SC refuses unilateral appointment of single arbitrator

BW Online Bureau May 11, 2020

Arbitration is a method of alternate dispute resolution wherein a third party is appointed for adjudication of disputes between the concerned parties. In such a scenario, preserving the sanctity of the judicial process becomes imperative. As arbitration requires adjudication on rights of the parties involved, principles of natural justice play a critical role in avoiding any potential risk of miscarriage of justice. The first principle of natural justice is ‘nemo judex in causa sua’, which means ‘no man can be a judge in his own cause’. This principle intends to avoid any ‘reasonable apprehension of bias’ that may arise during any judicial process.

In the recent years, arbitration has increasingly gained popularity as a preferred method of dispute resolution. The reasons being the extensive party autonomy and the flexibility it offers. Over the years, various situations have arisen, putting courts in dilemma to decide between upholding party autonomy or the principles of natural justice. However, as party autonomy is the cornerstone of arbitration, courts have been hesitant in interfering with party autonomy.

The courts faced a similar dilemma in the case of Perkins Eastman Architects DPC & Anr. v HSCC (India) Ltd (“Perkins”) [1], which was decided by a division bench of the Supreme Court in November 2019. In the case of Perkins, the Supreme Court, while interpreting the provisions of the Arbitration and Conciliation Act, 1996 (“Act”), and juggling between party autonomy and the principles of natural justice, held that a person who has an interest in outcome or award passed by the arbitrator during arbitration, cannot be entitled to appoint the sole arbitrator, irrespective of the fact that the parties agreed to it at the time of entering into the contract.

Hence, as per the decision of the Supreme Court in Perkins, no party to a dispute shall be allowed to unilaterally appoint an arbitrator, even though the terms of the contract may entitle them to do the same. This decision was later upheld by the Delhi High Court in Proddatur Cable TV Digi Services v Siti Cable Network Limited (“Proddatur Cable TV”).[2]

Facts of Perkins

An agreement was entered into between HSCC (India) Ltd (“Respondent”) and a consortium, consisting of Perkins Eastman Architects DPC and Edifice Consultants Private Limited (collectively referred to as the “Applicants”) on May 22, 2017. Under the said agreement, the Appellant was to carry out certain architectural designing and planning work for the Respondent. Certain disputes arose between the parties and in accordance with the dispute resolution clause of the agreement, the Respondent unilaterally appointed a sole arbitrator. The appointment of a sole arbitrator by the Respondent was challenged by the Applicants before the Supreme Court. Further, the Applicant also sought appointment of an arbitrator by the Supreme Court under Section 11(6) of the Act. The main issue before the apex court was whether the Applicants had made out a case for the appointment of an arbitrator by the Supreme Court under Section 11 (6) read with Section 11 (12) (a) of the Act.

Decision of the Supreme Court

The Supreme Court examined its decision in TRF Ltd. v Energo Engineering Projects Ltd.[3] (“TRF Limited”), wherein a three-judge bench had held that a party interested in the outcome of a case cannot be the sole arbitrator in the dispute. The Supreme Court broadly interpreted this to restrain a party interested in the outcome of the dispute to unilaterally nominate a sole arbitrator. In the case of TRF Limited, the Supreme Court analysed Section 12(5) of the Act (as amended by the Arbitration and Conciliation (Amendment) Act, 2015 “Amendment Act of 2015”), and observed that “by our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that a person who is statutorily ineligible can nominate a person. 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.”

The Supreme Court also relied on its decision in the case of Walter Bau AG v Municipal Corporation of Greater Mumbai[4] (“Walter Bau AG”), wherein the apex court opined 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 Arbitration Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11(6) cannot be countenanced in law”. Since the Supreme Court here had already observed that the Respondent could not solely appoint the arbitrator, the said petition under Section 11(6) was entertained.  

Further, in Voestapline Schienen Gmbh v. DMRC[5] (“Voestapline”), the Supreme Court relied on the 246th report of the Law Commission of India, wherein it was opined that “there are certain minimum levels of independence and impartiality that should be required of the arbitral process, regardless of the parties’ apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed”.

The Supreme Court, while relying on its findings in the cases of TRF Limited, Walter Bau AG and Votesapline, held that the Respondent should not be permitted to unilaterally appoint a single arbitrator and consequently, the application under Section 11(6) of the Act was admitted. While exercising the powers under Section 11 (6) of the Act, the Supreme Court appointed Retd. Justice Sikri as the sole arbitrator.

Proddatur Cable TV Case

The decision passed by the Supreme Court in Perkins was upheld by the Delhi High Court in the case of Proddatur Cable TV, which was decided on January 20, 2020. The High Court here had been approached by the petitioners, for certain disputes arising from the unilateral appointment of the arbitrator by the Respondents. Upholding findings of the Supreme Court in Perkins, the High Court stated that “it is clear that a unilateral appointment by an authority, which is interested in the outcome or decision of the dispute is impermissible in law… The underlying principle in arbitration no doubt is party autonomy, but at the same time fairness, transparency, and impartiality are virtues, which are equally important.” The High Court also observed that an arbitration clause cannot override the guiding principles of impartiality and fairness.

Concluding remarks

The stance taken by the Supreme Court is in consonance with the principle of ‘nemo judex in causa sua’ and the international principle of equal treatment of parties in the constitution of the arbitral tribunal. The decision of the Supreme Court in TRF Limited was predominantly based on its reading of Section 12 of the Act wherein it dealt with the ineligibility of an arbitrator under Schedule VII of the Act highlighting the essence of the Amendment Act of 2015. The case of Perkins has placed heavy reliance on the case of TRF Limited and observed, “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.”

This decision will result in the reduction of abuse of power by the party (ies) with higher bargaining power, thereby compelling parties to appoint the arbitral tribunals by mutual consent of parties or by arbitral institutions designated by the Supreme Court in accordance with the Arbitration and Conciliation (Amendment) Act, 2019.

Additionally, it is also important to understand that awards passed by sole arbitrators, who have been appointed unilaterally appointed have been under scrutiny on the grounds of apprehensions of bias and have led to further litigation. This decision of the Supreme Court is aimed at reducing such further litigation and strengthening the faith of parties in the process of arbitration by removing such apprehension of bias.

The decision will also require parties to introspect and relook at the dispute resolution clauses agreed upon in order to avoid future disputes on similar grounds. Shape