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Who Can Be Appointed As An Arbitrator

Well, not everyone can be appointed as an Arbitrator as there are some restrictions in place. Section 11(1) of the Arbitration and Conciliation Act, 1996[1], hereinafter referred to as the (Act), says that a person of any nationality can be appointed as an Arbitrator. But section 12[2], along with fifth[3] and seventh schedule[4] of the Act provides for the restrictions imposed upon the Arbitrators.

There are 34 categories in schedule five and 19 categories in schedule seven which act as restrictions on any person being approached to act as an Arbitrator.

Firstly, coming to schedule seven, section 12(5) of the Act bars any person from being appointed as an Arbitrator if he/she falls in any of the 19 categories mentioned under schedule seven. Such person becomes de-jure ineligible for being appointed as an Arbitrator as per section 14(1)(a) of the Act[5].

But there is a catch. Proviso to section 12(5) states that parties to the arbitration agreement, by way of an express agreement in writing, can waive the applicability of section 12(5), but only after the dispute has arisen between the parties. It means that parties can still appoint a person falling under any of the 19 categories mentioned in schedule seven provided they come into an express written contract to that effect after the dispute has arisen. This is the first line of scrutiny for the Arbitrators.

Now, suppose any of the parties believe that the Arbitrator is not acting independently and impartially, then what. Here comes into play section 12(1) and fifth schedule.

Section 12(1)(a) of the Act puts the responsibility upon the person being approached in connection with his/her possible appointment as Arbitrator to disclose in writing any and/or all of the circumstances at any stage of the arbitration proceedings which can give rise to justifiable doubts as to his/her independence and impartiality. If the person approached thinks that he/she falls into any of the categories mentioned under schedule five then such person has to disclose it in a format which is prescribed under schedule six of the Act as per section12(2).

Also, apart from satisfying the requirements of schedule five, the proposed Arbitrator also has to mention/disclose any circumstances which can affect his/her ability to devote sufficient time to arbitration proceedings [section 12(1)(b)].

The main difference between fifth and seventh schedule is that schedule seven applies de-jure while schedule five acts as only a guiding tool[6]. It means that if a person falls into any of the 19 categories mentioned in schedule seven, such person becomes automatically ineligible as per section 14(1)(a), whereas if a person falls into any of the 34 categories mentioned in schedule five then such person does not automatically become ineligible, instead any of the parties which believe that the Arbitrator falls into any of the categories mentioned in schedule five and it will, in turn, affect the Arbitrator's independence and impartiality, can challenge the appointment of Arbitrator before the Arbitral Tribunal itself and it is upon the Tribunal to decide whether the Arbitrator is eligible for appointment or not [section 13(3)][7]. If the challenge goes unsuccessful then the aggrieved party can further challenge the appointment only after passing of the award as per section 34(2)(a)(5)[8].

The first 19 categories mentioned under schedule five are exactly the same as all the categories mentioned under schedule seven, why is that?
If parties agree as to who will be the Arbitrator, then such person has to disclose all circumstances which can affect his/her independence and impartiality and for that purpose schedule five will act as a guiding tool. Also, in case one of the parties' approaches court for the appointment of an Arbitrator still the court, before appointing the Arbitrator, will ask him/her to disclose the information as per fifth schedule [section 11(8)].

As all such information which can affect Arbitrator's independence and impartiality is only within his/her knowledge, so, it is only after he/she discloses such information, will the parties come to know whether such proposed Arbitrator is de-jure ineligible or not[9].

If the Arbitrator falls under any of the first 19 categories mentioned under schedule 5 then he/she is de-jure ineligible for being appointed as an Arbitrator as per section12(5) and schedule seven; if he/she falls under rest of the categories mentioned under schedule five then any of the parties can challenge his/her appointment only before the Arbitral Tribunal.

What if the Arbitrator does not disclose such information.
There are no penal provisions provided in the Act, except for cancellation/reduction of the fees[10], if the Arbitrator fails to disclose any information which would make him/her fall under schedule five. Therefore, parties must also be cautious while appointing an Arbitrator as to whether he/she falls under any of the categories mentioned under schedule five, so that the arbitration proceedings may not go futile in the end.

Various judicial pronouncements on categories mentioned under fifth and seventh schedule.
The term 'Business relationship' under category 1 of both schedules must mean relationship which would establish a strong likelihood of bias. It implies a relationship which would naturally be biased to one of the parties[11].

The word 'is an employee' under category 1 of both schedules indicate that person so nominated is only disqualified if he/she is a present employee, consultant or an advisor of one of the parties. The word 'other' used in category 1 would indicate a relationship other than an employee, consultant or an advisor and cannot be used to widen the scope of the category to include past/former employees[12].

