1. Present application under Section 11(5) of the Arbitration and Conciliation Act, 1996 has been filed by the applicant/petitioner for the appointment of an independent Arbitrator and further seeking a relief for restraining the proceedings of the arbitration case which was initiated by the sole respondent.
2. Factual matrix of the case is that one Shyam Lal father of applicant Nos.4 and 5 had purchased shares of one Dynamic Laminates India Ltd., a Company incorporated under the provisions of the Companies Act. As the Company had outstanding dues of State Bank of Patiyala, to the tune of Rs.1,88,00,000/-, the said amount was to be paid by Shyam Lal to the Bank and further a sum of Rs.2,41,00,000/- to the Company. Thus, the total amount payable was Rs.4,29,00,000/-. This payment was to be made by 30.11.2014.
3. An agreement to this effect was executed between Shyam Lal and the Managing Director of M/s Dynamic Laminates India Ltd. on 18.11.2014.
4. One Sri B.S. Mahesh, Advocate of Muzaffar Nagar was witness to the said agreement. Further, in paragraph 2 of the agreement it is stated that, it was executed at the office of Sri B.S.Mahesh, Advocate. The agreement is annexed as Annexure 10 to the application. Subsequently, a memorandum of understanding was signed between Ajai Kumar Maheshwari (present respondent), Ambuj Kumar Maheshwari and Anil Kumar being first party and applicant nos.1, 2, 3 and Shyam Lal father of applicant nos.4 and 5 on 21.2.2016. According to the said MOU, the first party, i.e., present respondent resigned from the post of Directorship of the Company and handed over the charge to the newly appointed Additional Director. Further, full charge of all the operations, books of account and other documents were handed over to the second party. It was further averred in the MOU that the first party had cleared all the statutory dues of the Company.
5. Clause 6 of the said MOU provided for the arbitration, in case of any dispute and differences regarding the agreement, the matter was to be referred to sole Arbitrator Sri B.S.Mahesh, Advocate, Civil Court, Muzaffar Nagar.
6. As it appears from the pleadings of the parties, that the answering respondent gave a legal notice to the applicant for payment of certain amount, which was not paid pursuant to the agreement of the year 2014 as such, the respondent filed a reference before Sri B.S. Mahesh, Advocate appointing him as an Arbitrator in pursuance of Clause 6 of the MOU. It was on 13.5.2018, that a notice was issued to the applicants by the Arbitrator so appointed to appear.
7. Present application has been filed challenging the very appointment of Sri B.S.Mahesh, Advocate, as an Arbitrator on the ground, that applicant nos.4 and 5 were not signatory to the MOU and the appointment of Arbitrator is unilateral act of respondent. Further, ground of challenge is that in view of sub-Section 5 of Section 12 of the Arbitration and Conciliation Act, 1996 (hereinafter called as the "Act"), Sri Mahesh has become de jure unable to perform the function of an Arbitrator in view of Seventh Schedule.
8. The matter was contested by respondent by filing counter affidavit stating that Syam Lal was required to pay respondent an amount of Rs.2,34,00,000/- pursuant to the agreement dated 20.11.2014, but the same was not complied with, though respondent had handed over the management of the Company to the father of applicant nos.4 and 5. It is further averred in the counter affidavit that applicants have participated in the proceedings before the Arbitrator and had filed a reply to the claim. It is also stated that arbitration proceedings were initiated due to the existence of Clause 6 in the MOU, which is binding upon both the parties and applicant cannot go beyond the terms and condition of the contract and now cannot challenge the arbitration proceedings under Section 11(5) of the Act.
9. It is also averred, that the applicants were conscious of the fact that the name of Arbitrator was there in the agreement as well as in the MOU and if the applicants are apprehensive of bias, then procedure for such a challenge is provided under Sections 12 and 13 of the Act and present application under sub section (5) of Section 11 is not maintainable.
10. Applicants controverted the averments made in the counter affidavit by filing a reply and submitted that arbitration clause is confined only to the terms of the MOU and same cannot cover any dispute which is prior to execution of MOU. It is further stated that Sri B.S. Mahesh, Advocate has became de jure unable to perform his function having interest in the subject matter of the dispute, as the first agreement was not only prepared by him in his office, but the same was also witnessed by him. Further, Sri Mahesh, Advocate is having family relation with the contesting respondent and at present his junior Advocate is representing the contesting respondent before the Arbitrator. It is further stated that Sri B.S.Mahesh cannot act as an Arbitrator and has to be substituted by this Court exercising power under Section 11 read with Section 14 of the Act.
