Frequent appointment of a particular person as arbitrator - New Ordinance

AN INSIGHTFUL ANALYSIS ON THE EFFECT OF SECTION 12(1) OF THE ARBITRATION AND CONCILIATION (AMENDMENT) ORDINANCE, 2015.

One of the main objects of enacting the Arbitration and Conciliation Act, 1996 was to reduce the burden of the Courts which were already burdened with pending litigations. The object of the Act and the provisions the Act should be read in tandem to each other. The Arbitration and Conciliation Act, 1996 is in existence and practice for more than 19 years. The Ministry of Law and Justice, Government of India has promulgated an Ordinance amending the Arbitration and Conciliation Act, 1996 and published the same in the Gazette of India on 23.10.2015. The Ordinance is called The Arbitration and Conciliation (Amendment) Ordinance, 2015 and it shall come into force at once. There are omissions, additions, insertions and substitutions of certain provisions in the existing Act such as Sections 2, 7, 8, 9, 11, 12, 14, 17, 23, 24, 25, 28, 29, 29A, 29B, 31, 31A, 34, 36, 37, under PART – I and Sections 47, 48, 56, 57 under PART – II and insertion of FOURTH to SEVENTH Schedules.

This write up is to emphasis the effect of the substitution of Section 12 (1) and inclusion of 12 (5) to the Principal Act and inclusion of FIFTH, SIXTH and SEVENTH Schedules thereto with its respective explanations.

The amended Section 12 is extracted hereunder for a cursory reference:

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 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

(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.

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 arbitration 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 person whose  relationship, with parties or counsel or the subject matter of the dispute, falls under any of the categories specified in Seventh Schedule shall be ineligible to be appointed as an arbitrator.

Provided that parties may, subsequent to disputes having arisen between them, where the applicability of this subsection by an express agreement in writing.

Provided further that this subsection shall not apply to cases where an arbitrator has already been appointed on or before the commencement of the arbitration and conciliation (Amendment) Ordinance, 2015.

The FOURTH Schedule is model fee structure corresponding to Section 11(14) for determining the fee of Arbitral Tribunal. However, such fee structure is not applicable to international commercial arbitration and in arbitrations (other than international commercial arbitration) where parties agreed for determination of fees as per the rules of an arbitration institution. The FIFTH Schedule is the guiding grounds for determining the neutrality of an arbitrator who was already appointed. The SIXTH Schedule is corresponding to Section 12(1) (a & b) and Explanation 2 for disclosure by prospective arbitrator in the form specified therein. The SEVENTH Schedule is the categories specifying ineligibility of a person to be appointed as an arbitrator.  The FIFTH and SEVENTH Schedules are extracted hereto, after the conclusion paragraph of this write up, for a cursory reference.

Narrowing down to substitution of Section 12(1), Rule 22 and Explanation 3 of the FIFTH Schedule shall be read in conjunction. Under Section 12(1), it is contemplated that when a person is approached in connection with his possible appointment as an Arbitrator, he shall disclose in writing any circumstances which is likely to give rise to justifiable doubts as to his independence or impartiality and he shall also disclose in writing any circumstances which are likely to affect his ability to devote sufficient time and in particular his ability to complete the entire arbitration within a period of 12 months. Such disclosure shall be made by the prospective arbitrator in the form specified in SIXTH Schedule. [There is an inconsistency between Sections 12 (1)(b); 29A(1) and the SIXTH Schedule – The provisions contemplate 12 months time limit to render the Award but the SIXTH Schedule contemplates 24 + 3 months to complete the entire arbitration]

Under Section 12(5) of the Act, a proviso has been inserted notwithstanding any prior agreement in 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 who shall be ineligible to be appointed as an arbitrator. It is also provided that the parties may waive the applicability of the sub-section (5) by an express agreement in writing subsequent to the disputes having arisen between them. The second proviso contemplates that sub section (5) shall not be applicable to cases where an arbitrator has already been appointed on or before the commencement of the Ordinance.

