This article is written by Muskan Aggarwal, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.
Over the last decade, the idea of Arbitration as a Dispute Resolution Mechanism has been gaining appreciation and along with which their respective conflicts have also found their way through. This article attempts to discuss one such conflict reflecting on one of the most essential aspects of any Arbitration proceeding i.e. unilateral appointment of an Arbitrator.
It has been felt in recent times that since the arbitrator has been appointed by a Party, it shall function to safeguard the interest of the respective party leading to impartiality in Arbitration Proceedings. This shall further increase manifold if the unilateral appointment is that of a Sole Arbitrator negating the basic principle of mutual consent in Arbitration Proceedings.
The 2015 Amendment to Arbitration and Conciliation Act, 1996 (“the Act”), has taken this issue into consideration and highlighted the importance of independence and impartiality by an Arbitrator and therefore, introduced amendments to Section 12 to be read with Vth, VIth, and VIIth schedule. One such amendment in the Act specifically disqualified any employees of an organization to be the Arbitrators in their own disputes, to maintain the principle of neutrality.
Validity of unilateral appointment
Among the initial cases where the Supreme Court took this issue for consideration was TRF Limited v Energo Engineering Projects Limited, herein, the Court was faced by the question of whether as per the Arbitration clause if a person who has become ineligible under law could be appointed or appoint his nominee as an Arbitrator. The Hon’ble Court negated this clause, stating that if a party to the dispute has become ineligible under the operation of law to act as an arbitrator, it cannot go ahead and appoint his nominee as an arbitrator.
Further, this decision was recently relied on by the Apex Court in Perkins Eastman Architects DPC & Anr. versus HSCC (India) Ltd. The issue before the Court was if the Chief Managing Director could not be appointed as an Arbitrator himself as per the Act, could he legally exercise his authority to appoint a sole arbitrator?
The Apex Court held that any person who has an interest in the outcome or decision of the dispute must not have the power to appoint the Sole Arbitrator as it would go against the basic norms of mutual consent and impartiality in an Arbitration Proceedings.
Subsequent to this 2019 judgment, another question which then arose was, what would be the fate of the pending arbitrations to be presided over by unilaterally appointed arbitrators?
This issue was taken up for consideration by the Delhi High court in the matter of Proddatur Cable TV Digi Services v. SITI Cable Network Limited. Herein, following certain disputes between Proddatur Cable TV and SITI Cable Network, Proddatur appointed an arbitrator. This appointment was rejected by SITI, after which, on the basis of the arbitration agreement SITI unilaterally appointed a sole arbitrator. The Supreme Court applying the test laid down in Perkins case held that the rule shall also be applicable to the Managing Director in the given case, as based on the same line the Managing Director would have interest in the outcome of the dispute which clearly goes against the principle of biases and partiality. Hence, by common understanding, this idea of biasness and partial behaviour would also extend onto the arbitrator appointed by the said Managing Director.
Another matter that needs to be mentioned is Central Organisation for Railway Electrification v M/S EVI-SPIC-SMO-MCML. The Allahabad High Court after receiving an application under section 11, appointed a sole arbitrator to resolve the dispute between the parties which was outside the scope for the appointment of arbitrators under the arbitration agreement between the parties. After which an SLP was filled before the Supreme Court, wherein the issue which arose was whether the act of the High Court to appoint the sole arbitrator being outside the scope of the appointment of the arbitrator as per the arbitration agreement was valid or the court ought to have performed its functions within the bounds of the agreement.
While resolving this issue the Supreme Court held that as the arbitration clause was not hit by Section 12(5) of the Act read with Schedule VII of the Act and that the High Court was not justified in appointing an independent arbitrator without resorting to the procedure for appointment of arbitrators as prescribed in the arbitration clause.
The validity of unilateral arbitrator via different types of appointment:
- When an ineligible arbitrator or its nominee is appointed:
Section 12(5) read with Schedule VII of the Arbitration and Conciliation Act, 1996 states a few categories which make an arbitrator ineligible. In the words of the Hon’ble Court in TRF Ltd. v. Energo Engineering Projects Ltd, “Once the infrastructure collapses, the superstructure also collapses.” Under the said case law, the court rightfully held that, once a person becomes ineligible under the operation of law to be appointed as an arbitrator, this extends to mean that he cannot appoint another person as an arbitrator. Hence, based on the aforementioned precedent, it can be clearly drawn that such an appointment of the arbitrator is not valid.
