What goes around, comes around: The 2015 amendment on appointment of arbitrators in India

A lack of clarity has opened a window of challenges and the only plausible cure could be the legislature’s steadfastness.
Arbitration and Conciliation
Arbitration and Conciliation

This article discusses the legality of unilateral appointments and the waiver of ineligibility of an arbitrator under Section 12(5) of the Arbitration & Conciliation Act, 1996 as introduced by the 2015 Amendment Act.

It offers our critique on the aspects that require consideration of the Supreme Court of India and the Indian Legislature. In the backdrop of recent judicial decisions, the authors aim to highlight practical issues and lacunae in the existing jurisprudence which require conscious fortification under the provisions of the Act.

Waivers: Rewriting the IBA

The International Bar Association (IBA) Guidelines on Conflicts of Interest formed the foundation of the 246th Law Commission’s recommendation to incorporate the fifth and seventh schedule to the Act by way of the amendment. The fifth schedule read with Section 12(1) draws from the red and orange lists of IBA and provides a guide to determine the circumstances which give rise to justifiable doubts as to the independence of the arbitrator at the appointment stage (Scenario I).

Separately, few categories from the red list have been included in the seventh schedule and persons falling in such categories are considered de jure ineligible to act as an arbitrator (Scenario II).

However, in a departure from the IBA guidelines, the proviso to Section 12(5) allows parties to waive such de jure ineligibility by an ‘express agreement in writing’. Apart from the above and even before the amendment, Section 12(4) read with Section 12(3) deal with the scenarios that may raise justifiable doubts post-appointment (Scenario III).

The incongruity of Section 12(5) with the other provisions of the Act, as highlighted by the Supreme Court in HRD v. GAIL, is also evident from the below table which summarizes the procedure for challenge in case of the above scenarios:

Procedure for challenge to appointment of arbitrator
Procedure for challenge to appointment of arbitrator

Evidently, no time period has been provided under the Act to apply to the court under Section 14(2) to resolve a Scenario II controversy. This, countenanced with a situation that a party may participate in an arbitration and raise the issue of de jure ineligibility belatedly, has led to courts attempting to provide for the appropriate stage at which such controversy may be raised. This has also led to a few inconsistent interpretations as to whether the parties can waive off the applicability of Section 12(5) under the proviso by way of their conduct.

As noted above, the proviso to Section 12(5) allows parties to waive the de jure ineligibility of an arbitrator subsequent to disputes arising between them, by an ‘express agreement in writing’. This has been clarified by the Supreme Court in Bharat Broadband v. United Telecoms to mean ‘an agreement by which both parties, with full knowledge of the fact that the proposed arbitrator is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him/her to continue as such’. The Court clarified that participation in arbitral proceedings and filing pleadings does not amount to an express agreement. This has been followed by the Court in Jaipur Zila v. Ajay Sales and Ellora Paper Mills v. State of MP. Importantly, in these cases, despite participating in the arbitration, the aggrieved party took urgent steps to challenge the eligibility after becoming aware of the circumstances which would establish so.

However, recently, the Calcutta High Court in Aditya Birla FInance v. Mcleod Russel, has held that participation in an arbitration for nearly two years and filing of pleadings which have the effect of accepting the jurisdiction of the arbitrator would amount to an express agreement under the proviso. The basis for such finding was that the proviso is not ‘context-indifferent’ and cannot be allowed to be an escape route for a party to negate its continued participation.

This interpretation, prima facie, goes against the resolve of the proviso which was regarded to be bolstered by Bharat Broadband. However, the findings of the Calcutta High Court highlight the urgent need to legislatively provide a time limit to apply to the court under Section 14(2) to ensure that such pleas are not taken belatedly with a view to derail the arbitration and allow a second bite at the cherry. The same would also ensure that the Ccurts do not try to find cover under and expand the scope of the proviso to Section 12(5).

Appointments: Focusing on the ‘how’ after the ‘who’

As can be evident from the findings of the apex court while dealing with various kinds of appointment procedures, the amendment has, to a large extent, crystalized the position apropos who is de jure ineligible to act as an arbitrator:

Who is ineligible to be an arbitrator?
Who is ineligible to be an arbitrator?

However, the silence of the amendment on whether there is a requirement to have equal powers at the stage of appointment has caused controversy as to whether how an arbitrator is appointed can be judicially examined.

