Arbitrator Appeared As Counsel For An ‘Affiliate Company’ Of The Claimant, Award Liable To Be Set Aside : Calcutta HC

The bench of Justice Rajshekhar Mantha held that Section 12(2) of the A&C Act cast a continuous duty on the arbitrator to remain neutral and continue to disclose to the parties any acts or omissions that are likely to fall foul of the mandate under Section 12, in the course of the Arbitration.

The Court further held that a disclosure by the arbitrator of his past association with a party under Section 12(1) does not mean that he shall continue with such associations during the pendency of the arbitration. It held that Section 12(2) essentially mean that the Arbitrator shall not, during the subsistence of the proceedings, continue such association and also give disclosure as and when any such associated is formed during the pendency of arbitration proceedings.

The Court also held that the definition of “affiliate”, under section 12 of the Act, encompasses all the companies including the parent company within its fold. It held that an individual or a group of persons, including a family, in control and management of a company, upon lifting of its corporate veil, can definitely qualify as an “affiliate”, within the meaning of the Explanation 2 to the Fifth and Seventh Schedules, read with Section 12 of the Act of 1996.

Facts

Certain disputes arose between the parties pursuant to which the petitioners (award debtor) filed a suit before the High Court. In the suit, the respondents (award holder) moved an application under Section 8 of the A&C Act. Accordingly, the Court relegated the parties to arbitration and the parties by consent appointed Mr. X, Senior Advocate, as the sole arbitrator.

In the first sitting of arbitration dated 10.08.2014, the ld. Arbitrator disclosed that he had in past represented the claimant (respondent/award holder herein) in various proceedings. The petitioners (award debtor/respondent before the tribunal) submitted that they had full faith in the independence of the tribunal.

The arbitrator held several sittings between 10.08.2014 and 9.12.2017. Thereafter, on 03.01.2019, the arbitrator informed the parties that he has prepared a draft award and the final award would be released soon. However, between June-July 2018, the arbitrator had appeared as an advocate before the Hon’ble High Court for an ‘affiliate company’ of the claimant and this fact was not disclosed by the arbitrator to the respondents.

Thereafter, the arbitrator requested the parties to for further hearings due to lapse of time and difficulty in recollecting the particulars of the dispute. Accordingly, several sittings took place and the impugned award was finally passed on 29.02.2020.

That vide the impugned award, the arbitrator had partly allowed the claims of the respondent. However, after the award was made, the petitioner became aware of the non-disclosure by the arbitrator of the fact of his appearance as an advocate for an ‘affiliate company’ of the claimant/award holder during the arbitration proceedings. Accordingly, it challenged the award under Section 34 of the A&C Act.

Contention of the Parties

The petitioner challenged the award on the following grounds:

• The claimant i.e., Bulaki Das Bhaiya, was in direct control of the affairs and management of the company for whom the arbitrator appeared as an advocate.
• The award is vitiated by fraud and hence in conflict with public policy and/or fundamental policy of India for non-disclosure and active concealment by the arbitrator of having represented the ‘affiliate company’ of the claimant.
• Non-disclosure by the arbitrator give rise to justifiable doubts, within the meaning of Section 12 (1), (2), and (5), as regards the independence and impartiality of the Learned Arbitrator, and hence the award is vitiated.
• Section 12(1)(a) requires the Arbitrator to disclose any past or present relationship with the parties in terms of section 12(2) of the Act and such obligation to disclose continues from the time of his appointment throughout the arbitral proceedings until the end.
• The arbitrator stood de jure ineligible to continue as arbitrator for violation of Section 12 r/w 5^th and 7^th schedule of the Act.

The respondent made the following counter-arguments:

• That the allegations of fraud and corruption have been made out without any particulars and hence no credence whatsoever should be given to the argument of the award debtors.
• Fraud must be established beyond reasonable doubt and the standard of proof is of a high degree, that has not been discharged by the award debtors
• The award debtors have not been able to prove or demonstrate that the award was induced and affected by alleged fraud or corruption. Ineligibility and bias do not amount to fraud.
• The consent given by the petitioner at the inception of the arbitration, pursuant to the disclosure by the Arbitrator amounts to waiver and consent to the Arbitrator’s subsequent and continuous association, representation, and appearance as the counsel for the companies of the claimant.
• Non-disclosure in the instant case therefore cannot ipso facto be deemed as wilful, deliberate, or fraudulent. There is no causal connection between non-disclosure and the result of the proceedings and hence the same does not amount to concealment.
• It is only section 12(2) that would apply to the facts of the case, along with the Fifth schedule. The Fifth schedule and section 12(2), do not specify the requirement of any continuous disclosure. The Arbitrator did not guarantee or undertake, at the time of initial disclosure, that he would not represent any of the respondents again. Hence, in the facts of the case invoking section 12(5) and the Seventh schedule, to automatically terminate the mandate of the Arbitrator, is therefore incorrect and unwarranted.
• The unavoidable and unintentional overlaps between the professional engagement of a Senior Advocate and his duties as an Arbitrator, cannot be a ground for allegation of bias or fraud against the Arbitrator.

