India: A Guide For Appointment Of An Arbitrator

Introduction

Section 11 of the Arbitration and Conciliation Act, 1996... is the life support for the field of arbitration in India even though the same section is considered to be one of the most challenging and contentious sections in the entire statute. The said section 11 lists in detail the procedure for appointment of the arbitrators, and also empowers the court to examine the existence of an arbitration agreement while deciding the application for such appointment.

This section has evolved over the years starting from judgments in Konkan Railways¹ to Central Railway² , latter being recently passed by Supreme Court of India. But before discussing about Section 11, let us understand why the Arbitration Act has become important. The reason for its rising importance is timely rendering of decisions, flexibility of procedure and predictable outcomes as compared to civil courts which are perceived to be slow, antediluvian in their approach to business parlance and rigidity in terms of procedural norms. This article will summarily discuss the recent judicial trends w.r.t Section 11.

Judicial Evolution of Section 11

TRF Ltd vs Energo Engineering Projects Ltd³ : In this case the question before the Hon'ble Supreme Court was, "whether the appointment of an arbitrator made by the Managing Director of the Respondent therein was a valid one and whether at that stage an application moved under Section 11(6) of the Act could be entertained by the Court ?"

The Supreme Court ruled that a court can be approached to plead the statutory disqualification of an arbitrator under the provisions of the Arbitration and Conciliation Act, 1996, and that it is not necessary to approach the arbitrator for obtaining such a relief. Further, in Para 57 of the judgment, the court held that:

"By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another person as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated."

Perkins Eastman Architects DPC & Ors vs HRCC (India) Ltd⁴ : The judgment in this case is an extension of the principle laid down in TRF Limited vs. Energo Projects Ltd.⁵ which states that the person who has become ineligible to be appointed as an arbitrator is also ineligible to nominate an arbitrator. This judgment adds weight to the principles laid down in the above mentioned judgment by stating that "The person 'interested' in the outcome of an arbitration is also ineligible to be appointed an arbitrator and also to nominate someone as an arbitrator".

To briefly explain the case, the major issue before the court was, whether a case has been made out for the exercise of power by the court to appoint an arbitrator? The hon'ble court opined that after the Amendment Act of 2015, Schedule V and VII makes it evident that a person having direct interest in the dispute as such could not act as an arbitrator. Court further held that-

"16..the ineligibility referred was a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator"

Therefore, this judgment recapitulates the basic principles of any arbitration viz., rule against biasness, independence and impartiality of the arbitrator. The judgment further states that as per Section 11(2) of the Act, parties are free to agree on a procedure to appoint an arbitrator. Accordingly, liberty to act on the same shall be given if the parties have a written contract giving one of the parties the right to appoint a sole arbitrator.

This decision clarifies two crucial points of law:

a. First, that a person who is ineligible to act as an arbitrator also cannot appoint an arbitrator; and

b. Second, that the court has the power to intervene under Section 11 unless the appointment on the face of it is valid, and the court is satisfied with respect to the same.

Central Organisation for Railway Electrification vs. M/S ECI-SPIC-SMO-MCML (JV)⁶ : The hon'ble Supreme Court in this case held that the appointment of the arbitrators should be in terms of the agreement as agreed by the parties. The court while deciding the present matter opined that:

"34. After referring to para (50) of the decision in TRF Limited, in Perkins Eastman, the Supreme Court referred to a different situation where both parties have the advantage of nominating an arbitrator of their choice and observed that the advantage of one party in appointing an arbitrator would get counter-balanced by equal power with the other party."

"37. Since the respondent has been given the power to select two names from out of the four names of the panel, the power of the appellant nominating its arbitrator gets counter-balanced by the power of choice given to the respondent. Thus, the power of the General Manager to nominate the arbitrator is counter-balanced by the power of the respondent to select any of the two nominees from out of the four names suggested from the panel of the retired officers. In view of the modified Clauses 64(3)(a)(ii) and 64(3)(b) of GCC, it cannot therefore be said that the General Manager has become ineligible to act as the arbitrator. We do not find any merit in the contrary contention of the respondent."

The basic understanding after the rational given by the court in this case is that this judgment has given clarity to the judgment given by the Supreme Court and Bombay High Court in Perkins and Lite Food cases respectively, and re-applied the rational given in Voestalpine judgment by giving an explanation that power of a party to appoint an arbitrator would be at par when an option to choose an arbitrator was given to the other party. It has thereby, created a safe harbour for the parties intending to keep a sole arbitrator clause in the agreement by giving them an option to choose from the panel of the arbitrators.

Conclusion

After a combined reading of the above mentioned judgments in respect of the appointment of the arbitrators/sole arbitrator, there can be three possible solutions:

a. Appoint a sole arbitrator with mutual consent with an explicit clause in the agreement mentioning the name of the person to be appointed as the sole arbitrator.

b. Approach High Court/ Supreme Court to appoint a sole arbitrator, in case there is any dispute between the parties.

c. Provide an option to the other party to choose from the panel of arbitrators which tantamount to the power given to the other party to nominate the arbitrator. Irrespective of these solutions, the main universally accepted point is that the "person interested in the outcome of an arbitration is ineligible to nominate an arbitrator and to be appointed as an arbitrator".

Footnotes

1 Konkan Railway Corporation Ltd Anr v. Rani Construction Pvt. Ltd,(2002)

2 SCC 388 2 Central Organisation for Railway Electrification V. ECI-SPIC-SMO-MCML (JV),2020(1)ARBLR19(SC)

3 (2017)8 SCC 377

4 2019(6)ARBLR132(SC)

5 (2017) 8 SCC 377

6 2020(1)ARBLR19(SC

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.