A

Project Work

On

GROUNDS FOR CHALLENGE OF ARBITRAL PROCEEDING

Submitted to:

Mr. Sandeep K.Suman

(Faculty of Arbitration and Dispute Resolution)

By:

Neelam Thakur

Roll no:-88

Semester-VI- C

Date of Submission: 15thFebruary 2017

Hidayatullah National Law University

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 Declaration

I, Neelam Thakur, hereby declare that, the project work entitled, ‘Grounds For challenge of
arbitral proceeding’ submitted to H.N.L.U., Raipur is record of an original work done by me.

Neelam Thakur

Roll No. 88

Section C

Batch XIIV

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 Certificate
I, Neelam Thakur, hereby declare that, the project work entitled, ‘‘Grounds For challenge of
arbitral Proceeding submitted to H.N.L.U., Raipur is made under the guidance of Mr.Sandeep
K.Suman , Faculty Member, H.N.L.U., Raipur.

Neelam Thakur

Roll No. 88

Section C

Batch XIIV

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 Acknowledgement

First and Foremost, I take this opportunity to express my profound gratitude and deep
regards to my teacher Mr. Sandeep K.Suman(Faculty of Arbittration and dispute resolution) for
her exemplary guidance and encouragement throughout the course of this project. The blessing
help and guidance given by her time to time shall carry me a long way in the journey of life on
which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to IT lab staff and library
staff for their cordial support, valuable information and guidance which helped me in completing
this task efficiently.

Lastly, I thank almighty, my family and friends for their constant encouragement and
help without which this assignment would not be possible.

Neelam Thakur

Roll No. 88

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 Section C

Contents

Serial Topic Page No.

No.

1. Declaration ii

2. Certificate iii

3. Acknowledgment iv

4. Chapter-1: Introduction 6

 Party’s challenge to his own arbitrator 7

 Procedure of challenge.(Section 13) 7
 Disclosure before/on Appointment 9

 Section 12- Ground for Challenge 10

Conclusion 15
5.

6. Bibliography 16

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 INTRODUCTION

Arbitration is alternate dispute resolution mechanism, which aims at resolving commercial

dispute between parties at an affordable cost and to save time. Main difference between a Court
and an Arbitrator is that whereas the former is creation of the State the latter is appointed by
private parties (after agreeing to submit the commercial dispute to an Arbitrator, the parties fail
to appoint an arbitrator, the arbitrator may be appointed by intervention of the Court). Arbitration
in India is governed by the Arbitration and Conciliation Act, 1996. Main object of the
Arbitration and Conciliation Act, 1996 is that there should be a minimum of intervention in the
Arbitration Award and Arbitral Proceedings.

Section 13 of the 1996 Act provides for challenge to an arbitrator on the ground of lack of
independence or impartiality or lack of qualification. The arbitrator can be challenged only on
one or more of the following grounds:

(a) That circumstances exist which give rise to justifiable doubts as to his independence or
impartiality
(b) That he does not possess the qualifications agreed by the parties.

The appointment of an arbitrator cannot be challenged on any other grounds. The appointment of
an arbitrator can be challenged only on those grounds or for those reasons only which the party
became aware after the appointment of the arbitrator and if he (the party) was aware of the
grounds or reasons before the appointment, he cannot challenge the appointment on those
grounds or reasons.

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In Porter v. Magill1 the question was expressed about the test for apparent bias. “The question is
whether the fair-minded and informed observer who has considered the facts would conclude
that there was a real possibility that the tribunal was biased.”

The test for apparent bias involves a two stage process. First the court must ascertain all the
circumstances which have a importance on the suggestion that the tribunal was biased. Secondly,
it must ask itself whether those circumstances would lead a fair minded and informed observer to
conclude that there was a real possibility that the tribunal was biased. An allegation of apparent
bias must be decided on the facts and circumstances of the individual case including the nature of
the issue to be decided.

