To Appoint or Not to Appoint : A Critical Study of Unilateral Appointment of Arbitrators under the Arbitration Act, 1996

Introduction

Independence and impartiality of Judges and adjudicators, be it before courts of law or before tribunals or commissions, is the hallmark of the justice dispensation process. Equally fundamental is the principle of nemo judex in causa sua, ensuring that no person acts as a Judge in his own cause. However, prior to the amendment of the Arbitration and Conciliation Act, 1996[1] (the Act), parties were permitted to unilaterally appoint arbitrators to adjudicate disputes and often, such appointment was made either from a panel of arbitrators maintained by one of the parties to the dispute or the employees of one of the parties presided as or nominated the sole arbitrator. This often allowed parties to a contract with a higher bargaining power to have their disputes adjudicated by a person who had a vested interest in the outcome of the dispute. Resultantly, the 246th Law Commission Report (the LC Report) suggested sweeping changes to the Act, to inter alia stymie the practice of unilateral appointment of arbitrators[2].

Statutory position pre-amendment

Before we understand the suggestions made in the LC Report to amend the Act, it would be prudent to first ascertain the law on unilateral appointments, as it existed prior to the amendment of the Act. At the outset, it would be crucial to note that the Act, prior to its amendment, did not have strict guidelines and/or parameters to ascertain impartiality and independence of arbitrators.

(i) Section 11(2)[3] provided parties with the autonomy to agree on a procedure for appointment of arbitrators.

(ii) Section 11(6)[4] provided that where a party fails to act as required under the procedure prescribed, the Chief Justice or any person or institution designated by him was empowered to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

(iii) Section 11(8)[5] enjoined upon the Chief Justice of India the discretion to appoint an arbitrator, having due regard to (a) any qualifications required of the arbitrator by agreement between the parties; and (b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

(iv) Section 12(1)[6] enjoined upon the arbitrator the duty to disclose in writing any circumstance which may give rise to justifiable doubts concerning his appointment.

(v) Section 12(3)[7] allowed the appointment of an arbitrator to be challenged if there were justifiable doubts regarding his independence and/or he did not meet the prescribed qualifications as agreed to between the parties.

(vi) Section 18[8] additionally required the arbitrator to treat every party to the dispute on equal terms and without bias.

Evidently therefore, the Act, prior to its amendment did not enumerate specific circumstances and/or situations that could disqualify the appointment of an arbitrator. Mere apprehension of bias and/or prejudice were not sufficient grounds to set aside the appointment of the arbitrator unless such apprehensions were premised on real and sufficient evidence to establish bias. Moreover, the Courts had consistently held that clauses in which parties appoint their own employees as arbitrators or where such employees unilaterally appoint arbitrators is not ipso facto sufficient to allege bias and prejudice[9]. There is a rebuttable presumption that operates in favour of such arbitration clauses which can only be displaced if something more than mere apprehension of bias and/or prejudice is established[10].

The 246th Law Commission Report

The Law Commission Report, which formed the cornerstone of the amendments to the Act proposed to preserve the sanctity of the arbitral process by making it impartial, unbiased, and neutral. The LC Report envisaged drawing a fine line between ensuring neutrality and impartiality in the process of appointment of arbitrators while simultaneously balancing party autonomy. To this extent, the LC Report recommended:

Incorporating the guidelines of the International Bar Association (IBA) to establish the standards of independence and impartiality in the form of Schedule 5[11]and Schedule 7[12]to the Act; and
Introducing Section 12(5) to the Act[13] which would disqualify “any person whose relationship with the parties, counsel or the subject-matter of the dispute falls under one of the categories set out in the Fifth Schedule[14]”.

