The issue of appointment of arbitrators under Section 11 of the Arbitration & Conciliation Act, 2016 ("Act"), was discussed by the Supreme Court of India in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.1 It ruled on issues of an (i) appointment of an arbitrator by one of the parties or their officers and employees & (ii) whether the Supreme Court can exercise its power under S. 11 when an arbitrator has already been appointed.
Before to analyzing these issues, a brief narration of the facts is necessary.
A contract was entered into between a 'consortium of applicants' ["Applicant" in the Arbitration Application] and Hospital Services Consultancy Co. Ltd. ["Respondent"]. The contract contained an elaborate 'Dispute Resolution' clause ["Arbitration Clause"]. The Arbitration Clause provided that, (i) any dispute or difference shall be referred to arbitration before a sole arbitrator appointed by the Chief Managing Director ["CMD"] of the Respondent, and, (ii) such appointment has to be within 30 days from receipt of request for arbitration.
Dispute arose between the parties, and the Applicant called upon the CMD of Respondent to appoint a sole arbitrator through a letter dated 28.06.2019. The Applicant claimed that no arbitrator was appointed within 30 days. On 30.07.2019 (a couple of days post the 30 days' timeline) the Chief General Manager addressed a letter purporting to appoint a sole arbitrator.
Contesting this appointment on grounds of (i) delay in appointment, & (ii) requirement of an independent and impartial arbitrator to be appointed, the Applicant moved an Application under S. 11 (6) before the Supreme Court.
a. Impartiality and Independence of an Arbitrator
The argument of delay in appointment was dismissed by the Supreme Court on grounds of hyper-technicality. However, the issue of appointment of an arbitrator by the Respondent's CMD was discussed at length.
Applicant argued that the CMD could not have appointed the sole arbitrator. The Applicant relied on the Fifth & Seventh Schedules of the Act to advance this argument. The Fifth & Seventh Schedules flow from S. 12 of the Act, which provides for grounds of challenge to an arbitrator. The Fifth Schedule lists out circumstances, which give rise to justifiable doubts as to the independence or impartiality of arbitrators. Under S. 12 (5), if the relationship of an arbitrator falls within the list in the Seventh Schedule, the arbitrator would be ineligible to be appointed as an arbitrator. Both the Fifth & Seventh Schedules include in its scope a scenario where the arbitrator is a manager, director or part of the management in one of the parties. Evidently, the CMD would fall foul of the Section 12 read with the Fifth & Seventh Schedules if he was appointed an arbitrator.
However, in the present dispute, he was supposed to appoint a sole arbitrator and not act as one. The Arbitration Clause expressly provided that an arbitrator could not be appointed through any other mechanism. This specific issue fell for consideration. If the CMD could not have been an arbitrator himself in accordance with the Act, could he legally exercise an authority to appoint a sole arbitrator?
The Court held that the CMD could not have appointed a sole arbitrator. It relied heavily on a three-judge decision of the Supreme Court in TRF Limited v. Energo Engineering Projects Ltd..2 TRF was concerned with a clause that permitted the Managing Director of a company to either act as an arbitrator or nominate an arbitrator. The MD nominated an arbitrator, whose appointment was challenged. The Supreme Court in TRF held that if the MD could not have acted as an arbitrator, he could not have appointed an arbitrator either, applying the principle that what cannot be done directly may not be done indirectly.
In this decision, the Court was cognizant that the arbitration clause was different from in TRF i.e. the CMD was not authorized to arbitrate himself, but only had the power to appoint/nominate the sole arbitrator. Nevertheless, the Court held that the logic of TRF would apply, and the appointment by the CMD would be invalid. This was because the reason for ineligibility was the connection of the appointing authority with the dispute itself i.e. the interest that he would have in the outcome of the decision – in this case, by virtue of being the CMD of one of the parties. This connection or ineligibility would remain irrespective of whether the CMD acted as arbitrator herself, or only had the power to appoint arbitrators. The Court 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.
In the course of this discussion, the Court distinguished the facts with a scenario where both parties appoint arbitrators of their choice. The latter situation would have to be treated differently because in such a scenario, whatever advantage a party may derive by nominating an arbitrator of its choice would be counter-balanced by equal power with the other party.
