As per the Law Commission’s recommendations in its 246th Report (See paragraphs 53 to 60), certain amendments were made to the Arbitration and Conciliation Act, 1996 to address the issues of independence of arbitrators [Sections 12(1) and 12(5) and the 5th, 6th and 7th Schedule].
The present article analyses the impact of such amendments vis-à-vis unilateral appointments and the exceptions thereto.
Unilateral appointments and Section 12(5): The TRF and Perkins Eastman principle
The arbitration clause in TRF Ltd. v. Energo Enginneering Ltd provided that disputes should be referred to the sole arbitration of the respondent’s managing director or his nominee. The Supreme Court observed that under the amended regime, the managing director of the company would be ‘ineligible’ to act as an arbitrator since he has a vested interest in the outcome of the dispute. Further, such ineligibility would also extend to his power of appointing a nominee arbitrator.
The TRF principle was recently fortified by the Supreme Court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. The Court in this case classified two categories of cases:
(i) The TRF category, where an employee of the interested party is either appointed as the arbitrator or has the right to nominate the arbitrator; and
(ii) The Perkins category, where an employee of the interested party only has the right to nominate the sole arbitrator.
The Court held that if under the TRF principle, an interested person cannot act as or nominate an arbitrator, the sequitur must necessarily be that such person would be disentitled to nominate an arbitrator, even if he were not acting as an arbitrator himself. The possibility of bias would exist in both the categories.
The escape mechanism: Backdoor entry of unilateral appointments
An exception to the TRF and Perkins doctrine has been carefully carved out in cases where each party has a right to nominate its own arbitrator (paragraph 50 of TRF), since the appointing right of a party would be ‘counter balanced’ by a concomitant appointment right of the other party (paragraph 21 of Perkins).
In Voestalpine Schiennen GmBH v. Delhi Metro Rail Corporation Limited and Central Organization for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV), A joint Venture Company, the Supreme Court had occasion to deal with such an exception.
Voestalpine – one step forward
In Voestalpine, the appellant and the respondent were to nominate their respective arbitrators from a panel maintained by the respondent (a statutory body). While the Supreme Court upheld the validity of this clause on the facts of the case, it has importantly observed that:
(i) Discretion of the appellant was not unfettered since its choice of arbitrator was restricted to the respondent’s panel (which could be tailor-made to suit the respondent).
(ii) To dispel any apprehensions of impartiality, the panel of arbitrators should be broad based.
The respondent was thus directed to prepare a broad-based panel consisting of lawyers, accountants, private sector engineers etc.
Railway Electrification – two steps backward?
Under the arbitration clause in Railway Electrification, the respondent (a private entity) could only select two out of the four names forwarded by the appellant (a statutory body). The appellant would then nominate one out of the two names as the respondent’s arbitrator, and thereafter select the remaining two arbitrators. The Supreme Court has held this appointment mechanism to be valid. The reasoning adopted by the Supreme Court and our humble opinion in disagreement are as under:
(i) Reason – Procedure under the arbitration agreement ought to be followed. Reliance was placed on Union of India v. Parmar Construction Company, and Union of India v. Pradeep Vinod Construction Company.
Opinion – The Act, as amended, was held to be inapplicable in Parmar Construction and Pradeep Construction. Railway Electrification was governed by the Act (as amended), and ought to have been guided by TRF and Perkins.
(ii) Reason – TRF and Perkins held as inapplicable, since each party had a right to nominate its own arbitrator.
Opinion – The respondent did not have the right to nominate its own arbitrator. Therefore, the exception of ‘counter balancing’ of rights, could not have applied.
(iii) Reason – Limited reliance placed on Voestalpine to say that there was no bar on employing retired employees as arbitrators.
Opinion – The Supreme Court ignored the more significant observations in Voestalpine i.e.,
(a) sufficient names from the panel were not forwarded to the respondent; and
(b) the panel was not broad-based. (It only consisted of retired railway officers.)
