Provisions Of Section 12(5) R/W 7th Schedule Of The A&C Act Also Apply To Institutional Arbitrations: Bombay High Court

The bench of Justice Bharati Dangre held that rules of an arbitral institution cannot override the provisions of the A&C Act. It held that even if parties agree to institutional arbitration, it does not exclude the Court's power to decide on the termination of an arbitrator's mandate if a controversy arises regarding the grounds mentioned in Section 14(1)(a).

Facts

The parties entered into three sale contracts in September 2022 for the supply of US coal. In terms of the agreements, the petitioner deposited earnest money. The agreements provided for resolution of disputes through arbitration to be conducted under the aegis of respondent no. 2 - Mumbai Centre for International Arbitration (MCIA).

Disputes arose when respondent no. 1 (Aditya Birla Global Trading) allegedly violated the contracts by failing to provide Load Port Reports (LPRs) for quality determination and directing petitioner to take delivery without proper assessment. Petitioner refused to lift the coal, prompting respondent no.1 to threaten selling it to third parties.

Despite petitioner's objections and requests for EMD release, respondent no.1 sold the coal to third parties, claiming losses exceeding the EMD. Thereafter, the petitioner sought refund of its EMD, however, the respondent no.1 issued a legal notice claiming damages and consequently invoked arbitration.

Respondent no.2 appointed Ms. Ila Kapoor (respondent no.3) as the sole arbitrator. The petitioner raised a challenge to her appointment under MCIA Rule 10 on the ground that the law firm in which she is a partner has, on numerous occasions, acted as legal advisors to respondent no.1, ergo, her appointment is hit by Section 12(5) r/w 7^th Schedule to the Act.

The challenge was dismissed the by MCIA council and the arbitrator was directed to continue with the proceedings. Aggrieved thereby, the petitioner challenged her appointment under Section 14 of the A&C Act before the Bombay High Court.

Contention of the Parties

The respondent objected to the maintainability of the petition on the following grounds:

• That the parties agreed to resolve disputes through arbitration according to the MCIA Rules, which are comprehensive and align with global standards of arbitration.
• that since the parties agreed to be governed by the MCIA Rules, any objection to the arbitration process, including the nomination of the arbitrator, must only be decided as per MCIA rules and not otherwise.
• That the petition under Section 14 of the Act would not be maintainable because the parties agreed to the MCIA procedures, which specify that the decision of the MCIA Council is final and binding, thereby, constituting a contrary agreement as provided under Section 14(2) of the Act.

The petitioner made the following counter-submissions:

• That if the appointed arbitrator is de jure ineligible due to circumstances outlined in the Seventh Schedule of the Act, their mandate automatically terminates.
• that any agreement between the parties to contract out of Section 14(2) to approach the court cannot include a challenge based on Seventh Schedule circumstances, which are a strict disqualification for the arbitrator.
• That MCIA, being a private arbitral institution, does not fall under the definition of an 'arbitral institution' as defined in the Arbitration and Conciliation Act (Amendment) Act, 2019. Therefore, any inconsistency between MCIA Rules and the Act should be resolved in favor of the Act.
• That an award by an ineligible arbitrator is a nullity and cannot be enforced, and party autonomy cannot excuse such illegality.

Analysis by the Court

The Court observed that under the A&C Act parties are free to agree on a procedure for appointing arbitrators. The Act requires disclosure of any circumstances that might affect an arbitrator's independence or impartiality. This applies equally to institutional arbitration.

The Court held that even if parties agree to institutional arbitration, it does not exclude the Court's power to decide on the termination of an arbitrator's mandate if a controversy arises regarding the grounds mentioned in Section 14(1)(a).

It held that merely because the challenge to arbitrator's appointment has been dismissed by the arbitral institution in accordance with its rules, it cannot preclude the jurisdiction of the Court under Section 14 of the A&C Act on grounds falling under the 7^th Schedule.

The Court observed that he nominated arbitrator, an equity partner at Shardul Amarchand Mangaldas & Co., had a significant commercial relationship with one of the respondent no.1. This relationship was found to be in violation of Clause 7 of the Seventh Schedule of the A&C Act, which states that an arbitrator's law firm currently having a significant commercial relationship with one of the parties or an affiliate of one of the parties renders the arbitrator ineligible to act as an arbitrator.

The Court observed that despite the petitioner's objection, the MCIA Council rejected the challenge to the arbitrator's appointment without thorough examination, which the Court deemed perfunctory. Therefore, to ensure fairness and impartiality in the arbitration proceedings, the Court directed the MCIA to substitute the arbitrator with an independent one.

Case Title: Era International v. Aditya Birla Global Trading India Pvt. Ltd, Commercial Arbitration Petition (L) No. 27638 of 2023

Date: 26.02.2024

Counsel for the Petitioner: Mr. Rahul Totala with Mr.Manish Priyadarshi with Mr.Naman Maheshwari, Ms.Vidisha Rohira and Ms.Apeksha Agarwal i/b Ashwin Poojari

Counsel for the Respondents: Mr.Rushabh Sheth with Mr.Sayeed Mulani and Ms.Akshata Kadam and Ms.Ria Goradia i/b Mulani & Co. for respondent no.1. Mr.Vikram Nankani, Sr. Advocate with Mr.Sumeer Nankani, Anuja, Ms.Neha Bhosale, Ms.Laveena Tejwania and Mr.Divadkar i/b NDB Law for respondent no.2.

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