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Appointment Of A Person As A Sole Arbitrator By One Party Barred In Law Even If The Same Be Provided In The Arbitration Agreement Between The Parties?

The quest for analyzing the above question arose in mind after reading the judgement passed by the Hon'ble Supreme Court in the case of Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd.1 wherein the Hon'ble Supreme Court, while relying upon the ratio settled by it earlier in the case of TRF Limited v. Energo Engineering Projects Ltd. 2, Voestapline Schienen Gmbh v. Delhi Metro Rail Corporation Ltd.3 and the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) (the Amendment Act) and Law Commission's report No. 246 (the Report) came to a conclusion that the Chairman and Managing Director (CMD) of HSCC (India) Ltd.

Would also be ineligible to appoint the Sole Arbitrator even if terms of the arbitration clause provided the same in the agreement between the parties and an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the Act) would be maintainable even if the appointment of the Sole Arbitrator has been done, provided such appointment is ex facie invalid.

Factual Background
Perkins Eastman Architects DPC & Ors. (Appellants) were awarded the works contract by HSCC (India) Ltd. (Respondent). The Contract contained an arbitration clause viz. clause 24, providing for disputes to be referred to arbitration before a Sole Arbitrator who was to be appointed by the CMD of the Respondent within 30 days of receipt of seeking reference.

Disputes arose between the parties and the Sole Arbitrator was appointed by the Chief General Manager (CGM) (and not CMD) of the Respondent after 30 days of seeking reference by the Appellants. In view of the same, the Appellants moved applications under Section 11(6) and 11(12)(a) of the Act before the Hon'ble Supreme Court seeking appointment of the Sole Arbitrator in terms of clause 24 of the Agreement executed between the parties.

Issues and Findings
Principally three issues were considered by the Court:
  1. whether the arbitration would be an International Commercial Arbitration (ICA) in terms of Section 2(1)(f) of the Act or not,
  2. whether a case was made out for exercise of power by the Court to make an appointment of an arbitrator, and;
  3. whether the power can be exercised by the Court under Section 11 of the Act when the appointment of an arbitrator was already been made by the Respondent.

While dealing with the first issue, relying on the ratio of Larsen and Toubro Limited SCOMI Engineering BHD4 and the Report and the Amendment Act, the Court held that as the lead member of the Appellants was based in New York, the "Central Management and Control" of the Appellants, being a consortium, and covered under Section 2(1)(f)(iii) of the Act was held to be in a country other than India, the requirements of Section 2(1)(f) of the Act were satisfied and in view of the same, the arbitration proceedings in the case would be an ICA in terms of the Act.

While dealing with the second issue, the Court interpreted para 50 of TRF Ltd. (supra) which captured the essence of the Amendment Act and held that the ineligibility referred therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course of the dispute resolution by having the power to appoint an arbitrator. In a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.

The Court further relied on para 48 (vi) of its earlier decision in Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd.5 and held that if there were justifiable doubts as to the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, such appointment can be made by the Court.

The Court also delved upon the aspect of Independence, Impartiality and Neutrality of the Arbitrator and while relying upon the paras 53 to 60 of the Report quoted in Voestapline (supra) and in Bharat Broadband Network Limited v. United Telecoms Limited6 allowed the application filed under Section 11(6) and 11(12)(a) of the Act and removed the Sole Arbitrator appointed by the Respondent and appointed another Sole Arbitrator in his place.

While dealing with the third issue, the Court relied upon Walter Bau AG, Legal Successor of the Original Contractor, Dyckerhoff and Widmann, A.G. v. Municipal Corporation of Greater Mumbai and Anr.7 and TRF Limited (supra) and agreed with the view that unless the appointment of the arbitrator is ex facie valid and such appointment satisfies the Court exercising jurisdiction under Section 11(6) of the Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11(6) cannot be countenanced in law and in the light of such authorities held that there was no hindrance in entertaining the application preferred by the Applicants under Section 11(6) and 11(12)(a) of the Act at such stage i.e. even after the appointment of the Sole Arbitrator was made by the Respondent.

