Applicability of Section 12(5) of A&C Act where arbitration was invoked prior to 2015 Amendment

This article shall discuss the issue of maintainability of Execution Petitions on the aspect of applicability of Section 12 (5) r/w Schedule 7 of the Arbitration and Conciliation Act, 1996, as amended on 23.10.2015 when an arbitration clause is found to be invoked on any date i.e. prior to 23.10.2015 by way of service of Section 21 notice.

Prior to the introduction of Section 12(5) and Schedule 7 in the Arbitration and Conciliation Act, 1996, hereinafter referred to as “the Act”, there was no statutory provision dedicated to creating a negative list of persons/categories of persons who are not competent to preside an Arbitral Tribunal. Section 12(5) r/w the Seventh Schedule were incorporated vide Act no. 3 of 2016, titled the Arbitration and Conciliation (Amendment) Act, 2015, dated 31.12.2015, hereinafter referred to as “the Amendment Act, 2015”. It was published in the Gazette of India on 01.01.2016. However, as per Section 1 (2) of the Amendment Act the amendments came into force w.e.f. 23.10.2015. For ready reference, the above amendments are reproduced hereunder:

            Section 12 of Arbitration and Conciliation Act, 1996: 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, —

1. 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
2. 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—

1. Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
2. 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.]

                        “The Seventh Schedule”                      

1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.
4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.
5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
6. The arbitrator’s law firm had a previous but terminated involvement in the case without the arbitrator being invoked himself or herself.
7. The arbitrator’s law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.
8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.
9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate in one of the parties.
11. The arbitrator is a legal representative of an entity that is a party in the arbitration.
12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom.

Relationship of the Arbitrator to the dispute

15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
16. The arbitrator has previous involvement in the case.

Arbitrator’s direct or indirect interest in the dispute

17. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.
18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.
19. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.

Explanation 1- The term “close family member” refers to a spouse, sibling, child, parent or life partner.

Explanation 2- The term “affiliate” encompasses all companies in one group of companies including the parent company.

Explanation 3- For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or commodities arbitration, to draw arbitrators from a small, specialized pool. If in such fields it is the custom and practice for parties frequently to appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the rules set out above.

So, the question that arises is whether the newly introduced provisions of Section 12(5) r/w Schedule 7 of the Act are applicable prospectively as provided under Section 26 of the Amendment Act, 2015 or whether they can be applied retrospectively owing to the usage of words “Notwithstanding any prior agreement to the contrary” in newly introduced Section 12(5) of The Act.

For ready reference, Section 26 of the Amendment Act, 2015 is reproduced hereunder:

Section 26: Act not to apply to pending arbitral proceedings.

Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.

A plain reading of Section 26 of the Amendment Act, 2015 indicates-

1. That it has no bearing on the ongoing arbitral proceedings which commenced prior to 23.10.2015.
2. That an arbitral proceeding shall be treated as commenced on the date when notice/request for reference of dispute to Arbitration under Section 21 of the Act is received by the respondent.
3. That it gives liberty to the parties to agree for its application on the ongoing Arbitrations.
4. That it shall apply to arbitral proceedings commenced on 23.10.2015 or any date thereafter.

It is interesting to observe that after a gap of around 4 years, vide Section 15 of the Arbitration and Conciliation (Amendment) Act, 2019, hereinafter referred to as “the Amendment Act, 2019”, which came into force on 30.08.2019, Section 26 of the Amendment Act, 2015 was omitted retrospectively w.e.f. 23.10.2015 itself i.e. the date when it was introduced.

For ready reference, Section 15 of the Arbitration and Conciliation (Amendment) Act, 2019 is reproduced hereunder:

Section 15: Amendment to Act 3 of 2016

“Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 shall be omitted and shall be deemed to have been omitted with effect from the 23^rd October 2015.”

This means that from 30.08.2019 onwards, Section 26 of the Amendment Act 2015, which mandated prospective application of Section 12(5) r/w Schedule 7 of the Act, was obliterated from the statute retrospectively right from the day it was introduced i.e. 23.10.2015.

In order to somewhat placate the situation, the Amendment Act 2019 introduced Section 87 in the Act as under:

          Section 87: Effect of Arbitral and related Court Proceedings commenced prior to 23^rd October 2015

“Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) shall-

1. not apply to
   1. 1. arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016);
      2. court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016);
2. apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and to Court proceedings arising out of or in relation to such arbitral proceedings.

A plain reading of this newly added Section shows that an attempt was made to clarify the legislative intent regarding applicability of the amendments introduced vide the Amendment Act 2015 on arbitration and litigation emanating from the same. While upholding the parties’ discretion/autonomy to agree or otherwise, Section 87 of the Amendment Act, 2019 creates two categories of Arbitral Proceedings and related Court Proceedings as under:

“Applicability of Amendment Act, 2015 i.e. Section 12(5) r/w Schedule 7 and Other Changes”

This legislative flip-flop lasted more than four years, between 2015 and 2019. It had a cascading effect and impact on the issue of the applicability of Section 12 (5) and Schedule 7 to arbitral proceedings commenced prior to the introduction of the Amendment Act, 2015.

