Difference between Schedule V and Schedule VII of Arbitration and Conciliation Act, 1956

Introduction

ADR is one of the ways of settling the dispute in amicable manner. There are mainly four ways by which the dispute can be resolved without the court’s interference and these are:-

  • Mediation
  • Conciliation
  • Negotiation
  • Arbitration

All these are similar in nature but some of the differences are there which separates them. ADR is very effective, less costly, time saving and flexible also for solving any dispute or finding the solution in any case. These advantages of Alternate Dispute Resolution can be understood well by the explanation given below-

  1. Effective– The award passed by the arbitrator, mediator, negotiator or conciliator is effective and this can be applied by the parties. As here in these cases, the parties are given freedom to choose their appropriate solution to the problem and last the authority decides it’s validity and amends that according to the need and laws.
  2. Time saving– As civil litigations take much time and there is no time frame prescribed as to under what time limit the case is needed to be decided whereas in the case of Alternative Dispute Resolution there is time frame prescribed at every level and it had also been mentioned that in how much time the cases are needed to be decided.
  3. Flexible– ADR is flexible which means that the freedom is given to the parties rather it upon the parties to decide the place of arbitration. Three us one more thing that the parties can withdraw case filed at any time(after the initiation of the proceedings) they feel that the matter can be resolved by mutual understanding.

Under Arbitration and Conciliation Act, 1996 there are mainly two schedules that deal with the validity of the arbitrator or the grounds on which the arbitrator can be challenged. Firstly, Schedule V of this act which deals with grounds, that might bring the doubt in the mind with respect to the independence and impartiality of the sole arbitrator or the panel of arbitrators appointed. Whereas, Schedule VII clearly explains or mentions that under what conditions the person shall not be appointed as an arbitrator. And the Schedule V and Schedule VII are to be read with Section 12(1) (b) and 12(5) respectively.

Under Schedule V it had been clearly specified that the conditions when the arbitrator is doubted for its impartiality or being biased towards one of the parties. It discusses the relationships of the arbitrator with the other parties. If the arbitrator is connected or having any kind of relation with any of the two parties in that case that person is considered as being partial and inclined towards the particular party which is not the motive of any proceeding. The very nature of any judgement or award is that is decided with following the principles of natural justice.

Schedule V discusses various relations which are forbidden to be as an arbitrator and these relations are namely:-

  • Arbitrator’s relationship with the parties or counsel.
  • Relationship of the arbitrator to the dispute.
  • Arbitrator’s direct or indirect relation to the dispute.
  • Previous services for one of the parties or other involvement in the case.
  • Relationship between an arbitrator and another arbitrator or counsel.
  • Relationship between arbitrator and party and others involved in the arbitration.
  • Other circumstances.

Schedule VII says that what are the conditions under which the person cannot be appointed as an arbitrator. Here all the conditions had been discussed under three headings namely:-

  • Arbitrator’s relationship with the parties or counsel.
  • Relationship of the arbitrator to the dispute.
  • Arbitrator’s direct or indirect relation to the dispute.

Case Laws

TRF Ltd. v. Energo Engineering (2017) 8 SCC 377

Facts
Here, the respondent is involved in the business of procuring the materials for installation of thermal power plant on behalf of his clients. Then the respondent issued the purchase order to the claimant who was going to supply those materials required. They were bound by the agreement which had been made during the contract was signed by both the parties. In the agreement clause 33 discusses about the arbitration process. Thereafter the dispute arose in between the parties and the respondent to file the case before the arbitral tribunal as per the clause stated in the agreement itself.

But the person who had been appointed as an arbitrator was the Managing Director of the company who is considered as the part of arbitration process and cannot be considered as the eligible person de jure as per Schedule VII of the act. Hence the claimant rejected the appointment of the sole arbitration by the respondent and asked the arbitrator to allow them to file the case before the High court for appointing any other eligible arbitrator or deciding the case by them only. As the person who is himself ineligible to act as an arbitrator do not have any right to appoint any person on his behalf as an arbitrator and that will be considered as null and void ab initio.

Issue

  • Whether the appointment of Managing director as an arbitrator is valid according to arbitration and conciliation act (amendment),1956?

Held
It had been observed by the SC that once the person who is one of the party to the dispute and becomes ineligible to be appointed as an arbitrator in that he also does not have any power to appoint any person as an arbitrator.
Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd. Arbitration (Application No.32 of 2019)

Facts
Both the parties entered into the agreement of construction and designing. The claimant had to design something for the respondent. . According to the clause 24 of the agreement only respondent company had the right to appoint the sole arbitrator in case of any dispute between the parties.
Further the notice was sent to the petitioner by the respondent for not complying with the rules under the said clause and also issued the letter of termination. For this the reply was sent by the advocate of the petitioner for complying with e clause 24 and according to the said clause the respondent was required to respond within 30 days from the date of notice sent but he reply was received after 30 days. After this the claimant filed the application before the director of the respondent and after that Chief General Manager was called upon by the emotive and the arbitrator was appointed.

Issue

  • If the CMD could not have been the arbitrator himself in 5hat case dies he has the power to appoint the same?

