LLM Group 2 Business Law Fundamental Principles of Law of Contract and Allied Laws 2019 Question Paper with Solutions

For full marks, cover: the circumstances in which the appointing authority may be moved under section 11, taking each sub-section in turn; the fact that the authority is no longer the Chief Justice and the history of that change through Konkan Railway and SBP and Co.; then disqualification in its three layers, ineligibility, challenge and termination of mandate, with the leading cases; and the 2024 Constitution Bench decision.

The circumstances in which the appointing power arises

Section 11 of the Arbitration and Conciliation Act, 1996 supplies a default appointment machinery and a fall back to a court where the machinery fails. The power to appoint is not a general one: it arises only in defined circumstances, and setting them out in order is the first half of this answer.

Section 11(5) states the third circumstance, for a sole arbitrator: where the parties have not agreed a procedure and fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other, the appointment shall be made on request in the same manner.

Section 11(6) states the fourth and widest circumstance, and it is the one most often invoked. Where an appointment procedure has been agreed, and a party fails to act as required under that procedure, or the parties or the two appointed arbitrators fail to reach an agreement expected of them under that procedure, or a person including an institution fails to perform any function entrusted to him or it under that procedure, a party may request the Court or its designate to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

Section 11(9) adds a further circumstance for international commercial arbitration: in the case of appointment of a sole or third arbitrator in such an arbitration, the Supreme Court or its designate may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

The reason for the change is a decade of litigation about the nature of the power, and it earns marks. In Konkan Railway Corporation Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388, a Constitution Bench held that the Chief Justice's function under section 11 was administrative, not judicial, so no reasoned order was required and no appeal lay. In SBP and Co. v. Patel Engineering Ltd., (2005) 8 SCC 618, a seven-judge Bench overruled Konkan Railway and held that the power is judicial, that the Chief Justice must decide his own jurisdiction, the existence of a valid arbitration agreement and whether the claim is a live one, and that his order is amenable to a petition under Article 136. National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267, then catalogued the issues the Chief Justice must decide, those he may decide and those he should leave to the tribunal.

The 2015 amendment responded to that line in two ways. It moved the power from the Chief Justice as persona designata to the Court itself, which is consistent with its being judicial. And it inserted section 11(6A), providing that the Supreme Court or the High Court, while considering an application, shall confine its examination to the existence of an arbitration agreement, notwithstanding any judgment, decree or order of any court. The object was to reverse the wide inquiry SBP and Co. and Boghara Polyfab had permitted.

Layer one: ineligibility under section 12(5). 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. The proviso permits waiver only by an express agreement in writing entered into after the dispute has arisen.

The Seventh Schedule, inserted in 2015 and drawn from the IBA Guidelines on Conflicts of Interest in International Arbitration, covers among others an arbitrator who is an employee, consultant or adviser of a party or has a past or present business relationship with it; who has a controlling influence on an affiliate of a party where that affiliate is directly involved; who regularly advises a party and derives significant financial income from it; who is a manager, director or part of the management of a party; who has a close family relationship with a party or with counsel; and who has previously been involved in the case.

Layer two: challenge under sections 12 and 13. Section 12(1), as substituted in 2015, requires a person approached in connection with a possible appointment to disclose in writing, in the form of the Sixth Schedule, any circumstances such as those in the Fifth Schedule likely to give rise to justifiable doubts as to his independence or impartiality, and any circumstances likely to affect his ability to devote sufficient time to the arbitration and in particular to complete it within twelve months. The duty is continuing under section 12(2).

Section 12(3) states the grounds of challenge: circumstances exist that give rise to justifiable doubts as to independence or impartiality, or the arbitrator does not possess the qualifications agreed to by the parties. Section 12(4) provides that a party may challenge an arbitrator appointed by him, or in whose appointment he participated, only for reasons of which he becomes aware after the appointment.

Section 15 covers the wider cases: the mandate terminates where the arbitrator withdraws for any reason or by agreement of the parties, and a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. Unless otherwise agreed, where an arbitrator is replaced, any hearings previously held may be repeated at the discretion of the tribunal, and an order or ruling made prior to the replacement is not invalid solely because there has been a change.

The relationship between the layers is the point on which a good answer closes. Because a person within the Seventh Schedule is ineligible de jure, the route in such a case is a section 14 application to the Court and not a section 13 challenge before the tribunal, and that has been the settled practice since TRF Ltd. A challenge on justifiable doubts falling short of the Seventh Schedule goes first to the tribunal under section 13 and reaches a court only through section 34.

Disqualification operates in three layers. A person within the Seventh Schedule is ineligible under section 12(5) whatever the parties agreed, and TRF Ltd., Perkins Eastman and now Central Organisation for Railway Electrification have made the consequence severe: the appointment, and any nomination made under it, is void. A person outside that Schedule may be challenged under section 12(3) on justifiable doubts, and section 13 sends that challenge first to the tribunal itself, with the award and a section 34 application as the only route to a court. And an arbitrator's mandate terminates under sections 14 and 15 where he becomes unable to act or fails to act without undue delay, with the Court deciding any controversy and a substitute appointed by the rules that governed the original appointment.