Unilateral Appointment of Arbitrator — Whether Absolute Prohibition Contrary to the Scheme of the Act?

Introduction

In terms of Section 12(5) of the Arbitration and Conciliation Act, 1996¹ (hereinafter “the Act”), any person whose relationship, with the parties or the counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule² shall be ineligible to be appointed as an arbitrator. Clearly, no such ineligibility has been attached against the person appointing the arbitrator. Thus, an independent third party with no such relationship as provided under the Seventh Schedule can be appointed as an arbitrator by any one of the parties empowered to appoint the arbitrator in terms of the agreement. In the absence of a bar under the provisions of the Act, the arbitration clause empowering one of the parties to appoint an arbitrator cannot be termed an invalid clause. As a sequitur, the legality of such an appointment cannot be questioned more so when the arbitrator’s relationship does not fall foul of the Seventh Schedule. However, the Supreme Court vide its judgments in TRF Ltd. v. Energo Engg. Projects Ltd.³ and Perkins Eastman Architects DPC v. HSCC (India) Ltd.⁴ has held that a person who was disqualified and disentitled to act as an arbitrator could also not nominate any other person to act as an arbitrator and that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator thereby absolutely prohibiting the unilateral appointment of the arbitrator. This article attempts to analyse the legislative intent and statutory provisions regarding the appointment of arbitrators and give reasons as to why, in the authors’ views, the absolute prohibition against the unilateral appointment of an arbitrator goes contrary to the scheme of the Act.

Legislative intent

With a view to consolidating and amending the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards and defining the law relating to conciliation, taking into account the said UNCITRAL Model Law⁵ and Rules, the Act was brought into force. This Act further sought to make provision for an arbitral procedure that is fair, efficient, and capable of meeting the needs of the specific arbitration and also to minimise the supervisory role of courts in the arbitral process. As per the Statement of Objects and Reasons of the Amending Act 3 of 2016⁶, though the Act was enacted to provide for speedy disposal of cases relating to arbitration with the least court intervention, however, with the passage of time, some difficulties in the applicability of the Act have been noticed.

Interpretation of the provisions of the Act by the courts in some cases has resulted in the delay of disposal of arbitration proceedings and an increase in interference of courts in arbitration matters, which tend to defeat the object of the Act. To overcome these difficulties and to provide for more user-friendly, cost-effective and neutrality of arbitrators, various provisions of the Act were amended in 2016. Even though the provisions of the Act were amended in 2019⁷ when the judgment of the Supreme Court in TRF case⁸ was already in existence, yet no amendment was brought into Section 11(2) of the Act⁹ barring unilateral appointment of the arbitrator in terms of the agreement between the parties. It is also worth noting that while Section 12(5) and the Seventh Schedule provided for the ineligibility of the person to be appointed as an arbitrator, no provisions prescribing any ineligibility to the appointing authority were added to the Act. Rather, the legislature in its wisdom thought it fit to leave the manner and procedure of appointment of an arbitrator to the parties to dispute and respect “party autonomy” in this regard.

Statutory provisions and party autonomy

Party autonomy has been recognised as one of the cardinal principles of a free and fair arbitration process. It allows the parties to derogate from the provisions of the Act on certain matters.¹⁰ The provisions of the Act recognise this principle and confer due regard to it by ensuring that the parties to an agreement have sufficient say in the dispute resolution mechanism as well as dispute-resolving authority. Section 2(6) of the Act¹¹ empowers the parties to authorise any person, including an arbitral institution, to determine the issue between them. Section 19(2) of the Act¹² gives them the freedom to choose the procedure to be followed for the conduct of arbitral proceedings and Section 11(2) of the Act empowers the parties to decide on the procedure for the appointment of arbitrators. Further, in terms of Section 7(1) of the Act¹³, an arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not. The Act ensures party autonomy by limiting the court intervention in terms of Section 5 of the Act.¹⁴

