Difference between Fifth Schedule and Seventh Schedule of A&C Act, 1996? Supreme Court answers

Factual Background

GAIL India Ltd. (Respondents) entered a long-term contract with HRD Corporation (Appellants) for the supply of wax which was produced at GAIL’s plant in Uttar Pradesh. The appellant contended that GAIL had wrongfully withheld supplies of wax and therefore invoked the arbitration clause in the agreement. Three arbitrations had already taken place and the dispute is relating to the fourth arbitration.

In the fourth arbitration, the appellants and the respondents appointed Justice K. Ramamoorthy and Justice Doabia as arbitrators respectively. The two arbitrators appointed Justice KK Lahoti as the presiding arbitrator. Justice Ramamoorthy later withdrew from the case and Justice Mukul Mudgal was appointed in his place.

The appellants challenged the appointments of Justice Doabia, contending that since Justice Doabia had previously rendered an award on another dispute between the two parties, he should be removed as an arbitrator. Justice Lahoti’s appointment was also challenged as he had been an advisor to GAIL in an unrelated issue. Two applications under Section 12 challenging these two appointments were filed before the Arbitral Tribunal. Justices Doabia and Lahoti stated that they were entitled to continue with the arbitration. Justice Mudgal stated that Justice Doabia’s mandate has been terminated while there was no problem with Justice Lahoti’s appointment.

An appeal against the order of the Tribunal was filed before a single Judge of the Delhi High Court, who then dismissed both petitions. An appeal was filed before the Supreme Court.

Issues

Whether Justice Lahoti should be removed as an arbitrator under Items 1, 8 & 15 of the Seventh Schedule of the Arbitration & Conciliation Act?

Whether Justice Doabia should be removed as an arbitrator under Items 1, 15 & 16 of the Seventh Schedule of the Arbitration & Conciliation Act?

Appellant’s Position

Appellants argued that “Justice Doabia was ineligible as he squarely fell within Items 1, 15 and 16 of the Seventh Schedule, the last Item 16 being contrasted with Explanation 3 thereof. […] Justice Doabia has not disclosed in writing circumstances which are likely to affect his ability to devote sufficient time to the arbitration and for this reason also, his appointment should be set aside.” The appointment of Justice Lahoti was challenged under Items 1,8, and 15 of the Seventh Schedule along with Items 20 & 22 of the Fifth Schedule. However, the main contention of the appellants was that since Justice Doabia was ineligible to be an arbitrator in this case, Justice Lahoti’s appointment is bad in the eyes of the law.

Respondent’s Position

Respondents argued that neither Justice Doabia nor Justice Lahoti are ineligible to act as arbitrators. They argued that the Fifth and Seventh Schedules should be read in consonance with the International Bar Association Guidelines on Conflicts of Interest in International Arbitration, 2014 (hereinafter IBA Guidelines). The list in the fifth and seventh schedules is taken from the IBA Guidelines. The respondents contrasted Item 16 with Items 22 and 24 of the Seventh Schedule to prove that Justice Doabia can be an arbitrator despite his association with a previous dispute between both parties. The Respondents stated that non-disclosure to devote sufficient time on the part of Justice Doabia was not raised before the Arbitral Tribunal and cannot be raised now before the Supreme Court.

Decision & Reasoning

The Supreme Court dismissed challenges to the appointment of Justice Doabia and Justice Lahoti. The Court highlighted the distinction between the Fifth and Seventh Schedules of the Act after the 2016 Amendment. A Fifth Schedule challenge raises doubt about the independence and impartiality of the Arbitrator. The Court stated that a challenge under the Fifth Schedule can be made only after the Arbitral Tribunal has given an award. It is only after such an award has been rendered 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.” Since in this case, the Arbitral Tribunal has not given an award, Fifth Schedule challenges cannot be delved into by the Court.

A Seventh Schedule challenge, on the other hand, relates to the ineligibility of the arbitrator. Once an arbitrator becomes ineligible, under Section 14(1)(a) of the Act he becomes de jure unable to perform his functions. To determine this, one does not need to go to the Arbitral Tribunal under Section 13 since the arbitrator lacks inherent jurisdiction to proceed any further. An application under Section 14(2) of the Act might be filed before the Court to decide on the Termination of the arbitrator’s mandate under the Seventh Schedule.

The challenge to Justice Lahoti’s appointment failed on all three grounds. The Court stated that Item 1 of the Seventh Schedule deals with ineligibility due to business relationships. Business relationships would include commercial relationships of any kind but do not include legal advisors or any other professional relationships. To attract ineligibility for providing legal advice, the advice should be regular in nature (Item 8) and it should be relevant to the dispute at hand” (Item 15). Justice Lahoti had given a professional opinion to GAIL which had no concern for the present dispute at hand. Furthermore, the opinion was isolated and not regular in nature.

The challenge to Justice Doabia’s appointment was also dismissed. Under Item 16, “Relationship of the Arbitrator to the Dispute”, it has to be shown that the arbitrator had previous involvement in the dispute contained in the present arbitration. Furthermore, this involvement must be in an advisory capacity and not as an arbitrator. Since Justice Doabia was not involved in the current dispute in an advisory capacity, the challenge under Item 16 was dismissed. The challenge under Item 1 was dismissed as an appointment as an arbitrator is not a business relationship. Similarly, the delivery of an arbitral award is not an expert opinion or advice to a party covered by Item 15 and was hence dismissed.

The Court stated that Justice Doabia is not disqualified by the fact that he had rendered an award in a previous arbitration on a different issue between the two parties.  If an arbitrator has given an award in a previous arbitration on a different issue between the same parties, it has to be shown that “he will not bring an open mind and objective judgment to bear on the arguments” in the current arbitration.

Non-disclosure to devote sufficient time on the part of Justice Doabia was not raised before the Arbitral Tribunal and cannot be raised now before the Supreme Court. Hence, this challenge was also dismissed by the Supreme Court.

Author(s)