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Unilateral Appointment of Arbitrator

Background

Arbitration is an alternative dispute resolution mechanism, wherein parties agree to submit their dispute to one or more arbitrators, without resorting to the more conventional way of litigation- through Courts or Tribunals.  As striking feature, Arbitration gives freedom to the parties to choose the person(s) or arbitrator(s) to resolve their disputes arising under the contract. Therefore, the Arbitrator(s) are also commonly known as creatures of a contract. Appointment of Arbitrators is the foremost and pivotal step towards commencement of arbitral proceedings. However, often parties are unable to arrive at a consensus on the name(s) of the Arbitrator, which constrains them to approach the appropriate Court for the same under Section 11 of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”). It is considered that a key to a successful arbitration lies in the choice of arbitral tribunal[1] and thus, it is right that “an arbitration is as good as the arbitrators are[2]. The most important and fundamental aspect of appointment of arbitral tribunal is that the tribunal should be able to perform their duties responsibly to arrive at a fair and legal resolution of the dispute.

Party Autonomy and appointment of Arbitral Tribunal

In the jurisprudence surrounding appointment of arbitrators, at first, party autonomy rules the process and parties can mutually consent/agree to appoint an arbitrator or an arbitral tribunal, as the case may be. Party autonomy stems from the model law as prescribed by the UNCITRAL Model Law.[3] To ensure impartiality, the Arbitration Act has introduced further safeguards which allows a party having justifiable doubts on the impartiality or independence of the arbitrator, to raise such objections before the arbitral tribunal.[4]

Unilateral Appointment of Arbitrators

Since, arbitration is regarded as an alternative dispute redressal mechanism, an arbitration results in determination of rights and liabilities of parties, it is imperative to have safeguards to ensure that the rights of the parties are not adversely impacted on account of lack of impartiality of the Arbitrator(s).Also, the Arbitration Act through various provisions reflects the importance of independence and impartiality of the arbitrators.[5] The Supreme Court in a case discussing the 5th and 7th Schedule to the Arbitration Act, has held that a doubt pertaining to the impartiality or independence of an arbitrator would be justifiable, if a third person would reach such a conclusion that an arbitrator would be influenced by factors other than the merits of the case.[6]

In the above context, the principles of natural justice also come into play in arbitral proceedings. One of the principles of natural justice is “nemo judex in sua causa” which translates into, ‘a man cannot be a judge in his own case’. In relation to arbitration, this principle is critical as prior to the amendment to the Arbitration Act in 2015, we have observed in various government and infrastructure contracts where an officer of the government body or the contractor respectively, is nominated as an arbitrator. Since, the party employed by the government body or the contractor would not be in a position to negotiate such a clause in the contract at the time of execution, the arbitrator appointed would effectively be conflicted, rendering the award susceptible to challenges on account of bias.

In 1995, the Delhi High Court had held that a party could not have an exclusive right of initiation of arbitral proceedings and it has to be a bilateral invocation[7], which was followed again by the Delhi High Court in another case in the year 2005, when Delhi High Court went a step further to say that any such unilateral clauses were void and in contravention of the provisions of Section 28 the Indian Contract Act.[8]

In the year 2015, after considering the recommendations from the Law Commission[9], the Arbitration Act was amended[10] to provide that when a person is approached for a possible appointment in an arbitration, he /she shall disclose existence of a relationship or interest of any kind which can raise justifiable doubts on the impartiality and independence of the arbitrator.

Supreme Court on unilateral appointment

Following the amendment to the Arbitration Act, in or around 2017, the Supreme Court dealt with the issue of unilateral appointment, for the first time. In this case, the Supreme Court analyzed unilateral appointment, emanating from the arbitration agreement which provided that in case of disputes between the parties, they shall be referred to the managing director of one of the party or his nominee, who will act as a Sole Arbitrator. The Supreme Court held that the managing director and his nominee are ineligible to be appointed as an arbitrator[11].

