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2023 DIGILAW 2611 (PNJ)

New India Assurance Co. Ltd. v. UHBVNL

2023-08-29

GURVINDER SINGH GILL

body2023
JUDGMENT Mr. Gurvinder Singh Gill, J. The instant civil revision under Article 227 of the Constitution of India has been preferred by the petitioner assailing the validity of the entire arbitration proceedings being carried out by the sole Arbitrator (respondent No. 2), appointed by respondent No. 1. 2. The petitioner - New India Assurance Company Limited had insured respondent No. 1 in respect of the stocks lying in their workshops in various districts including combustible articles like transformers, oils etc. by way of 'Fire Declaration Policy' (Annexure P-1), as per which respondent No. 1 was insured for the period 18.7.2014 to 17.7.2015 for a sum of Rs.21,54,00,000/-. A fire spread in one of the Warehouses on 3.5.2015 leading to damage of stocks including transformers etc. A Surveyor was appointed on the same day who conducted survey on 4.5.2015 at the insured premises and submitted his report assessing the loss on 22.3.2016 (Annexure P-2), as per which the loss was assessed as Rs. 28,62,476/-. However, as per respondent no. 1, the loss was to the tune of more than Rs. 1.57 crores. 3. A dispute having arisen, the Chairman-cum-Managing Director, UHBVNL appointed Shri K.L. Khatri, Chief Engineer (Retired) as sole Arbitrator and conveyed the same to the Insurance Company vide letter dated 10.4.2017. Another letter dated 18.5.2017 (Annexure P-4) was written by respondent no. 1 - UHBVNL addressed to the Arbitrator wherein the Arbitrator was advised not to accept/acknowledge appointment of an Arbitrator by the Insurance Company and he (Sh. K.L.Khatri) was requested to start the arbitration proceedings with a copy to the Insurance Company whereby the Arbitrator was directed to start the arbitration proceedings. 4. In response to letter dated 18.5.2017 (Annexure P-4), the Insurance Company sent a letter through e-mail dated 19.5.2017 (Annexure P-5) to respondent no. 1 stating therein that the appointment of a sole Arbitrator was not acceptable to them and that the proceedings, if any, conducted by the sole Arbitrator shall be null and void. 5. The learned counsel for the petitioner submitted that the entire proceedings being conducted by the sole Arbitrator appointed by the Managing Director of respondent no. 1 stating therein that the appointment of a sole Arbitrator was not acceptable to them and that the proceedings, if any, conducted by the sole Arbitrator shall be null and void. 5. The learned counsel for the petitioner submitted that the entire proceedings being conducted by the sole Arbitrator appointed by the Managing Director of respondent no. 1 - UHBVNL are null and void and against the spirit of arbitration and that the unilateral appointment of an Arbitrator also militates against the ratio of judgement of Hon'ble the Supreme Court in Perkins Eastman Architects DPC and another v. HSCC (India) Limited, (2020)20 SCC 760 , wherein it has been held that in case a sole Arbitrator is appointed by a person, who himself has an interest in the outcome of the arbitration proceedings, such appointment could have element of bias. 6. It has further been submitted that as per Clause 13 of the 'Standard Fires and Special Perils Policy' annexed with the Insurance Policy (Annexure P-1), the sole Arbitrator can be appointed only by consent of both the parties and in case there is no consensus then both the parties would appoint their own Arbitrator and such Arbitrator would, thereafter, nominate a third Arbitrator and thus, the arbitration was to be conducted by a Three Member Tribunal of Arbitrators. The learned counsel in order to hammer forth his aforesaid submissions regarding unilateral appointment having been deprecated by Hon'ble Supreme Court, has pressed into service Perkins Eastman's case (supra). 7. On the other hand, the learned counsel representing respondent No.1- UHBVNL submitted that the instant petition which has been filed under Article 227 of the Constitution of India would not be maintainable so as to challenge the proceedings being conducted by an Arbitrator inasmuch as an Arbitrator or an Arbitration Tribunal would not qualify to be called as 'Court' or 'Tribunal' so as to invoke the superintending powers of the High Court. 8. This Court has considered the submissions addressed before this Court. 9. Having heard learned counsel for both the sides, it is necessary to first set out the statutory scheme contained in Sections 12 to 14 of the Act. 8. This Court has considered the submissions addressed before this Court. 9. Having heard learned counsel for both the sides, it is necessary to first set out the statutory scheme contained in Sections 12 to 14 of the Act. These Sections read as under:- "Sec. 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 or 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. Explanation 1.