disclosure and other

considerations as are likely to secure the

appointment of an independent and impartial

arbitrator.

xxx xxx xxx ”

“12. Grounds for challenge.—(1) When a person is

approached in connection with his possible appointment

as an arbitrator, he shall disclose in writing any

circumstances,—

(a) 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.

Explanation 1.—The grounds stated in the Fifth

Schedule shall guide in determining whether

circumstances exist which give rise to justifiable doubts

as to the independence or impartiality of an arbitrator.

Explanation 2.—The disclosure shall be made by such

person in the form specified in the Sixth Schedule.

(2) An arbitrator, from the time of his appointment and

throughout the arbitral proceedings, shall, without delay,

disclose to the parties in writing any circumstances

referred to in sub-section (1) unless they have already

been informed of them by him.

(3) An arbitrator may be challenged only if—

(a) circumstances exist that give rise to

justifiable doubts as to his independence or

impartiality, or

(b) he does not possess the qualifications

agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him,

or in whose appointment he has participated, only for

8

reasons of which he becomes aware after the

appointment has been made.

(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.”

“13. Challenge procedure.—(1) Subject to sub-section

(4), the parties are free to agree on a procedure for

challenging an arbitrator.

(2) Failing any agreement referred to in sub-section (1),

a party who intends to challenge an arbitrator shall,

within fifteen days after becoming aware of the

constitution of the arbitral tribunal or after becoming

aware of any circumstances referred to in sub-section (3)

of Section 12, send a written statement of the reasons

for the challenge to the arbitral tribunal.

(3) Unless the arbitrator challenged under sub-section

(2) withdraws from his office or the other party agrees to

the challenge, the arbitral tribunal shall decide on the

challenge.

(4) If a challenge under any procedure agreed upon by

the parties or under the procedure under sub-section (2)

is not successful, the arbitral tribunal shall continue the

arbitral proceedings and make an arbitral award.

(5) Where an arbitral award is made under sub-section

(4), the party challenging the arbitrator may make an

application for setting aside such an arbitral award in

accordance with Section 34.

(6) Where an arbitral award is set aside on an application

made under sub-section (5), the Court may decide as to

whether the arbitrator who is challenged is entitled to any

fees.”

9

“14. Failure or impossibility to act.—(1) The mandate

of an arbitrator shall terminate and he shall be

substituted by another arbitrator, if—

(a) he becomes de jure or de facto unable to

perform his functions or for other reasons fails

to act without undue delay; and

(b) he withdraws from his office or the parties

agree to the termination of his mandate.

(2) If a controversy remains concerning any of the

grounds referred to in clause (a) of sub-section (1), a

party may, unless otherwise agreed by the parties, apply

to the Court to decide on the termination of the mandate.

(3) If, under this section or sub-section (3) of Section 13,

an arbitrator withdraws from his office or a party agrees

to the termination of the mandate of an arbitrator, it shall

not imply acceptance of the validity of any ground

referred to in this Section or sub-section (3) of Section

12.”

11.Section 12(5) has been earlier dealt with in three Supreme Court

judgments. In Voestalpine Schienen GmbH v. Delhi Metro Rail

Corporation Ltd., (2017) 4 SCC 665, this Court went into the

recommendations of the aforesaid Law Commission Report, and

referred in great detail to the law before the amendment made in

Section 12 and then held:

“23. It also cannot be denied that the Seventh Schedule

is based on IBA guidelines which are clearly regarded as

a representation of international based practices and are

based on statutes, case law and juristic opinion from a

cross-section on jurisdiction. It is so mentioned in the

guidelines itself.”

