The Arbitration and Conciliation Act, 1996, is the cornerstone legislation governing arbitration in India. The 2015 Amendment to the Act significantly overhauled arbitration law to enhance the objectivity, impartiality, and credibility of arbitral proceedings. A vital aspect of this reform is Section 12(5), which deals with the ineligibility of arbitrators and underscores the importance of independence and impartiality in arbitration.

Text of Section 12(5)

Section 12(5) of the Act

Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or the counsel or the subject matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that the parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.
 

Key Features of Section 12(5)

• Mandatory Ineligibility: Section 12(5) imposes a mandatory disqualification on arbitrators who fall under any category listed in the Seventh Schedule. These include relationships with the parties, such as close familial, employment, or professional ties.
• Overriding Prior Agreements: The provision explicitly overrides any prior contractual agreement between the parties. This ensures that procedural fairness and neutrality cannot be contracted out.
• Party Autonomy with Limits: While parties retain autonomy in arbitration, they can only waive this disqualification post-dispute through a written agreement. This balances flexibility with the need for fairness.
• Seventh Schedule Compliance: The categories in the Seventh Schedule broadly align with international standards, such as the IBA Guidelines on Conflicts of Interest in International Arbitration, thus promoting uniformity.

Purpose and Legislative Intent

Section 12(5) was introduced to ensure the integrity of arbitral proceedings by addressing concerns about bias and partiality. Its introduction reflects the Indian judiciary's stance on due process and impartiality, as well as its effort to align domestic arbitration law with international best practices.
 

Judicial Interpretation and Application

Indian courts have played a pivotal role in interpreting Section 12(5) and clarifying its application.

Some significant cases include:

• TRF Ltd. v. Energo Engineering Projects Ltd. (2017): The Supreme Court held that if a person is statutorily ineligible under Section 12(5) read with the Seventh Schedule, such disqualification extends to their power to nominate another arbitrator.
• Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2019): The court ruled that a person who is ineligible to act as an arbitrator cannot nominate another arbitrator, ensuring independence in the nomination process.
• Ellora Paper Mills Ltd. v. State of Madhya Pradesh (2022): It was clarified that objections to ineligibility under Section 12(5) must be raised promptly. A delay in challenging an arbitrator's appointment may amount to waiver.
• NTPC Ltd. v. Deconar Services Pvt. Ltd. (2021): The court emphasized that a written waiver under Section 12(5) must be unequivocal and entered into post-dispute.
   

Impact of Section 12(5)

• Enhanced Credibility: By making certain individuals ineligible, Section 12(5) boosts confidence in the arbitral process.
• Increased Litigation: While the provision aims to reduce disputes about bias, it has also led to an increase in challenges to arbitrators.
• Harmonization with Global Standards: The provision aligns Indian arbitration laws with global norms, fostering India's image as a pro-arbitration jurisdiction.
• Corporate Implications: Corporations must now carefully assess potential arbitrators for compliance with Section 12(5) to avoid invalid appointments.
   

Challenges and Criticisms

• Increased Judicial Intervention: The provision has led to frequent judicial scrutiny, potentially undermining the efficiency of arbitration.
• Interpretation of Waiver: The requirement of a post-dispute waiver has raised questions about its rigidity and its impact on party autonomy.
• Ambiguity in the Seventh Schedule: Certain terms in the schedule, such as "close family relationship," lack precise definitions, leading to interpretational inconsistencies.

Conclusion and Way Forward
Section 12(5) of the Arbitration and Conciliation Act, 1996, is a progressive step towards ensuring impartiality in arbitration. While it has elevated the standards of neutrality, its implementation poses practical challenges. Moving forward, courts must strike a balance between upholding the provision's intent and minimizing procedural delays. Legislative refinements, such as clearer definitions in the Seventh Schedule, may further enhance the efficacy of this landmark provision.