Arbitration as a private mode of dispute resolution is known for the fundamental principle of party autonomy which provides parties the flexibility to choose the law and procedure for adjudication of their disputes. Party autonomy also allows parties to decide the arbitrator(s), however, independence and impartiality of arbitrator is of paramount importance. The Arbitration and Conciliation Act, 1996 ("Act") under section 12, 13, 14, 5th and 7th Schedule reflects the importance of the independence and impartiality of arbitrators. It is perceived that arbitrator being appointed by the party may act in a manner which suits interest of the party appointing them, therefore, to have a level playing field and balance the integrity of the process, the independence and impartiality of arbitrators are considered to be of paramount importance. Moreover, one of the principles of natural justice i.e. nemo judex in causa sua which also supplements the scrutiny for independence and impartiality.
Independence and impartiality is not a new concept, it already existed in the Arbitration and Conciliation Act, 1996. However the 2015 amendment gave a prescriptive guidelines of independence and impartiality to make it convenient for the arbitrators, counsels and court while appointing the arbitrators. These guidelines or safeguard were recommended by the 246th Law Commission in their report to ensure that the arbitration proceedings are unbiased and efficient. The Apex court in the HRD Corporation vs. GAIL (India) Ltd1 while interpreting 5th and 7th schedule of the Arbitration and Conciliation Act, 1996, held that "the doubts as to the independence and impartiality of the arbitrator are justifiable only if a third person would reach a conclusion that an arbitrator would be influenced by factors other than the merits of the case. This test requires taking a broad common-sensical approach to the Schedules – a fair construction neither tending to enlarge or restrict unduly."
Appointment of arbitrator is generally done by the parties as per their convenience, however if party fails to appoint then approaching the court under section 11 is the remedy. However, there has been a lot of debate on the unilateral appointment clauses whereby only one-party posses the right to appoint the arbitrator(s) or suggest the names of arbitrator(s) to the opposite party.
The first case to deal with the issue was TRF Limited vs. Energo Engineering Project Limited2 , whereby the arbitration agreement provided that the "disputes shall be referred to a sole arbitrator of the managing director of Buyer (Energo Engineering) or his nominee". The hon'ble Supreme Court (three judges bench) interpreted the arbitration agreement and held that since the managing director or his nominee are ineligible to be appointed as arbitrator as per the amendment to the Arbitration Act and therefore, they cannot be appointed as arbitrator.
Moreover, the Apex Court further went on to hold that such ineligibility to act as an arbitrator would extend whereby the managing director cannot nominate another in its place. Therefore, the Apex Court made it clear that once a person is ineligible to be appointed as arbitrator in a dispute, he/she cannot nominate someone else as an arbitrator in that dispute.
In Voestalpine Schienen GmbH vs. DMRC3 , the parties were required to nominate their respective arbitrators from a panel of arbitrators suggested by DMRC. DMRC shortlisted 5 names from the panel and each party nominated an arbitrator from the given list. The process was challenged being contrary to section 12(5) of the Act. While dealing with such a scenario, the Apex Court held that the choice given to opposite party is limited and there is no free choice to nominate a person out of the entire panel prepared by DMRC. Further DMRC choosing 5 names out of the list and then opposite party choosing their respective arbitrator from those 5 names, this would instill the idea of bias in mind of opposite party. The opposite party shall be given the full freedom to nominate an arbitrator from the entire panel. The Court also suggested that the panel should be broad-based. It should not only contain retired government employees, but also experienced and eminent engineers from private sector.
In Bharat Broadband Network Ltd. Vs. United Telecoms Ltd4 the Apex Court relied on its decision in TRF Ltd. case to hold that an arbitrator, appointed by a person who is ineligible to act as an arbitrator is de jure unable to perform his functions. Further if the ineligible person appoints an arbitrator in its place, such appointment is void ab initio. Moreover, the court held that the ineligibility under section 12(5) read with schedule VII of the Act will have a retrospective application and is not confined to only a prospective application.
Further, in Perkins Eastman Architects DPC & Anr. V HSCC (India) Ltd5 , where the arbitration clause provided for unilateral appointment of sole arbitrator by the respondent, the respondent's unilateral appointment power was challenged before the Supreme Court. The apex court relied upon TRF Ltd. case and held that this unilateral appointment power of appointing the sole arbitrator is invalid as there exist possibility of bias whereby the appointed arbitrator may act in a way to safeguard the interest of the appointing party and therefore violates the neutrality of the proceedings. This decision of the apex court gave the parties a level playing field while appointing the arbitrators.
