India: Appointment Of Arbitrators: Assessing The Balance Between Autonomy And Fairness

1. INTRODUCTION

The appointment of impartial and unbiased arbitrators is the cornerstone of an arbitration process, ensuring fair resolution of disputes and requires unwavering adherence to the principles of neutrality and impartiality. Parties have an unequivocal right to appoint the arbitrator of their choice. However, the issue of unilateral appointment of arbitrators has been a subject of extensive legal scrutiny. Recent developments in jurisprudence have shed light on the significance of preventing such appointments and upholding the principles of natural justice and transparency. Arbitration as a dispute resolution method mandates a neutral and impartial arbitrator to make legally binding decisions. An impartial arbitrator not only ensures a fair and just resolution for the parties involved but also strengthens public trust in the arbitration process.

2. JUDICIAL OVERVIEW

In 2015, the Arbitration and Conciliation Act, 1996 (“Act”) underwent a significant amendment to include Section 12(5) and the Seventh Schedule in order to enhance the credibility and effectiveness of the Indian arbitration framework, promoting a transparent and trustworthy dispute resolution mechanism. Section 12(5) explicitly states that any person whose relationship with the parties, counsel, or subject matter of the dispute falls under the categories specified in the Seventh Schedule to the Act is ineligible to be appointed as an arbitrator, regardless of any prior agreement. The section also provides a proviso, whereby an ineligible person may be appointed as an arbitrator, if the parties agree to the same expressly in writing. This amendment highlights the Indian legislature's commitment to ensuring a fair and unbiased resolution of disputes through arbitration. The importance of Section 12(5) has been highlighted by the Supreme Court in HRD Corporation v. GAIL (India) Limited, ¹ where it held that the ineligibility goes to the root of the appointment of the arbitrator.

A challenge which constantly comes up before the courts is the unilateral appointment of an arbitrator. It refers to the situation where one party proposes/appoints an arbitrator without obtaining the consent of the other party. It commonly occurs when a dispute resolution clause in an agreement, drafted by the dominant party specifies that the appointing authority for the arbitrator rests solely with that party. These are most frequently seen in boilerplate or template agreements such as loan agreements, insurance agreements, service agreements and are often presented as standard forms where the terms are predetermined and non-negotiable for the other party involved. Consequently, in the event of a dispute between the parties, the dominant party typically asserts its right to unilaterally appoint an arbitrator.

The challenge to an arbitral award based on the unilateral appointment of an arbitrator has been addressed by both the High Courts and the Supreme Court on numerous occasions. In the case of TRF Limited v. Energo Engineering Projects Limited, ² the Supreme Court dealt with a dispute resolution clause that specified the sole arbitrator as the buyer's managing director or his nominee for disputes between the parties. This meant that the managing director would not only act as an arbitrator, but in case of his unavailability, he also had the authority to nominate another arbitrator to resolve the disputes. The Court, while interpreting Section 12(5) of the Act, concluded that it would be legally inconceivable for a person who is statutorily disqualified from acting as an arbitrator to have the power to nominate one and that allowing such an appointment would essentially permit the managing director to conduct the arbitration proceedings himself, despite being de jure ineligible to act as an arbitrator.

The view held by the Supreme Court in TRF (supra) was affirmed in the case of Perkins Eastman Architects DPC and Anr. v. HSCC (India) Limited, ³ where the Supreme Court emphasized the importance of equal power for both parties in appointing an arbitrator. The Court highlighted that if one party possesses the exclusive authority to select the arbitrator, it inherently carries a risk of bias in favor of that party's interests. In the case of Bharat Broadband Network Limited v. United Telecoms Limited, ⁴ the Supreme Court invalidated an arbitration clause that allowed the chief managerial director of the appellant to unilaterally appoint a sole arbitrator. The Court determined that this appointment process contradicted the principle established in the TRF (supra) case, as the appointment procedure outlined in the arbitration clause was not valid due to the statutory ineligibility of the appointing authority and their inability to make nominations.

In the recent case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited. V. Ajay Sales & Suppliers, ⁵ the Supreme Court ruled that the appointment of a company chairman as an arbitrator is inherently invalid under Section 12(5) of the Act, in conjunction with the Seventh Schedule. The Court emphasized the importance of maintaining the neutrality of arbitrators, citing its previous decisions in TRF, Perkins, and Bharat Broadband. The Court stated that the rule against bias is a fundamental aspect of the arbitration process. Even if the chairman's role was not explicitly listed in the prohibited items of the Seventh Schedule, their influential position within the petitioner company rendered them ineligible to serve as an arbitrator.

