Whose Arbitrator is it Anyway?

Introduction

“Nullus commodum capere potest de injuria sua propria” is one of the basic tenets of law, disentitling a party from securing the Court’s assistance for enjoying the fruits of its own wrong. While on the face of it, this appears to be a fairly straightforward principle, the difficulty arises when a court is constrained to choose between upholding this principle versus complying with the strict mandate of a statute.

The Delhi High Court was recently called upon to make this difficult choice in Telecommunication Consultants India Ltd. v. Shivaa Trading¹ (TCIL judgment). This was a challenge to an arbitral award raised under Section 34² of the Arbitration and Conciliation Act, 1996 (Act). The arbitral award in this case was passed by a sole arbitrator, who was appointed by Telecommunication Consultants India Limited (TCIL).

TCIL mounted its challenge on a violation of Section 12(5)³ of the Act, alleging that the award was passed by an arbitrator who was de jure ineligible to act, despite such arbitrator being appointed by TCIL itself.

In this post, we discuss the manner in which the Delhi High Court proceeded with this challenge and the impact of its decision.

Statutory bar under Section 12 of the Act

Section 12 of the Act provides the grounds on which the appointment of an arbitrator may be challenged and categorises such challenges into two broad buckets — “arbitrators about whom justifiable doubts exist” and “arbitrators who are ineligible”.

Section 12(5) deals with the latter and provides that “Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter

of the dispute, falls under any of the categories specified in the Seventh Schedule⁴ shall be ineligible to be appointed as an arbitrator.”

Thus, in terms of Section 12(5) read with the Seventh Schedule of the Act, a person is ineligible to act as an arbitrator if their relationship with (i) parties; or (ii) counsel; or (iii) subject-matter of the dispute, fall under any of the categories specified in the Seventh Schedule. This includes the arbitrator (i) being an employee, consultant, advisor or has any other past or present business relationship with a party; (ii) having previous involvement in the case; (iii) holding shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held; and (iv) having significant financial interest in one of the parties or the outcome of the case.

As soon as an arbitrator is hit by the Bar under Section 12(5), he becomes de jure unable to perform his functions in terms of Section 14(1)⁵ and his mandate stands terminated.

However, the proviso to Section 12(5) carves out an exception and provides that “parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing”. Since consent is the foundation of arbitration, the proviso to Section 12(5) allows parties to waive this ineligibility by an express agreement in writing after the disputes have arisen between the parties.

TCIL’s belated challenge and the position taken by the Delhi High Court

In this case, the parties’ arbitration agreement in their contract provided that the “arbitrator shall be appointed by the Chairman & Managing Director (CMD), TCIL, New Delhi”. Consequently, when disputes arose between the parties, TCIL’s Chairman and Managing Director, as per the contractually agreed dispute resolution clause, proceeded to unilaterally appoint an arbitrator to decide the disputes between the parties. At this time and during the pendency of the arbitral proceedings, no objections were raised by either TCIL or the respondent, Shivaa Trading, in respect of the arbitrator who was appointed. This arbitrator ultimately passed an award in favour of Shivaa Trading.

This loss triggered TCIL’s challenge under Section 34(2)(v) of the Act, wherein TCIL sought to argue that the arbitrator’s appointment was hit by Section 12(5) of the Act.

In support of its challenge, TCIL primarily relied upon the Supreme Court’s judgment in Bharat Broadband Network Ltd. v. United Telecoms Ltd.⁶ (BBNL case).

In BBNL case⁷, the arbitrator was also appointed by the party who raised the challenge. However, the Supreme Court clarified that unless there was an express agreement in writing after disputes arose, an appointment falling within the ambit of Section 12(5) read with the Seventh Schedule would lead to automatic termination of the arbitrator’s mandate. The Supreme Court also held that deemed waiver of the right to object by conduct under Section 4 of the Act would not apply to a situation under Section 12(5), as the statute demands an express written waiver.

Shivaa Trading countered this challenge by arguing that (i) TCIL itself had appointed the sole arbitrator; (ii) TCIL did not raise any such objection during the pendency arbitral proceedings; and (iii) only belatedly raised this challenge as the award was not in its favour.

After considering the parties arguments, the Delhi High Court finally set aside the award inter alia placing reliance on the BBNL case⁸ and giving effect to the mandate under Section 12(5) of the Act.

Impact of the TCIL judgment

While at first blush, the TCIL judgment⁹ and BBNL case¹⁰ appear to deal with the same issue i.e. a party challenging the appointment of a sole arbitrator appointed by it, there is a stark difference between the two cases in terms of the timing of such challenge. In BBNL case¹¹, the challenge was raised before the arbitral award was passed. However, in the present case, TCIL raised its challenge for the first time only after the award had been passed against it.

This crucial difference in timing, which the High Court appears to have overlooked, casts serious aspersions on the genuineness of TCIL’s challenge. While in BBNL case¹², the party had promptly raised the challenge, TCIL’s challenge appears to be a convenient one. TCIL waited for the award to be passed, before raising this fairly preliminary and foundational Section 12(5) challenge to frustrate the award. Had TCIL’s grievance been genuine, it would have promptly raised the challenge. However, it waited till the conclusion of the arbitral proceedings and only raised the challenge since the arbitrator ruled in favour of the other party.

This belated challenge also raises the larger question of whether a party can benefit from its own wrong by later conveniently taking refuge under a statutory provision.

In this regard, it is important to consider such a challenge keeping in mind the mischief sought to be addressed by the law and the facts of the case. Judgments which strictly follow the letter of the law divorced from the peculiar facts of each case may inadvertently set a dangerous precedent. For instance, the mischief of biased/partial arbitrators which Section 12(5) seeks to address cannot be seen as a silver bullet available to a miscreant party to unravel the entire arbitral proceedings, if it is ultimately unhappy with the outcome.

Having said that, one also cannot disregard the plain dictate of Section 12(5), which leaves no doubt that an arbitrator falling within the realm of the Seventh Schedule is ineligible to act as an arbitrator. As ineligibility goes to the root of the appointment, an ineligible arbitrator ought not to be permitted to preside over arbitral proceedings. This is because Section 14(1)(a) of the Act terminates the mandate of an arbitrator who is de jure is unable to perform his functions.

Conclusion

As can be seen, the TCIL judgment¹³ presented an interesting conundrum wherein the Delhi High Court was constrained to choose between upholding the strict statutory mandate under Section 12(5) of the Act vis-à-vis permitting a party from taking advantage of its own wrong. Ultimately, the Delhi High Court opted to uphold the strict mandate of Section 12(5). As on the date of publication, there has been no challenge to this decision yet.

While in line with the Act’s statutory mandate, the TCIL judgment¹⁴ presents a concerning test case for parties seeking to belatedly unravel arbitral proceedings and frustrate an unfavourable arbitral award by raising a challenge under Section 12(5) of the Act. Parties may be encouraged to surreptitiously appoint ineligible arbitrators and belatedly raise a challenge in case the award goes against them. Faced with such a situation, the party who has prevailed in arbitration, would be deprived of the favourable arbitral award and the other party would benefit from its wrongful conduct of belatedly raising a challenge only if it does not succeed in the arbitration.

Time will tell if this is a one-off instance or opens the floodgates for challenges by parties seeking to avoid their liability under an unfavourable award. However, given the precedent set by the TCIL judgment¹⁵, parties ought to cautious while appointing an arbitrator to ensure that the arbitrator so appointed is not hit by the Bar under Section 12(5) of the Act. In the alternative, the parties ought to ensure that they execute the waiver in terms of Section 12(5) to avoid any such challenge in the future.