However, owing to its inherent weakness and its capacity to undo the futuristic steps introduced by the Amendment Act, 2015, Section 87 was struck down by a three-judge Bench of the Supreme Court of India on 27.11.2019, in a case titled Hindustan Construction Company Ltd. v. Union of India, 2019 Latest Caselaw 1160 SC. In this judgment, the Bench led by Justice R F Nariman along with Justices Surya Kant and V. Subramanian observed,

“The introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of the Courts in arbitration mattters, which defeats the very object of the Arbitration Act, 1996 which was strengthened by Amendment Act, 2015.”

The Bench weighed that if Section 87 is allowed to remain in the statute, the regime of the automatic stay under Section 36 upon filing an objection petition under Section 34, which was brought to an end by the Amendment Act 2015, would get revived. It was observed,

“When the mischief of misconstruction of Section 36 was corrected after a period of more than 19 years by legislative intervention in 2015, to now work in the reverse direction and bring back the aforesaid mischief itself results in manifest arbitrariness. The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed.........Hence the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India.”

It would be useful to go through the catena of other judgments passed by the Supreme Court on the issue of applicability of Section 12(5) r/w Schedule 7 of the Act between 2017 to 2023. The relevant judgments are enlisted hereunder:

             Now I shall summarily discuss the above cases: 

1.Voestalipine Schienen GMBH v. DMRC, 2017 Latest Caselaw 919 SC

In this case, a dispute was referred to arbitration on 14.06.2016. DMRC shortlisted five names from its panel, out of which Voestalpine Company was asked to choose two names who would, in turn, choose the Presiding Arbitrator. Petitioner Company objected to this method of appointing arbitrators, claiming it to be violative of Section 12(5) r/w Schedule 7 of the Amendment Act, 2015.

Vide decision dated 10.02.2017, the Supreme Court ruled that the independence and impartiality of the Arbitrator are the hallmarks of any arbitration proceeding. The time has come to send positive signals to the International Business Community in order to create a healthy arbitration environment and conducive arbitration culture in this country. DMRC was directed to prepare a broad base panel of independent professionals from different fields. The Petitioner was asked to choose the Tribunal from a list of 31 Arbitrators prepared by DMRC.

2. Aravali Power Company Pvt. Ltd. v. Era Infra Engg. Ltd., 2017 Latest Caselaw 667 SC

In this case, a dispute was referred to arbitration on 29.07.2015, and the CEO of M/s Aravali Power was appointed as an Arbitrator. The High Court invoked power under Section 11(6) of the Act and removed the Arbitrator on 29.07.2015 due to doubts about independence and impartiality, citing Section 12(3)(a) of the Act.

The Supreme Court ruled that since arbitration was invoked on 29.07.2015, Arbitrator was appointed on 19.08.2015 and hearing started before the Tribunal on 07.10.2015, the Amendment Act 2015, which came into force on 23.10.2015 has no application on the arbitral proceedings in question. Thus, power under Section 11(6) can’t be invoked in derogation of the appointment procedure. After 23.10.2015, in case the arbitration clause/procedure is not in conformity with Section 12(6) r/w Schedule 7, it would be rendered illegal, and the High Court can invoke Section 11 (6) of the Act.

3. BCCI v. Kochi Cricket Pvt. Ltd., 2018 Latest Caselaw 183 SC

In this case, which was decided on 15.03.2018, a dispute was referred to arbitration on 18.01.2012. A sole arbitrator was appointed as per the agreement dated 12.03.2011. The Tribunal passed two Awards against BCCI on 22.06.2015. This led to the filing of two Section 34 Petitions and two Execution Petitions under Section 36 of the Act. Executions were sought to be dismissed by BCCI, saying that as per old Section 36, the awards were stayed by mere filing of Section 34 petitions. The High Court disagreed and ruled that amended Section 36 would apply. The Supreme Court agreed with the High Court and advised the Government to retain Section 26 of the Amendment Act 2015 and not introduce Section 87 of the Amendment Act 2019, as it would delay the Court proceedings related to Awards already passed.

4. S.P Singla v. State of Himachal Pradesh and Anr., 2018 Latest Caselaw 898 SC

In this case, which was decided on 04.12.2018, a dispute was referred to Arbitration on 18.10.2013, upon which a serving Chief Engineer of Himachal Pradesh PWD was appointed as an Arbitrator. The appointment was objected to by the appellant before the High Court under Section 11(6) of the 1996 Act with a request that an independent Arbitrator shall be appointed. The Bench, however, concluded that as per Section 26 of the Amendment Act 2015, Section 12(5) r/w Schedule 7 was applicable only prospectively and had no applicability to the facts of this case.