Held
Here the court observed that the Chief Managing Director could not have been appointed the sole arbitrator in this case and this was said in the connection with TRF case which had already been discussed earlier. In TRF case the MD was not authorized to be elected as an arbitrator and also does not had any power to appoint the arbitrator according to the rule (Act which cannot be done directly, can also not be done indirectly.)
In the same way, here in this case the CMD is not eligible to be appointed as an arbitrator himself but he had been given power to appoint someone as an arbitrator. But the court had given its view that, if the CMD will appoint the arbitrator it might create the doubt in the mind that the particular person who had been appointed, the CMD might have interest involved here. This would lead to the doubt in the mind of the other party with respect to the independence and impartiality of the appointed person which would attract the Schedule V and VII of the Arbitration and Conciliation Act (amendment), 1956 which should be read with Section 12.
HRD Corporation v. GAIL

Facts
Both the parties were involved in the business of wax. The claimant was supposed to supply all it’s production of wax to the respondent for 20 years. Now, this term and condition as accepted by the respondent also. After sometime of the agreement the respondent established it’s new plant at some other place and started to sell the products of that plant to some third party. And there was the dispute with regard to the pricing of the products also. So for this the parties approached the arbitration. This arbitration is the fourth arbitration before the court

Issues

  • Whether the eligible person had been appointed for arbitration?

Held
Here the appointment of two of the arbitrators was in question because one of the arbitration had given its view where GAIL was one of the parties and the other arbitrator in their same subject of the previous arbitration had passed an award. These contentions were raised by the petitioner.
But the court rejected both the contentions raised by the petitioner and it clearly defined the difference between Schedule V and Schedule VII of the said amended act. It had been said by the judiciary that the conditions mentioned under schedule V discusses about the criteria which creates the question upon the independence and impartiality of the arbitrator and Schedule VII discusses about the grounds which makes the Larson I eligible to be appointed as an arbitrator. These have been added in the Arbitration and Conciliation Act, 1956 by the amendment in 2015. But this can be only applied after the award had been granted by the arbitrator/arbitrators. Before announcing an award it can not be interpreted or said that the arbitrator is bias.

Voestalpine Case (Arbitration Petition No. 50 of 2016, decided on 10th February, 2017.)

Facts
The claimant company which is VSG is a registered company in Austria but it had its branch in India. This company had a contract with the respondent for providing them materials for construction of rails. In respect to this matter they had some dispute and the matter went for arbitration. But when the contract was made the arbitration agreement was also made and according to that the respondent (DMRC) will be proposing five names to the claimant (VSG) for appointing the arbitrator. The first and foremost thing that the claimant said with respect to the proposal that the individuals which and had been put before him are either the retired engineers, the government officials or the people from public sector which belong to the respondent only and according to the section 12 after amendment the panel which had been suggested is not at all contrary to the law.

Issue

  • Whether the panel of arbitrators appointed by the respondent is valid according to the section 12 of the Arbitration and Conciliation Act (amendment), 1956?

Held
Here the court made the observations that:-
Firstly, the choice of arbitrators which had been provided to the claimant was limited in number.
Secondly, as per the arbitration agreement of the parties it can be seen that the respondent (DMRC) had been given full authority to choose the number of people for being appointed as an arbitrator. This might create the doubt or out the question upon the arbitrator for its independence and neutrality.
So, the court held that such power provided to the respondent through the agreement must be deleted. And both the parties should have power to appoint the arbitrator for themselves and those two arbitrators should appoint any third person as a arbitrator and is neutral to the parties. It is also suggested that the panel of arbitrators should be appointed which will not bring any doubt in the mind of both the parties with respect to the arbitrators neutrality and independence. This case is the landmark Judgment for the matter of deciding the impartiality, biasness, independence of the arbitrator appointed.

Conclusion
After covering this topic it can be understood that full independence is given to the parties to decide as to under what circumstances the particular person is forbidden from being appointed as an arbitrator. With the help of case laws it is well understood that in any condition the person who is related to parties, disputes or in anyway with any of the parties that person is not liable to be appointed as an arbitrator.
The wordings are “…senior officer/s (usually heads of department or equivalent) of a government/statutory corporation/public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as Arbitrators merely because their employer is a party to the contract.” But one condition is there that the person cannot be merely doubted for its independence an impartiality mere on the condition that one of the parties is from the same company or business from where the arbitrator is belonging.

References

  • https://www.mondaq.com/india/trials-appeals-compensation/802850/law-of-bias-in-arbitrators–certain-interesting-aspects#_ftnref8
  • https://www.scconline.com/blog/post/2020/10/17/mumbai-based-law-students-bag-the-best-research-paper-award-at-the-united-nations-academic-impact-unai/
  • https://viamediationcentre.org/readnews/NjU0/PERKINS-EASTMAN-ARCHITECTS-DPC-OTHERS-V-HSCC-INDIA-LTD
  • https://www.lexology.com/library/detail.aspx?g=3322a93b-898f-4265-8297-f6ccdeafe585
  • https://www.legitquest.com/case/hrd-corporation-v-gailindia-ltd/7ce6f

AUTHOR

Harshika Agrawal
Amity University Mumbai