The Supreme Court in HRD Corpn. v. GAIL (HRD)[15]distinguished between the scope of the Fifth and Seventh Schedules to the Act and held that while attracting any of the items under the Fifth Schedule would not necessarily lead to the disqualification of the arbitrator and would only raise a justifiable doubt about his independence and/or impartiality, an arbitrator would be statutorily disqualified if he attracted any of the items under the Seventh Schedule. Expanding further on its interpretation of the term “justifiable doubt”, the Court held that the doubts on the independence and impartiality of an arbitrator shall only be deemed to be justifiable, if a reasonable person or a neutral third party were to arrive at the same conclusion. The test for ascertaining whether such doubts are justifiable need to be interpreted broadly and, in any event, has to be based upon a fair construction of the Fifth and Seventh Schedules to the Act[16].

The 2015 Amendments to the Act and incorporation of the IBA Guidelines

To obviate against biased and prejudicial appointment of arbitrators, the Act, as amended in 2015[17]accepted the recommendations of the LC Report and introduced Section 12(5) and the Fifth and Seventh Schedules to the Act. Section 12(5) clarifies that any individual whose relationship with the party, the subject-matter of dispute, and counsel is found to be falling under the Seventh Schedule to the Act, he or she will not be considered eligible for the appointment as an arbitrator. The grounds enumerated under the Fifth and Seventh Schedules to the Act enlist the circumstances that could raise a justifiable doubt about the independence and impartiality of an arbitrator and/or de jure disqualify him from being appointed as an arbitrator.

The Fifth Schedule enumerates circumstances which raise a justifiable doubt about the independence of an arbitrator. The Seventh Schedule enumerates the circumstances which leads to the de jure termination of the arbitrator. Unlike the Fifth Schedule, attracting any of the grounds enumerated under the Seventh Schedule will lead to instant disqualification of the arbitrator from being appointed.

In HRD[18], the Supreme Court discussed the scheme of challenging the appointment of an arbitrator who falls under any of the circumstances enumerated under the Fifth Schedule and the Seventh Schedule. Since the grounds under the Seventh Schedule ipso facto leads to the termination of the mandate of an arbitrator, an application under Section 14 of the Act[19] needs to be filed before the court for terminating the mandate of the arbitrator. However, since the grounds under the Fifth Schedule merely raise a justifiable doubt about the independence and impartiality of the arbitrator, the challenge to such biased and prejudicial appointment needs to be made before the Tribunal. If the challenge is unsuccessful, the Tribunal must continue with the arbitral proceedings and deliver the award, subsequent to which parties have the liberty of filing an application for setting aside the award under Section 34 of the Act[20] on grounds of the appointment being bad in law.

Judicial treatment of unilateral appointment clauses

In TRF Ltd. v. Energo Engg. Projects Ltd.[21] (TRF), the Supreme Court was dealing with a dispute resolution clause which specified that disputes that arose between the parties would be referred to the sole arbitration of the Managing Director of the buyer and/or his nominee. Thus, the Managing Director was not only to act as an arbitrator but also had the power to nominate an arbitrator to adjudicate the disputes. The Supreme Court, relying upon Section 12(5) of the Act read with the Fifth and Seventh Schedules held that it is inconceivable in law that a person who is statutorily ineligible to act as an arbitrator could also have the power to nominate an arbitrator. Since the Managing Director would be necessarily interested in the outcome of the dispute, the proscription under the Fifth and Seventh Schedules would be squarely attracted and the Managing Director could thus neither act as nor nominate an arbitrator. The Supreme Court observed that permitting such an appointment would tantamount to the Managing Director carrying on the arbitration proceedings himself, despite being de jure ineligible to act as an arbitrator.

