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Supreme Court Clarifies Arbitrator's Ineligibility in Fee Dispute Case

In a significant legal ruling, the Supreme Court has established that a unilateral adjustment of fees by an arbitral tribunal, while not compliant with established practices, does not automatically disqualify the arbitrator under Section 12 of the Arbitration and Conciliation Act 1996.

In a significant legal ruling, the Supreme Court has established that a unilateral adjustment of fees by an arbitral tribunal, while not compliant with established practices, does not automatically disqualify the arbitrator under Section 12 of the Arbitration and Conciliation Act 1996.

The court's decision comes in the wake of its previous judgement in Oil and Natural Gas Corporation Ltd. vs. Afcons Gunanusa JV 2022, which emphasized that arbitrators should revise their fees only in consultation with the parties involved and should not do so unilaterally. However, the bench, consisting of Justices S Ravindra Bhat and Aravind Kumar, opined that a breach of this rule does not necessarily render the arbitrator ineligible, as stated in the case of Chennai Metro Rail Ltd v. M/s Transtonnelstroy Afcons JV.

In its ruling, the bench noted that although the ONGC ruling explicitly states that fee adjustments require the agreement of all parties, a breach of this rule, as seen in the present case where the increase of fees was insisted upon, does not amount to automatic ineligibility or warrant termination of the tribunal's mandate.

To support their decision, the bench referenced the cases of HRD Corporations v. Gas Authority of India Ltd (2017) and National Highways Authority of India & Ors. vs. Gayatri Jhansi Roadways Limited & Ors (2019).

Furthermore, the bench categorically asserted that only grounds specified in the Fifth and Seventh Schedules of the Arbitration and Conciliation Act could be used to determine an arbitrator's ineligibility. Ineligibility must be tied to issues that undermine the fundamental jurisdiction and authority of the tribunal, resulting in the termination of the arbitrator's mandate, as outlined in Justice Bhat's written judgement.

The court rejected the argument put forth by Chennai Metro, contending that de jure ineligibility due to doubts about the tribunal's impartiality or independence on unenumerated grounds cannot be upheld. The court found it difficult to conceive of grounds beyond those listed in the schedule, which could warrant an application under Section 12 (3).

Section 12 of the Arbitration and Conciliation Act, 1996, outlines the grounds for challenging an arbitrator, and Schedule 5 of the Act specifies the conditions that raise doubts about an arbitrator's independence or impartiality.

The legal dispute arose during an ongoing arbitration between M/S Chennai Metro Rail Limited and M/S Transtonnelstroy Afcons (JV). The conflict stemmed from the Arbitral Tribunal's decision to raise its fees from Rs.1,00,000 per session per arbitrator to Rs.2,00,000 per session per arbitrator. While the respondent complied with the increased fee, the appellant raised objections.

Unsatisfied with the decision, the appellant sought to challenge the tribunal's mandate in the Madras High Court, arguing that there was a reasonable apprehension of bias that could prejudice the appellant. Therefore, they contended that the tribunal's mandate should be terminated due to de jure ineligibility. However, the High Court dismissed the appeal, leading to the present case.

In its judgement, the Supreme Court cited the UK Supreme Court's decision in Halliburton Company v. Chubb Bermuda Insurance Ltd., which emphasized the use of an objective test to determine whether there was an appearance of bias that warranted the removal of an arbitrator. The test involved assessing whether an informed, fair-minded observer would conclude that there was a real possibility of bias.

The Court also noted that the de-jure condition is not the sole basis for challenging arbitrators and should not restrict the Court from considering other potential causes for arbitration challenges beyond those explicitly provided in the Act.

Consequently, the Supreme Court dismissed Chennai Metro's appeal. The appellant was represented by Additional Solicitor General N Venkataraman and Senior Advocate Ritin Rai, while Senior Advocate Darius J Kambhatta represented the respondent.

High Court's Decision on Fee Dispute

In the initial High Court proceeding, the appellant argued that the arbitrator's unilateral fee revision was impermissible, contrary to the agreed contract terms, and in violation of the IV schedule of the Arbitration and Conciliation Act. Additionally, they contended that the payment of the first respondent's share of the fee to the Tribunal not only placed the petitioner in an awkward financial position but also created a reasonable apprehension of bias and prejudice against them.

Based on these grounds, they asserted that the Tribunal's mandate should be terminated on the grounds of de jure ineligibility.

In contrast, the respondent strongly opposed these claims, arguing that the petitioner's assumptions regarding the Tribunal's potential bias were unfounded and lacked a tangible basis.

The High Court, in its impugned judgement, ruled that the repeated use of the terms "de jure," "unable to perform its function," "biased," and "prejudice" in the appellant's pleadings did not substantiate a case for bias or prejudice, citing the Hon'ble Supreme Court's judgement in the ONGC case and the manner in which it was presented.

The case, titled M/S CHENNAI METRO RAIL LIMITED vs. M/S TRANSTONNELSTROY AFCONS JV, C.A. No. 4591/2023, marked a significant development in arbitration law in India.