It is not uncommon for parties to incorporate arbitration clauses that give them the unilateral power to appoint a sole arbitrator. The parties (particularly companies) do that in order to have a greater role in constituting an arbitral tribunal as also to expeditiously constitute an arbitral tribunal without having to approach the courts for constituting the arbitral tribunal, which can be a time-consuming process.
The recent judgment of the Supreme Court in Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd ("Perkins Eastman")1 has created quite a stir. On a rigid reading of Perkins Eastman, arbitration clauses that give the right to one party to appoint a sole arbitrator, would no longer be valid. A more recent judgment of the Bombay High Court in Lite Bite Foods Pvt Ltd v. Airports Authority of India2 (the "Lite case") has followed Perkins Eastman. However, in certain other instances, the courts have respected party autonomy in determining the procedure for appointment of an arbitrator. In order to fully understand the controversy, it would be prudent to examine the law on this aspect.
The 246th Report of the Law Commission of India3 (the "Report"), which was the driving force behind the amendments to the Arbitration and Conciliation Act, 1996 (the "Arbitration Act"), placed immense importance on the neutrality of arbitrators. 4 The Report emphasized that the requirement of an arbitrator being independent and impartial cannot be discarded at any stage of the proceedings, and more so, during the stage of appointment of the arbitral tribunal. 5 While the Report emphasized that party autonomy is the fulcrum of the arbitration legislation, there are certain minimum levels of independence and impartiality of arbitrators which must pervade throughout the arbitral process. Based on the recommendations of the Law Commission of India, Section 12(5) was inserted into the Arbitration Act, which renders a person 'ineligible' to be appointed as an arbitrator, if the person shares a certain kind of relationship with the party or the case. Schedule V (grounds that give rise to justifiable doubts as to the independence and impartiality of arbitrators, which could be waived by the parties), and Schedule VII to the Arbitration Act (grounds that make the arbitrator ineligible, which cannot be waived by the parties) were also inserted, to ensure the independence and impartiality of arbitrators, and lend more credence to the sanctity of the arbitration process.
Despite all the recent amendments, the Arbitration Act protects party autonomy to determine the procedure for appointment of arbitrator(s) 6. While, the Arbitration Act respects party autonomy7, the same would have to be tested on the touchstone of the internationally recognized principles of independence and impartiality of arbitrators. There is a thin line between the two, and the courts have had the occasion to deal with this on a few occasions. It will be interesting to analyze these judgments.
2. ANALYSIS OF PERKINS EASTMAN AND TRF CASES
In Perkins Eastman, the Supreme Court had to decide an application for appointment of an arbitrator, where the arbitration clause8 provided for sole arbitrator that had to be appointed by the chief managing director ("CMD") of HSCC (India) Ltd ("HSCC"). Relying on the three-judge bench of the Supreme Court in TRF Limited v. Energo Engineering Projects Limited9 ("TRF"), the unilateral appointment made by HSCC was set aside by the Supreme Court.
In TRF, one of the issues involved was whether a person who becomes ineligible by law to be an arbitrator can, in turn, nominate another person to be an arbitrator. The arbitration clause10 provided for disputes to be resolved by a sole arbitration of the Managing Director of the buyer or his nominee. An argument was raised that even though the managing director is statutorily disqualified under the Arbitration Act to act as an arbitrator, he is not deprived of his right to nominate an arbitrator who has no relationship with the party. This argument was negated. The Supreme Court held that once the named arbitrator becomes ineligible by operation of law, he cannot nominate another person to act as the arbitrator. According to the Supreme Court "...once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth".
The controversy is accentuated by the observations made in Perkins Eastman at paragraph 21 of the judgment. The Supreme Court extrapolates the principles of TRF and emphasizes the right of a party to appoint its nominee in a three-panel arbitral tribunal, as whatever advantage a party may derive from nominating an arbitrator of its choice, would get counter-balanced by an equal power with the other party. However, the Supreme Court further observes "...But, in a case where only party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course of 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 amendment brought in by the Arbitration and Conciliation (Amendment) Act, 2015 [Act 3 of 2016] and recognised by the decision of this Court in TRF Ltd...". Interestingly, even though Perkins Eastman was based on TRF judgment (where the clause read differently), it goes a step ahead, and declares that any unilateral appointment of a sole arbitrator by a party would not be in accordance with law.