xxx xxx xxx

“25. Section 12 has been amended with the objective to

induce neutrality of arbitrators viz. their independence

10

and impartiality. The amended provision is enacted to

identify the “circumstances” which give rise to “justifiable

doubts” about the independence or impartiality of the

arbitrator. If any of those circumstances as mentioned

therein exists, it will give rise to justifiable apprehension

of bias. The Fifth Schedule to the Act enumerates the

grounds which may give rise to justifiable doubts of this

nature. Likewise, the Seventh Schedule mentions those

circumstances which would attract the provisions of sub-

section (5) of Section 12 and nullify any prior agreement

to the contrary. In the context of this case, it is relevant to

mention that only if an arbitrator is an employee, a

consultant, an advisor or has any past or present

business relationship with a party, he is rendered

ineligible to act as an arbitrator. Likewise, that person is

treated as incompetent to perform the role of arbitrator,

who is a manager, director or part of the management or

has a single controlling influence in an affiliate of one of

the parties if the affiliate is directly involved in the matters

in dispute in the arbitration. Likewise, persons who

regularly advised the appointing party or affiliate of the

appointing party are incapacitated. A comprehensive list

is enumerated in Schedule 5 and Schedule 7 and

admittedly the persons empanelled by the respondent

are not covered by any of the items in the said list.”

12.In HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC 471,

this Court, after setting out the amendments made in Section 12 and

the Fifth, Sixth, and Seventh Schedules to the Act, held as follows:

“12. After the 2016 Amendment Act, a dichotomy is made

by the Act between persons who become “ineligible” to

be appointed as arbitrators, and persons about whom

justifiable doubts exist as to their independence or

impartiality. Since ineligibility goes to the root of the

appointment, Section 12(5) read with the Seventh

Schedule makes it clear that if the arbitrator falls in any

one of the categories specified in the Seventh Schedule,

he becomes “ineligible” to act as arbitrator. Once he

11

becomes ineligible, it is clear that, under Section 14(1)

(a), he then becomes de jure unable to perform his

functions inasmuch as, in law, he is regarded as

“ineligible”. In order to determine whether an arbitrator is

de jure unable to perform his functions, it is not

necessary to go to the Arbitral Tribunal under Section 13.

Since such a person would lack inherent jurisdiction to

proceed any further, an application may be filed under

Section 14(2) to the Court to decide on the termination of

his/her mandate on this ground. As opposed to this, in a

challenge where grounds stated in the Fifth Schedule are

disclosed, which give rise to justifiable doubts as to the

arbitrator’s independence or impartiality, such doubts as

to independence or impartiality have to be determined as

a matter of fact in the facts of the particular challenge by

the Arbitral Tribunal under Section 13. If a challenge is

not successful, and the Arbitral Tribunal decides that

there are no justifiable doubts as to the independence or

impartiality of the arbitrator/arbitrators, the Tribunal must

then continue the arbitral proceedings under Section

13(4) and make an award. It is only after such award is

made, that the party challenging the arbitrator’s

appointment on grounds contained in the Fifth Schedule

may make an application for setting aside the arbitral

award in accordance with Section 34 on the aforesaid

grounds. It is clear, therefore, that any challenge

contained in the Fifth Schedule against the appointment

of Justice Doabia and Justice Lahoti cannot be gone into

at this stage, but will be gone into only after the Arbitral

Tribunal has given an award. Therefore, we express no

opinion on items contained in the Fifth Schedule under

which the appellant may challenge the appointment of

either arbitrator. They will be free to do so only after an

award is rendered by the Tribunal.”

xxx xxx xxx

“14. The enumeration of grounds given in the Fifth and

Seventh Schedules have been taken from the IBA

Guidelines, particularly from the Red and Orange Lists

thereof. The aforesaid guidelines consist of three lists.

The Red List, consisting of non-waivable and waivable

guidelines, covers situations which are “more serious”

12

and “serious”, the “more serious” objections being non-

waivable. The Orange List, on the other hand, is a list of

situations that may give rise to doubts as to the

arbitrator’s impartiality or independence, as a

consequence of which the arbitrator has a duty to

disclose such situations. The Green List is a list of

situations where no actual conflict of interest exists from

an objective point of view, as a result of which the

arbitrator has no duty of disclosure. These Guidelines

were first introduced in the year 2004 and have

thereafter been amended, after seeing the experience of

arbitration worldwide. In Part 1 thereof, general

standards regarding impartiality, independence and

disclosure are set out.”

xxx xxx xxx

“17. It will be noticed that Items 1 to 19 of the Fifth

Schedule are identical with the aforesaid items in the

Seventh Schedule. The only reason that these items also

appear in the Fifth Schedule is for purposes of disclosure

by the arbitrator, as unless the proposed arbitrator

discloses in writing his involvement in terms of Items 1 to

34 of the Fifth Schedule, such disclosure would be

lacking, in which case the parties would be put at a

disadvantage as such information is often within the

personal knowledge of the arbitrator only. It is for this

reason that it appears that Items 1 to 19 also appear in

the Fifth Schedule.”

