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

by | Mar 8, 2024 | Blog

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.

A Frisson of Schadenfreude: The Harmonious Construction of the Arbitration Act, the Stamp Act, and the Contract Act

by | Jan 10, 2024 | Blog

Article by Saima Mahmood

The recent judgment of  7 Judge Bench in the In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, the Court has extensively dealt with the overall harmonious play of Arbitration Act, Stamp Act and the Contract Act. The Court’s purpose to dwell in this aspect was the Five-Judge Bench in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[1] which directly impacts the business and commercial transaction in the country as it has raised a vital question to the entire interpretation and application of the Arbitration Law in India.

Position of Law prior to In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899:

A Division Bench of the Supreme Court in SMS Tea Estates vs Chandmari Tea Co (P) Ltd[2] had held that if any document is found to be unstamped/insufficiently stamped then even the arbitration clauses shall become invalid as per Section 35 of the Stamp Act.

After this judgement, a legislative amendment was inserted as Section 11(6) of the Arbitration and Conciliation Act which limited the scope of judicial intervention to merely “examine” the existence of arbitration agreement. The Supreme Court further clarified that the role of Courts under Section 11 of the Arbitration Act shall confine to analyzing the existence of arbitration agreement at the stage of appointment of Arbitrator(s).

Subsequent to the insertion, a Three-bench judge in Vidya Drolia v. Durga Trading Corpn.[3],held that the existence and validity of an arbitration agreement would not exist if it were illegal or does not satisfy the mandatory legal requirements for it to be enforceable which includes a stamp duty.

Subsequent to this position, a Three-judge Bench of the Supreme Court, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited[4] doubted this position and observed that since arbitration agreement is an independent agreement, it cannot be invalidated merely on insufficiently stamped main contract.

Since both the judgments were passed by 3-judge Bench, the Supreme Court referred the issue to a larger bench to render the verdict of this issue. Thereafter, a Five Judge Bench decided the reference by a 3:2 majority summarizing as below[5]:

  1. An unstamped instrument containing an arbitration agreement is void under Section 2(g) of the Contract Act;
  2. An unstamped instrument, not being a contract and not enforceable in law, cannot exist in law. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped;
  3. The “existence” of an arbitration agreement contemplated under Section 11(6A) of the Arbitration Act is not merely a facial existence or existence in fact, but also “existence in law”;
  4. The Court acting under Section 11 of the Arbitration Act cannot disregard the mandate of Sections 33 and 35 of the Stamp Act requiring it to examine and impound an unstamped or insufficiently stamped instrument; and the certified copy of an arbitration agreement.

Thereafter, The Supreme Court has meticulously dealt with every aspect of Stamp Act, Arbitration Act and Contract Act to in the 7-judge bench judgement in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899

The scope and effect of Stamp Act:

The court discussed the procedure envisaged in the Stamp Act regarding failure to stamp an instrument. Section 17 of the Stamp Act provides that all instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution. Further, section 62 penalizes any failure to comply with Section 17 of the Stamp Act. The Court further discussed other ways vide which an instrument may not be properly stamped including the following[6]:

  1. The duty may have been paid under an incorrect description under Schedule I;
  2. The duty paid may be of a sufficient amount but of improper description;
  3. The provisions of Section 5 which govern instruments relating to several distinct matters may not have been complied with; or
  4. The instrument may be written in contravention of Sections 13 and 14, and thereby deemed to be unstamped in terms of Section 15.

The court observed that the legislature realized that the mandate of Stamp Act maybe not be complied for reasons as mentioned and thus Sch IV was enacted. Further, Section 35 of the Stamp Act provides that instruments which are not duly stamped are inadmissible in evidence and it shall not be acted upon, registered, or authenticated[7]. The Court also explained that Clause (a) of the proviso to Section 35 stipulates that the bar contained in the provision is removed upon the payment of duty and the penalty. Thus, the party or parties may pay the duty chargeable to the person who has the authority to receive evidence by law or by consent of parties. Further under Section 38 of the Stamp Act, the Collector is granted with power to impound an instrument under section 33 of the Stamp Act. In terms of Section 42 of the Stamp Act, an instrument is admissible in evidence once the payment of duty and a penalty is complete. It is clear that section 38 of the Stamp Act stipulates that either the person admitting the instrument in evidence or the Collector, as the case may be, shall certify by endorsement that the proper duty has been paid.

The procedure contemplated by the Stamp Act facilitates the collection of revenue. It permits instruments to be impounded not only by persons in charge of a public office or those who are empowered by law to receive evidence but also by any person who is empowered to receive evidence by consent of parties. The statute then sets out the procedure to be followed upon impounding a document. This procedure ensures that stamp-duty is paid. After the payment of the appropriate amount under the appropriate description in Schedule I and the penalty (if any), the Stamp Act provides for the certification of such payment by an endorsement by the appropriate authority. Once an instrument has been endorsed, it may be admitted into evidence, registered, acted upon or authenticated as if it had been duly stamped.

Distinctiveness between inadmissibility and voidness of arbitration agreements

The next question that emanated from the above observation of the Court is the distinctiveness between inadmissibility (Stamp Act) and voidness (As per Contract Law) of an agreement. Whether the impact of an inadmissibility of documents hold the same weightage as voidness of contract. This question was also answered by the Court, wherein the Court concluded that in essence the difference is that when an agreement is void, it raises the question of enforceability of the agreement before the Court of Law whereas when the question of inadmissibility arises, it raises the issue whether such a document maybe considered by the court while adjudication of the case.

