Unilateral Appointment And Section 12(5) Of Arbitration And Conciliation Act, 1996

Update: 2024-06-05 13:12 GMT
Click the Play button to listen to article

Despite having landmark judgements and amendments, unilateral appointments have been perplexing the courts in India. The question remains whether unilateral appointments are void ab into, whether all unilateral appointments have to be tested with schedule seven and what is the extent of waiver of rights under section 12 Act. Although the Apex court has laid clear precedent in...

Your free access to Live Law has expired
Please Subscribe for unlimited access to Live Law Archives, Weekly/Monthly Digest, Exclusive Notifications, Comments, Ad Free Version, Petition Copies, Judgement/Order Copies.

Despite having landmark judgements and amendments, unilateral appointments have been perplexing the courts in India. The question remains whether unilateral appointments are void ab into, whether all unilateral appointments have to be tested with schedule seven and what is the extent of waiver of rights under section 12 Act. Although the Apex court has laid clear precedent in the Perkin Eastman and TRF case that all unilateral appointments attack the root of arbitration hence are invalid. But the judgment of Mcleod Case showed two major diversions from established precedent; firstly, all unilateral appointments are not invalid and secondly, participating and filing applications in unilateral appointed arbitration amounts to written agreement thus waiving the right to object. Although dust did not settle, the Madras High court within months of Mcleod, in the Prime store Case found a major escape from judgment. The court invalidated unilaterally appointed even though no real relation can be established between the party and the arbitrator. This shows the extent of judicial intervention and multiple interpretations on the same subject matter.

The Article deals with five major parts, the concept of neutrality and independence of arbitrator, Doctrine of Mutuality and doctrine of Unconscionability, analysis of Mcleod Case[1] and Prime store case[2], and lastly whether filing pleading is express agreement or conduct of the party and the difference between appointment of arbitrator and nomination of arbitrator,.

Importance of neutrality and independence of arbitrators

Section 12 of Arbitration and Conciliation Act, 1996 (henceforth “Act”) holds important impetus in Arbitration proceeding for ensuring neutrality and fairness of proceeding. Unilateral appointments strike upon these basic principles. It is seen from the framing from Section 12 (3) of the Act, majorly the grounds of challenge are firstly the neutrality or independence of arbitrator and secondly, non-possession of qualification agreed by parties. S.12(5) further elaborate on the relationship that fouls the principle of neutrality. The use of the word “only if” in S.12(3) holds its supremacy and provides S.12(5) as its sub-set. Hence prior to testing any appointment or question of law on the ground of S.12(5) it is important to test on the ground neutrality and independence under Section 12(3). As stated in case Hashwani v. Jivraj[3],“arbitration agreement would be a contract for the provisions of personal services, but they were not personal services under the direction of parties”

The role of Independence and impartiality in arbitration is described in Perkin Eastman[4] and Voestailpine Schienen GmbH[5], which state “impartiality as a subjective concept and can be surfaced during the proceedings whereas independence is more objective and can be discovered on the outskirts of proceedings.” The Mcleod argument that only those appointments hit by S.12(5) read with Schedule 7 are invalid seems to be more diverted from the principle of “Independence of arbitrator” especially, which from very outskirt can be seen arbitratory. Although schedule 7 provides the list of people ineligible, it has to be remembered that the schedule has been brought from Part I of International bar association Guidelines on conflict of interest in International Arbitration, 2014, based on the US understanding of neutrality and independence which stands contrast to Indian understanding as seen in Perkin Eastmen. Basic principles like neutrality and independence, which may vary from country to country or case to case, cannot be read strictly to particular sections or schedules. Hence, section 12 should be seen more in the line of S.12(3) rather than S.12(5). The principle which does not align may be invalidated by court of law.

