I. Introduction

The most rudimentary requirement of arbitration proceedings is the independence, neutrality and impartiality of the arbitrator(s) appointed by the parties. The Arbitration and Conciliation Act, 1996 ("Act") did not possess much of the definitive law that could encounter the biasness of the appointed arbitrator. However, the amendments put forth by the Arbitration and Conciliation (Amendment) Act 2015 ("2015 Amendment Act") introduced certain safeguards to eliminate biasness of arbitrator(s) and accordingly inserted certain categories (by way of seventh schedule), which would directly render an arbitrator ineligible to be appointed and adjudicate the disputes between the parties.

Section 12(5) introduced by the 2015 Amendment Act clearly specified that 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.

Post the 2015 Amendment Act, various cases have put the courts to test to determine the supremacy between party autonomy in appointment of arbitrator(s) and principles of natural justice. However, as party autonomy is the cornerstone of arbitration, courts in certain cases have been hesitant in interfering with party autonomy. Despite, the law being settled by the Supreme Court of India ("SCI") by holding that any person who is itself de jure ineligible to be appointed as an arbitrator, is also disqualified to appoint an arbitrator, the SCI recently in Central Organisation for Railway Electrification V. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company1 ("CORE Case") created a dilemma by upholding the validity of an arbitration clause giving power to an ineligible person to appoint an arbitrator.  

This piece attempts to analyse the conflicting findings of the SCI in relation to validity of appointment of arbitrator by a person who is itself ineligible to be appointed as an arbitrator as per section 12(5) and seventh schedule of the Act and how the recent order dated 11.01.2021 passed by SCI in the case of Union of India vs. M/s Tantia Constructions Limited2 ("TCL Case") has given a ray of relief to the existing dilemma.      

II. Appointment of an arbitrator by an ineligible person is invalid: Affirmative precedents of SCI

The saga of appointment of an arbitrator by an ineligible person was enunciated for the first time by the SCI (three-judge bench) in the case of TRF Limited vs. Energo Engineering Projects Limited3 ("TRF Case"), wherein the SCI held that a person who himself is ineligible to be appointed as an arbitrator, cannot also nominate an arbitrator. In the TRF Case, the arbitration clause was such that in case of disputes, either the EEPL's (i.e. the Respondent's) managing director would be appointed as an arbitrator or he will appoint his nominee arbitrator. While dealing with the validity of the appointment of the arbitrator by the managing director, the SCI held that once the identity of the managing director as the sole arbitrator is lost (in view of the insertion of section 12(5) and the seventh schedule by the 2015 Amendment Act), the managing director's power to nominate someone else as an arbitrator is obliterated.

The TRF judgment was later upheld by the SCI (division bench) in the case of Bharat Broadband Network Limited vs. United Telecoms Limited4 ("BBNL Case") and Perkins Eastment Architects DPC & Anr. Vs. HSCC (India) Limited5 ("Perkins Case"), which also held that that when a person becomes statutorily ineligible to act as an arbitrator (by virtue of operation of section 12(5) inserted by the 2015 Amendment Act), then such a person is also disqualified to nominate an arbitrator, even if so provided in the arbitration clause.

BBNL Case

In the BBNL Case, the arbitration clause empowered the BBNL's (i.e. the Appellant's) Managing Director ("MD") to appoint an arbitrator. Subsequent to disputes between the parties, the MD appointed the sole arbitrator. In light of the TRF Case, the Appellant, despite having appointed the arbitrator itself, made an application before the sole arbitrator to withdraw himself from the proceedings. However, the sole arbitrator rejected the application without giving any reasons. The Appellant then filed a petition before the Hon'ble Delhi High Court ("DHC") submitting that in view of the finding of the SCI in the TRF Case the appointed arbitrator has become ineligible for appointment, therefore as per law, a substitute arbitrator should be appointed in his place. However, the DHC also rejected the said petition holding that the very person who appointed the arbitrator is estopped from raising a plea that such arbitrator cannot be appointed after participating in the proceedings. The matter was then referred to the SCI. While relying on the TRF Case, the SCI held that in view of section 12(5) of the Act and the TRF Case, since the MD has himself become ineligible to be appointed as an arbitrator, therefore, the MD is also disqualified to nominate an arbitrator, even if it is provided in the arbitration clause.

Perkins Case

In the Perkins Case, the arbitration clause empowered the Chief Managing Director ("CMD") of HSCC (i.e. the Respondent) to appoint an arbitrator. Once the disputes arose, Perkins (i.e. the Appellant) called upon the Respondent's CMD to appoint an arbitrator. Accordingly, the CMD addressed a letter to the Appellant purporting to appoint a sole arbitrator (which was not replied within 30 (thirty) days as may have been prescribed in the Agreement). The Appellant duly contested the appointment of arbitrator on the ground of impartiality and independency, among few others. Accordingly, the Appellant filed petition under section 11 of the Act for the appointment of an independent and impartial arbitrator, wherein the SCI held that connection or ineligibility would remain irrespective of whether the CMD acted as arbitrator itself, or only had the power to appoint arbitrators. The SCI noted that ineligibility strikes at the root of an arbitrator's power to arbitrate as well as to appoint a nominee to conduct the arbitration. Accordingly, the SCI upheld the finding of the TRF Case and held that since CMD is ineligible to be appointed as an arbitrator, therefore, the CMD is also disqualified to nominate an arbitrator. The SCI based its decision on the fundamental principle that a person having an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator unilaterally.

