ADR PROJECT

SUBJECT:
A PROJECT ON THE TOPIC

SUBMITTED BY:
MOHD SAKIB

B.A.LLB Semester 6th

Reg No GU17R0032

SUBMITTT
ED TO:-
Mr. ABHIJIT ANAND

(FACULTY OF LAW)
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TABLE OF CONTENT
Introduction

Grounds For Challenge The Appointments Of Arbitrators

(Section-12)

Fifth Schedule (see section 12(1)(b))

Seventh Schedule

Cases

Conclusion

Bibliography
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-: INTRODUCTION:-

The judicial system in India is overstressed and notoriously slow in disposing cases. Around
1.65 lakh cases are pending in every High Court of the country and more than 2.6 crore cases are
pending in the subordinate judiciary.
As a result, there is a need to provide a faster and effective mechanism to resolve disputes. The
Arbitration and Conciliation Act, 1996 (the Act) was passed with the same goal in mind. It
promotes arbitration as an alternate dispute resolution mechanism in India. It was an attempt to
ease the burden as well.
Commercial entities usually include arbitration clauses in any agreement that they sign with
another entity or sign a separate arbitration agreement altogether. With heavy reliance placed on
arbitration, it is of utmost importance that the arbitrators appointed are impartial. The Supreme
Court of India has observed that independence and impartiality of an arbitrator is the hallmark of
arbitration and is a fundamental principle of natural justice.
Independence and impartiality of the arbitrator is the basic requirement of any arbitration
proceeding. Rule against bias is one of the fundamental principles of natural justice which
applies to all judicial and quasi-judicial proceedings. The genesis of this principle is the
necessity of an arbitrator appointed in terms of the contract and by the parties to the contract to
be independent of the parties.
Section 121 of the Act lays down the grounds on which an arbitrator can be challenged. The
2015 amendment to the Act, has added a schedule to this section which lays down additional
criteria that may give rise to a challenge of an arbitrator. Section 12 of the recently amended
Arbitration and Conciliation Act 1996 requires that a person who has been approached for a
possible appointment as an arbitrator disclose in writing the circumstances which are likely to
raise justifiable doubts as to his or her independence or impartiality to act as an arbitrator. This
disclosure must be made in the form specified in the Sixth Schedule of the act.

1
Section 12 0f THE ARBITRATION AND CONCILIATION ACT, 1996
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GROUNDS FOR CHALLENGING THE APPOINMENT OF

ARBITRATORS (SECTION-12):-

Section 12 of the Arbitration and conciliation Act, 1996 provides grounds for challenge to an
arbitrator and it is pattern of Article 12 of the Model Law of UNCITRL2.

SECTION 12:- Grounds for challenge.—

(1) When a person is approached in connection with his possible appointment as an arbitrator, he
shall disclose in writing any circumstances.
(a)Such as the existence either direct or indirect , of any past or present relationship with interest
in any of the parties or in relation to the subject – matter in dispute , whether financial ,
business , professional , or other kind , which is likely to give rise to justifiable doubts as to his
independence or impartiality , and .
(b) Which are likely to affect his ability to devote sufficient time to the arbitration and in
particular his ability to complete the entire arbitration within a period of twelve months.
Explanation1- The stated 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.

2
2. Article 12 - Grounds for challenge

1. When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose
any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator,
from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any
such circumstances to the parties unless they have already been informed of them by him.
2. An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his
impartiality or independence, or if he does not possess qualifications agreed to by the parties. A party may
challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of
which he becomes aware after the appointment has been made.
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Explanation2- The disclosure shall be made by such person in the form specified in the sixth
schedule.

(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings,
shall, without delay, disclose to the parties in writing any circumstances referred to in sub-
section (1) unless they have already been informed of them by him.
(3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality,
(b) He does not possess the qualifications agreed to by the parties.
(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has
participated, only for reasons of which he becomes aware after the appointment has been made.

(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.

Provided that parties may, subsequent to the dispute having arisen between them , waive the applicability
of this sub- section by an express agreement in writing 3.

Section 12(1)(a) states that the arbitrator should disclose if he has any direct, indirect, past or
present relationship to the parties, or if he has any financial, business, professional or any other
kind of interest in the subject-matter of the dispute, which would affect his impartiality in the
case.

For example, Company X and Company Z while entering into a particular contract, add an
arbitration clause naming Mr. A as an arbitrator. Mr. A is the owner of Company C. A dispute
concerning payment of bills to Company X by Company Z arose and Mr. A was approached for

3
The Arbitration and conciliation Act ,1996 (BARE ACT)
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presiding as an arbitrator. Company Z is a client of Company C and forms a considerable part of

its income.