Current judicial trends
The issue of unilateral appointment of arbitrators has witnessed intense judicial scrutiny in the recent past. Encouragingly, before Railway Electrification, various High Courts have followed the Voestalpine principle and have either directed parties to prepare a broad-based panel or appointed an individual arbitrator [See inter alia Simplex Infrastructures Ltd. v. Rail Vikas Nigam Ltd. and ITD Cementation v. Konkan Railway].
A reference to Lite Bite Foods Pvt. Ltd. v. AAI would also be appropriate, as it effectively harmonised the TRF and Perkins principles with Voestalpine. The arbitration clause provided for the unilateral appointment of a sole arbitrator by the respondent. Relying upon Perkins, the Court invalidated such an appointment procedure.
In addition, the Court negated the respondent’s without prejudice offer of appointing an arbitrator from a panel for the reason that the panel was (a) narrowly-tailored; and (b) not broad-based, hence being in conflict with the Voestalpine principle.
However, Railway Electrification seems to have diluted the principle of impartiality of arbitrators, as enshrined in Voestalpine. Therefore, it would be fruitful to briefly analyze subsequent judgments on the same.
The Delhi High Court in Proddatur Cable TV Digi Services v. Siti Cable Network Limited was faced with the issue of appointment of a sole arbitrator by the respondent. Terminating the arbitrator’s mandate, the Court relied on Perkins to state that it would make no difference if the appointing authority was the Managing Director or the Board of Directors, since both entities would have a vested interest in the outcome of the dispute.
The Delhi High Court, in SMS Limited v. Rail Vikas Nigam Limited, and BVSR-KVR (Joint Ventures) v. Rail Vikas Nigam Ltd, was concerned with pari materia arbitration clauses that envisaged the constitution of a three-member tribunal, with both the petitioner and the respondent selecting one name each from the panel maintained by the respondent, and the two nominators then selecting the presiding arbitrator from the same panel.
The Court, while setting aside the appointment procedure, observed that the panel was not broad-based, as it majorly included retired or serving employees of the respondent, creating a reasonable apprehension of bias and impartiality. Accordingly, allowing the appointment of an arbitrator from such a panel would ex facie contravene the Voestalpine principle of broad-based panels.
It is interesting to note that both SMS Limited and BSVR – KVR (authored by the same judge) do not make any reference to Railway Electrification. It can certainly be argued that the clauses in both these cases would have passed the Railway Electrification muster, since each party had the right to appoint its own nominee arbitrator.
In light of the above, it is evident that the prevalent landscape of Indian arbitration law proscribes unilateral appointment of sole arbitrators. Pertinently however, an exception to this principle (as recognised in TRF) is carved out when both parties have an equal right to nominate, such as in panel-based arbitrations (generally seen in GCC clauses of tenders floated by PSUs).
Voestalpine, by placing caveats and restrictions in the structuring of panels by PSUs (i.e., a wider and a broad-based panel), was a step in the right direction. However, it seems to have been undone by Railway Electrification.
Further, it is our understanding that because of unequal bargaining powers between the contracting parties, a party agrees to incorporate unilateral appointment clauses, often in exchange for obtaining favourable concessions and/or longer repayment timelines.
However, administering arbitration through established arbitral institutions (such as the NPAC, MCIA, etc.) could potentially stymie the unequal bargaining power. Since such arbitral institutions have standard appointment procedures, no party would have an unequal bargaining power while entering into the contract and would effectively be subject to the modalities and regulations of such institutions in the administration of the arbitration.
With India’s renewed push to establish itself as a global arbitration hub, encouraging institutional arbitrations would be a positive step in inviting investor confidence, regulating the costs of arbitration and promoting transparency in the arbitration process.
Soham Banerjee is an Associate (Dispute Resolution) in a law firm in Mumbai and Salona Mittal is an advocate at the Bombay High Court. Views are personal.