Unilateral Appointment of Arbitrators In India

Section 12 of the Arbitration and Conciliation Act, 1996 (“Act”) lays down provisions for the appointment of an arbitrator and conditions where the appointment may be valid or invalid. This article will delve into the practice of unilateral appointment of arbitrators in India, the internationally recognised principle of unilateral appointment of arbitrators in India and important rulings of the courts as an attempt to evade this practice.

Scenario Prior to the 2015 Amendment

Prior to the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), unilateral appointments were allowed in India without any restrictions. Such appointments, specially by PSU’s, were done either from the panel of arbitrators nominated by one of the parties to the dispute or the employees of one of the parties were nominated as the sole arbitrator. Of course, this would tilt the balance of power in favour of the party nominating / acting as an arbitrator.

The practice of appointment of employees as arbitrators was, in fact, upheld by the Hon’ble Apex Court in the matter of Indian Oil Corporation Ltd. v Raja Transport (P) Ltd¹ wherein it was held that while appointment of employees of private parties is not suitable, there is no bar for an employee of a government /statutory corporation/ PSU acting as arbitrator, so far as the person being appointed as an arbitrator has no nexus with the contract in respect of which such dispute has arisen.

Thus, the practice of appointing the employees of one of the parties to a dispute became prevalent, especially in cases of PSU’s and government organisations. This went against the very root of the Act, as the main essence of an arbitration is that the arbitrator should be independent and impartial.

International Jurisprudence on Unilateral Appointment of Arbitrators

In a very famous French judgement of Siemens AG & BKMI Industrienlagen GmbH V. Dutco Consortium Construction Co., also famously known as the “Dutco Case”, the issue of equality as a matter of public policy in appointing an arbitrator was discussed, way back in 1992. The agreement entered into between the parties had a multi-party arbitration agreement wherein, BKMI and Dutco the two defendants were requested to agree on a joint arbitrator, which was done under protest. This was subsequently challenged. ICC and Paris Court of Appeal did not see any problem with the appointment. However, the Cour de Cassation (French Supreme Court) set aside the order passed by the Paris Court of Appeal and considered the appointment process to be contrary to public policy stating 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”.

As a result of this judgement, various arbitration institutions such as ICC, the German Institutions of Arbitration etc. provided for appointment of arbitrators by the institution wherein the parties are unable to agree on a joint arbitrator. Thus, party equality has been well recognised internationally since decades.

Scenario Post 2015 Amendment

However, post the 2015 Amendment, the law with respect to unilateral appointment was made a bit stringent, and a host of restrictions were put in place as to who cannot be appointed as an arbitrator. The law however remains silent on the point “who can appoint an arbitrator”. Many big corporates and PSU’s still continue the practice of appointing arbitrators unilaterally. Subsequently, the Hon’ble Apex Court in the matter of TRF Limited v. Energo Engineering Projects Ltd.² finally put to rest the issue of employees of a corporate or a PSU being appointed and/or appointing an Arbitrator, by holding that a person who is ineligible by the bar of Section 12(5) of the Act to act as an Arbitrator could not even appoint another as an Arbitrator.

Despite the TRF Judgement (Supra), big corporates, mostly banks, non-banking financial companies, infrastructure companies, financial sector entities etc. kept unilaterally appointing their own arbitrators in numerous cases. Such practice was not appreciated by the Hon’ble Bombay High Court in the matter of Sawarmal Gadodia vs. Tata Capital Financial Services Limited & Ors³. The Hon’ble Bombay High Court in this matter observed that the practice being followed, specially by Non-Banking Financial Institutions of unilaterally appointing one single arbitrator under numerous contracts, ranging in hundreds, cannot be done and thus, the Award passed by the arbitrator unilaterally appointed was set aside.

Subsequently, organisations resorted to another practice of appointing their retired employees or people having some other relationship or nexus with the organisation, as arbitrators. A very common trend observed in large conglomerates particularly, government run entities or NBFCs etc, is the appointment of senior level employees or previously retired employees as arbitrators in a dispute. The former instance has been explicitly made invalid by Section 12(5) of the Act, but the latter still remains as a grey area. Since it is not practical to impose a blanket ban on the appointment on all people related to an organisation, section 12(5) read with the seventh schedule lays down conditions when such individuals may be unbiasedly appointed.

Various High Courts across the country have consistently distinguished the principles laid down in the TRF judgement (Supra), upholding the appointment procedure agreed between the parties. In one such matter of D.K. Gupta v. Renu Munjal⁴ the Hon’ble Delhi High Court upheld the appointment procedure wherein one of the parties to the dispute had a right to appoint an Arbitrator. The Court held that in this case, no person interested with the outcome of the dispute was vested with the power to nominate an Arbitrator. Accordingly, this case was distinguished from the TRF judgement (Supra) and the appointment procedure agreed between the parties was held to be valid.

