Despite the various advantages of arbitration, an apprehension regarding the lack of independence and impartiality of an arbitrator is a major impediment for the mechanism. It is perceived that since the arbitrators are appointed by the parties, they may act in a manner to safeguard the interests of the respective party appointing them. This apprehension increases manifold where the Agreement provides for unilateral appointment of sole arbitrators. Some examples of such a clause are "arbitrator will be the Managing Director of the Company or any person nominated by him" or "arbitrator will be appointed by Managing Director of the Company". Such clauses negate the basic principle of 'mutual agreement' in an arbitration process.
As far the Indian Arbitration and Conciliation Act, 1996 ("the Act") is concerned, the Amendment Act of 2015 introduced several safeguards to address this issue. Prior to the 2015 Amendment, even an employee / consultant of one of the parties, particularly Government Departments and Undertakings could act as an arbitrator and such appointment was presumed valid, unless circumstances were shown which indicated justifiable doubts regarding his impartiality. However, in order to ensure legitimacy of the process, the 2015 Amendment set-out several conditions which render an arbitrator ineligible for appointment, 1 including an employee / consultant / adviser of one of the parties. Thus, the Act specifically disqualified employees of an organisation from being arbitrators in their own disputes, to ensure adherence to the principles of neutrality.
However, can one party appoint arbitrator unilaterally? Does such unilateral appointment run contrary to the principles of neutrality espoused under the Act? These are some of the questions that this article aims to answer by analysing the judicial precedents post the 2015 Amendment. The article also covers legislation that have special provisions for unilateral appointment of arbitrators and their validity in light of the 2015 Amendment.
II. Unilateral appointments: An Invalid Action
One of the first cases to deal with this issue was TRF Limited v. Energo Engineering Projects Limited.2 The arbitration clause in this case provided that the disputes "shall be referred to a sole arbitration of the Managing Director of Buyer (Energo Engineering) or his nominee". The question before the Supreme Court was whether a person, who becomes ineligible under law to be appointed as an arbitrator, can nominate an arbitrator. The Court opined that once a person is ineligible to be appointed as an arbitrator by operation of law, he cannot further appoint another person as an arbitrator. In the words of the Hon'ble Court, "once the infrastructure collapses, the superstructure is bound to collapse". This decision has been heavily relied upon in a recent judgement of the Apex Court in the matter of Perkins Eastman Architects DPC and another v. HSCC (India) Limited 3. Therein, the Court had opined that 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. A person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator as it runs contrary to the basic principles of neutrality which the 2015 Amendment has strived to bring in.
In the case of Voestapline Schienen Gmbh v. Delhi Metro Rail Corporation Ltd. 4, the Apex Court was once again posed with the interpretation of Section 12 (5) of the Act. In this particular case, the arbitration clause provided that there shall be an arbitral tribunal consisting of three arbitrators. They shall be nominated from the panel of arbitrators maintained by DMRCL consisting of ex-Government and Railway employees. DMRCL shall shortlist 5 names from the panel and each party shall nominate an arbitrator from the given list. This process was challenged as being contrary to Section 12 (5) of the Act. While dealing with such indirect unilateral appointment, the court was of the opinion that the 2015 Amendment sought to ensure that the arbitration should be free from any possibility of bias. The amended Section 12 helps in achieving such objective by ensuring impartiality and independence of the arbitrators. It identifies circumstances which give rise to justifiable doubts about the impartiality and independence of the arbitrators. However, the Hon'ble Court clarified that merely because an arbitrator is a retired government employee, it does not necessarily constitute bias so as to render them ineligible for appointment. However, the Court opined that the process of shortlisting 5 names from the panel is not correct. The contractor should 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.
This decision has been followed in the case of Central Organisation for Railway Electrification v M/S ECI-SPIC-SMO-MCML (JV) 5 where the Supreme Court has reiterated that merely being a retired employee of an organisation does not necessarily attribute bias against such employee while acting as an arbitrator. However, the Supreme Court, upheld the process of shortlisting of arbitrators from panel, which appears to be contradictory to the observations made in Voestapline (supra), which was also passed by a co-ordinate bench.
