- Ujjawal Satsangi[1]
Jan Paulsson explains the Idea of Arbitration, in his book of the same name, in following wise words “[a] binding resolution of disputes accepted with serenity by those who bear its consequences because of their special trust in chosen decision-makers.”[2]
This sentence binds the entire philosophy behind arbitration and essentially enumerates its components. We must understand that arbitration is an alternative method of dispute resolution and such method can only be effective and acceptable if the parties to the agreement have faith in the decision maker. Paulsson emphasised upon ‘special trust in chosen decision-makers’ which is the cornerstone of any acceptable and justiciable arbitration. Unless the parties are ready to accept the judgment of the chosen umpire, the arbitration cannot be considered to be a rendering of justice and would be nothing more than a sham.
Among all the words used, two i.e. “special trust” and “chosen” are of significant importance. Both these words were under constant scrutiny and interpretation by various courts around the world. The word chosen has to be understood from a mutual prospective. Since, arbitration is a method adopted mutually by the parties, the arbitrator so chosen must also be mutually appointed by the parties. A logical stretch of this proposition leads us to assume that one party’s unilateral act of appointing an arbitrator, without considering the opinion of the other, violates the sacred thread of mutuality which is the foundation of arbitration, and hence the very neutrality of the appointed arbitrator becomes questionable.
With this backdrop, I will analyse two questions i.e. 1. Whether a party to arbitration can unilaterally appoint an arbitrator? and 2. Whether such appointment prima facie posts a challenge to neutrality of an arbitrator?
Section 11(2) of the Act and Freedom to Determine Procedure
Arbitration and Conciliation Act 1996, in very simple terms, provides the power to the parties to decide the procedure of arbitration and manner of appointment of the arbitrator(s).[3] It makes us wonder, as to whether this liberty has any limitation attached to it or does it give the unfettered powers to the parties to construct a contract as per their own whims and fancies. The only caveat visible from a reading of the sub-section is with respect to the failure of the parties to perform their obligations and power of the Courts to intervene then. However, the fundamental question we post here is whether at the very moment of entering the contract, the parties can formulate a clause wherein one of the parties waives his very right to nominate or appoint an arbitrator or not.
As explained, the simple reading of the sub-section suggests that the parties can formulate a clause where one party waives its right to appoint an arbitrator. However, we must not forget that in modern times parties do not always find themselves to be at equal footing and hence there are chances of one party taking advantage of the other and formulating onerous contracts. It is in this factual circumstance we require a reading of the law. Evidently, such onerous contracts were a benchmark for the industry where we saw government agencies, statutory bodies, public sector undertaking and other like organisations with bargaining power on their side preferring standard contracts formulated by them for entering into any agreement and without any exception used an arbitration clause, naming their own employee or MD /CEO/Chairman or trusted confidante as the arbitrator.[4]
Amendment to the Act and judgement of TRF Ltd v. Energo Engineering Projects Limited
On the very face of it, such clauses were averse to the idea of arbitration discussed above. Although, the parties agreed to such clauses in the contract at the first place and indeed the law in its plain reading did give them the right to formulate such procedures, but in principle, the clauses were a sham and were going against the very spirit of arbitration. As a result, a welcome change was brought by the government when the Schedule V and Schedule VII were added to the Arbitration and Conciliation Act 1996 by way of amendment in 2016.[5]
The newly added schedules, essentially took away the immoral foundation of aforementioned illustrations of clauses wherein people with interest, especially employees, agents and consultants were made ineligible from becoming the arbitrator. The situation was further clarified and streamlined when the Hon’ble Supreme Court in TRF Limited v. Energo Engineering Projects Limited[6] explained that not only the persons falling into the category of Schedule VII are ineligible for becoming an arbitrator but they are also ineligible for nominating an arbitrator in their stead.
With the above position of law in place, the question of neutrality of an arbitrator is more or less being addressed. The reading of the above judgment construes that even if a unilateral appointment of arbitrator is present, the party with such power cannot exercise it arbitrarily and it has to be exercised keeping the neutrality of the arbitrator in mind.
Unilateral Right to Appoint Arbitrator vis-à-vis Arbitration Act 1940
In the regard, the pertinent question of validity of such clauses is now required to be revisited. As we delve into the basic foundation of arbitration, as explained by Jan Paulsson, the mutuality of parties is a must. If we read the question, in light of the above principle and the reasoning behind bringing Schedule V and Schedule VII in the Arbitration and Conciliation Act 1996, it can be said that a clause giving unilateral power to one of the party to appoint arbitrator does not qualify the basic principle of mutuality and gives arbitrary powers in the hands of one of the parties resulting into grave injustice. This question did come for scrutiny before the Apex Court in Dharma Prathishthanam v. Madhok Construction Pvt. Ltd.[7] wherein the above position was read in accordance with the earlier Arbitration Act of 1940 wherein the following was observed:
“A unilateral appointment and a unilateral reference – both will be illegal. It may make a difference if in respect of a unilateral appointment and reference the other party submits to the jurisdiction of the arbitrator and waives its rights which it has under the agreement, then the arbitrator may proceed with the reference and the party submitting to his jurisdiction and participating in the proceedings before him may later on be precluded and estopped from raising any objection in that regard.”
The reasoning coming out of the above position being that a unilaterally appointed arbitrator may continue only if the other party agrees to his appointment and waives his objection. But prima facie, such appointment will be illegal. Although, the above observations were in respect of the Arbitration Act, 1940 it must not be forgotten that even then mutuality of parties had to be respected.
