Madras High Court
M/S. Clarke Energy India Pvt. Ltd vs M/S.Sas Epc Solution Private ... on 2 December, 2021
Arb.O.P.Nos.196 & 197 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE D : 02.12.2021
CORAM:
The Hon'ble Mr. Justice SENTHILKUMAR RAMAMOORTHY
Arb.O.P.Nos.196 and 197 of 2021
and
Application Nos.3880 and 3882 of 2021
M/s. Clarke Energy India Pvt. Ltd.,
Shivikiran, Plot No.160, Lane No.4,
Dhanukar Colony, Kothrud,
Pune – 411 038.
Rep. by its Authorized Signatory
Mr.M.Arun. ... Petitioner
(in both Arb.O.Ps)
Vs
1.M/s.SAS EPC Solution Private Limited,
No.1644E, H. Block, Sarayu APTS,
14th Street, 16th Main Road,
Anna Nagar West,
Chennai – 600 040.
2.Mr.Justice E.Padmanabhan(Retd)
Sole Arbitrator ... Respondents
(in both Arb.O.Ps)
PRAYER : These Petitions have been filed under Section 14 and 15 r/w
Section 11 of the Arbitration and Conciliation Act 1996 praying to terminate
the mandate of the second Respondent as the Sole Arbitrator in Arbitration
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proceedings titled as ''M/s.SAS EPC Solution Private Limited vs. M/s.
Clarke Energy India Pvt. Ltd.'' arising out of contracts dated 08.09.2011 (in
respect of Engine I and II) executed between Applicant and Respondent
No.2 and reconstitute the arbitral tribunal by substituting the Sole Arbitrator.
For Petitioner : Mr.Vijay Narayan, S.C.
for Mr.K.Gowtham Kumar
For Respondents : Mr.K.Harishankar for R-1
COMMON ORDER
Interesting questions with regard to the scope of Sections 14 and
15 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) arise
for consideration in these two petitions in respect of connected but separate
arbitral proceedings. As a preliminary issue, it should be noticed that the
arbitral proceedings commenced after 23.10.2015 and, therefore, Act 3 of
2016 would apply.
2. The petitioner herein is the respondent in the above mentioned
arbitration proceedings, which are underway before a sole arbitrator (the
Arbitrator) appointed with the consent of both parties. The current stage of
proceedings is that the claimant has filed its proof affidavit and the next
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hearing is scheduled in early December 2021 for the cross examination of
C.W.1.
3. The petitioner asserts that the Arbitrator is de jure unable to
perform his functions. Such assertion is made partly on the basis that the
petitioner has justifiable doubts as to the independence or impartiality of the
Arbitrator and partly on the basis that the Arbitrator demanded exorbitant
fees in contravention of the Fourth Schedule of the Arbitration Act. These
contentions are refuted by the first respondent. The first respondent submits
that the petitions are not maintainable under Sections 14 and 15 of the
Arbitration Act. According to the first respondent, there is no basis to the
assertion that the Arbitrator has become de jure unable to perform his
functions. As regards the fixation of fees, the first respondent submits that
the parties agreed to the fixation of fees in accordance with the Fourth
Schedule of the Arbitration Act. However, the first respondent contends that
the learned Arbitrator misapplied the Fourth Schedule and thereby charged
much more than the amount that would be payable if the Fourth Schedule
were to be applied correctly.
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4. Oral submissions were made on behalf of the petitioner by
Mr.Vijay Narayan, Senior Counsel, assisted by Mr.K.Gowtham Kumar,
learned counsel; and on behalf of the first respondent by Mr.K.Harishankar,
learned counsel.
5. Mr.Vijay Narayan opened his submissions by contending that
the present petitions are maintainable under Sections 14 and 15 of the
Arbitration Act. By drawing reference to Sections 12 and 13 thereof, he
submitted that a challenge to an arbitrator is permissible under Sections 12
and 13 if justifiable doubts as to the independence or impartiality of the
arbitrator concerned arise in circumstances specified either in the Fifth or
Seventh Schedule of the Arbitration Act. According to him, the grounds on
which the present petitions are filed are outside the scope of the Fifth and
Seventh Schedules. Therefore, a challenge could not have been made before
the Arbitral Tribunal.
6. By contrast, he submitted that Section 14 becomes applicable if
the Arbitrator becomes de jure or de facto unable to perform functions. In
the case at hand, he submitted that the material on record justifies the
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inference that the apprehension of bias on the part of the petitioner is
reasonable. In support of the said submissions, reference was made to the
orders passed by the learned Arbitrator. An order dated 02.11.2020 was
passed by the Arbitral Tribunal on an application filed by the first
respondent under Section 17 of the Arbitration Act. By such order, the first
respondent was directed to pay a sum of Rs.13,72,354/- to the petitioner.
This order was not complied with by the first respondent. In spite of such
non-compliance, it was contended that no action was taken against the said
respondent for such non-compliance, and that such non-compliance was not
even questioned or highlighted by the Arbitrator.