3. PANEL OF ARBITRATORS

Although unilateral appointments may seem to be generally prohibited under the amended Act, exceptions to this rule have emerged in certain appointment procedures. These exceptions involve situations where an arbitrator is selected from a panel that is established, maintained, curated, and overseen by one of the parties involved in the dispute. Such clauses are commonly found in post tender government contracts, where the selection of the presiding and/or sole arbitrator is to be done from a panel consisting of retired and senior officials from the relevant department.

In the case of Voestalpine Schienen GmbH v. DMRC, ⁶ the Supreme Court examined the legality of an appointment procedure where the parties were required to select arbitrators from a panel maintained by DMRC. Voestalpine challenged the composition of the arbitration panel, which primarily consisted of retired government officials and engineers, arguing that it violated Section 12(5) of the Act and the Seventh Schedule. The Court clarified that the Seventh Schedule only prohibits the appointment of individuals with personal relationships to any party involved in the dispute. Since the panel included individuals from the Railways and Public Works Department, it was not disqualified under these grounds. In another case of Central Organisation for Railway Electrification (CORE) v. ECI-SPIC-SMO-MCML (JV), ⁷ the Supreme Court upheld an arbitration clause that required each party to select their nominee arbitrators from CORE's panel of arbitrators, who would then appoint the presiding arbitrator. The Court, relying on the precedent set in Voestalpine (supra), determined that the inclusion of retired railway officers in CORE's panel did not violate the provisions of the Act. The Court emphasized that since both parties had an equal right to nominate an arbitrator, there was no reasonable cause for concern regarding bias or impartiality. As a result, the appointment procedure was deemed valid by the Hon'ble Supreme Court

The decisions in Voestalpine (supra) and CORE (supra) give rise to certain ambiguity concerning the appointment of arbitrators, as they have allowed certain parties, which may be interested in the outcome of the dispute, to not only serve as arbitrators but also possess the authority to appoint and/or nominate other arbitrators, while the cases of TRF (supra) and Perkins (supra) have clearly stated that individuals with an interest in the outcome of a dispute cannot act as arbitrators or nominate arbitrators.

Recently, the Supreme Court in Union of India v. Tantia Constructions Limited, ⁸ was faced with a situation where the arbitration clause provided for both parties to nominate an arbitrator from a panel which comprised of retired employees of one of the parties involved in the dispute. The said arbitration clause was upheld by the High Court of Calcutta in view of the judgment delivered in CORE (supra). The Supreme Court, in the appeal, disagreed with the aforementioned judgment and referred the issue to a larger bench. Further, in JSW Steel Limited vs. South Western Railway and Anr., ⁹ the arbitration clause in the contract provided for a sole arbitrator to be appointed by the general manager of the concerned railway zone, which was upheld by the High Court of Karnataka in view of CORE (supra). Thus, in view of the reference of CORE (supra) to a larger bench in Tantia Constructions (supra), the Supreme Court in JSW Steel (supra) also referred the matter to be decided by the larger bench.

Another looming issue is one that of waiver, i.e. when does a party seem to have waived its right to challenge an arbitrators jurisdiction. In the case of Naresh Kanaylal Rajwani & Ors. v. Kotak Mahindra Bank Limited and Anr., ¹⁰ the Bombay High Court, while setting aside an award, ruled that a party's participation in the arbitral proceedings does not automatically bar them from challenging the award based on the unilateral appointment of the arbitrator, i.e., it does not waive the party's right to challenge the appointment procedure.

Recently, the Delhi High Court, in Kotak Mahindra Bank Limited vs. Narendra Kumar Prajapat, ¹¹ held that an arbitral award passed by an arbitrator unilaterally appointed by a party is a nullity and thus, cannot be enforced. The Court observed that conditions set out in Section 12(5) of the Arbitration Act concerning a party's waiver of its right to object to the ineligibility of an arbitrator are unambiguous. The twin conditions set out by the Arbitration Act are as under:

1. The waiver is required to be done by an express agreement in writing; and
2. That such an agreement is entered into after disputes have arisen between the parties.

4. CONCLUSION

Both the Supreme Court and the High Courts have set aside numerous arbitral awards due to the unilateral appointment of arbitrators. The rationale behind this is that such appointments introduce bias and partiality by allowing one party to appoint an arbitrator without the other party's participation.

Thus, the decision of the larger bench of the Supreme Court is much awaited, to put the controversy to rest and reinforce the party's faith in arbitration being a fair, neutral and independent process.

Footnotes

1. (2018) 12 SCC 471.

2. (2017) 8 SCC 377.

3. (2020) 20 SCC 760.

4. (2019) 5 SCC 755.

5. 2021 SCC OnLine SC 730.

6. (2017) 4 SCC 665.

7. (2020) 14 SCC 712.

8. 2021 SCC OnLine SC 271.

9. 2022 SCC OnLine SC 1973.

10. Comm. Arbitration petition (L) No. 1444 of 2019

11. 2023 SCC Online Del 3148

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