This case is a part of our Annual Arbitration Review 2017.
JUDGMENT NAME: HRD Corporation (Marcus Oil & Chemical Division vs. GAIL (India) Limited (formerly Gas Authority of India Ltd.)
CITATION: (2018) 12 SCC 471
COURT: SUPREME COURT OF INDIA
CORAM: ROHINTON FALI NARIMAN, and SANJAY KISHAN KAUL, JJ.
DATE: 31st AUGUST 2017
In a challenge to the eligibility and appointment of an arbitrator under Schedule 5 and 7 of the amended Arbitration and Conciliation Act, 1995 (the A&C Act), the Court dwelled into the changes brought about by the amendment. In the challenge under the Fifth Schedule, which is a challenge where grounds give rise to justifiable doubts as to the arbitrator’s independence or impartiality, it was found that such doubts are to be determined as a matter of fact in the facts of that challenge, under a Section 13 application otherwise, the arbitration continue till the stage of passing of award. On the challenge for disqualification under the Seventh Schedule, the Court heavily relied on the IBA Guidelines from which the Schedule was adopted, in determining whether the Items 1 and 16. Giving precedence to the intention of the Guidelines, the Court took a purposive approach to the language of the Items and determined that the arbitrators were not in conflict with their duties.
Whether an arbitrator, in tendering a professional opinion in an earlier unconnected matter to one of the parties to the present dispute, would be disqualified by Item 1 of the Seventh Schedule?
Whether an arbitrator may be disqualified under item 16 of the Seventh Schedule, for rendering an award between the same parties in an earlier arbitration concerning the same disputes?
Disputes arose between the parties due to wrongful acts by GAIL (“Respondents”) in the withholding of supplies of wax, as a result of which HRD Corporation (“Appellants”) invoked arbitration. The present matter before the court arose in one of the four arbitrations between the parties when the Appellants challenged the Presiding Arbitrator and the Respondent appointed arbitrator. The Appellants had appointed Justice K. Ramamoorthy who, before withdrawing and being replaced by Justice Mukul Mudgal, appointed Justice K.K. Lahoti, in consultation with Respondent appointed arbitrator, Justice Doabia. Two applications under Section 12 of the A&C Act were filed by the appellant seeking the termination of the mandates of Justice Doabia and Justice Mudgal, on the grounds that their appointment was hit by Schedule 5 and 7 of the A&C Act. The matter was heard by a single judge of Delhi High Court, who dismissed the petitions and the present appeal is a challenge to the same.
The relevance of this case majorly stems from the dichotomy created by the amendment to the A&C Act, where an arbitrator or their appointment may be challenged either on the ground of “ineligibility” or by the existence of “justifiable doubts as to independence or impartiality”. Ineligibility is still decidedly an easier matter to decide as it is a question answered by going to the root of the appointment. If hit by any of the categories under the Seventh Schedule, the arbitrator is simply ineligible and de jure unable to perform the functions required under law. In this situation, the Court must step in to determine the termination of the mandate. Since this case also looks at a challenge under the Fifth Schedule, which is a question of the existence of justifiable doubts, the facts of the case have to be scrutinised. However since the Appellants challenge under the Fifth Schedule failed before the Arbitral Tribunal, the same issue can only be raised after passing of the award. Thus the only questions left to answer are those of ineligibility.
A significant portion of the judgment is an analysis of the difference between the two schedules and the consequences of their breach. A crucial deciphering code was the IBA Guidelines on Conflicts of Interest in International Arbitration. Succinctly put by the Law Commission of India in its report, the Fifth Schedule was intended to contain a broader list of disclosures for the arbitrator, and this list drew from the IBA Guidelines Red and Orange Lists. The former list consists of non-waivable and waivable requirements of the arbitrator and deals with significantly more serious situations. Whereas, the Orange List, provides situations concerning the possibility of doubts concerning impartiality or independence.
The more relevant observations of the Court were raised with respect to the Law Commission Report, which not only highlighted features of the amendment such as the narrowed grounds of challenge to appointment of arbitrator in order to preserve independence, but also all in all the overall reduced the area for challenges available under Section 28 and 34. It was in the Voestalpine case where the Court emphasised the importance of the arbitrators’ independence. The Court rather than construing the two schedules in the most expansive manner possible, laid down a test where, if a third person having knowledge of the relevant facts and circumstance would reach the conclusion that there is a likelihood that the arbitrator may be influenced by factors other than the merits of the case, then in that case there would be justifiable doubts as to the independence and impartiality. Further, the Court also highlighted a common sense approach to be taken towards the interpretation and construction of the categories under the schedules.
Firstly, Item 1 of the Seventh Schedule would not apply, as since it deals with ‘business’ and not ‘professional’ relationships, a degree of regularity must exist between the parties with respect to that relationship. Thus Justice Lahoti’s professional opinion which he tendered to GAIL would not be hit by Item 1. As for Justice Doabia’s appointment, the Court held that the mere fact that he had already rendered an award in a previous arbitration between the parties, would not by itself raise a ground of reasonable likelihood of bias or render him ineligible to act. The Court broached the subject of the role of the arbitrator and in H. v. L & Others and emphasised that Judges (an analogy to arbitrators) are assumed to be trustworthy. It was categorically laid down in this case that a challenge couldn’t be sustained merely on the basis that an arbitrator had previously decided a particular issue in favour of another party. The Locabailcase, provided another hurdle to sustain such a challenge, in that whether the arbitrator may not have unconsciously leant in favour of either party and whether there is a real danger of such a result. The Court in light of the facts found that there was no real danger that justice Doabia would not bring an open mind; thus the challenge failed.
The underlying theme of this case can be seen in the Courts, reliance on the IBA Guidelines in determining the construction and interpretation of the Schedules. The Court took a pragmatic approach to arbitration law in relying on the IBA Guidelines and the general principles contained therein, i.e. (i) every arbitrator shall be impartial/independent at the time of his/her appointment; (ii) doubts with respect to the appointment are justifiable only if a third party would reach a conclusion that an arbitrator is likely to be influenced by factors other than the merits of the case. The principles of the IBA Guidelines point to a more fair rule of construction and the language of the present case displays a commonsensical and interpretive approach. The Court acknowledges that the growing realm of arbitrations needs to be matched with an equivalent number of well-equipped arbitrators, yet, parties cannot use every little instance to challenge the appointment of an arbitrator and needlessly delay arbitrations. Arbitrators performing quasi-judicial functions are still adjudicatory authorities discharging an official role, thus challenges to their appointment must follow a carefully crafted set of guidelines and the present case lays down the law in respect to challenges under Schedule 5 and 7.
 Law Commission Rep. No. 246, at 30-31 (2014)
 id. at 53-54
 Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665
 H. v. L & Others (2017) 1 W.L.R. 2280 at 2288-2289
 Locabail v. Bayfield, (2000) 1 AII E.R. 65