7. In furtherance of the allegation of justifiable doubts as to the
independence or impartiality of the Arbitrator, the direction issued by the
Arbitral Tribunal on 23.10.2020 for payment of a sum of Rs.2,00,000/- by
each party towards fees and a sum of Rs.15,000/- towards secretarial
charges was referred to. By relying upon the statement of accounts provided
by the petitioner's bank, it was contended that the said sum was duly
remitted by the petitioner on 09.11.2020. In spite of such remittance, the
petitioner pointed out that the Arbitral Tribunal erroneously recorded in
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paragraph 21 of the order dated 06.09.2021 that only the first
respondent/claimant therein remitted the said amount on 09.11.2020, and
that the petitioner/ respondent therein did not remit such amount. The
petitioner also referred to the observations of the Arbitral Tribunal at
paragraphs 4, 6 and 7 of the order dated 06.09.2021 in support of the
contention that the conduct of the Arbitrator justifies a reasonable
apprehension of bias. In particular, the petitioner referred to the observation
at paragraph 3 that the “ Claimant was ready and willing both for fixation of
fees and remittances thereof to the Sole Arbitrator in terms of the Fourth
Schedule. However it is the Respondent who had been dragging the matter
indefinitely under one pretext or other.” The following observations were
also relied upon in this regard: at paragraph 4 that the petitioner herein was
not ready and willing to pay the sitting fees even after filing the counter
claim; at paragraph 6 that ''....Less said is better with respect to the stand
taken by the respondent and its Counsel....''; and at paragraph 7 that ''.... the
respondent raised various objections, to put it mildly untenable
objections....''.
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8. In the above factual context, the petitioner developed its
arguments on bias by citing several judgments. The said judgments are set
out below:-
(i) HRD Corporation (Marcus Oil and Chemical Division) v.
GAIL (India) Limited (2018) 12 SCC 471 (HRD Corporation), wherein, at
paragraphs 11, 12 and 13, the Hon'ble Supreme Court discussed the Fifth
and Seventh Schedules of the Arbitration Act in relation to Sections 12 and
14 thereof and concluded that a petition under Section 14 is maintainable if
the Arbitrator concerned is ineligible in terms of the Seventh Schedule of
the Arbitration Act;
(ii) Bharat Broadband Network Limited v. United Telecoms
Limited (2019) 5 SCC 755 (Bharat Broadband), wherein, at paragraphs 11
and 17, the Hon'ble Supreme Court concluded that a petition under Section
14 would lie in all cases to which Section 12(5) of the Arbitration Act is
applicable;
(iii) Madras Fertilizers Limited v. SICGIL India Limited and
another 2010 (2) CTC 357 (Madras Fertilizers), wherein, at paragraphs 23
and 24, this Court held that the mandate of an Arbitrator is liable to be
terminated if there is a controversy with regard to the fixation of fees;
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(iv) Government of Tamil Nadu v. VDB Projects Private Limited
and others (2020) 4 LW 468 (VDB Projects), wherein, at paragraphs 12 and
13, the Court concluded, in the factual context set out in paragraphs 3 and 4
thereof, that the Arbitral Tribunal had become de jure unable to perform
functions properly because exorbitant fees were demanded;
(v) Doshion Private Limited v. Hindustan Zinc Limited AIR 2019
Raj 54 (Doshion), wherein the Rajasthan High Court followed the judgment
of this Court in Madras Fertilizers and concluded that the mandate is liable
to be terminated on account of the dispute over fees;
(vi) Union of India v. Singh Builders Syndicate (2009) 4 SCC
523, wherein, at paragraphs 20 to 24, the Hon'ble Supreme Court lamented
about the high costs involved in arbitral proceedings in India;
(vii) Parekh Industries Limited v. Diamond India Limited 2019
SCC Online Bom 851(Parekh Industries), wherein, at paragraphs 31 to 38,
the Bombay High Court concurred with the reasoning of the Madras High
Court in Madras Fertilizers by holding that the scope of Section 14(1)(a) of
the Arbitration Act is wide enough to take within its ambit bias as the basis
to seek a declaration that the mandate had terminated;
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(viii) Entertainment City Limited v. ASPEK Media Private
Limited AIR 2021 Delhi 51(Entertainment City), wherein, at paragraphs 18
to 21, the Delhi High Court concluded that the mandate of the Arbitrator
would be determinable under Section 14(1) of the Arbitration Act if the fee
charged by such Arbitrator is in contravention of the provisions of the
Arbitration Act;
(ix) NTPC Limited v. Amar India Limited 276 (2021) DLT 742
(Amar India), wherein the Delhi High Court concluded that the mandate is
liable to be declared as terminated in view of the Arbitral Tribunal charging
a fee contrary to that specified in the relevant contract; and
(x) In re Medicaments and Related Classes of Goods( No.2)
(2001) 1 WLR 700 (In re Medicaments), wherein the Court of Appeals
discussed the tests for deciding whether there is real likelihood of bias.
9. In response to these submissions, learned counsel for the first
respondent contended that all the judgments cited by the petitioner were
rendered in a specific factual context. Consequently, such judgments cannot
be applied without reference to the factual context. With this introduction,
the first respondent referred to the relevant facts of the present case. By
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turning to the written submissions of the petitioner, the first respondent
pointed out that the petitioner had stated categorically in paragraph 5 of the
written submissions that it is not liable or willing to pay fees as far as the
claim is concerned. The first respondent pointed out that the petitioner had
stated categorically, at paragraph 8 of the written submissions, that it is
willing to pay one third of the fee payable on the counter claim within four
weeks from the said date and the remaining fee as per the directions of the
Arbitral Tribunal. The first respondent also pointed out that the petitioner
stated therein that the first respondent herein should pay the fees on the
claim. According to the first respondent, the order dated 06.09.2021 of the
Arbitral Tribunal was issued in this factual context.
