The Calcutta High Court, in McLeod Russel v. Aditya Birla Finance Limited, recently upheld the unilateral appointment of a sole arbitrator and held that such appointments shall not be void ab initio in all cases. The decision in McLeod is a stark departure from the jurisprudence of the Indian Supreme Court in the context of unilateral appointments, headlined by its 2019 judgment in Perkins Eastman.
In Perkins, it was recognised that any appointment or nomination of an arbitrator by an individual/appointing authority who is himself/itself ineligible to act as an arbitrator in the dispute shall be tainted, and therefore, invalid. While Perkins has subsequently been relied upon by High Courts across the country, the decision in McLeod has presented a curious dilemma in the uniformity of the jurisprudence surrounding unilateral appointments in India.
Through this post, I attempt to delve into the reasoning of the Court and the ramifications of the decision in McLeod, and detail how the judgment has deviated from the test of the ‘poisoned chalice’ – as fortified by the Supreme Court in TRF Energo and Perkins.
The 2015 amendment to the Arbitration Act in India: Creating an objective criteria for independence and impartiality
The Arbitration and Conciliation Act, 1996 in India underwent a significant change in 2015, with the 2015 Amendment Act being a major catalyst in bringing crucial changes to the arbitration landscape in the country. In the context of arbitrator appointments, the Seventh Schedule to the Arbitration Act was added, which provided a comprehensive list of categories that would determine whether a potential arbitrator is ineligible for a given case. This amendment was based on the IBA Guidelines on Conflicts of Interest in International Arbitration, and provided an objective criteria to assess the ineligibility of potential arbitrators.
Section 12 of the Arbitration Act provides parties with grounds on which they can challenge an arbitrator appointment, based on justifiable doubts arising out of his professional, financial or personal relationships. Sub-section (1) to Section 12 requires any potential arbitrator to provide a full disclosure of any past or present relationship with the parties. However, the proviso to Section 12(5) draws a balance between party autonomy and potential bias affecting an arbitrator appointment. While Section 12(5) states that any potential arbitrator falling within one of the categories specified in the Seventh Schedule will be ineligible for appointment, the proviso allows the parties to waive such ineligibility through an “express agreement in writing”. The Act therefore recognises that any potential ineligibility can be overridden by parties only through an express agreement, and such a waiver cannot be inferred from mere conduct of parties.
This position has been buttressed by the Supreme Court in Bharat Broadband and Ellora Paper Mills, where the Court has reaffirmed that filing of pleadings and mere participation by parties cannot be interpreted as an implicit waiver on the ineligibility of the arbitrator under Section 12(5). The Court stressed upon the requirement of an express written agreement, through which parties repose their faith in the appointed arbitrator, which indicates their intention to waive the ineligibility under Section 12(5).
Understanding bias, apprehension of bias and the test of the ‘poisoned chalice’
Any party which has justifiable doubts regarding an arbitrator’s independence or impartiality is entitled to challenge the appointment under Section 12, and have the arbitrator’s mandate terminated under Section 14 of the Act. This test illustrates how the Arbitration Act moves beyond the objective test of impartiality (which was introduced for the purpose of determining ineligibility), and looks at bias, as well as apprehension of bias, from the viewpoint of the parties – to ensure that the fairness and impartiality of the arbitral process is uncompromised.
In the context of unilateral appointments, however, courts were facing a peculiar scenario. Arbitration clauses sometimes indirectly provided for unilateral appointments, by allowing a senior management official, such as a Managing Director or Chairman (who would himself be ineligible under the Seventh Schedule), to nominate/appoint an arbitrator to adjudicate the dispute under the relevant contract.
Faced with such a clause in TRF Energo, the Supreme Court laid down what I refer to as the test of the ‘poisoned chalice’ - holding that the ineligibility of the appointing authority will extend to invalidate any nomination or appointment made by such authority. In TRF, the Court held that since the MD of the company was ineligible to act as an arbitrator himself, any appointment/nomination made by him would also be tainted, since it will create a reasonable apprehension of bias. The MD would essentially be passing on the ‘poisoned chalice’ to the subsequent appointee. In Perkins, the Supreme Court upheld the ‘poisoned chalice’ test, holding that any arbitrator appointment arising out of a clause which provided an exclusive and unilateral power to appoint, will be invalid from the get-go.
The Supreme Court’s decisions in TRF and Perkins laid down a binding principle on the invalidity of unilateral arbitrator appointments, which was subsequently followed by High Courts across the country. However, the decision in McLeod has come as an aberration in the settled jurisprudence on the subject post Perkins.
