Section 12(5) of The Arbitration Act III

Section 12(5) is a new provision which relates to the de jure inability of an Arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non-obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The Sub-Section then declares that such person shall be “ineligible” to be appointed as Arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an Arbitrator. The only way in which this ineligibility can be removed, gain, in law, is that parties may after disputes have arisen between them, waive the applicability of this Sub-Section by an “express agreement in writing”. Obviously, the “express agreement in writing” has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule.

A case which falls under Section 12(5), Section 14(1)(a) gets attracted inasmuch as the Arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an Arbitrator. This being so, his mandate automatically terminates, and he shall then be substituted by another Arbitrator under Section 14(1) itself. It is only if a controversy occurs concerning whether he has become de jure unable to perform his functions as such, that a party has to apply to the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. Thus, in all Section 12(5) cases, there is no challenge procedure to be availed of. If an Arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate has terminated. Questions which may typically arise under Section 14 may be as to whether such person falls within any of the categories mentioned in the Seventh Schedule, or whether there is a waiver as provided in the proviso to Section 12(5). As a matter of law, it is important to note that the proviso to Section 12(5) must be contrasted with Section 4. Section 4 deals with cases of deemed waiver by conduct; whereas the proviso to Section 12(5) deals with waiver by express agreement in writing between the parties only if made subsequent to disputes having arisen between them.

Section 12(5) refers to an “express agreement in writing”. The expression “express agreement in writing” refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct. Here, Section 9 of The Indian Contract Act, 1872 becomes important. It is thus necessary that there be an “express” agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that an Arbitrator is ineligible to be appointed as an Arbitrator, still go ahead and say that they have full faith and confidence in her/him to continue as such.

The facts of the present case disclose no such express agreement.”

Hon’ble Justice R.F. Nariman, Bharat Broadband Network Ltd. v. United Telecoms Ltd., [Civil Appeal No. 3972 of 2019].