This article is written by Yuga Kane, final year, BA. LL.B (Hons.), Maharashtra National Law University, Mumbai.
Since the commencement of the Arbitration and Conciliation Act, 1996 (“the Act”), unilateral appointment of arbitrators has been a common practice. As stipulated by the arbitration agreement or clauses, an employee could act as an arbitrator, or they could appoint some other person to be an arbitrator. However, post the amendment to the Act in 2015 (“amendment of 2015”), § 12(5) was inserted. This sub-section prohibited employees of an entity from acting as arbitrators in cases where the same entity was a party to the dispute. Consequently, a question arose whether a person disqualified to be an arbitrator could appoint another person to be an arbitrator. The Supreme Court, in TRF Limited v. Energo Engineering Projects (“Energo”) andPerkins Eastman Architects DPC & Anr. v. HSCC (“Perkins”), held that a person disqualified would not have the power to appoint another person as an arbitrator. However, Courts in several judgements including Central Organisation for Railway Electrification v. M/S ECI-SPIC-SMO-MCML (JV) (“COFRE”) and Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. (“Voestalpine”) highlighted the lack of clarity on the issue. Consequently, in JSW Steel Limited v. South Western Railway and Another, a three-judge Bench of the Supreme Court requested the matter to be placed before a larger Bench. Currently, the issue is still ongoing and pending before the Supreme Court.
This article will attempt to understand the arguments from both sides that ideally need to be considered before the Supreme Court passes its judgement. It will cover two main considerations – firstly, can a person disqualified by law to be an arbitrator appoint another person to be an arbitrator? Secondly, what happens when parties have consented to apply the list/panel mechanism for the appointment of an arbitrator?[i]
Changing legal basis of § 12 of the Act
Prior to the amendments, the Act did not contain a lot of provisions to ensure the impartiality of the arbitrators. Thus, parties to arbitration would appoint arbitrators unilaterally without any restrictions. This was usually done in two ways – firstly, one of the parties would choose an arbitrator from a list of arbitrators nominated by the other party. Secondly, one of the parties’ employees could be appointed as an arbitrator. This practice was fairly common among the Public Sector Utilities (“PSUs”). However, post the amendment of 2015, if the relation of a person with the parties falls under any of the categories mentioned in the Seventh Schedule, they are ineligible to be appointed as an arbitrator. Since employees of the organisation could no longer be appointed as arbitrators, the parties started including clauses that permitted the appointment of former employees of the organisation as arbitrators. It is to be noted that, currently, appointment of former employees as arbitrators has not been disallowed.
The question of the appointment of an arbitrator, dealt with in this post, arises because the amendment clarified who cannot be appointed as an arbitrator, to a large extent, but failed to clarify who can appoint an arbitrator.
Arguments against appointment by a person disqualified
One of the primary arguments raised is based on the maxim ‘qui facit per alium facit per se’. This means that what one does through another is done by oneself. Thus, if such a disqualified person is allowed to appoint another person as an arbitrator, it would mean that the entire proceedings are carried out by the person who is disqualified. In Energo, the Court pointed out that if the infrastructure collapses, the superstructure is bound to collapse. Thus, if a person were statutorily disqualified from being an arbitrator, they would also not be able to nominate another person to be an arbitrator. Such an appointment will defeat the purpose of the amendment of 2015 to § 12(5). Furthermore, the thread of bias and partiality would continue to run in the appointment made by the disqualified person. Thus, the arbitrator would not have risen above the partisan interests of the parties and, resultantly, would not be independent. Such issues of partiality and bias would go to the core of the arbitral proceedings and may hamper its legitimacy.
Arguments in favour of appointment by a person disqualified
Judgements in favour of such appointments have stated that there is a distinction between the role of acting as an arbitrator and nominating an arbitrator. As argued in Energo, the legislative amendment of 2015 categorically disqualified persons related to the dispute from becoming arbitrators. However, there is no bar on them from appointing another person as an arbitrator.
Furthermore, the Courts have not considered factors like impartiality and unbiased functioning of the persons thus appointed. It is important to note that the Court, in Energo, explicitly stated that the judgement would not be concerned with the objectivity and individual respectability of such persons. Also, the fact that the practice of appointing former employees or those nominated by them as arbitrators was in place to harbour the commercial wisdom of such persons was ignored.
In addition to these points, this issue raises the ‘party autonomy versus fairness’ debate. As per the current position of law, the courts have given preference to fairness and transparency over the choice of the parties. This is despite the fact that the arbitration clause, mutually agreed upon by the parties, gives power to the ineligible person to appoint an arbitrator.
The discourse on the topic clarifies that there are two situations that are exempted by the law set down by Energo and Perkins:
Firstly, if both the parties are to appoint their own arbitrators, the advantage that a party would have by nominating its own arbitrator will get nullified by the equivalent power that the other party would have. In such situations, the authority of the person disqualified under the law to nominate will not be questioned.
Secondly, the list mechanism or nomination of arbitrators through panels has been exempted from the rule. In COFRE, the Appellants had given a list of four retired employees to the Respondent and had asked them to select two as arbitrators from amongst them. The Respondents challenged this process and instead moved to the High Court to have an arbitrator appointed under §. 11(6). On appeal, the Supreme Court held that the mere fact that the panel consisted of retired employees did not make them ineligible to be arbitrators. This case relied on Voestalpine, where the Supreme Court had upheld the validity of the list mechanism. However, the Court stated that the list could not be as restrictive as having just five arbitrators. It had to be broad-based. Furthermore, the arbitrators nominated by the selecting party would be required to have full choice to nominate the remaining arbitrators.
The present issue pits party autonomy and expertise of arbitrators against fairness and impartiality of arbitration proceedings. Though the courts have attempted to answer a few questions and carve out a few exceptions, the overarching question still remains unsolved. It is also to be noted that, as mentioned above, Energo has left a lot of questions unanswered. These questions, which have not been dealt with, by the Court seem to be the crucial for discussion. A proper consideration of these issues will, in all probability, change the position of the Court.
This issue of nomination by persons ineligible was to be decided by a five-judge bench in COFRE. However, in light of the Expert Committee constituted to consider amendments in the Act, the matter has been deferred for hearing. It is expected that the Expert Committee’s Report and the judgement in COFRE will give finality to the issue. Not just the decision but the reasoning in COFRE will potentially set the tone for the future of arbitration in India.
[i] Note: For the purpose of this post, list or panel mechanism refers to the situation where one party provides the other party with a list of arbitrators giving the other party the right to choose a stipulated number from amongst them.