Supreme Court Clarifies Arbitrator Disqualification Under The Arbitration and Conciliation Act

Supreme Court Clarifies Arbitrator Disqualification Under Section 12(5) of the Arbitration and Conciliation Act in TRF Ltd v. Energo Engineering Projects Ltd

In a landmark judgment, the Supreme Court in TRF Ltd v. Energo Engineering Projects Ltd addressed two critical issues regarding the statutory disqualification of arbitrators under the Arbitration and Conciliation Act, 1996 (the Act). The Court ruled that a party can approach the court directly to raise the issue of statutory disqualification of an arbitrator, without needing to first seek a remedy from the arbitrator themselves. The Court also clarified that a person designated as an arbitrator who becomes disqualified under the amended provisions of the Act loses the authority not only to preside over the arbitration but also to nominate an alternate arbitrator.

Issues Addressed:

1. Eligibility of a nominated arbitrator: If a person authorized under a contract to act as an arbitrator becomes disqualified by operation of law, does that person still have the right to nominate another arbitrator?
2. Plea for statutory disqualification: Can a plea for the statutory disqualification of a nominated arbitrator be raised under Section 11(6) of the Act?

Facts of the Case:

The dispute arose between TRF Ltd (Appellant), an equipment supplier, and Energo Engineering Projects Ltd (Respondent), a company engaged in the installation of thermal power plants. The Respondent had issued a Purchase Order (PO) in favor of the Appellant, which led to a performance-related dispute. As per the PO, if the dispute could not be resolved through negotiation, it would be referred to arbitration under the Arbitration and Conciliation Act, 1996.

The Appellant invoked arbitration on December 28, 2015, and objected to the procedure for the appointment of an arbitrator under the PO. Specifically, the Appellant contested the designation of the Managing Director of the Respondent as the sole arbitrator, as well as the right of the Managing Director to nominate an alternate arbitrator. The Appellant sought an appointment under Section 11(5) and Section 11(6) of the Act.

The Respondent, however, appointed the Managing Director as the sole arbitrator, and the Appellant filed an application with the High Court under Section 11 of the Act to seek the appointment of an arbitrator outside the PO’s specified process. The High Court dismissed the Appellant’s application, stating that the old Act provisions regarding arbitrator appointments did not conflict with the amended Act. The Appellant then approached the Supreme Court.

Court’s Judgment:

Statutory Disqualification of an Arbitrator

The Supreme Court examined Section 12(5) of the Act, which prescribes the disqualification of arbitrators based on their relationships with the parties or the subject matter of the dispute. The Court emphasized that if the nominated arbitrator falls under the categories mentioned in the Seventh Schedule to the Act, the individual would be ineligible to serve as an arbitrator.

In this case, the Managing Director of the Respondent company was found to be ineligible by operation of law, as he had a relationship with the parties that fell within the disqualification criteria set out under Section 12(5) of the Act. As a result, the Court concluded that the Managing Director could no longer serve as an arbitrator for the dispute between the Appellant and the Respondent.

Jurisdiction of the Court under Section 11

The Supreme Court further clarified that a party could approach the Court under Section 11(6) to raise the issue of an arbitrator’s disqualification. The Court held that it is not necessary to first seek a remedy from the arbitrator regarding their disqualification. The Court emphasized that Section 11 not only empowers the judiciary to appoint an arbitrator but also gives the Court the authority to scrutinize any possible disqualification of a nominated arbitrator.

Loss of Authority to Nominate

The Court then dealt with the critical question of whether a person who is authorized to nominate an arbitrator (such as the Managing Director in this case) loses their power to do so if they become ineligible under the Act.

The Court held that if the person nominated as an arbitrator is also the one empowered to nominate another arbitrator, that person loses the authority to nominate an alternate if they become disqualified. The Court explained that, in the present case, the Managing Director of the Respondent company, who had been designated both as the arbitrator and the nominating authority, was disqualified from both roles. The Court ruled that an ineligible person could not delegate the power of nomination, as it would effectively result in the disqualified individual overseeing the arbitration process.

Legal Precedents Cited:

The Supreme Court referred to several key judgments to support its decision:

• SBP & Co. v. Patel Engineering Ltd: The Court reaffirmed that the designated Judge who receives an application for the appointment of an arbitrator can, at the initial stage, scrutinize the existence of any disqualification.
• Arasmeta Captive Power Company v. Lafarge India Pvt Ltd: The Court reinforced that judicial review over the appointment of arbitrators is appropriate when a party is concerned about the eligibility or disqualification of the proposed arbitrator.

The Court noted that these decisions provided the legal foundation for its conclusion that the Court under Section 11 has the jurisdiction to entertain and adjudicate a plea for the statutory disqualification of an arbitrator.

The Supreme Court’s judgment in TRF Ltd v. Energo Engineering Projects Ltd clarifies several important aspects of the Arbitration and Conciliation Act, 1996, particularly regarding the disqualification of arbitrators and the jurisdiction of the court in such matters:

• A nominated arbitrator who becomes statutorily disqualified under the Amended Act loses the right not only to act as an arbitrator but also to nominate another arbitrator.
• Section 11 allows the court to entertain a plea for the statutory disqualification of an arbitrator, even without approaching the arbitrator first.
• The case settles the legal position that an ineligible arbitrator, who is also authorized to nominate a replacement, loses their authority to do so if they are disqualified.

This judgment brings much-needed clarity to the arbitration process and provides guidance for businesses and legal practitioners on how to handle disputes involving the statutory disqualification of arbitrators. It also highlights the critical importance of adhering to the amended provisions of the Arbitration and Conciliation Act, 1996 in both the selection and nomination of arbitrators.