Now slimming down to Section 12(1)(a)(b) r/w Rule 22 of FIFTH Schedule of the Ordinance, while describing the grounds that give rise to justifiable doubts as to the independence or impartiality of arbitrator, appointment of an arbitrator on two or more occasions by one of the parties or an affiliate of one of the parties within the past 3 years has been grounded as justifiable doubts as to independence or impartiality of the arbitrator. Rule 22 of FIFTH Schedule can be deceptive if read in isolation. There can be no apprehension to appointment of Arbitrators in terms of Rule 22 of the FIFTH Schedule as the same will have to be read in conjunction with Explanation 3 to the said schedule. To comprehend and for better understanding, both the Rule 22 and Explanation 3 are extracted hereunder:

Rule 22 :

“The Arbitrator has within the past three years been appointed as Arbitrator on two or more occasion by one of the Parties or an affiliate of one of the parties”.

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, specified pool. If in such fields it is custom and practice for parties frequently to appoint the same arbitrators in different cases, this is a relevant fact to be taken into account while applying the rules set out above”.

A reading of the aforesaid Explanation with Rule 22 would mean that the said Rule would not be applicable to classes of cases wherein:-

1. Practice in certain specific kinds of Arbitrations to draw arbitrators from a small, specialized pool.

2. If it is a custom and practice for parties frequently to appoint the same Arbitrators in different cases.

The words in the Explanation 3 of FIFTH Schedule, such as, “Specific kind”, “Custom”, “Practice”, “Specialized” and “Pool” have significant effect and meaning of those respective words are derived as hereunder:

Meaning of “Specific” (as per 8th Edition of Black’s law dictionary): “Specific” means designating a particular or defined thing.

Meaning of “Custom” (as per 8th Edition of Black’s law dictionary): “Custom” means a practice that by its common adaption and long, unvarying habit has come to have the force of law.

Meaning of “Practice” (as per Oxford dictionary of English): “Practice” means the repeated exercise in or performance of an activity or skill so as to acquire or maintain proficiency in it.

Meaning of “Specialized” (as per Oxford dictionary of English): “Specialized” means concentrating on a small area of the subject.

Meaning of “Pool” (as per Oxford dictionary of English): “Pool” means a group of people available for work when required or considered as a resource.

Explanation 3 of FIFTH Schedule stipulates an exception wherein it has been clarified that the parties can frequently  appoint the same arbitrator in different cases from their specialized pool when the same is their custom and practice. The Explanation 3 also gives an example to draw arbitrators from a small, specialized pool in certain arbitrations such as maritime or commodities arbitration.

A Bare reading of the Amendment to Section 12 (1) of the Arbitration and Conciliation Act would reveal that there is no bar imposed on Appointment of Arbitrators, however Explanation 1 of FIFTH Schedule stipulates various grounds under which the appointment of Arbitrators can be challenged.

On the contra, a reading of insertion of Section 12(5) of the Arbitration and Conciliation Act, it would reveal that there is an absolute bar for appointing a person as an arbitrator whose relationship with the parties fall under any of the categories specified in the SEVENTH Schedule.

There are 34 Nos. of Rules under FIFTH Schedule while there are only 19 Nos. of Rules under the SEVENTH Schedule. The Rules 1 to 19 are common in both the FIFTH and SEVENTH Schedules. Rule Nos.20 to 34 of the FIFTH Schedule are not available under the Rules of SEVENTH Schedule. More particularly, the Rules relating to frequent appointment of arbitrator by a party or the same Counsel or the same Law Firm is not available under the SEVENTH Schedule.

To put it in a nut shell, there is no bar for a party in frequently appointing the same arbitrator in different cases, if such appointment is custom and practice. However, after appointment, such an appointment is challenged by a party, the grounds stated under the FIFTH Schedule shall be the guiding factors, as stated in Explanation 1 of Section 12(1), and such challenge has to be considered and decided by applying the exception as clarified under Explanation 3 of FIFTH Schedule.

Per contra, Section 12(5) specifically creates an absolute bar for appointing a person as an arbitrator at the initial stage itself, if the party or counsel or the subject matter of the dispute falls under any of the categories specified in the SEVENTH Schedule even though the replica of Explanation 3 of the FIFTH Schedule is available under SEVENTH Schedule. Even if any person is appointed or believed to be appointed as an arbitrator in spite of the initial bar and such appointment is challenged, such challenge has also to be considered and decided by applying exception as clarified under the Explanation 3 of the SEVENTH Schedule.

