[This article has been authored by Paritoshika Singh, who is an Editor at Mapping ADR.]
Keywords: Arbitration, Nominate, Appointment, Seventh Schedule, Section 12(5) of the A&C Act.
In Steel Limited v South Western Railway. (“Steel Limited”), the Supreme Court recently rekindled a contentious question of law: whether a person who is ineligible to become an Arbitrator can nominate an Arbitrator. An omnibus of cases on this point of law has given divergent and at times, conflicting answers to resolve the conundrum surrounding the issue. The conundrum remains unsolved as the Supreme Court in the Steel Limited case referred the question to a larger Bench. The article first analyses how different cases on the point of ineligibility to nominate an Arbitrator attempted to remove the ambiguity surrounding the debate on the above point. While doing so, the authors will look into the underlying principles that formed the basis of decisions in multiple cases through case laws. Furthermore, the author will argue that instead of answering unanswered questions, the recent judgments pertaining to this case have created more confusion around the issue.
TRF and Perkins: Quit Facit Per Alium Facit Per Se
The saga stems from the TRF Limited v. Energo Engineering Private Limited (“TRF case”) where the Court held that a person who is not eligible to be appointed as an Arbitrator cannot nominate an Arbitrator. In this case, the Managing Director (“MD”) could nominate an Arbitrator. However, the Appellants argued that on a reading of the Seventh and Fifth Schedules, the MD was ineligible to act as an Arbitrator and hence, he could not nominate an Arbitrator.[i] However, the Respondents contended that other than on the grounds listed in the Fifth and Seventh Schedule, a person cannot be ineligible to become an Arbitrator.[ii] The grounds listed in the schedules should be treated as general principles. The Court endorsed its decision by relying1 on the principle of qui facit per alium facit per se: that what cannot be done directly may not be done through indirect means. Since the parties had not waived the applicability of Section 12(5) of The Arbitration and Conciliation Act, 1996 (“A&C”) through a written agreement, the Section was applicable to the case. There are two important aspects to note here. Firstly, the Court made it clear that the question of law did not pertain to the disclosure, objectivity, or impartiality of the Arbitrator.[iii] Had this case been about each party nominating their respective Arbitrator, the situation would have been different in comparison to one where the MD is the sole Arbitrator. This means the principle applied in this case can only be applied to cases where there is a unilateral clause. Secondly, it is interesting to note that in this case, the Court acknowledged that the agreement was signed before the Arbitration and Conciliation (Amendment) Act, 2015 came into force.[iv] However, given the confusion surrounding the retrospective application of Section 12(5) of the A&C, the Court made no attempt to justify the retrospective application of the Section to this case. Moreover, no legislative intent can be discovered to suggest that an Arbitrator’s ineligibility criteria prevents an Arbitrator from nominating an Arbitrator under the Act since the Act has express ineligibility criteria for Arbitrators. It seems that the Court attempted to preserve the principle of neutrality of an Arbitrator; however, there was no mention or discussion of neutrality. In fact, the Court explicitly mentioned that objectivity or impartiality was not part of the issue in the case. Additionally, the Court did not mention whether the principle would apply to all unilateral clauses in agreements. Therefore, the Court chose to selectively apply a general principle of law without evaluating what effect the application of this principle might have on different kinds of Arbitrator appointments. Does the principle align with the legislative intent of the Act? Should the grounds stated in Schedules V and VII be treated as principles for appraising the neutrality of the Arbitrator? The Seventh Schedule contains numerous ineligibility criteria for arbitrators. Therefore, it is not clear why the Court felt the need to add another layer of restrictions over the appointment of an Arbitrator.
The rationale propounded in the TRF case was reaffirmed through several case laws such as Perkins Eastman Architects DPC v HSCC (India) Ltd. (“Perkins case”). A clause in the contract in this case gave unrestricted discretion to the Chairman and MD of the respondents to select an Arbitrator of his choice.[v] While drawing on the TRF case, the Court said that there were two categories of cases relevant for the principle. Firstly, as in the TRF case, it is where the MD himself is an Arbitrator with additional power to appoint any other person as an Arbitrator. In the second category, the MD is not acting as an Arbitrator himself but is empowered to appoint an Arbitrator of his choice. The TRF case found the MD to be ineligible as an Arbitrator because he would have an interest in the outcome or decision of the case, which would be antithetical to the principle of neutrality of an Arbitrator. If interest in the outcome of the dispute is the basis for determining bias, it will present in the second category of the case as well.[vi] Therefore, the Court said that the bias will be present regardless of whichever category the case falls under. However, the case where both parties could nominate an Arbitrator will be a completely different situation given that the power of one party will be counterbalanced by equal power with another party. The Court concluded by saying “the person who has an interest in the outcome or decision of the despite must not have the power to appoint a sole Arbitrator”.[vii] Again, the division of categories, in this case, fails to examine the fate of unilateral clauses in arbitration agreements.
