That The Arbitrator Is An Employee Of A Party By Itself Is Not A Disqualification In Cases Before The Amendment Of 2015 [Read Judgment]

In Aravalli Power Company Ltd. v. Era Infra Engineering Ltd. , the Supreme Court had occasion to consider the impact of the 2015 amendment to Arbitration and Conciliation Act 1996 in proceedings initiated before the amendment came into force.

The respondent-company had taken a construction contract for a thermal power project from the appellant. When disputes arose, arbitration was resorted to, and the CEO of the appellant-company was appointed as the arbitrator, in terms of the arbitration clause.  It is pertinent to note that arbitration clause was invoked on 29.07.2015, and the CEO was appointed as arbitrator on 19.08.2015. The dates are relevant in that they are prior to the date when 2015 amendment to the 1996 Act was deemed to have oame into force, i.e 23.10.2015.

After participating in the arbitration, and seeking for extension of time for filing statement, the respondent raised objection to the mandate of arbitrator, for the first time on 12.01.2016.  Petition under Section 14 of the Act was filed by the respondent before the Delhi High Court, seeking termination of the mandate of the arbitrator on grounds of partiality and bias.  The High Court allowed the petition. The respondent had also invoked Section 11(6) of the Act, seeking appointment of  arbitrator by the Chief Justice of High Court, and the same was also allowed, directing the appellant to furnish a panel of three arbitrators.

In this context, it is worthwhile to note that the 2015 amendment inserted Fifth Schedule to the Act, which enumerated circumstances which give rise to justifiable doubts regarding the impartiality or independence of the arbitrator.  Entry No.1 of Fifth Schedule is “The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party”.  So, as per the 2015 amendment, the fact that the arbitrator is a CEO of the company is definitely a ground affecting independence and impartiality as per Fifth Schedule.

However, the arbitration in the instant case commenced before the 2015 amendment, and the Supreme Court did not invoke the provisions of 2015 amendment for that reason.  The Court held that in such cases, the fact that the arbitrator was an employee of any of the parties ipso fact is not a ground for disqualification. That was because the Court was bound to give full effect to the terms of the contract between the parties. However, a rider was added that the arbitrator should not be a person who was the controlling or dealing authority in regard to the subject contract or a direct subordinate to the officer whose decision is the subject-matter of the dispute.

The Court also added that there could not be any automatic invocation of Section 11(6) by the Chief Justice of High Court for appointment of an arbitrator, without establishing any of the following conditions :-

1. a party fails to act as required under the appointment procedure(Sec.11(6)(a); or


2. the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure(Sec.11(6)(b); or


3. a person, including an institution, fails to perform any function entrusted to him or it under the appointment procedure(Sec.11(6)(c)).

The conclusions of the Court were summarised as follows :-

A. In cases governed by 1996 Act as it stood before the Amendment Act came into force:-

• The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part. There can however be a justifiable apprehension about the independence or impartiality of an employee arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate to the officer whose decision is the subject-matter of the dispute.


• unless the cause of action for invoking jurisdiction under Clauses (a), (b) or (c) of sub-section (6) of Section 11 of 1996 Act arises, there is no question of the Chief Justice or his designate exercising power under sub-section (6) of Section 11.


• The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.


• While exercising such power under sub section (6) of Section 11, If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.

B. In cases governed by 1996 Act after the Amendment Act has come into force:-

If the arbitration clause finds foul with the amended provisions, the appointment of the Arbitrator even if apparently in conformity with the arbitration clause in the agreement, would be illegal and thus the Court would be within its powers to appoint such arbitrator(s) as may be permissible.

Read the Judgment Here