However, in Central Organisation for Railway Electrification v M/S ECI-SPIC-SMO-MCML (JV)6 where the arbitration clause provided the appointment of arbitrators from a panel of arbitrators(5 nominees) comprising of retired railway officers, the apex court sitting in the capacity of division bench though relied on its decision Voestalpine GmbH, upheld the arbitration clause and held that "merely being a retired employee of an organisation does not necessarily attribute bias against such employee while acting as an arbitrator. This decision has been criticised for taking the contrary view from Perkins Eastman and Voestalpine GmbH.
The Delhi High Court in a recent judgement in Proddatur Cable TV Digi Services v. SITI Cable Network Limited7 , while relying on the Perkins Eastman Case held that directors of a company ,as a part of Board of Directors, would have a clear interest in the outcome of the arbitral proceedings and therefore, the idea of bias would come in the mind of opposite party and therefore the company acting through its Board of Directors would be ineligible under section 12(5) read with schedule VII of the Act. The Delhi High court in the present matter held that be it a company acting through its board of directors or the managing director as in the Perkins Eastman's case, there cannot be any distinction and such a scenario is impermissible in the law.
The Bombay High Court in Lite Bite Food Pvt. Ltd. Vs. AAI,8 facing the similar issue of unilateral appointment of sole arbitrator by the responded, relied upon Perkin Eastman and Voestalpine to hold the procedure of unilateral appointment of sole arbitrator as invalid. Moreover, court also invalidated the respondent's offer to appoint arbitrators from a panel as the panel was a tailored one and not broad enough to give freedom of choice to opposite party as held in Voestalpine.
Moreover, the Delhi High Court, in SMS Ltd. Vs. Rail Vikas Nigam Ltd. 9 , and BVSR-KVR(JV) vs. Rail Vikas Nigam Ltd. 10 where the High court acting under section 11 of the Act, held that the appointment procedure is invalid as the panel suggested by the authority is not broad-based, as it majorly include retired or serving employees of the respondent, creating a reasonable apprehension of bias and impartiality.
From the above discussions we can conclude that:
- The arbitration clauses providing for unilateral appointment of sole arbitrator is invalid and impermissible in the law.
- The arbitration clauses providing unilateral appointment of arbitrator from a panel suggested by one of the parties could be valid provided the panel is broad based and not narrowly tailored in order to give opposite party a freedom to choose the arbitrator of their choice from the said list.
Moreover, the apex court decision in Railway Electrification is a deviation from the Voestalpine and Perkins Eastman and therefore require interference of larger bench. However, TRF Case being a three judges bench decision would have more persuasive value over Voestalpine and Railway Electrification case.
The Supreme Court will once decide this issue in the case of Bhayana Builders Pvt. Ltd. v Oriental Structural Engineers Pvt. Ltd.11. We are expecting from the Hon'ble Supreme Court to clear the ambiguity by prohibiting use of unilateral appointment clauses by the parties.
1 HRD Corporation v. GAIL (India) Limited, 2017(5) ARBLR 1 (SC)
2 TRF Limited v. Energo Engineering Projects Limited, AIR 2017 SC 3889.
3 Voestalpine Schienen GmbH vs. DMRC, [(2017) 4 SCC 665]
4 Bharat Broadband Network Limited v. United Telecoms Limited, (2019)
5 SCC 755. 5 Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2019 SCC Online 1517
6 Central Organisation for Railway Electrification v M/S ECI-SPIC-SMOMCML (JV), 2019 SCC OnLine SC 1635
7 Proddatur Cable TV Digi Services v. SITI Cable Network Limited, 2020(2) ArbLR260(Delhi)
8 Lite Bite Food Pvt. Ltd. Vs. AAI MANU/MH/3423/2019
9 SMS Ltd. Vs. Rail Vikas Nigam Ltd 2020(2)ArbLR376(Delhi)
10 BVSR-KVR(JV) vs. Rail Vikas Nigam Ltd [2020 (1) ArbLR 580 (Delhi)].
11 SLP (C) No. 007161 of 2018/p>
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