11. Further, preliminary objections filed by applicants before the sole Arbitrator challenging his jurisdiction to enter into reference and having not issued any declaration in accordance with Section 12 of the Act has also been placed before the Court during the course of argument, which has been taken on record.
12. The question, which arises for consideration is, as to whether the sole Arbitrator Sri B.S. Mahesh, Advocate, so appointed, has become de jure unable to perform his function as an Arbitrator under Section 12(5) of the Act be substituted by an Arbitrator in terms of Section 14 of the Act.
13. Having heard Sri Nipun Singh, learned counsel for the applicant and Sri Shrey Sharma, learned counsel for the respondents and perused the material on record.
14. Present dispute is in regard to the appointment of Arbitrator in the year 2018, which is after the amendment of Section 12 of the Act. The amended Section 12 of the Act reads as under:
"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 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.]
15. Sub-clause(5) of Section 12 of the Act, which starts with a non-obstinate clause categorically states that any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject- matter of dispute, falls under any of the category specified in the Seventh Schedule shall be ineligible to be appointed as an Arbitrator. Meaning thereby that any agreement prior to the enforcement of the amended provision will not become binding if the parties have agreed between themselves for appointment of any person as an Arbitrator, if he is disqualified under the terms of Seventh Schedule to Section 12(5) of the Act.
16. Seventh Schedule provides for Arbitrator's relationship with the parties or counsel, and nineteen contingencies have been provided where the Arbitrator may be having relationship with the parties, counsel, relationship of the Arbitrator with dispute, or direct, or indirect interest of Arbitrator in dispute.
17. Sri Nipun Singh, counsel for the applicant submitted that Sri B.S.Mahesh, Advocate has not made any declaration in accordance with Section 12 of the Act. Further, as he was privy to the earlier agreement of 2014, was a person who is de jure unable to perform as an Arbitrator in view of Seventh Schedule. He further relied upon the judgment of the Apex Court in the case of TRF Ltd. vs. Energo Engineering Projects Ltd., 2017(8) SCC 370. Reliance has been placed on paragraph 50 of the said judgment, which is extracted below:
"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 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. In this regard, our attention has been drawn to a two-Judge Bench decision in State of Orissa vs. Commr of Land Records & Settlement. In the said case, the question arose, can the Board of Revenue revise the order passed by its delegate. Dwelling upon the said proposition, the Court held: (SCC p.173, para 25) "25. We have to note that the Commissioner when he exercises power of the Board delegated to him under Section 33 of the Settlement Act, 1958, the order passed by him is to be treated as an order of the Board of Revenue and not as that of the Commissioner in his capacity as Commissioner. This position is clear from two rulings of this Court to which we shall presently refer. The first of the said rulings is the one decided by the Constitution Bench of this Court in Roop Chand vs. State of Punjab. In that case, it was held by the majority that where the State Government had, under Section 41(1) of the East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act, 1948, delegated its appellate powers vested in it under Section 21(4) to an "officer", an order passed by such an officer was an order passed by the State Government itself and "not an order passed by any officer under this Act" within Section 42 and was not revisable by the State Government. It was pointed out that for the purpose of exercise of powers of revision by the State under Section 42 of that Act, the order sought to be revised must be an order passed by an officer in his own right and not as a delegate of the State. The State Government was, therefore, not entitled under Section 42 to call for the records of the case which was disposed of by an officer acting as its delegate."
