India: Have You Been Empanelled? - An Evaluation Of The Process Of Appointment Of Arbitrators From A ‘Broad Based Panel'

Introduction

Arbitration is an ever-evolving arena. The Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) ("Arbitration Amendment Act, 2015") had introduced substantial changes to the provisions of the Arbitration and Conciliation Act, 1996 ("Arbitration Act, 1996"). Many vexed questions regarding interpretation of several provisions of the Arbitration Amendment Act, 2015 have arisen, some of which have subsequently been settled and/or clarified by various judgments of the High Courts and the Supreme Court of India. Some issues, however, continue to harbour controversies, like that of the appointment of arbitrators.

This paper endeavors to analyse firstly, the degree of fairness which the parties are required to adopt with regard to the procedure for appointment of arbitrators in government contracts in light of the current legal scenario established by Indian courts. Secondly, whether the current norms established by the courts for appointment of arbitrators in government contracts can be regarded as cogent? And lastly, understanding the duty incumbent upon the courts to create a conducive environment for arbitration of disputes arising out of government contracts.

The Journey thus Far

As far as the present legal scenario regarding appointment of arbitrators in government contracts are concerned, it will be interesting to note the development of precedents. The Supreme Court's decision in TRF Limited vs. Energo Engineering Projects Limited ("TRF Limited"),¹ opened up more chambers of controversy than the issues it had put to rest. The court held that once the identity of a managing director of a company, being a party to an arbitration proceeding, as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated, thereby extending the scope of Entries, 1, 5 and 12 of the Seventh Schedule to attract the disqualification, which provides that the proposed Arbitrator should not be an employee of one of the parties to the arbitration.

The Supreme Court vide the judgment of Perkins Eastman Architects DPC & ors. vs. HSCC (India) Ltd ("Perkins Eastman"),² while clarifying the TRF Limited (supra) legacy eloquently established that arbitration clauses which provide exclusive power to one party to appoint a sole arbitrator cannot be the norm of the day anymore and principles of impartiality and absence of bias in arbitration proceedings should be of paramount consideration.

The aforesaid principle established by Perkins Eastman (supra) also resonates in the recent judgment delivered by the Delhi High Court in the case of Proddatur Cable TV Digi Services vs. SITI Cable Network Limited ("Proddatur"),³ wherein the court while placing reliance on the ratio of Perkins Eastman (supra) held that even a 'company' acting through its Board of Directors will have an interest in the outcome of the dispute and thus, the arbitration clause which envisaged the appointment of a sole arbitrator by the 'company', would be rendered unworkable. The court further opined that the underlying principle of party autonomy in an arbitration clause, cannot be permitted to override the principles of impartiality and fairness in arbitration proceedings.

However, a situation where both parties to an arbitration agreement are provided with the option to nominate their respective arbitrators, the same would be treated differently. The rationale behind the same is that, an advantage which one party may derive by nominating an arbitrator of its choice would get counter-balanced with the equal power provided to the other party. The court drew the distinction with respect to cases where only one party has a right to appoint a sole arbitrator and stated that such choices will always have an element of exclusivity in determining or charting the course for dispute resolution and thus, a person who has an interest in the outcome or decision of the dispute, must not have the power to appoint a sole arbitrator.

It is to be noted that Perkins Eastman (supra) despite initiating discussions, did not deal with a situation where an arbitrator is chosen from a panel appointed unilaterally by one of the parties to arbitration.

A Snapshot of Other Jurisdictions

The jurisprudence in foreign jurisdictions is also not significantly different when it comes to ensuring equality of opportunity of parties in constituting the arbitral tribunal. The principle of equality of parties or the principle of equal treatment in the designation of parties was first enunciated by the French Cour de Cassation case of Sociétés BKMI et Siemens v. Société Dutco ("Dutco").⁴ In this case, the court set aside an arbitral award rendered in a three-party dispute where each of the two respondents asserted the right to appoint their own arbitrator, rather than make a joint appointment. Though the respondents eventually made a joint nomination under protest, the court set aside the award on the basis that, the appointment procedure violated the respondents' right to equal treatment because it granted the claimant greater influence in the constitution of the arbitral tribunal than each of the respondent. The Cour de Cassation further went onto hold that the "equality of the parties in the appointment of arbitrators is a matter of public policy which can be waived only after the disputes has arisen".⁵ The position of law thus underwent a noticeable change post Dutco which consequently led to major alterations in the rules formulated by prominent arbitral institutions, including the International Chambers of Commerce ("ICC") and London Court of International Arbitration ("LCIA") pertaining to constitution of arbitral tribunals by the parties.

The aforesaid prevailing rule of law is also manifest from the decisions rendered by U.S. Courts which have time and again refused to enforce appointment procedures in employment disputes which permits one party (in most cases, the employer itself) to dictate the list from which the arbitral tribunal could be constituted.⁶

Establishing a New Norm pertaining to Appointment of Arbitrators

The Supreme Court in Voestapline Schinen GmbH vs. Delhi Metro Rail Corporation Limited,⁷ ("DMRC case") dealt with the question of choosing an arbitrator from a panel selected by a party, for the first time. For the purposes of understanding the rationale of the decision, it may be useful to delve into the facts of the case in brief.

In this matter, the procedure for constitution of the arbitral tribunal came up for consideration by the court. The procedure envisaged that upon invocation of the arbitration clause, the respondent shall forward names of five persons from the panel of arbitrators maintained by the respondent. Thereafter, both the petitioner and the respondent, will have to choose its nominee arbitrator from the said panel. Two such chosen arbitrators will, thereafter, choose the third arbitrator from the said panel, to act as the presiding arbitrator. This procedure of constitution of the arbitral tribunal was not acceptable to the petitioner owing to the fact that the panel prepared by the respondent comprised of serving or retired engineers of the respondent company and government departments or public sector undertakings and they purportedly did not qualify as independent arbitrators in the light of the ineligibility norms provided under Section 12(5) read with Seventh Schedule to the Arbitration Act, 1996.

The Supreme Court struck down the aforesaid procedure holding that it is imperative that a panel should be 'broad based' in nature. The court also prescribed the category of persons who can form a part of the panel in addition to serving or retired engineers of government departments and public sector undertakings. As per the court, such persons included engineers of prominence and high repute from the private sector and also, persons with legal background like judges and lawyers of repute. Further, while concluding, the Supreme Court directed formation of a panel comprising 31 arbitrators. It would, however, be pertinent to mention that the Supreme Court vide the said judgment, did not prescribe a specific number of arbitrators who are mandatorily required to be included in a panel so it may be called 'broad based'.

It is however, pertinent to mention, that although the DMRC case (supra) discussed the issue of constructive bias with regard to a situation where a party is given the exclusive power to create a panel of arbitrators, the Supreme Court failed to lay down any specific guideline to address it and anticipated that the rule of creating a 'broad based panel' established by it, would sufficiently address any controversy that may arise in connection to it. Whether or not such rule clarifies the position or confuses it has been analysed in the following portion on this paper.

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Footnotes

1. (2017) 8 SCC 377. Decided on 03.07.2017.

2. Arbitration Application Nos. 32, 34 and 35 of 2019. Decided on 26.11.2019.

3. O.M.P. (T) (COMM.) 109 of 2019. Decided on 20.01.2020.

4. ASA Bulletin 10(2) (1992), 295. Decided on 17.01.1992.

5. Id. at 297.

6. Murray v. United Food & Commercial Workers Int'l Union, 289 F.3d 297, 303 (4th Cir. 2002); Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999).

7. Arbitration Petition (Civil) No. 50 of 2016. Decided on 10.02.2017.

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