#Columns: Unilateral Appointment of an Arbitrator – A Point of View

#Columns: Unilateral Appointment of an Arbitrator – A Point of View

Payal Chawla and Hina Shaheen

The appointment of an arbitrator by one party to an arbitration agreement has been a vexed issue. The pre-amended Arbitration & Conciliation Act, 1996 (“Act”) permitted such appointments, with certain limited exceptions. That these unilateral appointments have been the cause of much angst and litigation is not in dispute.

The issue of neutrality of arbitrators, particularly when one party or its employees are arbitrators themselves, has been the cause of much disquiet, leading to some scathing observations by the Law Commission in its 246th Report. The Commission was of the view that “a sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed”.

The Commission recommended ‘large scale amendments’, which the Commission believed were critical to the functioning of the arbitration process in India. Amendments inter-alia were proposed to ss. 11, 12 and 14 of the Act, along with several new schedules. Most suggestions made by the Law Commission were incorporated into the amended Act.

However, the amended Act was silent on whether one of the parties to the arbitration agreement could be the appointing authority.

In February, 2017, in the matter of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. [(2017) 4 SCC 665], a two-judge bench of the Supreme Court upheld an arbitration agreement whereby the petitioner was to choose an arbitrator/arbitrators from a panel of arbitrators presented to the petitioner by the respondent.

The impugned arbitration clause inter-alia stipulated the appointment of a sole arbitrator below a certain financial threshold, and a three-member arbitral panel above that threshold. However, the relevant aspect of the clause was that although the petitioner had the right to choose the arbitrator, it could do so only from the panel of arbitrators suggested by the respondent. While the Supreme Court did not accept the arbitration clause in its entirety and inter alia, directed the respondent to broad-base its existing panel of arbitrators, importantly it upheld the selection of the panel by one party.

In July 2017, a three-judge bench of the Supreme Court delivered the judgement of TRF Ltd. vs. Energo Engineering [(2017) 8 SCC 377] (“TRF”). One of the issues that arose for consideration in this matter was, whether the person who was required to arbitrate upon the disputes, which had arisen under the terms and conditions of the contract, once ineligible by operation of law, would still be eligible to nominate a person as an arbitrator.

The arbitration agreement in controversy in the TRF judgement stated that the disputes between the parties were to ‘be referred to sole arbitration of the Managing Director of Buyer or his nominee’. Setting aside the High Court’s judgement, the Supreme Court held – “once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator”.

While the Supreme Court’s decision in the TRF matter is a welcome one, it has raised some confusion as to its import. In essence, the confounding issue is – can the ratio of the judgement be construed to mean that one party can no longer be the appointing authority for an arbitrator?

The issue was dealt with recently by the High Court of Delhi in the matter of D.K. Gupta v. Renu Munjal [2017 SCC OnLine Del 12385]. The court, distinguishing the language of the arbitration clause in the TRF matter from the one in the DK Gupta matter, was of the view that TRF (supra) judgement did not lay down a universal proposition that one party to an arbitration could no longer be an appointing authority, but was limited to the issue that if a person was ineligible to act as an arbitrator, such person could not appoint another in its place.

Our analysis:

While the interpretation taken by the High Court in the DK Gupta matter is a tempting one, and on first glance appears to be the correct analysis of the law, some deeper introspection leaves no room for doubt — the power of one party to appoint an arbitrator is no longer available.

The Supreme Court, in the TRF matter, relying on the principle, “Qui facit per alium facit per se” (What one does through another is done by oneself), observed, “once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act”.   

However, the Supreme Court does not stop here, and goes on to state – “It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth.” [emphasis supplied]. This is the principle of “Sublato Fundamento Cadit opus” – remove the foundation and the superstructure falls.

There can be no dispute that if one party cannot be the arbitrator, by whatever name called – managing director, employee or even party in person – such party once statutorily barred, cannot nominate another. To put it differently, the test would be that if a person is eligible to be an arbitrator, only then can such person be eligible to be an appointing authority [emphasis supplied]. But if the person at the first instance is ineligible to be an arbitrator, then nomination by such ineligible person would also be vitiated in law. No person can be a judge in his own cause, which principle acts as a bar to the eligibility of a party to an arbitration agreement, and is now statutorily recognised, to act as an arbitrator.

