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Challenging Arbitrator’s Mandate Vis-à-vis Entry 22 of Schedule 5, Arbitration Act, 2015

Article by Shivani Tandon & Anchit Baliyan

Introduction

A much-needed shift was brought about by the Arbitration and Conciliation Act (Amendment) Act, 2015 (“Amendment Act”), which aimed to bring in a new age of prompt and efficient arbitration together with a renewed emphasis on the impartiality and independence of arbitrators.

The 246th Law Commission Report aimed to enhance arbitration as a viable alternative to court disputes, stressing the importance of arbitrators’ independence and impartiality. It proposed adopting the Red and Orange Lists from the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration to assess arbitrators’ eligibility. These lists were integrated into the Fifth Schedule of the amended Arbitration & Conciliation Act. Per Section 26 of the Amendment Act, they were set to be effective from October 23, 2015, onwards. This Amendment was introduced in lieu of elucidating the principle of ‘Arbitrator’s Impartiality & Independence’ enshrined under Article 12 of the said act. The said amendment aimed at improving the neutrality of the arbitrator and strengthening the existing framework, which suffered from various lacunas.

Intricately woven within the amendment are critical criterions which raise justifiable doubts to an arbitrator’s independence and impartiality. One such criterion is listed in Entry 22 of Schedule 5 of said act. This provision notable flags situations where a justifiable doubt emerges when an arbitrator is nominated by the same party more than twice within a span of three years. This article embarks on an insightful analysis of how Entry 22 is interpreted and applied by Indian Courts and Arbitral Tribunals, shedding light on the evolving landscape of arbitration jurisprudence in the Country.

 

Rationale of amendment

Schedule 5

The inclusion of the Fifth Schedule acts as a clarifying element, elucidating the extensive scope of ‘justifiable doubts’ concerning an arbitrator’s impartiality and independence as outlined in Section 12 of the Act. This interpretation is supported not only by the marginal note labeling it as an explanation but also by the 246th Law Commission Report on Amendments to the Arbitration & Conciliation Act. The Commission suggested that the integration of the Schedule should be seen as a tool for assessing whether circumstances leading to such doubts exist.

Schedule 7

In accordance with Section 14 of the Act, the mandate of an arbitrator is designated to cease should they find themselves either de jure or de facto incapable of executing their responsibilities. Moreover, this provision affords parties the recourse to seek judicial intervention in determining such termination. Notably, the Law Commission, in its comprehensive report, advocated for an additional clarification – the Proposed Explanation – to be appended to Section 14. This proposed amendment explicitly stated that if an arbitrator’s relationship with the involved parties, legal counsel, or the subject matter of the dispute aligns with the categories delineated in the Seventh Schedule, they would be deemed ‘legally unable to perform their functions.’ However, despite the Commission’s recommendation, this explanatory provision did not find its way into the enacted amendments of the Act.

The omission of this suggested explanation to Section 14 consequently prompted questions regarding the interpretative scope of the Seventh Schedule. Parties involved in arbitration proceedings were left to ponder whether the criteria outlined within this schedule could indeed serve as substantive grounds for the termination of an arbitrator’s mandate under Section 14 of the Act. This ambiguity stemming from the non-inclusion of the proposed amendment underscored the importance of clarity and precision within the legislative framework governing arbitration proceedings, particularly in safeguarding the integrity and efficacy of the arbitration process.

 

Guiding Principles

In the realm of arbitration, the guiding principles for the appointment of arbitrators and the grounds for their challenge are a mosaic crafted from diverse sources, a legal tapestry that courts now meticulously weave when addressing matters under Schedule 5 of the Arbitration Act.

In the pivotal case of HRD Corporation (Marcus Oil and Chemical Division) v. GAIL (India) Limited, (2018) 12 SCC 471, the Supreme Court delved into the legislative intent behind Schedule 5 and Schedule 7 of the Act, drawing from the insights provided by the 246th Report of the Law Commission of India. The Court emphasized the contrasting roles of the Fifth Schedule and the Seventh Schedule. According to the Commission’s report, the Fifth Schedule encompasses a comprehensive list for disclosures to be made by arbitrators upon appointment, including circumstances outlined in the Red and Orange lists. Conversely, the Seventh Schedule incorporates a narrower subset, covering situations deemed egregious, as enumerated in the Red list, which automatically disqualify an arbitrator from appointment.

The Court noted that challenges based on circumstances identified under the Fifth Schedule necessitate a separate determination regarding the existence of justifiable doubts regarding the arbitrator’s independence and impartiality, based on the specific facts of the case. Conversely, situations outlined in the Seventh Schedule render an individual ineligible for appointment as an arbitrator. Challenges based on grounds mentioned in the Seventh Schedule can be directly raised before the court, while those stemming from circumstances under the Fifth Schedule can only be questioned post-award, at the stage of setting aside the award. Consequently, the Court ruled that challenges against the appointment of arbitrators based on the Fifth Schedule could not be entertained at the pre-award stage. Doubts concerning Entry 22 are deemed justifiable only if a reasonable third party, with knowledge of the relevant facts and circumstances, would conclude that there is a likelihood of the arbitrator being influenced by factors other than the merits of the case.

Crucially, the Court underscored that since the Fifth and Seventh Schedules are derived from the IBA Guidelines, they should be interpreted in light of the general principles contained therein. These principles include the requirement that every arbitrator be impartial and independent at the time of appointment, and doubts regarding the appointment’s fairness are justifiable only if a third party would conclude that the arbitrator is likely to be swayed by factors unrelated to the case’s merits. Consequently, the interpretation of the schedules should be fair, neither unduly enlarging nor restricting their scope. Against this backdrop, the Court meticulously examined the matters enumerated in the Seventh Schedule, considering the underlying facts of each case.

