TRF Ltd. v. Energo Engineering Projects Ltd.
Supreme Court of India · 3 July 2017 · 3 judges
A Managing Director who has become ineligible under Section 12(5) of the Arbitration Act read with the Seventh Schedule to act as arbitrator cannot nominate another person as sole arbitrator.
Facts
On 10 May 2014 the respondent issued a purchase order to the appellant for the design, supply, erection and commissioning of bulk material handling equipment. After disputes arose, the appellant invoked arbitration under Clause 33 of the general terms of the purchase order on 28.12.2015 and objected to the agreed appointment procedure. Under Clause 33(d), which referred disputes to the sole arbitration of the respondent's Managing Director or his nominee, the respondent nominated a former Judge of the Supreme Court as sole arbitrator on 27.1.2016. The appellant applied under Section 11(5) and 11(6), contending that after the 2015 amendment the Managing Director was ineligible under Section 12(5) and the Seventh Schedule and so could not nominate. The High Court rejected this and appointed the nominated former Judge as sole arbitrator.
Questions before the Court
- Whether a Managing Director who is ineligible by operation of Section 12(5) and the Seventh Schedule to act as arbitrator can nominate another person as the sole arbitrator.
- Whether the statutory disqualification of the nominated arbitrator can be raised in an application under Section 11(6) of the Act.
What the Court held
- By Section 12(5) read with the Seventh Schedule, the Managing Director of the respondent became ineligible by operation of law to act as arbitrator.
- Once the named sole arbitrator is ineligible by law, he cannot nominate another as arbitrator. With his identity as arbitrator lost, his power to nominate is also gone, whatever the respectability of the nominee or any disclosure made.
- The Chief Justice or designated Judge acting under Section 11 may examine, at the initial stage, his own jurisdiction, the conditions for exercise of the power and the disqualification of the arbitrator. The High Court's appointment of the nominee was set aside.
- As Clause 33(c), the general arbitration clause, is independent of Clause 33(d), the arbitration agreement survives, and the matter was remitted to the High Court to appoint an arbitrator afresh.
Why it matters
The judgment applies the Seventh Schedule, inserted by the 2015 amendment, to hold that the ineligibility of a named arbitrator extends to his power to nominate: a person who is statutorily ineligible cannot nominate another as arbitrator. The Court distinguished clauses under which each party appoints its own arbitrator, where the authority to nominate is not questioned, from a clause making the ineligible person both the sole arbitrator and the nominating authority.
In the Court's words
Copied from the official judgment; each passage links to its page.
“First, we shall deal with Clause (d). There is no quarrel that by virtue of Section 12(5) of the Act, if any person who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as the arbitrator. There is no doubt and cannot be, for the language employed in the Seventh Schedule, the Managing Director of the Corporation has become ineligible by operation of law.”
“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. 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 purpose of referring to these two judgments is that apart from the fact that the Designated Judge can, at the initial stage, adjudicate upon his jurisdiction, he is also entitled to scrutinize the existence of the condition precedent for the exercise of his power and also the disqualification of the arbitrator or arbitrators.”
Provisions interpreted
Related judgments
Case and bench
- Parties
- TRF Ltd. v. Energo Engineering Projects Ltd.
- Case
- Civil Appeal No. 5306 of 2017
- Decided
- 3 July 2017
- Bench
- Dipak Misra, A.M. Khanwilkar, Mohan M. Shantanagoudar
- Opinions
- Unanimous. Judgment delivered by Dipak Misra J. for the Bench.
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