The hallmark of arbitration proceedings lies in the independence and impartiality of arbitrators. Such features have been meticulously imbedded in the Arbitration and Conciliation Act, 1996 by the Parliament. Over the past few years, the parties and courts have been facing an issue of appointment of arbitrator by one party alone by invoking the terms of the agreement. According to Section 11(2) of the Arbitration and Conciliation Act, 1996 the parties are free to agree on a procedure for appointing the arbitrator. Various companies, banks and dominant parties which majorly enjoy a dominating position over the other party, incorporate the procedure for the appointment of arbitrator in their agreements in such a way that the other party has no say in the appointment of the arbitrator. The mandate of the Arbitration and Conciliation Act, 1996 has been succinctly explained in various Supreme Court decisions and the 246th Law Commission Report1.
As the name suggests, it means that an arbitrator is proposed for appointment by one party alone without taking the consent of the other party. In many agreements, usually the dominating party inserts a dispute resolution clause which provide for appointment of arbitrator by that party which has drafted the agreement. In such cases, usually the second party does not have any negotiating power with respect to the alteration of the terms of agreement. For instance, loan agreements, insurance agreements, agreements for providing services, etc. are all drafted by the companies and usually the terms are non-negotiable by the other party. These are also called as standard form of contracts. Therefore, when a dispute arises between the parties, the dominating party usually proposed to appoint the arbitrator without seeking the consent of the opposite party. This is called unilateral appointment of arbitrator.
Unilateral appointment of arbitrator considered as bad in law
Section 11(2) of the Arbitration and Conciliation Act, 1996 states that the parties are free to agree on a procedure for the arbitrator or arbitrators. The party which drafts the agreement take resort to this provision and insert a clause, thereby ensuring that they can exercise the absolute right to appoint the arbitrator of their own choice for the adjudication of a dispute. It is also argued that once the other party has consented to such a clause, then they lose the right to make any objection on the unilateral appointment of arbitrator at a later stage. However, this practice has been reprimanded by the Hon'ble Supreme Court and various High Courts in India.
The Hon'ble Supreme Court has High Courts have dealt with the challenge to an arbitral award on the ground of unilateral appointment of arbitrator several times. The Hon'ble Supreme Court's decision in Perkins Eastman Architects DPC and Ors. vs. HSCC (India) Ltd., (2020) 20 SCC 760 discusses the equal power of parties to appoint the arbitrator.
The Court has observed that if one party has the exclusive right to appoint the arbitrator, then his choice will always have an element of bias. The relevant extract of the Court's observation is as follows:
"21. ...The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a 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. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016)."
In this case, the Hon'ble Supreme Court has followed the decision given in Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Ltd.2 Thereafter the High Courts in various adopted these decisions of the Supreme Court, and whenever a challenge to an arbitral award came up before the courts on the ground of unilateral appointment of the arbitrator, the same has been set aside. In Geeta Poddar v. Satya Developers Private Limited, Arb. P. 133/2019, the Court held that unilateral appointment of the second arbitrator by the respondent is non-est and the award is liable to be set aside. The Court further held that even if the petitioner did not challenge the unilateral appointment under Section 14 of the Arbitration and Conciliation Act, 1996, the right to approach the court for the independent appointment is not curtailed. The relevant extract of the decision has been reproduced herein as follows:
"17. Lastly, it must also be noted that an award delivered by a unilaterally appointed arbitrator has been set aside under Section 34 of the Act by this Court, and has been held to be void ab initio.10 Thus, the argument of final award granting sanctity to the non-est proceedings, too, does not convince the Court. The manner in which the Respondent has proceeded in the appointment of the Arbitrator is inexcusable and cannot be countenanced."
Further, the Bombay High Court in Naresh Kanayal Rajwani & Ors. v. Kotak Mahindra Bank Limited & Anr., held that the mere fact that a party has participated in the arbitral proceedings, the same will not disentitle the party to challenge the award on the ground of unilateral appointment of the arbitrator. Accordingly, on this ground, the Court set aside the arbitral award. The relevant extract of the court's decision has been reproduced as follows:
"19. ... The specific manner of waiving the applicability of Section 12(5) of the said Act is mandated in the proviso thereof, but such procedure was admittedly not followed in the present case and therefore, it cannot be said that merely because the petitioners participated in the arbitration proceedings, they were dis-entitled from raising the ground about the arbitration proceedings having been vitiated, due to unilateral appointment of the Arbitrator by the respondent-Bank."
Similarly, the Calcutta High Court in Yashovardhan Sinha HUF v. Satyatej Vyapaar Pvt. Ltd., A.P. No. 156 of 2022 appointed a new arbitrator in place of an arbitrator who was appointed unilaterally by a party. The Court held that while exercising the powers under Section 14 of the Arbitration and Conciliation Act, 1996, the Court will be guided by the principles of Section 11 of the Act. Therefore, in view of the recent decisions of High Courts, it is seen that unilateral appointment of arbitrator has emerged as strong ground for setting aside an arbitral award.
There has been plethora of cases where High Courts and Supreme Court has set aside the arbitral award on the ground of unilateral appointment of arbitrator. The reason behind such setting aside is that appointment of arbitrator by one party alone without giving opportunity to the other party shall have an element of bias and partiality. Unilateral appointment is also not allowed because any party who has an interest in the outcome of the dispute should not be allowed to preside over as an arbitrator for that dispute. The Supreme Court has given rationale behind such appointment in decisions like Perkins and TRF Ltd. Further, it has become important for parties to draft the dispute resolution clause cautiously and should keep in mind that unilateral appointment is not allowed under the garb of party autonomy. On one hand, where parties are given autonomy to agree on the procedure to appoint an arbitrator under Section 11(2), on the other hand, it is not correct to say that the same is not an absolute right of the party. The right of the parties to agree on the procedure to appoint the arbitrator is now subject to reasonable restriction, and one such instance of reasonable restriction is the unilateral appointment of arbitrator.
1. 246th Law Commission Report on Amendments to the Arbitration and Conciliation Act, 1996, August, 2014, available at https://cdnbbsr.s3waas.gov.in/s3ca0daec69b5adc880fb464895726dbdf/uploads/2022/08/2022081615.pdf
2. Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Ltd., (2017) 4SCC 665.
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