Priyanshu Shrivastava[1]
Background
Giving one party the right to appoint an arbitrator of their choice, directly or indirectly, goes against one of the cardinal principles of arbitration of ensuring an impartial and independent arbitrator. In India, such arbitration agreements providing one party the option to unilaterally appoint the arbitrator(s) were common. This is particularly in situations where the parties’ underlying contract involved a state entity, for example a Public Sector Undertaking. Due to asymmetrical bargaining powers, the other party has no option but to accept the standard form contract, often referred to as the General Conditions of Contract (“GCC”), including such unilateral appointment clauses (See GCC (BHEL), Clause 32.1; GCC (BPCL), Clause 108.1).
In response to this practice, the Arbitration and Conciliation Act, 1996 (“Act”) was amended through the Arbitration and Conciliation (Amendment) Act, 2015. Through this amendment, the Indian parliament incorporated the Red List and the Orange List of the IBA Guidelines on the Conflicts of Interest in International Arbitration (“IBA Guidelines”) in Schedule 5 and Schedule 7 of the Act, respectively. Section 12(5) of the Act gave effect to Schedule 7 (i.e., the Red List) by stating that such relationships mentioned on this list would entail ‘ineligibility’ of an arbitrator “[n]otwithstanding any prior agreement to the contrary”. Because of this non-obstante clause, such unilateral appointment arbitration clauses do not survive. In fact, the parties cannot even consensually agree to such an arbitration clause. For instance, one standard-form contract has an arbitration clause with the heading “[a]ppointment of Arbitrator where applicability of section 12 (5) of Arbitration and Conciliation Act has been waived off ” (GCC (Indian Railways), Clause 64.(3)). Even this does not survive the impact of Section 12(5) of the Act.
That being said, it is trite law in India that such clauses lead to a de jure ineligibility of an arbitrator. This is separate from circumstances which give rise to ‘justifiable doubts’ under Section 12(1) of the Act; this can be addressed through a disclosure made by the arbitrator (See also HRD Corporation v. GAIL). In this regard, the Indian legislation goes a step ahead vis-à-vis Article 12 of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) as the latter does not include any de jure disqualifications. The discussions on the nature and implications of unilateral appointments (or unequal arbitrator appointments) under Indian law and their concomitant aspects have taken place on this blog and on other platforms as well (here, here, and here). This legal position is no longer res integra (See TRF v. Energo Engineering, para. 54).
Ordinarily, parties choose to appoint their arbitrators via courts under Section 11 of the Act to cure the ineligibility which will be caused if they follow the unilateral appointment procedure in their contracts. In Indure v. JMC Projects India, the Delhi High Court even referred the dispute to the Delhi International Arbitration Centre, thereby promoting institutional arbitration. There is, yet, another way to cure this defect. In that light, it seems pertinent to point out that the present discussion relates to a separate branch of Section 12(5) of the Act. The Proviso to Section 12(5) of the Act states that the “parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing” (emphasis supplied). This proviso is modelled after General Standard (4)(c) of the IBA Guidelines. This waiver is another way to cure the ineligibility caused by unilateral appointments, to resurrect the mandate of an ineligible arbitrator.
Apex Court’s Construction — Bereft of Practicalities?
The Supreme Court of India (“SC”), in Bharat Broadbank v. United Telecoms, ruled on the nature of waiver present in proviso to Section 12(5) of the Act. The parties’ contract contained a unilateral appointment clause as appointment of the sole arbitrator was to be made by one of the parties’ Chairman/Managing Director. Three important points of discussion arise from this decision.
First, the SC discussed the difference of this provision with Section 4 of the Act, which is on a party’s waiver of its right to object to any non-compliance under the Act’s non-derogable provisions. Unlike Section 4 of the Act, the waiver under Section 12(5) of the Act does not come into operation by conduct. Rather, there is a requirement of an “express agreement in writing” vis-à-vis the waiver. It follows that this provision contains a specific procedure for the waiver and the general procedure mentioned in Section 4 of the Act has no bearing on it.
