(Via Lexology) The Fate of Unilaterally Appointed Sole Arbitrators in India: Part – I

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

For arbitration clauses allowing only one party to appoint the sole arbitrator, the Supreme Court observed in Perkins Eastman Architects DPC & Anr. v HSCC (India) Limited[1] (Perkins) that the appointing party’s choice will always have an element of exclusivity in determining or charting the course of dispute resolution. Such unilateral appointments were held to be invalid since the appointing party would certainly be interested in the outcome of the dispute.

Perkins will have a serious impact on several ongoing arbitrations and potential disputes arising out of contracts providing for a party with the unilateral right to appoint an arbitrator.

In this two-part post, I have argue that the Arbitration and Conciliation Act 1996 (Arbitration Act/the Act) does not curtail parties’ right to choose a process for appointing an arbitrator. It allows the appointment of any person who meets the eligibility and disclosure requirements under Section 12.

Factual matrix

In 2016, HSCC Limited (HSCC) had invited bids for a design and architectural planning project. A consortium comprising Perkins Eastman Architects DPC and Edifice Consultants Private Limited [the Consortium] made the success bid in 2017 and entered into a formal contract(the Contract).

Clause 24 of the Contract provided an escalation mechanism for dispute resolution. If the Consortium had a grievance with HSCC’s decision, it was required to approach HSCC’s Chief General Manager (CGM) to determine the issue. The CGM’s decision could be appealed to the Director, Engineering. If the Consortium remained dissatisfied, it was required request the Chief Managing Director (CMD) to appoint a sole arbitrator.

Disputes ensued between the parties in about six days of signing the Contract. Following a termination notice from HSCC, the Consortium invoked the dispute resolution mechanism in Clause 24. While the Consortium pursued the contractual process, the CGM and Director (Engg) failed to discharge their obligations. The Consortium also called upon the CMD to appoint a sole arbitrator. While no appointment was made in the 30-day period, the Consortium was informed on the 31st day that a sole arbitrator had been appointed.

The Consortium refused to accept his appointment; and approached the Supreme Court with an application under Section 11(6) of the Arbitration Act (Appointment Application).

Supreme Court’s decision

The Consortium argued that Clause 24 gave complete discretion to the CMD to make an appointment of his choice. Since the CMD will be interested in the outcome of the decision, the CMD’s appointee was bound to lack impartiality.

HSCC defended the appointment on grounds that all contractual requirements had been followed. It was also argued that Perkins could not have approached the Supreme Court under Section 11(6) since the underlying dispute would not be an international commercial arbitration (ICA).

The Court was required to decide two main issues. First, whether the dispute was an ICA. If not, it would have to be heard by the High Court having jurisdiction. Second, whether the Court should override the parties’ contract and appoint the sole arbitrator.

Firstly, the Court relied on Larsen and Toubro v MMRDA[2]  to observe that a consortium is not a separate legal entity. Since the lead member of the Consortium is domiciled outside India, the Court held that the dispute was an ICA. Secondly, the Court observed that a delay of one working day in appointing the arbitrator did not warrant an Appointment Application. The Court then examined the validity of the process agreed under Clause 24, in light of its earlier decision in TRF Limited v. Energo Engineering Projects[3] [TRF].

The arbitration agreement in TRF provided that the parties’ disputes will be resolved by a sole arbitrator who shall be the managing director (MD) of one of the contracting parties, or her nominee. Since arbitration was invoked after the 2015 amendments came into force, Section 12(5) was applicable in TRF. Pursuant to Section 12(5), read with the Seventh Schedule, the MD of a party became ineligible to act as an arbitrator. It was observed that the appointing MD will always be interested in the outcome of the dispute. Because the MD was ineligible to act as an arbitrator, the Court held an MD was disentitled to nominate her substitute as well. It was held that ‘once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated’.

In Perkins, the arbitration agreement empowered the CMD to appoint the sole arbitrator. The Court reasoned that the party’s official/authority/representative, who is authorised to unilaterally appoint a sole arbitrator, will always have an interest in the outcome of the dispute and therefore act with bias. Given that any person who is ineligible to act as arbitrator is necessarily barred from appointing her substitute, the Court noted that the element of invalidity would always arise even when the MD is empowered to merely appoint the arbitrator. Relying on TRF, the Court held in Perkins that parties to the agreement would be disentitled to make any appointment of an arbitrator on its own.

