The Fate of Unilaterally Appointed Sole Arbitrators in India: Part – II

[This is the second part of the author’s composite article originally published here on Lexology.]

In the first part of this post, the Supreme Court’s decision in Perkins was analyzed in light of the parties’ right to choose an appointment procedure under Section 11(2) and the specific legislative purport of Section 12. This part attempts to analyse the effect of Perkins on the party’s right or agreement to appoint one arbitrator each where the underlying agreement provides for a three-member tribunal.

Three-member conundrum

The court ruled in Perkins that a party cannot be allowed to appoint a sole arbitrator since the party, or its appointing representative will necessarily be acting its own interest. Yet, Section 11(3) provides where parties have not agreed to an appointment process in an arbitration with three arbitrators, each party shall appoint one arbitrator. The two appointed arbitrators must appoint the third and presiding arbitrator. If Perkins is correct, then no party should be entitled to appoint an arbitrator by itself, regardless of the number of arbitrators on the tribunal.

Critics may argue that this line of argument is myopic and misplaced. The Supreme Court has, in TRF and Perkins, clearly set out the subtle difference between the right to make a unilateral appointment and equal right for both parties to ‘nominate’ their respective arbitrators. In particular, the Supreme Court has observed the following:

 ‘whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party. But, in a case 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. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. […]

It is respectfully submitted that no party is entitled derive any ‘advantage’ whilst appointing or nominating an arbitrator. No arbitrator, whether as sole arbitrator or part of a three-member, is permitted to be predisposed in any manner towards her appointing party. Section 18 of the Arbitration Act particularly provides that arbitrators must treat all parties with equality and fairness.

The Fifth and Seventh Schedules are sourced from the lists set out in the IBA Guidelines on Conflict of Interest in International Arbitration (IBA Guidelines). General Standard 5(a) provides that the IBA Guidelines will apply equally to tribunal chairs, sole arbitrators and co-arbitrators, howsoever appointed. The Explanation to this Standard further clarifies that each member of an Arbitral Tribunal has an obligation to be impartial and independent. It is for this reason that the General Standards do not distinguish between sole arbitrators, tribunal chairs, party-appointed arbitrators or arbitrators appointed by an institution.

Sundaresh Menon, Chief Justice, Singapore, has also argued that all arbitrators owe the same duties to all the parties. They must study all material and consider the case of all disputing parties, not just those presented by their respective appointing parties. The Chief Justice has further argued as follows:

‘[…] Confidence in arbitration must be anchored in the belief that it is a procedurally fair and substantively neutral process for the resolution of disputes. Any other view would be greatly corrosive of confidence in the institution of arbitration. For this reason, I do not think we should do anything that would encourage the belief that the party appointee has a special duty to apply particular care to the arguments, evidence, understandings, and expectations of his appointer.’

If a party is entitled to nominate or appoint its member on a three-member tribunal, then it should be equally entitled to appoint a sole arbitrator if both parties have agreed to this process. On the other hand, if no party can unilaterally appoint a sole arbitrator because the appointing party will act in her own interest, then no party can be permitted to unilaterally appoint an arbitrator on a three-member tribunal either. The latter situation is neither desirable nor contemplated by the Arbitration Act.

It is respectfully submitted that the findings in TRF and Perkins may need to be reconsidered in light Sections 11(2), 11(3), the specific categories in the Seventh Schedule, and Section 18 of the Arbitration Act.

Practical implications

In BBNL v. United Telecoms Limited [(2019) 6 SCALE 491], the Supreme Court clarified that TRF was not intended to be made applicable prospectively, ie only to arbitral appointments made prior to the date of the judgment. It will affect all arbitrations commenced after 23 October 2015, i.e. when the 2015 Amendments came into force.

In the same vein, Perkins lacks any specific indication for prospective application. Every unilaterally appointed sole arbitrators have become de jure ineligible to act as arbitrators on 26 November 2019 if the underlying arbitration was commenced after 23 October 2015. If such arbitrators do not step down themselves, their continued participation is likely to be challenged by the non-appointing party under Section 14 of the Arbitration Act. Either way, Perkins may severely disrupt many ongoing arbitrations – especially if they have reached an advanced stage. Perhaps the Supreme Court should have provided for TRF and Perkins to apply prospectively, in the same way as it had in Bharat Aluminium Co v. Kaiser Aluminium Technical Services (‘BALCO’) [(2012) 9 SCC 552].

Concluding remarks

In TRF, the managing director had nominated a former judge to act as an arbitrator. The nominee arbitrator had made the requisite disclosures in accordance with the Sixth Schedule, clarifying that there were no circumstances which were likely to give rise to justifiable doubts as to the independence and impartiality.

In the proceedings under challenge, the High Court noted that ‘the learned Counsel for the Petitioner before it had clearly stated that it had faith in the arbitrator but he was raising the issue as a legal one, for a Managing Director once disqualified, he cannot nominate.’

Based on these circumstances, the High Court had decided that were no circumstances which were likely to give rise to justifiable doubts as to the independence and impartiality of the nominee arbitrator.

The Supreme Court, however, categorically stated that it was ‘neither concerned with the disclosure nor objectivity nor impartiality nor any such other circumstance’. The Court was singularly concerned with the legal issue, ie whether the Managing Director, after becoming ineligible by operation of law, is still eligible to nominate an arbitrator. It is unclear why the court decided to examine the ‘legal issue’ de hors the undisputed impartiality and independence of the nominee arbitrator. Where all disputing parties have expressed ‘faith’ in the arbitrator, should the court examine a legal objection?

In the realm of arbitration, party autonomy is the norm and judicial intervention the exception. Parties are entitled to mutually agree to any procedure for appointment of an arbitrator or arbitrators. Whether the appointee is eligible to act as an arbitrator is an independent issue. Every appointee, regardless of the strength of the tribunal, would ideally have to undergo the rigors of eligibility set out in Section 12.

This narrative has arguably been reversed by the decisions in TRF and Perkins. The parties’ right to choose an appointment process has been diluted. If the result of these judgments is in fact the desired or recommended effect, then the Arbitration Act should be amended to disentitle parties from unilaterally appointing a sole arbitrator. Until then, however, the findings in TRF and Perkins may warrant a second look by the Hon’ble Supreme Court.

The views of the author in this article are personal and do not constitute legal / professional advice of Khaitan & Co. For any further queries or follow up please contact us at ergo@khaitan.com

One thought on “The Fate of Unilaterally Appointed Sole Arbitrators in India: Part – II

  1. Pingback: (Via Lexology) The Fate of Unilaterally Appointed Sole Arbitrators in India: Part – I | Koinos

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