Case Note & Summary
The Supreme Court allowed the appeals filed by Bharat Broadband Network Limited (BBNL) against the judgment of the Delhi High Court, which had rejected BBNL's petition under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996 to terminate the mandate of the sole arbitrator appointed by BBNL's Chairman and Managing Director (CMD). The dispute arose from a tender floated by BBNL for a turnkey project, and the arbitration clause in the General Conditions of Contract provided for the sole arbitration of the CMD or his nominee. After disputes arose, the respondent invoked arbitration, and the CMD appointed Shri K.H. Khan as sole arbitrator. Following the Supreme Court's judgment in TRF Ltd. v. Energo Engineering Projects Ltd., which held that a person ineligible to act as arbitrator cannot appoint an arbitrator, BBNL sought the arbitrator's withdrawal. The arbitrator rejected the application, and the High Court dismissed BBNL's petition, holding that BBNL was estopped from challenging the appointment and that the proviso to Section 12(5) was satisfied by the parties' conduct. The Supreme Court examined the interpretation of Section 12(5) and its proviso, which states that notwithstanding any prior agreement, persons falling under the Seventh Schedule are ineligible to be arbitrators unless the parties expressly agree in writing after disputes have arisen. The Court held that the CMD's ineligibility to act as arbitrator rendered his appointment of another arbitrator void ab initio, following TRF Ltd. The Court further held that the proviso requires a conscious, express agreement in writing after the dispute has arisen, which was absent in this case. The mere filing of a statement of claim or participation in proceedings without reservation does not constitute such an agreement. The Court also rejected the argument that Section 12(4) or Section 13(2) barred the challenge, as the ground of ineligibility goes to the root of the appointment and is not a mere procedural irregularity. Consequently, the Court set aside the impugned judgment, terminated the mandate of the arbitrator, and directed the parties to approach the High Court for appointment of a substitute arbitrator under Section 11(6) of the Act.
Headnote
A) Arbitration Law - Appointment of Arbitrator - Section 12(5) read with Seventh Schedule - Ineligibility of CMD to Act as Arbitrator - The CMD of a party, being ineligible to act as arbitrator under Item 5 of the Seventh Schedule, cannot appoint an arbitrator; such appointment is void ab initio. The judgment in TRF Ltd. v. Energo Engineering Projects Ltd. applies retrospectively as a declaration of law. (Paras 2-6, 10-15) B) Arbitration Law - Waiver - Section 4 and Proviso to Section 12(5) - Express Agreement in Writing - The proviso to Section 12(5) requires an express agreement in writing after disputes have arisen, waiving the applicability of the section. Mere participation in proceedings or filing a statement of claim without reservation does not constitute such an agreement. The waiver under Section 4 is inapplicable as Section 12(5) is a non-derogable provision. (Paras 7-9, 16-20) C) Arbitration Law - Challenge to Arbitrator - Sections 12(4), 13(2), 14 - De Jure Incapacity - A party may challenge an arbitrator appointed by it if the appointment is void ab initio due to ineligibility. Sections 12(4) and 13(2) do not bar such a challenge as the ground of ineligibility goes to the root of the appointment and is not a mere procedural irregularity. (Paras 10-15)
Issue of Consideration
Whether the appointment of a sole arbitrator by the Chairman and Managing Director (CMD) of a party, who is himself ineligible to act as arbitrator under Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996, is void ab initio; and whether the proviso to Section 12(5) requiring an 'express agreement in writing' subsequent to the dispute can be satisfied by pre-dispute conduct or implied waiver.
Final Decision
Appeals allowed. Impugned judgment of Delhi High Court set aside. The mandate of the sole arbitrator, Shri K.H. Khan, is terminated. Parties are directed to approach the High Court for appointment of a substitute arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.
Law Points
- Section 12(5) of the Arbitration and Conciliation Act
- 1996
- Seventh Schedule
- de jure inability
- waiver
- express agreement in writing
- TRF Ltd. v. Energo Engineering Projects Ltd.