However, while dealing with a similar clause, the Delhi High Court in Bhayana Builders (P) Ltd. v. Oriental Structural Engineers (P) Ltd.[22] distinguished TRF[23] to hold that if parties in their commercial wisdom acquiesce to an appointment procedure which vests one of the parties to the dispute with the sole right to nominate and/or preside as an arbitrator, such a procedure cannot be countenanced in law as being violative of Section 12(5) of the Act. In the instant case, the appointment procedure permitted the Managing Director to appoint the sole arbitrator to adjudicate the dispute. Notably, while distinguishing TRF[24], the Delhi High Court observed that while TRF[25] vested the Managing Director with powers to preside and/or nominate an arbitrator, in the instant case the power being exercised by the Managing Director extended only to the nomination of an arbitrator. Accordingly, the Delhi High Court held that unilateral appointment clauses which permit persons who are statutorily disqualified under the Fifth Schedule or Seventh Schedule to nominate and/or appoint an arbitrator shall not fall foul of Section 12(5) of the Act. Pertinently, the finding of the Delhi High Court in the instant judgment is currently under challenge before the Supreme Court. However, there has been no stay on the operation of the judgment by the Supreme Court till date[26].

As a matter of fact, various high courts across the country have consistently distinguished the TRF[27] principle, opting to uphold the appointment procedure mutually agreed upon between the parties[28]. In D.K. Gupta v. Renu Munjal[29], the Delhi High Court upheld the appointment procedure which vested with one of the parties to the dispute, the sole right to unilaterally appoint an arbitrator. The Delhi High Court, distinguishing the appointment procedure in TRF[30], held that in the instant case, no person interested in the outcome of the dispute was vested with the power to nominate the arbitrator. The parties had in their commercial understanding, agreed that the lender had the right to appoint the arbitrator. Accordingly the TRF[31] principle would not be applicable and the appointment procedure to that extent, was deemed to be valid.

The TRF[32] principle was eventually affirmed by way of two Supreme Court decisions. In Bharat Broadband Network Ltd. v. United Telecoms Ltd.[33], the Supreme Court set aside an arbitration clause which permitted the Chief Managerial Director of the appellant to appoint a sole arbitrator. The Supreme Court held that such an appointment procedure was in teeth of the TRF[34] principle and when the appointing authority was statutorily ineligible to act as an arbitrator, he also could not be permitted to nominate an arbitrator. Similarly, in Perkins Eastman Architects DPC v. HSCC (India) Ltd[35] (Perkins), the Supreme Court extended the applicability of the TRF[36] principle and held that interested persons to a dispute, such as a Managing Director or Chief Executive Officer (CEO) would not only be ineligible to act as an arbitrator but also be proscribed from appointing an arbitrator to adjudicate the dispute. Perkins[37] further went on to hold that a court ought not to enter into a merit-based assessment of the existence of bias in the arbitrator sought to be appointed. As long as one of the parties to a dispute has a unilateral right to appoint an arbitrator, such a clause ought to be set aside irrespective of whether such an arbitrator is disqualified under the Fifth Schedule or the Seventh Schedule. Perkins[38] therefore extended the ineligibility criteria to two categories i.e. ineligibility to act and ineligibility to appoint, effectively putting an end to unilateral appointment clauses in arbitration agreements.

The ratio of Perkins[39] was succinctly explained in the Bombay High Court’s decision in Lite Bite Foods (P) Ltd. v. Airports Authority of India (Lite Bite)[40] where the Court held that post TRF[41] and Perkins[42], there are only two modes of appointment of an arbitrator – the arbitrator may be appointed by consent of the parties or alternately, there must be an order of the Court appointing an arbitrator. It was held that, “There is simply no third option. This is the destination to which Perkins Eastman takes us for it requires that there be neutrality in the dispute resolution process throughout. You cannot have an impartial arbitration free from all justifiable doubt if the manner in which the Arbitral Tribunal is constituted itself is beset by justifiable doubt[43].”

Panel based appointments—Backdoor entry of unilateral appointment clauses

While unilateral appointments prima facie appear to be prohibited under the amended Act, the exceptions to the rule began cropping up in appointment procedures where the arbitrator was appointed from a panel, maintained, curated, and supervised by one of the parties to the dispute. Such clauses are typically found in contracts with statutory bodies and governmental agencies where the general conditions of contract (GCC) and special conditions of contract (SCC) contain standard form appointment clauses of selecting the presiding and/or sole arbitrator from a panel of retired and senior officials of the governmental department concerned.

