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Free To Arbitrate But Not To Appoint

Sonal Kumar Singh,Ashutosh Nagar & Sayantika Ganguly
29 Feb 2020 9:30 AM GMT
Free To Arbitrate But Not To Appoint

-Scrutiny of unilateral appointment mechanisms by the Supreme Court

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'Party autonomy' is a primary principle or the feature that governs arbitrations. In other words, the parties to a contract are free to agree on, inter alia, the mode of dispute resolution, the seat of arbitration, the rules governing the arbitration and for the purpose of the present article, the mechanism for appointment of arbitrator(s). Lately, the mechanisms prescribed and agreed in the contracts are being challenged primarily on the ground of being contrary to the provisions of the Arbitration and Conciliation Act, 1996 ("the Act"), particularly Section 12 and Section 15 read with the Fifth Schedule and Seventh Schedule of the Act. A party aggrieved by the mechanism for appointment of arbitrator(s), which it consented to at the time of execution of contract, may approach an appropriate court under Section 12 read with Section 11 of the Act or under Section 15 read with Section 11 of the Act for appointment of arbitrator(s), in effect challenging the mechanism for appointment prescribed and agreed in the contract. In such a situation, the appropriate court is empowered to scrutinize the mechanism for appointment of arbitrators as agreed in the contract. It appears from the recent decisions of the Hon'ble Supreme Court that mechanisms for unilateral appointment of arbitrators are being observed to be in violation of the provisions of the Act for being unfair and raising doubts on the credibility and neutrality of arbitrator(s) appointed through such mechanisms. The issue amplifies when these precedents are given retrospective effect to the ongoing arbitral proceedings.

The parties may resolve to include provision for dispute resolution, particularly a mechanism for appointment of the arbitrator(s) in terms of sub-section (2) of Section 11 of the Act in their respective contracts. Sub-Section (3)(a) of Section 12 the Act provides that "An Arbitrator may be challenged only if – (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality,…". Further, sub-section (5) of Section 12 of the Act states that "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."

The Hon'ble Supreme Court subsequent to implementation of the Arbitration and Conciliation (Amendment) Act, 2015 has delivered various decisions on who may appoint an arbitrator and who maybe appointed as an arbitrator, in effect commenting on validity of various unilateral mechanisms for the appointment of arbitrators.

The Hon'ble Supreme Court on February 10, 2017 passed the decision in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Limited, Arbitration Petition (Civil) No. 50 of 2016 ("Voestalpine Judgment") wherein the Court was presented with a situation where the Respondent i.e. Delhi Metro Rail Corporation ("DMRC") was contractually empowered to maintain a panel of arbitrators, from which, in case of a dispute, DMRC was required to share three or five prospective names to the other party for the appointment of the tribunal. Pursuant to sharing the prospective names for the other party's consideration, DMRC shared the entire list of panel of arbitrators maintained by it for the other party's consideration. The Hon'ble Supreme Court in the Voestalpine Judgment decided on the validity of such dispute resolution/appointment mechanism where one party was contractually empowered to maintain a panel of arbitrators from which a tribunal was to be constituted.

Although the mechanism under challenge in the Voestalpine Judgment was not a mechanism for unilateral appointment in strict sense. It is an important Judgment to understand how alternative mechanisms have been examined by the Hon'ble Supreme Court to be in line with the Act, where one party is more empowered in the process of appointment of arbitrators. The Hon'ble Court in the Voestalpine Judgment stated:

"27. Before we part with, we deem it necessary to make certain comments on the procedure contained in the arbitration agreement for constituting the arbitral tribunal. Even when there are number of persons empanelled, discretion is with the DMRC to pick five persons therefrom and forward their names to the other side which is to select one of these five persons as its nominee (Though in this case, it is now done away with). Not only this, the DMRC is also to nominate its arbitrator from the said list. Above all, the two arbitrators have also limited choice of picking upon the third arbitrator from the very same list, i.e., from remaining three persons. This procedure has two adverse consequences. In the first place, the choice given to the opposite party is limited as it has to choose one out of the five names that are forwarded by the other side. There is no free choice to nominate a person out of the entire panel prepared by the DMRC. Secondly, with the discretion given to the DMRC to choose five persons, a room for suspicion is created in the mind of the other side that the DMRC may have picked up its own favourites. Such a situation has to be countenanced. We are, therefore, of the opinion that Sub-clauses (b) & (c) of Clause 9.2 of SCC need to be deleted and instead choice should be given to the parties to nominate any person from the entire panel of arbitrators. Likewise, the two arbitrators nominated by the parties should be given full freedom to choose third arbitrator from the whole panel.