13.In TRF Ltd. (supra), this Court referred to Section 12(5) of the

Act in the context of appointment of an arbitrator by a Managing

Director of a corporation, who became ineligible to act as arbitrator

under the Seventh Schedule. This Court held:

“50. First, we shall deal with Clause (d). There is no

quarrel that by virtue of Section 12(5) of the Act, if any

person who falls under any of the categories specified in

the Seventh Schedule shall be ineligible to be appointed

as the arbitrator. There is no doubt and cannot be, for the

13

language employed in the Seventh Schedule, the

Managing Director of the Corporation has become

ineligible by operation of law. It is the stand of the

learned Senior Counsel for the appellant that once the

Managing Director becomes ineligible, he also becomes

ineligible to nominate. Refuting the said stand, it is

canvassed by the learned Senior Counsel for the

respondent that the ineligibility cannot extend to a

nominee if he is not from the Corporation and more so

when there is apposite and requisite disclosure. We think

it appropriate to make it clear that in the case at hand we

are neither concerned with the disclosure nor objectivity

nor impartiality nor any such other circumstance. We are

singularly concerned with the issue, whether the

Managing Director, after becoming ineligible by operation

of law, is he still eligible to nominate an arbitrator. At the

cost of repetition, we may state that when there are two

parties, one may nominate an arbitrator and the other

may appoint another. That is altogether a different

situation. If there is a clause requiring the parties to

nominate their respective arbitrator, their authority to

nominate cannot be questioned. What really in that

circumstance can be called in question is the procedural

compliance and the eligibility of their arbitrator depending

upon the norms provided under the Act and the

Schedules appended thereto. But, here is a case where

the Managing Director is the “named sole arbitrator” and

he has also been conferred with the power to nominate

one who can be the arbitrator in his place. Thus, there is

subtle distinction……”

xxx xxx xxx

“54. In such a context, the fulcrum of the controversy

would be, can an ineligible arbitrator, like the Managing

Director, nominate an arbitrator, who may be otherwise

eligible and a respectable person. As stated earlier, we

are neither concerned with the objectivity nor the

individual respectability. We are only concerned with the

authority or the power of the Managing Director. By our

analysis, we are obligated to arrive at the conclusion that

once the arbitrator has become ineligible by operation of

law, he cannot nominate another as an arbitrator. The

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arbitrator becomes ineligible as per prescription

contained in Section 12(5) of the Act. It is inconceivable

in law that person who is statutorily ineligible can

nominate a person. Needless to say, once the

infrastructure collapses, the superstructure is bound to

collapse. One cannot have a building without the plinth.

Or to put it differently, once the identity of the Managing

Director as the sole arbitrator is lost, the power to

nominate someone else as an arbitrator is obliterated.

Therefore, the view expressed by the High Court is not

sustainable and we say so.”

14.From a conspectus of the above decisions, it is clear that Section

12(1), as substituted by the Arbitration and Conciliation (Amendment)

Act, 2015 [“Amendment Act, 2015”], makes it clear that when a

person is approached in connection with his possible appointment as

an arbitrator, it is his duty to disclose in writing any circumstances

which are likely to give rise to justifiable doubts as to his independence

or impartiality. The disclosure is to be made in the form specified in the

Sixth Schedule, and the grounds stated in the Fifth Schedule are to

serve as a guide in determining whether circumstances exist which

give rise to justifiable doubts as to the independence or impartiality of

an arbitrator. Once this is done, the appointment of the arbitrator may

be challenged on the ground that justifiable doubts have arisen under

sub-section (3) of Section 12 subject to the caveat entered by sub-

section (4) of Section 12. The challenge procedure is then set out in

Section 13, together with the time limit laid down in Section 13(2).

