Unilateral Appointment of Arbitrators - An issue which has significantly impacted resolution through Arbitration Mechanism

Introduction

Alternate Dispute Resolution Mechanisms (herein referred to as "ADR mechanisms") have significantly impacted and improved the Indian dispute resolution system in last few decades. One of the key successful ADR mechanisms evolved over a period of time is the Arbitration mechanism. Presently this law is governed in India by means of ARBITRATION AND CONCILIATION ACT, 1996(herein referred to as "A&C Act, 1996".

 Evolvement of Arbitration Law in India

Before the enactment of A&C Act 1996, the law of arbitration in India was substantially governed by three enactments i.e., the Arbitration Act, 1940, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961.

 In order to sustain the economic reforms and other policy changes, the need for a consolidated and amended law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards was felt which also define the laws relating to conciliation, taking into account the model law and conciliation rules adopted by United Nation Commission on International Trade Law & UNCITRAL Model law on International Commercial Arbitration in 1985. Following which the Arbitration and Conciliation Act, 1996 was enacted.

 Objective of A&C Act, 1996

Hon'ble SC in the case of Bharat Sewa Sansthan vs U. P. Electronics Corporation (AIR 2007 SC 2961) has stated the objective of the A&C Act, 1996 as:

             "The main objectives of the Arbitration Act is to make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of the specific arbitration and to minimize the supervisory role of courts in the arbitral process and to permit an arbitral tribunal to use mediation, conciliation or other procedures during the arbitral proceedings in settlement of disputes, etc. etc."

Present Issue

Unilateral appointment of a sole arbitrator without the consent of respondent has evolved as a major issue over the years as the same has put halt to execution of large number of Arbitration Tribunal awards on the grounds of unfairness and violation of principles of natural justice.

 The issue has been dealt by number of Courts over the years and currently pending before constitutional bench of Hon'ble Supreme Court of India where the issue is:

     "Can a person who is ineligible to be an arbitrator in a dispute nominate another person to be an arbitrator?"

 Let's analyze the position w.r.t important provisions and judgments in this regard:

Important Statutory Provisions:

Section 11. Appointment of Arbitrators

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by 1 [the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court].

(6) Where, under an appointment procedure agreed upon by the parties,— (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request 1 [the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court]to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

Section 12: Grounds for challenge. —

[(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.]

THE SEVENTH SCHEDULE

Arbitrator’s relationship with the parties or counsel...

Relationship of the arbitrator to the dispute...

Arbitrator’s direct or indirect interest in the dispute...

 

Relevant Cases

TRF Ltd. v. Energo Engineering Projects Ltd.: (2017) 8 SCC 377

In this case, the Agreement was entered into before the provisions of the Amending Act (Act No.3 of 2016) came into force and the Appellant submitted that the Managing Director of the respondent would be a person having direct interest in the dispute and as such could not act as an arbitrator. Further, Appellant contended that a person who himself was disqualified and disentitled could also not nominate any other person to act as an arbitrator.

 On the other hand, respondent's submission was to the effect that since the Managing Director of the respondent has become ineligible to act as an arbitrator subsequent to the amendment in the Act, he could also not have nominated any other person as arbitrator is absolutely unsustainable, for the Fifth and the Seventh Schedules fundamentally guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence and impartiality of the arbitrator. In other words, respondent meant to say that if any person whose relationship with the parties or the counsel or the subject-matter of dispute falls under any of the categories specified in the Seventh Schedule, then only he is ineligible to be appointed as an arbitrator but not otherwise.

Key Issue: Whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator?

Held: Court observed that in present case held that the Managing Director became ineligible by operation of law to act as an arbitrator, hence, he could not nominate another person to act as an arbitrator and that once the identity of the Managing Director as the sole arbitrator was lost, the power to nominate someone else as an arbitrator was also obliterated.

Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.: (2020) 20 SCC 760

Issues Addressed:

1. Whether the arbitration in the present case would be an International Commercial Arbitration or not. In case, it is not, then this Court cannot deal with the application under Section 11(6) read with Section 11(12)(a) of the Act.

2.  Whether a case is made out for exercise of power by the Court to make an appointment of an arbitrator?

Held: Hon'ble Supreme Court, following the earlier decision in TRF Ltd. (supra), held that the Chairman-cum-Managing Director of a party was ineligible to appoint an arbitrator.