Party’s challenge to his own arbitrator

An arbitrator can be challenged by the party who appointed him, only for the reasons of which
the party became aware after the appointment has been made.

Procedure of challenge.(Section 13)

The Act gives freedom to the parties to settle the question about challenging the arbitrator by
agreement. If there no agreement on the point or the parties have failed to agree, then the
procedure to be followed is that the party wishing to present the challenge has to inform the
Arbitral Tribunal of that matter. This should be done within fifteen days. If the other party agrees
to the challenge and the arbitrator does not voluntarily withdraw, the Tribunal shall decide the
matter. If the challenge is not successful, the Tribunal shall continue with the proceeding and
may make an award. The party who has challenged the arbitrator may challenge the award also
and make an application for setting aside in accordance with Section 34. If the award is set aside,
the court can consider whether the arbitrator should be entitled to his remuneration or not.

In the first instance, a challenge is to be made before the arbitral tribunal itself.2 If the challenge
is rejected, the tribunal shall continue with the arbitral proceedings and make an award. 3 Section
13(5) of the 1996 Act provides that where the tribunal overrules a challenge and proceeds with

1
(2002) 2 AC 357 (2002) 2 WLR 37: (2002) 1 All ER 465 (HL)
2
The 1996 Act, s 13(2).
3
The 1996 Act, s 13(4)

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the arbitration, the party challenging the arbitrator may make an application for setting aside the
arbitral award under Section 34 of the 1996 Act.

Section 16 incorporates the competence-competence principle and enables the arbitral tribunal to
rule on its jurisdiction, with respect to the existence or validity of the arbitration agreement. If
the arbitral tribunal rejects any objection to its jurisdiction, or to the existence or validity of the
arbitration agreement, it shall continue with the arbitral proceedings and make an award.4
Section 16(6) of the 1996 Act provides that a party aggrieved by such award may make an
application for setting aside the same in accordance with Section 34. The Indian Act permits
approach to the court only at the award stage (and not during the pendency of the arbitration
proceedings). Hence, Section 13(5) and 16(6) of the 1996 Act furnish two additional grounds for
challenge of an arbitral award.

Like any other contract, an arbitration agreement can be revoked only with the consent of both
parties. Failing in such revocation, the arbitrator gets an irrevocable authority to proceed with the
matter even if one of the parties refuses to submit to the arbitration. But in order to provide
redress in hard cases, the court is empowered to order revocation of the authority of an appointed
arbitrator on the application by the party. Further, the court could not abrogate the agreement, but
could only terminate the authority of the appointed arbitrator. The court could be persuaded to
pass such order only in hard cases. The principles to be followed were explained by the Supreme
Court in Amar Chand Lalitkumar v. Shree Ambika Jute Mills Ltd5. It was pointed out that before
the court exercises its discretion to give leave to revoke an arbitrator’s authority, it should be
satisfied that a substantial miscarriage of justice will take place in the event of its refusal. It must
not be forgotten that arbitration is a particular method for the settlement of disputes. Parties
should know that in referring a dispute to arbitrator, the decision of the arbitrator is final both as
to fact and law. In exercising its jurisdiction cautiously, the court considers that the parties
should not be relieved from a Tribunal they have chosen because they fear that the arbitrator’s
decision may go against them.

4
The 1996 Act, s 16(5).
5
AIR 1966 SC 1036: (1963) 2 SCR 953

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The ground on which leave to revoke could be given were put under five heads:

1. Excess of refusal of jurisdiction by the arbitrator.

2. Misconduct of arbitrator
3. Disqualification of arbitrator
4. Charges of fraud
5. Exceptional cases

Sub-section (1) and (2) of section 12 confers a duty upon the arbitrator to disclose at the time of
his appointment and after appointment throughout the arbitral proceedings, any circumstances
which are likely to give rise to reasonable apprehension as to his impartiality or independence.

