This article has been written by Soumya Nandi, pursuing the Certificate course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Nemo judex in causa sua is the first principle of natural justice. This Latin phrase literally means that ‘no-one is judge in his own cause’. It is the rule against bias. It is a prerequisite to ensure that the authority deciding / resolving any dispute must act impartially and without prejudice & bias and deliver justice. The Indian judicial system has a huge backlog of pending court cases and the entire judicial system is overstressed. Arbitration is a procedure of alternative dispute resolution and a method to resolve disputes outside court. Thus, the importance and growth potential of arbitration in today’s world cannot be overstated.
Arbitration is a mechanism to ensure that the aggrieved party (applicant) is delivered justice without unnecessary expenses or delay. Thus, the principles of natural justice are very well applicable in case of arbitration. This is further corroborated by the fact that arbitration can only take place with the mutual consent of the parties and only if an arbitration agreement exists between the parties or there is a relevant clause in the agreement between the parties. Thus, it would be apposite to say that mutual consent is the cornerstone of dispute resolution by arbitration.
Just like judges, who are deemed to be the guardians of the legal system, arbitrators may be construed to be the sentinels of the arbitration ecosystem. In order to ensure that the principle of natural justice is applied in the procedure of arbitration, the independence and impartiality of the arbitrator(s) is of absolute importance. The Arbitration and Conciliation (Amendment) Act, 2015 inserted the Fifth Schedule which is a guideline to determine the independence or impartiality of arbitrators and the Seventh Schedule which is a guideline to check the (a) the relationship of the arbitrator with the parties in dispute / their counsels, (b) the relationship of the arbitrator with the dispute itself and (c) the arbitrator’s direct or indirect interest in the dispute.
The legality of Unilateral appointment of arbitrators
Unilateral appointment of arbitrators is against the very spirit of the mechanism of Arbitration, i.e. mutual consent of the parties in dispute and impartiality of the arbitrators to facilitate fast delivery of justice at low cost and without delay. Unilateral appointment of arbitrators might deprive the aggrieved party of natural justice, which is not desirable at all and might render the mechanism ineffective.
However, in certain contracts / agreements in India, the Employers / Buyers misuse their position and power and frame a one-sided dispute resolution / arbitration clause although it is against the provisions of the amended Act. Such biased arbitration clauses may authorize the appointment of an arbitrator who would be rendered ineligible as per the fifth / seventh schedules or appointment of an arbitrator by a person who would be rendered ineligible as per the fifth / seventh schedules or appointment of an arbitrator from a predetermined panel of arbitrators fixed by one of the parties, generally the Employer. More often than not, the prospective Contractors / Sellers are left with no other alternative but to accept such biased clauses. The only solace is that the apex court has decisively ruled against unilateral appointment of arbitrators in some of its landmark judgments.
Let’s look at some important cases on appointment of Unilateral Appointment
TRF Ltd. vs Energo Engineering Projects Ltd
In the matter of TRF Ltd. vs Energo Engineering Projects Ltd., the question arose before the Hon’ble Supreme Court that whether a person who is ineligible to be appointed as an arbitrator according to the terms laid out in the Seventh Schedule was eligible to appoint a sole arbitrator to resolve the dispute between the parties.
The Resolution of dispute/arbitration clause in the agreement stated – “(a) In case any disagreement or dispute arises between the buyer and the seller under or in connection with the PO, both shall make every effort to resolve it amicably by direct informal negotiation.(b. If, even after 30 days from the commencement of such informal negotiation, seller and the buyer have not been able to resolve the dispute amicably, either party may require that the dispute be referred for resolution to the formal mechanism of arbitration. (c) All disputes which cannot be settled by mutual negotiation shall be referred to and determined by arbitration as per the Arbitration and Conciliation Act, 1996 as amended.(d) Unless otherwise provided, any dispute or difference between the parties in connection with this agreement shall be referred to sole arbitration of the Managing Director of Buyer or his nominee.
Venue of arbitration shall be Delhi, and the arbitration shall be conducted in English language.(e) The award of the tribunal shall be final and binding on both; buyer and seller.” This clause was mutually agreed between the parties when TRF had been awarded a contract by Energo to design, manufacture and supply certain equipment.
Some dispute arose during the pendency of the contract. TRF, the aggrieved party and the applicant invoked arbitration but objected to the methodology of appointment of arbitrator as stated in the Contract. In spite of the same, Energo unilaterally appointed a person of their choice as the arbitrator.
Thereafter, TRF filed an application at the High Court of Delhi u/s 11 of the Act seeking the assistance of the Court in the appointment of arbitrator. In their application, TRF had argued that Managing Director of TRF was not eligible to be the arbitrator as per the terms of the seventh schedule as he had direct & indirect interest in the outcome of the dispute and as a consequence, the Managing Director was not eligible to nominate an arbitrator also. However, the arguments of the applicant were rejected by the High Court and hence the applicant challenged the judgment of the High Court by filing a Special Leave Petition before the Supreme Court. The same arguments were put up by the applicant before the Supreme Court as well. The Hon’ble Supreme Court overturned the decision of the High Court and set aside the order for appointment of arbitrator nominated by Energo unilaterally.
