Murky Waters of Quasi-Unilateral Appointment of Arbitrator

[This guest post is authored by Mona Das, 3rd year BBA LLB (Hons.) student at Kirit P Mehta School of Law, NMIMS, Mumbai]

Murky Waters of Quasi-Unilateral Appointment of Arbitrator

Introduction

Arbitration, as a mode of dispute resolution, is known or preferred for its fundamental principle of autonomy of parties. Under the aegis of autonomy, the parties are also allowed to decide the arbitrator, hence the impartiality of the arbitrator becomes of utmost significance. Unilateral appointment of arbitrator refers to a clause or an arrangement between the parties which provides one party the sole power of appointing an arbitrator to resolve the dispute and the other party must agree to it. Quasi-unilateral appointment of arbitrator on the other hand, is a slight variation of unilateral appointment, wherein one party is supposed to choose an arbitrator from a limited panel arbitrators devised and proposed solely by the other party. It is natural to assume that an arbitrator quasi-unilaterally appointed by a party, may act in favour of the appointing party thereby defeating the purpose of the resolution process. The principle of natural justice, nemo judex in causa sua, which means ‘no man can be a judge in his own cause’ amplifies the importance for independence in such processes.  Even though the courts have time and again stated that the independence of arbitrators is of utmost significance, a complete restriction on quasi-unilateral appointment has not been imposed yet.

Fallacies in Quasi- Unilateral Appointment

Every coin has two sides. If quasi-unilateral appointment is providing certain benefits to the parties in terms of reduced cost and speedy resolution, it is bound to have some fallacies as well. The answer lies in whether such fallacies overpower the benefits or not. One of the major problems with quasi- unilateral appointment is that it is inconsistent with the fundamental edifice of arbitration that is ‘mutual confidence in arbitration’. When both the parties appoint the arbitrator or a neutral institution does, the parties tend to have greater confidence in the arbitration process in entirety. Moreover, when an arbitrator is appointed unilaterally, the grounds for challenging the impartiality and independence of the arbitrator increases and this leads to unnecessary delays. One of the aims of arbitration is speedy resolution, which stands defeated.  Yet another issue that arises is that while a question on the impartiality of the arbitrator can be challenged under Section 13 of the Act, other conflict of interests between the arbitrator and a party will fall under Schedule V of the Act and in such cases the aggrieved party can approach the court only under Section 34 of the Act, that is, after the completion of arbitration proceedings.

The Grey Area of Quasi-Unilateral Appointment of Arbitrator

Before delving into the confusion regarding quasi-unilateral appointment, it is pertinent to point out that the debate on the biasness of the arbitrator is a secondary issue because the premise that one party has the exclusive right to appoint an arbitrator is itself unfair and unwarranted. It is undoubtedly true that party autonomy is the bedrock of arbitration and hence the courts hesitate to interfere with it but, maintaining balance is the key. This dilemma was majorly resolved by the Supreme Court in Perkins Eastman Architects DPC and Anr. v. HSCC India Ltd. (2019) (“Perkins”), wherein it was held that while unilateral appointment of a sole arbitrator is impermissible in law, the validity of quasi-unilateral appointments remain dubious. The reason behind the importance of this issue is the underlying tension between ‘autonomy of parties’ and ‘equal treatment.’  Even the Arbitration and Conciliation (Amendment) Act 2015 (“the Act”) has solidified the importance of independence of arbitrators by adding the 5th and 7th Schedule in the Act.

At this point, the confusion regarding the appointment of a sole arbitrator has been certainly well-settled by Perkins, however appointment of a tribunal, that is, selecting either a sole arbitrator or three arbitrators from a panel, still remains ambiguous. This issue has been vaguely discussed by the Hon’ble Supreme Court by a 2-judge bench in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation (“Voestalpine”) wherein, the petitioner had questioned the panel of 5 arbitrators made by the other party which was posing concerns regarding the arbitrator’s neutrality. The Court said that the option of choosing from 5 arbitrators was way too less but, when the respondents provided a panel of 31 arbitrators to choose from, it was found acceptable by the Court. It further opined that the panel should be “broad based”, which is a vague term. Subsequently in Central Organization for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV)  (“Railway Electrification”) the Supreme Court by a 3-judge bench opined that even a panel of 4 arbitrators provides a wide choice to the party. The Court here did not rely on the observations made in Perkins – that allowing a party to the dispute or a party interested in the outcome of the dispute to unilaterally have control of appointment of arbitrator while the other party is constrained, is not warranted. Such contradictory observations wherein, a panel of 5 arbitrators is too narrow to choose from but, a panel of 4 arbitrators is completely acceptable, raises concerns regarding the term “broad-based” and calls for clarity.

