Legality of the Unilateral Appointment of an Arbitrator: India
A unilateral appointment clause is an agreement that gives one of the parties the opportunity to choose between two available options to settle a dispute, while only one of the options is available to the other party. Whether Unilateral Appointment Clauses are accepted as legitimate and enforceable is inconclusive and paradoxical.
Arbitration relies on the important elements of a neutral third party to be mutually selected to resolve the dispute and whose decision is considered as final and binding.
The Arbitration and Conciliation (Amendment) Act, 2015
The Arbitration and Conciliation (Amendment) Act, 2015 altered the arbitration in India. Section 12(5) of the 1996 Arbitration and Conciliation Act was amended to incorporate two separate schedules into the Act. The new Fifth Schedule provides as to whether there are circumstances giving rise to justifiable suspicions to an arbitrator’s independence or impartiality, and the new Seventh Schedule lays down the categories of individuals who are ineligible to be nominated as arbitrators. The Supreme Court of India in TRF Limited v. Energo Engineering Projects Limited, AIR 2017 SC 3889 (the “TRF Case”) introduced another category of ineligibility because it was held that the person designated as an arbitrator who is ineligible under the 2015 Act could not nominate an arbitrator himself. The Supreme Court in Broadband Network Limited v. United Telecoms Limited held that the arbitrator was “de-jure” unfit to exercise his functions as an arbitrator and due to such ineligibility, his mandate has been revoked.
The TRF principle was fortified by the Supreme Court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (ARBITRATION APPLICATION NO.32 OF 2019). The Court classified two categories of cases:
- TRF category, where the employee of the interested party is appointed as the arbitrator or has the right to nominate the arbitrator; and
- Perkins category, where only the employee of the interested party has the exclusive right to nominate the sole arbitrator.
The Court stated that if under the TRF principle, an interested person cannot act as or nominate the arbitrator, the consequence must necessarily be that such person would be disentitled to nominate an arbitrator, even if the person were not acting as an arbitrator. The possibility of bias exists in both categories.
The Delhi High Court on 20 January 2020 in Proddatur Cable TV Digi Services v. SITI Cable Network Limited held that while party autonomy is an underlying principle in the arbitration agreement, the procedure laid down in the arbitration clause cannot override considerations of impartiality and fairness in arbitration proceedings.
Similarly, the Delhi High Court in Arvind Kumar Jain v. Union of India on 4 February 2020 held that the respondent could not pressurize the petitioner to agree to waive under Section 12(5) of the 2015 Arbitration Act to appoint a sole arbitrator of the respondent’s choice.
It is a welcome trend to invalidate unequal arbitration agreements where only one party is able to appoint a sole arbitrator. The question is not whether the sole arbitrator appointed by one party is biased or partial. The fact that one party enjoys the exclusive right to appoint an arbitrator of its choice is by itself unfair. Even if the unilaterally appointed sole arbitrator has the best of the intentions, the court would still invalidate the appointment and appoint another arbitrator.
In Voestalpine Schienen GmbH vs. DMRC, [(2017) 4 SCC 665], the parties would nominate their respective arbitrators from a panel of arbitrators where the respondent shortlisted five names from the panel, and each party nominated an arbitrator from the given list. The process was challenged as contrary to Section 12(5) of the 2015 Arbitration Act. The Apex Court held that the choice of the opposite party is limited, and there is no free choice to nominate a person out of the entire panel prepared by the respondent. Further, the respondent selecting five names out of the list and then opposite party choosing their respective arbitrator from those five names instills the idea of biasness. The opposite party must be given the full freedom to nominate an arbitrator from the entire panel.
In Bharat Broadband Network Limited v. United Telecoms Limited, 2019 the Apex Court held that the ineligibility under Section 12(5) of the 2015 Arbitration Act along with schedule VII of the 2015 Arbitration Act will have a retrospective application and is not confined to only a prospective application.
Parties keep a unilateral appointment clause in their contract because if two parties are to agree on a sole arbitrator when the disputes arise, the parties more often than not do not agree to follow that settlement in the absence of a written contract. The parties then move to the court to appoint an arbitrator which can take about 6 months or even 2 years to make the appointment. Most organizations appoint their own arbitrators for ensuring speedy resolution of the dispute.
