The jurisprudence on appointment of an arbitrator is filled with plethora of judgments by various High Courts and the Supreme Court. Yet, the law on appointment of an arbitrator always throws up some challenges, which results in new decisions being rendered by Courts. One such recent decision, which has set a new benchmark, is the decision of the Supreme Court in the case of Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd. ("Perkins").1 The Supreme Court in order to ensure neutrality of arbitrators, has interpreted Section 11 and the Schedules to the Arbitration and Conciliation Act, 1996 ("the Act"), as amended by the Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act"), to hold that a person who is disqualified from acting as an "Arbitrator" is also disqualified to appoint an "Arbitrator". Pursuant to the above said decision, several sole arbitrators appointed by one party to the arbitration agreement have resigned either on their own or at the instance of the other party to the agreement in view of the said decision which has created a flutter in various ongoing arbitration proceedings in the country. Further, we understand that petitions have been filed under Section 14 and Section 15 of the Act seeking termination of mandate of arbitrators appointed by one of the parties to an arbitration agreement even in ongoing arbitrations.2
In this article, we propose to closely/critically examine the said judgment in the context of the express provisions of the statue, 246th Law Commission Report (hereinafter referred to as "Law Commission Report") including several other High Court decisions regarding appointment of arbitrator under Part I of the Act, both pre and post amendment in 2015 on the subject.
BACKGROUND TO CHALLENGE
It is not unusual or uncommon in commercial contracts to have an arbitration clause for parties to grant the unilateral power to appoint a sole arbitrator to adjudicate upon their disputes. Moreover, the practice is largely prevalent in Government contracts and Public Sector Undertaking contracts. It is one of the recognized modes of appointment which has been there for a long time. Whether it is advisable to vest power in one party to appoint the sole arbitrator is a matter of debate and it is for the Parliament to make necessary amendments to the law.
(a) Party Autonomy under Arbitration and Conciliation Act, 1996
Consensus and party autonomy between the parties is the essence of arbitration process because an arbitration clause in a contract or agreement entered between the parties has far reaching and wide consequences. Such arbitration agreements take away the right of the parties to avail their remedies in a court of law for resolution of the disputes covered by the terms of the arbitration agreement; and makes the consequent award binding on parties, with a limited right of recourse in terms of section 34 of the Act. One of the foundational pillars of arbitration is the party autonomy in the choice of the procedure. It is virtually the backbone of an arbitration procedure.3 Hence, the Law Commission Report and the subsequent amendments made in 2015 to the Arbitration and Conciliation Act, 1996 have laid emphasis that party autonomy is to be respected.
(b) Trigger to approach High Court/Supreme Court for appointment of Arbitrator.
In view of the recommendations by the Law Commission Report, the Parliament amended the Act vide the Amending Act and introduced certain new provisions to the Act.
Amended provisions relevant to the present discussion are as follows:
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator.........
(6) Where, under an appointment procedure agreed upon by the parties, —
(a) a party fails to act as required under that procedure; or
a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—
(a) any qualifications required for the arbitrator by the agreement of the parties; and
(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator." (emphasis supplied)
"12. Grounds for challenge. — (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —
(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.
Explanation 1. —The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.
Explanation 2. —The disclosure shall be made by such person in the form specified in the Sixth Schedule.]
(3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.
(5) 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:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."
Therefore, the trigger to approach the Court for appointment of arbitrator under Section 11(6) is activated when a party fails to follow the agreed procedure under Section 11(2) of the Act. If under the agreed procedure, one of the parties has the right to appoint an arbitrator and the said party has appointed an arbitrator, the other party has no right to approach the Court and the Court also does not have the jurisdiction to appoint an arbitrator. The Legislative scheme is very clear that, in cases where the parties have agreed to settle their disputes by arbitration, the Courts` role is very minimal.
Prior to the 2015 amendment, the trigger for appointment of arbitrator was similar under the corresponding sections of the unamended Act. The only difference between the unamended Act and the amendments made to Section 11 of the Act was that earlier, the power to appoint an arbitrator was vested in the Chief Justice of the Court or his designate which post-amended in 2015 was transferred to Supreme Court/High Court as the case maybe.
Likewise, the Parliament amended Section 12 of the Act and, inter-alia, modified Section 12 (1), added Section 12(5), Fifth and Seventh Schedule to the Act to serve as a guide for appointment of independent and impartial arbitrator and also provided the exhaustive grounds for disqualification of arbitrator.