18. He further relied upon the judgment of this Court in the case of M/s Aargee Engineers and Co. and another vs. Era Infra Engineering Ltd. And others 2017 (4) ADJ 513 and the judgment of the Apex Court in the case of Walter Bau, legal Successor, of the Original Contractor, Dyckerhoff and Widmann A.G. vs. Municipal Corporation of Greater Mumbai and another, 2015 (3)SCC 800. Reliance has been placed upon paragraph 10 of the said judgment, which is extracted as under:
"10. Unless the appointment of the arbitrator is ex facie valid and such appointment satisfies the Court exercising jurisdiction under Section 11(6) of the Arbitration Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11(6) cannot be countenanced in law. In the present case, the agreed upon procedure between the parties contemplated the appointment of the arbitrator by second party within 30 days of receipt of a notice from the first party. While the decision in Datar Switchgears Ltd. (supra) may have introduced some flexibility in the time frame agreed upon by the parties by extending it till a point of time anterior to the filing of the application under Section 11(6) of the Arbitration Act, it cannot be lost sight of that in the present case the appointment of Shri Justice A.D. Mane is clearly contrary to the provisions of the Rules governing the appointment of Arbitrators by ICADR, which the parties had agreed to abide in the matter of such appointment. The option given to the respondent Corporation to go beyond the panel submitted by the ICADR and to appoint any person of its choice was clearly not in the contemplation of the parties. If that be so, obviously, the appointment of Shri Justice A.D. Mane is non- est in law. Such an appointment, therefore, will not inhibit the exercise of jurisdiction by this Court under Section 11(6) of the Arbitration Act. It cannot, therefore, be held that the present proceeding is not maintainable in law. The appointment of Shri Justice A.D. Mane made beyond 30 days of the receipt of notice by the petitioner, though may appear to be in conformity with the law laid down in Datar Switchgears Ltd. (supra), is clearly contrary to the agreed procedure which required the appointment made by the respondent Corporation to be from the panel submitted by the ICADR. The said appointment, therefore, is clearly invalid in law."
19. Sri Shrey Sharma, learned counsel for the respondent vehemently argued and submitted that the judgment relied upon by the applicant in the case of Aargee Engineers(supra) and Walter Bau(supra) are not applicable in the present controversy. He further submitted that the present application has been filed under sub-section (5) of Section 11 of the Act, and no plea has been taken in the petition regarding the Arbitrator becoming de jure unable to perform the function as envisaged under sub section (5) of Section 12, nor this application be read in consonance with Section 14 of the Act, and further the applicants have a remedy of challenging the award so made by the Arbitrator under Section 13 of the Act. For ready reference, Sections 13 and 14 of the Act are extracted here under:
"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 subsection (5), the court may decide as to whether the arbitrator who is challenged is entitled to any fees.
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."
20. Sri Sharma had further tried to distinguish the argument of the counsel for the applicant and submitted that the judgment in Walter Bau(supra) was in regard to a case when procedure agreed upon by the parties was not followed and therefore, the Court was within its jurisdiction to appoint an Arbitrator on an application under Section 11(6) of the Act. He further submitted that the Apex Court in the case of Antrix Corporation Ltd. vs. Devas Multimedia (P) Ltd., 2014(11)SCC 560 had refused to appoint an Arbitrator under Section 11(6) of the Act. The distinction between the judgment in the case of Walter Bau (supra) and Antrix Corporation Ltd. (supra) is that in case of Antrix Corporation (supra) the procedure as agreed upon by the parties was followed and Arbitrator was appointed accordingly, while in Walter Bau (supra), the procedure agreed upon between the parties was not followed. He further submitted that after the amendment of Section 12 of the Act, the Apex Court in the case of Aravali Power Corporation Pvt. Ltd. vs. M/s Era Infra Engineering Ltd., AIR 2017 SC 4450 , held that the Court would be within its jurisdiction to appoint such Arbitrator as may be permissible, if the arbitration clause find foul with the amended provision. He relied upon paragraph nos.21, 22 and 23 of the said judgment, which are extracted here under:-
"21. Except the decision of this Court in Voestalpine Schienen GMBH (AIR 2017 SC 939) (supra) referred to above, all other decisions arose out of matters where invocation of arbitration was before the Amendment Act came into force. Voestalpine Schienen GMBH (supra) was a case where the invocation was on 14.6.2016 i.e. after the Amendment Act and the observations in Para 18 clearly show that since "the arbitration clause finds foul with the amended provisions", the Court was empowered to appoint such arbitrator(s) as may be permissible. The ineligibility of the arbitrator was found in the context of amended Section 12 read with Seventh Schedule (which was brought in by Amendment Act) in a matter where invocation for arbitration was after the Amendment Act had come into force. It is thus clear that in pre-amendment cases, the law laid down in Northern Railway Administration (AIR 2009 SC (Supp)839 (Supra), as followed in all the aforesaid cases, must be applied, in that the terms of the agreement ought to be adhered to and/or given effect to as closely as possible. Further, the jurisdiction of the Court under Section 11 of 1996 Act would arise only if the conditions specified in clauses (a), (b) and (c) are satisfied. The cases referred to above show that once the conditions for exercise of jurisdiction under Section 11(6) were satisfied, in the exercise of consequential power under Section 11 (8), the Court had on certain occasions gone beyond the scope of the concerned arbitration clauses and appointed independent arbitrators. What is clear is, for exercise of such power under Section 11 (8), the case must first be made out for exercise of jurisdiction under Section 11 (6).
