Shaurya Dhoundiyal and Bhavana Chandak[i]
Arbitration clauses allowing the unilateral appointment of arbitrators empower one party to impose its will on the opposite party in the process of appointing the arbitrator/s. The validity of such clauses has been subjected to judicial scrutiny on multiple occasions on the grounds of being opposed to the principles of natural justice and the provisions of the Arbitration and Conciliation Act, 1996 (“the Act”). The primary argument against the validity of such arbitration clauses is that there exists a presumption of inherent bias on the part of the arbitrator in favor of the party that has made the appointment.
Unilateral appointment of arbitrators can be made via two arbitration clauses i.e. first the arbitration clauses allowing the unilateral appointment of a sole arbitrator by either party to the dispute and second, arbitration clauses requiring one party to choose an arbitrator from a panel of arbitrators that is unilaterally prepared by the opposite party. In the present scenario, the Courts apply different standards while dealing with cases relating to the two different categories of arbitration clauses as mentioned above. In this light, the blog analyses these standards and proposes a uniform test that the Courts should apply for determining the validity of both the categories of arbitration clauses allowing the unilateral appointment of arbitrator/s.
I. Unilateral Appointment of Sole Arbitrator: (“Category I”)
The question regarding the validity of an arbitration clause that provided for the unilateral appointment of a sole arbitrator was raised before the Supreme Court in the case of TRF Ltd. v. Energo Engineering Projects Ltd. (“TRF”). The arbitration clause in the TRF case provided that either the Managing Partner of the Respondent Company or his nominee shall act as the sole arbitrator in the arbitration proceedings. While dealing with the question regarding the legality of this arbitration clause, the Apex Court held that the Managing Partner of the Respondent Company cannot be appointed as the sole arbitrator as he is disqualified to act as an arbitrator as per Section 12(5) read with the Seventh Schedule of the Act. Furthermore, it was also held that once a person becomes statutorily disqualified from being appointed as the sole arbitrator, such a person should not be permitted to appoint/nominate the sole arbitrator in the same dispute between the parties.
The same question was recently raised before the Apex Court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (“Perkins”). In the Perkins case, the Apex Court laid heavy reliance on the judgment of the TRF case and held that a person who has an interest in the outcome of the dispute must not have the power to appoint a sole arbitrator. The Apex Court categorically stated that an arbitration clause that provides for the unilateral appointment of a sole arbitrator by either party to the dispute is impermissible in law. The ratio of the Perkins case was followed by the Delhi High Court in Proddatur Cable TV Digi Services v. Siti Cable Network Ltd. and by the Bombay High Court in Lite Bite Foods Pvt Ltd. v. Airports Authority of India.
II. Appointment from a Panel of Arbitrators: (“Category II”)
Some arbitration clauses also impose compulsion on one party to choose an arbitrator from a panel of arbitrators that is unilaterally prepared by the opposite party. The validity of such arbitration clauses was questioned before the Apex Court in Voestalpine Schienen Gmbh v. DMRC (“Voestalpine”). In this case, the arbitration clause provided that the Respondent would prepare a panel of 5 arbitrators and both the parties were to choose one arbitrator each from the panel prepared by the Respondent. On the arising of a dispute, the Petitioner objected to the process of appointing the arbitral tribunal. In response to the objections raised by the Petitioner, the Respondent sent a list of 31 arbitrators containing the names of serving and retired officials of the Central government and asked the Petitioner to nominate its arbitrator therefrom. Nevertheless, the Petitioner went ahead to challenge the arbitration clause and the process of appointing the arbitral tribunal, proposed by the Respondent as bring in contravention to Section 12(5) read with the Seventh Schedule of the Act.
At the very outset, the Apex Court deleted the actual arbitration clause as being in contravention to Section 12(5) of the Act, because the Respondent intensively restricted the choice of the Petitioner by forcing him to choose an arbitrator from a panel of only 5 arbitrators, who were former employees of the appointing party, i.e. DMRC. However, the Apex Court upheld the validity of the process of appointing the arbitral tribunal proposed by the Respondent. The Apex Court observed that the panel of 31 arbitrators drawn by the Respondent consists of serving and retired officials of the Central government who had no present or past connection with the DMRC. Thus, the appointment of such persons as arbitrators ensures neutrality, independence, and impartiality of the arbitral tribunal, which cannot be held to be in contravention to Section 12(5) read with the Seventh Schedule of Act.
Very recently, the Delhi High Court relied on the findings of the Voestalpine case in SMS Ltd. v. Rail Vikas Nigam Ltd. (“SMS”). In the SMS case, the Petitioner was supposed to nominate an arbitrator from the panel of 37 arbitrators prepared by the Respondent. The Petitioner challenged the panel of arbitrators prepared by the Respondent because out of 37 persons in the panel, only 8 were such persons who were not the former employees of the Respondent. After taking the challenge raised by the Petitioner into consideration, the Delhi High Court held that the persons in panel prepared by the Respondent fail the test of neutrality, independence and impartiality applied by the Apex Court in the Voestalpine case and allowed the Petitioner to nominate its arbitrator from outside the panel. In the author’s opinion, the Voestalpine case provides the appropriate standard that must be considered by the Courts while dealing with similar cases.
