UNILATERAL APPOINTMENT OF ARBITRATORS – THE QUANDARY CONTINUES
Written by: Pranav K R
Since the inception of arbitration as a preferred mode of dispute resolution, the issue of arbitrator’s impartiality and independence has been a recurring source of contention in India. Such contentions are mainly observed in contracts where one party in abuse of its dominant position retains the right to appoint the arbitrator and the place of arbitration and the party with a weak bargaining power is forced to accept such terms without any room for negotiation. Since parties can always appoint arbitrators who are favourable to their case, there are high chances that the unilaterally appointed arbitrator will sway in favour of the appointing party. This exploitation is more prevalent in standard form of contracts (‘take it or leave it’ contracts) such as finance agreements, employment agreements, insurance agreements etc.
Validity of unilateral appointment of arbitrators:
Despite room for foul play and partiality, the Supreme Court in a series of cases such as M/s. Indian Drugs & Pharmaceuticals v. M/s. Indo-Swiss Synthetics Germ Manufacturing Co. Ltd.1, Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd.2 and Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd.3 had held that unilateral appointment of arbitrators are legally valid and enforceable. The courts’ rationale behind validating unilateral appointments was that mere challenge cannot be justified unless there are circumstances that give rise to justifiable doubts under Section 12(3)4 of Arbitration & Conciliation Act, 1996. Further, since the parties have already agreed to such appointments while entering into the contract, invalidating them would go against ‘doctrine of estoppel’ and ‘party autonomy’.
Neutrality of Arbitrators – Law Commission’s Report and 2015 Amendments:
The 246th Report of The Law Commission of India5 (‘Report’) was a positive step towards addressing the issue of neutrality of arbitrators. Based on the recommendations suggested by the Report, Section 126 was amended and consequently the Fifth Schedule7, Sixth Schedule8 and Seventh Schedule9 was inserted in the Arbitration and Conciliation (Amendment) Act, 2015 which came into effect on 23.10.2015 (‘Act’). Though the amendments and schedules were introduced to promote impartial arbitrations and to prevent ineligible persons from acting as arbitrators, a comprehensive ban on unilateral appointments was not imposed by the 2015 Amendment Act.
TRF Ltd. v. Energo Engineering Projects Ltd. – The turning point:
1 (1996) 1 SCC 54
2 (2007) 5 SCC 304
3 (2009) 8 SCC 520
- Section 12(3) of The Arbitration and Conciliation Act, 1996 – 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.
- Law Commission of India, Report No. 246: Amendments to the Arbitration & Conciliation Act, 1996, Pgs. 28 to 31 6 Section 12 – Grounds for challenge
- Fifth Schedule – Grounds which give justifiable grounds as to the independence and impartiality of arbitrators
- Sixth Schedule – Disclosure to be given by the arbitrators
- Seventh Schedule – Categories of persons who are ineligible to be appointed as arbitrators.
The genesis to the downfall of unilateral appointments was first observed in TRF Ltd. v. Energo Engineering Projects Ltd.10 (‘TRF Ltd.’) wherein the arbitration clause provided that in case of a dispute, the matter shall be “referred to sole arbitration of the Managing Director of Buyer or his nominee”. The Court considered the maxim Qui Facit Per Alium Facit Per Se (he who acts through another acts himself) and held that if the nomination of an arbitrator by an ineligible arbitrator is allowed, it would tantamount to carrying out the proceedings by himself and held that once an arbitrator becomes ineligible by operation of law, he cannot nominate another person as an arbitrator. This position was also affirmed by the Supreme Court in Bharat Broadband Network Limited v. United Telecoms Limited11 (‘Bharat Broadband’).
Perkins Eastman – The Long Awaited Decision:
The law laid down in TRF Ltd. and Bharat Broadband was further expanded in Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd12 (‘Perkins Eastman’). In Perkins Eastman, the agreement provided that in case of a dispute, it shall be referred to a sole arbitrator appointed by the Chairman and Managing Director of HSCC. The Court held in TRF Ltd., the Managing Director was found incompetent because of the interest he was having in the outcome of the dispute and if the interest that a person has in the outcome of the dispute is taken as the basis for the possibility of bias, it will always be present in all types of unilateral appointments. The Court held that a person who has an interest in the outcome of the dispute must not have the power to appoint a sole arbitrator and imposed a ban on all unilateral appointment of arbitrators.
Aftermath of Perkins Eastman:
One question that stems from Perkins Eastman is whether the decision will have a retrospective effect on all arbitrations commenced under the 2015 Act. This was clarified by the Delhi High Court in Proddatur Cable TV Digi Services v. SITI Cable Network Limited 13 (‘Proddatur Cable’) wherein the Court referred to the ratio laid down in Bharat Broadband and held that the decision in Perkins Eastman would be applicable to all arbitrations commenced after the 2015 Act. Going by Proddatur Cable, all unilateral appointments would become automatically invalid and the mandate would be liable for termination under Section 1414 of the Act. However, the arbitrator could continue if a written consent is obtained under the proviso to Section 12(5)15 of the Act. Where awards are already passed, such awards would be deemed to have been passed without jurisdiction and the parties could set-aside the awards under Section 34(2)(a)(v) and Section 34(2)(b) Explanation I (iii) of the Act16. In cases where the awards are not set-aside, a party could still challenge it during execution on ground that it is null and non est in law.