In the year 2019, the Supreme Court put the issue pertaining to unilateral appointment, to rest by interpreting unilateral appointments as invalid by virtue of 2015 Amendment to the Arbitration Act[12]. The Apex Court held that a person who has an interest in the outcome or the decision of a dispute must not have the power to appoint a sole arbitrator as it runs contrary to the basic principles of neutrality which the 2015 Amendment has strived to bring in. The Supreme Court relied on its earlier judgment[13] of 2017, wherein the Supreme Court had invalidated the arbitration clause between the parties, as it provided that the Managing Director of the one of the parties or his nominee alone, will be the sole arbitrator to resolve the disputes arising between the parties. The Supreme Court interpreted that a person who is a managing director of the party involved in the dispute, cannot be appointed as an arbitrator as per the provisions of the Arbitration Act,[14] the Managing Director had become ineligible to act as the arbitrator and as a natural corollary, he had no power to nominate another person.

Following the footsteps of the Supreme Court, the Delhi High Court in similar cases, has held that even though party autonomy has been considered as the heart and soul of arbitrations, unilateral appointment cannot be permitted as it raises questions on the impartiality or fairness of the arbitral tribunal.[15] In a case before the Delhi High Court, wherein the agreement mandated appointment of Gazetted Officer as the sole arbitrator, the Delhi High Court held that a party cannot propel the other party to appoint such a person as the sole arbitrator by seeking a waiver from the party.[16]

Although the Supreme Court has settled the law in respect of unilateral appointment, in the case of Central Organization for Railway Electrification vs. M/s Eci Spic Smo Mcml (JV) a joint venture company[17], it was faced with a question in respect of appointment of arbitrator from a panel of members, wherein both the parties had the power to nominate their choice of arbitrators. In this case, the Supreme Court held that, “where both the parties could nominate respective arbitrators of their choice…whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party”. Thus, this judgement though runs contrary to the general theme of what was held by the Perkins judgement (supra), the Supreme Court does clarify that the power of one of the parties to nominate from the members of the panel was counter balanced with the power given to the other party to select two names out of the panel.

Conclusion

The rulings of the Supreme Court speak volumes on which way the wind is blowing being that unequal arbitration agreements giving the power of appointment of arbitrator to just one party or unilateral appointment is not permissible and such clauses go against the basic notions of natural justice. The amendment to the Arbitration Act and the emphatic view taken by the Supreme Court, has not only ensured appointment of impartial arbitrators but also paved way for the parties who are not able to negotiate the dispute resolution clause in a contract, to challenge the unilateral process of appointment and get an impartial arbitrator(s) appointed through the Court process.

 

[1] Justice (Retd.) Indu Malhotra, Commentary on the Law of Arbitration, Volume I Page 428, 4th Edition 2020.

[2] T Clay, L’arbitre, Dalloz, 200, Page 10, 1st Edition, January 2001.

[3] Article 10 of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (1985).

[4] Section 12(3) of the Arbitration & Conciliation Act, 1996.

[5] Section 12, 13, 14 along with the Schedule V and Schedule VII to the Arbitration & Conciliation Act, 1996.

[6] HRD Corporation vs. GAIL (India) Ltd 2017(5) ARBLR 1 (SC).

[7] Bhartia Cutler Hammer v. AVN Tubes, (1995 (33) DRJ 672.

[8] Emmsons International Ltd. v. Metal Distributors (2005 (80) DRJ 256); Lucent Technology v. ICICI Bank 2009 SCC OnLine Del 3213.

[9] Law Commission Report No. 246, Government of India (Amendments to the Arbitration & Conciliation Act) can be accessed at: (https://lawcommissionofindia.nic.in/reports/report246.pdf)

[10] Arbitration & Conciliation 2015 Amendment Act.

[11] TRF Limited vs. Energo Engineering Projects Limited, (2017) 8 SCC 377.

[12] Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. 2019 SCC OnLine SC 1517.

[13] TRF Limited vs. Energo Engineering Projects Limited, (2017) 8 SCC 377.

[14] Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015 read with Schedule V and Schedule VII to the Arbitration and Conciliation Act, 1996.

[15] Proddatur Cable TV Digi Services vs. SITI Cabel Network Limited, (2020) 267 DLT 51.

[16] Arvind Kumar Jain v. Union of India, February 4, 2020 Delhi High Court, Arbitration Petition 779/2019.

[17] Central Organization for Railway Electrification vs. M/s Eci Spic Smo Mcml (JV), (2020) 14 SCC 712.

Dhiraj Mhetre

Partner

Smiti Tewari

Associate Partner

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