22. The principles which emerge from the decisions referred to above are:-
A. In cases governed by 1996 Act as it stood before the Amendment Act came into force:-
(i) The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part. There can however be a justifiable apprehension about the independence or impartiality of an employee arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate to the officer whose decision is the subject-matter of the dispute.
(ii) unless the cause of action for invoking jurisdiction under Clauses (a), (b) or (c) of sub-section (6) of Section 11 of 1996 Act arises, there is no question of the Chief Justice or his designate exercising power under sub-section (6) of Section 11.
(iii) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.
(iv) While exercising such power under sub section (6) of Section 11, If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.
B. In cases governed by 1996 Act after the Amendment Act has come into force:-
If the arbitration clause finds foul with the amended provisions, the appointment of the Arbitrator even if apparently in conformity with the arbitration clause in the agreement, would be illegal and thus the Court would be within its powers to appoint such arbitrator(s) as may be permissible.
23. The observations of the High Court in paragraphs 37-38 as quoted above show that the exercise was undertaken by the High Court, "in order to make neutrality or to avoid doubt in the mind of the petitioner" and ensure that justice must not only be done and must also be seen to be done. In effect, the High Court applied principles of neutrality and impartiality which have been expanded by way of Amendment Act, even when no cause of action for exercise of power under Section 11 (6) had arisen. The procedure as laid down in unamended Section 12 mandated disclosure of circumstances likely to give rise to justifiable doubts as to independence and impartiality of the arbitrator. It is not the case of the Respondent that the provisions of Section 12 in unamended form stood violated on any count. In any case the provision contemplated clear and precise procedure under which the arbitrator could be challenged and the objections in that behalf under Section 13 could be raised within prescribed time and in accordance with the procedure detailed therein. The record shows that no such challenge was raised within the time and in terms of the procedure prescribed. As a matter of fact, the Respondent had participated in the arbitration and by its communication dated 04.12.2015, had sought extension of time to file its statement of claim."
21. Sri Sharma further placed reliance upon the judgment of the Supreme Court in the case of HRD Corporation (Marcus Oil and Chemical Division) vs. Gail (India) Limited (Formerly Gas Authority of India Limited) Ltd. 2018(12)SCC 471. He has placed reliance upon paragraph nos.12 and 17 to 24 of the judgment, which are extracted here under:
"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 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 Section14(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.
..............
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.
18. Shri Divan is right in drawing our attention to the fact that the 246th Law Commission Report brought in amendments to the Act narrowing the grounds of challenge co-terminus with seeing that independent, impartial and neutral arbitrators are appointed and that, therefore, we must be careful in preserving such independence, impartiality and neutrality of arbitrators. In fact, the same Law Commission Report has amended Section 28 and 34 so as to narrow grounds of challenge available under the Act. The judgment in ONGC v. Saw Pipes Ltd, has been expressly done away with. So has the judgment in ONGC v. Western Geco International Ltd.. Both Section 34 and 48 have been brought back to the position of law contained in Renusagar Power Plant Co. Ltd. vs. General Electric Co., where "public policy" will now include only two of the three things set out therein, viz., "fundamental policy of Indian law" and "justice or morality". The ground relating to "the interest of India" no longer obtains. "Fundamental policy of Indian law" is now to be understood as laid down in Renusagar (supra). "Justice or morality" has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the Court as understood in Associate Builders vs. Delhi Development Authority, Section 28(3) has also been amended to bring it in line with the judgment of this Court in Associate Builders (supra), making it clear that the construction of the terms of the contract is primarily for the arbitrator to decide unless it is found that such a construction is not a possible one.