10. As a corollary, the first respondent contended that the Arbitral
Tribunal focused attention on the question whether the petitioner is liable to
pay its share of fees only on the counter claim or also on the claim. The first
respondent submitted that the observations in the order dated 06.09.2021
should be viewed from that perspective. The first respondent also submitted
that the Arbitral Tribunal is required to accord equal treatment to parties.
Therefore, even with regard to payment of fees, both parties are required to
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share the fees equally. Even if it transpired that the claim made by the first
respondent herein was exorbitant or unreasonable, the petitioner is not
without remedy, in as much as the law requires apportionment of costs to be
made on the basis of the outcome of the case. In this connection, the first
respondent relied upon Report No.246 of the Law Commission, submitted
in August 2014, on the “Amendments to the Arbitration and Conciliation
Act 1996” (the Report). With specific reference to paragraphs 70 to 72
thereof, the first respondent pointed out that the Law Commission
recommended that costs be allocated in a manner that reflects the parties'
relative success or failure in the arbitration.
11. With regard to the contention that the learned Arbitrator had
erroneously recorded observations to the effect that the petitioner had not
paid the initial fee of Rs.2,00,000/-, the first respondent referred to an
e-mail of 26.10.2021 from the Arbitrator to the two parties. On such basis,
the first respondent pointed out that the Arbitrator acknowledged that a sum
of Rs.1,98,000/- was received from the petitioner, but the Arbitrator was
unable to reconcile or correlate the said payment because the credit advice
did not indicate the source of payment.
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12. On the issue of bias, the first respondent submitted that the
judgment of this Court in VDB Projects was in the factual context of a sum
of Rs.1,00,000/- being charged per arbitrator per sitting. Thus, a sum of
Rs.3,00,000/- per sitting was charged by the arbitral tribunal which
aggregated to almost Rs.1 crore for 32 sittings. This amount was grossly
disproportionate to the claims and counter claims in that case. The first
Respondent further contended that courts have interfered when the arbitral
tribunal departed from the contractual stipulation as to fees (see Amar
India) or in cases where the fee fixation was arbitrary. On the contrary, it
was contended that no court had interfered when fees were fixed on the
basis of the Fourth Schedule of the Arbitration Act.
13. With reference to the Law Commission's recommendations on
bias in the Report, the first respondent referred to paragraphs 53 to 60
thereof. The first respondent pointed out that the Law Commission
recommended objective criteria to decide whether justifiable doubts exist
with regard to the independence or impartiality of an arbitrator. To put it
differently, the first respondent contended that the Law Commission did not
recommend a challenge to an arbitrator on the basis of subjective
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assessment of bias. With regard to the scope of Section 14 of the
Arbitration Act, the first respondent contended that unless the Arbitrator is
unable to function, either de jure or de facto, a petition under Section 14 of
the Arbitration Act is not maintainable.
14. The first Respondent referred to and relied upon the following
judgments:
(i) Government of Tamil Nadu v. Munuswamy Mudaliar and
another 1988(Supp) SCC 651 (Munuswamy Mudaliar), wherein, at
paragraphs 11 to 13, the Hon'ble Supreme Court concluded that a reasonable
apprehension of bias must be based on cogent materials.
(ii) Ladli Construction Company (P) Ltd. v. Punjab Police
Housing Corporation Ltd. and others, AIR 2012 SC 1580 (Ladli
Construction), wherein the Hon'ble Supreme Court applied the test of
reasonable apprehension of bias in the mind of a reasonable person.
(iii) Jewan Kumar Lohia and Others v. Durgadutt Lohia and
Others (1992) 1 SCC 556, wherein the Hon'ble Supreme Court concluded
that the material on record did not disclose a basis for a reasonable
apprehension of bias.
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(iv) Locabali (UK) Ltd. v. Bayfield Properties Ltd & another
(1999) EWCA CIV 3004, wherein the Court of Appeals concluded that
conclusions of bias are entirely dependent on the facts and the nature of
issue to be decided.
15. With regard to the fee fixed by the Arbitral Tribunal by the
order dated 06.09.2021, the first respondent conceded that such fee was
fixed by misconstruing and misapplying the Fourth Schedule of the
Arbitration Act. The first Respondent produced two calculation sheets in
such regard. According to the first respondent, if calculated correctly, the
total fee as per the Fourth Schedule in respect of the dispute pertaining to
Engine-I would be a sum of Rs.21,63,732/-. By contrast, the Arbitral
Tribunal had fixed a fee of Rs.62,31,875/- on the claim and Rs.4,49,914/- on
the counter claim. As regards the dispute arising out of Engine-II, if
Schedule IV is applied correctly, the fee would be Rs.37,50,000/-, whereas
the Arbitral Tribunal had fixed a fee of Rs.62,31,875/- for the claim and
Rs.4,49,914/- for the counter claim. The first respondent submitted that it
intends to raise this issue with the Arbitral Tribunal.
