The Delhi High Court in a recent judgment in Proddatur Cable TV Digi Services v. SITI Cable Network Limited held that the unilateral appointment of arbitrator by an authority interested in the outcome or the decision of the dispute is impermissible in law.
While addressing the conundrum raised in a plethora of cases over the years relating to the unilateral appointment of arbitrators, Hon’ble Ms. Justice Jyoti Singh observed that even though party autonomy is a cornerstone of arbitration, other virtues such as fairness, transparency and impartiality are equally important. The Court emphasised that the procedure laid down in an arbitration clause cannot override the considerations of impartiality and fairness in arbitral proceedings.
The issue before the Court was that whether in light of the Supreme Court’s judgment in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (2019 SCC OnLine SC 1517), the unilateral appointment of the sole arbitrator by the respondent is vitiated under Section 12(5) of the Arbitration and Conciliation Act, 1996. The issue encompassed questions regarding the retrospective effect of the law laid down in Perkins (supra) and its applicability on arbitration agreements entered into before the 2015 Amendment Act. The Court also ruled on the eligibility of a ‘company’, acting through its Board of Directors, in unilaterally appointing a sole arbitrator.
Contentions of the Parties
Relying on the Perkins (supra) dictum, the petitioner argued that the arbitration agreement entered between the parties envisaged the appointment of a sole arbitrator by the respondent company and therefore, the appointment of the sole arbitrator is invalid and non-est. Petitioner contended that the basic principle is that no authority having interest in the dispute is entitled to make an appointment, be it as an individual, or a board of directors, or a company. Relying on the judgments delivered by the Supreme Court in Bharat Broadband Network Limited v. United Telecoms Limited ((2019) 5 SCC 755) and TRF Ltd. v. Energo Eng. Projects Ltd. ((2017) 8 SCC 377), the petitioner argued that de jure termination under Section 12(5) in on-going arbitrations is well-settled as an appointment made by an ineligible person is void ab initio and is not confined to only a prospective application, as clarified in TRF (supra).
On the other hand, the respondent distinguished the Perkins (supra) judgment on facts since in the impugned matter, the arbitration clause provided for the ‘Company’ to appoint the arbitrator. The respondent argued that though a Managing Director was held to be ineligible in Perkins, the same test cannot be applied to a Board of Directors of a Company, who have been authorised by the MOA (Memorandum of Association) and AOA (Articles of Association) of the company.
The respondent further contended that the petitioner has waived off its right to object under Section 12(5) since it chose not to file any objections under Section 13 before the arbitrator; to which the petitioner argued that the objections under section 12(1) read with Section 13 are different from objections raised under Section 12(5) read with Section 14 of the Act and it cannot be said that by not filing its objections under Section 13 before the arbitral tribunal, the petitioner has waived off its right to object under Section 12(5) of the Act.
Observations of the Court
On the issue of eligibility of a ‘company’ in unilaterally appointing a sole arbitrator, the Court held that the Directors of a Company, as a part of the Board of Directors, without a doubt, have clear interest in the outcome of the arbitral proceedings and that there cannot be any distinction based on the appointing authority being a Company for the purposes of Section 11(6) and 12(5) read with Schedule VII of the Act. Therefore, the Company acting through its Board of Directors (or any other person) would suffer the ineligibility under Section 12(5) read with Schedule VII of the Act.
The Court found the situation to be impermissible in law in light of the Perkins judgment in so far as the eligibility of the arbitrator was concerned. Dispelling the respondent’s attempt to distinguish Perkins on facts, the Court highlighted the rationale in Perkins:
“The Supreme Court held that the Managing Director was ineligible from appointing an Arbitrator on the simple logic that a Managing Director of a Company would always have an interest in the outcome of the arbitration proceedings. The interest in this context takes the shape of bias and partiality. As a natural corollary, if the Managing Director suffers this disability, even if he was to appoint another person as an Arbitrator, the thread of biasness, partiality and interest in the outcome of the dispute would continue to run. Seen in this light, it can hardly be argued that the judgment in Perkins (supra) will not apply only because the designated Authority empowers to appoint an Arbitrator is other than a Managing Director. Moreover, as brought out by the respondent itself, Company here is run by the Board of Directors.”Delhi High Court
On the question of applicability of the judgment in Perkins (supra) to on-going arbitrations, the Court clarified that the law has been laid down by Supreme Court in the cases of Bharat Broadband (supra) and TRF (supra), wherein it was held that ineligibility under 12(5) read with Schedule VII of the Act will have retrospective application and is not confined to only a prospective application. There is no doubt that Section 12(5) would be applicable in the present instance and hence, the Company was barred from appointing the arbitrator. The Court also emphasised that independence and impartiality of the arbitrators are hallmarks of any arbitration proceedings, and absence of the same would render the appointment of an arbitrator invalid.
Take-away from the judgment
In the author’s opinion, in any arbitral proceeding which has commenced after 2015, wherein the sole arbitrator has been appointed unilaterally, the appointment will become non-est by virtue of Section 12(5) and such an appointment is liable to be terminated under Section 14 of the Act. Further, such unilateral appointments raise a question on the jurisdiction of the arbitral tribunal and shall be rendered illegal and non-est by virtue of Perkins (supra) and Proddatur Cable (supra). If an award has been passed by a unilaterally appointed arbitrator, such an award is liable to be set aside under Section 34(2)(a)(v) and Clause (iii) of Explanation I to Section 34(2)(b) of the Act as being in conflict with the fundamental notions of morality and justice. It may also be open for a party resisting execution of such an award to take this argument, as the ineligibility would render the entire proceedings void and the award would be deemed to have been passed without jurisdiction.
In the view of the author, a solution to this conundrum is that in order to continue with the proceedings, a unilaterally appointed arbitrator must take written consent from both the parties. In the absence of such an express written consent, the arbitrator must ideally refrain himself/herself from initiating/continuing the proceedings [unless the parties have waived the applicability of Section 12(5) as per the proviso to Section 12(5)]. In the absence of an express written consent permitting the unilaterally appointed arbitrator to continue, he/she must voluntarily terminate his mandate and the arbitrator will also be duty-bound to return the arbitrator’s fee to the parties, both as per law and in order to maintain a healthy arbitration environment and keep the spirit of arbitration alive.
The practice of unilateral appointments is appalling, to say the least, and poses a severe threat to the very idea and institution of arbitration. The Hon’ble Court has made a conscious attempt to address and put to rest, the ethical dilemma of unilateral appointments. It is the duty of the judiciary, arbitrators and the parties to uphold the right to a fair and equal opportunity.
With the implementation of the 2019 Amendment Act and the sprawling growth of institutional arbitration in India, the future of arbitration looks promising. An increase in institutional arbitration would also ensure appointment of neutral arbitrators and help in phasing out the immaculately flawed and degenerate practice of unilateral appointments.
Shashank Garg is Partner at Advani & Co., New Delhi.
Aastha Jain, Associate at Advani & Co assisted the author.
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