10 (2017) 8 SCC 377
11 (2019) 5 SCC 755
12 AIR 2020 SC 59
13 267 (2020) DLT 51
14 Refer Section 14 of The Arbitration and Conciliation Act, 1996 as amended by Act 3 of 2016 – Failure or impossibility to act. 15 Proviso Section 12(5) of The Arbitration and Conciliation Act, 1996 as amended by Act 3 of 2016 – Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.
- Refer Section 34 of The Arbitration and Conciliation Act, 1996 as amended by Act 3 of 2016 – Application for setting aside arbitral award.
Another question is whether the Court has overstepped its domain in making unilateral appointment invalid in law. Firstly, a joint reading of Section 11(2)17 and Section 12(4)18 of the Act would make it clear that unilateral appointment was indeed allowed by the Act. Further, if the 2015 Act intended to prevent such appointments, then the amendment would have expressly said so. Therefore, TRF Ltd. and Perkins Eastman have in a way expanded the legislative intent of the Parliament. Secondly, the retrospective effect of Perkins Eastman have rendered all arbitrations commenced after 23.10.2015 in which an arbitrator was appointed unilaterally as invalid. This would result in parties knocking the doors of the courts either for appointment of arbitrators, or to set aside the arbitral awards which nullifies the principle of ‘minimum court intervention’.
Appointment by one party from a panel prepared by the other – Good or Bad?
In 2017, the Supreme Court in Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Limited19 (‘Voestalpine’) upheld an arbitration clause which provided for appointment of arbitrators from a panel prepared by Delhi Metro Rail Corporation (‘DMRC’) wherein Voestalpine Schienen and DMRC are required to appoint one arbitrator each and the two arbitrators so appointed will appoint the presiding arbitrator from the panel. The first five- member panel prepared by DMRC which included its employees, ex-employees and other officials from government departments was objected by Voestalpine Schienen and consequently DMRC broadened the panel to 31 arbitrators and excluded its employees and ex- employees from the list. The Court struck down the five-member panel prepared by DMRC on grounds that it gave limited opportunity and upheld the broader list of 31 arbitrators. Though Perkins Eastman cited Voestalpine in its decision, it did not clarify the position of law with respect to the appointment of arbitrators from a panel prepared by the other.
The Exception – The Derailment:
The exception left out by Perkins Eastman was elaborated in Central Organisation for Railways Electrification v. M/s ECI-SPIC-SMO-MCML (JV)20 (‘Railways Electrification’) wherein the Contractor was required to suggest two names from the four-member panel prepared by the Railways and the General Manager of the Railways was required to appoint one arbitrator from the two names suggested by the Contractor as Contractor’s nominee and simultaneously appoint the second and the presiding arbitrator. Even though Railways Electrification relied on Voestalpine, TRF Ltd., and Perkins Eastman, the Court finally held that the appointment should be strictly in terms of the agreement agreed by the parties.
The decision in Railways Electrification is controversial on two aspects. Firstly, the Supreme Court in Voestalpine struck down the panel which contained employees and ex-employees and directed for a diversified panel for selection of arbitrators. However, this was not the case in Railways Electrification since the panel provided by Railways was very limited. Secondly, Railways Electrification also departed from balance of power principle cited in TRF Ltd. and Perkins Eastman by allowing the General Manager to nominate both the second and the presiding arbitrator
- Section 11(2) of The Arbitration and Conciliation Act, 1996 as amended by Act 3 of 2016 – Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
- Section 12(4) of The Arbitration and Conciliation Act, 1996 as amended by Act 3 of 2016 – 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.
19 (2017) 4 SCC 665
20 2020 (1) ALT 70
Takeaway and the way forward:
Railways Electrification, being a larger bench has not only overruled Voestalpine in various aspects but has also diminished the proposition deduced by TRF Ltd. and Perkins Eastman. Therefore, whether the decision in TRF Ltd. and Perkins Eastman can be applied to prevent unilateral appointments or whether the ‘binding nature of contracts’ as upheld by Railways Electrification should be applied to allow such unilateral appointments is the quandary that needs more clarity from the judiciary.
In future, the parties will have to carefully structure their arbitration clauses to ensure that no undue advantage is exercised by any party.
- The parties can still opt for sole arbitrators, provided such appointments are made by a written consent from both parties. In case of a disagreement, the parties can take recourse under Section 11 of the Act.
- Since three-member tribunals ensure balance of power between the parties, the parties can prefer the same, if commercially feasible.
- Parties can consider institutional arbitration over ad-hoc arbitrations. Though ad hoc arbitrations are cost effective compared to institutional arbitrations, the latter negates any challenges against arbitrator’s independence and impartiality.
- In future, the parties can also choose the appointment of arbitrators by the arbitral institutions which are proposed under the recent amendments.21
The exploitation by a stronger party will continue to persist until the position of law is clarified by the courts or the legislature. The concept of ‘party autonomy’ and ‘binding nature of contracts’ should not be stretched to a point where it negates the very basis of having impartial arbitrations and it is expected that either the Supreme Court or the Parliament will declare neutrality of arbitrators as the cornerstone of arbitration and prohibit all types of unequal and unilateral appointment of arbitrators in future.
21 Arbitration and Conciliation (Amendment) Act, 2019 (33 of 2019) dated August 09, 2019