With the TRF judgement, the nomination of an arbitrator by such ineligible party, too, would be bad in law – no matter how the language is couched. What cannot be done statutorily cannot be done contractually either. Such a proposition, if undertaken, would be hit by the mandate of s.23 of the Indian Contract Act, 1872.

In the underlying High Court’s decision in the TRF matter, the court had held that the right of one party to an arbitration agreement to appoint a sole arbitrator was well established under the un-amended regime, and the amended Act does not take away such a right, since such a disqualification is not mentioned in the detailed list of ineligibility criteria enumerated under the Seventh Schedule to the Act.

The Supreme Court, while passing its judgement was cognizant of the High Court’s observation and recorded it as such in para 17 of its decision. It is stated with the utmost respect that para 17 of the TRF judgement is neither the observation of the Supreme Court, nor its ratio. In the said paragraph, the Supreme Court is merely stating what the High court had held. Importantly, the Supreme Court has over-ruled the underlying judgement in totality, without any qualification. Therefore, the reliance by the High Court in the DK Gupta matter on para 17 of the Supreme Court’s TRF judgement is misplaced in our view.

One might also note, that while there is no bar under the un-amended act, equally, there is no specific authority granted to a singular party to be the appointing authority.

Party autonomy has been the anchor argument in support of arbitral appointments by one party. Even the High Court in the DK Gupta matter places reliance on s. 11(2) of the Act.  However, the Law Commission had some words in regard to unfettered party autonomy and says in no uncertain terms – ‘Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles – even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties apparent agreement.’

On a slightly separate but related note, the DK Gupta judgement also deals with the concept of waiver stipulated in s.12(5), stating that the party had waived its right to object. Such a waiver, however, would be in the teeth of the proviso to s.12(5), which requires the waiver to be specific, express, and in writing.

It is well recognised that there are two types of waivers in law – one that is expressly made, and the other, implied by conduct. Even the Law Commission, while explicating the rationale for the insertion of the waiver in the proviso to s. 12(5), views it only as an exception and not the norm, and only where an arbitrator commands blind faith and trust of the parties, despite existence of ‘justifiable doubts’ regarding their impartiality/independence.

Lastly, our analysis would be incomplete without mentioning that albeit the TRF judgement was delivered by a three-judge bench, there is no reference to the Voestalpine case therein. In all fairness, it is possible that the Supreme Court, in the TRF matter, might not have intended to look into the aspect of the legality of the power of appointment by one party, and perhaps that is the reason why the case of Voestalpine finds no mention in the TRF judgment. Furthermore, the recent decisions of S.P. Singla Constructions v. Delhi Metro Rail Corporation [2017 SCC OnLine Del 10689] and Bcl Secure Premises v. Metro Railway [2017 SCC OnLine Cal 9449] (and other decisions), re-iterate the view of the Supreme Court in the Voestalpine case, and believes that TRF’s judgement has no application to the facts at hand. By sequitur, therefore, the High Court in the S. P. Singla matter like in the DK Gupta matter has endorsed the appointing power of a party.

Our analysis of the TRF judgement, today, therefore, only remains a point of view – that is – intended or not, the import of the language of the TRF judgment is that the power of appointment of an arbitrator can now only belong to the one who is himself eligible to be an arbitrator. Whether the same will be endorsed by the Supreme Court can only be hoped, on the ground, that there cannot, and should not, be any identity or the appearance of identity between an arbitrator and a party. Justice must not only be done, but also appear to be done.

Payal Chawla is the founder of JusContractus, a Delhi based full service law firm, with primary focus on arbitrations. Ms. Hina Shaheen is an advocate at JusContractus. For feedback, contact payalchawla@juscontractus.com. This article is for informational purposes only, and is not intended to provide, and should not be relied on for, legal advice. Readers are advised to seek independent legal advice in relation to their particular facts and circumstances.

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