Moreover, the panel is constituted after the dispute arises which increases the possibility of the party creating a favourable panel. This prima facie goes against the principle of equality. In cases like SMS Limited v. Rail Vikas Nigam Limited (“SMS Limited”)and BVSR-KVR (Joint Ventures) v. Rail Vikas Nigam Ltd. (“BVSR”), the Court rejected an arbitral tribunal wherein both the parties were given the right to select one arbitrator each, from a panel of 5 arbitrators maintained by the respondent, who would then jointly appoint the third arbitrator. This prima facie seems to be fair since both the parties are given the chance to choose but, what is important here is that the panel is maintained by one party only. The Court in Voestalpine, highlighted the possibility that a panel can be independently formed and still be biased (and vice versa). Thus, there is a requirement for an exhaustive panel of arbitrators for the parties to choose from. As illustrated in BVSR and the SMS Limited case, the choice of selecting arbitrators gets highly limited when the third arbitrator is to be chosen from the remaining 3 panel members, thereby, going against the principle of a “broad-based” panel formation.

The Way Forward

It is understandable that the parties opt for quasi-unilateral appointments mainly to reduce costs. However, the parties are free to pre-decide and fix the fee structure which would be binding on the arbitral tribunal because the framework for arbitral fees in the 4th Schedule of the Act has been rendered as merely an enabling provision instead of a mandatory one. Courts also have a very limited number of arbitrators as there is a dearth of arbitrators who are subject matter specialists. If the judiciary is able to fill this dearth and increase the number of arbitrators on-record, then it might encourage the parties to opt for court-appointed arbitrators. Additionally, where panel members are decided at the time of agreement between the parties, the appointing party can assess the impartiality of the panel (as per the 5th and 7th Schedule of the Act), prior to the dispute and raise contentions in case of any issues, further saving the time of the courts in case the impartiality of the arbitrator is questioned after the proceedings commence.

Arbitral institutions like MCIA, NPAC etc. should be approached to reduce the possibility of unequal bargaining power because such institutions have standard appointing procedures. Encouraging institutional arbitration is also in alignment with India’s objective to become a global arbitration hub in the coming years and it would serve the dual purpose of reducing costs and bringing transparency as well. This will substantially reduce the possibility of biasness and encourage people to appoint arbitrators through Section 11 applications in ad hoc arbitrations and in institutional arbitrations. 

Concluding Remarks

Admittedly, there is some veracity to the criticisms against the quasi-unilateral appointment of arbitrators. However, scraping off this practice completely would be unjust and would undermine the principle of party autonomy. Since unilateral appointment of sole arbitrator has already been abolished, quasi-unilateral appointment based on a broad panel – containing a large number of arbitrators ranging from 10-30 or more, who are subject matter specialists, seems to be a possible middle ground between respecting both parties’ autonomy as well as the principle of equality. With reference to Voestalpine, courts can lay down a clearer standard of procedure for quasi-judicial appointments. Due to a larger bench in the Railway Electrification case, the essential principles laid down in Voestalpine seem to have been overruled. Hence, it is important for the court to step in and provide clarity. Since arbitration is a voluntary process, trust in the decision of the parties and capabilities of the arbitrators to adjudge, is essential. However, certain guidelines and safeguards regarding panel formation would do no harm. Although Section 12 of the Act read with the 6th Schedule provides much needed clarity regarding independence of arbitrator, proper recognition of quasi-unilateral appointment is necessary. It would be an utter waste of the court’s time if they must decide upon the validity of quasi-unilateral appointments on a case-to-case basis. In order to maintain consistency, it is imperative to elucidate the dos and don’ts for formation of such panels.  Therefore, the grey areas of quasi-unilateral appointments need to be settled at the earliest, otherwise, the questions regarding the susceptibility of biasness in the arbitral processes will arise time and again. 

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