In the case of Bharat Broadband Network Ltd (BBNL) Versus United Telecom Limited (UTL), the Supreme Court bench of Justice R F Nariman and Justice Vineet Saran held that a person, who is himself ineligible to be appointed as an Arbitrator as per Section 12(5) of the Arbitration and Conciliation Act, 1996, cannot appoint another person to act as an Arbitrator. The Bench referred to the judgment in TRF Ltd v. Energy Engineering Projects Ltd (2017) 8 SCC 377 (“TRF”) which, in itself, had held that an ineligible person cannot appoint an arbitrator.
A dispute arose between the parties out of an agreement between them which resulted in UTL invoking the arbitration clause therein for appointment of arbitrator. Accordingly, the CMD of BBNL appointed an arbitrator, namely Mr. Khan. Subsequently, the TRF judgment was passed and therefore, BBNL sought for the withdrawal of the Arbitrator on the grounds of the TRF judgment. The request for withdrawal was rejected by the Arbitrator and accordingly, the said appointment was challenged in the High Court. The High Court rejected the plea of challenge raised by BBNL and held that BBNL was estopped from challenging the Arbitrator as it had appointed him. Accordingly, the present petition was filed in the Supreme Court challenging the said decision of the High Court.
The Bench held that the CMD of BBNL who had appointed the Arbitrator was, in itself, ineligible as per Item No 5 of the Seventh Schedule which reads as follows:
- 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.
Therefore, in light of the TRF judgment, the Bench concluded that the CMD could not appoint the arbitrator.
The Counsel for UTL argued that as per Section 12(4), any party appointing an arbitrator can challenge his mandate only for reasons which he became aware about after the appointment takes place. The CMD of BBNL was well aware of the ineligibility of Mr Khan as Arbitrator even before appointment and was not a fact known subsequent to the appointment.
The Bench rejected the contentions of the UTL and stated that:
“18. ……………Whether such ineligible person could himself appoint another arbitrator was only made clear by this Court’s judgment in TRF Ltd. (supra) on 03.07.2017, this Court holding that an appointment made by an ineligible person is itself void ab initio. Thus, it was only on 03.07.2017, that it became clear beyond doubt that the appointment of Shri Khan would be void ab initio. Since such appointment goes to “eligibility”, i.e., to the root of the matter, it is obvious that Shri Khan’s appointment would be void. There is no doubt in this case that disputes arose only after the introduction of Section 12(5) into the statute book, and Shri Khan was appointed long after 23.10.2015. The judgment in TRF Ltd. (supra) nowhere states that it will apply only prospectively, i.e., the appointments that have been made of persons such as Shri Khan would be valid if made before the date of the judgment. Section 26 of the Amendment Act, 2015 makes it clear that the Amendment Act, 2015 shall apply in relation to arbitral proceedings commenced on or after 23.10.2015.”
On the aspect of waiver of objection under Section 12(5), the Bench referred to Section 9 of the Indian Contract Act, 1872 and held that:
“20. ……………….It is thus necessary that there be an “express” agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that Shri Khan is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him to continue as such. The facts of the present case disclose no such express agreement.”
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