The Fifth Schedule of the Arbitration Act and its impact on adjudication of bulk financial disputes on ODR platforms

A typical Alternative Dispute Resolution (ADR) conference in India would often dedicate a session or two to the emergence of Online Dispute Resolution (ODR) platforms and the benefits they entail in effectively adjudicating small claims and disputes.

While it is a no-brainer that such platforms/institutions facilitate the adjudication of disputes in a quick and cost-effective manner (at least in theory), a fundamental question that often goes unaddressed is these conferences is this:

To what extent do the items in the Fifth Schedule of the Arbitration and Conciliation Act, 1996 apply to bulk disputes of financial institutions initiated by a particular/singular financial institution against several individuals/entities facilitated through an ODR platform/institution?

The expression “bulk disputes” is a colloquial expression used by the author to signify a situation where an individual entity, say a financial institution, approaches an ODR platform and refers a batch of similar or identical disputes against several parties to an ODR platform. The types of claims would typically be credit card or loan default cases ranging from an average of ₹20,000 to ₹10,00,000. The ODR platform in turn appoints an arbitrator from its panel of arbitrators and assigns, for instance, a batch of 50 disputes of a similar kind to the selected arbitrator to adjudicate the disputes. The claimant would be common: namely the financial institution, and each of the 50 disputes would have different respondents/defaulters.

In such a situation, would the Fifth Schedule of the Arbitration Act - and more particularly Item 22 and 24 of the Schedule - be an impediment or disqualify an arbitrator from adjudicating these 50 disputes?

The Fifth Schedule

The source of the Fifth Schedule is Section 12 of the Arbitration Act titled, “Grounds for challenge”. Section 12 (1)(a) states that “Where a person is approached in connection with his possible appointment as an arbitrator” he has to submit a written disclosure in the manner set out in the Sixth Schedule setting out the existence of any direct, indirect, past or present “relationship with or interest in any of the parties or in relation to the subject-matter in dispute”, financial or otherwise, “which is likely to give rise to justifiable doubts as to his independence or impartiality”.

Explanation 1 to Section 12 states that the grounds set out 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.” The Fifth Schedule has 34 items which have been adopted from the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration. The IBA Guidelines contain three lists: Red, Orange, and Green. The Red List contains both waivable and non-waivable guidelines and the Orange List contains a list of situations giving justifiable doubts as to an arbitrator’s impartibility or independence. The Green List is “a non-exhaustive list of specific situations where no appearance and no actual conflict of interest exists.”

The items of relevance for the purpose of this column are Item 22 and 24 of the Fifth Schedule of the Arbitration Act. Items 22 and 24 are in pari materia to Items 3.1.3 and 3.1.5 of the “Orange List” of the IBA Guidelines. Items 22 and 24 fall within sub-heading, “Previous services for one of the parties or other involvement in the case”. The entries read as follows:

• 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.

• 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.

Decision of the Supreme Court in HRD Corporation

Both the aforesaid entries as well as Section 12 of the Arbitration Act have been examined in detail by the Supreme Court in HRD Corporation (Marcus Oil and Chemical Division) v. GAIL (India) Limited. Not only did the Supreme Court examine the Fifth Schedule, it also undertook a comparison of the Fifth and Seventh Schedules of the Arbitration Act. According to the Supreme Court, a challenge to the arbitrator under the Seventh Schedule would be on the grounds of “ineligibility” contemplating immediate disqualification thereby resulting an arbitrator becoming de jure unable to perform his functions as per Section 14 of the Arbitration Act. However, a challenge to the arbitrator under the Fifth Schedule should be on the grounds giving “rise to justifiable doubts as to the arbitrator’s independence or impartiality” in the facts of a case.

A challenge on the grounds set out in the Fifth Schedule would lie under Section 13 of the Arbitration Act. If the challenge is not successful under Section 13, then the arbitration continues, and such challenge can only be raised once the award is passed in an application/petition under Section 34 of the Arbitration Act. The Supreme Court also noted that “Items 1 to 19 of the Fifth Schedule are identical” with the Items in the Seventh Schedule and the “only reason that these items also appear in the Fifth Schedule is for purposes of disclosure by the arbitrator, as unless the proposed arbitrator discloses in writing his involvement in terms of Items 1 to 34 of the Fifth Schedule, such disclosure would be lacking, in which case the parties would be put at a disadvantage as such information is often within the personal knowledge of the arbitrator only.”

So far as the disqualification contained in Item 22 and 24 is concerned, the Supreme Court held,

“The disqualification contained in Items 22 and 24 is not absolute, as an arbitrator who has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties or an affiliate, may yet not be disqualified on his showing that he was independent and impartial on the earlier two occasions.”

To fortify its view, the Supreme Court relied on an authoritative textbook titled Liability Insurance in International Arbitration, 2nd ed. (2011), with specific reference to a passage dealing with Bermuda Form Arbitrations. The passage states that “where a loss, whether from boom or batch, gives rise to a number of arbitrations against different insurers who have subscribed to the same programme”, numerous arbitrations may be commenced at around the same time or simultaneously, in which case the same arbitrator may be appointed at the outset in respect of all these arbitrations. In such situations, an objection as to an appointment of an particular arbitrator “would not be sustained simply on the basis that the arbitrator had previously decided a particular issue in favour of one or another party.” Therefore, in such situations, the prohibition or disqualification as contained in Item 22 or 24 of Fifth Schedule would not apply.

The aforesaid decision of the Supreme Court has also been followed by the Delhi High Court in several decisions including Sudesh Prabhakar v. Emaar MGF Constructions Pvt. Ltd., Dream Valley Farms Pvt. Ltd. and Anr. v. Religare Finvest Ltd., Panipat Jalandhar NH 1 Tollway Pvt. Ltd. v. National Highways Authority of India and Bharat Foundry and Engineering Works and others v. INTEC Capital Ltd. and others.

Concluding comments

The line of reasoning given by the Supreme Court and followed and adopted by the Delhi High Court is that an arbitrator would not be disqualified under Item 22 and 24 of the Fifth Schedule if the arbitrator clearly discloses that that she/he was independent and impartial on while adjudicating previous disputes on past occasions.

Apart from the above, with respect to Item 22, so far as institutional arbitration is concerned whether through an ODR platform or otherwise, the appointment of an arbitrator is not made directly by the party or an affiliate of the party, but by a neutral institution whose role is to only facilitate in the adjudication of a dispute. In any event, so far as institutional appointments are concerned, Item 22 of the Fifth Schedule would have no application.

Therefore, Item 22 and 24 of the Fifth Schedule of the Arbitration Act does not prohibit an ODR platform from appointing the same arbitrator for adjudicating bulk disputes filed by a singular financial institution against several individuals/entities. It would, however, be prudent for ODR platforms and institutions as well as arbitrators so appointed to disclose this fact to all parties to a dispute to maintain ethical standards and transparency.

Dormaan Jamshid Dalal is an arbitrator and an advocate practicing at the Bombay High Court.