Arbitration is a method of alternative dispute resolution that aims to provide speedy justice. It achieves this goal with the help of an independent and impartial Arbitrator bound neither by the Code of Civil Procedure of 1908 nor the Indian Evidence Act of 1872 as per Section 19 of the Arbitration and Conciliation Act of 1996.
But, to ensure that Arbitration can achieve its goal of speedy justice successfully, it must also ensure that the Arbitrator is genuinely independent and impartial in his conduct. In this regard, Section 12(5) of the Arbitration and Conciliation Act of 1996 provides that any Arbitrator who falls within the categories specified in the Seventh Schedule of the Act shall be considered an ineligible Arbitrator.
The categories specified by the Seventh Schedule of the Act, under which an Arbitrator is deemed as an ineligible Arbitrator, are as follows:
Arbitrator's relationship with the parties or counsel
1. The Arbitrator has a business relationship, either current or previous, with a party as an employee, consultant, advisor, or in any other capacity.
2. Currently, one of the parties or their affiliate is advised by or represented by the Arbitrator.
3. Currently, the Arbitrator is a representative of the lawyer or the law firm, which is an acting counsel for any one of the parties.
4. Representing one of the parties is the same legal firm where the Arbitrator practices.
5. When an affiliate of one of the parties is directly involved in the issues at hand in the Arbitration, the Arbitrator is that party's manager, director, or other member of the management or has a comparable controlling influence.
6. Without the Arbitrator being directly involved, the Arbitrator's law firm had previously been involved in the case but has withdrawn from it.
7. Currently, one of the parties or a subsidiary of one of the parties has a significant business relationship with the Arbitrator's law firm.
8. Despite not receiving a sizable financial benefit from it, the Arbitrator or their firm frequently advises the appointing party or their affiliate.
9. One of the parties and the Arbitrator are closely related. In the case of companies, a close working relationship with those in charge and managing the company.
10. A close relative of the Arbitrator holds a significant financial interest in one of the parties or their affiliates.
11. The Arbitrator is the legal representative of any entity that is a party in the Arbitration.
12. The Arbitrator holds a position of authority over one of the parties, such as a managing partner, director, or member of the management.
13. The Arbitrator is financially interested in one of the parties or the case's resolution.
14. The Arbitrator or their firm earns a substantial financial gain from providing regular advice to the appointing party or their affiliate.
Relationship of the Arbitrator to the Dispute
15. A party or their affiliate has received the Arbitrator's expert opinion or legal assistance on the dispute.
16. The Arbitrator has already been involved in the case.
Arbitrator's direct or indirect interest in the dispute
17. The Arbitrator, either directly or indirectly, holds shares in one of the parties or their affiliate that is privately held.
18. A close relative of the Arbitrator holds a significant financial interest in the outcome of the case.
19. The Arbitrator or a close relative of the Arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.
Explanation: The term "close relative" refers to a spouse, sibling, child, parent, or life partner.
Explanation: The term "affiliate" encompasses all businesses within a single group of businesses, including the parent company.
Difference between the Fifth and the Seventh Schedule
The grounds mentioned above are also provided under the Fifth Schedule of the Arbitration and Conciliation Act of 1996.
The only difference between the Fifth and the Seventh Schedule of the Act is that the Fifth Schedule deals with grounds that give rise to justifiable doubt as to the independence or impartiality, and such grounds are enough to challenge his appointment as an Arbitrator.
However, the Seventh Schedule provides for the ineligibility of an Arbitrator, which restricts them from even being appointed as an Arbitrator to begin with.
Hence, the Fifth Schedule read with Section 12(3) deals with Arbitration that has already begun, while the Seventh Schedule read with Section 12(5) deals with Arbitration that has yet to start.
Note: As per the proviso attached to Section 12(5), the parties can, by an express agreement in writing, waive off the ineligibility of an Arbitrator provided under the Seventh Schedule.
Frequently Asked Questions
Q. What is Arbitration?
A. Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside the courts. One or more Arbitrators will decide the dispute, which renders the 'Arbitration award.' An Arbitration decision or award is legally binding on both sides.
Q. What are the types of Arbitration?
A. The types of Arbitration recognised in India are:
Institutional Arbitration
Ad-hoc Arbitration
Domestic Arbitration
International Arbitration
Fast-track Arbitration
Q. Which disputes are not Arbitrable?
A. In the case of Vidya Drolia & Others v. Durga Trading Corporation, the Supreme Court held that disputes are not arbitrable when the cause of action or subject matter of the dispute:
relates to actions in rem
affects third party rights,
relates to inalienable sovereign and public interest functions of the State; and
is expressly or by necessary implication non-arbitrable under a specific statute.
Q. What cases are not arbitrable?
A. In the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Others, The Supreme Court laid down the test of arbitrability, known as the Booz Allen Test, provided a list of 6 categories of disputes that are not arbitrable:
disputes which give rise to or arise out of criminal offences;
marital disputes,
guardianship matters;
insolvency and winding up matters;
testamentary matters; and
eviction or tenancy matters.
Q. What is the difference between an Arbitrator and a Mediator?
A. The difference between an Arbitrator and a mediator lies in their role and whether the agreement or judgment is binding. An Arbitrator judges the dispute and provides resolution measures binding on the parties.
A mediator is more of a facilitator who assists in developing options and achieving a mutually agreed resolution. He does not decide for the parties.
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