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16. By way of a brief rejoinder, the Petitioner submitted that
Section 14 is wider and different from Section 12 because it is not limited
to the circumstances set out in the Fifth and Seventh Schedules of the
Arbitration Act. The Petitioner further contended that the computational
error by the Arbitral Tribunal is grave and not merely clerical. The
petitioner reiterated that this Court and several other courts concluded that a
dispute over fees would result in a reasonable apprehension of bias. With
reference to the facts of the present case, the petitioner pointed out that the
Arbitral Tribunal had recorded that the first respondent had agreed to pay
the fees fixed by the Arbitral Tribunal and, therefore, as the only contesting
party on such issue, it has justifiable doubts that the Arbitral Tribunal is and
would continue to be biased against it.
17. At the outset, before embarking on a discussion and analysis
of the rival contentions, Sections 12 to 15 are set out below:
''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
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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.
(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.
(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 persons 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 an arbitrator:
Provided that parties may, subsequent to disputes
having arisen between them, waive the applicability of this sub-
action by an express agreement in writing.''
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''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 sub-section (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 if—
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(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.''
''15. Termination of mandate and substitution of
arbitrator.—
(1) In addition to the circumstances referred to in
section 13 or section 14, the mandate of an arbitrator shall
terminate—
(a) where he withdraws from office for any reason;
or
(b) by or pursuant to agreement of the parties.
(2)Where the mandate of an arbitrator terminates,
a substitute arbitrator shall be appointed according to the rules
that were applicable to the appointment of the arbitrator being
replaced.
(3) Unless otherwise agreed by the parties, where
an arbitrator is replaced under sub-section (2), any hearings
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previously held may be repeated at the discretion of the arbitral
tribunal.
(4) Unless otherwise agreed by the parties, an
order or ruling of the arbitral tribunal made prior to the
replacement of an arbitrator under this section shall not be
invalid solely because there has been a change in the
composition of the arbitral tribunal.''
18. Against the above statutory backdrop, the first question that
arises for consideration is whether these petitions are maintainable under
Sections 14 and 15 of the Arbitration Act. The contention of the first
respondent was that the Arbitration Act only provides for a challenge to the
independence or impartiality of the Arbitrator on the basis of objective
criteria. While the first respondent conceded that the criteria specified in
the Fifth and Seventh Schedules are not exhaustive; nonetheless, it was
contended that any criteria adopted for such purpose should be both
analogous to those in the Fifth and Seventh Schedules and objective but not
subjective. Therefore, this contention should be subjected to close scrutiny.
On perusal of the Fifth and Seventh Schedules of the Arbitration Act, which
were introduced by Act 3 of 2016, with effect from 23.10.2015, it is evident
that the 34 entries in the Fifth Schedule as well as the 19 entries in the
Seventh Schedule refer to forms of conflict of interest. In particular, the
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Fifth and Seventh Schedules deal with conflicts of interest which arise out
of: (i) the relationship between the arbitrator and one or more of the parties
to the dispute; (ii) the relationship between the arbitrator and one or more of
the counsel involved in the dispute; or (iii) the relationship of the arbitrator
to the subject matter of the dispute. Thus, the common thread running
through both the Fifth and Seventh Schedules, as indicated above, is
conflict of interest. The contention that the criteria are objective is also self-
evident on running through the Schedules. As is evident from the Report,
the Fifth and Seventh Schedules were inspired by the orange and red lists,
respectively, of the International Bar Association (the IBA) in its guidelines
on conflict of interest. Both the Fifth and Seventh Schedule are referred to
in Section 12 and not Section 14. Therefore, Sections 12 and 13 of the
Arbitration Act should be examined next.
19. Sections 12 and 13 provide for a challenge to the arbitrator
by a party before an arbitral tribunal. As per sub-section 3 of Section 12,
such challenge is permissible only if circumstances exist that give rise to
justifiable doubts as to his independence or impartiality or if he does not
possess the qualifications agreed to by the parties. Sub-section 2 thereof
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imposes an obligation on the arbitrator to make continual disclosures of the
circumstances which may give rise to justifiable doubts as to his
independence or impartiality. As per Section 13(4), if a challenge under
Sections 12 and 13 is unsuccessful, the arbitral tribunal is empowered to
continue the arbitral proceedings and pronounce an award. Section 12 was
recast by Act 3 of 2016, with effect from 23.10.2015. By such amendment,
sub-section (1), which was generic earlier, was amended by introducing
Clauses (a) and (b) and Explanation 1 and 2 thereto. Clause (a) makes it
clear that it applies to any direct or indirect conflict of interest situation,
whether arising out of a financial, business, professional or any other kind
of relationship, which is likely to give rise to justifiable doubts as to
independence or impartiality. The use of the words “such as” at the
inception of clause (a) indicates that the enumerated forms of conflict of
interest are illustrative and not exhaustive. Sub-section 5 was also
introduced in Section 12 by Act 3 of 2016. By such amendment, it was
made clear that if the relationship of the arbitrator falls under any of the
categories specified in the Seventh Schedule, he becomes ineligible to be
appointed as an arbitrator.