28. …Keeping in view the spirit of the amended provision and in order to instill confidence in the mind of the other party, it is imperative that panel should be broad-based. …Likewise panel should comprise of persons with legal background like judges and lawyers of repute as it is not necessary that all disputes that arise, would be of technical nature. There can be disputes involving purely or substantially legal issues, that too, complicated in nature. Likewise, some disputes may have the dimension of accountancy etc. Therefore, it would also be appropriate to include persons from this field as well."

[Emphasis supplied]

Accordingly, the Hon'ble Supreme Court in Voestalpine Judgment upheld the validity of the mechanism of maintaining a broad panel of arbitrators by one party from which the other party may select its nominee arbitrator or sole arbitrator for the constitution of the tribunal.

Thereafter, the Hon'ble Supreme Court on November 26, 2019 passed the judgment in the case of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd., Arbitration Application No. 32 of 2019 ("Perkins Judgment") wherein the dispute resolution mechanism prescribed that the Petitioner may approach Respondent's CGM for resolution of any dispute. The decision of Respondent's CGM could be appealed before Respondent's Director (Engg.) and if the Petitioner was still dissatisfied, it was required to give Notice to Respondent's CMD for the appointment of arbitrator. The Dispute Resolution clause specifically stated that "no person other than a person appointed by such CMD, HSCC as aforesaid should act as arbitrator."

In accordance with the dispute resolution mechanism, the Petitioner issued a Notice to Respondent's CMD. However, no appointment of arbitrator was made within the prescribed time. Subsequent to the expiry of such time, the Respondent issued a letter to the Petitioner appointing a sole arbitrator. Accordingly, the Hon'ble Court considered whether a case was made out for exercise of power by the Court to make an appointment of an arbitrator.

The Hon'ble Court while deciding the issue discussed its previous decision passed in TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377 ("TRF Limited") where the Court states:

"50. There is no quarrel that by virtue of Section 12(5) of the Act, if any person who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as the arbitrator. …We are singularly concerned with the issue, whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator.

54. …By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. …It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse."

  • In order to circumvent TRF Limited, dominant parties (mostly companies) modified their appointment clauses to empower the company to appoint the arbitrator instead of a particular designated individual from the same company, which mechanism was upheld by various Courts by not applying TRF Limited in its letter and spirit. The said issue was put to rest by the Perkins Judgment. The Perkins Judgment discussed two categories of cases. The first, similar to the one dealt with in TRF Limited where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorized to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. The Hon'ble Supreme Court while discussing the ratio in TRF Limited states:

"But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited."

The Hon'ble Supreme Court then relied on the Law Commission Report No. 246 and its previous Voestalpine Judgment on the issue of 'Neutrality of Arbitrators', wherein the Court states as under:

"20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator's appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration…"

In light of the TRF Limited, Voestalpine Judgment and the Law Commission Report No. 246, the Hon'ble Supreme Court in Perkins Judgment annulled the letter of the Respondent appointing an arbitrator, in effect, ruling that the practice of empowering any individual/entity, interested in the cause, to appoint a sole arbitrator to be contrary to or beyond the Act as the empowered individual/entity may have an interest in the outcome of a dispute and there is a possibility of bias. The said principle has also been affirmed by the Hon'ble High Court of Bombay in its judgment Lite Bite Foods Pvt. Ltd. v. Airports Authority of India, Comm Arbitration Application (L) No. 495 of 2019 passed on December 4, 2019.

The Perkins Judgment sets the law straight. However, it is a point of concern that when the Perkins Judgment is given a retrospective effect, it raises doubts on the appointment mechanisms of on-going arbitral proceedings. The Hon'ble Supreme Court in the Judgment of Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755 and later on the Hon'ble High Court of Delhi in Proddatur Cable TV Digi Services v. SITI Cable Netwek Limited – O.M.P.(T)(Comm.) No. 109 of 2019 have clarified that the Perkins Judgment is applicable retrospectively to on-going arbitral proceedings.

