2017 (7) TMI 1288 - SC - Indian Laws

Managing Director loses power to nominate replacement arbitrator after becoming ineligible under Section 12(5)

The SC held that a Managing Director who becomes ineligible as an arbitrator by operation of law under Section 12(5) of the Arbitration and Conciliation ... Appointment of an arbitrator - Section 11(6) of the Arbitration and Conciliation Act, 1996 - power of Managing Director to nominate an arbitrator - HELD THAT:- In the case at hand we are neither concerned with the disclosure nor objectivity nor impartiality nor any such other circumstance. We are singularly concerned with the issue, whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator. At the cost of repetition, we may state that when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto. But, here is a case where the Managing Director is the “named sole arbitrator” and he has also been conferred with the power to nominate one who can be the arbitrator in his place. Thus, there is subtle distinction. 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. 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. The orders passed by the learned Single Judge are set aside and the matters are remitted to the High Court for fresh consideration - Appeal allowed. Issues Involved:1. Validity of the High Court's decision under Section 11(6) of the Arbitration and Conciliation Act, 1996.2. Ineligibility of the Managing Director to nominate an arbitrator after becoming ineligible by operation of law.3. Whether a plea of statutory disqualification of the nominated arbitrator can be raised before the court in an application under Section 11(6) of the Act.Issue-wise Detailed Analysis:1. Validity of the High Court's decision under Section 11(6) of the Arbitration and Conciliation Act, 1996:The Supreme Court scrutinized the High Court's decision, which had rejected the appellant's contention that the Managing Director, once ineligible, could not nominate an arbitrator. The High Court had held that the amended Act did not remove the right of a party to nominate a sole arbitrator. However, the Supreme Court found that the High Court failed to consider the statutory disqualification under Section 12(5) of the Act, which explicitly renders the Managing Director ineligible to act as an arbitrator or to nominate one. The Supreme Court emphasized that the statutory disqualification of the Managing Director nullifies his power to nominate an arbitrator.2. Ineligibility of the Managing Director to nominate an arbitrator after becoming ineligible by operation of law:The Supreme Court analyzed Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015, which states that any person whose relationship with the parties or the subject matter of dispute falls under any category specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator. The Court concluded that once the Managing Director becomes ineligible, he loses the authority to nominate an arbitrator. The Court cited the principle 'Qui Facit Per Alium Facit Per Se' (What one does through another is done by oneself) to support the argument that an ineligible person cannot delegate a power they no longer possess.3. Whether a plea of statutory disqualification of the nominated arbitrator can be raised before the court in an application under Section 11(6) of the Act:The Supreme Court addressed the contention that the issue of an arbitrator's disqualification should be raised before the arbitral tribunal. The Court referred to various precedents, including Walter Bau AG and Deep Trading Company, to establish that the Designated Judge has the jurisdiction to decide on the disqualification of an arbitrator at the initial stage. The Court held that the statutory disqualification under Section 12(5) is a fundamental issue that goes to the root of the appointment process and can be addressed by the court under Section 11(6) of the Act.Conclusion:The Supreme Court set aside the High Court's order, ruling that the Managing Director, being ineligible under Section 12(5), could not nominate an arbitrator. The matter was remanded to the High Court for fresh consideration of the appointment of an arbitrator, independent of the invalid nomination by the Managing Director. The Court emphasized that the arbitration clause survives, and the High Court should appoint an arbitrator considering all aspects.