5. Union of India v. Parmar Construction Company, 2019 Latest Caselaw 1307 SC

In this case that was decided on 29.03.2019, a dispute was referred to Arbitration on 23.12.2013. However, the Union of India failed to appoint any Arbitrator and as such, the respondent company approached the High Court under Section 11(6) of the 1996 Act, which appointed a retired High Court Judge as an independent Arbitrator. The Supreme Court Bench set aside the High Court order for the reason that the appointment was not made as per the arbitration agreement.

6. Union of India v. Pradeep Vinod Construction Company, 2019 Latest Caselaw 1107 SC

In this case, which was decided by the Full Bench of the Supreme Court on 14.11.2019, a dispute was referred to Arbitration on 05.05.2014, but the Union of India refused to refer the dispute to Arbitration, forcing the respondent to file Section 11(6) petition, the High Court appointed a retired District and Sessions Judge as the Sole Arbitrator. The Supreme Court set aside the High Court's order and directed that Railways should carry out appointments as per the arbitration agreement.

7. Jaipur Zila DUSS. Ltd. v. Ajay Sales and Suppliers, 2021 Latest Caselaw 710 SC

In this case, decided on 09.09.2021, a dispute was referred to Arbitration on 18.08.2018 under an agreement dated 31.03.2015. The tribunal was appointed by the Chairman of the appellant, but the respondent approached the High Court under Section 11(6) for the appointment of a neutral arbitrator. High Court appointed a retired District and Sessions Judge as the Sole Arbitrator, which led to the filing of an SLP. The Supreme Court, while highlighting the independence, impartiality, and neutrality as core virtues of an Arbitral Tribunal, ruled that the Chairman of the Appellant was ineligible by virtue of Section 12(5) r/w Schedule 7, and the order of the High Court was upheld.

8. Ellora Paper Mills Ltd. v. State of MP, 2022 Latest Caselaw 8 SC

In this case, a dispute was sought to be referred to Arbitration as per the Clause contained in an agreement dated 22.09.1993. Since a civil suit was filed by the appellant, Section 8 application was moved by the State which was rejected by the Trial Court but allowed by the High Court in revision. Initially, the Stationery Purchase Committee was appointed as the Tribunal but the Supreme Court held that by virtue of Section 12(5) r/w Schedule 7 a committee consisting of Government officials ought not have been appointed as Arbitrators. So, a retired judge of the Supreme Court was appointed as the Sole Arbitrator.

9. M/s Shree Vishnu Constructions v. Engineer in Chief MES, 2023 Latest Caselaw 455 SC

In this case, decided on 09.05.2023, a dispute was sought to be referred to Arbitration on 20.12.2013. The appellant filed a Section 11(6) petition before the High Court on 27.04.2016 for the appointment of an Arbitrator, but the High Court declined the request with an observation that the unamended Arbitration Act, as it stood prior to the introduction of the Amendment Act, 2015, would apply. The Supreme Court observed that the notice invoking the arbitration clause was issued much prior to the Amendment Act, 2015, but the application under Section 11(6) was moved much after the Amendment Act 2015 was notified on 23.10.2015. Thus, the Apex Court ruled that the law prevailing prior to this notification shall be applicable. As such, the order of the High Court dismissing Section 11(6) was upheld.

 The above-mentioned judgments of the Supreme Court are milestones on this subject in the arbitration arena. As held in the BCCI Judgment of the Supreme Court, the Amendment Act 2015 is prospective in nature for the purpose of Section 34 and Section 36 of the Act. Since the aspects of issuance of Section 21 notice or moving of Section 11(6) application were not involved. No specific finding was given qua Section 12(5) r/w Schedule 7.

This aspect was touched by Parmar Construction Company Case, S P Singla Constructions and Ors. where it is ruled that when the notice under Section 21 invoking arbitration is issued prior to 23.10.2015 when Amendment Act, 2015 was notified but the application for appointment of Arbitrator under Section 11(6) is filed after 23.10.2015, the arbitral proceedings shall be deemed to be commenced on the date of issuance of Section 21 notice and hence as summarised by the Supreme Court in Shree Vishnu Constructions Case the newly added provisos of Section 12(5) r/w Schedule 7 shall not be applicable to such cases and they shall continue to be governed by the Arbitration Act, 1996 as it stood prior to 23.10.2015.

As such, it can be safely concluded that Section 12(5) r/w Schedule 7 of the Arbitration and Conciliation Act, 1996 does not apply to cases and awards wherein a Section 21 notice invoking the arbitration clause was issued prior to 23.10.2015.

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