McLeod: A chink in the armour of the Supreme Court’s jurisprudence on unilateral appointments
In McLeod, the arbitration clause stipulated that a sole arbitrator shall be appointed by one of the parties to the arbitration (the respondent in this case). Subsequently, the respondent appointed a retired judge of the Madhya Pradesh High Court to adjudicate the dispute between the parties. Pertinently, no express agreement in writing to waive the ineligibility of the arbitrator was executed. After filing their pleadings in the arbitration, the petitioner challenged the mandate of the arbitrator under Section 14 of the Act, on the grounds that the unilateral appointment of the sole arbitrator was invalid and void ab initio.
The Calcutta High Court distinguished the appointment of the sole arbitrator in McLeod from the decisions in TRF and Perkins on three grounds: first, the sole arbitrator appointed was a retired judge of the Madhya Pradesh High Court, who did not fall under any of the categories for ineligibility as provided under the Seventh Schedule, and was an independent and impartial appointee.
Second, the Court made a curious distinction between the present case and the decisions of the Supreme Court in TRF and Perkins. The Court held that in TRF and Perkins, the arbitration clause provided for a persona designata arbitrator, where such a person was to either act as the arbitrator or was provided with the right to nominate an arbitrator in his place. However, in the present case, the respondent was not a persona designata, and did not have any right to act as the arbitrator himself. The respondent was only provided with the right to appoint the sole arbitrator, and by appointing an independent and impartial appointee, the appointment cannot be challenged merely on the ground that the appointment emanated from a clause providing a unilateral right.
Third, the Court observed that the parties had already participated in the proceedings, filed their pleadings and even recognised consent awards passed by the sole arbitrator. Thus, any objection to the unilateral appointment of the sole arbitrator would be construed as waived when the party has participated in, and filed its written pleadings, the arbitration proceedings – effectively acceding to the jurisdiction of the sole arbitrator.
Key takeaways from McLeod: A fatal deviation from the apprehension of bias test
The decision in McLeod is premised on a misinterpretation of the ‘poisoned chalice’ test laid down by the Supreme Court in TRF and Perkins. In Perkins, the Court illustrated that ineligibility of an arbitrator, as established under the Seventh Schedule, will seep through to any appointment/nomination made by such an arbitrator – since the apprehension of bias will continue to remain during the arbitration. The ineligibility of the appointing authority will go to the very root of the appointment itself, and taint any subsequent appointment or nomination, even if such an appointee is unaffected by the categories under the Seventh Schedule.
In McLeod, the Calcutta High Court has deviated from the apprehension of bias test, by concluding that since the respondent was not a persona designata, and the subsequent appointee was not ineligible as per the Seventh Schedule, the decisions of TRF and Perkins would stand distinguished. However, the Court has failed to appreciate that the invalidity of unilateral appointments in TRF and Perkins did not emanate from the appointments being made by a persona designata, but by the ineligibility of the appointing authority tainting the subsequent appointment through the passing of the ‘poisoned chalice’. In validating the appointment of the sole arbitrator, the Court has turned a blind eye to the inherent ineligibility of a party to act as the arbitrator, and the consequent bar on the respondent to appoint/nominate an arbitrator, following the ratio in TRF and Perkins.
Further, the Court’s conclusion that an “express agreement in writing” can be inferred from the participation of the parties in the arbitration falls afoul of settled jurisprudence under Section 12(5). The proviso to Section 12(5) has been interpreted strictly by courts in India to conclude that an express agreement in writing is a mandatory requirement. In the absence of such an agreement, mere participation or pleadings filed by a party will not be construed to be a waiver on the ineligibility of the unilaterally appointed arbitrator. The decision in McLeod defeats the balance drawn between party autonomy and independence and impartiality of arbitrators in Section 12(5), and also clashes with the Supreme Court’s observations in Bharat Broadband and Ellora Paper Mills as highlighted earlier.
For the moment, the decision in McLeod remains an anomaly in the post-Perkins jurisprudence on unilateral appointments, and it remains to be seen whether the decision will be subject to a challenge before the Supreme Court in the future. Decisions subsequent to McLeod in High Courts across the country have followed the ratio in Perkins, fortifying the ‘poisoned chalice’ test on unilateral appointments of arbitrators, and perhaps strengthening the conclusion that the aberration in McLeod will remain an isolated example.
Sumit Chatterjee is an Advocate at Arista Chambers, Bengaluru. The author would like to thank Anjali Singhvi for her helpful research assistance with the post.
The opinions expressed in this blog post are of the author alone, and do not reflect the views or opinions of Arista Chambers.