- The grounds 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. Explanation 2. - 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, or (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 disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing. Sec. 13 Challenge procedure.- (1) Subject to sub-section (4), the parties are free to agree on a procedure for challenging an arbitrator. (2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in subsection (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal. (3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge. (4) If a challenge under any procedure agreed upon by the parties or tinder the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award. (5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34. (6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees. Sec. 14. Failure or impossibility to act. - (1) The mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, if (a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and (b) he withdraws from his office or the parties agree to the termination of his mandate. (2) If a controversy remains concerning any of the grounds referred to in clause (a) of subsection (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate. (3) If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12." 10. (3) If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12." 10. As per Section 12 of the Act, a person, when approached in connection with his possible appointment as an arbitrator, has to make a disclosure in writing, as regards the existence of any relationship or interest in any of the parties or in relation to the subject matter in dispute, which is likely to give justifiable doubts as to his independence or impartiality. Section 13 of the Act provides for procedure to challenge to Arbitral Tribunal. Section 14 of the Act enlists the circumstances under which mandate of an arbitrator shall stand terminated. Schedule (V) to the Act delineates, in context of section 12(a) of the Act the situation which could give rise to "justifiable doubts as to the independence or impartiality of arbitrators". Schedule (VII) to the Act enumerates, in context of Section 12(5) of the Act, the conditions which would render an arbitrator ineligible for appointment as such. 11. It is apposite to refer to a few expositions on the subject by Supreme Court in context of ineligibility of an arbitrator. The observations made in M/s TRF Limited v. Energo Engineering Project Ltd. AIR 2017 SC 3889 are as under: "57. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so." 12. Hon'ble Apex Court, in HRD Corporation v. GAIL (India) Limited (formerly Gas Authority of India Ltd.), (2018) 12 SCC 471 , held as under: "13. After the 2016 Amendment Act, a dichotomy is made by the Act between persons who become "ineligible" to be appointed as arbitrators, and persons about whom justifiable doubts exist as to their independence or impartiality. Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes "ineligible" to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as "ineligible". In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground. As opposed to this, in a challenge where grounds stated in the Fifth Schedule are disclosed, which give rise to justifiable doubts as to the arbitrator's independence or impartiality, such doubts as to independence or impartiality have to be determined as a matter of fact in the facts of the particular challenge by the Arbitral Tribunal under Section 13. If a challenge is not successful, and the Arbitral Tribunal decides that there are no justifiable doubts as to the independence or impartiality of the arbitrator/arbitrators, the Tribunal must then continue the arbitral proceedings under Section 13(4) and make an award. If a challenge is not successful, and the Arbitral Tribunal decides that there are no justifiable doubts as to the independence or impartiality of the arbitrator/arbitrators, the Tribunal must then continue the arbitral proceedings under Section 13(4) and make an award. It is only after such award is made, that the party challenging the arbitrator's appointment on grounds contained in the Fifth Schedule may make an application for setting aside the arbitral award in accordance with Section 34 on the aforesaid grounds. It is clear, therefore, that any challenge contained in the Fifth Schedule against the appointment of Justice Doabia and Justice Lahoti cannot be gone into at this stage, but will be gone into only after the Arbitral Tribunal has given an award. Therefore, we express no opinion on items contained in the Fifth Schedule under which the appellant may challenge the appointment of either arbitrator. They will be free to do so only after an award is rendered by the Tribunal." 