19. Thus, an award rendered in an international commercial arbitration - whether in India or abroad - is subject to the same tests qua setting aside under Section 34 or enforcement under Section 48, as the case may be. The only difference is that in an arbitral award governed by Part I, arising out of an arbitration other than an international commercial arbitration, one more ground of challenge is available viz. patent illegality appearing on the face of the award. The ground of patent illegality would not be established, if there is merely an erroneous application of the law or a re-appreciation of evidence.
20. However, to accede to Shri Divan's submission that because the grounds for challenge have been narrowed as aforesaid, we must construe the items in the Fifth and Seventh Schedules in the most expansive manner, so that the remotest likelihood of bias gets removed, is not an acceptable way of interpreting the Schedules. As has been pointed out by us hereinabove, the items contained in the Schedules owe their origin to the IBA Guidelines, which are to be construed in the light of the general principles contained therein - that every arbitrator shall be impartial and independent of the parties at the time of accepting his/her appointment. Doubts as to the above are only justifiable if a reasonable third person having knowledge of the relevant facts and circumstances would reach the conclusion that there is a likelihood that the arbitrator may be influenced by factors other than the merits of the case in reaching his or her decision. This test requires taking a broad common-sensical approach to the items stated in the Fifth and Seventh Schedules. This approach would, therefore, require a fair construction of the words used therein, neither tending to enlarge or restrict them unduly. It is with these prefatory remarks that we proceed to deal with the arguments of both sides in construing the language of the Seventh Schedule.
21. Coming to the challenge in the present case, Justice Lahoti's appointment is challenged on the ground that the arbitrator has been an advisor to GAIL in another unconnected matter and, therefore, Justice Lahoti should be removed. In his disclosure statement made on 24.11.2016, Justice Lahoti had said:
"That on a legal issue between GAIL and another Public Sector Undertaking, an opinion was given by me to GAIL, in the year 2014, but it has no concern with respect to the present matter. I am an Arbitrator in a pending matter between M/s. Pioneer Power Limited and GAIL (India) Limited."
22. Shri Divan has pressed before us that since on a legal issue between GAIL and another public sector undertaking an opinion had been given by Justice Lahoti to GAIL in the year 2014, which had no concern with respect to the present matter, he would stand disqualified under Item 1 of the Seventh Schedule. Items 8 and 15 were also faintly argued as interdicting Justice Lahoti's appointment. Item 8 would have no application as it is nobody's case that Justice Lahoti "regularly" advises the respondent. And Item 15 cannot apply as no legal opinion qua the dispute at hand was ever given. On reading Item 1 of the Seventh Schedule, it is clear that the item deals with "business relationships". The words "any other" show that the first part of Item 1 also confines "advisor" to a "business relationship". The arbitrator must, therefore, be an "advisor" insofar as it concerns the business of a party. Howsoever widely construed, it is very difficult to state that a professional relationship is equal to a business relationship, as, in its widest sense, it would include commercial relationships of all kinds, but would not include legal advice given. This becomes clear if it is read along with Items 2, 8, 14 and 15, the last item specifically dealing with "legal advice". Under Items 2, 8 and 14, advice given need not be advice relating to business but can be advice of any kind. The importance of contrasting Item 1 with Items 2, 8 and 14 is that the arbitrator should be a regular advisor under items 2, 8 and 14 to one of the parties or the appointing party or an affiliate thereof, as the case may be. Though the word "regularly" is missing from Items 1 and 2, it is clear that the arbitrator, if he is an "advisor", in the sense of being a person who has a business relationship in Item 1, or is a person who "currently" advises a party or his affiliates in Item 2, connotes some degree of regularity in both items. The advice gi ven under any of these items cannot possibly be one opinion given by a retired Judge on a professional basis at arm's length. Something more is required, which is the element of being connected in an advisory capacity with a party. Since Justice Lahoti has only given a professional opinion to GAIL, which has no concern with the present dispute, he is clearly not disqualified under Item 1.