The contention that one of the members of arbitral tribunal is an 'advisor' to the respondent since the respondent had obtained legal opinion from him in another matter, is holy unmerited. The word 'adviser' used in category 1 indicates an ongoing relationship with one of the parties. In this perspective, relationship of an advisor would signify an association that is continued and would not include obtaining a solitary opinion[13].

Categories 1 and 2 of the seventh schedule have to be read with section 12(5) of the said Act. Therefore, in spite of an agreement, the managing director of a party would not be eligible to act as an arbitrator. Since the managing director himself is not eligible to act as an arbitrator, he also will not be eligible to appoint any other arbitrator[14].

There are two expressions used in the fifth schedule and the seventh schedule. Category 31 of the fifth schedule uses the expression former employee. The natural corollary is that, there is a difference between an employee and an ex-employee. Thus, while being an employee is sufficient for justifiable doubts, such justifiable doubts would arise in case of an ex-employee only if he is within the window of three years from the date of ceasing to be an employee[15].


End-Notes:
  1. Section 11. Appointment of arbitrators. — (1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.
  2. Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
  3. Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.
  4. If the appointment procedure in sub-section (3) applies and:
    1. a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or
    2. the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made, upon request of a party, by [the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court]
  5. Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by [the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court].
  6. Where, under an appointment procedure agreed upon by the parties:
    1. a party fails to act as required under that procedure; or
    2. the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
    3. a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request [the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court]to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
    (6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

    (6B) The designation of any person or institution by the Supreme Court or, as the case may be, the High Court, for the purposes of this section shall not be regarded as a delegation of judicial power by the Supreme Court or the High Court.
  7. A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court is final and no appeal including Letters Patent Appeal shall lie against such decision.
  8. The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to:
    1. any qualifications required for the arbitrator by the agreement of the parties; and
    2. the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.]
  9. In the case of appointment of sole or third arbitrator in an international commercial arbitration, [the Supreme Court or the person or institution designated by that Court] may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.
  10. The Supreme Court or, as the case may be, the High Court, may make such scheme as the said Court may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-section (6), to it.
  11. Where more than one request has been made under sub-section (4) or sub-section (5) or subsection (6) to the Chief Justices of different High Courts or their designates, different High Courts or whom the request has been first made" their designates, the High Court or its designate to whom the request has been first made] under the relevant sub-section shall alone be competent to decide on the request.
  12. (a) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and sub-section (10) arise in an international commercial arbitration, the reference to the "Supreme Court or, as the case may be, the High Court" in those sub-sections shall be construed as a reference to the "Supreme Court"; and

    (b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and sub-section (10) arise in any other arbitration, the reference to "the Supreme Court or, as the case may be, the High Court" in those sub-sections shall be construed as a reference to the "High Court" within whose local limits the principal Civil Court referred to in clause (e) of sub-section (1) of section 2 is situate, and where the High Court itself is the Court referred to in that clause, to that High Court.
  13. An application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such Court, as the case maybe, as expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.
  14. For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.

Explanation: For the removal of doubts, it is hereby clarified that this sub-section shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution.]

[2] Section 12. Grounds for challenge. — (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances:
  1. such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
  2. which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.
Explanation1: The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

Explanation 2:The disclosure shall be made by such person in the form specified in the Sixth Schedule.

(2) An arbitrator may be challenged only if:
  1. circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
  2. he does not possess the qualifications agreed to by the parties.
(3) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

(4) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or 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 parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.


[3] THE FIFTH SCHEDULE [See section 12(1)(b)]
The following grounds give rise to justifiable doubts as to the independence or impartiality of arbitrators:

Arbitrator's relationship with the parties or counsel
  1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
  2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
  3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.
  4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.
  5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
  6. The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.
  7. The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.
  8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.
  9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
  10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.
  11. The arbitrator is a legal representative of an entity that is a party in the arbitration.
  12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
  13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
  14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom.
  15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
  16. The arbitrator has previous involvement in the case.
  17. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.
  18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.
  19. The arbitrator or a close family member 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.
  20. The arbitrator has within the past three years served as counsel for one of the parties or an affiliate of one of the parties or has previously advised or been consulted by the party or an affiliate of the party making the appointment in an unrelated matter, but the arbitrator and the party or the affiliate of the party have no ongoing relationship.
  21. The arbitrator has within the past three years served as counsel against one of the parties or an affiliate of one of the parties in an unrelated matter.
  22. The arbitrator has within the past three years been appointed as arbitrator on two or more occasions by one of the parties or an affiliate of one of the parties.
  23. The arbitrator's law firm has within the past three years acted for one of the parties or an affiliate of one of the parties in an unrelated matter without the involvement of the arbitrator.
  24. The arbitrator currently serves, or has served within the past three years, as arbitrator in another arbitration on a related issue involving one of the parties or an affiliate of one of the parties.
  25. The arbitrator and another arbitrator are lawyers in the same law firm.
  26. The arbitrator was within the past three years a partner of, or otherwise affiliated with, another arbitrator or any of the counsel in the same arbitration.
  27. A lawyer in the arbitrator's law firm is an arbitrator in another dispute involving the same party or parties or an affiliate of one of the parties.
  28. A close family member of the arbitrator is a partner or employee of the law firm representing one of the parties, but is not assisting with the dispute.
  29. The arbitrator has within the past three years received more than three appointments by the same counsel or the same law firm.
  30. The arbitrator's law firm is currently acting adverse to one of the parties or an affiliate of one of the parties.
  31. The arbitrator had been associated within the past three years with a party or an affiliate of one of the parties in a professional capacity, such as a former employee or partner.
  32. The arbitrator holds shares, either directly or indirectly, which by reason of number or denomination constitute a material holding in one of the parties or an affiliate of one of the parties that is publicly listed.
  33. The arbitrator holds a position in an arbitration institution with appointing authority over the dispute.
  34. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties, where the affiliate is not directly involved in the matters in dispute in the arbitration.

Explanation 1: The term "close family member" refers to a spouse, sibling, child, parent or life partner.

Explanation 2: The term "affiliate" encompasses all companies in one group of companies including the parent company.

Explanation 3: For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or commodities arbitration, to draw arbitrators from a small, specialised pool. If in such fields it is the custom and practice for parties frequently to appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the rules set out above.

[4] THE SEVENTH SCHEDULE [See section 12(5)] Arbitrator's relationship with the parties or counsel
  1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
  2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
  3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.
  4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.
  5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
  6. The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.
  7. The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.
  8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.
  9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
  10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.
  11. The arbitrator is a legal representative of an entity that is a party in the arbitration.
  12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
  13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
  14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom.
  15. Relationship of the arbitrator to the dispute.
  16. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
  17. The arbitrator has previous involvement in the case. Arbitrator's direct or indirect interest in the dispute.
  18. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.
  19. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.
  20. The arbitrator or a close family member 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 1.: The term "close family member" refers to a spouse, sibling, child, parent or life partner.

Explanation 2.: The term "affiliate" encompasses all companies in one group of companies including the parent company.

Explanation 3.: For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or commodities arbitration, to draw arbitrators from a small, specialised pool. If in such fields it is the custom and practice for parties frequently to appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the rules set out above.

[5] 14. Failure or impossibility to act
  1. The mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, if:
    1. he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and
    2. he withdraws from his office or the parties agree to the termination of his mandate.
  2. If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.
  3. If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12.
[6] Gauri Shankar Educational Trust v. Religare Finvest ltd, 2019 SCC Online Del 6987
[7] 13.Challenge procedure:
  1. Subject to sub-section (4), the parties are free to agree on a procedure for challenging an arbitrator.
  2. Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section(3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.
  3. Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.
  4. If a challenge under any procedure agreed upon by the parties or under the procedure under subsection (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.
  5. Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.
  6. Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees.
  7. 34. Application for setting aside arbitral award:
    1. Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).
    2. An arbitral award may be set aside by the Court only if:
      1. the party making the application 1 [establishes on the basis of the record of the arbitral tribunal that]
        1. a party was under some incapacity, or
        2. the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
        3. the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
        4. the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
        5. he composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
           
      2. the Court finds that:
        1. the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
        2. the arbitral award is in conflict with the public policy of India.

Explanation 1.: For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,:
  1. the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
  2. it is in contravention with the fundamental policy of Indian law; or
  3. it is in conflict with the most basic notions of morality or justice.

Explanation 2.: For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.

[9] HRD Corp v. GAIL (India) ltd, (2018) 12 SCC 471
[10] Supra, note 7, section 13(6)
[11] Supra, note 9, HRD Corp v. GAIL (India) ltd, (2018) 12 SCC 471
[12] State of Haryana v. GF Toll Road Pvt ltd, (2019) 3 SCC 505
[13] Supra, note 9, HRD Corp v. GAIL (India) ltd, (2018) 12 SCC 471
[14] Jay Bhagwati Construction Co. v. Haware Engineers and Builders Pvt ltd, 2018 SCC Online Bom 3873
[15] Offshore Infrastructure ltd. v. BEHL, 2016 SCC Online Mad 31837

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