In such a scenario, Mr. A would have an interest in the dispute and that might give rise to doubts
to his impartiality.

Section 12(1)(b) similarly points to any circumstances that would affect an arbitrator’s capacity
to devote enough time to finish the arbitration within twelve months.

There are two explanations given under the sub-section. The first one states that the Fifth
Schedule should be referred to understand whether circumstances under Section 12(1)(a) exist.
The second one states that such a disclosure should happen in the format under Sixth Schedule.

Fifth Schedule (see section 12(1)(b))

The fifth schedule deals with following types of relations which might give rise to reasonable
doubts as to the independence or impartiality of arbitration.

1. Arbitrator’s relationship with parties or counsel

2. Arbitrator’s relationship to the dispute
3. Arbitrator’s interest in the dispute
4. Arbitrator’s past involvement with the dispute
5. Relationship of co-arbitrator’s
6. Relationship of the arbitrator with parties and others in the dispute
7. Other Circumstances
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1. Arbitrator’s relationship with parties or counsel:-

a. The arbitrator is an employee , consultant, advisor, or has any other past or present business
relationship with a party.
b. The arbitrator currently represents or advises one of the parties or an affiliate of one of the
parties.
c. The arbitrator is a lawyer in the same law farm which is representing one of the parties.
d. The arbitrator currently represents the lawyer or law farms acting as the counsel for one of
the parties.

2. Arbitrator’s relationship to the dispute:-

a. The arbitrator has given legal advice or provides an expert opinion on the dispute to a party or
an affiliate of one of the parties.
b. The arbitrators has previous involvements in the cases.

3. Arbitrator’s direct or indirect interest in the dispute:-

a. The arbitrators holds shares , either directly or indirectly , in one of the parties or an affiliate
one of the parties that is privately held.
b. A close family member of the arbitrators has a significant financial interest in the outcome of
the dispute.
c. The arbitrators or a close family member of the arbitrators has a close relationship with a third
party who may be liable to recourse on the part of the unsuccessful party in the dispute.

4. Arbitrator’s past involvement with the dispute:-

a. The arbitrators has within the past three years served as counsel for one of the parties or an
affiliate of one of the parties or has previously advised or been consulted by the party or an
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affiliate of the party making the appointment in an unrelated matter. But the arbitrators and the
party or the affiliate of the party have no ongoing relationship.
5. Relationship of co-arbitrator’s:-
a. The arbitrator and another arbitrator are the lawyer in the same law farm .

b. The arbitrator was within the past three years a partner of, or otherwise affiliated with, another
arbitrator or any of the counsel in the same arbitration.
6. Relationship of the arbitrator with parties and others in the dispute:-
a. The arbitrator law firm is currently acting adverse to one of the parties or an affiliate of one of
the parties.
b. The arbitrator had been associated within the past three years with a party or an affiliate of
one of the parties in a professional capacity , such as a former employee or partner.

7. Other Circumstances:-
a. The arbitrator hold shares, either directly or indirectly , which by reason of number or
denomination constitute a material holding in one of the parties or an affiliate of one of the
parties that , is publicly listed.
b. The arbitrator hold a position in an arbitration institution with appointing authority over the
dispute.

If the factual scenario of a case falls under any of the above headings, then the arbitrator may be
challenged. These are extensive headings which cover many scenarios to ensure maximum
impartiality. However, ‘Explanation 3’ to this schedule says that ‘ for the removal of doubts ,it is
clarified that it may be the practice in certain specifics kinds of arbitration , such as maritime or
commodities arbitration , to draw arbitrators from a small , specialized pool. If in such field it is
the custom and practice for parties frequently to appoint the same arbitrator in different case, this
is relevant fact to be taken into account while applying the rules set out above.
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Section 12(2) reinforces sub-section 1, by stating that unless a written disclosure has already
been given, an appointed arbitrator should disclose any conflict of interest as soon as possible.

Other Grounds for Challenge:-

The actual grounds for challenge under this section are illustrated under Section 12(3).

If an arbitrator’s independence and impartiality are doubted due to the circumstances under
Section 12(1) then he may be challenged or in the event that he doesn’t possess the necessary
qualifications agreed to by the parties.

A party to the dispute which appoints an arbitrator may challenge such appointment for reasons
he becomes aware only after the appointment.
Section 12(5), inserted by the 2015 amendment, automatically disqualifies any potential
arbitrator who falls in any category under the Seventh Schedule of the Act.

Seventh Schedule:-
This schedule also covers most of the headings under the Fifth Schedule. The list is not as
exhaustive as the Fifth Schedule but as stated above, simply acts as a bar to appointment as
arbitrator. However, this bar can be waived by the parties by an agreement in writing.