However, the long-awaited issue of unilateral appointment of arbitrators under the Act was put to rest by the landmark judgement passed of the Hon’ble Apex Court in the matter of Perkins Eastman Architects DPC & Anr. V. HSCC⁵. In the said Perkins judgement (Supra), the Hon’ble Apex Court went ahead to interpret Section 11(6) of the Act, which deals with the appointment of an arbitrator by the court. The Hon’ble Supreme Court examined what was held in TRF (Supra) – “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator”. The Hon’ble Supreme Court said that the logical deduction from the said TRF judgement should be that the ineligibility referred to therein, was a result of operation of law, is 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.

The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice, would get counterbalanced by equal power with the other party. But, in case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution.

Thus, it was held that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.

The judgement passed by the Hon’ble Apex Court in the Perkins (Supra) was further relied upon by the Hon’ble Delhi High Court in their recent decision in the matter of Poddatur Cable TV Digi Services v. SITI Cable Network Limited⁶.

The Hon’ble Delhi High Court noted that – “…the Managing Director was ineligible from appointing an Arbitrator on the simple logic that a Managing Director of a Company would always have an interest in the outcome of the arbitration proceedings. The interest in this context takes the shape of bias and partiality. As a natural corollary, if the Managing Director suffers this disability, even if he was to appoint another person as an Arbitrator, the thread of biasness, partiality and interest in the outcome of the dispute would continue to run. Seen in this light, it can hardly be argued that the judgment in Perkins (supra) will not apply only because the designated Authority empowered to appoint an Arbitrator is other than a Managing Director. Moreover, as brought out by the respondent itself, Company here is run by the Board of Directors.”

The Hon’ble Bombay High Court also in the matter of Lite Bite Foods Pvt. Ltd. v. Airports Authority of India⁷ further clarified the ratio laid down by the Hon’ble Apex Court in the matter of Perkins (Supra). The Court held that the law relating to question of independence and impartiality also takes into ambit the procedure for the appointment of arbitral tribunal. The court went to hold that “…you cannot be an impartial arbitrator free from all justifiable doubt if the manner in which the arbitral tribunal is constituted itself is beset by justifiable doubt.”

The Court held that appointment of an arbitral tribunal can either be with consent of parties or by an order of the court, there can be no third way.

In Sum

The practice of unilateral appointments can be said to defeat the very essence of the Act by giving one party a right over the other, which goes against the basic notions of natural justice. In one-sided arbitration clauses, especially in contacts of private parties (not being government entities) or entities which are not PSU’s, enforceability of such clause becomes difficult to achieve. While a party may get the counter party to sign an agreement with a unilateral appointment clause should the counter party, at the time of appointment of an arbitrator, raise an issue with respect to the validity of the clause and/or refuse to give consent under Section 12(5), the manner of appointment becomes infructuous and the party pressing the arbitration in that scenario would need to approach the courts for appointment of an arbitrator.

Though, courts in India have made a conscious attempt to put to rest the ethical dilemma of unilateral appointments of arbitrators, however, the practice of appointing arbitrators from a panel, maintained and formulated by one of the parties to the dispute⁸ still prevails.

We recommend that unilateral appointment clauses be avoided at all times. Parties can mutually agree on a list of arbitrators from which the party initiating the arbitration may nominate an arbitrator. This would reduce the time and energy of commencing arbitration through appointment of an arbitrator under Section 11 by filing an application either before the High Court and/or the Supreme Court.

Also, in the light of 2019 amendment to the Act which seeks to promote institutional arbitration, it is also seen that in many contracts, parties have been giving the power of appointment of an arbitrator to an arbitration institution. Considering the time taken for Section 11 matters to be decided by Courts along with the expenses incurred, appointment of arbitrators through an institution would be faster and efficient as compared to the route under Section 11. With the time limits imposed by the arbitration act for newer arbitration and quick resolution for appointment of arbitrator, arbitration does emerge as an effective mode of dispute resolution.

Footnotes

1 (2009) 8 SCC 520

2 (2017) 8 SCC 377

3 2019 SCC OnLine Bom 849

4 2017 SCC OnLine Del 12385

5 2019 SCC OnLine SC 1517

6 2020 SCC OnLine Del 350

7 2019 SCC OnLine Bom 5163

8 Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation [(2017) 4 SCC 665] and Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML(JV) [(2020) 14 SCC 712]