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20. Explanation 1 to Section 12(1) indicates that the grounds
stated in the Fifth Schedule are a guide to determine whether circumstances
exist which give rise to justifiable doubts as to the independence or
impartiality of an arbitrator. Thus, it is abundantly clear that the Fifth
Schedule is not exhaustive but illustrative. However, since it is intended as a
guide, a corollary would be that the alleged circumstances should fall within
the framework specified in the Fifth and Seventh Schedules read with
Clause (a) of sub-section (1) of Section 12. While on this issue, it should be
noticed that the 19 entries in the Seventh Schedule are the same as the first
19 entries in the Fifth Schedule. Therefore, the two Schedules overlap,
albeit the Fifth Schedule is wider in scope. As contended by learned
counsel for the first respondent, it appears that Parliament accepted the
recommendations of the Law Commission on the proposed amendments to
the Arbitration Act. By accepting such recommendations, the Fifth and
Seventh Schedules were introduced in the Arbitration Act by way of Act 3
of 2016. In effect, Parliament adopted and prescribed objective criteria to
determine whether circumstances exist that would give rise to justifiable
doubts as to the independence or impartiality of the arbitrator. Given the
fact that challenges under Sections 12 and 13 are made before the arbitral
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tribunal, it stands to reason that Parliament adopted objective, albeit non-
exhaustive, criteria for such purpose. To put it differently, since objective
criteria are specified, it is possible for a party making a challenge before an
arbitral tribunal to provide evidence of the existence of one of the
circumstances enumerated in Schedule V or VII, or circumstances
substantially similar or analogous thereto, as the basis to challenge the
arbitrator. As long as the challenging party is able to prove the alleged
conflict of interest and demonstrate that it fits into an enumerated category,
the arbitral tribunal will have no choice but to allow the challenge. If the
challenge is on the basis of an unenumerated but substantially similar
circumstance, it could be relatively harder to succeed. On this issue, it is
also pertinent to reiterate that all the circumstances enumerated in the Fifth
and Seventh Schedules relate to conflict of interest. In the context of
conflict of interest, it is relatively easier to formulate and fix objective
criteria. By contrast, if bias de hors conflict of interest is alleged, such as
bias in favour of or against a party or counsel outside the framework of a
conflict of interest relationship, it is extremely difficult to arrive at objective
criteria. Furthermore, it would be difficult, unpleasant and inappropriate to
mount a challenge on the basis of such subjective criteria before the arbitral
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tribunal. On the basis of the foregoing discussion, it may be concluded that
a challenge under Sections 12 and 13 can be made only on the allegation
that one of the three broad categories of conflict of interest, which form
part of the framework of the Fifth and Seventh Schedules, exist. This leads
to Section 14 which permits a challenge before court albeit in limited
circumstances.
21. Section 14 deals with the termination of the mandate of an
arbitrator. Sub-section 1 thereof provides for such termination in five
different circumstances. Clause (b) deals with a situation where an arbitrator
withdraws from his office or the parties agree to the termination of the
mandate. In both the situations, it is not necessary to approach a court.
Indeed, it should be noted that the legal regime for arbitration sanctifies
party autonomy to the extent of permitting parties to the arbitration to agree
upon the termination of the mandate of the arbitrator even after appointing
such arbitrator. This leads to the three categories which are dealt with under
Clause (a) of Sub-section 1. Clause (a) deals with termination because the
arbitrator de jure becomes unable to perform functions; or de facto becomes
unable to perform functions; or for other reasons fails to act without undue
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delay. Given the fact that Section 29-A of the Arbitration Act specifies a
time limit for the conclusion of arbitral proceedings, a petition alleging
failure to act without undue delay would be maintainable if an arbitrator or
the arbitral tribunal fails to conclude the arbitral proceedings within the time
specified under Section 29-A without obtaining extension of time from the
jurisdictional court. As regards de facto inability to perform functions,
several circumstances may result in such inability. By way of illustration, if
the arbitrator concerned falls seriously ill and is, therefore, unable to
schedule hearings for a considerable period of time, a petition may be filed
both on the ground that he is de facto unable to perform functions and on
the ground that he has failed to act without undue delay. Similarly, if an
arbitrator resides or carries on business at a location different from the seat
of arbitration and is unable or unwilling to schedule and attend hearings, a
petition on both these grounds may be maintainable. A number of other
examples may be cited, including the inability of an arbitrator to travel on
account of travel, including visa restrictions.
22. Turning to de jure inability to perform functions, it should be
noted at the threshold that the expression is not defined in the Arbitration
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Act. The word 'de jure' in Latin means ''as a matter of law''. It has been
defined in Black's Law Dictionary, 11 Edition (2019), as ''existing by right
or according to law''. Thus, it appears that the expression de jure applies
undoubtedly to legal disability. One illustration of legal disability would be
if the arbitrator is ineligible in terms of the Seventh Schedule. This was
expressly dealt with by the Hon'ble Supreme Court in HRD Corporation as
well as Bharat Broadband. In both the cases, the Hon'ble Supreme Court
held that a petition would lie under Section 14 of the Arbitration Act in such
circumstances and that it is not necessary to file a petition under Section 12
thereof. Hence, ineligibility under the Seventh Schedule is certainly an area
of intersection between Sections 12 and 13, on the one hand, and Sections
14 and 15, on the other. However, ineligibility is only one illustration of de
jure inability to function. It is conceivable that an arbitrator may be afflicted
by some form of cognitive impairment. If such cognitive impairment is
serious enough to lead to an inference that such arbitrator is not of sound
mind, whether on account of schizophrenia, Alzheimer's disease or the like,
as understood in the Indian Contract Act, 1872, it would result in de jure
inability to function even if the arbitrator concerned declines to withdraw.