Courts tend to have a limited pool of arbitrators which makes it difficult for matters that require subject matter specialists. The most popular reason for adopting the unilateral clause is cost reduction.
The case of SMS Ltd. v. Rail Vikas Nigam Ltd. (14 January 2020) highlighted the need for having clarity on the legality of the exclusive right of one party over panel selection. The respondent, in this case, provided the petitioner with a panel of thirty-seven candidates to choose its arbitrator from. It was found that only eight of the thirty-seven candidates were not employed earlier by the respondent in some capacity. The Delhi High Court relied on Voestalpine and Perkins judgment and held that the panel did not satisfy the neutrality test of arbitrators. The Court permitted the petitioner’s appointment of its nominee outside of the panel and appointed an arbitrator for the respondent.
Indian Law in sync with the International Law
The Supreme Court in the TRF Case grounded its reasoning on the 2015 Arbitration Act. Under Section 12(5) of the 2015 Arbitration Act, a person covered by the Schedule VII of the 2015 Arbitration Act shall be ineligible to be appointed as an arbitrator.
Similarly, in the Perkins Case, it was held that naturally, the person having an interest in the outcome or decision of the dispute should not have the power to appoint the sole arbitrator.
This stance was long desired and indeed beings India in compliance with the international understanding of this issue- the principle of equality.
What does the principle of equality or equal treatment hold?
The parties must have the opportunity to participate in the constitution of the arbitral tribunal on equal terms. The equality of the parties is part of transnational procedural public policy. The parties may jointly choose a sole arbitrator, but none of the parties should be able to make that choice solely. For party-appointed arbitrators, the principle requires that each party has the possibility of making a unilateral appointment.
In a landmark case in France, two defendants had to jointly nominate an arbitrator. They challenged this composition in the Paris Court of Appeal, which saw no issue with the appointment procedure. However, the Cour de Cassation reversed the ruling and held that the equality of the parties in the appointment of arbitrators is a matter of public policy that can be waived only after the dispute has arisen.
The principle of equality to appoint an arbitrator is enshrined in the laws of some countries for instance in Germany by virtue of 1034 of the Code of Civil Procedure, in the Netherlands by virtue of 1028 of Dutch Code of Civil Procedure and in Spain by virtue of Article 15 of Act on Arbitration. The disadvantaged party in such countries can request the domestic court to nullify the exclusive privilege of the opposite party.
India's interpretation of Section 12(5) and the Schedule VII of the 2015 Arbitration Act in TRF Case and Perkins Case syncs India with the global consensus.
The national courts in common law countries, for instance, the United States of America, the United Kingdom and Singapore have upheld the validity of unilateral dispute resolution clauses. Whereas, the decisions of the courts in civil law countries like France and Russia have gone in the other direction of invalidating unilateral option clauses. India is a hybrid legal system and is opting both.
The recent court rulings in India are more in favor of civil law jurisdiction. The party autonomy is respected if the parties are given a wider choice of arbitrators with neutral credibility.
The Courts have largely perceived the agreement for the procedure of arbitration between the parties as a manifestation of party autonomy in an arbitration proceeding.
The amendments made to the Act in 2015 struck a balance between impartiality and neutrality of an arbitrator with party autonomy by making amendments in Section 11 and 12 of the Act and introducing Schedule V, VI and VIII to the Act for increasing the credibility of arbitration proceedings. The primary role is to ensure that the person appointed as an arbitrator is neutral, independent and impartial.
However, the Supreme Court in the TRF Case and Perkins Case took away the right to appoint the sole arbitrator by one party to the arbitration agreement. The Supreme Court clearly established that the only option remaining is to approach the Court for the appointment of an arbitrator in cases where the agreements provide for the appointment of sole arbitrator agreement by one party, and there is no consensus between the parties on the choice of arbitrator.
Such practice is against the rule of minimum Court intervention provided under the 2015 Arbitration Act. The ongoing arbitration proceedings where only one party has appointed the independent and impartial arbitrator and agreements where one party had the exclusive right to appoint the sole arbitrator are in jeopardy.
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