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

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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.”

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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

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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

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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

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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  246th 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.”

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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—”

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(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

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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.”

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“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

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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

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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”

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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

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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,

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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

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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

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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.

25

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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