A conspectus reading of all these provisions of the Act makes it explicitly clear that the Act was designed and enacted to give all freedoms to the parties to an agreement to get their disputes resolved in the manner they deem fit, of course within the contours of the Act, meaning thereby that the parties to the agreement are free to choose their arbitrator whose relationship with them or their counsels or the subject-matter of the dispute does not fall within any of the categories specified in the Seventh Schedule. Party autonomy will also extend to such cases where in terms of the agreement between them, one of the parties confer the power of appointing the arbitrator on the other party and bind itself by the award passed by such an arbitrator. Clearly, no bar has been laid down in the Act barring the unilateral appointment of a third-party independent arbitrator for the resolution of the disputes.

Appointment of arbitrator and statutory safeguards

In terms of Section 11(2) of the Act, parties to an agreement are free to decide on the procedure for the appointment of arbitrators. Such an agreement may provide for ad hoc or institutional arbitration. For the purpose of the present article, we are concerned with a type of ad hoc arbitration wherein the parties to the dispute confer upon one of the parties the right to appoint an arbitrator. In such cases, when the disputes arise, the party upon whom such right of appointment was conferred in terms of the agreement executed between them refers to the said disputes for adjudication by a sole arbitrator without seeking any fresh consent of the other party. The provisions of the Act provide for pre as well as post-appointment checks. In terms of Section 12(1) of the Act read with the Sixth Schedule¹⁵, the person whose appointment as an arbitrator has been sought by the appointing party is statutorily obliged to furnish a declaration of this independence and impartiality. It is only thereafter that the appointing authority can confirm his appointment as an arbitrator. In case the said disclosure falls foul of the Seventh Schedule, the appointing party is legally barred from confirming his appointment as an arbitrator. Thus, this disclosure serves as the first check, or say, pre-appointment check, on the independence and impartiality of the arbitrator.

Section 12(3) read with Section 13 of the Act¹⁶ and Section 16¹⁷ provide for post-appointment checks on the appointment of the arbitrator inasmuch as these provisions expressly empower a party to challenge the appointment of the arbitrator before the arbitrator itself and the arbitrator is bound to adjudicate those challenges. It is only in those cases where the said challenges are dismissed, the arbitrator can continue with the proceedings and pass an arbitral award. Section 34(2) of the Act¹⁸ acts as another check by empowering a party to challenge the arbitral award itself on the grounds enumerated therein. Adjunct to this, Section 37(1)(c) of the Act¹⁹ acts as a further check. Not only these checks, in a case where the appointment of an arbitrator violates the mandate of Section 12(5) read with the Seventh Schedule or where the arbitrator has become de jure or de facto ineligible to act as an arbitrator, the Act empowers the aggrieved party to challenge the said appointment under Section 14(2) of the Act²⁰ and get the mandate of such an arbitrator terminated by the court²¹ without forcing the said aggrieved party to raise challenge before the said ineligible arbitrator.

Thus, a reading of the Act as a whole makes it clear that as far as the resolution of disputes through arbitration was concerned, the legislature conferred the majority power and role on the contesting parties and not to the court. Rather, the legislature limited the role of the court by expressly incorporating Section 5 in the Act. As a sequitur, the role of the court was supposed to be limited to those cases where the agreement between the parties provided for the appointment of an arbitrator by the court under Section 11 of the Act or where the appointment of the arbitrator by one of the parties was done without adhering the procedure provided under the agreement executed between them, or where such an appointment was done in contravention of the provisions of the Act, nothing more, nothing less.

