[This article has been authored by Tawishi Beria, a final year law student at JGLS, Sonipat.]
Keywords: Unilateral Appointment, Independence, Impartiality, Perkins, Railway Electrification.
The unilateral appointment of arbitrators has been an issue that has plagued the Indian arbitration framework for a while now. This essentially means that only one of the parties to a dispute has the right to appoint or nominate an arbitrator. Notably, there is nothing in the Arbitration and Conciliation Act, 1996 (“the Act”) that prohibits unilateral appointments. The idea of independence and impartiality in appointing arbitrators has always been part of the Act, but the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 amendment”), based on the recommendations of the 246th Law Commission Report, laid down certain guidelines that have strengthened these concepts.
While on the one hand, the importance of party autonomy is emphasized in making a case for unilateral appointments if the parties so agree, on the other hand, the indispensable aspects of impartiality, fairness, and transparency become apparent if such appointments are allowed. This article discusses the legality of the unilateral appointment of arbitrators in India. First, the author outlines the changes brought about by the 2015 amendment for ensuring independence and impartiality in the appointment of arbitrators. Second, the judicial development on the issue is traced and the issue is analyzed dividing the cases into two categories. The article concludes by highlighting the need for invalidating unilateral appointments in their entirety.
The Amended Regime
Before looking at the approach taken by the courts on the unilateral appointment issue, it is important to understand the existing statutory framework. By way of the 2015 amendment, the Fifth and Seventh Schedules were incorporated in the Act, taking inspiration from the Orange list and Red List of the IBA Guidelines on Conflict of Interest in International Arbitration.
Section 12(1) of the Act refers to circumstances requiring disclosure in writing when a person is approached for a possible appointment as an arbitrator. This includes the existence of any kind of relationship or interest in any of the parties with respect to the subject matter of the dispute that could “give rise to justifiable doubts as to his independence or impartiality.” Explanation 1 provides for reference to the grounds stated in the Fifth Schedule for guidance in assessing the independence and impartiality. Section 12(5) of the Act provides for the ineligibility of certain persons in being appointed as an arbitrator, making reference to the Seventh Schedule, precluding the category of persons enlisted therein from being appointed as arbitrators.
The addition of the two schedules implies that any appointment by an interested party, either that of an arbitrator directly or of an appointing authority for such an arbitrator requires an assessment of bias. In this light, the judicial development on the legality of arbitration clauses that facilitate unilateral appointments is discussed hereinbelow.
Tracing the Judicial Development
One of the first cases that brought the issue of unilateral appointment of arbitrators to the fore was that of TRF Ltd. v. Energo Engineering Ltd. (“TRF”). In the said case, the arbitration clause provided for reference of disputes to the sole arbitration of the Respondent’s Managing Director, or his Nominee. It was noted by the Supreme Court of India (“SC”) that since the Managing Director had a vested interest in the outcome of the dispute, he would be ineligible to act as the sole arbitrator; this would also preclude him from nominating an arbitrator by reason of his disqualification.
In Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Court extensively drew from its holding in TRF, broadly interpreting the same - to restrain the unilateral appointment of a sole arbitrator by an interested party. The Court divided cases into two categories: the first one was the TRF category where the arbitration clause provides for the appointment of an employee of an interested party or the right of such employee to nominate an arbitrator. The second category was the Perkins category, where only the right of nomination as a sole arbitrator by an interested party is present. It was held that the possibility of bias would exist in both categories and that any person who has an interest in the outcome of the dispute should not be allowed to either act as or nominate the arbitrator.
Coming to a slightly different vein of cases dealing with unilateral appointments, the Voestalpine Gmbh v. Delhi Metro Rail Corporation (“Voestalpine”) case becomes relevant. In the said case, the process for appointment of the arbitral tribunal provided for each of the parties to nominate their respective arbitrators from a panel of arbitrators suggested by the Delhi Metro Rail Corporation. Voestalpine Gmbh claimed that this procedure was invalid since it would effectively lead to the appointment of “ineligible persons” in terms of Section 12(5) read with Clause 1 of the Seventh Schedule. Interestingly, in holding the procedure in the case valid, the SC stated the requirement for a “broad-based” panel to be named. The SC held that persons not even remotely connected with the parties could not be precluded from being appointed as arbitrators; effectively ensuring that the Seventh Schedule is not misused.
