India: Delhi High Court On The Prohibition On Unilateral Appointment Of Arbitrators

Introduction

In a recent judgment, Taleda Square Private Limited vs. Rail Land Development Authority¹, the High Court of Delhi (Court) (Taleda Square) held that, regardless of what is stated in the arbitration clause, in the event of an appointment procedure involving appointment of arbitrator from a panel prepared by one of the parties, it is mandatory for the panel to be sufficiently broad based, and in conformity with the principle of 'counter balancing' laid down in the judgment of Voestalpine². A party can neither unilaterally appoint two out of three arbitrators, nor compel the other party to choose an arbitrator from a narrow panel of five arbitrators.

Facts

A dispute arose between the parties from a lease agreement. The arbitration clause was invoked, and the Petitioner/Taleda Square filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) for appointment of an arbitrator/arbitral tribunal.

The Petitioner submitted that, as per the arbitration clause in the lease agreement, disputes between the parties were to be resolved by a three-member tribunal. One member was to be nominated by the Petitioner, another by the Respondent, and the vice-chairman of the Respondent was to appoint the presiding arbitrator. The Petitioner proposed its nominee arbitrator, but the Respondent refused to accept the nominee and instead, offered names of five persons, who were on the panel of the Respondent and asked the Petitioner to select one of those persons as its nominee. As per the Petitioner, the Respondent's panel was not broad-based, and was contradictory to the decision of the Supreme Court in Voestalpine³. The Petitioner also placed reliance upon the Supreme Court judgments of TRF Limited⁴, Perkins Eastman Architects⁵ and Margo Networks⁶.

The Respondent placing reliance on the Supreme Court judgments of Central Organization for Railway Electrification (Central/CORE)⁷, BCC Developers and Promoters⁸, Pradeep Vinod Construction Company⁹, and Jammu and Kashmir National Conference¹⁰, argued that, since the arbitration clause specifies that the Petitioner's nominee arbitrator must be chosen from the panel provided by the Respondent, the Petitioner is obligated to adhere to this condition.

Judgment

Analyzing the arbitration clause and reaffirming the law laid down in Margo Networks and Voestalpine, the Court concluded that the Respondent's argument could not be accepted.

As a recap, it is pertinent to observe what was held in judgments prior to the present one. In Margo Networks, the Supreme Court while analyzing a similar clause pertaining to a railway board, had after considering the judgments of Voestalpine and Central, held that a ten-member panel of arbitrators being offered by the respondent in that judgment, was clearly restrictive, and manifestly not 'broad based'. It was further held that an appointment procedure involving appointment from a panel made by one of the contracting parties, it is mandatory for the panel to be sufficiently broad based, failing which, it would be incumbent on the Court, while exercising jurisdiction under Section 11, to constitute an independent and impartial Arbitral Tribunal.

The arbitration clause in the Voestalpine case required the respondent to submit a list of five individuals from its maintained panel, from which the petitioner would select its arbitrator nominee. The Supreme Court concurred that a panel of only five persons was too narrow and emphasized the need of establishing a more broad-based panel. This broader base was deemed essential so that the principle of impartiality and independence would not be discarded at any stage of the proceedings, specially at the stage of constitution of the arbitral tribunal. It was held that independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings, and that the rule against bias is one of the fundamental principles of natural justice which applies to all judicial and quasi-judicial proceedings. Top of Form

Having analyzed Margo Networks, the Court in Taleda Square, i.e., the present judgment, held that

• a scenario where one party possesses the power to unilaterally appoint two out of the three arbitrators and compels the other party to select one from a panel of five arbitrators, does not satisfy the test of 'counter balancing' as laid down in Voestalpine.
• mere fact that the Petitioner was provided with an option to choose from a list of five persons, demonstrated that the panel proposed by the Respondent was not even sufficiently 'broad-based'.
• the question as to whether 'counter balancing' can be achieved in a situation where one of the contracting parties has a right to appoint 2/3^rd of the members of the arbitral tribunal was not specifically considered in the case of Central, and thus the said judgment sought to be relied upon by the Respondent, does not apply to the present case.

The petition was therefore allowed, and the Petitioner's prayer for appointing an independent impartial tribunal to adjudicate the disputes between the parties was accepted.