Less serious forms of cognitive impairment, such as bipolar disorder and the
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like, may, on the other hand, may pose greater challenges. Besides, an
arbitrator may be adjudged insolvent after entering upon reference. By
relying upon the applicable insolvency statute, it could be contended with a
fair measure of justification that he is de jure unable to function.
23. In this case, however, the contention of the petitioner is that
the Arbitrator has become de jure unable to function because of the
reasonable apprehension of bias on the part of the petitioner. A reasonable
apprehension of bias, in contrast to actual bias, even if established, does not
constitute legal disability in a formal, statutory sense. Beyond legal
disability, does the expression de jure also apply to loss of legitimacy to
function as an arbitrator? Both in common parlance and otherwise, the
expression de jure is used in contrast to the expression de facto which
means actual or existing in fact. For instance, a de facto government which
captures power by a coup d'etat is one which exists as a matter of fact, but
which does not have legitimacy. On the contrary, a de jure government is
one which has legitimacy because it was constituted in accordance with law,
and is considered legitimate. By taking into account the following: the
expression is not defined in the Arbitration Act; Sections 12 and 13 read
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with the Fifth and Seventh Schedules cannot be activated except in a
conflict of interest situation and on the basis of objective criteria; and even
Explanation 1(i) to Section 34(2)(b)(ii) provides for the setting aside of an
award on the ground of conflict with the public policy of India only if it is
established that the making of the award was induced or affected by fraud or
corruption, the expression de jure should be construed as extending beyond
open-and-shut legal disability so as to take within its fold disability due to
established loss of legitimacy. It is needless to say that the burden of proof
should be set at a level high enough to deter derailment of arbitral
proceedings except where really warranted.
24. When the present petitions are considered in the above
perspective, it cannot be said that these petitions are not maintainable. As
pointed out by learned senior counsel for the petitioner, in a long line of
cases such as Madras Fertilizers, VDB Projects, Parekh Industries and
Entertainment City, it was held that a petition under Section 14 is
maintainable on the ground of bias, including bias arising out of the fixation
of fees.
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25. The sustainability of the present petition is, however, distinct
from the maintainability thereof. The present petitions were filed on the
basis that the circumstances give rise to justifiable doubts as to the
independence or impartiality of the Arbitrator. In order to test this
contention, it is necessary to extract the written submissions of the
petitioner, which indicate the context, and the observations of the Arbitral
Tribunal on which the petition is founded. The relevant extracts from the
written submissions in the arbitral proceedings relating to Engine 1 are set
out below:-
“4. That as such, it is apparent that Claimant
has filed unsubstantiated claim for such an astronomical
and imaginary amount purely with a view to put heavy
and onerous burden of Ld. Arbitrator's fee on
Respondent/Counter Claimant.
5. That in view thereof and even otherwise,
Respondent submits that Respondent is neither willing
nor liable to pay any amount towards fees and costs of
arbitration as far as claim of Claimant is concerned and
submits that same may be borne solely by Claimant.
8. Respondent further submits that
Respondent is willing to pay 1/3rd to fee payable on
Counter Claim amounting to Rupees 1,23,310 with in
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four weeks from today and remaining fee as per
directions of this Hon'ble Tribunal, with in a reasonable
time frame. It is further submitted that schedule of
payment of fee fixed for Respondent / Counter
Claimant on Counter Claim may be made similarly
applicable to Claimant and Claimant be directed to pay
fee of Rs.20,39,577 payable on claim in similar manner,
instalments, time and schedule as fixed for
Respondent/Counter Claimant/Applicant herein.”
26. The relevant extract from the written submissions in the
arbitral proceedings relating to Engine 2 is set out below:
“5. That as already submitted by
Respondent/Counter Claimant Respondent/Counter
Claimant is neither willing nor liable to pay any amount
towards fees and costs of arbitration as far as claim of
Claimant is concerned and submits that same be borne
solely by Claimant. It is further submitted that in case
of failure or refusal on behalf of Respondent/Counter
Claimant to pay its share of Arbitrator's fee on Claim,
Claimant can always pay share of fee to be borne by
Respondent as per provisions of The Act.”
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27. The observations of the Arbitral Tribunal in the order dated
06.09.2021 are set out below:
(i) From paragraph 3: '' ....The Claimant was ready and willing
both for fixation of fees and remittances thereof to the Sole Arbitrator in
terms of Schedule IV. However, it is the respondent who had been dragging
the matter indefinitely under one pretext or other.''
(ii) From paragraph 4: ''....Even with respect to the counter claim,
the said learned counsel appearing for the respondent was not ready and
willing to pay the sitting fees for the Sole Arbitrator even after filing the
counter claim in both the arbitrations.''
(iii) From paragraph 7: '' Besides raising the above objections, the
respondent raised various objections, to put it mildly, untenable objections
contrary to law and the provisions of the Arbitration and Conciliation Act
1996....''.
