Disqualification under the Arbitration Act extended to the power to appoint - Supreme Court

Supreme Court - IBC

Dr. Amit George

It needs no gainsaying that the enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (Act) has brought about a sea-change in the independence and impartiality requirements for arbitrators in India. The appointment of an arbitrator is now subject to scrutiny under the detailed parameters that exist under the Fifth and Seventh schedules of the Act.

What the Act had seemingly left untouched, however, was the power of a party under an arbitration agreement to nominate the arbitrator in question, if the agreement otherwise bestowed such a power upon the party concerned. The only caveat was that the person so nominated by the party concerned would need to confirm to the requirements of independence and impartiality as set out in the Act.[1]

Such a reservation of power seems unproblematic in cases where the agreement provides for a three member arbitral tribunal, with each party appointing a nominee arbitrator, and the presiding arbitrator being further chosen by the two nominee arbitrators.

However, the situation is somewhat different in a contract which provides for arbitration by a sole arbitrator to be nominated by one party to the agreement. There has been certain, and not entirely misplaced, disquiet around the continuance of such a power after the enactment of the Act, in as much as it preserves the significant power granted to an interested party to the dispute to appoint an arbitrator who on paper would seem to meet the requirements of independence and impartiality.

The counter-argument, of course, is that such a power is expressly protected under the principles of party autonomy which underlie arbitration and that Section 12 of the Arbitration and Conciliation Act, 1996 is only concerned with the qualifications of the person ultimately appointed and not with the process or mode of appointment.

In a recent judgment of a three judge bench of the Supreme Court in TRF Ltd. v. Energo Engineering Projects Ltd. (Civil Appeal No. 5306 of 2017 decided on 03.07.2017), this very question has been considered, and far reaching findings have been arrived at by the Apex Court. The controversy before the Court stemmed from the appointment of an arbitrator by the Managing Director of one of the parties to the arbitration agreement, who claimed to possess such a power by dint of the following clause in the agreement:

“Unless otherwise provided, any dispute or difference between the parties in connection with this agreement shall be referred to sole arbitration of the Managing Director of Buyer or his nominee. Venue of arbitration shall be Delhi, and the arbitration shall be conducted in English language.”

The decision of the High Court, which was under challenge before the Supreme Court had endorsed the continuance of such a power of appointment post the enactment of the Act. Before the Supreme Court, the appellant argued that the arbitrator could not have been nominated by the Managing Director as the said authority had been itself statutorily disqualified under the Act. The submission of the respondent, on the other hand was that even though the Managing Director may be disqualified to act as an arbitrator, however there was no consequential extinguishment of the right to nominate an arbitrator who did not suffer any disqualification under the Act.

After an exhaustive survey of the applicable law on the subject, the Supreme Court held as under:

“57. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. 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 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. Therefore, the view expressed by the High Court is not sustainable and we say so.”

The Supreme Court however, did strike a note of caution in cases where both parties were entitled to nominate their respective arbitrators in terms of the arbitration clause, in the following words:

“53. …At the cost of repetition, we may state that when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto.”

The Supreme Court therefore extended the disqualification of the appointing authority under the provisions of the Act, to his or her very power to nominate a person even if the said person being nominated was not so disqualified to act as an arbitrator. This is a significant and far-reaching finding which would impact the interpretation of a large number of arbitration clauses in the country with similar appointment provisions.

It requires to be noted that the clause in question before the Supreme Court provided that the Managing Director would himself/herself act as an arbitrator or nominate another person to do so. An argument could possibly be made that when the arbitration agreement simpliciter provides the right to appoint to a designated authority without simultaneously providing the right to such an authority to act as an arbitrator, then in such cases such a power would continue to subsist despite the aforesaid judgment of the Supreme Court. However, the judgment itself expressly seems to confine any such continuation of the power of appointment only to arbitration agreements where both parties can nominate their respective arbitrators.

[1] Reference in this regard may be made to the decision of the High Court of Delhi in Virender Kumar Jain v. Grand Venezia Commercial Towers Pvt. Ltd. and Anr. [Arb. P. No. 194/2016 decided on 3.10.2016] and the recent decision of the High Court of Bombay in DBM Geotechnics & Constructions Pvt. Ltd. Vs. Bharat Petroleum Corporation Ltd. MANU/MH/0977/2017.

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TRF Judgment

Dr. Amit George is a an advocate practicing in Delhi.

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