Doctrine of Mutuality and doctrine of Unconscionability

Unilateral appointment is not the point of contention in India, but around the globe. The arbitration around the globe is not only challenged on unilateral appointments clauses but all other unilateral clauses such as jurisdiction, procedure and governing laws. The forefront runner to unfold this quest is the United States. The doctrine evolved involving the subject is “doctrine of mutuality” and “doctrine of unconscionability”. Doctrine of mutuality evolved in the case of Hull v. Norcom[6], where the unilateral clause provided only the employer with the right to move court. The court held the clause as non-mutual because of lack of promises to perform obligation mutually. Hence, where agreement is not reciprocal and lacks mutual obligation, it will be void. Similarly on the same line, doctrine of unconscionability means the unjust and unfair practice by the dominant party to suppress the weaker by unreasonable clauses. The court further ruled in Armendariz vs. Foundation Health Psychcare Services, Inc.[7], formulated two requirements for doctrine; firstly procedural (exploitation of bargaining power) and substantive (one sided unreasonable effect). In another case, describing these clauses as agreement between rabbits and foxes, it stated that, “The relative positions of the parties, a national corporate lender on one side and elderly, unsophisticated consumers on the other, were grossly unequal.”

On the other hand, contrasting opinions can be seen in common law jurisdiction. Initially, common law followed the bilateral rights of references but in Pittalis v. Sherefettin[8]diversion was seen and the court ceased to follow the doctrine of mutuality. The common law believes these clauses to be needed for business and encompassing party autonomy. These principles are also followed in Australia and some of the European countries.

Finding a escape from Mcleod Case ( the analysis of “Prime store case”)

Prior to analysing the Prime store case, it is important to briefly discuss the Mcleod case. In Mcleod, S.14 of Act was filed over a dispute for unilateral appointment of arbitrator, who was a Retired High Court judge, through clause providing power to respondent to appoint unilaterally and petitioner proceeded with the arbitration without raising objection. On the other hand, in the Prime store case, S.34 petition was filed over a lease dispute for arbitration held unilaterally through a clause providing the power to lessor and where the arbitrator was also a retired High court Judge.

The court in Mcleod case provided that all unilateral appointment of arbitrator is not invalid and only those hit with S.12(5) read with schedule 7 are invalid, thus carving an exception for Perkin Eastman. Although the petitioner contended the violation of Entry 12 of schedule 7. But in paragraph 56, the court rejected this on the premise that the arbitrator was a retired judge of Madhya Pradesh High court and is seen impartial. On the other hand in similar situation in Prime store case where petitioner challenged under Schedule 7 Entry 8, the court in paragraph 42 held that, “in such cases a reasonable and justifiable doubt "may arise in the minds of the petitioners since the respondents had particularly chosen and appointed the learned Arbitrator unilaterally, he “might have been regularly advising the respondents” even though he derived no significant financial income.” The court arguments were based on dubious and uncertain words like "would” and “may”. Hence, the court rejected the award based on assumption where the party and arbitrator lacked a real relationship. The court further rejected the plea of unbiasedness of the arbitrator being a retired judge and held that disqualification under schedule 7 covers even the retired judge.

The second contention in Mcleod case was with regards to proviso of S. 12(5) which requires waiver by express writing agreement. The court held that pleading filed during an arbitration is a written agreement and will act as a waiver. Further, the petitioner's awareness of Perkin Eastman and TRF will act like a waiver of right to object under S. 12(4) of the Act. In this regard, the court in the Prime store case held that even if both parties participated in proceedings commenced by a disqualified person, the same is non est in law and award rendered would be set aside. This will also be discussed in a further part of the article. Hence, Prime store case nullified the Mcleod on both the aspects and with its liberal interpretation further the horizon of apex court judgment in Perkin Eastman. The court helps in creating an arbitration friendly environment and furthers the scope of arbitration in India and hence stands as a good law.

Filing of pleading in Arbitration is “conduct of party”, not the express written agreement.

Another contention revolving around S.12(5) is the waiver by “express written agreement”. The Court in “Bharat Broadband Network Limited v. United Telecoms Limited[9]” has made clear that written agreement is a necessity and does not include any implied waiver by conduct or otherwise. The court pointed out S.9 of Indian Contract Act[10] which states that proposal or acceptance made in words is expressed and otherwise than word, is implied. In this regard G. Antony Kanselin v. Naresh & Co[11] hold significant standing where a more explicit definition is found in S.187 of Contract Act[12]. It states, “An authority is said to be expressed when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted for in the circumstances of the case.” From the circumstances of the cases involving unilateral appointments, it can be inferred that the filing of pleading, even if written, is not the agreement and mere a legal obligation or practice of its natural rights of audi alteram partem (hear the other side). Usually an inflicted party is left in a dubious situation whether to participate or not because as seen in Arjun mall retail holding p. Ltd v. Gunicen inc.[13], even if the party failed to proceed then also the tribunal passes an ex-parte award, hence participating portrays a better option of fair hearing.