23. Coming to Justice Doabia's appointment, it has been vehemently argued that since Justice Doabia has previously rendered an award between the same parties in an earlier arbitration concerning the same disputes, but for an earlier period, he is hit by Item 16 of the Seventh Schedule, which states that the arbitrator should not have previous involvement "in the case". From the italicized words, it was sought to be argued that "the case" is an ongoing one, and a previous arbitration award delivered by Justice Doabia between the same parties and arising out of the same agreement would incapacitate his appointment in the present case. We are afraid we are unable to agree with this contention. In this context, it is important to refer to the IBA Guidelines, which are the genesis of the items contained in the Seventh Schedule. Under the waivable Red List of the IBA Guidelines, para 2.1.2 states:
"2.1.2. The Arbitrator had a prior involvement in the dispute." (emphasis supplied)
24. On reading the aforesaid guideline and reading the heading which appears with Item 16, namely "Relationship of the arbitrator to the dispute", it is obvious that the arbitrator has to have a previous involvement in the very dispute contained in the present arbitration. Admittedly, Justice Doabia has no such involvement. Further, Item 16 must be read along with Items 22 and 24 of the Fifth Schedule. The disqualification contained in Items 22 and 24 is not absolute, as an arbitrator who has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties or an affiliate, may yet not be disqualified on his showing that he was independent and impartial on the earlier two occasions. Also, if he currently serves or has served within the past three years as arbitrator in another arbitration on a related issue, he may be disqualified under Item 24, which must then be contrasted with Item 16. Item 16 cannot be read as including previous involvements in another arbitration on a related issue involving one of the parties as otherwise Item 24 will be rendered largely ineffective. It must not be forgotten that Item 16 also appears in the Fifth Schedule and has, therefore, to be harmoniously read with Item 24. It has also been argued by learned counsel appearing on behalf of the respondent that the expression "the arbitrator" in Item 16 cannot possibly mean "the arbitrator" acting as an arbitrator, but must mean that the proposed arbitrator is a person who has had previous involvement in the case in some other avatar. According to us, this is a sound argument as "the arbitrator" refers to the proposed arbitrator. This becomes clear, when contrasted with Items 22 and 24, where the arbitrator must have served "as arbitrator" before he can be disqualified. Obviously, Item 16 refers to previous involvement in an advisory or other capacity in the very dispute, but not as arbitrator. It was also faintly argued that Justice Doabia was ineligible under Items 1 and 15. Appointment as an arbitrator is not a "business relationship" with the respondent under Item 1. Nor is the delivery of an award providing an expert "opinion" i.e. advice to a party covered by Item 15."
22. Submission of Sri Sharma is that the applicants have neither approached the Arbitrator under Section 13 or the Court under Section 14 of the Act, which was in the teeth of the judgment of the Apex Court in the case of HRD Corporation (supra).
23. Thus, it is an undenied fact that after the amendment in 2016 Section 12(5) read with Seventh Schedule, it is clear that if the Arbitrator falls with any of the categories so enumerated in the Seventh Schedule, he becomes ineligible to perform as an Arbitrator.
24. The Supreme Court in the case of Voestalpine Schienen GmbH Vs.Delhi Metro Rail Corporation Ltd., 2017(4)SCC 665 dealing with the earlier judgment of the Apex Court held as under:
"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 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."
25. A similar question arose before the Supreme Court again regarding the interpretation of Section 12(5) of the Act.
26. In a recent judgment passed by the Apex Court in Civil Appeal No.3972 of 2019, Bharat Boradband Network Limited vs United Telecoms Limited, decided on 16.4.2019, justice Nariman in depth considered the effect of 2016 amendment in Section 12 of the Act, held in paragraph nos.14, 15, 17 and 20, which are extracted as under:
"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). 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, 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.
17. The scheme of Section 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 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.
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 (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 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 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.
27. Thus, after the judgment of the Apex Court in Bharat Broadband Network Ltd. (supra) no doubt remains as regard the Arbitrator becoming de jure unable to perform his function in terms of sub section (5) of Section 12 of the Act, once he is covered under the Seventh Schedule, and the very objection being raised regarding the Arbitrator Tribunal by the party. Further, the mandate of such Arbitrator will terminate.