On similar lines, in Central Organization for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV)(“Railway Electrification”), the SC held that the decided appointment mechanism was valid. The procedure essentially permitted the Respondent Joint Venture to choose only two out of the four names proposed by the Appellant. After this, the Appellant would nominate one of the two arbitrators selected by the Respondent, who would subsequently appoint the other two arbitrators. The peculiarity of this decision lies in the fact that the four-member panel to be proposed by one of the parties cannot be said to be “broad-based” as explicitly stated by the SC in Voestapline.
Additionally, the various High Courts across the country have also largely held unilateral methods of appointment of arbitrators to be invalid. The Bombay High Court, in Lite Bite Foods Pvt. Ltd. v. Airports Authority of India , invalidated the unilateral appointment of the sole arbitrator relying on Perkins and Voestapline. The Delhi High Court, in Proddatur Cable TV Digi Services v. SITI Cable Network Limited, relying on Perkins, held thatthe unilateral appointment procedure was invalid since the Company acting through its Board of Directors would be an interested party. However, in Iworld Business Solutions v. Delhi Metro Rail Corporation, the Delhi High Court relied on the Railway Electrification case in holding the quasi-unilateral appointment method valid and stated that the impartiality of the panel could not be questioned.
Creating Unnecessary Confusion?
In the author’s opinion, the aforementioned decisions of the SC reflect two categories of cases:
(i) The first is the TRF and Perkins kind, where one of the parties has a direct right to either appoint or nominate an arbitrator. The position on such cases is clear from the holding in Perkins- in the interest of independence and impartiality, such a power of unilateral appointment of arbitrators by an interested party is invalid.
(ii) The other category includes cases like Voestapline and Railway Electrification, where the arbitration agreement allows one of the parties, that is directly disqualified due to their interest in the dispute, to provide an exhaustive list for the other party to choose an arbitrator from. The courts have arguably carved out an exception for such cases where each party has a right to nominate its arbitrator, since the appointing right of a party would be “counterbalanced” by an equivalent appointment right of the other party. Such an arrangement would not amount to a unilateral appointment in the strict sense but would be a quasi-unilateral method instead.
Since such a quasi-unilateral method allows both the parties to assert some control over the arbitrator appointment process, it would not go against the natural rights of the parties and could be considered valid. It is also pertinent to note that the SC, in HRD v. GAIL, cautioned against undue enlargement or restriction of the words used in the Fifth and Seventh Schedules of the Act, stating that a broad approach should be adopted. If a broad-based panel is chosen, it can further the requirement of technical expertise, without compromising the right of the other party.
While the position taken by the SC does account for party autonomy by following the procedure under the arbitration agreement, it has the effect of compromising the essential values of independence and impartiality on a practical front. It is the party that provides the exhaustive list for the other party to choose from, effectively has the upper hand in the process and a possibility of bias in its favour cannot be discounted. This is manifested even more prominently when a small panel is selected by the nominating party.
The decision in Perkins kept in perspective the importance of independence and impartiality in the appointment of arbitrators. However, the SC’s decision in Railway Electrification arguably takes a step back by undoing the fairness standard set by Perkins. To eliminate the confusion caused by conflicting positions taken by the courts across the country, disallowing unilateral as well as quasi-unilateral appointments would, as per the author, be the best way out.
The idea of having a broad-based exhaustive list is also a relative one in that while a list may seem to be broad enough to one person, it might be a narrow one for another. An example of this is the case of SMS Ltd. v. Rail Vikas Nigam Ltd., where the respondent provided a list of thirty-seven persons for the petitioner to choose from. The Delhi High Court held that the panel did not satisfy the test of neutrality and allowed appointing an arbitrator outside of the said nominee list.
Keeping interested parties completely out of the appointment procedure would help maintain independence, impartiality, transparency, and fairness in the process of dispute resolution, and truly further the spirit of the relevant 2015 amendments to the Act. In recent events, the Hon’ble Chief Justice has been requested for the constitution of a larger bench to assess the correctness of the decision in Railway Electrification. The final decision, in this case, would be a landmark one in conclusively settling the position of such quasi-unilateral appointments.