In TRF v. Energo, the Supreme Court expounded on the scope of the amendment and held that if an arbitrator is de jure ineligible, they are also ‘statutorily ineligible’ to nominate an arbitrator in their place.  Thereafter, in Perkins Eastman v. HSCC, the Court developed on TRF and identified that the ineligibility to appoint an arbitrator is separate from the ineligibility to act as one. This was so because the clause before it provided  that the arbitration would be conducted by ‘a sole arbitrator appointed by the CMD’ of the respondent. The Court opined that "a party…would be disentitled to make any appointment…on its own," due to their interest in the outcome of the arbitration. In doing so, Perkins lays down that notwithstanding who is appointed, there is a blanket ban on all unilateral appointments to ensure neutrality and independence.

Perkins has been followed by several High Courts to invalidate unilateral appointments. In fact, the Bombay High Court in Lite Bite v. AAI went so far as to say that appointment of an arbitrator can only be made with mutual consent, and the only other way is by approaching the court under Section 11.

However, Perkins does leave room for alternative interpretation.

First, it does not emphasize that there should be equal division of power at the appointment stage. This led the Supreme Court in Railway Electrification v. ECI-SPIC-SMO-MCML to hold that an agreement requiring a party to select its nominee from a roster maintained by the other party would be valid. Interestingly, the Court in UOI v. Tantia and JSW Steel v. SW Railway has referred this judgment to a larger bench, noting that conflicting decisions pertaining to appointments have been ‘re-occurring’ across the country.

Second, Perkins fails to juxtapose its ratio with the unfettered powers of the parties under Section 11(2) to agree on any procedure for appointment.

Lastly, Perkins does not elaborate on how one party can ‘charter the course’ of an arbitration by unilaterally nominating an arbitrator, despite the safeguards introduced by the amendment. In the same vein, it was held in McLeod that only those unilateral appointments are invalid which fall foul of the seventh schedule and the same should not be conflated with other scenarios where an eligible arbitrator is proposed through unilateral appointment. Similar observations have been made by the Delhi High Court in DK Gupta v Renu Munjal.

While Perkins' ratio is in line with the best international practices, it has not conclusively settled the question of unilateral appointments and other appointment mechanisms which do not share the powers equally. It is undeniable that the fundamental premise of arbitration is the mutual faith reposed on the arbitrators and unilateral appointments may threaten this very base. In fact, in a country like India which is just finding its feet as an arbitration-friendly jurisdiction, it is all the more critical to guard arbitrators from such apprehensions of bias. However, given the unique nature of arbitration clauses, it is difficult to contemplate a judgment which fits all possible scenarios of unilateral appointments.

Therefore, if the assumption of perceived predisposition towards the appointing party must be crystallized, the legislature has to step-in aid and amend the Act accordingly. In this regard, one can refer to the French Code of Civil Procedure which in Article 1453 codifies that arbitrators have to be appointed mutually or by the court.  It is the lack of this clarity that has opened a window of challenges and the only plausible cure could be the legislature’s steadfastness.

Applicability: Back to black 

Over and above the inconsistency in interpretation of the provisions introduced by the amendment, the applicability of the amendment itself has also not been settled by Supreme Court, yet. In line with Section 26 of the amendment, which has been revived by Hindustan Construction v. UOI and following several of its decisions such as UOI v. Parmar Construction, the Court in UOI v. Pradeep Vinod Construction held that the Section 12(5) will only apply to arbitral proceedings commenced on or after the commencement of the amendment, that is with effect from October 23, 2015.

However, in Ellora, the Court has rekindled an issue which was seemingly res integra by applying Section 12(5) retrospectively. In the facts before it, the Court noted that though the tribunal was constituted in 2001, the arbitration did not ‘technically’ commence in all these years due to a stay order of the Allahabad High Court. Similar facts led the Delhi High Court to hold in Progressive Infotech v. Ircon that Section 12(5) can be applied retrospectively. The decision in Ellora does not follow the rationale of BCCI v. Kochi and Hindustan Construction, which have clarified that the amendment is prospective in nature.

Recently, Shree Vishnu v. EIC had set out to resolve the question at hand, but has entangled the issue further by noting that BCCI and Parmar hold divergently. Now, the question of applicability of the amendment, which was once settled with great difficulty, appears to have made a comeback to haunt the arbitration fraternity.

Back to the drawing board

The asymmetry elucidated above strikes a note of caution. It is evident that while the judiciary is trying to build on the foundation put in place by the amendment, the saga of multiple interpretations and judicial challenges will continue to haunt Indian parties as long as the legislators do not review the law and proactively strive to plug the floodgates. After almost seven years since the introduction of the amendment, it is high time to ensure that such issues pertaining to Section 12(5), insofar as it deals with unilateral appointments and waiver of ineligibility, are laid to bed through good and responsible lawmaking.

Prerona Banerjee and Vishal Sinha are practicing advocates at the Calcutta High Court and Associates at Khaitan & Co LLP.

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