The legality and validity of such appointment procedures came up first before the Supreme Court in Voestalpine Schienen GmbH v. DMRC [44](Voestalpine). The arbitration clause required the parties to nominate their arbitrators from a panel maintained by Delhi Metro Rail Corporation Ltd. (DMRC). DMRC provided a panel of 5 arbitrators, mostly consisting of retired servicemen and engineers of the Government and public sector undertakings. Out of this panel of 5 arbitrators, Voestalpine and DMRC were to nominate its respective arbitrators and from the remaining names in the panel, both the nominee arbitrators were to jointly appoint the presiding arbitrator. Contending that such a procedure fell foul of Section 12(5) of the Act read with the Seventh Schedule, Voestalpine filed an application for appointment of an arbitrator under Section 11 of the Act. The Supreme Court at the outset observed that the factum of retired employees and servicemen on the panel of DMRC could not ipso facto attract the bar provided under the Seventh Schedule to the Act. Observing that Item 1 of the Seventh Schedule only proscribed employees, consultants, advisors, and arbitrators with past and/or present relationships with any party to the dispute from being appointed as arbitrators, the Supreme Court held that since the panel provided by DMRC included individuals who worked in the Railways under the Central Government and the Public Works Department, the grounds of disqualification under the Seventh Schedule would not be applicable to the facts of this case. The Supreme Court however noted that the narrowly tailored panel provided by DMRC could ostensibly raise justifiable doubts regarding the independence and impartiality of the appointment procedure and thus, directed DMRC to, inter alia:

broad base its panel by including not just retired government employees but also experts, engineers and retired Judges; and
provide the entire panel of 31 arbitrators maintained by DMRC to Voestalpine to obviate the presumption of bias and impartiality in the appointment procedure.

Similarly, in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)[45] (CORE), the Supreme Court upheld an arbitration clause which postulated that either party were to select their nominee arbitrators from the panel of 5 arbitrators maintained by CORE, and the nominee arbitrators so selected were to appoint the presiding arbitrator. Notably, the Supreme Court while upholding the validity of such an appointment procedure relied upon Voestalpine[46] to observe that mere presence of retired railway officers in the panel maintained by CORE would not attract the proscription under the Fifth and Seventh Schedule to the Act and since there was an equal and counter-balancing right provided to the other party to nominate the arbitrator, there could not be any justifiable apprehension of bias. However, in the author’s opinion, the facts in CORE[47] were different from the facts in Voestalpine[48] in at least two critical aspects:

the panel of arbitrators maintained by CORE[49] exclusively consisted of retired officers of the Railways, which was an interested party in the dispute. In Voestalpine[50], the panel of arbitrators merely contained retired servicemen and senior officials of the Central Government and the PWD, not retired employees of DMRC; and
the panel of arbitrators maintained by CORE[51] was a narrowly-tailored panel and the Supreme Court, contrary to the observations in Voestalpine[52] held that there was no obligation and/or requirement under law to provide the complete panel and/or broad base the panel maintained by CORE[53].

Ostensibly therefore, there exists an ambiguity in the law, where TRF[54] and Perkins[55] have categorically held that persons who are interested in the outcome of a dispute cannot act as an arbitrator or nominate an arbitrator while Voestalpine[56] and CORE[57] have allowed for interested persons to not only act as arbitrators but also cloak themselves with the power to appoint and/or nominate arbitrators. While in Voestalpine[58], the Court in the facts and circumstances of the case did not find any bias in the appointment of arbitrators from a panel consisting of retired government servants provided the same was broad-based, CORE[59] fundamentally alters the position by allowing the nomination of arbitrators from a narrowly tailored panel and exclusively consisting of persons vested with an interest in the outcome of the dispute.