Section 12 of the 1996 Act enumerates the grounds on which the appointment of an arbitrator
can be challenged by a party. The succeeding section 13 prescribes the procedure to be adopted
for challenging the appointment of an arbitrator. Thus both these sections are cognate sections.

Sub-section (1) of section 12 – Disclosure before/on Appointment

Sub-section (1) of section 12 provides that when a person is approached in connection with his
possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to
give rise to justifiable doubts as to his independence or impartiality.

It is mandatory for the person, being appointed as an arbitrator to disclose the interest which he
may be having in relation to the arbitration matter. Sub-section (3) lays down another ground,
namely, lack of qualifications on which the appointment of an arbitrator may be challenged by a
party to arbitration disputes.

An arbitrator is required to be absolutely disinterested and impartial. Where the arbitrator is

related to either of the parties and had monetary dealings with the other, both of which facts
ought to have been disclosed and were not disclosed to affected party at the time when he
entered into the agreement, nay award made by such an arbitrator is liable to be set aside6.

6
Nihal Chand v Shanti Lal, AIR 1935 Oudh 349 (DB).

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Sub-section (2) of section 12 – Disclose by arbitrator during proceedings.

Sub-section (2) of section 12 imposes a duty on the arbitrator, from the time of his appointment
and throughout the arbitral proceedings, to disclose to the parties in writing any circumstances
likely to give rise to justifiable doubts as to his independence or impartiality unless they have
already been informed of them by him.

When the administrative head of the department, the Registrar was appointed as arbitrator to
adjudicate on the disputes, it could be said that he carried an official bias because there is no
reason to suppose that if any of his subordinates or the auditors appointed by him were found to
be connected with the fraud, he would not put the responsibility where it should lie7.

Sub-section (3) of the section 12- Ground for Challenge

Section 12 (3) has opted for a wide –ranging formula rather than attempting to enumerate
specific grounds of challenge. Examples of what may be covered are a financial interest or
previous involvement in the subject matter of a dispute, or a certain relation to one of the parties.

Sub-section (3) provides broadly two important grounds for challenging the arbitrator-

(a) Impartiality: An arbitrator may be challenged when there are such circumstances that
give rise to justifiable doubts as to his independence or impartiality.
(b) Qualification: An arbitrator may be challenged if he does not possess the qualifications
agreed by the parties.

Having specified the grounds of challenge under section 12, section 13 considers the issue of a
procedure for making such a challenge.

Under section 13(1) the parties are free to agree upon their own challenge procedure. Under
section 13(2) where the parties fail to agree on a challenge procedure one is provided for them in
this section. Under section 13(4) is a compromise between the need for an assurance of fair and
authoritative resolution of challenges, and the need to prevent the proceeding being delayed
unduly.

7
Registrar, Co- op. Societies v Dharam Chand, AIR 1961 SC 1743

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This section provides that the parties are free to agree on a procedure for challenging an
arbitrator. In case the parties have not prescribed any procedure, the provisions of sub-section (2)
would be attracted and the party challenging the appointed arbitrator shall send to the arbitral
tribunal a written statement of reasons within 15 days after becoming aware of the circumstances
or after becoming aware of the constitution of the arbitral tribunal. After the expiry of 15 days,
the right to challenge would be deemed to have been waived by the party.

Sub-section (4) provides that if the challenge is rejected, the arbitral tribunal shall continue the
arbitral proceedings and make the award. There is no provision for appeal against rejection of
challenge by the arbitral tribunal. Sub-section (5) permits the challenging party to make an
application to the court for setting aside the award under section 34 of the 1996 Act. Sub-section
(6) provides that where the court has set aside the award, it also has the power to decide whether
the arbitrator whose appointment was under challenge is entitled to any fees or not.