Again, in the case of Proddatur Cable TV Digi Services v. Siti Cable Network Limited: (2020) 267 DLT 51, Hon'ble Delhi High Court held in respect of Section 12(5) of A&C Act, 1996 that it is not permissible for a party to unilaterally appoint an arbitrator without the consent of the other party(ies).

KOTAK MAHINDRA BANK LTD. v. NARENDRA KUMAR PRAJAPAT: 2023: DHC:3705-DB

Facts: Appellant filed present appeal impugning an order dated 23.11.2022, passed by the learned Commercial Court whereby the appellant’s application for enforcement of an ex parte arbitral award dated 21.07.2021, passed by Shri C. Prasanna Venkatesh, Sole Arbitrator in favour of D.H. Finance Company, was rejected.

 The learned Commercial Court had found that the Arbitral Award was rendered ex-parte by an Arbitrator who was unilaterally appointed by D.H. Finance Company without any recourse or consent of the respondent. The Court had also found that the learned Arbitrator was ineligible for being appointed as an Arbitrator in terms of Section 12(5) of the Arbitration and Conciliation Act, 1996.

Hon'ble Court relying on TRF's judgement, Perkins judgement and Proddatur judgement, upheld the decision of learned Commercial Court as the same was in contravention with Section 12(5) of the A&C Act, 1996 and the aforementioned judgements.

 However, the contention of the respondent in the present case was in respect that the respondent was aware of the appointment of the arbitrator and had not raised any objection to such appointment; therefore, the respondent is now precluded from challenging the impugned award.

 Court addressed this issue of waiver of right to object by respondent.

 Court observed that party can waive its right to object to the ineligibility of an arbitrator under Section 12(5) of the A&C Act but the same is subject to two conditions:

1. First, that the waiver is required to be by and done by an express agreement in writing; and

2. Second, that such agreement is entered into after the disputes have arisen.

 Unless both the aforesaid conditions are satisfied, there can be no waiver of the ineligibility of an arbitrator.

 Hon'ble Court relied on the SC judgement of Bharat Broadband Network Limited v. United Telecoms Limited: (2019) 5 SCC 755 where in the Supreme Court had authoritatively held that waiver of a right to object to ineligibility of an arbitrator under Section 12(5) of the A&C Act cannot be inferred by conduct of a party. Such waiver can only be by an express agreement in writing. The Court had also clarified that “the expression ‘express agreement in writing’ refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct”.

 Further, Court cited HRD Corporation v. GAIL (India) Ltd.: (2018) 12 SCC 471 & Govind Singh v. M/S Satya Group Pvt Ltd & Anr.: 2023/DHC/000081 where in courts have again upheld the same position in regard to ineligibility of an arbitrator.

 Held: Court in the instant case, upheld the decision of learned Commercial Court.

Central Organisation for Railway Electrification (CORE) v ECL-SPIC-SMO-MCML (JV), JSW Steel Limited v South Western Railway

In the first case, i.e. CORE vs ECL-SPIC-SMO-MCML, the issue was raised where the terms of contracts were such that CORE provided respondents with 4 arbitrators, out of which respondents have to select two. Respondents did not select the arbitrators, instead approached Allahabad High Court for appointment of Sole Arbitrator which HC appointed, the reason being CORE’s nominees were retired officers and were therefore ineligible to become arbitrators.

However, Supreme Court through an SLP (3 Judge bench) set aside the arbitrator appointed by Allahabad High Court and held that Arbitrator needs to be appointed by GCC(General Conditions of Contract) and a person couldn't be deemed ineligible simply because he was a retired officer.

However, in another three judge bench case of Union of India vs M/S Tantia Constructions Ltd, (2021), Hon'ble SC disagreed with the CORE judgement (supra). Hence, referred matter to Constitutional Bench where the key issue was:         "Can a person who is ineligible to be an arbitrator in a dispute nominate another person to be an arbitrator?"  which is still pending before Hon'ble SC Constitutional bench in which on July 12, 2023, a Constitution Bench led by CJI Chandrachud postponed all hearings related to the appointment of arbitrators by two months as an Expert Committee of the Union Government was in the process of examining the provisions of the Arbitration and Conciliation Act, 1996.

 

 

 

 

 

Author

Adv. Tushar Bawa

Delhi High Court

LL. B, Faculty of Law, University of Delhi

PGD-IPR, IGNOU,

B. Tech (Punjabi University, Patiala)

7986376670/9646302140

 

 

 

 

 

 

 

Disclaimer: This contents of this article are restructured in a summarized way and the authenticity of the content is subject to understanding of the author.