In is clear from above that any mechanism absolutely empowering one party to appoint the arbitrator will be covered by the Perkins Judgment. In this regard, we may see that in order for parties to retain freedom to appoint, a mechanism similar to one being upheld in Voestalpine Judgment may be followed. Further, the Hon'ble Supreme Court recently on December 17, 2019 passed the decision of Central Organisation for Railway Electification v. M/s ECI-SPIC-SMO-MCML (JV), Civil Appeal Nos. 9486-9487 of 2019 ("CORE Judgment") wherein the Court has upheld the practice of one contractual party suggesting names of four or five prospective arbitrators to the other contractual party from which the other contractual party may select two names. Thereafter, the first contractual party will select its nominee arbitrator from the two names selected by the other party and also appoint an arbitrator as the presiding member, not necessarily from the names suggested previously. The advantage of such a mechanism is that the parties are not required to maintain a broad panel of arbitrators as discussed in the Voestalpine Judgment. The relevant paragraphs of the CORE Judgment have been extracted herein below:

"36. Clause 64(3)(b) of GCC deals with appointment of arbitrator where applicability of Section 12(5) of the Act has not been waived off. In terms of Clause 64(3)(b) of GCC, the Arbitral Tribunal shall consist of a panel of three retired Railway Officers retired not below the rank of Senior Administrative Grade Officers as the arbitrators. For this purpose, the Railway will send a panel of at least four names of retired Railway Officers empanelled to work as arbitrators indicating their retirement date to the contractor within sixty days from the date when a written and valid demand for arbitration is received by the General Manager. The contractor will be asked to suggest the General Manger at least two names out of the panel for appointment of contractor's nominees within thirty days from the date of dispatch of the request of the Railway. The General Manager shall appoint at least one out of them as the contractor's nominee and will simultaneously appoint the remaining arbitrators from the panel or from outside the panel, duly indicating the "Presiding Officer" from amongst the three arbitrators. The exercise of appointing Arbitral Tribunal shall be completed within thirty days from the receipt of names of contractor's nominees. Thus, the right of the General Manager in formation of Arbitral Tribunal is counterbalanced by respondent's power to choose any two from out of the four names and the General Manager shall appoint at least one out of them as the contractor's nominee.

37. …Since the respondent has been given the power to select two names from out of the four names of the panel, the power of the appellant nominating its arbitrator gets counter-balanced by the power of choice given to the respondent. Thus, the power of the General Manager to nominate the arbitrator is counter-balanced by the power of the respondent to select any of the two nominees from out of the four names suggested from the panel of the retired officers. In view of the modified Clauses 64(3)(a)(ii) and 64(3)(b) of GCC, it cannot, therefore, be said that the General Manager has become ineligible to act as the arbitrator. We do not find any merit in the contrary contention of the respondent. The decision in TRF Limited is not applicable to the present case."

It is clear from the judgments specified hereinabove that any mechanism for appointment of arbitrators will have to be tested against the provisions of the Act and the Perkins Judgment. Accordingly, we may see a change in how parties frame these mechanisms for the appointment of arbitrators in their contracts. In order to retain some power over the appointment process, a dominant party may consider mechanisms similar to ones discussed in Voestalpine Judgment and CORE Judgment to be prescribed in their contracts. Be that as it may, as of now it appears that the days of unilateral appointments are over.

There is a possibility that appointment mechanism's similar to Voestalpine Judgment and CORE Judgment may be challenged in the future (on a case-to-case basis) for being unfair and in violation of the Act. But one thing is certain, that the Hon'ble Supreme Court is proactive in protecting the fundamental objects of the Arbitration and Conciliation (Amendment) Act, 2015.

Mr. Sonal Kumar Singh (Managing Partner), Mr. Ashutosh Nagar (Associate) and Ms. Sayantika Ganguly (Research Associate) of AKS Partners – Advocates, Solicitors & Consultants. Views of the authors are personal.

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