Paving the way for Institutional Appointment of Arbitrators and use of Technology in Arbitration

The recent decision of the Supreme Court in Perkins Eastman Architects DPC vs. HSCC (India) Ltd., dealing with the power of a party to appoint a sole arbitrator, has the potential to fundamentally disrupt the arbitration landscape across India. The decision appears to make it impossible for a party or its officers to unilaterally appoint a sole arbitrator. A narrow reading of the decision, with earlier precedents, suggests that such a power may still be exercised through independent institutions.

This concern, together with another recent decision of the Bombay High Court in Sawarmal Gadodia Tata Capital Financial Services Ltd., which also dealt with party-appointed arbitrators and the restrictions applicable thereto, creates further problems for entities dealing with a huge volume of arbitrations – particularly those in the financial services sector. In respect of such disputes, a credible online arbitration institution may be the only practical option to obtain enforceable arbitral awards.

Decision of the Supreme Court

The Supreme Court, in its decision in Perkins, has expanded the ratio laid down by the Supreme Court in its previous judgment in TRF Energo, and held that “a party or an official or an authority having interest in the dispute would be disentitled to make the appointment of an Arbitrator.” The court went on to hold that “a person having an interest in the dispute or in the outcome or decision thereof […] must […] not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator.” Therefore, even where a clause permits a contracting party to unilaterally appoint a sole arbitrator, the decision appears to disbar any officers of the party from making such an appointment.

Decision of the Bombay High Court

The Bombay High Court in Sawarmal strongly deprecated the practice of lending institutions appointing the same arbitrator, in more than 2 cases, including on instance, in as many as 2278 cases. This was particularly where no specific disclosures were made at the time of appointment, as prescribed under Section 12 of the Arbitration and Conciliation Act, 1996 and the Sixth Schedule. The court held that this was clearly violative of the scheme of the Act which provided that in circumstances where an arbitrator has been appointed by the same party more than two times over a three year period, it gives rise to justifiable doubts as to his/her impartiality, mandating disclosure.

The court further imposed an obligation on the company appointing an arbitrator, to ensure that the disclosures made by the appointed arbitrator accurately reflect the exact number of pending arbitrations with the concerned arbitrator, and the number of matters in which he/she is appointed as an arbitrator in the last three years by the appointing entity and/or its affiliates.

Analysis

The decision of the Supreme Court in Perkins takes off from the previous decision of the Supreme Court in TRF Energo. The correctness of the decision in TRF Energo is questionable as it imposes a requirement of independence and impartiality during the stage of appointment of arbitrators, even though the statute only requires independence and impartiality on part of the arbitrator so appointed, and not on the person making such an appointment. The decision in TRF Energo, also fails to take note of the consistent line of authority that recognized as valid unilateral arbitrator appointment clauses. In light of the binding precedent in TRF Energo, the Supreme Court had no choice but to arrive at the conclusion it did in Perkins.

However, in arriving at this conclusion, the judgment in Perkins uses extremely broad language. If this language is given an expansive interpretation, it would effectively result in unilateral appointment clauses becoming unenforceable – in effect overruling established previous line of Supreme Court decisions that permit unilateral appointment clauses. A harmonious interpretation of the judgment would suggest that the test of independence and impartiality applies to both the arbitrator and the person appointing an arbitrator. Therefore, if a company is able to nominate an impartial and independent person to perform the task of appointment on behalf of the company, then this should be permissible.

Even on this narrow reading of the judgment, the implications are far-reaching. A number of contracts across the country including significantly: government contracts, contracts with financial institutions, contracts with insurance service providers etc., all have unilateral arbitrator appointment clauses. These clauses vest exclusive power with the government entity/financial institution/insurance provider to appoint the sole arbitrator. In light of the decision in Perkins, no officer of the government/financial institution/insurance provider has the right to make such an appointment. This is of course hugely problematic as it makes a well-established practice that permeates an overwhelming majority of all commercial contracts unenforceable.

The only option available appears to be for such companies to act through a person/entity who is not directly affiliated with the company, who has no direct interest in the outcome of the dispute, and who can be trusted with such powers of appointment. The most sensible option then appears to be to designate arbitration institutions to make such appointments. Given the limited number of credible arbitration institutions in the country, this can prove to be extremely challenging.

This problem is compounded in the context of financial institutions, insurance companies etc., which deal with over 300-500 arbitrations per month. It is simply impractical to approach a court for every such appointment. Existing well-established arbitration institutions are also not the answer as they simply do not have either the bench strength necessary nor are their prescribed rates affordable for the value and complexity of the disputes involved. Further, existing institutions are not equipped, nor do they have the infrastructure to keep track of the number of arbitrations that an arbitrator has been handling for a company/its affiliates, especially where appointments are happening (as revealed by the Bombay High Court decision), in the hundreds and thousands.

The decision of the Bombay High Court in Samarwal reveals that the fees that these companies are used to paying is in the range of Rs. 1000/- per arbitration – which is infinitesimal in comparison to the fees existing institutions offer. These rates, or even an acceptable multiple of these rates, can only be offered either by ad hoc appointments by these entities (which are now not recognised) or by resorting to technological aids to reduce the effort involved in decision making. This makes a strong case for a trusted online arbitration institution that has the necessary technological infrastructure, and a wide pool of affordable arbitrators that can help businesses resolve these disputes.

Vikas Mahendra is a Partner and Shailja Agarwal is an Associate at Keystone Partners.

Disclaimer: Vikas Mahendra is presently assisting and advising the Centre for Online Dispute Resolution in creating an online dispute resolution platform.