Second, the SC did not clarify the form in which such a waiver has to be made. The Apex Court merely reiterated that such a waiver has to be made expressly in words. The court also refused to take guidance from Section 7 of the Act which states that an arbitration agreement can be contained in “an exchange of letters, telex, telegrams or other means of telecommunication including communication through electronic means which provide a record of the agreement ”. In the absence of any jurisprudence on this waiver, this provision can certainly provide some much-needed guidance. The wording of Section 7 of the Act indicates that an arbitration agreement is not confined to any specific form, but can be derived from parties’ letters, correspondences, or any other means of communication. This provision gives an indication that there is no rigid form for the parties’ “express agreement” vis-à-vis waiver under Section 12(5). This opens up a multitude of possible forms in which such a waiver can be made. This angle is further explored below in this piece.
Third, while rejecting the lower court’s consideration of the arbitrator’s appointment letter to be an express agreement of waiver, the SC opined that the party must be fully aware of the arbitrator’s ineligibility; that there must be “full knowledge”. It is argued that this specific requirement cannot form a part of the threshold for such waivers. This is because, in these given facts and circumstances, the appointment of the arbitrator took place before the decision in TRF v. Energo Engineering was delivered. In fact, in the words of the apex court, the arbitrator’s “invalid appointment only became clear after the declaration of the law by the Supreme Court in TRF Ltd. which, as we have seen hereinabove, was only [after the appointment was made]”. Currently, the law on unilateral appointments is settled. If a party engages in the process laid down in a unilateral appointment clause, constructive knowledge can very well be imputed on such a party. This is also in consonance with the travaux préparatoires of the Model Law.
Possible Forms of Waiver — Cannot Put the Same Shoe on Every Foot
The lower courts in India have blindly followed the rigid, linear approach laid down by the Apex Court. However, the applicability of this waiver cannot be in black and white. Quite the opposite, considering the dynamic environment arbitration functions in, there are multiple possible forms of waiver. These forms are discussed by taking on alternative perspectives vis-à-vis the judicial application of this waiver by lower courts. In furtherance of this, two fictional scenarios are pertinent. For this purpose, it is assumed that there is a unilateral appointment clause in the arbitration agreement entered between ‘A’ and ‘B’, where B’s managing director has the right to unilaterally appoint the sole arbitrator.
Scenario 1: This is where, after a dispute has arisen between the parties, A invokes the arbitration agreement either through a request made and/or through a notice (under Section 21 of the Act). In response to A’s request/notice, B’s managing director appoints a sole arbitrator. The appointment is acknowledged and accepted by A through a correspondence. It is argued that these series of letters/correspondence between A and B can be construed as an ‘express agreement’ amounting to a waiver. However, these facts were overlooked by the Delhi High Court in at least two decisions (Delhi Integrated Multi Modal Transit Systems v. Delhi Jal Board; AK Builders v. Delhi State Industrial Infrastructure Development Corporation).
Scenario 2: This is where the arbitral proceedings, with a unilaterally appointed sole arbitrator, between A and B have been going on for around twelve months. Now, the parties successfully sought a court order extending the time limit under Section 29A of the Act, thereby mutually extending the mandate of the sole arbitrator. This means that both A and B consented to continuation of the sole arbitrator’s mandate. It is well settled that a court order containing statements made by the parties can be regarded as an “an agreement in writing” (See Brahm Singh v. Nisha Rani; Mahabir v. Manohar Singh). Therefore, it is argued that such an extension of the sole arbitrator’s mandate can be construed as a waiver under Section 12(5) of the Act. At the same time, it is admitted that not every extension can be construed as a waiver. For instance, in Naresh Kanayalal Rajwani v. Kotak Mahindra Bank, the Bombay High Court terminated the mandate of a sole arbitrator who had unilaterally extended his mandate. There was no consent to extend the arbitrator’s mandate.
These scenarios showcase the need for a relatively flexible approach while applying the waiver under Section 12(5) of the Act. While doing this, the courts must keep in mind the objectives of the Act. It would defeat the purpose of the Act, and the underlying Model Law, if the mandate of arbitrator(s) is terminated on the basis of rigid and impractical thresholds, evoking the need to restart the whole process of arbitration leading to significant increase in both cost and time. Fairness and efficiency are two sides of the same coin. Both of them need to be balanced.
[1] B.A. LL.B. (Hons.), National Law University, Jodhpur. His interests lie in commercial dispute resolution (including arbitration) and international trade law. The author can be reached at priyanshumukesh.shrivastava@nlujodhpur.ac.in.