28. Supreme Court in the case of Bharat Broadband Network Ltd.(supra) had distinguished between a situation arising where an Arbitrator makes a disclosure in writing which is likely to give justifiable doubt as to his independence or impartiality. Such appointment can be challenged under Section 12(1) to 12(4) read with Section 13 of the Act, but where such a person becomes "inelligible" to be appointed as an Arbitrator, there is no question of challenge to such appointment before such Arbitrator. In such a case, which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted and the Arbitrator becomes, as a matter of law (i.e. de jure) unable to perform his function, meaning thereby that his mandate automatically terminates and he shall be substituted by another Arbitrator under Section 14(1) of the Act.
29. The argument of counsel for the applicant has force as regards the substitution of an Arbitrator under Section 14 as in the present case Sri B.S.Mahesh, Advocate lost his mandate to be an Arbitrator and has de jure become ineligible to remain as an Arbitrator as he was a witness to the agreement of 2014, which was executed in his office between the parties and Clause 2 of the agreement categorically provided that the agreement was being executed in his office. Thus, he became ineligible in view of Seventh Schedule of the Act.
30. Further, the argument of Sri Sharma to the extent that the recourse open to the applicant was to challenge the appointment under Section 13 of the Act and after the award being made, the same can be challenged under Section 34 has no force as Section 12 itself mandates for the disclosure to be made by the Arbitrator so appointed.
31. In the present case no such disclosure having been made by the Arbitrator and he being a witness to the agreement executed in the year 2014 and thereafter the MOU mentioning his name to act as an Arbitrator would not waive off the right of the applicant to challenge his appointment as an Arbitrator under Section 12 of the Act. Further, in view of sub section (5) of Section 12 read with Section 14 he has become de jure unable to perform his function.
32. It is neither the case of the applicant or the respondent that in pursuance to the proviso to sub section (5) of Section 12, the applicant had waived off the applicability of this sub section by express agreement, and the Apex Court had categorically in paragraph 15 of the judgment in Bharat Broadband Network(supra) had held that waiver will only amount when there is express agreement in writing.
33. As far as the reliance placed by learned counsel for respondents in the case of Aarwali Power Co. (supra) and in the case of HRD Corporation (supra) the recent judgment of the Apex Court in the case of Bharat Broadband Network Ltd.(supra) has laid rest to all the doubts in regard to the amendment of 2016 in Section 12 and in particular to sub section (5) of Section 12 and its proviso.
34. The judgment of the Apex Court in the case of HRD (supra) was in depth considered by the Apex Court in Bharat Broad Band Network Ltd.(supra) and the Court found that once the Arbitrator was found de jure unable to perform his function as given in Seventh Schedule, he cannot be continued to be an Arbitrator.
35. In the present case there is no denial to the fact that the agreement of the year,2014 was executed between Dynamic Laminate India Pvt. Ltd. through its Managing Director Sri A.K.Maheshawari (the present respondent) and one Sri Shyam Lal, where Sri B.S.Mahesh was the witness to the said agreement and the same having been executed in his office was stated in paragraph 2 of the agreement, while the MOU of 2016 being executed between the respondent and applicant nos.1, 2 and 3 and father of applications no.4 and 5 provided for arbitration in which name of B.S,. Mahesh appeared as the sole Arbitrator.
36. It is the very appointment of Sri Mahesh, which has been challenged by the applicant as being hit by Seventh Schedule of Section 12(5) of the Act.
37. In view of the law laid down by the Apex Court in the case of Bharat Broadband Network Ltd. (supra) I am of the opinion that the Arbitrator Sri B.S.Mahesh has de jure become ineligible to act as an Arbitrator by virtue of Seventh Schedule read with Section 12(5) of the Act. The applicant, in such circumstances, cannot be left remediless.
38. Application for appointment of Arbitrator is thus allowed.
39. Let Mr. Justice Rajes Kumar, a retired Judge of this Court, R/o 3-C, Tashkant Marg, Allahabad (Mobile No.9415235009) be appointed as an Arbitrator to resolve the dispute subject to his consent in terms of Section 11 (8) of the Arbitration and Conciliation Act.
40. The registry is directed to obtain consent of the proposed Arbitrator in terms of Section 11(8) of the Act within three weeks.
41. List thereafter.
Dated:26.4.2019 AKJ.