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Validation by courts of arbitrator nominated by defaulting party after application under Section 11(6): Loser takes it all?
The decisions of the Uttarakhand, Karnataka and Delhi High Courts have contributed to an unusual practice with strange consequences.
A respondent forfeits its right to appoint its nominee arbitrator, beyond the period of 30 days. In such a situation, nomination of arbitrator by the respondent after a petition is filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 is not permissible in law. When this happens, does the court still have any power to confirm such nomination? We explore the answer to this question in this post.
Current Legal Position
As early as 2000, in Datar Switchgears Limited v. Tata Finance Limited and another, the question before the Supreme Court was whether the respondent forfeited its right to appoint a nominee arbitrator, beyond the period of 30 days. The Court held that as no period of time is prescribed under Section 11(6) of the Arbitration and Conciliation Act, 1996, the opposite party can make an appointment even after 30 days, but prior to an application being filed under Section 11. The right to appointment is not automatically forfeited after expiry of 30 days. In this case, the appointment, although made beyond 30 days from the date of the arbitration notice, was prior to the filing of the application under Section 11(6), and was held to be valid.
In 2007, the Supreme Court in Union of India v. Bharat Battery Manufacturing Company Pvt. Ltd had the occasion to further develop the law on this issue. In this case, unresolved disputes between the parties led to Bharat Battery sending a notice of arbitration and requesting Union of India to appoint an arbitrator within 30 days. No arbitrator was appointed, and Bharat Battery filed an application under Section 11(6). The High Court appointed an arbitrator. Union of India challenged the order on the ground that it had, after the filing of the application, appointed an arbitrator, and the Court ought not to have exercised its jurisdiction under Section 11(6). In other words, the Court should have confirmed the belated nomination by the recalcitrant party and allowed the right which had accrued to Bharat Battery (as a result of the law laid down in Datar Switchgear), to perish.
The Court held that the nomination of the arbitrator by the Union of India was after the filing of petition under Section 11(6), which is not permissible in law. It held that once a petition is filed seeking appointment of an arbitrator, the power to appoint an arbitrator in terms of the arbitration clause of the agreement ceases. Therefore, the nomination of arbitrator by the Union of India was held to be without jurisdiction, and the appeal was dismissed.
In 2013, in Deep Trading Company v. Indian Oil Corporation and others, the same question again surfaced before the Supreme Court. In this case as well, the respondent, Indian Oil Corporation (IOC), appointed an arbitrator, during the pendency of the proceedings under Section 11(6). In that situation, the Allahabad High Court found no reason to appoint an arbitrator, since IOC had already appointed an arbitrator. This decision was challenged by Deep Trading. The Supreme Court held that IOC had forfeited its right to nominate an arbitrator and the appointment of the arbitrator by IOC during the pendency of proceedings under Section 11(6) was of no consequence. The High Court ought to have exercised his jurisdiction under Section 11(6). The Court thus sent the matter to the High Court for fresh consideration. Eventually, the parties agreed on appointment of a retired judge as the arbitrator before the High Court.
In 2016, the Delhi High Court, in Zion Promoters and Developers Private Limited v. Ferrous Infrastructure Private Limited, was faced with a similar situation. Ferrous Infrastructure appointed an arbitrator after the High Court issued notice in the application under Section 11(6). Zion Promoters challenged the appointment and prayed for appointment of an independent arbitrator. The Court held that the right of Ferrous Infrastructure ceased upon filing of the application under Section 11(6) and its appointment of nominee arbitrator is not valid.
Problem and solution
The Supreme Court has clarified multiple times that the defaulting party forfeits its right to nominate an arbitrator of its choice the moment the aggrieved party files an application under Section 11 of the Arbitration Act. This gives the aggrieved party a valuable right to have an arbitrator on behalf of the defaulting party nominated by the court. However, can it be said that the court still has the power to confirm the arbitrator nominated by the defaulting party, in exercise of its jurisdiction under Section 11(6)?
In Rapti Contractor v. Executive Engineer and others, the Uttarakhand High Court appointed the very person nominated by the respondent despite the appointment being made after the Section 11 application was filed. Even in Malu Sleepers Private Ltd. v. Union of India and another, the Karnataka High Court appointed the arbitrator suggested by the defaulting party. The same view was recently taken by Delhi High Court in TATA Projects Ltd. v. Oil and Natural Gas Corporation [fair disclosure – the authors appeared before the Court in this case].
Can it be argued that the decision in Bharat Battery does not limit the power of the court to appoint the same person as an arbitrator whose name was suggested by the defaulting party, not on the request of such defaulting party, but in exercise of its powers under Section 11(6)?
In our view, the decisions of the Uttarakhand, Karnataka and Delhi High Courts have contributed to an unusual practice with strange consequences.
The moment the defaulting party forfeits its right with the filing of the Section 11 application, the court has to absolutely ignore any nomination made by the defaulting party, after such forfeiture. Once the appointment is invalid in law, it is non est. Such lost right cannot be resurrected by the court. In other words, the court cannot confirm the arbitrator nominated by the defaulting party. This often happens when the court is of the view that the appointment is of an independent arbitrator.
On the other hand, the right which has accrued to the applicant to have an arbitrator other than the one belatedly nominated by the defaulting party, is a valuable right. This is of some significance in disputes with public sector undertakings also. There is a noteworthy difference between the court appointing an arbitrator itself and merely confirming the appointment of a person nominated by the defaulting party. This difference is real and substantial. The fact that the defaulting party approached that person in the first instance makes all the difference. It is irrelevant that the person is otherwise independent or neutral or otherwise fit? Aren’t all arbitrators supposed to be independent?
If such right of the applicant is not given effect to, what we have is a recalcitrant party getting away with a belated appointment of an arbitrator.
In our humble view, the discretion given to the court under Section 11 of the Arbitration Act must be exercised completely independently. The moment the court exercises its discretion to appoint the same person nominated by the defaulting party, the court is taking away a valuable right which has accrued to the aggrieved party. The courts should consciously ignore and disregard any belated nomination of an arbitrator by the defaulting party because it is about propriety and it is also about doing what is just. This would ensure higher confidence of both parties in the process under Section 11 as also in the arbitral tribunal itself. Anything short of this leads to a situation where the loser takes it all and the winner stands small!
Renu Gupta is a litigation lawyer based in Delhi and Sushma Nagraj is a litigation lawyer based in Mumbai.