With the Central Organisation for Railway Electrification (supra) taking a contrary view from Perkins Eastman (supra) and also Voestapline (supra), this issue is far from settled and it is likely to be referred to a larger bench for clarification.
III. Special Statutes Providing For Appointment Of Arbitrator
In addition to unilateral clauses in an agreement, there are also certain statutes that provide for unilateral appointment of arbitrators E.g. the National Highways Act, 1956 ("NHAI Act"), the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") and the Electricity Act, 2003. All these statutes prescribe independent procedure for appointment of arbitrators.
The NHAI Act [Ref Section 3(G)(5)] provides that any dispute related to land acquisition compensation shall be referred to arbitration. Such arbitration shall be adjudicated by a sole arbitrator appointed by the Central Government. Thus, prima-facie such a provision appears to be in contradiction to the principles enshrined under Section 12 (5) of the Act.
This question was raised before the Hon'ble Supreme Court of India in the matter of General Manager (Project) National Highways and Infrastructure Development Corporation Ltd. v Prakash Chand Pradhan 6 wherein the court had to determine as to whether the provisions of the NHAI Act shall override that of the Arbitration Act and thereby whether an application under section 11 shall be maintainable in such cases. The Court held that an application under Section 11 is not maintainable as the Central Government alone has the right to appoint an arbitrator under Section 3-G (5) of the National Highways Act. If a demand is made for the appointment of an arbitrator, and the Central Government fails to appoint an arbitrator within a reasonable time, the remedy lies by way of a writ petition or a suit but not under Section 11 of Act. This view was also followed in the case of National Highways Authority of India v Sayedabad Tea Company Limited 7.
The MSMED Act also contains similar provisions under Section 18 wherein the Micro and Small Enterprises Facilitation Council is empowered to act as an arbitrator for any dispute arising out of failure to make payments by the buyer. A question similar to that raised in Prakash Chand Pradhan (supra) was raised before the Delhi High Court in the matter of Bata India v AVS International Private Limited. 8 The Court held that the Section 18 of the MSMED Act would override the provisions of the arbitration clause agreed to between the parties and consequently the arbitration proceedings before the Micro and Small Enterprises Facilitation Council shall survive.
However, in Porwal Sales v Flame Control Industries 9, the Bombay High Court carved out an exception to this principle. The court distinguished between cases where a reference application has been made under the Section 18(1) and cases where no such reference has bene invoked. It was opined that considering the scheme of Sections 17 and 18 of the MSMED Act, sub-section (4) of Section 18 cannot be read in isolation. It is required to be read in conjunction with sub-section (1) of Section 18. Section 18 of the MSMED Act is attracted when the jurisdiction of the Facilitation Council is invoked by a party to a dispute with regard to any amount due under section 17 of the Act. In case where no such reference application has been made, the parties shall free to approach a court for appointment of arbitrator.
A similar matter related to the power of State Commissions under section 86 (1)(f) of the Electricity Act, 2003 to adjudicate upon the disputes between the licensees, and generating companies and to refer any dispute for arbitration, was decided by the Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Essar Power Ltd. 10 It was held that where the statute provides for a thing to be done in a particular manner, then it has to be done in that manner and no other manner. If section 86 (1)(f) provides for a special manner of making references to an arbitrator, the same implies that all other methods are barred. Electricity Act being a special legislation shall override the provisions of a general law i.e. the Arbitration Act for arbitration of disputes. Hence the State Commission was held to have sole power to adjudicate dispute either by itself or by appointing an arbitrator.
Over the last decade, dispute resolution mechanism has seen major shift across the world with arbitration becoming a preferred choice. Thus, preservation of its sanctity has assumed more significance and that is evident from the approach adopted by the judicial authorities towards holding unilateral appointments in contradiction to the principle of independence. However, as highlighted above, the issue is far from settled and it is hoped that the conflicting judgements will be finally settled.
1 Sch. VII, Arbitration and Conciliation Act, 1996
2 [(2017) 8 SCC 377]
3 [(2019) SCC Online SC 1517]
4 [(2017) 4 SCC 665]
5 2019 SCC OnLine SC 1635
6 2018 SCC OnLine SC 3245
7 2019 SCC Online 1102
8 2019 SCC Online Del 9801
9 2019 SCC Online Bom. 1628
10 (2008) 4 SCC 755
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