13. Hon'ble Supreme Court in Bharat Broadband Network v. United Telecoms Limited, (2019) 5 SCC 755 , held as follows: "14.From a conspectus of the above decisions, it is clear that Section 12(1), as substituted by the Arbitration and Conciliation (Amendment) Act, 2015 ["Amendment Act, 2015"], makes it clear that when a person is approached in connection with his possible appointment as an arbitrator, it is his duty to disclose in writing any circumstances which are likely to give rise to justifiable doubts as to his independence or impartiality. The disclosure is to be made in the form specified in the Sixth Schedule, and the grounds stated in the Fifth Schedule are to serve as a guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Once this is done, the appointment of the arbitrator may be challenged on the ground that justifiable doubts have arisen under sub-section (3) of Section 12 subject to the caveat entered by subsection (4) of Section 12. The challenge procedure is then set out in Section 13, together with the time limit laid down in Section 13(2). What is important to note is that the arbitral tribunal must first decide on the said challenge, and if it is not successful, the tribunal shall continue the proceedings and make an award. The challenge procedure is then set out in Section 13, together with the time limit laid down in Section 13(2). What is important to note is that the arbitral tribunal must first decide on the said challenge, and if it is not successful, the tribunal shall continue the proceedings and make an award. It is only post award that the party challenging the appointment of an arbitrator may make an application for setting aside such an award in accordance with Section 34 of the Act." 14. Their Lordships of Hon'ble Supreme Court, while dealing with issue of validity of arbitrator unilaterally appointed, in Perkins Eastman Architects DPC and Anr. v. HSCC (India) Ltd., (2020)20 SCC 760 , and while referring to the judgements rendered by Supreme Court in M/s TRF Limited v. Energo Engineering Project Ltd. AIR 2017 SC 3889 ; HRD Corporation v. GAIL (India) Limited (formerly Gas Authority of India Ltd.), (2018) 12 SCC 471 ; Bharat Broadband Network v. United Telecoms Limited, (2019) 5 SCC 755 held as under: "20. We thus have two categories of cases. The first, similar to the one dealt with in TRF Limited where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Limited, all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an Arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an Arbitrator. 21. But, in our view that has to be the logical deduction from TRF Limited. Paragraph 50 of the decision shows that this Court was concerned with the issue, "whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator" The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited." 15. It was, thus, underlined that an arbitration clause which gives a complete discretion to the Chairman and Managing Director to make the appointment of an Arbitrator of his choice, would result in appointment of an arbitrator by a person who himself would be interested in the outcome of the decision in respect of the dispute. In other words the independence of arbitrator would be compromised and such arbitrator would be ineligible to be appointed as such. 16. Examining the facts of the present case, it is found that although the petitioner had raised his objection against appointment of the arbitrator to the respondent but no formal application either under section 12 or section 14 of the Act was filed. It has been held by the Supreme Court in the case of HRD Corporation (supra) that proper proceedings to adjudicate upon alleged disqualification under the Seventh Schedule would be an application under Section 14 of the Act which lies before the District Court. Thus, even in the present case, the appropriate remedy could be an application under Section 14 of the Act. The scheme of the Act, as noticed in preceding paragraphs, and as interpreted by Hon'ble Supreme Court, leave no manner of doubt that a party aggrieved by appointment of Arbitrator, particularly as regards his eligibility does have a remedy to rake up the said issue by moving appropriate application in terms of Sections 12, 13 and 14 of the Act. The supervisory powers under Section 227 of Constitution of India can not be availed of to set aside appointment of an Arbitrator when statute itself provides for a remedy. It is could only be under exceptional circumstances where a party is left remediless that Article 227 could be invoked. The supervisory powers under Section 227 of Constitution of India can not be availed of to set aside appointment of an Arbitrator when statute itself provides for a remedy. It is could only be under exceptional circumstances where a party is left remediless that Article 227 could be invoked. Under these circumstances, the instant petition can not be held to be maintainable for the purpose sought to be served. The petition, as such is dismissed.