While taking the aforementioned position, the SCI clarified that the cases where both the parties could nominate respective arbitrators of their choice is completely a different situation as 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.

III. Conflicting position

The TRF Case (three-judge bench), BBNL Case (division bench) and the Perkins Case (division bench) had clearly settled the position in relation to appointment of an arbitrator by an ineligible person and held that any person who is itself de jure ineligible to be appointed as an arbitrator, is also disqualified to appoint an arbitrator.    

However, in the CORE Case the arbitration clause stipulated that the CORE (i.e. the Appellant) will send a panel of at least four names of retired railway officers empaneled with the Appellant to the ECI-SPIC-SMO-SCML (JV) (i.e. the Respondent) and it will be asked to suggest to the Appellant's General Manager ("GM') at least two names out of the said proposed names for appointment as Respondent's nominee arbitrator. The GM shall then appoint at least one out of them as the Respondent's nominee and will, also simultaneously appoint the balance number of arbitrators from the proposed panel or from outside the panel, duly indicating the presiding arbitrator from amongst the three arbitrators so appointed.

On arising of disputes, the Respondent did not agree to the procedure laid down for appointment of the arbitral tribunal specified in the agreement. The Respondent filed a petition under section 11 of the Act before the Hon'ble High Court of Allahabad ("AHC"). The AHC rejected the argument of the Appellant that the arbitrator ought to be appointed only from the panel of arbitrators in terms of agreement. The AHC observed that the powers of the court to appoint arbitrator are independent of the contract between the parties and no fetters could be attached to the powers of the court. With those findings, the AHC appointed a sole arbitrator. Being aggrieved, the Appellant preferred to appeal before the SCI. The SCI while setting aside the AHC order upheld the validity of the arbitration clause set out in the agreement. The SCI after placing reliance on Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited6, TRF Case and Perkins Case held that the right of the GM in formation of arbitral tribunal is counter-balanced by Respondent's power to choose any two names out of the four names and the GM shall appoint at least one out of them as the Respondent's nominee.

Interestingly, the SCI in CORE Case, even after placing reliance on the TRF Case and Perkins Case, allowed the appointment of arbitrators by the GM, who was itself ineligible to be appointed as an arbitrator. In the present case, the SCI respecting the principles of party autonomy in an arbitral process, has in essence reiterated that the courts shall make efforts to adhere to the agreed procedure for appointment of an arbitrator. Consequently, the CORE Case created a dilemma in relation to validity of appointment of arbitrator by an ineligible person.

IV. TCL Case: A new ray of hope.

Recently the SCI (three judge bench) in the TCL Case, while dealing with an exactly similar procedure for appointment of the arbitrators as in the CORE Case, perused the CORE Case and prima facie doubted its correctness and stated that: "We have perused the aforesaid judgment and prima facie disagree with it for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case". The SCI upheld the finding of the High Court of Calcutta that the procedure for appointment of the arbitrators in the arbitration clause is contrary to section 12(5) and seventh schedule of the Act. Accordingly, the SCI has requested the Hon'ble Chief Justice of India to constitute a larger bench to look into the correctness of the CORE Case.

V. Analysis and comments.

Even, though the direction of the SCI in the TCL Case, has given a ray of relief for the existing dilemma in relation to validity of appointment of arbitrator by a person who is itself ineligible to be an arbitrator under section 12(5) and seventh schedule of the Act, however, has still not put the issue to rest, till the larger bench of the SCI steps in and looks into the correctness of the decision laid down in the CORE Case.

Till then, the reference shall have to be placed upon section 18 (Equal treatment of parties) and section 19 (Determination of rules of procedure) of the Act to understand the incorrectness of the CORE Case. Section 18 and section 19 of the Act are exact adoption of Article 18 (Equal treatment of parties) and Article 19 (Determination of rules of procedure) of the UNCITRAL Model Law ("Model Law"). The Analytical Commentary on the Model Law7 states that the cardinal requirement of Article 18 must be adhered by the parties when using their freedom under Article 19 of the Model Law, to establish the procedure and the words "subject to this part" used under Article 19, clearly indicates this limitation of party autonomy, i.e. to adhere to equal treatment of parties. Therefore, the finding of the SCI in the CORE Case that the unilateral power of the CORE (i.e. the Appellant) to prepare the list and nominate an arbitrator is counter-balanced by the power of the ECI-SPIC-SMO-SCML (JV) (i.e. the Respondent) to choose another name from the list as arbitrator, seems to be incorrect in view of section 18 & 19 of the Act and the law laid down by the SCI in the TRF Case, BBNL Case and the Perkins Case. 

Footnotes 

1 2020 (1) ARBLR 19 (SC).

2 SLP (C) 12670/2020.

3 (2017)8 SCC 377.

4 (2019) 5 SCC 755.

5 AIR 2020 SC 5.

6 2017 SCC OnLine SC 172.

7 https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/06-54671_Ebook.pdf

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