India: Supreme Court: If Ineligible To Be Appointed As Arbitrator, You Can't Nominate

Introduction

Recently, the Hon'ble Supreme Court of India (Supreme Court) in the case of TRF Ltd. v Energo Engineering Projects Ltd1 has held that once an arbitrator becomes ineligible to be appointed as an arbitrator by operation of law, he also loses his power to nominate another as an arbitrator, irrespective of the fact that such other person is an independent person i.e. he / she does not have any financial or other relationship with the person appointing him.

Factual Background

TRF Ltd (the Appellant) had entered into a purchase order for purchasing certain products from Energo Engineering Projects Ltd (the Respondent) (the Purchase Order). In order to secure the performance under the Purchase Order, the Appellant submitted an advance bank guarantee and a performance bank guarantee to the Respondent.

As disputes arose between the Parties, the Appellant approached the Hon'ble High Court of Delhi (Delhi HC) for restraining the invocation of the bank guarantees. While that matter was pending, the Appellant also sought the appointment of an arbitrator.

The arbitration clause in the Purchase Order read as follows:

"33. Resolution of dispute/arbitration:

  1. In case any disagreement or dispute arises between the buyer and the seller under or in connection with the PO, both shall make every effort to resolve it amicably by direct informal negotiation.
  2. If, even after 30 days from the commencement of such informal negotiation, seller and the buyer have not been able to resolve the dispute amicably, either party may require that the dispute be referred for resolution to the formal mechanism of arbitration.
  3. All disputes which cannot be settled by mutual negotiation shall be referred to and determined by arbitration as per the Arbitration and Conciliation Act, 1996 as amended.
  4. Unless otherwise provided, any dispute or difference between the parties in connection with this agreement shall be referred to sole arbitration of the Managing Director of Buyer or his nominee. Venue of arbitration shall be Delhi, and the arbitration shall be conducted in English language.
  5. The award of the tribunal shall be final and binding on both; buyer and seller."

Since the Appellant disagreed with the procedure for appointment of the arbitrator under the terms of the Purchase Order, it called upon the Respondent to agree on the appointment of an arbitrator de hors the specific terms of the Purchase Order. The Respondent did not agree with what was being asserted by the Appellant and suggested the appointment of a retired judge of the Supreme Court as the sole arbitrator in terms of the arbitration clause.

Disagreeing with the above, the Appellant approached Delhi HC under the provisions of Section 11 (6) of the Arbitration and Conciliation Act, 1996 (the Act) seeking the appointment of an arbitrator2.

The Appellant's primary contention before the Delhi HC was that by virtue of section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015, read with the Fifth and Seventh Schedules to the amended Act, the Managing Director had become ineligible to act as the arbitrator and as a natural corollary, he had no power to nominate another as the arbitrator.

The Delhi HC was of the view that in spite of the amended provisions of the Act, the power to nominate by a party was not affected and it confirmed the appointment of the retired judge of the Supreme Court as the sole arbitrator to decide the disputes between the parties3.

Aggrieved by the decision of the Delhi HC, the Appellant approached the Supreme Court. The Appellant raised, inter alia, the following contentions before the Supreme Court:

  1. That the arbitration clause in the Purchase Order had become void as the Managing Director had become ineligible to act as the arbitrator under the newly amended provisions of the Act and, by extension of the same logic, he had also become ineligible to appoint another person as an arbitrator.
  2. That the principle of qui facit per alium facit per se (what one does through another is done by oneself) was attracted in the instant case and therefore if the original arbitrator was ineligible to be appointed, his power to nominate was also lost.
  3. That merely by virtue of the fact that the nominated arbitrator was otherwise an eligible arbitrator under the Act, a conclusion could not be drawn that the process of appointment of such arbitrator was valid under law.

The said contentions were resisted by the Respondent, primarily on the ground that the nominated arbitrator was an eligible arbitrator under the Fifth and Seventh Schedules to the Act and that the Appellant had failed to demonstrate any circumstances which would give rise to justifiable doubts as to the independence and impartiality of the said nominated arbitrator. Further, it was submitted that there was no warrant for the conclusion that an appointed arbitrator would automatically stand disqualified merely because the named arbitrator had become ineligible to become the arbitrator. Lastly, relying on Antrix Corporation Limited v Devas Multimedia Private Limited4 it was contended by the Respondent that the challenge to the appointment of an arbitrator could be made only before the Arbitral Tribunal under the provisions of Section 13 of the Act and such a procedure could not be bypassed by making an application under Section 11 of the Act.

Judgment of the Supreme Court

The Supreme Court firstly noted that there was no argument amongst the parties that the Managing Director had, indeed, by operation of law, become ineligible to arbitrate himself.

As regards the primary issue of whether the Managing Director could exercise the power to now nominate an eligible arbitrator, the Supreme Court relying on the decision in Firm of Pratapchand Nopaji v Firm of Kotrike Venkata Setty & Sons5 and a host of other authorities, reiterated the maxim "qui facit per alium facit per se" and held that if an ineligible arbitrator was allowed to nominate another arbitrator, it would tantamount to carrying out the proceedings of arbitration himself.

The Supreme Court has also recognized that the power of a party to nominate an arbitrator under the provisions of the contract would be different from the present case where the issue was regarding the power of the Managing Director to nominate an arbitrator, subsequent to himself becoming ineligible due to operation of law. In case of the former, what can be called in question is the procedural compliance and the eligibility of the arbitrator so appointed under the provisions of the Act and Schedules thereto.

In light of the above, the Supreme Court, while setting aside the order of the Delhi High Court, remanded the matter back to the Delhi High Court for fresh consideration concluding that if the ability of the Managing Director to act as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is also obliterated.

Comment

The Supreme Court's judgment seeks to apply the golden rule of interpretation (rather than a literal interpretation) to the Act in order to determine the true purpose of the said legislation. Interestingly, the Supreme Court has refused to consider the ratio in the case of Antrix Corporation6 which disallows a challenge to the appointment of the arbitrator by way of an application under Section 11 once the tribunal is constituted, on the basis that the same is distinguishable on facts as that was a matter under the International Chamber of Commerce Rules.

On the other hand, this judgment clarifies aspects of procedure of appointment of arbitrators especially for various public sector undertakings which provide for arbitration clauses permitting their employees to nominate either employees / third parties as arbitrators.

We are hopeful that this judgment would result in ushering in a more transparent and impartial arbitration regime and instill confidence in persons to adopt the fora of arbitration, rather than Court proceedings, to settle disputes.

Footnote

1Civil Appeal No. 5306 of 2017 decided on 3 July 2017

2Arbitration Petition No. 85 of 2016

3Order dated 19 April 2016 passed by Justice Manmohan Singh in Arbitration Petition No. 85 of 2016

4(2014) 11 SCC 560

5(2015) 3 SCC 800

6Supra

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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