Therefore this judgment by the Supreme Court clarifies beyond doubt that if an arbitrator is ineligible as per the amended Act, that person is also ineligible to appoint an arbitrator. This judgment highlights the essence of the 2015 amendments that any person who has some interest in the outcome of the dispute must not have the power to appoint a sole arbitrator.
Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.
The above principle was further reinforced by the Supreme Court’s judgment in the case of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. The consortium of Applicants, i.e. Perkins, etc. were appointed as the Design Consultants for the project and entrusted to do some architectural & planning work for the Respondent, i.e. HSCC. Some dispute occurred due to some alleged failures on the part of the Applicants and subsequent termination of Contract by the Respondent and therefore the applicants invoked arbitration as per the terms of the Contract.
The dispute resolution clause stated that, “Except as otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, design, drawings and instructions herein before mentioned and as to the quality of services rendered for the works or as to any other question, claim, right, matter or thing whatsoever in any way arising out of or relating to the contract, design, drawings, specifications estimates instructions, orders or these conditions or otherwise concerning the works or the execution or failure to execute the same whether arising during the progress of the work or after the cancellation, termination, completion or abandonment thereof thereof shall be dealt with as mentioned hereinafter: (i) If the Design Consultant considers any work demanded of him to be outside the requirements of the contract or disputes on any drawings, record or decision given in writing by HSCC on any matter in connection with arising out of the contract or carrying out of the work, to be unacceptable, he shall promptly within 15 days request CGM, HSCC in writing for written instruction or decision.”
Thereupon, the CGM, HSCC shall give his written instructions or decision within a period of one month from the receipt of the Design Consultant’s letter. If the CGM, HSCC fails to give his instructions or decision in writing within the aforesaid period or if the Design Consultant(s) is dissatisfied with the instructions or decision of the CGM, HSCC, the Design Consultants(s) may, within 15 days of the receipt of decision, appeal to the Director (Engg.) HSCC who shall offer an opportunity to the Design Consultant to be heard, if the latter so desires, and to offer evidence in support of his appeal.
The Director (Engg.), HSCC shall give his decision within 30 days of receipt of.” As per this clause, the Respondent, i.e. Chief General Manager (CGM), HSCC was supposed to appoint an arbitrator within one month from the date of receipt of any notice invoking arbitration from the Applicants. However, they failed to do so within the stipulated time and issued a letter appointing an arbitrator on the 33rd day after the applicant’s letter. This matter was an international commercial arbitration as the lead member of the consortium had its registered office outside India and hence the applicants submitted an application to the Supreme Court u/s 11 of the Act seeking assistance in appointment of an arbitrator. In this application the applicants argued that the appointment of the arbitrator was not done within the stipulated time and that the CGM, HSCC was not eligible to appoint a sole arbitrator as per the fifth and seventh schedules of the Act. T
his case was almost identical to the TRF case, the only difference being that as per the dispute resolution clause in the Contract, the CGM was not authorized to become the arbitrator himself and was only given the authority to appoint an arbitrator. The Hon’ble Supreme Court referred the TRF judgment and adjudged that the appointment of sole arbitrator by CGM, HSCC was not valid as per the terms of the Act and hence set aside such appointment.
Similarly, in the case of Proddatur Cable TV Digi Services v. SITI Cable Network Limited, the Delhi High Court held that the appointment of an arbitrator by anybody who has some interest – direct or indirect, in the outcome of the dispute resolution proceedings cannot be considered as valid by virtue of section 12(5) of the amended Act.
Case of Central Organisation for Railway Electrification
Contrary to the above, in the case of Central Organisation for Railway Electrification (COFRE) and ECI-SPIC-SMO-MCML (JV) A Joint Venture Company (ECI) the Supreme Court adjudged that unilateral appointment of one arbitrator by the applicant or respondent was justified for constitution of an arbitral tribunal of three arbitrators.
As per the arbitration clause in the agreement between the parties, if the claim amount exceeds INR One Crore then the arbitral tribunal was to consist of three gazette Railway officers or two gazette Railway officers and one retired Railway officer. A dispute arose between the parties due to alleged failure of the Applicant (ECI) to complete their scope of work within the stipulated time and termination of the Contract by the Respondent (COFRE).
When the Applicant filed a petition before the Allahabad High Court challenging the termination order, the High Court directed to resolve the dispute through arbitration as an arbitration clause was present in the agreement. Accordingly, the Applicant invoked arbitration as per the agreement. As per the arbitration clause, COFRE was supposed to send a panel of at least 4 names to the ECI for choosing 2 arbitrators. One of the two persons chosen by ECI would then be selected by the General Manager, COFRE as ECI’s nominee to the tribunal.
The GM, COFRE would then appoint their nominee from within the above panel or from outside the panel. Thus, when a SLP was filed before the Supreme Court, it ruled that the right of the Respondent to propose four names was counter balanced by the power of the Applicant to choose 2 names from the panel provided to them. It further adjudged that the General Manger has not become eligible to act as the arbitrator. In this judgment, the Supreme Court has contradicted its stand to some extent.
The mechanism of arbitration is threatened by the practice of unilateral appointments. The Hon’ble Supreme Court and High Courts has made a determined effort to address and put to rest, the ethical dilemma of unilateral appointments. But, there is still a long way to go!!!
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