Person ineligible to be Arbitrator under Sec.12(5) of Arbitration Act cannot appoint another arbitrator

The Supreme Court has held that the appointment of arbitrator by a person who himself is ineligible to be an arbitrator as per Section 12(5) of the Arbitration and Conciliation Act 1996 is void ab initio.

The said ruling was held in the matter of Bharat Broadband Network Ltd. (BBNL) Vs. United Telecoms Ltd [Civil Appeal No. 3972 of 2019], decided on 16.04.2019.

Challenge

In relation to contractual disputes, UTL invoked the arbitration clause on January 3, 2017, and sought for appointment of arbitrator. The CMD of BBNL appointed one K H Khan as arbitrator. Citing he SC decision in TRF Ltd. case, BBNL sought withdrawal of Khan from the proceedings. ‘since a Managing Director of a company which was one of the parties to the arbitration, was himself ineligible to act as arbitrator, such ineligible person could not appoint an arbitrator, and any such appointment would have to be held to be null and void’.
Interestingly, UTL did not object to the continuation of Khan, who was appointed by BBNL’s CMD. Khan rejected the request for withdrawal. This was challenged under Section 14 & 15 of the Act by BBNL before Delhi High Court. The High Court too rejected the challenge, holding that BBNL was estopped from questioning the mandate of the arbitrator appointed by it. The Court also construed from the conduct of parties – i.e BBNL appointing the arbitrator and UTL filing claim statement in proceedings before him – waiver of objections as per proviso to Section 12(5).

Challenging the High Court’s judgment, BBNL approached the Supreme Court.

Held

Allowing the appeal of BBNL, the Apex Court stated that ineligibility under Section 12(5) of the Act was de jure in nature, leading to automatic termination of his mandate.
Coming to the facts of the case, it was noticed that CMD of BBNL was himself an ineligible person as per Item 5 of Seventh Schedule which barred manager, director etc. of a party to the dispute from being an arbitrator. Applying the decision in TRF Ltd, the bench said that CMD could not have appointed arbitrator.

It was observed that it was only on 03.07.2017 (when the TRF judgment was passed), that it became clear beyond doubt that the appointment of Shri Khan would be void ab initio. Leaving no doubt in this case that disputes arose after the introduction of Section 12(5) into the statute book and Shri Khan was appointed long after 23.10.2015.

It was further observed that BBNL had objected to Khan’s continuation soon after TRF judgment. The fact that UTL filed claim statement before the arbitrator cannot be taken into account to presume waiver and that the waiver of objection under Section 12(5) should be express and in writing.