Circumstances Falling Under Schedule V: Automatic Disqualification of an Arbitrator? Schedule V and VII of the Arbitration and Conciliation Act, 1996 (“the Act”) provides a list of circumstances, which led to the disqualification of an Arbitrator from an arbitration proceeding. However, unlike Schedule VII of the Act, the circumstances falling under Schedule V of the Act does...
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Circumstances Falling Under Schedule V: Automatic Disqualification of an Arbitrator?
Schedule V and VII of the Arbitration and Conciliation Act, 1996 (“the Act”) provides a list of circumstances, which led to the disqualification of an Arbitrator from an arbitration proceeding. However, unlike Schedule VII of the Act, the circumstances falling under Schedule V of the Act does not automatically disqualify the Arbitrator without proving the fact of disqualification. The same has been opined by the Hon’ble Delhi High Court in the case of Bharat Foundry and Engineering Works & Ors. v. INTEC Capital Ltd. & Ors.1
The parties entered into a loan agreement, where the appellant received loans from the respondent, a financial non-banking institution. Failing the return loan in full, a dispute arose between the parties. The respondent appointed a sole Arbitrator. There were two more loan agreements from which identical issues arose. These issues were also referred to same Arbitrator. The appellant was served but they failed to be present before the Tribunal. Due to the non-appearance of the appellant, the Tribunal proceeded with the ex-parte proceedings.
An ex-parte award was given by the Tribunal. The same was challenged by the appellant under Section 34 of the Act. The sub-ordinate court upheld the awards. Hence, the ruling of the subordinate court has been appealed by the appellant under Section 37 of the Act.
In the appeal, the appellant contended that in all four arbitral proceedings, the sole Arbitrator was the same. Due to the lack of proper disclosure by the sole Arbitrator under Section 12 of the Act, the award is legally vulnerable. The respondent contended that the Arbitrator has made a declaration in terms of Schedule VI of the Act, as his appointment was from a pool of Arbitrators, and, hence, covered by Explanation 3 of Schedule VII. The appellant denied the applicability of Explanation 3 and submitted that the appointment of the Arbitrator in all four proceedings was hit by Entries 222 and 243 of Schedule V.
In response to the claims of the Claimant, the Respondent contended that the disclosure under Section 12 of the Act is not mandatory but a directory in nature. While justifying the appointment of the same Arbitrator in all four proceedings, the Respondent referred to the exception in Explanation 3 of Schedule VII and claimed that the Arbitrator was chosen from a specialized pool.
II. ISSUE BEFORE THE HIGH COURT
The issue in the present case was the competence and eligibility of the Sole Arbitrator appointed in respect of four arbitral proceedings between the parties, in view of Entries 22 and 24 of Schedule V.
III. FINDINGS OF THE COURT
The Court relied on the judgment of HRD Corporation (Marcus Oil and Chemical Division) v. GAIL (India) Ltd.4, in which it was held that unlike Schedule VII, circumstances listen in Schedule V would not themselves make the Arbitrator ineligible to act, unless it is established by attending facts that the Arbitrator’s neutrality was indeed compromised. The Following was discussed in the HRD Corporation (supra):
“…. the items contained in the Schedules owe their origin to the IBA Guidelines, which are to be construed in the light of the general principles contained therein- that every Arbitrator shall be impartial and independent of the parties at the time of accepting his/her appointment. Doubts as to the above are only justifiable if a reasonable third person having knowledge of the relevant facts and circumstances would reach the conclusion that there is a likelihood that the Arbitrator may be influenced by factors other than the merits of the case in reaching his or her decision. This test requires taking a broad commonsensical approach to the items stated in the Fifth and Seventh Schedules. This approach would, therefore, require a fair construction of the words used therein, neither tending to enlarge or restrict them unduly.”
The Court while relying on the HRD Corporation (supra) held as follows:
“The contention raised in the present case with respect to appointment of the Sole Arbitrator being hit by Entries 22 and 24 of Schedule V does not per se deprive him of eligibility to have acted as Arbitrator between the parties. The appellants have neither pleaded not proved any action of the Arbitrator that otherwise taints his neutrality making him unfit to act as an Arbitrator. The appellants’ sole reliance on Entries 22 and 24 of Schedule V, to presume bias against the Arbitrator, is not in the spirit of what has been held in HRD Corporation.”
While dealing with the legality of the ex-parte award, the Court held that it is a well-settles position of law that an ex-parte award is just as binding as an award passed in the presence of the respondents.5 The Court held that following:
“An ex-parte award by nature would mean that the appellant is precluded from setting up his defence of such nature for the first time by way of objections under Section 34 of the Act. If the appellants had not been proceeded es-parte, they would have been required to pursue the challenge procedure laid down under Section 13 to challenge the appointment of the Arbitrator. This challenge is made before the Arbitrator and not in objections under Section 34. As has been held above, circumstances provided for under Schedule V do not per se render the Arbitrator ineligible, unlike Schedule VII. The appellants’ contention that challenges to the appointment of Arbitrator could have only been made by way of objections under Section 34 for the first time is not correct.”
It was held that appellants were duly served in all the four proceedings separately, however, deliberately chose not to appear in any of them. The appeal was dismissed by the Court as the appellants failed to show any grounds doubting the impartiality and independence of the Sole Arbitrator.
To ensure the sanctity of an arbitral proceeding, Section 12 of the Act read with Schedule VI underlines the importance of disclosure to maintain the independence and impartiality of an Arbitrator. However, a challenge to the independence and impartiality of an Arbitrator under Schedule V will not automatically disqualify the Arbitrator, it must be duly proven by the other party. Merely because an Arbitrator has been appointed in more than one arbitral proceeding between the parties, the Award cannot be set aside, until concrete proof against the independence and impartiality of the Arbitrator has been proved.