Agreed procedure to be followed

In terms of the law settled by the Supreme Court in various judgments, if the parties to the dispute have agreed on a procedure for appointing the arbitrator as contemplated by Section 11(2) of the Act, then the dispute between the parties has to be decided in accordance with the said procedure and recourse to the Chief Justice or his designate cannot be taken straightaway. In the matter of settlement of disputes by arbitration, the agreement executed by the parties has to be given great importance and an agreed procedure for appointing the arbitrators has to be placed on a high pedestal and has to be given preference over any other mode of securing the appointment of an arbitrator.²² The agreed procedure has to be given due consideration is also clear from the mandate of Section 11(8) of the Act which requires the Chief Justice or his designate to give due regard to the qualifications required of the arbitrator by the agreement of the parties. The High Court cannot appoint an independent arbitrator without resorting to the procedure for appointment of the arbitrators which has been prescribed under the General Conditions of the Contract.²³ Thus, even after the judgments in TRF case²⁴ and Perkins case²⁵, the Supreme Court has passed various judgments ruling that the agreed procedure between the parties has to be given due effect and the High Court cannot derogate from the said procedure and appoint an independent arbitrator.

The provisions of the Contract Act of 1872²⁶ also mandate the parties to adhere to the procedure agreed between them. Any deviation from the agreed procedure can be done only by the parties to the said agreement. It is a settled principle of law that commercial contracts must be construed with care since it not only affects the party’s autonomy but also the country’s economy. The parties to an arbitration agreement have the autonomy to decide not only on the procedural law to be followed but also on the substantive law. The courts have to read the agreement as it is and cannot rewrite or create a new one,²⁷ and, therefore, the courts are bound to give due effect to the terms of the agreement.

Impartiality and biasness are subjective concepts

Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.²⁸ Thus, whether a unilaterally appointed arbitrator is impartial or not can be ascertained only during the continuance of arbitral proceedings. The presumption that a unilaterally appointed arbitrator would always be partial and inclined to favour the appointing party is legally unsustainable and amounts to questioning the arbitrator’s integrity. It cannot be presumed that a unilaterally appointed arbitrator would only favour the party who has appointed it. If a unilaterally appointed arbitrator gives equal opportunities to both parties to present their case and lay down evidence, adheres to the principles of natural justice, and passes a reasoned arbitral award on the basis of the material on record, terming said appointment as illegal, and void would not only amount to travesty of justice but would also shake the pillars on which our judicial system is standing.

Unilaterally appointed arbitrators are cost-effective

In cases of unilaterally appointed arbitrators, the party making their appointment fixes a lump sum amount as their fee which is much less than the amount mentioned in the Fourth Schedule.²⁹ The fee so fixed is not exorbitant as compared to the amount mentioned in the Fourth Schedule. This relaxation is not available to the parties when the appointment is made by the court under Section 11 of the Act. When a court appoints an arbitrator under Section 11 of the Act, it directs the parties to pay the fee of the arbitrator as per the Fourth Schedule. Many times, the parties find it burdensome to pay such huge amounts as mentioned in the Fourth Schedule. Clearly, if the arbitration between the parties is not cost-effective and user-friendly, it tends to violate the objects of the Amending Act 3 of 2016. Thus, the fee of the arbitrators is another reason arbitrations conducted by unilaterally appointed arbitrators are more cost-effective and user-friendly.

Conclusion

In light of the analysis and reasons given above, the authors are of the opinion that there should not be a blanket prohibition against the right of one of the parties to make the appointment of an arbitrator. The authors are of the view that the contesting parties should be given the freedom and authority to resolve their disputes as per the terms of their agreement and proceed with the appointment of the arbitrator by one of the parties to the agreement, however, at the same time, the appointing party shall ensure that the person whose appointment as an arbitrator has been sought must give his disclosure in terms of the Sixth Schedule. In case, the said disclosure reveals that the relationship of that person with any of the contesting parties or counsels of the said parties or the subject-matter of the dispute falls within any of the categories mentioned in the Seventh Schedule, the appointing party shall not proceed with the said appointment and appoints an independent arbitrator having no such relationship as is prohibited under the Seventh Schedule. The safeguards provided under Sections 12, 13, 14 and 16 of the Act shall be taken recourse to by the other party if any of the grounds mentioned under those sections are attracted. The authors are of the opinion that the non-appointing party shall not be allowed to frustrate the dispute resolution process only on the ground of the unilateral appointment of the arbitrator unless the ineligibility provided under Section 12(5) read with the Seventh Schedule or Section 14(2) is attracted.