Disagreements with Precedents
As it is evident, the TRF and Perkins case reinforced the legal position that a person who is not eligible to become an Arbitrator cannot nominate an Arbitrator. Interestingly, in Central Organisation for Railway electrification v EPI-SPIC-SMO-MCML(JV) (“CORE case”), the Court refused to apply TRF and Perkin's rationale. In the CORE case, a panel of three retired railway officers as arbitrators not below the rank of Senior Administrative Grade Officers would preside over the arbitration proceedings. The Respondents or the contractor were asked to suggest two out of four names from a list that was sent to them by the Appellant or General Manager of, Railway. The Respondents refused to send the names within the stipulated time as they argued that the retired railway officers would be ineligible to serve as an Arbitrator under Section 12(5) read with Schedule VII. The High Court of Allahabad (“HC”) appointed a sole Arbitrator while accepting their argument. The Supreme Court said that the HC erred in appointing a sole Arbitrator as the work contract was worth more than 165 crores, and therefore, the dispute could be resolved only by a panel of three Arbitrators.[viii] Moreover, the Court said that there was no bar under Section 12(5) of the A&C Act, 2015 for the appointment of a retired employee to act as an Arbitrator. The retired railway officers would be conversed with the technical aspects of the dispute and could contribute more effectively by utilizing their experience.[ix] Additionally, while evaluating the application of the TRF and Perkins cases to the present situation, the Court opined that the present case falls under the alternative situation, where there is more than one Arbitrator and both parties could appoint the Arbitrator. The General Manager would appoint at least one of the contractor’s nominees and the remaining Arbitrator from the panel or outside the panel as suggested in the procedure.[x] This will ensure a balance of appointment powers between both parties. Therefore, in the CORE case, the General Manager could not be ineligible to appoint an Arbitrator.[xi]
Matters became more convoluted when the judges in Union of India v. Tantia Constructions Limited (“TCL case”) while dealing with factually similar scenarios doubted the credibility of the CORE case. The Court in its order declared that they disagreed with the judgment in CORE “for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case.” The Order obfuscates the matter as the judges gave no justification for their reasoning. It is unclear how they could overlook the distinction pointed out in the CORE case between cases where there is a sole Arbitrator vis-a-vis cases where there is more than one Arbitrator. The judges did not adequately engage with the reasoning propounded in the CORE case. In the Steel Limited case, the judges doubted one of the party's reliance on the CORE case as the Court said that it could be deduced on a prima facie appraisal of the arbitration order that the petitioner did not participate in the appointment process. Here, the Court had the golden opportunity to investigate the lacunae in the TCL case; however, the same was lost as the Court directed the matter to a larger Bench.
The puzzle surrounding the ineligibility of an Arbitrator to nominate an Arbitrator needs to be resolved for the sake of quick redressal for the parties who are caught in the quagmire of legal precedents. Although the TRF and Perkins case did not answer all the questions, they still made the position of law clear with regard to the nomination of an Arbitrator. The CORE case further consolidated the judgements by emphasizing the application and non-application of the principle in different cases. It was understood that any case where each party had the power to nominate at least one Arbitrator would not cast doubts on the validation of appointments made by a General Manager or an MD. However, the TCL and Steel Limited case criticized the rationale in the CORE case and demanded that the question be referred to a larger constitutional Bench. It is awaited to be seen what the Court will come up with to fill the gaps and lacunae now visible in the case laws.
[i] TRF Limited v. Energo Engineering Private Limited (2017) (6). [ii] Ibid (7). [iii] Ibid (53). [iv] Ibid (17). [v] Perkins Eastman Architects DPC and Anr. v HSCC (India) Ltd. (2019) (5). [vi] Ibid (15). [vii] Ibid (16). [viii] Ibid (20). [ix] Ibid (27). [x] Ibid (35). [xi] Ibid (37).