Significantly, the Supreme Court made no distinction between (a) clauses that provided for a particular person to be the named arbitrator or the person who could nominate an arbitrator, and (b) clauses where one party had a right to appoint a sole arbitrator. It would be worthwhile to note that there is a difference in the arbitration clauses in Perkins Eastman and TRF. While the former, gave the right to an authority within the company to appoint an arbitrator, the latter gave the power to a specified person or his 'nominee' to act as the arbitrator. It could be argued that just because a power is given to a party to appoint an arbitrator, it does not automatically mean that only a person within the company would be appointed as an arbitrator, as it would be possible to appoint an independent and neutral person as an arbitrator as well, who is not disqualified by the Arbitration Act. Besides, the Arbitration Act requires that proper disclosures are made by the arbitrator, thereby entitling the other party to flag any issues with regard to disqualification. This could be distinguished from the TRF case, where the clause provided for the managing director or his "nominee" to act as the arbitrator, which takes away the element of neutrality and impartiality.
Another argument against Perkins Eastman is that it takes away the party autonomy in determining the procedure for constituting an arbitral tribunal, which has been recognized and upheld by the Supreme Court in a few cases. 11 Perkins Eastman also does not consider the observations made at paragraph 17 of TRF judgment, in which the Supreme Court noted that "...It has been observed by the Designated Judge that the amending provision does not take away the right of a party to nominate a sole arbitrator, otherwise the legislature could have amended other provisions..." (Emphasis Added).
The controversy gets murkier, as it could also be argued that even when a party appoints its nominee for a three-panel arbitral tribunal, it does so through some person or authority within the company, who himself or herself would not be in a position to act as the arbitrator, being an interested party. Applying the principles of Perkins Eastman and TRF, any such nomination would also get hit by Schedule VII of the Arbitration Act, and merely because there is counter-balancing of power in appointing arbitrators (as detailed in TRF), it does not vindicate an appointment that may not be in accordance with the Arbitration Act.
3. RAILWAY ELECTRIFICATION AND VOESTALPINE CASES
Few weeks after the Perkins Eastman case, the Supreme Court in Central Organisation for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV) 12 ( the "Railway Electrification case"), had the occasion to deal with an arbitration clause that provided for a panel of three retired railway officers to act as the arbitrators and a procedure was agreed upon for their appointment, which enabled the other party to select nominees from a list of potential arbitrators. The Supreme Court relied on its earlier judgment in Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Ltd., 13 (the "Voestalpine case"), which had held that retired government officials do not become 'ineligible' to act as arbitrators. The Supreme Court in Railway Electrification case carved out an exception to Perkins Eastman and TRF and held that the agreed procedure in the arbitration clause had to be complied with.
It would be pertinent to note that the Railway Electrification case and the Voestalpine case dealt with a three panel arbitral tribunal, wherein even the TRF case carved out an exception and permitted a party to nominate their arbitrator to a three panel arbitral tribunal, on the principle that power of appointment of an arbitrator of one party gets counter balanced by the power given to the other party.
4. JUDGMENTS OF THE DELHI HIGH COURT
The Delhi High Court in judgments referred to below, distinguished the TRF judgment, and ruled in favour of party autonomy and the right of one party to appoint a sole arbitrator. The Delhi High Court upheld clauses which gave the right to appoint an arbitrator to one party (without naming a designated authority within the clause itself). In D.K. Gupta v. Renu Munjal14 the arbitration clause that gave the lender a right to appoint a sole arbitrator was upheld. The Delhi High Court distinguished the arbitration clause in TRF case and upheld the party autonomy and the right of the parties to determine the procedure for appointment of arbitrator.
In Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd. & Ors15, the arbitration clause provided for a sole arbitrator to be nominated by the Managing Director of the party. The Delhi High Court distinguished it from the TRF judgment, as the arbitration clause in TRF provided for the arbitrator to be managing director or his "nominee", which is different from a "nomination" to be made by the managing director of a party. Party autonomy was treated to be sacrosanct. This judgment is under challenge before the Supreme Court and notice has been issued to counter-party. It will be interesting to see how the Supreme Court finally decides this issue.
In the more recent judgments passed in August 2019, the Delhi High Court, restricted the applicability of the TRF case and upheld the arbitration clauses that provided parties with the power to unilaterally appoint an arbitrator. In Kadimi International Pvt. Ltd. v. Emaar MGF16, the Delhi High Court noted that the 2015 Amendment to the Arbitration Act as well as the insertion of Section 12(5) into the Arbitration Act do not have the effect of taking away the right of a party to unilaterally appoint an arbitrator. Such right, it noted, was in consonance with Section 11(2) of the Arbitration Act. In Sriram Electrical Works v. Power Grid Corporation of India Ltd17 the Delhi High Court made a distinction between arbitration clauses where the clause provides for an arbitrator (by name or designation as in the TRF case) and clauses where the right to appoint a sole arbitrator is given to one party. The latter was held to be valid. It would be relevant to note that all these judgments were passed prior to the Perkins Eastman case.