The Supreme Court concludes its discussion on this issue stating that if there are justifiable doubts as to the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, such appointment can be made by the Court. The Court relied on Indian Oil Corporation v. Raja Transport (P) Ltd.3 to arrive at this conclusion.
b. Power of the Supreme Court under Section 11 of the Act.
In a brief discussion on this issue, the Court delineated its powers under S. 11 of the Act. The Court relied on Walter Bau AG v. Municipal Corporation of Greater Mumbai and Anr.4, to prescribe that unless the appointment of the arbitrator is ex-facie valid and such appointment satisfies the Court, acceptance of such appointment as ousting jurisdiction under S. 11 (6) cannot be sustained in law. Simply put, the appointment must be valid on the face of it and the must satisfy the Court exercising jurisdiction under S. 11 (6).
In this context, it is to be noted that this decision was distinguished from the one in Pricol Ltd. v. Johnson Controls Enterprise Ltd.5 In Pricol, the party which filed an Application under S. 11 (6) had already submitted to the jurisdiction of the arbitrator, which precluded the Court from exercising its jurisdiction under S.11. This distinction should therefore be read as limiting the powers of the Court under S. 11.
On the Issue of the definition of 'International Commercial Arbitration'
Section 11 (12) (a) read with Section 11 (6) provides that an Application for appointment of arbitrator can be maintained before the Supreme Court only if it is an international commercial arbitration. Therefore, it was necessary to determine whether this specific dispute arose out of an international commercial arbitration.
It is important to note that the Applicants are a consortium. In accordance with the Consortium Agreement, Perkins Eastman (the foreign party registered in New York City, United States of America) was to be the focal point for the Agreement. There was a requirement in the Agreement to declare a lead member of the Consortium and Perkins Eastman was so declared. However, the Respondent argued that both Applicants were jointly & severally liable for execution of the project. This argument sought to minimize the implications of there being a foreign lead member. The Court, nevertheless made it clear that irrespective of their joint and several liability, lead member status of Perkins Eastman remained unaltered.
Now in this background, it is imperative to understand the Court's analysis of Section 2 (1) (f) (iii) of the Act. This section defines an international commercial arbitration. In an arbitration with respect to a commercial dispute arising out of legal relationships, if one of the parties fall within the scope of sub-clauses (i) to (iv) of Section 2 (1) (f), the arbitration would be an international commercial one.
In the present factual matrix, we are specifically concerned with S. 2 (1) (f) (iii). It includes an 'association' or a 'body of individuals' whose central management and control is exercised in any country other India. The Court placed reliance on Larsen & Toubro Limited SCOMI Engineering BHD v. MMRDA6, to rule that an 'association' as referred in Section 2 (1) (f) (iii) would include a consortium consisting of two or more body corporate, with at least one of whom is a body corporate incorporated in a country other than India. Then, within the consortium, it is to be determined as to which body corporate has the determining voice. In the present factual matrix, the Court found the lead member Perkins Eastman to be so. Accordingly, the consortium was held to fall within Section 2 (1) (f) (iii), and Section 11 (6) was determined to be applicable.
This decision clarifies three crucial points of law. First, that a person who is ineligible to act as an arbitrator cannot also appoint an arbitrator. Second, the Court has the power to intervene under S. 11 unless the appointment on the face of it is valid, and the Court is satisfied with respect to the same. Third, in arriving at these two conclusions, the Court laid down that an unincorporated consortium with the lead member, or the member with determining voice being controlled and managed in a country other than India would come within the scope of S. 2 (1) (f)(iii).
This judgment will have a significant impact, especially on government contracts that frequently contain one-sided arbitration clauses. Though the decision may cause significant disruption in the short run, in the long run it is likely to provide benefits in the form of a more robust & impartial Indian arbitration eco-system.
1. Judgment delivered on 26.11.2019 in Arbitration Application No. 32 of 2019
2. (2017) 8 SCC 377
3. (2009) 8 SCC 520
4. (2015) 3 SCC 800
5. (2015) 4 SCC 177
6. (2019) 2 SCC 271
Posted on November 30, 2019
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