Bombay High Court: Provisions of Section 12(5) R/W 7th Schedule of A&C Act Are Applicable To Institutional Arbitrations

Bombay High Court: Provisions of Section 12(5) R/W 7th Schedule of A&C Act Are Applicable To Institutional Arbitrations

The Bombay High Court has ruled that the provisions outlined in Section 12(5) in conjunction with the 7th Schedule of the A&C Act extend to institutional arbitration as well.

Justice Bharati Dangre has ruled that the regulations of an arbitral institution cannot supersede the stipulations of the A&C Act. It clarified that even if parties opt for institutional arbitration, it does not preclude the Court's authority to adjudicate on the termination of an arbitrator's appointment in case of a dispute concerning the grounds specified in Section 14(1)(a).

In September 2022, the parties executed three sale contracts for the provision of US coal. As per the agreements, the petitioner submitted earnest money. The contracts stipulated that any disputes would be resolved through arbitration under the jurisdiction of respondent no. 2, the Mumbai Centre for International Arbitration (MCIA).

Disputes arose when respondent no. 1 (Aditya Birla Global Trading) allegedly breached the contracts by not providing load port reports (LPRs) for quality assessment and instructing the petitioner to accept delivery without proper evaluation. The petitioner declined to accept the coal, leading respondent no. 1 to threaten selling it to third parties.

Despite the petitioner's objections and requests for the release of Earnest Money Deposit (EMD), respondent no. 1 sold the coal to third parties, alleging losses surpassing the EMD. Subsequently, the petitioner sought reimbursement of its EMD, but respondent no. 1 issued a legal notice asserting damages and subsequently initiated arbitration proceedings.

Respondent no. 2 designated Ms. Ila Kapoor (respondent no. 3) as the sole arbitrator. The petitioner contested her appointment under MCIA Rule 10, citing that the law firm where she holds a partnership has frequently served as a legal advisor to respondent no. 1. Therefore, the petitioner argued that her appointment is in violation of Section 12(5) of the 7th Schedule to the Act.

The challenge was rejected by the MCIA council, and the arbitrator was instructed to proceed with the proceedings. Dissatisfied with this decision, the petitioner contested her appointment under Section 14 of the A&C Act before the Bombay High Court.

The respondent contests the maintainability of the petition on several grounds. Firstly, they argue that the parties explicitly agreed to resolve disputes through arbitration in accordance with the MCIA Rules, which are comprehensive and adhere to global arbitration standards. Consequently, any objections regarding the arbitration process, including the appointment of the arbitrator, should be addressed solely in accordance with the MCIA rules and not otherwise.

Additionally, the respondent asserts that the petition under Section 14 of the A&C Act would be untenable due to the parties' agreement to follow the MCIA procedures. According to these procedures, the decision of the MCIA Council is deemed final and binding, thereby constituting a conflicting agreement as outlined in Section 14(2) of the Act.

The petitioner presented the following counter-submissions: Firstly, they argued that if the appointed arbitrator is legally ineligible due to circumstances delineated in the Seventh Schedule of the Act, their authority automatically ceases to exist.

Additionally, the petitioner contended that any agreement between the parties to circumvent Section 14(2) of the Act, allowing recourse to the court, cannot extend to challenges based on Seventh Schedule circumstances, which represent strict disqualifications for the arbitrator. Furthermore, the petitioner emphasized that the Mumbai Centre for International Arbitration (MCIA), as a private arbitral institution, does not meet the definition of an 'arbitral institution' as outlined in the A&C Act. Hence, any inconsistencies between the MCIA Rules and the Act should be resolved in favor of the latter.

Lastly, the petitioner asserted that an award rendered by an ineligible arbitrator is inherently void and unenforceable, and party autonomy cannot justify such illegality.

The Court noted that according to the A&C Act, parties have the liberty to establish a procedure for appointing arbitrators. The Act mandates the disclosure of any circumstances that could potentially compromise an arbitrator's independence or impartiality, a requirement that holds true for both institutional and non-institutional arbitration processes.

The Court emphasized that despite parties opting for institutional arbitration, it does not preclude the Court from exercising its authority to adjudicate the termination of an arbitrator's mandate in case a dispute arises concerning the grounds specified in Section 14(1)(a).

The Court ruled that the rejection of a challenge to the arbitrator's appointment by the arbitral institution, following its procedures, does not negate the jurisdiction of the Court under Section 14 of the A&C Act, especially concerning issues outlined in the 7th Schedule.

The Court noted that the appointed arbitrator maintained a notable commercial association with one of the respondent parties, which was deemed to contravene Clause 7 of the Seventh Schedule of the A&C Act. This clause specifies that an arbitrator's law firm, engaged in a significant commercial relationship with one of the parties or its affiliate, renders the arbitrator ineligible to serve as an arbitrator.

The Court noted that despite the petitioner's objection, the MCIA Council dismissed the challenge to the arbitrator's appointment without conducting a thorough examination, which the Court considered perfunctory. In order to uphold fairness and impartiality in the arbitration proceedings, the Court instructed the MCIA to replace the arbitrator with an independent individual.