In a recent decision1, the Supreme Court of India (Supreme Court) had the occasion to interpret the provisions of Section 11 of the Arbitration and Conciliation Act, 1996 (Indian Arbitration Act) where it reiterated that a person, who has an interest in the outcome of an arbitration must not have the power to appoint a sole arbitrator.
A consortium including Perkins Eastman Architects DCP and Edifice Consultants Pvt. Ltd. (Applicants) and HSCC (India) Ltd. (Respondent) entered into a contract for architectural planning and designing related work. Soon after execution of the contract, disputes arose between the parties and the Respondent, terminated the contract and appointed a sole arbitrator to adjudicate the disputes in terms of Clause 24.1(ii) of the contract. The arbitration clause in the underlying agreement (Arbitration Clause) provided the following:
"24.0 Dispute Resolution
(ii) Except where the decision has become final, binding and conclusive in terms of sub-Para (i) above disputes or difference shall be referred for adjudication through arbitration by a sole arbitrator appointed by the CMD HSCC within 30 days from the receipt of request from the Designing Consultant......It is also a term of this contract that no other person other than a person appointed by such CMD, HSCC as aforesaid should act as arbitrator......"
The Applicants moved an application before the Supreme Court challenging the appointment of the sole arbitrator appointed by the Respondent and sought the appointment of an independent impartial sole arbitrator under Section 11 of the Indian Arbitration Act.
The Supreme Court, while examining the provisions of Section 11 of the Indian Arbitration Act set out the following two instances of unilateral appointment of arbitrators in India that are prevalent in the Indian legal scenario:
- Firstly, where a party names a person as the sole arbitrator like the Managing Director, Chairman, CEO, etc.
- Secondly, where the person so named in the contract (MD, Chairman, CEO, etc.) has the exclusive power to appoint the sole arbitrator.
The Supreme Court noted that in TRF Ltd. v Energo Engineering Projects Ltd.2 (TRF Ltd), it had the occasion to examine an arbitration clause in the underlying agreement which said that in a dispute, either the Managing Director of Energo Engineering would be appointed as a sole arbitrator or the Managing Director would, in his place, nominate a third party to act as the arbitrator. The Managing Director chose not to act as sole arbitrator and nominated a third-party sole arbitrator. The third party was held to be ineligible to act as an arbitrator since the Managing Director was himself ineligible because he was a person inherently interested in the outcome of the arbitration.
In summary, if a person is ineligible to be appointed as a sole arbitrator due to his interest in the outcome of the arbitration, then that person could also not appoint or nominate a sole arbitrator in his place.
The Supreme Court also observed that in view of such an interpretation, a party would be disentitled to unilaterally appoint a sole arbitrator or to delegate such a power in that nominee. It would always be open to the opposite party to argue that such the person (including an official or an authority) having interest in the dispute would be disentitled to appoint an arbitrator.
In view of the above, the Supreme Court set aside the appointment by the Respondent and appointed a retired Supreme Court judge, Justice (Retd.) A.K. Sikri as the sole arbitrator.
While this judgment adds to body of precedents that invalidate arbitration clauses providing for unilateral appointment of sole arbitrators, it remains to be seen the manner in which the same will be implemented by a number of companies, which continue to routinely insert arbitration clauses providing for appointment of employees/representatives/Directors as sole arbitrators and/or delegating the power to appoint on those employees/representatives/Directors.
1. Perkins Eastman Architects DPC v HSCC (India) Ltd. [Arbitration Application No. 32/2019 decided on November 26, 2019]
2. (2017) 8 SCC 377
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.