28. Apart from the above observations, the petitioner relied upon
the fact that the Arbitrator did not take any steps against the first respondent
for failure to comply with the interim order directing payment of a sum of
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Rs.13,72,354/-, and on the statement that the petitioner did not pay the
initial fee.
29. In this factual context, the question that arises for
consideration is whether the circumstances would lead to justifiable doubts
as to the independence or impartiality of the Arbitrator. While the first
respondent contended that the Arbitration Act only provides for objective
criteria to determine the issue of bias, as discussed supra, the scope of
Section 14 is distinguishable from Section 12 and it cannot be said that it is
confined to objective criteria. Nonetheless, a balance has to be struck
between non-interference with the arbitral process and interference when
warranted so as to ensure that the time and resources invested in such
arbitral process do not become infructuous because of a serious flaw in the
arbitral process. Sections 12 and 13, on one hand, and Sections 14 and 15,
on the other, attempt to strike such balance. Therefore, as regards the
relatively less serious forms of conflict of interest, which are contained only
in the Fifth Schedule, the Arbitrator concerned does not become ineligible.
However, if a challenge is made, he is required to rule on such challenge. If
the challenge is unsuccessful, the arbitral tribunal is permitted to proceed
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with and conclude the arbitral proceedings. By contrast, if the flaw in the
arbitral process is more serious, Sections 14 and 15 of the Arbitration Act
are attracted. From this scheme, it is clear that the threshold for sustaining a
petition under Sections 14 and 15 should be pegged at a high level.
30. In the specific context of justifiable doubts as to the
independence or impartiality, learned senior counsel for the petitioner
contended that it is not actual bias but a reasonable apprehension of bias or
apparent bias. For such purpose, the judgment of the Court of Appeal in the
In re Medicaments was referred to. There can be no cavil with the
proposition that it is not necessary to establish actual bias. Having said that,
as held in Munuswamy Mudaliar and Ladla Corporation, it is still
necessary for the petitioner to establish that the circumstances would lead to
an inference of reasonable apprehension of bias. The observations in the
order were relied upon for such purpose. These observations were made in a
specific factual context. The said factual context was the assertion by the
petitioner that it is liable to pay the Arbitrator's fees only in respect of the
counter claim made by it and not in respect of the claim made by the
claimant. This contention was self-evidently erroneous, and in derogation of
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the mandate of the Arbitration Act to treat parties equally. Thus, these
observations of the learned Arbitrator cannot be looked at in isolation by
divorcing them from the specific context, i.e. the untenable stand of the
petitioner that it is liable to pay the Arbitrator's fees only on the counter
claim and not on the claim. As correctly pointed out by learned counsel for
the first respondent, the Arbitration Act provides for the apportionment of
costs depending on the outcome of the case. Therefore, even if an inflated
claim is made, the remedy is by way of apportionment of costs and not by
directing only the party making the claim or counter claim, as the case may
be, to make such payment. While there is basis to conclude that the learned
Arbitrator was unhappy with the stand taken by the petitioner on the issue of
payment of fees; on the basis of the material on record, it is not possible to
conclude that a reasonable and objective third party would infer that the
learned Arbitrator is biased against the petitioner. As regards the observation
of the learned Arbitrator that the petitioner had not paid the initial fee of
Rs.2,00,000/-, the subsequent e-mail of the Arbitrator clarifies the position.
Thus, this appears to be an inadvertent error on the part of the learned
Arbitrator with regard to the correlation of the remittance to the remitter.
Therefore, on the facts of this case, the petitioner has failed to meet the
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threshold for interference under Section 14.
31. Another issue was canvassed by both parties. This issue relates
to the erroneous fixation of fees by the Arbitral Tribunal and, on this issue,
the first respondent joined hands with the petitioner to point out that the
fixation of fees was not in accordance with Schedule IV. Before delving
further, it should be stated at the outset that charging of a high fee per se, if
charged equally from both or all parties, cannot lead to an inference of bias.
As indicated earlier, the first respondent circulated computation sheets as
evidence of such erroneous calculation. In light of the conclusion that the
petitioner has failed to make out a case for termination of the mandate under
Sections 14 and 15 of the Arbitration Act, I do not propose to issue notice to
the learned Arbitrator. Without putting the learned Arbitrator on notice, it is
not appropriate to examine and enter specific findings on the computation of
fees by the Arbitral Tribunal in this case. Subject to this caveat, general
observations are made with regard to fixation of fees under the Arbitration
Act.
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32. By Act 3 of 2016, the Fourth Schedule was introduced, on the
basis of recommendations of the Law Commission, primarily to deal with
allegations that arbitrations are both expensive and time consuming. The
Fourth Schedule provides for ad valorem fees depending on the sum in
dispute. The expression “sum in dispute” is not defined in the Arbitration
Act. If construed as applying separately on the claim and counter claim, in
an arbitration with a three member panel, depending on the sum in dispute,
the consolidated fee of the arbitral tribunal could increase up to a maximum
of Rs.1,80,00,000. Likewise, in a sole arbitrator scenario, the fee could be as
much as Rs.75,00,000. In most cases, this would far exceed the fee payable
if the erstwhile per sitting fee even with a lump sum fee for drafting and
pronouncing the award were used. The amendment was clearly not designed
with this object in mind. Besides, if an analogy is drawn from the practice of
credible domestic and international arbitral institutions such as the Indian
Council of Arbitration Rules of Domestic Commercial Arbitration, the
Mumbai Centre for International Arbitration, the Construction Industry
Arbitration Council, the Delhi International Arbitration Centre, the
Singapore International Arbitration Centre, the Hong Kong International
Arbitration Centre and the European Court of Arbitration, the sum in dispute
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has been consistently used to refer to both the claim and counter claim. The
judgment of the Delhi High Court in Delhi State Industrial Infrastructure
Development Corporation Ltd. v. Bawana Infra Development (P) Ltd. 2018
(4) Arb.L.R.168(Del) deals elaborately with this issue and I concur with the
views expressed therein.