Sub-section(1) of Section 13

Before the stage of challenge of award under section 34 comes, sub-sections (1), (2) and (3) of
section 13 envisage a situation where the arbitrator may on his recluse himself on objection
being taken qua his functioning as an arbitrator or where both the parties agree to his removal as
per procedure accepted by them. If both fail, the arbitrator is required to decide on the challenge
to his functioning as an arbitrator levelled by a party. The arbitrator is expected to be fair person
and if he finds that there is substance in the allegations, an arbitrator is expected to
dispassionately rile on such objection. Failing all this the last resort for an aggrieved party is the
challenge under section 13(5) read with section 34. Thus, on going with the ethos of the 1996
Act of speedy progress of arbitration proceeding without judicial interference with the fact of the
aggrieved party is not without remedy, it cannot be said that the absence of a provision regarding
removal of an arbitrator renders the relevant provisions of the statute ultra vires the Constitution.
Absence of a provision of removal of an arbitrator does not render the relevant statutory
provisions invalid or ultra vires the Constitution of India8.

8
BHEL v C.N. Grag and others 2000 (3) Arb. LR 674.

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The Act, 1996 does not contain any provision where the Court can remove an arbitrator during
the pendency of arbitration proceedings. The intension behind the legislation i.e the 1996 Act is
important. The arbitration is envisaged as a method of speedy alternate redressal of disputes
between the parties. If court interference is permitted during arbitral proceedings, then the very
object of speedy redressal of disputes would be frustrated. That is why keeping the peculiar
conditions in India, coupled with the need for speedy resolution of disputes, the provision of
Court interference is avoided.

Where a plea of bias is not raised as per section 13, then party cannot raise it later on for
challenging the award under section 34. If it is raised, rejected and arbitral award is passed
against that party then it can challenge it under section 349.

The parliament has not allowed the unsuccessful party to challenge the appointment immediately
when its challenge has been unsuccessful before the arbitrator and requires such a party to wait
and challenge the same only after the arbitral award has been made, it is so to avoid the adoption
of dilatory tactics10.

Sub-section (2) of Section 13 – Statutory procedure for challenging arbitrator

Sub-section (2) deals with a situation where there is no agreement on procedure for challenging
the arbitrator. It provides a procedure in such a case. A party who intend to challenge an
arbitrator is required to, within fifteen days after becoming aware of the constitution of the
arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of
section 12, send written statement of the reasons for the challenge to the arbitral tribunal.

While calculating the period of 15 days for making a challenge, the day of knowledge and the
last terminal day will have to be excluded from calculation and further the time will have to be
calculated from midnight to midnight.11

If for the reason the petitioner had exercised doubt on the independence or impartiality of the
arbitrator, then the petitioner should have challenged such appointment of arbitrator within 15
days, from the date of appointment or from the date on which he became aware of the

9
Kitiku Imports Trade Private Limited v Savitri Mentals Limited and Another 1999 (2) Arb. LR
10
Satish Chander Gupta & Sons v Union of India and Ors. 2003 (1) Arb. LR 589 (P&H) (DB).
11
Satyanarayan Agarwal v Baidyanath Mandal AIR 1972 Pat 29.

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circumstances that lead to doubt the impartiality. The petitioner has not taken any steps in this
regard within the time specified under sub-section (2) to section 13. Therefore, the petitioner
cannot challenge the appointment of the arbitrator after 15 days. In the present case, the
petitioner had participated in the arbitral proceeding. Therefore, the belated challenge cannot be
determined12.

Sub-section (3) of section 13 – Arbitral tribunal to decide on challenge of arbitrator

Sub-section (3) provides that 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.

Whether after a decision is rendered under section 13(3), the Court can interfere in a petition
under section 14. Under section 12(3) the challenge can be of two fold. One if the circumstances
give rise to justifiable doubts as to his independence or impartiality and second if he does not
possess the qualifications agreed to by the parties. Under section 13 if a challenge is thrown,
there are two courses open to the arbitrator. One to immediately withdraw from the office and
the other to decide on the challenge. The importance of a challenge and decision under section
12(3) and 13(3) in the case of bias becomes important as bias can be waived, by a party
participating in the proceedings even though aware of the circumstances of possible bias.