15

What is important to note is that the arbitral tribunal must first decide

on the said challenge, and if it is not successful, the tribunal shall

continue the proceedings and make an award. It is only post award

that the party challenging the appointment of an arbitrator may make

an application for setting aside such an award in accordance with

Section 34 of the Act.

15.Section 12(5), on the other hand, is a new provision which

relates to the de jure inability of an arbitrator to act as such. Under this

provision, any prior agreement to the contrary is wiped out by the non-

obstante clause in Section 12(5) the moment any person whose

relationship with the parties or the counsel or the subject matter of the

dispute falls under the Seventh Schedule. The sub-section then

declares that such person shall be “ineligible” to be appointed as

arbitrator. The only way in which this ineligibility can be removed is by

the proviso, which again is a special provision which states that parties

may, subsequent to disputes having arisen between them, waive the

applicability of Section 12(5) by an express agreement in writing. What

is clear, therefore, is that where, under any agreement between the

parties, a person falls within any of the categories set out in the

Seventh Schedule, he is, as a matter of law, ineligible to be appointed

as an arbitrator. The only way in which this ineligibility can be removed,

16

again, in law, is that parties may after disputes have arisen between

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

agreement in writing”. Obviously, the “express agreement in writing”

has reference to a person who is interdicted by the Seventh Schedule,

but who is stated by parties (after the disputes have arisen between

them) to be a person in whom they have faith notwithstanding the fact

that such person is interdicted by the Seventh Schedule.

16.The Law Commission Report, which has been extensively

referred to in some of our judgments, makes it clear that there are

certain minimum levels of independence and impartiality that should be

required of the arbitral process, regardless of the parties’ agreement.

This being the case, the Law Commission then found:

“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

17

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.”

(emphasis in original)

Thus, it will be seen that party autonomy is to be respected only in

certain exceptional situations which could be situations which arise in

family arbitrations or other arbitrations where a person subjectively

commands blind faith and trust of the parties to the dispute, despite the

18

existence of objective justifiable doubts regarding his independence

and impartiality.

17.The scheme of Sections 12, 13, and 14, therefore, is that where

an arbitrator makes a disclosure in writing which is likely to give

justifiable doubts as to his independence or impartiality, the

appointment of such arbitrator may be challenged under Sections

12(1) to 12(4) read with Section 13. However, where such person

becomes “ineligible” to be appointed as an arbitrator, there is no

question of challenge to such arbitrator, before such arbitrator. In such

a case, i.e., a case which falls under Section 12(5), Section 14(1)(a) of

the Act gets attracted inasmuch as the arbitrator becomes, as a matter

of law (i.e., de jure), unable to perform his functions under Section

12(5), being ineligible to be appointed as an arbitrator. This being so,

his mandate automatically terminates, and he shall then be substituted

by another arbitrator under Section 14(1) itself. It is only if a

controversy occurs concerning whether he has become de jure unable

to perform his functions as such, that a party has to apply to the Court

to decide on the termination of the mandate, unless otherwise agreed

by the parties. Thus, in all Section 12(5) cases, there is no challenge

procedure to be availed of. If an arbitrator continues as such, being de

jure unable to perform his functions, as he falls within any of the

19

categories mentioned in Section 12(5), read with the Seventh

Schedule, a party may apply to the Court, which will then decide on

whether his mandate has terminated. Questions which may typically

arise under Section 14 may be as to whether such person falls within

any of the categories mentioned in the Seventh Schedule, or whether

there is a waiver as provided in the proviso to Section 12(5) of the Act.

As a matter of law, it is important to note that the proviso to Section

12(5) must be contrasted with Section 4 of the Act. Section 4 deals

with cases of deemed waiver by conduct; whereas the proviso to

Section 12(5) deals with waiver by express agreement in writing

between the parties only if made subsequent to disputes having arisen

between them.

