In January 2024, Aarohan Pharma Private Ltd ('Aarohan'), a reputed pharmaceutical manufacturer, entered into a contract with Pentagon Lifesciences Ltd ('Pentagon') for the development and supply of a new line of oncology
CS Professional · Arbitration, Mediation and Conciliation · PYQS · December 2025
In January 2024, Aarohan Pharma Private Ltd ('Aarohan'), a reputed pharmaceutical manufacturer, entered into a contract with Pentagon Lifesciences Ltd ('Pentagon') for the development and supply of a new line of oncology drugs. The contract, valued at ₹150 crore, contained detailed provisions on regulatory approvals, manufacturing timelines, quality control standards, penalties for delay, variation in technical specifications and dispute resolution. Clause 21 of the agreement stipulated that disputes would be resolved through arbitration under the Arbitration and Conciliation Act, 1996, with Hyderabad as the seat and proceedings governed by CIAC Rules. By April 2024, disagreements surfaced as Aarohan alleged that Pentagon delayed release of milestone-based payments and failed to provide timely approvals for raw material sourcing protocols, leading to cost overruns. Pentagon countered that Aarohan had missed regulatory submission deadlines, used substandard excipients in certain trial batches, and ignored directions from the joint project monitoring committee. Quality inspections conducted by Pentagon revealed compliance defects in two pilot production runs, which Pentagon relied on to withhold further payments. Tensions escalated and after weeks of negotiation, the parties signed a Settlement Agreement on July 15, 2024. Pentagon agreed to pay Aarohan ₹30 crore in full and final settlement of all claims, while Aarohan agreed to transfer all partially developed product dossiers and trial data to another manufacturer appointed by Pentagon. However, the settlement did not expressly reaffirm or exclude the arbitration clause. In October 2024, Aarohan, aggrieved that the compensation did not cover its actual R&D and manufacturing expenses, issued a Notice of Arbitration invoking Clause 21 of the original contract. Pentagon objected, contending that the settlement agreement had superseded the original contract and extinguished the arbitration clause. Further, Pentagon challenged Aarohan's nominated arbitrator, citing the arbitrator's past professional ties with Aarohan's counsel. Aarohan then approached the Court seeking constitution of an arbitral tribunal, supporting its application with correspondence, invoices and the disputed settlement terms. Based on the above facts, answer the following questions: Elucidate the legal grounds on which Pentagon can challenge the appointment of Aarohan's nominated arbitrator.
Answer & Explanation:
Section 12 of the Arbitration and Conciliation Act, 1996 provides for the Grounds for challenge. According to section 12(1), when a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,- (a) 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 (b) 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. 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. According to section 12(3), an arbitrator may be challenged only if- (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or (b) he does not possess the qualifications agreed to by the parties. Further, according to section 12(5), 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. In the given situation, Aarohan's nominated arbitrator, may be challenged by Pentagon on the ground of having past relationship with parties or counsel of the parties. The law does not treat every prior association as disqualifying; however, where the arbitrator has significant professional engagements with the counsel of any party, such as regularly appearing as senior counsel with them, frequently being appointed as arbitrator at the instance of that counsel, sharing chambers or office space, having ongoing advisory or consultancy arrangements, or having financial or business associations, the apprehension of bias becomes reasonable. Similarly, where the arbitrator has previously advised the counsel or their firm on issues closely connected to the subject matter of the dispute, or has been professionally dependent on the counsel for briefs or appointments in the recent past, such relationship may too be acted upon and be a ground for challenge.
Topics: Arbitration and Conciliation Act, 1996
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