 

Trends in recent Judicial Pronouncements

In recent years, the Indian Courts have witnessed evolving trends in the interpretation and application of Entry 22 of Schedule 5 of the Arbitration Act. This pivotal aspect of arbitration law revolves around Section 13(2), which allows for the challenge of an arbitrator’s mandate. The procedure as delineated in Section 13(3), entrusts the adjudication of this challenge with the Arbitral Tribunal itself. Of utmost significance is Section 12(3)(a), which outlines the grounds for challenging an arbitrator’s mandate, primarily focusing on circumstances that may cast doubts upon their independence or impartiality. The delineation of these circumstances, encapsulated within Entry 22 of Schedule 5, forms the crux of analyzing this trend, illuminating the nuanced approach adopted by the courts in adjudicating upon them.

The Delhi High Court, in the matter of Dream Valley Farms Pvt. Ltd. v. Religare Finvest Ltd., 2016 SCC OnLine Del 5584, observed that an arbitrator had been appointed by a party more than 20 times, which is a clear violation of Entry 22 of Schedule 5 of Arbitration Act. The Hon’ble Court held that the misleading declaration by the arbitrator concealing the number of his appointments by the same party, was in violation of Entry 22 and was also unbecoming of an arbitrator. His appointment to the tune of 20 times defeated the very purpose of the amended act which sets out grounds that give rise to justifiable doubts as to the independence and impartiality of the arbitrator.  This case supported the somewhat mandatory application of Entry 22 of Schedule 5. However, since the case is that of concealing the number of appointments in the declaration made, the cancellation of the arbitrator’s mandate is in lieu of both the concealment in declaration as well as having breached the limit of appointments set out in Entry 22, and not just a clear violation of Entry 22.

Akin to the aforementioned, is the case of Sawarmal Gadodia v. Tata Capital Financial Services Ltd., 2019 SCC OnLine Bom 849, wherein the arbitrator appointed by the Respondent had failed to make a correct disclosure of the number of times he had been appointed by the same party, which was proved to be in excess of 250 times. The Bombay High Court held that the same having been in violation of Section 12(1) and Entry 22 of Schedule 5 of Arbitration Act, is a clear ground to set aside the award made under Section 34 of the said act. Seemingly, the Bombay High Court’s ruling was not intended to be a constricted reading of Entry 22; it was swayed by the erstwhile arbitrator’s omission to give full and frank disclosure in this case.

Based on the analysis of the aforementioned cases, it appears that the threshold for triggering the application of Entry 22 in Schedule 5 is notably higher than the statutory provision, requiring two instances. In the case of Kunwer Sachdev v. Hero Fincorp Limited, O.M.P. (T) (COMM.) 9/2019, the Delhi High Court concluded that Entry 22 necessitates a cautionary signal to be raised when an individual has been appointed as an arbitrator on two or more occasions by one of the parties or its affiliate within the preceding three years. Hence, it is the third appointment as an arbitrator that effectively triggers the application of Entry 22 in Schedule 5.

Conversely, the Supreme Court’s elucidation in Panipat Jalandhar NH-1 Tollway Private Ltd. v. NHAI, SLP (C) No. 4115 of 2022 clarifies the positive application of Entry 22, Schedule 5. The Supreme Court carefully examined the circumstances involved in the case, wherein a nominee arbitrator had been appointed successively by NHAI with regard to disputes which had arisen from the same agreement. The Hon’ble court while dismissing the petition clarified that Entry 22 would not apply as a rule to appointment of the same Arbitral Tribunal to adjudicate multiple disputes between the same parties arising out of the same contract. However, Entry 22 of the Fifth Schedule would be attracted in case of multiple references by a party, of disputes relating to different contracts, to the same Arbitrator, in excess of the cap of Entry 22. It is immaterial whether the Arbitrator is biased in favor of the party making the nomination. Justice should not only be done, but manifestly be seen to have been done. The nomination of the same Arbitrator in successive arbitrations relating to different contracts may give rise to justifiable apprehension that the Arbitrator may be favorably disposed towards the party making the nomination.

Continuing to explore the legal terrain from another perspective, in the case of Sudesh Prabhakar and Ors. v. EMAAR Constructions Pvt. Ltd, Arb. P. 32/2018, the Delhi High Court, drawing from the Supreme Court’s ruling in HRD Corporation, determined that an arbitrator who has been appointed by a party or its affiliates on two or more occasions within the preceding three years may still remain eligible if it can be demonstrated that the arbitrator maintained impartiality and independence in the previous two arbitrations.

In consonance with this evolving narrative, the Delhi High Court, in Bharat Foundry and Engineering Works & Ors. v. INTEC Capital Ltd. & Ors., FAO no. 145/2021 held that the appellants neither pleaded nor proved any action of the Arbitrator that otherwise taints his neutrality making him unfit to act as an Arbitrator. Therefore, the sole reliance on Entry 22 of Schedule 5, to presume bias against the Arbitrator, is not in the spirit of what has been held in the case of HRD Corporation.

 

Conclusion

In summation, the kaleidoscope of interpretations surrounding Entry 22 has given rise to this mosaic of judgments, beckoning a balanced approach. The judicial pendulum, swinging between rigid application and flexible interpretation of Entry 22, gives rise to a discernible grey area. While the Panipat Jalandhar case erects a framework defining specific circumstances warranting the invocation of Entry 22, the HRD Corporation case and its progenies counsel against an uncritical reliance on this provision to presumptively assume bias. The evolving jurisprudence in this domain necessitates a balanced and discerning approach, one that contemplates individual arbitrator conduct simultaneously with the application of Entry 22, thereby fashioning a nuanced tapestry of legal precedent in the domain of appointment of an arbitrator.

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