Comment

The findings in Perkins are built on the plinth of TRF’s rationale. It is imperative, therefore, that TRF be analyzed before commenting on Perkins.

                Process v identity

Section 11(2) of the Act allows parties to agree on a procedure for appointing the arbitrator or arbitrators. Where parties have agreed to a procedure, a party can invoke the Court’s jurisdiction under Section 11(6) only if:

‘(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure.

[…] unless the agreement on the appointment procedure provides other means for securing the appointment.’ (emphasis supplied)

Section 11(2), juxtaposed with Section 11(6), expressly allows parties to choose any process for appointing their arbitrator(s). Subsection (c) to Section 11(6) suggests that parties can entrust any person) with the responsibility of inter alia appointing the arbitrator. There is no express bar or limitation on the parties’ right to designate any person appointing an arbitrator.

The parties’ right to choose an appointment process is mutually exclusive from their right to determine the identity of the appointee. The former is derived from Section 11(2), while the latter is circumscribed by the eligibility and disclosure requirements under Section 12.

The arbitration clause in TRF can be dissected into two components. That the MD shall act as the sole arbitrator. And, if not, then, the MD will nominate the sole arbitrator. Since the first component determines the identity of the arbitrator, the grounds of ineligibility under Section 12(5) are applicable. Category 12 in the Seventh Schedule specifically disqualifies any person who is a manager, director or part of the management, or has a similar controlling influence in one of the parties.

The second component, however, is purely procedural; it falls within the realm of Section 11(2). Section 11(6)(c) clearly provides that parties can agree to entrust any person with the power to appoint an arbitrator. The Act nowhere requires the appointing person or authority to also be eligible to act as an arbitrator in the parties’ dispute.

                Qui facit?

In TRF, the Court held otherwise. The Court found it ‘inconceivable’ that a person who is statutorily ineligible to act as an arbitrator can nominate another in her stead. Once the foundation collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. It was thus held that once the identity of the MD is lost as the sole arbitrator, the power to nominate someone else is also eliminated.

The Court’s findings in TRF, and supported by Perkins, are founded on the principle of ‘qui facit alium, facit per se’. She who act through another, acts through herself. It is respectfully submitted, however, that this principle applies where persons in question share principal-agent or like relationship. No arbitrator can act for or on behalf of any party to the arbitration. If she does, the aggrieved party can apply to Court under Section 14(a) of the Act and seek termination of her mandate.

                Redefining the plinth

The true plinth that supports a person’s eligibility to be appointed as an arbitrator is Section 12. In fact, Section 12(5) allows the parties to reinforce the plinth even where the appointee is ineligible pursuant to the Seventh Schedule. It reads as follows:

notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.’  (emphasis supplied)

The ineligibility prescribed in Section 12(5) presupposes the existence of a relationship between the proposed appointee and the parties or counsel or subject matter of the dispute. Simply being appointed or nominated by any person cannot by itself give rise to a ‘relationship’ between the appointer and appointee. To be ineligible under Section 12(5), they must share a pre-existing relationship which falls within one of the specific categories in the Seventh Schedule.

In fact, the Seventh Schedule specifically covers certain relationships between the appointee and her appointing party. Category 8 disqualifies an arbitrator if she regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.

If the Legislature intended that a party should never be able to unilaterally appoint a sole arbitrator, then there would be no need to carve out a ground for ineligibility in case of a specific relationship between the proposed arbitrator and the appointing party. In fact, the term ‘appointing party’ would not have been used in the Seventh Schedule if parties are inherently disentitled from unilaterally appointing an arbitrator.

The second part of this post will deal with Perkins’ effect on the parties right to appoint an arbitrator on a three-member tribunal. It will also highlight the practical implications of the judgment, followed by brief concluding remarks.  

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

 —

[1] [2019 (9) SCC Online SC 1517]

[2] 2018 SCC OnLine SC 1910

[3] (2017) 8 SCC 377

2 thoughts on “(Via Lexology) The Fate of Unilaterally Appointed Sole Arbitrators in India: Part – I

  1. Pingback: The Fate of Unilaterally Appointed Sole Arbitrators in India: Part – II | Koinos

  2. Pingback: Quippo Construction v. Janardhan Nirman: Right to Object to the Venue in a Domestic Arbitration | Koinos

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