At the first instance, it is to be noted that the Rules under FIFTH and SEVENTH Schedules of the Ordinance were taken and adapted from the Orange and Red list respectively of Rules of the International Bar Associations Guidelines on Conflicts of interest in international Arbitration. Hence, it is clear that such International Bar Association Guidelines were not intended to be made to be applicable for domestic Arbitration. However, this amendment has been brought into effect under the Ordinance keeping in mind the best practices opted for internationally and to bring the Indian arbitration practice in conformity with the Guidelines of Conflicts of Interest by keeping Explanation 3 under respective Schedules intact.

On applying the Explanation 3 to FIFTH Schedule of the Ordinance, the Banking and Finance Sector, apart from various other Sectors, is frequently appointing a particular person as arbitrator in more than two cases within 3 years. In so far as Banking & Finance sector, it has been their custom and practice, to maintain a small and specialized pool of arbitrators and frequently appoint the same arbitrator in different cases since the existence of the Arbitration Act 1940 and the present Arbitration and Conciliation Act, 1996. In the cases reported in 1) MANU/DE/0559/2000 in the case of G.Vijayaraghavan v. M.D. Central Warehousing Corpn. & another rendered by Delhi High Court; and 2) 2003 (3) CTC 148 in the case of Novel Granits Ltd. v. Lakshmi General Finance Ltd., rendered by Madras High Court it has been held that there is no illegality in the appointment of a particular person as arbitrator, in any number of disputes, from their panel of arbitrators and mere such appointment itself is not sufficient ipso facto to impugn the impartiality and objectivity of that person.

Thus, the custom of appointing the arbitrators from their specialized panel of arbitrators and practice of resolving disputes through such appointed arbitrators are in existence for several decades. In other words, in a broader perspective, since the Ordinance is having prospective effect, the restrictions may not be intended to be made to be applicable to the sectors who follow their custom and practice in frequently appointing the same person as arbitrator in different cases.

THE FIFTH SCHEDULE

[ See Section 12(1)(b)]

The following grounds give rise to justifiable doubts as to the independence or impartiality of arbitrators:

Arbitrator’s relationship with the parties or counsel

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 involved 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 of 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.

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.

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. Previous services for one of the parties or other involvement in the dispute.

Previous services for one of the parties or other involvement in the case

20. The arbitrator has within the past three years served as counsel for one of the parties or an affiliate of one of the parties or has previously advised or been consulted by the party or an affiliate of the party making the appointment in an unrelated matter, but the arbitrator and the party or the affiliate of the party have no ongoing relationship.

21. The arbitrator has within the past three years served as counsel against one of the parties or an affiliate of one of the parties in an unrelated matter.

22. The arbitrator has within the past three years been appointed as arbitrator on two or more occasions by one of the parties or an affiliate of one of the parties.

23. The arbitrator’s law firm has within the past three years acted for one of the parties or an affiliate of one of the parties in an unrelated matter without the involvement of the arbitrator.

24. The arbitrator currently serves, or has served within the past three years, as arbitrator in another arbitration on a related issue involving one of the parties or an affiliate of one of the parties.

Relationship between an arbitrator and another arbitrator or counsel.

25. The arbitrator and another arbitrator are lawyers in the same law firm.

26. The arbitrator was within the past three years a partner of, or otherwise affiliated with, another arbitrator or any of the counsel in the same arbitration.

27. A lawyer in the arbitrator’s law firm is an arbitrator in another dispute involving the same party or parties or an affiliate of one of the parties.

28. A close family member of the arbitrator is a partner or employee of the law firm representing one of the parties, but is not assisting with the dispute.

29. The arbitrator has within the past three years received more than three appointments by the same counsel or the same law firm.

Relationship between arbitrator and party and others involved in the arbitration.

30. The arbitrator’s law firm is currently acting adverse to one of the parties or an affiliate of one of the parties.

31. The arbitrator had been associated within the past three years with a party or an affiliate of one of the parties in a professional capacity, such as a former employee or partner.

Other circumstances

32. The arbitrator holds shares, either directly or indirectly, which by reason of number or de-nomination constitute a material holding in one of the parties or an affiliate of one of the parties that is publicly listed.

33. The arbitrator holds a position in an arbitration institution with appointing authority over the dispute.

34. 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, where the affiliate is not directly involved in the matters in dispute in the arbitration.

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.

THE SEVENTH SCHEDULE

[ See Section 12(5) ]

Arbitrator’s relationship with the parties or counsel

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 involved 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 of 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 there from.

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.

By: D.SARAVANAN,

Advocate, High Court, Chennai & Arbitrator

Email:arbitratorsaravanan@gmail.com