Conclusion
The decision of the Supreme Court in this case is welcome step inasmuch as it goes one step ahead, touches the element of bias (which the other party will have in his mind) and settles the position that a person who might have an interest in the outcome of the arbitration proceedings shall be ineligible to act as an arbitrator as well as appoint an arbitrator.

However, at this point of time, as a matter of abundant caution, a question which has been left unanswered is that whether the clauses providing for the appointment of the sole arbitrator by the companies/corporations/PSUs etc. will also fall under the ratio of the Perkins Eastman (supra), as there are clauses in the agreements (which agreements are drafted by the companies/corporations/PSUs etc. itself and the other person entering into such contract either is not aware of such clause or has no option but to sign on the dotted lines) wherein it is provided that in case of any dispute between the parties, the matter shall be referred to the sole arbitrator, which shall be appointed by the company.

Whether such an appointment would be valid or not is the question that has also to be settled inasmuch as even if the sole arbitrator is appointed solely by one party, it would also raise an element of bias in the mind of the other party and whether can it be said that the sole arbitrator be appointed with the consent of both the parties as even if the sole arbitrator be qualified on paper in terms of the Act, there would always remain an element of bias in the mind of the other party and also many a times the Courts restrain themselves in interfering with such appointment made by one of the parties.

The basic principle that the goal which is to be achieved by way of the provisions in the Act is to have an independent/impartial arbitration proceedings is seldom ignored in the absence of the specific provisions in the Act itself, which, in turn, increases the arbitration related litigation before the Courts.

The answer to the question framed before the writing of the present article is that the ratio in the Perkins Eastman (supra) can, at best, be said that as on date the nomination/appointment of a sole arbitrator by a person/officer/official in the company (which is appointing the arbitrator) is barred in law and not the nomination/appointment of a sole arbitrator by the company itself meaning thereby that the right of the Company to appoint the sole arbitrator remains valid and only the right of the official/officer of the Company to nominate/appoint a sole arbitrator is void to such extent. So, it cannot be specifically said that one party is barred in law from nominating/appointing a sole arbitrator as a company, being a separate legal and juristic person and such clauses forming part of the arbitration agreement shall be valid provided the same are in terms of the Act.

Further, the three judge bench of the Hon'ble Supreme Court in the subsequent case of Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCML (JV)8 has also held that:

when the agreement specifically provides for appointment of Arbitral Tribunal consisting of three arbitrators from out of the panel serving or retired Railway Officers, the appointment of the arbitrators should be in terms of the agreement as agreed by the parties. That being the conditions in the agreement between the parties and the General Conditions of the Contract, the High Court was not justified in appointing an independent sole arbitrator ignoring Clauses 64(3)(a)(ii) and 64(3)(b) of the General Conditions of Contract and the impugned orders cannot be sustained.

And relying upon the same, the Hon'ble Madras High Court has also held in the case of COPCO Engineering Pvt. Ltd. vs. Southern Railway 9 that:
Therefore, now, in view of the majority judgment of the apex Court there is no prohibition for appointment of retired employee and the contract also stipulates the panel of arbitrators to be drawn from the retired employee, this court is of the view that the independent Arbitrator cannot be appointed ignoring the very provision of the contract.

It is in view of the above, one needs to be cautious and must wait and see how the Hon'ble Supreme Court and/or the Hon'ble High Courts interpret the ratio/findings in Perkins Eastman (supra) in their subsequent judgements/orders as even after passing of the judgement in TRF Ltd. (supra), the Hon'ble Courts have differentiated the findings in TRF Ltd. (supra) and have upheld the right of the company/corporation/PSUs to appoint the sole arbitrator, which in fact, is the unilateral appointment of a sole arbitrator by one of the parties.

End-Notes:
  1. 2019 SCC OnLine SC 1517
  2. (2017) 8 SCC 377
  3. (2017) 4 SCC 665
  4. (2019) 2 SCC 271
  5. (2009) 8 SCC 520
  6. (2019) 5 SCC 755
  7. (2015) 3 SCC 800
  8. 2019 SCC OnLine SC 1635
  9. MANU/TN/2915/2020

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