Underscoring the derogable provisions of the Arbitration & Conciliation Act, 1996

Indian courts have a reputation for plummeting in the wrong direction while deciding between interference and non-interference in arbitration proceedings. Although for the better half of the last five years, Indian courts have attempted to improve upon this reputation, there is no denying that it has continued to take a zig-zag, crab-like course.

One such judgment, which in the authors’ opinion has again plummeted in the wrong direction of the equation, is Era International v. Aditya Birla Global Trading Pvt Ltd as decided by the Bombay High Court. The Court in this case exercised its jurisdiction under Section 14 of the Arbitration and Conciliation Act, 1996 to remove an arbitrator appointed by an arbitral institution.

The decision assumes significance since parties may be concerned regarding the extent of the court’s intervention despite having chosen institutional rules to govern the procedure of the arbitration, which ultimately would impact the decision to choose India as their seat of arbitration. Therefore, the pertinent question arises:

Whether the 1996 Act supersedes the arbitral rules expressly chosen by the parties?

Aditya Birla Global Trading vide a letter to Era International, relying on an arbitration clause in the contract between the parties, sought for the appointment of an arbitrator by the and Mumbai Centre for International Arbitration (MCIA). Accordingly, MCIA appointed a partner of a law firm as the sole arbitrator. However, Era requested the arbitrator not to enter upon the reference on the ground that the arbitrator’s law firm had previously represented the group companies of Aditya Birla on several occasions and thus there was a possibility of the arbitration not being conducted fairly and impartially. Despite Era’s objections, MCIA continued with the appointment of the arbitrator. Consequently, Era filed an application formally challenging the arbitrator.

The arbitrator in terms of Rule 10 of the MCIA Rules, 2017 forwarded Era’s application along with Aditya Birla’s reply to the MCIA Council, which dismissed the challenge. Aggrieved by this decision, Era applied to the High Court under Section 14 of the 1996 Act for the termination of the mandate of the arbitrator as well as appointment of an independent arbitrator under Section 11 of the 1996 Act.

The High Court rejected the challenge to the maintainability of the Section 14 application and held that the parties’ choice of referring their dispute to the MCIA or mere participation will not by itself exclude the applicability of Section 14(2) and shall not denude the court of its power. Specifically, the High Court held that “by no stretch of imagination, the words used in subsection (2) of Section 14 ‘unless otherwise agreed by the parties’ would amount to surrender of his remedy in favour of the MCIA Council.” It relied upon the Supreme Court’s decisions in Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd v. Ajay Sales & Suppliers and Bharat Broadband Network Ltd v. United Telecoms Ltd. to hold that an application under Section 14 was maintainable when an arbitrator’s appointment was challenged under Section 12(5) read with the Seventh Schedule of the 1996 Act. Further, it held that institutional arbitration shall not deviate and would still be governed by the provisions of the 1996 Act. Therefore, the High Court held that such interference was justified.

It is important to highlight that the doctrine of party autonomy and Section 19(2) of the 1996 Act expressly allows the parties to choose their own procedure. It is also pertinent to remember that the national law (lex arbitri) only provides for default rules, which are to be followed in the absence of specific rules chosen by the parties. Therefore, if the parties have expressly chosen institutional rules to govern the procedure of their arbitration, then the parties contract out of the derogable provisions, whilst still being bound by the mandatory provisions contained in the national law.

Against this backdrop, it is important to consider that the parties had expressly chosen the MCIA Rules to govern the procedure of arbitration, including any challenge to the appointment of the arbitrator when it becomes de jure ineligible to fulfil the functions. Resultantly, the parties have contracted out of the derogable provisions of the 1996 Act. In such situations, as opposed to the tribunal making the decision in ad-hoc arbitration, in arbitration governed by the MCIA, the decision on such challenge is made by the MCIA Council.

Even if it is contended that Section 12(5) read with the Seventh Schedule is mandatory law, one still must consider that Section 14 of the 1996 Act is a derogable provision and not mandatory. The BHC has rightly recognised that Section 14(1)(a) is attracted when an arbitrator’s appointment is hit by Section 12(5) of the 1996 Act since the arbitrator becomes de jure ineligible to act.

However, in the humble opinion of the authors, the High Court failed to consider the following:

(a) The legislative intent behind the wording of Section 14

A juxtaposition of Article 14(1) of the UNCITRAL Model Law, from where the Indian legislature had framed Section 14(2) of the 1996 Act, would conspicuously show that it was the intention of the legislature to have a derogable provision by adopting the specific phrase ‘unless otherwise agreed upon the parties’.

This intention of the legislature has been highlighted in a recent judgment passed by a Constitution Bench of the Supreme Court in Central Organisation of Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company wherein it was held,

“The Arbitration Act has given pre-eminence to party autonomy throughout the arbitral process. The Arbitration Act has used phrases such as “unless otherwise agreed by the parties”...to recognise the autonomy of parties to determine the arbitral proceedings. The use of the above phrases also indicates that an arbitrator is bound by the procedures agreed upon between the parties.”

If observed in this context, the High Court's decision that the expression “‘unless otherwise agreed by the parties’ does not amount to surrender of this remedy in favour of the MCIA Council” appears to render the legislative intent of including the expression to be otiose. There is a plethora of decisions passed by the Supreme Court which hold that an interpretation which renders an expression to be otiose should be avoided. Therefore, the interpretation of Section 14(2) by the High Court would be impermissible.

(b) Jaipur Zilla and Bharat Broadband are factually distinguishable

These decisions advanced the proposition that if an arbitrator was ineligible under Section 12(5) read with the Seventh Schedule, then parties could directly challenge the appointment of the arbitrator under Section 14(2) on the ground listed in Section 14(1) of the 1996 Act. However, these decisions involved ad hoc arbitration which were carried out under the default rules contained in the 1996 Act. Consequently, the approach would be different if arbitration was carried out under institutional rules expressly chosen by the parties, which contain necessary provisions and procedures for the removal of an arbitrator. Thus, the authors opine that the High Court should not have relied upon these decisions in the present circumstance.

India is seeking to build its reputation as a favoured destination for arbitration. However, to achieve that goal, it is important that the legislature adopts a pro-arbitration policy, and the courts restrict intervention in circumstances not permitted by the 1996 Act. Although the Bombay High Court may have rightly held that there was a justifiable doubt as to the arbitrator’s impartiality and independence, its intervention at this stage may be cause for concern for international parties to choose India as their preferred seat for arbitration.

Shantanu Lakhotia is an advocate handling cases across India. Anuraag Mitra is a trainee lawyer at Obeid & Partners.

The views expressed in this article are personal and do not represent the views of the firms the authors are associated with.