Arbitration Tribunal Appointment Procedure: The Conflict between Party Autonomy and Principles of Natural Justice
Date: 11/01/2021
Author: Abhinav Jain
Institute of Author: USLLS, GGSIPU
Year: 3rd.
Introductory Remarks
Party autonomy has always been a key element of arbitration that distinguishes it from regular court proceedings. Among other things, it includes the right of the parties to decide and agree upon an appointment procedure of the arbitral tribunal. This is usually done in the main contract itself wherein an arbitration clause is provided. Court intervention through Section 11 of the Arbitration and Counciliation Act[1], thus, is further limited with the presence of such agreed procedures.
It may be apparent that a given appointment procedure, in a way, allocates certain power into the hands of the parties involved. On one hand, with appointment procedures that have been agreed to in a contract or arbitration clause, there is an implied consent and approval to such ‘allocation of power’. On the other hand, an appointment procedure which gives more power in the hands of one party, may lead to the appearance, if not also the possibility, of bias in the decision making process, through the considerations of the lack of independence and impartiality of the arbitrators so appointed, thereby violating the principles of natural justice.
While section 12 of the Act, provides for grounds of challenge against the appointment of certain arbitrators, such grounds are exercised on the considerations of apparent relations of the party to the arbitrator so appointed or nominated, and not the appointment procedure, as such. The Fifth Schedule and the Seventh Schedule, inserted by the 2015 Amendment Act[2], which find mention in sections 12(1)(b) and 12(5), delineate certain relations that give justifiable doubts as to the independence and impartiality of the arbitrator. These grounds are exercisable before the arbitral tribunal so formed,[3] or the court depending on the stage of the proceeding and the Schedule referred therein. However, the question of unequal power through the appointment procedure still remains a concern.
In this article, the author will be looking at four recent landmark judgments that have shaped the judicial position relating to the appointment procedure of the arbitration tribunal.
The Conundrum in the status quo
In TRF vs. Energo Engineers Limited,[4] the Supreme Court held that a person, who has been held ineligible to arbitrate, is also de jure ineligible to nominate an arbitrator.
The court implicitly equated the power and effect of nomination with that of delegation, and applied the maxim ‘Qui facit per alium facit per se’ (What one does through another is done by oneself). In this regard, the court observed that if the nomination of an arbitrator by an ineligible arbitrator, is allowed, it would tantamount to carrying on the proceeding of arbitration by the ineligible arbitrator himself:
“Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated.”
In Voestapline vs. DMRC[5], the arbitration clause provided for selection from a panel of arbitrators of certain qualifications, maintained by DMRC. A list of five would be forwarded from the panel, from which both the parties would appoint their respective nominee arbitrators, who would then appoint the third (presiding) arbitrator from the said list.
The court, first held that clause 1 of the Seventh Schedule pertains only to the relationship of the arbitrator with the Respondent DMRC, and not, in general, with any and all government undertakings/departments. Thus, the panel was not ineligible as per section 12(5).
But, more important to the present discussion, the court went on to hold that the procedure, wherein DMRC would unilaterally select a list of only five arbitrators for the tribunal to be selected from – limited the choice given to Voestapline, and also created a room for suspicion against the neutrality and independence of the arbitrators, so appointed. The court held that the parties should be free to nominate from the entire panel providing for a wider range. This was an interesting development in the aspect of fairness in the appointment procedure.
The Supreme Court in Perkins Eastman Architects DPC vs. HSCC,[6] further developed and expanded on the reasoning in TRF vs. Energo, and held the unilateral appointment of a sole arbitrator to be invalid.
The court observed that the element of invalidity would arise from the interest of the nominating person in the outcome of the dispute; and thus, an interested person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator.
The court following the TRF decision carved out an exception where both the parties have equal nominating powers, and thus observed:
“16. …cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party.”
As clarified by Bharat Broadband,[7] an ineligibility flowing from the Seventh Schedule would terminate the mandate of the arbitrator, and this effect would also extend to appointments that had already been made before the TRF decision. The same principle was followed for the law laid down in Perkins Eastman, in Proddatur Cable vs. SITI Cable[8] by the Delhi High Court.