- When an ineligible arbitrator’s nominee is appointed:
The independence and impartiality of an arbitrator is the most basic principle guaranteeing fair arbitration proceedings and hence imperative for maintaining the sanctity of the arbitration agreement. In such a process, the principles of party autonomy and arbitrator neutrality have to be adhered with.
Under this appointment to judge its validity, the following maxim needs to be taken into consideration – qui facit per alium facit per se (“the Principle”), i.e., what one does through another is done by oneself, or as elaborated by the court, in the TRF case, stating that what cannot be done directly may not be done indirectly by engaging another outside the prohibited area. Hence, inconsistency with the Seventh Schedule, the appointment of the ineligible arbitrator’s nominee shall also stand ineligible, although it doesn’t have any relevance with the neutrality of the arbitrator. Thus, this calls for a quick and full proof solution to such an issue clarifying the position of the unilateral appointment of arbitrators.
- When an appointment is done from a panel of arbitrators:
Such a matter of appointment from a panel of arbitrators was taken up in the case of Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Ltd. [(2017) 4 SCC 665]. The court in this case was faced with the interpretation of Section 12(5) of the Act. The Respondent, a statutory body, maintained a panel of five arbitrators from which both the Appellant and Respondent were to nominate their respective arbitrators. This process was challenged, and the court observed that the amended Section 12 of the Act sought to achieve the objective of Arbitration without any bias i.e. achieved through independence and impartiality by the Arbitrator. The Supreme Court while upholding the validity of the Arbitration clause directed to Respondents to prepare a broad-based panel i.e. it was not to be limited to retired government employees but was also to include experienced and eminent engineers from the private sector.
Further, under the Railway Electrification case, an issue similar to the previously discussed case was taken up for consideration wherein, the Appellant, a statutory body, forwarded names of four arbitrators and the Respondent, a private entity, was to select names of the two arbitrators listed therein. Once, the Respondent stated these names, the Appellant was then to nominate one of the two names as the Respondents Arbitrator, and thereafter select the two remaining Arbitrators. The Supreme Court upheld such an appointment mechanism which is completely in contrast to its earlier decision in Voestalpine case, leaving the issue to be settled by a larger bench.
The Delhi High Court, in SMS Limited v. Rail Vikas Nigam Limited, was concerned with the arbitration clauses that envisioned the constitution of a three-member tribunal, wherein both the petitioner and the respondent were to select one name each from the panel that was maintained by the respondent. The two nominators then selected from the same panel, the presiding arbitrator.
The Court set aside the appointment procedure and observed that the panel was not broad-based, as it majorly included retired or serving employees of the respondent, creating a reasonable apprehension of bias and impartiality. Accordingly, if such an appointment of the arbitrator is allowed from such a panel it would contravene the Voestalpine principle of broad-based panels as discussed above.
In the light of cited precedents and case law and different scenarios regarding the unilateral appointment of the arbitrator, a clear conclusion can be drawn that the Indian Arbitration Law forbids the unilateral appointment of the sole arbitrator.
However, an exception which can be drawn in this context relates to the TRF case, wherein such appointment can be upheld if equal right is given to both the parties to nominate their respective arbitrators or if the circumstances involve the appointment to be done in form of panel-based (maintained by PSU’s), such panel being broad-based and comprises independent and efficient private experts as decided in Voestalpine case, leaving next to no chance of any biases. This now seems to have been undone by the Railways Electrification case.
A solution in this step would be the adoption of procedures established by the arbitral institutions such as Indian Council of Arbitration (“ICA”), the Delhi International Arbitration Centre (“DIAC”). The adoption of such a procedure would provide us with standard and regulated appointment procedures subject to timely modifications wherein all the parties involved would be given an equal standing while entering into an arbitration agreement.
Hope still remains to be able to reach an informed and reasonably justified manner to resolve this issue which forms the most basic principle requirement in any arbitration proceeding.
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