Analysis and Suggestive Framework
A clear difference in the standards applied by the Apex Court can be seen while dealing with cases relating to the validity of Category I and Category II arbitration clauses. In Category I cases, the Apex Court has provided a settled law that not only invalidates all arbitration clauses allowing the unilateral appointment of sole arbitrator but also disables a statutorily ineligible arbitrator from appointing/nominating the sole arbitrator. On the other hand, in cases relating to Category II arbitration clauses, the decision of the Court is based on the application of the test of neutrality, independence and impartiality on the persons in the panel, unilaterally prepared by either party to the dispute. Henceforth, it is clear that only such arbitration clauses that allow the unilateral appointment of a sole arbitrator, i.e. Category I arbitration clauses, are prima facie invalid.
At this juncture, it is important to mention that both Category I and Category II arbitration clauses are very similar – allow one party to impose its will on the opposite party in the process of appointing the arbitral tribunal. In cases relating to Category I arbitration clauses, one party to the dispute has no choice in the process of appointing the sole arbitrator. Similarly, in cases relating to Category II arbitration clauses, the opposite party’s right to choose an arbitrator is merely an illusion because such choice is primarily based on the will of the party that unilaterally prepares the panel of arbitrators, in the process of appointing the arbitral tribunal. Therefore, a deeper insight must be given to the reasoning of the Court for invalidating Category I arbitration clauses, after taking the judgments regarding Category II arbitration clauses and the provisions of the Act into account.
The principle of party autonomy is the grundnorm of the arbitration process. Section 11(2) of the Act allows the parties to choose the process of appointing the arbitral tribunal. The appointment of such arbitrators can only be challenged when there are justifiable doubts regarding the neutrality, independence, and impartiality of the arbitrators, as enshrined in Section 12 read with the Fifth and the Seventh Schedule of the Act. The Act clearly defines the kinds of relationships that create justifiable doubts in the conduct of the arbitrator in the Fifth and the Seventh Schedule of the Act. Thus, the test of challenging the appointment of an arbitrator is comprehensively provided in the provisions of the Act. The Apex Court uses the same test of neutrality, independence, and impartiality of the arbitrators while dealing with cases relating to Category II arbitration clauses.
On the other hand, while dealing with cases relating to Category I arbitration clauses, it is seen that Courts do not apply the test of neutrality, independence, and impartiality, and prima facie set aside all arbitration clauses allowing the unilateral appointment of a sole arbitrator. For instance, in the TRF case, it was held that neither the Managing Director nor his nominee could be appointed as the arbitrator. While stating that the Managing director (who is statutorily disqualified from being appointed as the sole arbitrator) is not permitted to nominate the sole arbitrator, the Court was of the view that the person who has a personal interest in the outcome of the arbitration proceedings is incapable of nominating an impartial and independent arbitrator. However, the Court failed to consider that the Managing Director nominated a retired Judge of the Supreme Court as the sole arbitrator, who had no past or present relationship with either party to the dispute and was not disqualified to act as the arbitrator as per Section 12 read with the Seventh Schedule of the Act.
By considering these factors, the author thinks that the rule of invalidating all Category I arbitration clauses established by the Apex Court, is neither in consonance with the principle of party autonomy in the arbitration process nor with the provisions of the Act. While dealing with cases regarding the validity of Category I arbitration clauses, the Court must apply the test of neutrality, independence, and impartiality to decide upon the eligibility of the unilaterally appointed sole arbitrator or his nominee. The decision of the Court must be based on the question that whether the sole arbitrator who is unilaterally appointed by a party, or his nominee, is capable of delivering a neutral, independent, and impartial decision in the arbitration proceedings. Thus, the Court should not prima facie invalidate all Category I arbitration clauses.
Concluding Remarks
Party autonomy is the fundamental principle that governs the arbitration process. Once the parties have agreed upon the procedure to appoint the arbitrator, the challenge to the appointment of an arbitrator shall be decided by applying the test of neutrality, independence, and impartiality in cases regarding both, Category I and Category II arbitration clauses. The application of the same principle on both the categories of arbitration clauses will enable the Courts to build a uniform practice to effectively deal with cases about the arbitration clauses allowing the unilateral appointment of arbitrators in the future.
[i] Shaurya Dhoundiyal and Bhavana Chandak are final year law students at RGNUL, Punjab. For any feedback or discussion regarding the article, you can contact them at shauryadhoundiyal@rgnul.ac.in or bhavana@rgnul.ac.in. Preferred Citation: Shaurya Dhoundiyal and Bhavana Chandak, A Step Forward Towards Unilateral Appointment Of Arbitrators In India, Arbitration & Corporate Law Review, Published on 19th August, 2020.
This post was reviewed by Arnav Maru and Utsav Saxena.
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