This Perkins exception became critical in the Supreme Court decision of Central Railways vs. ECI-SPIC-SMO-MCML[9] wherein arbitration jurisprudence was moved towards party autonomy, away from the overarching principles of natural justice that had been glorified in the previous judgments, as well as in the 246th Law Commission Report.[10]
In this case, the clause provided for a panel of 4 retired Senior Railway Officers selected by the Appellant, from within which the nomination of the tribunal would take place; creating an issue of independence under section 12(5) r/w the Seventh Schedule. The court ruled the panel to be eligible, basing it on the Voestapline decision.
It is important to notice that the court in Voestapline had distinguished between persons who were or had been employees of the party concerned (DMRC), from persons who were or had been government employees in general, of other departments. In this way, the court validated the clause (after widening the panel) only because it consisted of persons in the latter category, and not the former:
“25. …it is relevant to mention that only if an arbitrator is an employee, a consultant, an advisor or has any past or present business relationship with a party, he is rendered ineligible to act as an arbitrator. …
26. It cannot be said that simply because the person is a retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (the party in dispute), he would be treated as ineligible to act as an arbitrator. …”
Thus, the Voestapline decision would, in turn, render the Central Railways panel ineligible, since it consists of ex-officers of the Railways itself.
The second concerning aspect was the procedure wherein the Railways (COFRE) would provide a panel of 4 arbitrators, from which the respondent ECI would choose two. One of these two would be nominated by the General Manager of COFRE, as one of the three arbitrators; and the General Manager, not limited by the panel, would select the remaining two.
For this issue, the court justified the clause based on the aforementioned exception carved in the Perkins case. The exception may have been wrongly applied. The court in Perkins observed that any interested party “must not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator”. This was subject to the exception wherein both the parties have equal and counter-balancing powers in the nomination process.
The Central Railways clause has 3 important aspects:
- ECI’s namesake role/power bound by the superseding discretion of COFRE in its unilateral panel selection of only four persons.
- COFRE’s discretion to appoint any one of the two nominations of ECI.
- ECI’s namesake role only exists in the minority, since the other 2 arbitrators are appointed by COFRE.
The clause clearly does not delineate equal or counter-balancing powers to the parties. Thus, the exception provided for in Perkinswas wrongly applied, and the Central Railways decision, in the author’s opinion, is bad in law. Even the Voestapline judgment would render such a narrow panel invalid.
Conclusion
Thus, while the unilateral appointment of sole arbitrators are clearly invalid; the validity of procedures providing for the nomination of the tribunal from a unilaterally selected panel would, thus, depend on the exact procedure as set out in the agreement (which could have various permutations and combinations) balancing the considerations of party autonomy and neutrality of arbitrators.
In this regard, considerations of independence based on the relationship of the parties, though forming a separate issue, would, especially in State contracts, in the larger realm of “neutrality of the arbitral tribunal”, have an important bearing in such a ruling.
[1] The Arbitration and Conciliation Act, 1996, S. 11, No. 26, Acts of Parliament, 1996 (India).
[2] The Arbitration and Conciliation (Amendment) Act, 2015, No. 10, Acts of Parliament, 2016 (India).
[3] The Arbitration and Conciliation Act, 1996, S. 13(3), No. 26, Acts of Parliament, 1996 (India); Antrix Corporation Limited v. Devas Multimedia Private Limited, (2014) 11 SCC 560.
[4] TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 S.C.C. 377.
[5] Voestapline Schienen Gmbh v. Delhi Metro Rail Corporation Limited, (2017) 4 S.C.C. 665.
[6] Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2019 (6) Arb. L.R. 132 (S.C.).
[7] Bharat Broadband Network Limited v. United Telecom Limited, (2019) 5 S.C.C. 755.
[8] Proddatur Cable TV DIGI Services Vs. SITI Cable Network Limited, 2019 S.C.C. OnLine Del. 350.
[9] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company, 2019 S.C.C. OnLine S.C. 1467.
[10] Law Commission of India, Amendments to the Arbitration and Conciliation Act 1996, 246 Law Commission Report (2014).