Before the amendment to the Act in 2015, the idea of balancing party autonomy and independence/ impartiality in appointment of sole arbitrator was extensively discussed by the Supreme Court in its judgment of Indian Oil Corporation v. Raja Transport (P) Ltd.4 The Court after examining the provisions of the Act as it stood prior to the amendment, held that the Act per se does not bar appointment of an employee of a party (Govt. or its instrumentalities) as a sole arbitrator especially where the named arbitrator is a senior officer of the Government/statutory body/Government company, and had nothing to do with execution of the subject contract, then there can be no justification for anyone doubting his independence or impartiality. However, the Supreme Court also noted that ground realities may differ with this observation of the Court and suggested that the Government should reconsider their policy providing for arbitration by employee-arbitrators in view of the concepts of independence/impartiality under the Act and a general shift may be necessary in future for understanding the word "independent" as referring to someone not connected with either party as that will increase the credibility of arbitration process. Even after recording this suggestion, the Court held that the jurisdiction of the Court under Section 11(6) of the Act, arises only when parties have not followed agreed procedure. Therefore, the Court allowed one of the parties to appoint their own employee as an arbitrator as per the agreed procedure between the parties. Further, the Court never expressed any view on one party having the right to appoint the arbitrator.
246th Law Commission Report
The Law Commission of India in its Law Commission Report,5 which served as the driving force behind 2015 amendments brought to the Arbitration and Conciliation Act, 1996, proposed to introduce certain changes which warranted safeguards to ensure that the arbitration proceedings are indeed unbiased. The Law Commission Report emphasized on the need for appointment of neutral and impartial arbitrators along with balancing the party autonomy at the same time.
The Commission in order to ensure that every arbitrator shall be independent and impartial at the time of his/her appointment, proposed to introduce the guidelines provided by International Bar Association ("IBA"), to determine the grounds of independence and impartiality in the form of Fifth and Seventh Schedule (referred as Fourth and Fifth Schedule respectively in the Law Commission Report) under the Act. The Fifth and Seventh Schedule introduced vide the 2015 amendment to the Act, find their source in the Red and Orange lists of the IBA (International Bar Association) Guidelines on Conflicts of Interest in International Arbitration.
The relevant paragraph 59 and 60 of the Law Commission Report has been reproduced as follows:
"59. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed section 12 (5) of the Act and the Fifth Schedule which incorporates the 31 categories from the Red list of the IBA Guidelines (as above), the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed explanation to section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the Fourth Schedule, and as based on the Red and Orange lists of the IBA Guidelines), the ineligibility to be appointed as an arbitrator (and the consequent de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the Red list of the IBA Guidelines).
Note- This amendment is in consonance with the principles of natural justice, that an interested person cannot be an adjudicator. The Fifth Schedule incorporates the provisions of the Waivable and Non-waivable Red List of the IBA Guidelines on Conflict of Interest. However, given that this clause would be applicable to arbitrations in all contexts (including in family settings), it is advisable to make this provision waivable, provided that parties specifically agree to do so after the disputes have arisen between them.
60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule."
The Hon'ble Supreme Court in the case of HRD Corporation v. GAIL (India) Limited,6 while interpreting the two Schedules held that the doubts as to the independence and impartiality of the arbitrator are justifiable only if a third person would reach a conclusion that an arbitrator would be influenced by factors other than the merits of the case. This test requires taking a broad common-sensical approach to the Schedules – a fair construction neither tending to enlarge or restrict unduly.
The Law Commission while proposing amendments to the Act to ensure that every arbitrator shall be independent and impartial did not think it to be appropriate to comment on rights of one party appointing the sole arbitrator. It was only dealing with the position that the arbitrator so appointed must have minimum level of independence and impartiality that is required in the arbitral process regardless of the parties apparent agreement.7
1. Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2019 SCC Online 1517.
2. Proddatur Cable TV DIGI Services v. SITI Cable Network Limited, O.M.P.(T)(COMM.)109/2019.
3. Centrotrade Minerals and Metal Inc. v. Hindustan Copper Limited, AIR 2017 SC185.
4. Indian Oil Corporation v. Raja Transport (P) Ltd., (2009) 8 SCC 520.
5. Law Commission of India, Report No. 246: Amendments to the Arbitration & Conciliation Act, 1996.
6. HRD Corporation v. GAIL (India) Limited, 2017(5) ARBLR 1 (SC).
7. Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd., 249 (2018) DLT 619 (The judgment is under challenge before Hon'ble Supreme Court in SLP No. 7161-7162/2018. However, there has been no stay on the operation of judgment by the Hon'ble Court.).
Originally published May 2, 2020
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