Pertinently, CORE[60] has been referred to a Constitution Bench for fresh consideration by the Supreme Court in Union of India v. Tantia Constructions Ltd.[61], where the Supreme Court prima facie observed that once an appointing authority is disqualified from nominating the arbitrator, the appointment procedure shall be deemed to be invalid. While no stay has been granted on the operation on the judgment, CORE[62] has essentially reignited the debate surrounding unilateral appointment of arbitrators.

Current developments

Amidst the ambiguity on account of the conflicting schools of thought on the issue i.e. between TRF[63] and Perkins[64] on one hand, and CORE[65] on the other, various High Courts have sought to provide their own varying interpretations on the legality of unilateral appointment clauses.

The Delhi High Court in SMS Ltd. v. Rail Vikas Nigam Ltd.[66] and BVSR-KVR (Joint Ventures) v. Rail Vikas Nigam Ltd.[67] was concerned with identical arbitration clauses that envisaged the constitution of a three-member Tribunal, with both the petitioner and the respondent selecting one name each from the panel maintained by the respondent, and the two nominee arbitrators then selecting the presiding arbitrator from the same panel. The Court, relying upon Voestalpine[68] set aside the appointment procedure and observed that the panel was not broad-based since it majorly included retired or serving employees of the respondent and created a reasonable apprehension of bias and impartiality. Accordingly, allowing the appointment of an arbitrator from such a panel would ex facie contravene the Voestalpine[69] principle of appointing an arbitrator from a broad-based panel. It is interesting to note that both SMS Limited[70] and BSVR-KVR[71] (authored by the same Judge) do not make any reference to CORE[72]. It can certainly be argued that the clauses in both these cases would have passed the CORE[73] muster, since each party had the right to appoint its own nominee arbitrator.

In Proddatur Cable TV Digi Services v. Siti Cable Network Ltd.[74], the Delhi High Court was considering the issue of appointment of a sole arbitrator by the respondent company. Terminating the mandate of the arbitrator, the Delhi High Court relied on Perkins[75] to hold that it was immaterial whether the appointment was made by the respondent company or the Managing Director or the Board of Directors. As long as the appointing authority had a vested interest in the outcome of the dispute, the bar under Section 12(5) would ipso facto become applicable.

In Afcons Infrastructure Ltd. v. Konkan Railway Corpn.Ltd.[76] and ITD Cementation India Ltd. v. Konkan Railway Corpn. Ltd.[77], the Bombay High Court was dealing with similar arbitration clauses that envisaged the appointment of a tribunal consisting of three gazetted railway officers from a panel maintained, curated and supervised by the respondent. The petitioner was to select two names from such a panel and, more particularly in Afcons[78], the discretion to appoint the nominee arbitrator of the petitioner also vested with the respondent. The Bombay High Court, setting aside such one-sided arbitration clauses categorically holding that appointment procedures which vests the power to appoint the presiding arbitrator unilaterally with one of the parties to a dispute militates against the principles of autonomy and neutrality which is the cornerstone of the arbitral process.

In Iworld Business Solutions (P) Ltd. v. Delhi Metro Rail Corpn. Ltd.[79], the Delhi High Court was dealing with an arbitration clause that permitted the respondent to appoint a sole arbitrator(in cases where the value of the dispute was upto Rs 50 lakhs) and/or constitute a tribunal (in cases where the value of the dispute was above Rs 50 lakhs) from a panel curated, maintained, and supervised by the respondent. The petitioner was to select its nominee arbitrator from a panel of three arbitrators forwarded to it by the respondent, which primarily included retired Additional District and Sessions Judges. The petitioner contended that such an appointment procedure would be foul of Section 12(5) of the Act and relied upon Voestalpine[80] to buttress its submissions. However, the Delhi High Court held that reliance upon Voestalpine[81] was erroneous since the same was considered in CORE[82] (which was delivered by a larger Bench) and had been derogated from. Holding that the issue sought to be raised by the petitioner is no longer res integra, the Delhi High Court held that since the panel consisted of retired Judges, the impartiality of such a panel cannot, by the farthest stretch of imagination, be doubted or questioned. However, in the author’s opinion, the judgment of the Delhi High Court in the instant case failed to consider that:

