Navigating Commercial Disputes: Is there a distinction between ineligibility and jurisdiction?

The wording of Section 12(5) of the Arbitration and Conciliation Act, 1996 (“ACA”) is an example of a veritable lawyer’s paradise, offering the possibility of myriad interpretations. A language that, on first blush, appears so clear, and yet is not. Despite the Supreme Court's authoritative ruling in Bharat Broadband Network Limited v. United Telecoms Limited, the Section continues to confound.

The Section reads: - “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.”

Section 12(5) essentially deals with waiver by the parties of ineligibility of an arbitrator. The Section and its proviso deal with two distinct conditions – (1) where any arbitrator’s relationship with a party or its counsel falls within the mischief of the Seventh Schedule, such party cannot be appointed as an arbitrator. Such ineligibility cannot be waived by any prior agreement; (2) However, subsequent to the arising of disputes between the parties, “the parties” may waive such ineligibility by “express agreement in writing”. 

The Supreme Court in Bharat Broadband clarified that Section 12(5) of ACA begins with a non-obstante clause, stating "Notwithstanding any prior agreement to the contrary." This means that any person falling within the categories listed in the Seventh Schedule is, by law, ineligible to act as an arbitrator. The Court described the proviso to Section 12(5) as a “special provision”, emphasizing that there is only one exception to the rule under Section 12(5), which is the proviso itself. Consequently, “any prior agreement to the contrary is wiped out”.

In the peculiar facts of Bharat Broadband, the arbitration clause specified that the CMD of the appellant or their nominee could serve as the arbitrator. Following the judgment in TRF Limited v. Energo Engineering Projects Limited (“TRF”), the appellant filed an application before the arbitrator, informing them of the judgment and stating that the arbitral tribunal had become de jure incapable of acting as an arbitrator. While invalidating the appointment of the arbitral tribunal, the Supreme Court noted that the High Court had erred in applying Sections 4, 7, 12(4), 13(2), and 16(2) of the ACA to the case. Other than this single mention, there is no further reference to Section 16 in the Supreme Court’s judgment. Thus, it remains unclear whether Section 16 was explicitly relied upon by the respondent during the arguments before the Court.

Before the High Court, however, the petitioner (appellant before the SC)  specifically referred  to Section 16(2) arguing that jurisdictional challenges cannot be raised subsequent to the filing of the statement of defence. In the peculiar facts, the petitioner/appellant, submitted its statement of defence on 04.07.2017, without  objecting to the arbitrator’s jurisdiction or conduct.

It is important to note that the Supreme Court delivered the TRF judgment on 03.07.2017, just a day before the petitioner/appellant filed its statement of defence. Thus, on the date of filing, the petitioner/appellant was deemed to have knowledge of the TRF decision. Even if some allowance is made due to the short time frame, the Petitioner also filed an application under Section 17 of the ACA on 16.08.2017. The matter continued until 28.09.2017, when the Petitioner challenged the arbitrator’s eligibility under Section 12(5), citing TRF. After the tribunal dismissed the challenge, the Petitioner filed an application under Sections 15 and 14(2) of the ACA, arguing that the tribunal was de jure ineligible.

The Supreme Court in HRD Corporation v. GAIL (India) Ltd., while clarifying the distinction between arbitrator ineligibility under the Seventh Schedule and the existence of justifiable doubts regarding independence or impartiality under the Fifth Schedule, observed that in case of ineligibility it is not necessary to go to the Arbitral Tribunal under Section 13, since such a person would lack inherent jurisdiction to proceed any further.  Instead, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate. However, if the challenge involves grounds under the Fifth Schedule, it must be raised before the Arbitral Tribunal under Section 13. In fact, HRD Corporation also states that Section 12(5) is exempt from the time limits imposed by Section 13(2). The Court in Bharat Broadband, cited HRD Corporation with approval.

In Bharat Broadband, while the Supreme Court did not directly address the connection, or lack thereof, between Section 16 and Section 12(5), it appears that the Court severed any fetters, indicating that a challenge under Section 12(5) can be raised at any time. Several factors may have influenced the decision, though this is not explicitly stated. Section 16 has a specific timeline; a jurisdictional challenge must be raised before filing the statement of defence, or it is waived. In contrast, Section 12(5) has no such time limitation, and any waiver must be “express” and in “writing”. In fact, the Court in Bharat Broadband explains that the expression “express agreement in writing” refers to a direct agreement made in words, not one inferred by conduct, making a reference to Section 9 of the Indian Contract Act, 1872.

In Man Industries (India) Limited v. Indian Oil Corporation Limited, the Delhi High Court went further by allowing an amendment to a Section 34 petition to include the plea that the Sole Arbitrator was de jure ineligible under Section 12(5), and subsequently set aside the arbitral award.

In In re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 (“Stamp Matter”), the seven-judge bench held that courts should refrain from addressing challenges to the jurisdiction of the arbitral tribunal until the tribunal has had the opportunity to rule on its own jurisdiction. The tribunal must first decide on its powers, after which the courts can review whether the tribunal exercised those powers properly.

A combined reading of Bharat Broadband and Man Industries, in the backdrop of the Stamp Matter, suggests that an ineligibility challenge, unlike issues of stamping or limitation, falls outside the scope of a Section 16 jurisdictional challenge. Therefore, if ineligibility is not a jurisdictional matter, it can be raised in a post-award challenge and, potentially by sequitur, even in a pre-arbitral challenge by inference.

Another interesting aspect is that the language of Section 12(5) differs from that of Section 16. While Section 16 pertains to jurisdictional challenges, Section 12(5) addresses ineligibility. However, in Govind Singh v. M/S Satya Group Pvt Ltd and Anr., the Division Bench of the Delhi High Court held that the  “ineligibility of the arbitrator goes to the root of his jurisdiction”, suggesting a link between the two.

However, in this context, it is also important to consider the language of Section 14, which states that the "mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, if .. he becomes de jure... unable to perform his functions.". Consider the expressions "terminate" and "becomes de jure unable" are used, as opposed to words that signify “void ab initio”, “non-est” or “non-existent in law”. While this may only be a case of unhappy wording, it highlights contradictions within the current framework of Section 12(5) that may warrant judicial /legislative attention. The question, then is, does Bharat Broadband suggest otherwise? Also, did the legislature intend to distinguish the two at all?

Whether the intention was to treat an ineligibility challenge as distinct from a jurisdictional challenge, or simply to carve it out as an exception to Section 16, awaits a decision for another day.

About the authors: Payal Chawla is a practicing advocate specializing in arbitration and commercial litigation and is the founder of JusContractus, India’s only all-women law firm.

Hina Shaheen is an independent advocate practicing before the Delhi High Court.

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