Unilateral Right to Appoint Arbitrator vis-à-vis Arbitration and Conciliation Act 1996
Considering the jurisprudence we have discussed so far, the Bombay High Court, on a couple of occasions found it necessary to address the daunting question at hand. The first two occasions which came before the Hon’ble Bombay High Court were in Prajakta Mahesh Joshi v. Rekha Uday Prabhu[8] and Zenith Fire Services (India) Private Limited v. Charmi Sales.[9] On both the occasions, the Hon’ble Court was pleased enough to throw some light on the question at hand and tried to answer some pertinent questions. While in Prajakta Mahesh Joshi v. Rekha Uday Prabhu[10], the Hon’ble Court read the situation in light of the scheme of the Act and passed the following observations:
“Considering the scheme and object of Arbitration Act, in my view, first requirement is that the Arbitrator must be appointed by the consent of the parties. The consent of Petitioner was never obtained. Therefore, the unilateral appointment of Arbitrator, in such fashion itself is impermissible mode to resolve the disputes by this alternative dispute resolution mode through the Arbitration…It is contrary to the terms and the law. Apart from this clause, it is necessary for both the parties to appoint and/or nominate and/or select sole Arbitrator by consent. The appointment of the Arbitral Tribunal without consent itself was contrary to the agreed terms of the contract.”
It was in the following judgement of Zenith Fire Services (India) Private Limited v. Charmi Sales[11] wherein the Hon’ble Court applied Doctrine of Acquiescence examined the situation and strengthens the above position in following words:
“Mere appointment of Arbitrator by one party and admittedly when it was not mutual appointment, that itself also is not sufficient to treat valid appointment of the Arbitrator, as per clause as well as under the provisions of the Arbitration Act. The mutual consent is a must, even otherwise, to appoint sole Arbitrator. I am inclined to observe that such appointment of the sole Arbitrator cannot be accepted as valid and legal appointment by invoking the Doctrine of Acquiescence and/or Estoppel and/or Waiver. Considering the whole scope and purpose of Arbitration Act and specifically in view of the provisions of Section 11 and the judgment of Supreme Court and even otherwise such unilateral appointment of Arbitrator itself is void, unjust and contrary to law. The whole proceedings therefore so initiated and continued also faces the same consequences. The consequential proceedings in view of this illegal appointment of sole Arbitrator are also bad.”
Effect of Amendment and TRF Ltd v. Energo Engineering Projects Ltd on Unilateral Appointment of Arbitrator
Recently, on 04.03.2019, once again the Bombay High Court addressed the issue and to the relief of many covered the scenario by taking into account the amendment of 2016 and the judgment of Hon’ble Apex Court in TRF Limited v. Energo Engineering Projects Limited.[12] Significantly, the following observations were made by the Hon’ble Court which is pertinent to note:
“Learned counsel for the Petitioners is also correct in her second contention that article 12 of the agreement being the arbitration agreement as entered between the parties had become unworkable by virtue of the amended provisions of the Arbitration and Conciliation Act (Act No. 3 of 2016) as the Respondent either ought to have appointed an arbitrator by consent of the petitioners or in that regard, ought to have approached the High Court under Section 11 of the Act and could not have proceeded to make a unilateral appointment…In these circumstances, a unilateral appointment of the Arbitrator on the part of the Respondent would be required to be held to be illegal and invalid considering the provisions of Section 11, subsection 5 of the Act which were clearly attracted on such disagreement on the part of the parties. It was necessary for the Petitioners to approach the High Court under Section 11(6) of the Act.”[13]
With these observations made by the Hon’ble Bombay High Court, the question pertaining to validity of unilateral appointment of arbitrator is now fairly settled. Consent of parties for valid application of a clause is sacrosanct in the law of contract and we need to understand that mutuality of agreement between the parties must be adhered to in arbitration as well. Hence, the clauses pertaining to unilateral appointment of arbitrator must now be examined with a strict scrutiny and in accordance with the spirit of arbitration.
[1] Ujjawal Satsangi is a practicing advocate at the Allahabad High Court. He practices in Arbitration Law, apart from Civil Laws, Services laws, Commercial Laws and Criminal Laws. He has regularly assisted the Hon'ble High Court of Allahabad, NCLT, DRT, and other forums. Further, he has been representing the interest of his clients in Arbitrations, Investment Negotiations and other commercial transactions. He graduated from National Law University Odisha in 2016. He has been an avid writer and often writes on several niche topics of law with an aim of enriching the world of legal writing and bringing a meaningful impact by the same. He can be contacted at ujjawalsatsangi@gmail.com
[2] Jan Paulsson, The Idea Of Arbitration (Oxford University Press 2013).
[3] Section 11(2) of Arbitration and Conciliation Act 1996.
[4] 246th Report of Law Commission of India (2014).
[5] Arbitration and Conciliation (Amendment) Act 2016, Act No. 3 of 2016. (See also article by Gaurav Rai – on Challenges’ for Arbitrators – Introduction available at https://www.thearbitrationworkshop.com/post/challenges-for-arbitrators-the-indian-experience-introduction)
[6] TRF Limited v. Energo Engineering Projects Limited, 2017 (8) SCC 377.
[7] Dharma Prathishthanam v. Madhok Construction Pvt. Ltd., 2005 (9) SCC 686.
[8] Prajakta Mahesh Joshi v. Rekha Uday Prabhu, 2013 (7) BomCR 791
[9] Zenith Fire Services (India) Private Limited v. Charmi Sales, 2013 (3) BomCR 156
[10] Prajakta Mahesh Joshi v. Rekha Uday Prabhu, 2013 (7) BomCR 791
[11] Zenith Fire Services (India) Private Limited v. Charmi Sales, 2013 (3) BomCR 156
[12] TRF Limited v. Energo Engineering Projects Limited, 2017 (8) SCC 377.
[13] Meenu Arora v. Dewan Housing Finance Corporation Ltd., Commercial Arbitration Petition No. 396 of 2017