Therefore, the Court held that paying inadequate duty or not paying it, would only render an instrument inadmissible in evidence and not void.

Harmonious Intent under Indian Laws

The Court further analyzed the scope of Harmonious Intent under Indian Laws. While going into the harmonious construct, the Court defined that the cardinal principle of interpretation of statutes is to discover and give effect to the legislative intention. If a statute is susceptible to two interpretations, the court will have to reject the construction which will defeat the plain intention of the legislation[8]. The purpose of judiciary is to not only truly interpret the clause but the entirety of a statute. The Court relied on Sultana Begum v. Prem Chand Jain[9],  to enumerate the principles pertaining to harmonious construction of statue which includes that an interpretation which reduces one of the provisions to a “dead letter” or “useless lumber” is not harmonious construction; and to harmonize is not to destroy any statutory provision or to render it otiose[10].

It is clear understanding that the challenge before the Court is to harmonize the provisions of the of the Arbitration Act and the Stamp Act. The object of the Arbitration Act is to inter alia ensure an efficacious process of arbitration and minimize the supervisory role of courts in the arbitral process. On the other hand, the object of the Stamp Act is to secure revenue for State. It is a cardinal principle of interpretation of statutes that provisions contained in two statutes must be, if possible, interpreted in a harmonious manner to give full effect to both the statutes[11].

The Court discussed the primacy of Arbitration Act for arbitration agreements over Contract Act and Stamp Act. The reasons opined by the Court were as follows:

  1. Arbitration Act is a special law and the Indian Contract Act, and the Stamp Act are general laws.
  2. Scope of Section 5 of the Arbitration Act restricts the scope of judicial intervention in the Arbitration Act. The courts can only intervene if the same is provided in the Arbitration Act. The Court further observed that one of the primary objectives of the Arbitration Act was to minimize the supervisory role of the courts in the arbitral process[12] and therefore, dissented from the N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[13] view that effect of Sections 33 and 35 of the Stamp Act shall prevail despite the interdict in Section 5.
  3. Parliament was aware of the Stamp Act when it enacted the Arbitration Act, thus despite being aware of the mandate of Section 33 of the Stamp Act, the Parliament at the time of enactment of Arbitration Act, did not specify stamping as a pre-condition to the existence of a valid arbitration agreement.

Upon establishing the primacy of Arbitration Act for arbitration agreements over Contract Act and Stamp Act, the Court further enumerated the Harmonious construction of the three statutes.

  1. Effect of competence-competence doctrine: the effect of the principle of competence-competence is that the arbitral tribunal is vested with the power and authority to determine its enforceability. The question of enforceability survives, pending the curing of the defect which renders the instrument inadmissible. By appointing a tribunal or its members, this Court is merely giving effect to the principle enshrined in Section 16. The Court further observed that Arbitration requires to provide “a one-stop forum” for resolution of all disputes and held:

(a) Courts must give effect to the commercial understanding of parties to arbitration agreements that arbitration is efficacious; and

(b) This can be done by minimizing judicial intervention[14]

  1. Scope of Arbitral Tribunal: The Court goes on to say that issues which concern the payment of stamp-duty fall within the remit of the arbitral tribunal and it is understood from the legislative intent that courts are not required to deal with the issue of stamping at the stage of granting interim measures under Section 9.
  2. Scope and interpretation of word “shall” in Section 33 and 35 of Stamp Act: The Court while interpreting the term shall has expressly stated that while ordinarily term “shall” is mandatory, however sometimes it may be read directory which depends on the intent of the legislature. Therefore, it is pertinent that the interplay of the three statutes and the intent of the legislature must be evaluated in the context of interpreting “shall”.
  3. Fourthly, another important aspect which the Court discussed was the interpretation of the law must give effect to the purpose of the Arbitration Act in addition to Stamp Act.

Conclusion:

For the above observation, the Court concluded as follows:

  1. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
  2. Non-stamping or inadequate stamping is a curable defect;
  3. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
  4. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and
  5. The decision in SMS Tea estates vs Chandmari Tea Co (P) Ltd[15] and N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[16] are overruled.

The aforementioned detailed observations of the Supreme Court makes it clear that any non-payment or incorrect or inadequate stamp duty will not render an instrument invalid or void. Further it was highlighted the objective of the Arbitration Act is to reduce the judicial intervention or supervisory role in arbitration mattes. This judgment has brought immense clarity to the Arbitration Laws in India, it is a perfect epiphany to the harmonious intent in Indian Laws. This ruling brings great relief to parties entering commercial contracts and other business related transactions.

[1] (2023) 7 SCC 1
[2] (2011) 14 SCC 66
[3] (2021) 2 SCC 1
[4] (2021) 4 SCC 379
[5] Para 5 of the judgment
[6] Para 38 of the judgment
[7] Subject to the proviso to Section 35
[8] CIT v. Hindustan Bulk Carriers, (2003) 3 SCC 57
[9] (1997) 1 SCC 373
[10] (1997) 1 SCC 373
[11] Jagdish Singh v. Lt. Governor, Delhi, (1997) 4 SCC 435
[12] Statements of Objects and Reasons, Arbitration Act
[13] (2023) 7 SCC 1
[14] (2016) 10 SCC 386
[15] (2011) 14 SCC 66
[16] 2023) 7 SCC 1
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