18.On the facts of the present case, it is clear that the Managing

Director of the appellant could not have acted as an arbitrator himself,

being rendered ineligible to act as arbitrator under Item 5 of the

Seventh Schedule, which reads as under:

“Arbitrator’s relationship with the parties or counsel

xxx xxx xxx

5. The arbitrator is a manager, director or part of the

management, or has a 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”

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Whether such ineligible person could himself appoint another arbitrator

was only made clear by this Court’s judgment in TRF Ltd. (supra) on

03.07.2017, this Court holding that an appointment made by an

ineligible person is itself void ab initio. Thus, it was only on 03.07.2017,

that it became clear beyond doubt that the appointment of Shri Khan

would be void ab initio. Since such appointment goes to “eligibility”,

i.e., to the root of the matter, it is obvious that Shri Khan’s appointment

would be void. There is no doubt in this case that disputes arose only

after the introduction of Section 12(5) into the statute book, and Shri

Khan was appointed long after 23.10.2015. The judgment in TRF Ltd.

(supra) nowhere states that it will apply only prospectively, i.e., the

appointments that have been made of persons such as Shri Khan

would be valid if made before the date of the judgment. Section 26 of

the Amendment Act, 2015 makes it clear that the Amendment Act,

2015 shall apply in relation to arbitral proceedings commenced on or

after 23.10.2015. Indeed, the judgment itself set aside the order

appointing the arbitrator, which was an order dated 27.01.2016, by

which the Managing Director of the respondent nominated a former

Judge of this Court as sole arbitrator in terms of clause 33(d) of the

Purchase Order dated 10.05.2014. It will be noticed that the facts in

the present case are somewhat similar. The APO itself is of the year

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2014, whereas the appointment by the Managing Director is after the

Amendment Act, 2015, just as in the case of TRF Ltd. (supra).

Considering that the appointment in the case of TRF Ltd. (supra) of a

retired Judge of this Court was set aside as being non-est in law, the

appointment of Shri Khan in the present case must follow suit.

19.However, the learned Senior Advocate appearing on behalf of the

respondent has argued that Section 12(4) would bar the appellant’s

application before the Court. Section 12(4) will only apply when a

challenge is made to an arbitrator, inter alia, by the same party who

has appointed such arbitrator. This then refers to the challenge

procedure set out in Section 13 of the Act. Section 12(4) has no

applicability to an application made to the Court under Section 14(2) to

determine whether the mandate of an arbitrator has terminated as he

has, in law, become unable to perform his functions because he is

ineligible to be appointed as such under Section 12(5) of the Act.

20.This then brings us to the applicability of the proviso to Section

12(5) on the facts of this case. Unlike Section 4 of the Act which deals

with deemed waiver of the right to object by conduct, the proviso to

Section 12(5) will only apply if subsequent to disputes having arisen

between the parties, the parties waive the applicability of sub-section

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(5) of Section 12 by an express agreement in writing. For this reason,

the argument based on the analogy of Section 7 of the Act must also

be rejected. Section 7 deals with arbitration agreements that must be

in writing, and then explains that such agreements may be contained in

documents which provide a record of such agreements. On the other

hand, Section 12(5) refers to an “express agreement in writing”. The

expression “express agreement in writing” refers to an agreement

made in words as opposed to an agreement which is to be inferred by

conduct. Here, Section 9 of the Indian Contract Act, 1872 becomes

important. It states:

“9. Promises, express and implied.—In so far as a

proposal or acceptance of any promise is made in words,

the promise is said to be express. In so far as such

proposal or acceptance is made otherwise than in words,

the promise is said to be implied.”

It is thus necessary that there be an “express” agreement in writing.