Analysis by the Court

Firstly, the Court examined the issue whether the company for which the arbitrator had appeared were affiliate of the claimant. The Court observed that the claimant had overall Control and Management of the company. The Court held that family-controlled companies are commonplace in India. The control of the family is exercised either through direct shareholding of the family members or through other companies controlled by the same family or a member of the same.

The Court held that “Given that the definition of “affiliate”, under section 12 of the Act, encompasses all the companies including the parent company, this Court is hesitant to hold that M/s. SSSMIL is an affiliate of M/s. C&E Ltd. of the Bhaiya group, in the Arbitration. Mr. Ghosh’s argument, that an individual i.e. Bulaki Das Bhaiya in control and management of M/s. SSSMIL, does not qualify as an affiliate, cannot be accepted by this Court. The said Bulaki Das Bhaiya and his family members directly or indirectly do control and manage M/s. SSSMIL and M/s C&E Ltd. and the latter two companies function as per the wishes and dictates of Bulaki Das Bhaiya. This Court is, therefore, of the view that an individual or a group of persons, including a family, in control and management of a company, upon lifting of its corporate veil, can definitely qualify as an “affiliate”, within the meaning of the Explanation 2 to the Fifth and Seventh Schedules, read with Section 12 of the Act of 1996.”

Next, the Court examined the issue of non-disclosure by the arbitrator and its impact on the impugned award.

The Court observed that the arbitrator during the pendency of the arbitrator and without making any disclosures, appeared for the ‘affiliate’ of the claimant. The Court also observed that given the nature of the control exercised by the claimant over the ‘affiliate’ it is not unfathomable that the claimant would have been personally present during the meetings held in relation to the proceedings in which the arbitrator made appearance.

The Court Mantha held that Section 12(2) of the A&C Act cast a continuous duty on the arbitrator to remain neutral and continue to disclose to the parties any acts or omissions that are likely to fall foul of the mandate under Section 12, in the course of the Arbitration.

The Court further held that a disclosure by the arbitrator of his past association with a party under Section 12(1) does not mean that he shall continue with such associations during the pendency of the arbitration. It held that Section 12(2) essentially mean that the Arbitrator shall not, during the subsistence of the proceedings, continue such association and also give disclosure as and when any such associated is formed during the pendency of arbitration proceedings.

The Court observed that the conduct of an Arbitrator and his duty to disclose commences and continues from the time of appointment of the Arbitrator till the award is passed. It is a continuous obligation. Any act on the part of the Arbitrator, that would suggest a likelihood of bias would, in the most uncertain terms, lead to the termination of the mandate of the Arbitrator.

The Court observed that the arbitrator suppressed/failed to disclose such facts to the respondent and the it is a clear breach/infraction of the principle that ‘justice must not only be done but manifestly seem to have been done’.

Accordingly, the Court set aside the impugned award.

Case Title: Gopaldas Bagri v. C&E Ltd, AP 364 of 2020

Date: 27.07.2023

Counsel for the Petitioners: Mr. Nalin Kohli, Senior Adv. Mr. Sandip Agarwal, Adv. Mr. Abhishek Swaroop, Adv. Mr. Tanay Agarwal, Adv. Mr. Naman Kandar, Adv. Mr. Vasu Manchanda, Adv. Ms. Nimisha Menon, Adv. Ms. Surabhi Banerjee, Adv. Mr. Biswaroop Bhattacharya, Adv. Ms. Sulagna Mukherjee, Adv. Ms. Shristi Sharma, Adv.

Counsel for the Respondent: Mr. Dhruba Ghosh, Adv. Ms. Sananda Ganguly, Adv. Ms. Ajaya Choudhury, Adv. Mr. Soumyajit Ghosh, Adv. Mr. Rajarshi Dutta, Adv. Mr. Arindam Halder, Adv. Mr. Shubradip Roy, Adv.

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