The second could be that there may be circumstances under which a party in order, to delay or to
avoid arbitration may move the Court under section 14. Under section 14, the Court, on the
material before it, may be in a position to examine the real possibility of bias. There could be
other situations in which the Court may have to gather material for the purpose of finding out
whether there was any real possibility of bias. In these circumstances, a decision under section
13(2) would throw light on the matter. As an illustration an arbitrator may not be aware of the
material giving rise to a possibility of bias, and may conduct the proceeding. In these
circumstances which give rise to jurisdiction to justifiable doubt as to independence or
impartiality would be the best person in circumstances to meet contention raised or to answer the
same. Reference at this stage can be made to section 14(3). This is only for the purpose of

12
Novel Granities Ltd. V. Lakshmi General Finance Ltd. 2003 (Suppl.) Arb. LR 286 (Mad).

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deciding whether the ground of possibility of bias can be decided by this Court/without the
arbitrator first deciding the issue under section 13(3).

Will the mere reference to section 12(3) or 13(3) result in this Court coming to a conclusion that
such a challenge is also open under section 14 of the 1996 Act. The language only indicates that
if the arbitrator withdraws or excuses himself then that would not mean acceptance of the
allegations or ground. It is founded on the principle, that the arbitrator in order to maintain
impartiality in the proceedings and dispel any probability of real bias wants to refuse himself. If
the language was otherwise then it may have been difficult for an arbitrator to rescue himself.
Merely they are found in section 14 cannot lead to the conclusion that the challenge always be
made under section 14. The entire scheme and sections of the 1996 Act will have to be
examined. Therefore the nexus for the object to be achieved is speedy disposals of the
arbitration proceedings and also the intelligible differentia13.

Now the position under the 1996 Act, under section 13(1) is that in the case of setting aside of an
arbitral award, the court is required to entertain a decision whether the arbitrator who is
challenged is entitled to any fee.

Sub-section (4) of section 13- Arbitral tribunal to continue if challenge unsuccessful

Sub-section (4) provides that if a challenge is not unsuccessful then the arbitral tribunal shall
continue the arbitral proceedings and make an arbitral award. It is not that the decision of the
arbitral tribunal on a challenge is final.

The challenge regarding vires of section 13(3) and (4) is based mainly on the ground that there is
no provision in the 1996 Act for removal of an arbitrator by the Court, through such a provision
was contained in section 11 of Arbitraion Act, 1940.

Section 13(4) and 16(5) are not discriminatory. Party invoking arbitration and party subjected to
arbitration are not differently treated. There is intelligible differential in providing an appeal at
the threshold to one party and not providing such an appeal to the other party and there is a nexus
for the object to be achieved that is the speedy disposal of the arbitral proceedings.

13
M. Mohan Reddy v Union of India and others 2000 (1) Arb. LR 39 (AP).

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 CONCLUSION

In the conclusion, from this project I came to know that in what circumstances a party can
challenge the arbitration for proceeding and basically when there is a circumstances that give rise
to justifiable doubt in the mind of the party as to his independence and impartiality and secondly
an arbitrator may be challenged if he does not possess the qualification agreed by the parties.

According to Russell statement I have learned that the arbitrator must be fairly to both the parties
and in the proceedings throughout the reference he must not favour one party more than another
or do any thing for one party, which does not do offer to do for the other. The arbitrator must
observe these ordinary well understood rules of administration of justice. These grounds for
challenging arbitrator are derived under sub-section (3) of section 12.

Further in this project I have also focused on the different procedures to be followed by the party
for challenging given under sub-sections of section 13 of the Act 1996. Lastly from my side, I
would conclude that working on this project was very interesting and worthwhile.

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BIBLIOGRAPHY

1. Law of Arbitration and Conciliation, Avatar Singh

2. Bharat’s Commentary on the Arbitration and Conciliation Act, 1996, First Edition 2007

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