This agreement must be an agreement by which both parties, with full

knowledge of the fact that Shri Khan is ineligible to be appointed as an

arbitrator, still go ahead and say that they have full faith and

confidence in him to continue as such. The facts of the present case

disclose no such express agreement. The appointment letter which is

relied upon by the High Court as indicating an express agreement on

the facts of the case is dated 17.01.2017. On this date, the Managing

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Director of the appellant was certainly not aware that Shri Khan could

not be appointed by him as Section 12(5) read with the Seventh

Schedule only went to the invalidity of the appointment of the

Managing Director himself as an arbitrator. Shri Khan’s invalid

appointment only became clear after the declaration of the law by the

Supreme Court in TRF Ltd. (supra) which, as we have seen

hereinabove, was only on 03.07.2017. After this date, far from there

being an express agreement between the parties as to the validity of

Shri Khan’s appointment, the appellant filed an application on

07.10.2017 before the sole arbitrator, bringing the arbitrator’s attention

to the judgment in TRF Ltd. (supra) and asking him to declare that he

has become de jure incapable of acting as an arbitrator. Equally, the

fact that a statement of claim may have been filed before the arbitrator,

would not mean that there is an express agreement in words which

would make it clear that both parties wish Shri Khan to continue as

arbitrator despite being ineligible to act as such. This being the case,

the impugned judgment is not correct when it applies Section 4,

Section 7, Section 12(4), Section 13(2), and Section 16(2) of the Act to

the facts of the present case, and goes on to state that the appellant

cannot be allowed to raise the issue of eligibility of an arbitrator, having

itself appointed the arbitrator. The judgment under appeal is also

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incorrect in stating that there is an express waiver in writing from the

fact that an appointment letter has been issued by the appellant, and a

statement of claim has been filed by the respondent before the

arbitrator. The moment the appellant came to know that Shri Khan’s

appointment itself would be invalid, it filed an application before the

sole arbitrator for termination of his mandate.

21.The learned Additional Solicitor General appearing on behalf of

the appellant has relied upon All India Power Engineer Federation v.

Sasan Power Ltd., (2017) 1 SCC 487, and referred to paragraph 21

thereof, which reads as follows:

“21. Regard being had to the aforesaid decisions, it is

clear that when waiver is spoken of in the realm of

contract, Section 63 of the Contract Act, 1872 governs.

But it is important to note that waiver is an intentional

relinquishment of a known right, and that, therefore,

unless there is a clear intention to relinquish a right that

is fully known to a party, a party cannot be said to waive

it. But the matter does not end here. It is also clear that if

any element of public interest is involved and a waiver

takes place by one of the parties to an agreement, such

waiver will not be given effect to if it is contrary to such

public interest. This is clear from a reading of the

following authorities.”

This judgment cannot possibly apply as the present case is governed

by the express language of the proviso to Section 12(5) of the Act.

Similarly, the judgments relied upon by the learned Senior Advocate

appearing on behalf of the respondent, namely, Vasu P. Shetty v.

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Hotel Vandana Palace, (2014) 5 SCC 660, and BSNL v. Motorola

India (P) Ltd., (2009) 2 SCC 337 [“BSNL”], for the same reason,

cannot be said to have any application to the express language of the

proviso to Section 12(5). It may be noted that BSNL (supra) deals with

Section 4 of the Act which, as has been stated hereinabove, has no

application, and must be contrasted with the language of the proviso to

Section 12(5).

22.We thus allow the appeals and set aside the impugned judgment.

The mandate of Shri Khan having terminated, as he has become de

jure unable to perform his function as an arbitrator, the High Court may

appoint a substitute arbitrator with the consent of both the parties.

23.Vide order dated 25.01.2018, we had issued notice in the Special

Leave Petition as well as notice on the interim relief prayed for by the

appellant. Since there was no order of stay, the arbitral proceedings

continued even after the date of the impugned judgment, i.e.,

22.11.2017, and culminated in two awards dated 11.07.2018 and

12.07.2018. We have been informed that the aforesaid awards have

been challenged by the appellant by applications under Section 34 of

the Act, in which certain interim orders have been passed by the Single

Judge of the High Court of Delhi. These awards, being subject to the

26

result of this petition, are set aside. Consequently, the appellant’s

Section 34 proceedings have been rendered infructuous. It will be

open to the appellant to approach the High Court of Delhi to reclaim

the deposit amounts that have been made in pursuance of the interim

orders passed in the Section 34 petition filed in the High Court of Delhi.

……........................... J.

(R.F. NARIMAN)

……........................... J.

(VINEET SARAN)

New Delhi;

April 16, 2019.

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