Voestalpine[83] was not expressly derogated from in CORE[84]. The judgment in CORE[85] had considered the findings and the observations in Voestalpine[86] but had not expressly derogated from the same;
one of the tests laid down in Voestalpine[87] to ascertain the impartiality of a panel was to ensure that such panels are broad based and the nominating party is given the benefit of nominating its arbitrator from the entire panel. Appointment of an arbitrator from a cherry-picked and narrowly tailored panel would ipso facto create a suspicion of bias and would prima facie be in violation of Section 12(5) of the Act; and
the Perkins[88] principle expressly holds that the first level of enquiry has to be made in relation to the unilateral right of a party to appoint an arbitrator. Once that is established, even if the arbitrator is impartial and does not incur a Fifth or Seventh Schedule disqualification, the unilateral appointment by itself will be hit by Section 12(5) of the Act.

More recently, the Supreme Court in Jaipur Zila DugdhUtpadakSahkari Sangh Ltd. v. Ajay Sales & Suppliers[89] held that the chairman of a company is de jure ineligible to be appointed as an arbitrator as such an appointment would fall foul of Section 12(5) read with the Seventh Schedule of the Act. The Supreme Court, relying upon TRF[90], Perkins[91], Voestalpine[92] and Bharat Broadband[93] held that the object and intent of Section 12(5) read with the Seventh Schedule was to provide for neutrality of arbitrators. It further observed that in order to achieve intent, Section 12(5) lays down that “notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator”. Accordingly, a party cannot insist on the appointment of an arbitrator in terms of the agreement when the appointment itself is hit by the statutory bar under Section 12(5) read with the Seventh Schedule to the Act. Observing that the rule against bias is the cornerstone of the arbitration process, the Supreme Court held that even if a Chairman was not specifically listed as a prohibited item under the Seventh Schedule, the arbitrator had a controlling influence in the petitioner company and as such, would be ineligible to enter upon reference.

Author’s comment

From a conspective reading of the above, it is evident that the trend of appointing unilateral arbitrators under the amended Act has been judicially proscribed. Further, such a proscription not only applies to unilateral appointment of biased and prejudiced arbitrators but also extends to the practice of unilateral appointments in itself. It is immaterial whether the arbitrator who has been unilaterally appointed is biased and or prejudiced; the factum of parties making unilateral appointments in itself has been judicially proscribed under the amended Act.

While such a practice is in line with international standards, more particularly the IBA Guidelines on neutrality and independence in appointment of arbitrators, it is the author’s opinion that recourse to Section 11 of the Act to set aside such unilateral appointments is not in consonance with the scheme of the Act. Post the amendment to the Act, the jurisdiction of a Section 11 Court has been limited to prima facie ascertaining the existence and validity of an arbitration agreement. The Supreme Court in Vidya Drolia v. Durga Trading Corpn.[94] has categorically held that:

244.3. The Court under Sections 8 and 11 has to refer a matter to arbitration or to appoint an arbitrator as the case may be, unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding.

244.4. The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above i.e. when in doubt, do refer[95].

The Court is not expected to enter into a merit-based assessment of the facts of the dispute while exercising its jurisdiction under Section 11 and should ensure that arbitrations are carried on, unless the issue before the Court patently indicates existence of deadwood. Therefore, allowing parties to set aside unilateral appointments under Section 11, when the Act itself provides for a separate and independent challenge procedure under Sections 13[96] and 14, dilutes the summary jurisdiction of a Section 11 court.

Having said that, there is no gainsaying in the fact that independence and impartiality is the hallmark of the arbitration process and the proactive approach taken by Indian courts to set aside appointment clauses that give rise to justifiable doubts about the arbitrator’s independence is a welcome step towards ensuring that parties have an equal and counterbalancing right in appointment of independent arbitrators.