Therefore, the law as it stands post Perkins Eastman is that a party cannot be vested with the unilateral power to appoint an arbitrator and constitute an arbitral tribunal. This does not change the position as regards the right of a party to appoint its nominee for a three-panel arbitral tribunal. The Bombay High Court in the Lite case (decided on December 04, 2019), has summarised all the judgments, and has confirmed the above position.
It would be relevant to note that any arbitral award passed in favour of a party that had the right to unilaterally appoint the sole arbitrator, may be challenged in proceedings under Section 34 of the Arbitration Act inter-alia on the ground that the composition of the arbitral tribunal itself was not as per law, and also on grounds of 'public policy'. The parties that have incorporated an arbitration clause providing them the unilateral right to appoint an arbitrator, would be well advised to ensure that either the consent of the other party is taken for the choice of an arbitrator, or the appointment is done through courts, or the arbitral institutions that are proposed to be constituted pursuant to the recent amendments18 to the Arbitration Act. This would be more time consuming, but it would at least ensure that challenges with regard to the composition of the arbitral tribunal are largely negated. The other option would be to incorporate arbitration clauses which provide for disputes to be resolved by the rules of an arbitral institution. The law as it stands has also steered towards institutional arbitration. Perhaps, the Perkins Eastman case may drive more parties to designate arbitral institutions to appoint the arbitrator. However, the challenge is that there are not many reputed arbitral institutions in the country, and reputed arbitral institutions, are already feeling the weight of volumes of cases being referred to them.
We will have to wait and see if the Supreme Court in subsequent judgment(s) clarifies that the TRF and Perkins Eastman stand in different spheres, and if arbitration clauses that do not provide for an interested person or his nominee to act as an arbitrator, but provide for unilateral appointment of arbitrator by one party, are indeed valid in law. Until such time, the parties would have to be more circumspect while appointing the sole arbitrator in furtherance of an arbitration clause that provides for unilateral appointment.
1 2019 SCC OnLine SC 1517.
2 Commercial Arbitration Application (L) No. 495 of 2019, Decided on December 04, 2019.
3 Law Commission of India, Report No. 246: Amendments to the Arbitration & Conciliation Act, 1996.
4 Id., Page 28.
5 Id., Page 29.
6 Section 11 of the Arbitration Act.
7 Please also see Sections 13(1), 19(2), 20 and 22 of the Arbitration Act.
8 The arbitration clause read as under ".....(ii) Except where the decision has become final, binding and conclusive in terms of sub-Para (i) above disputes or difference shall be referred for adjudication through arbitration by a sole arbitrator appointed by the CMD HSCC within 30 days form the receipt of request from the Design Consultant. If the arbitrator so appointed is unable or unwilling to act or resigns his appointment or vacates his office due to any reason, whatsoever another sole arbitrator shall be appointed in the manner aforesaid. Such person shall be entitled to proceed with the reference from the reference from the stage at which it was left by his predecessor..." (Emphasis Supplied).
9 (2017) 8 SCC 377.
10 Arbitration clause read thus – "...(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..." (Emphasis Supplied).
11 Please see Supreme Court's judgment in Centrotrade Minerals and Metal Inc v. Hindustan Copper Limited, (2017) 2 SCC 228, where the court ruled in favour of party autonomy and upheld a two-tier arbitration clause. Please also see Voestapline Schienen Gmbh v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665; Newton Engg. And Chemicals Ltd. v. Indian Oil Corp. Ltd. (2013) 4 SCC 44; S.P. Singla Constructions Pvt. Ltd. v. DMRC Ltd., 2017 SCC OnLine Del 10689; Datar Switchgears v. Ltd. v. Tata Finance Ltd. & Ors. (2000) 8 SCC 151.
12 SLP (C) Nos.24173-74/2019 decided on December 17, 2019
13 (2017) 4 SCC 665.
14 D.K. Gupta v. Renu Munjal, MANU/DE/7943/2017.
18 Arbitration and Conciliation (Amendment) Act, 2019 (33 of 2019) dated August 09, 2019.
* The authors are grateful to Mr. Sameer Sharma, final year student National Law University, Jodhpur for his research assistance and his insights
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