The Schedule covers:

1. Arbitrator’s relationship with the parties or counsel

2. Relation of Arbitrator to the dispute
3. Arbitrator’s interest in the dispute. 4

4
BOOK, Alternative Dispute resolution , Dr S.R. Myeni , 3rd Edition , Page No 177-184
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Cases:-

JIWAN KUMAR LOHIA V. DURGA DUTT LOHIA5

In this case, the supreme court of india held that ‘reasonable apprehension of bias in the mind of
reasonable man, can be a good ground for the termination of the mandate of an arbitrator. The
doubts about ‘bias’ or partiality must be ‘justifiable’ on some objective basis. The
reasonableness of doubts must be tested by the standard of a fair minded, rational, objective
standard.

TRF Ltd. v. Energo Engineering Projects Ltd.6 

In this case, the Supreme Court held that since a Managing Director of a company which was
one of the parties to the Arbitration proceedings, was himself ineligible to act as the Arbitrator,
such ineligible person could not appoint an Arbitrator and any such Appointment would be null
and void.

 Hindustan Construction Company Limited V. IRCON International Ltd7

In this case, the Hon'ble Delhi High Court observed that a former employee of the Northern
Railway cannot be said to have had a business relationship with the Respondent merely because
the Respondent is wholly owned by the Government of India/ Ministry of Railways. The Court
identified that to attract Entry 1 of the Seventh Schedule to the Act, it must be shown that the

5
(AIR 1992 SC 188)

6
(2017) 8 SCC 377
7
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proposed arbitrator is an employee of the Respondent or has any other past or present business
relationship with it. It was therefore held that only the presently serving employees of the
Northern Railway would stand disqualified to act as an arbitrator, and not a former employee.

Voestalpine Schienen v. Delhi Metro Rail Corporation

The Supreme Court pointed that the main purpose of amending Section 12 was to maintain a
higher level of arbitrator impartiality. In light of this, it stated that in the event that the arbitration
clause was in contradiction to Section 12 (5), the latter would prevail. In such a case the court
would appoint an arbitrator and a party cannot claim appointment as per the agreement.
However, in the case, the Court held that only because of the fact that the suggested arbitrators
were former or current government employees they won’t be automatically disqualified from
being arbitrators. If they didn’t have any relation to any of the parties, they were not barred
under Section 12(5).
The court differentiated between the concepts of ‘impartiality’ and ‘independence’. Thus, the
court held, any question on impartiality or independence would surface when the arbitrator
discloses any interest in writing.

HRD Corporation (Marcus Oil and Chemical Division) v GAIL (India) Limited

The Supreme Court set out the legal position regarding challenges to a person's possible
appointment as an arbitrator. The position under the act is that a disclosure must be made by a
person approached as a possible arbitrator. If he or she discloses circumstances which fall under
any of the categories specified in the Seventh Schedule, then that person cannot be appointed as
an arbitrator. Since such person would lack the inherent jurisdiction to proceed as an arbitrator,
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the court of appropriate jurisdiction can terminate the mandate of such person under Section
14(2) of the act. The Supreme Court has held that since ineligibility goes to the root of the
appointment, Section 12(5), read with the Seventh Schedule, clarifies that if the arbitrator falls
under any of the categories specified in the Seventh Schedule, he or she becomes ineligible to
act as an arbitrator.
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-: Conclusion:-

The 2015 Amendment to the Act is aimed to promote arbitration in India and to provide for
greater transparency and reliability on the same. Section 12 gains more importance in light of the
new amendment and hopefully, it contributes to making arbitration a more popular recourse than
judicial courts.
Section 12 of the recently amended Arbitration and Conciliation Act 1996 requires that a person
who has been approached for a possible appointment as an arbitrator disclose in writing the
circumstances which are likely to raise justifiable doubts as to his or her independence or
impartiality to act as an arbitrator. This disclosure must be made in the form specified in the
Sixth Schedule of the act.
The grounds stated in the Fifth Schedule serve as a guide to determine whether circumstances
exist which could raise justifiable doubts as to the independence or impartiality of the potential
arbitrator. On the other hand, the grounds specified under the Seventh Schedule render a person
ineligible to be appointed as an arbitrator.
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-: BIBLIOGRAPHY:-

BOOKS:-
1. Alternative Dispute Resolution, Dr. S. R. Myneni, 3rd Edition 2017 published by
Asian Law Book, Hyderabad

Website:-
1. www.scribd.com
2. https://singhania.in
3. https://www.mondaq.com
4. http://www.icaindia.co