33. Another aspect of the Fourth Schedule, which was subject to
interpretation by other courts, demands attention. The 6 rows (Serial Nos. 1
to 6) in the Fourth Schedule deal with a sum in dispute up to or above the
amounts specified therein. Serial No.1 deals with cases where the sum in
dispute is up to Rs.5,00,000/- and the fee of Rs.45,000 is fixed in respect
thereof. Serial No.2 deals with cases where the sum in dispute is above
Rs.5,00,000/- and up to Rs.20,00,000/-, and a minimum fee of Rs.45,000,
which is the maximum fee under Serial No.1, is fixed in respect thereof.
While the maximum fee is not expressly specified, if computed for the sum
of Rs.20,00,000/-, the maximum would be Rs.97,500, which is the minimum
fee under Serial No.3. This pattern of the maximum fee permissible in the
band in respect of disputes falling within the preceding Serial No. being the
minimum fee in respect of disputes falling within the succeeding Serial No.
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repeats across the remaining Serial Nos. Thus, Serial No. 6 deals with cases
where the sum in dispute is above Rs.20,00,00,000/-. The minimum fee
prescribed for this category is Rs.19,87,500/-, which is the maximum fee
under the preceding category if the sum in dispute is about Rs.20,00,00,000.
Thus, except for Serial No.1, a scale of fees with a range from minimum to
maximum is prescribed for each category. Except in Serial No.6, no firm
number is prescribed as the ceiling or cap on fee. The reason for not
specifying a firm number as the ceiling in Serial Nos.1-5 is that even if the
maximum sum in dispute of Rs.20,00,00,000 under Serial No.5 is claimed in
an arbitration, the fee would not exceed Rs.19,87,500 per arbitrator. On the
contrary, since Serial No.6 encompasses any sum in dispute above
Rs.20,00,00,000 without a ceiling on such sum in dispute, a ceiling or cap
on fees at Rs.30,00,000 is prescribed therein. In other words, irrespective of
the total sum in dispute, the object of the Fourth Schedule is to cap the fees
at Rs.30,00,000/- per arbitrator, albeit subject to the qualification that a sole
arbitrator may charge 25% in addition. Although not expressly specified,
construing it as a cap on the arbitral tribunal would be anomalous and,
indeed, patently erroneous because if a sole arbitrator is entitled to charge
up to Rs.37,50,000, a three member panel cannot be confined to
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Rs.10,00,000 each. Needless to say, this ceiling would apply separately to
each arbitral proceeding if there are separate proceedings between the same
parties. For these reasons, I do not agree with the views in NTPC Limited v.
Afcons R.N.Shetty and Co. Pvt. Ltd. O.M.P.(T) (COMM)37/2021 or Rail
Vikas Nigam Ltd. v. Simplex Infrastructures Ltd.
O.M.P.(T)(COMM)28/2020. All the above conclusions are subject, however,
to the significant caveat that the Fourth Schedule is a model schedule of
fees, which is intended for use until the jurisdictional high court frames
rules in this regard. Moreover, under extant law, except where a court orders
otherwise, party autonomy, which is the bedrock of the arbitral process,
enables and empowers all the parties to an ad hoc arbitration to agree
expressly and collectively to any fee, whether in consonance with the Fourth
Schedule or otherwise.
34. A few suggestions are made in view of the steadily increasing
stream of cases where the fees charged by the arbitral tribunal is the focal
point of attack. In order to avert such challenges, arbitral tribunals should
fix the fees at the earliest. Even if the claims and/or counter claims are
unknown at the outset and it is proposed to charge subsequently on the basis
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of the Fourth Schedule, fees may be fixed initially on per sitting basis
subject to subsequent adjustment. Instead of merely recording such fees in
the minutes of proceedings, parties may be directed to provide written
consent to the fixation of fees, be it towards advance or firm fees. Once
written consent is provided, the likelihood of subsequent challenges on this
sensitive issue would be considerably minimised although it may never be
completely eliminated.
35. In conclusion, since both parties submit that grave
computation errors have been made by the Arbitral Tribunal, it is open to
both parties to re-agitate this issue before the Arbitral Tribunal especially in
view of the fact that neither party had pointed out to the Arbitral Tribunal
earlier that the computation was not in consonance with the Fourth
Schedule.
36. With the above observations, Arbitration O.P.Nos.196 & 197
of 2021 are disposed of without any order as to costs. Consequently,
connected a pplications are closed.
02.12.2021
Index :Yes
Internet :Yes
rrg
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SENTHILKUMAR RAMAMOORTHY J.,
rrg
Arb.O.P.Nos.196 & 197 of 2021
02.12.2021
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