Introduction
“An ounce of arbitration is worth a pound of mediation and a ton of litigation” is one of the most powerful quotes by renowned ADR Advocate Joseph Grynbaum which highlights the vital benefits that arbitration offers as compared to traditional courtroom litigation process. However, arbitration as a judicial process aimed to promote the hallowed principles of speedy justice along with maintaining impartiality and sanctity cannot be completed without a fair, just and equitable mechanism for appointment of arbitrators for constituting the tribunal which shall further adjudicate the dispute or “lis” arising between the parties.
Statutory Guidelines Pertaining to Appointment of Arbitrators
Section 11 of the Arbitration and Conciliation Act, 1996 has clearly stated that the parties are at liberty to determine the number of arbitrators provided that the appointed tribunal must consist of an odd number of arbitrators to prevent a scenario of deadlock wherein even number of arbitrators are divided in their views. Moreover, the Act has also stipulated a time period of 30 days for appointment of arbitrators, post which the appointment shall be made upon the request of the Hon’ble Supreme Court or the concerned High Court or the organizations working towards institutional arbitration. In event of conflict in the appointment of 3rd arbitrator as per the agreement, each party shall appoint one arbitrator and both the appointed arbitrators shall together appoint one impartial arbitrator.
Under Section 12 of the Act, the appointed arbitrator is bound to provide a written disclosure pertaining to his/her relationship with the parties or any interest, whether in present or in future in the subject matter of the dispute or any other relationship of any kind which may establish any reasonable doubt upon the competence or ability to act in an impartial manner while adjudicating the dispute.
Judicial Developments Over The Years
In 2015, there was a significant amendment to the Arbitration and Conciliation Act, 1996 (“Act”) which aimed at bolstering the credibility and efficiency of the Indian arbitration framework, fostering a more transparent and dependable mechanism for resolving disputes. This amendment introduced Section 12(5) and the Seventh Schedule. Section 12(5) explicitly prohibits the appointment of an arbitrator who has any relationship with the parties, counsel, or subject matter of the dispute as specified in the Seventh Schedule, irrespective of any prior agreement. However, there’s a provision within the section allowing for the appointment of an ineligible person as an arbitrator if expressly agreed upon in writing by the parties. This legislative change underscores the Indian government’s dedication to ensuring impartial and fair resolution of disputes through arbitration. The significance of Section 12(5) was underscored by the Hon’ble Supreme Court in HRD Corporation v. GAIL (India) Limited, where it was emphasized that the ineligibility fundamentally affects the appointment of the arbitrator [¶13].
The issue of challenging an arbitral award stemming from the one-sided selection of an arbitrator has been addressed by both the High Courts and the Supreme Court on numerous occasions. In the case of TRF Limited v. Energo Engineering Projects Limited, the Supreme Court examined a dispute resolution clause designating the buyer’s managing director or their nominee as the sole arbitrator for disputes between the parties. This arrangement meant that not only would the managing director serve as an arbitrator, but in the event of their unavailability, they also possessed the authority to designate another arbitrator to resolve disputes. The Court, in its interpretation of Section 12(5) of the Act, determined that it would be legally implausible for an individual who is statutorily disqualified from acting as an arbitrator to have the power to nominate one. Allowing such an appointment would effectively enable the managing director to oversee the arbitration proceedings themselves, despite being legally ineligible to act as an arbitrator [¶57].
The stance taken by the Supreme Court in the TRF case was upheld in Perkins Eastman Architects DPC and Anr. v. HSCC (India) Limited, where the Court underscored the significance of both parties having equal authority in appointing an arbitrator. The Court emphasized that if one party holds exclusive authority in selecting the arbitrator, it inherently carries the risk of bias towards that party’s interests [¶16]. In the case of Bharat Broadband Network Limited v. United Telecoms Limited, the Supreme Court invalidated an arbitration clause allowing the chief managerial director of the appellant to unilaterally appoint a sole arbitrator. The Court ruled that this appointment process contradicted the principle established in the TRF case, as the outlined arbitration clause’s appointment procedure was not valid due to the appointing authority’s statutory ineligibility and their incapacity to make nominations [¶18].
In the recent matter of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, the Supreme Court declared that appointing a company chairman as an arbitrator is inherently invalid under Section 12(5) in conjunction with the Seventh Schedule. The Court stressed the significance of upholding the impartiality of arbitrators, referencing its prior rulings in TRF, Perkins, and Bharat Broadband. It underscored that the prohibition against bias constitutes a fundamental aspect of the arbitration process and even if the chairman’s designation wasn’t explicitly listed among the prohibited roles in the Seventh Schedule, their influential position within the petitioner company rendered them ineligible to serve as an arbitrator [¶9-10].
Regarding the Panel of Arbitrators, while unilateral appointments may generally be deemed impermissible under the amended Act, exceptions to this rule have surfaced in specific appointment procedures. These exceptions occur in cases where an arbitrator is chosen from a panel that is established, managed, and supervised by one of the disputing parties. Such clauses are commonly observed in post-tender government contracts, where the selection of the presiding and/or sole arbitrator is to be conducted from a panel comprising retired and senior officials from the relevant department.
In the case of Voestalpine Schienen GmbH v. DMRC, the Supreme Court scrutinized the legality of an appointment process wherein arbitrators were required to be chosen from a panel maintained by DMRC. Voestalpine contested the composition of the arbitration panel, predominantly composed of retired government officials and engineers, arguing that it contravened Section 12(5) of the Act and the Seventh Schedule. The Court clarified that the Seventh Schedule solely prohibits the appointment of individuals with personal connections to any party involved in the dispute. As the panel included individuals from the Railways and Public Works Department, it wasn’t disqualified on these grounds [¶25-26].
In another instance, Central Organisation for Railway Electrification (CORE) v. ECI-SPIC-SMO-MCML (JV), the Supreme Court upheld an arbitration clause mandating each party to select their nominee arbitrators from CORE’s panel of arbitrators, who would then designate the presiding arbitrator. Drawing from the precedent established in Voestalpine, the Court concluded that the inclusion of retired railway officers in CORE’s panel didn’t violate the Act’s provisions. Emphasizing that both parties possessed an equal right to nominate an arbitrator, the Court found no reasonable grounds for concern regarding bias or impartiality, thereby validating the appointment procedure [¶27].
Conclusion
Even though the Hon’ble High Courts across the country may be divided upon their opinions towards reasonable procedure for impartial appointment of arbitrators, the jurisprudence and objective behind ensuring unbiased arbitration tribunal remains sacrosanct and cannot be dispensed with. In the present, the Indian arbitration jurisprudence has come along a great way in ensuring the above objective and providing a fair and efficacious space towards institutional as well as non – institutional arbitrative methods.
In the Indian legal system where ad – hoc arbitrations assume greater prevalence over other forms of dispute resolution, these reforms such as the criterion under the Fifth and Seventh Schedule of the Act have proved to be a welcomed step towards exponentially increasing the confidence of the parties in the process of arbitration. However, in the present day the various stakeholders of the pre – arbitration process such as the parties including MNCs, individuals or government organizations should focus more upon institutional arbitration which already consists of a systematic arrangement of rules, procedures and bye – laws for ensuring impartiality and purposefulness of the dispute resolution cum adjudication process.
Last but not the least, the parties and agencies opting for arbitration such as Public Sector Undertakings, Multi – National Corporations, In – House Corporates and other governmental and private authorities should voluntarily opt for appointment of arbitrators in a broad and consensus based process instead of unilateral appointments in order to uphold the principles of natural justice.
Author(s)
Akash Sharma
Student at SLS, Noida
Sneha Mukherjee
Student at SLS, Noida