Nomination of an arbitrator, not the appointment of an arbitrator.

In recent times, the judiciary has been using appointment of arbitrator and nomination of arbitrator in interrelated ways. But the point of contention is that “appointment of arbitrator” finds its mention in S.11 but “nomination” is totally absent from the Act. The Black law dictionary defined “Appointment” as “the designation of a person having authority to discharge duties of some office” whereas “Nomination” means to name, designate or propose for appointment. Appointment means certainty with authority whereas nomination lacks authority and can be altered. Although, nomination finds its place in various landmark cases. In TRF Ltd. v. Energo Engg. Project Ltd[14], the court stated, “ If the Managing director is found to be ineligible as arbitrator then its power to nominate also stands vitiated.” Hence court related nomination with the “delegation of power”. Another category of cases involves “nomination” as “selection from List of panels”,as discussed in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd (“Voestalpine”), Central Organisation For Railway Electrification v ECL-SPIC-SMO-MCML (JV)[15] and JSW Steel Limited v South Western Railway , which is pending before 5 bench of the Supreme court.[16]

The arbitrators in cases like Mcleod and Prime store cases are merely nominated and have no value in the eyes of law or arbitration act, hence have no authority or right to commence the arbitration proceeding. From the definition provided in TRF Ltd. case and Voestalpine Schienen GmbH case, nomination has limited meaning and therefore when only one party had the choice of appointing, it would be nomination. Deliberation, consensus, neutrality or unbiasedness are one of the basic tenets of arbitration. These appointments raise suspicion as seen in the Prime store case and agreement providing for these appointments are non-est, as it promotes unequal power sharing and dominating parties asserting their influence. Some commenters held these practices as a “moral hazard”, a practice based on “comfort in the status quo” and having the potential to foster “arbitral terrorism” where a party appoints a partisan arbitrator.[17]

Issue of Unilateral appointments questions the basics of arbitration and henceforth, should not be held restrictive to Schedule 7. Schedule 7 is, however, beneficial and holds significant importance but should not be the yardstick for determining validation of unilateral appointments. There are conflicts between two concepts of arbitration: neutrality or independence of arbitrator and party autonomy Although the concept of “party autonomy” favours the freedom of party to procedure and agreement, it should not be the genesis to principle which has a tendency to distort the process fairness. Hence, there is a need to have an arbitration friendly environment but with fair procedure and natural justice.

Views are personal.

[1] McLeod Russel India Ltd. v. Aditya Birla Finance Ltd., 2023 LiveLaw (Cal) 40

[2] Prime Store v. Sugam Vanijya Holdings (P) Ltd., 22023 LiveLaw (Mad) 135

[3] Jivraj v Hashwani (2011] UKSC 40

[4]    Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760

[5] Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665

[6] Hull v. Norcom, 750 F.2d 1547 (11th Cir. 1985)

[7] Armendariz vs. Foundation Health Psychcare Services, Inc. 24 Cal. 4th 83, 6 P.3d 669 (2000)

[8] Pittalis v. Sherefettin [1986] EWCA Civ J0227-6

[9] Bharat Broadband Network Limited v. United Telecoms Limited, 2019 SCC Online SC 547.

[10] S.9 of Contract Act 1872

[11] G.Antony Kanselin and another versus M/s.Naresh & Co., Arb.O.P.(Com.Div.) No.600 of 2022

[12] S.187 of Contract Act 1872

[13] Arjun Mall Retail Holdings (P) Ltd. v. Gunocen Inc., AIR 2024 Del 62

[14] TRF Limited v. Energo Engineering Projects Ltd., [(2017) 8 SCC 377]

[15] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.

[16] JSW Steel Ltd. v. South Western Railway, 2022 SCC OnLine SC 1973

[17] Berwin, Leighton, Paisner, Research Based Report on Party appointed arbitrator (2017)


Similar News