Unilateral Appointment of Arbitrator: In defense of Legislative Intention

Departing from the procedure of mutual consent for the appointment of an arbitrator, which sometimes is complicated, prolonged and unnecessarily tedious, parties, in their commercial wisdom often incorporate clauses for the appointment of an arbitrator by one party. Unquestionably, incorporation of such clause by the parties to the arbitration, having equal bargaining power does not place the non-appointing party at a disadvantage regarding the composition of the arbitral tribunal. However, the recent line of judgments by the Apex Court and various other High Courts hold that such agreement/arrangement for unilateral appointment are no longer enforceable contracts. In this context, it is critical to note that the Supreme Court of India in its ruling in the matter of Perkins Eastman Architects DPC and Anr v HSCC India Ltd 2020 20 SCC 760 has considered and concluded that unilateral appointment of arbitrators results in an omnibus disqualification and further held that such an award passed shall be void ab initio and non -est in law. The Supreme Court has in Perkins emphasized that such unilateral appointments have an element of exclusivity in favor of the Appointing Party and negates the counter balance of powers between the parties. According to Perkins, the legislative intent of the 2015 Amendment (that spells out the criteria for ineligibilities to be appointed as arbitrator) was to prevent a party having interest in the decision of a dispute, not only from acting as an arbitrator but also making it ineligible to appointing an arbitrator. This conclusion was arrived by the Supreme Court after placing reliance in the findings of another Supreme Court judgment in the matter of TRF Ltd. V Energo Engg. Projects Ltd 2017 8 SCC 377 that authorized the Managing Director of a company to neither act as an arbitrator or nominate an arbitrator. The Managing Director nominated an arbitrator, whose nomination was challenged. The Supreme Court in TRF concluded that once the Managing Director was not capable of acting as an arbitrator, he could not have appointed an arbitrator either, applying the principle that what cannot be done directly may not be done indirectly.

Before the amendment to section 12(5) was brought in by the Arbitration and Conciliation (Amendment) Act 2015 (Act 3 of 2016), there existed no guidelines and/or parameters listing out the ineligibilities that ousted an arbitrator from being appointed or to ascertain impartiality and independence of arbitrators.

The 246^th Law Commission Report emphasized the need for appointment of neutral and impartial arbitrators, simultaneously balancing the principles of party autonomy. While Section 12(5) of the A&C Act gives a reference to the Seventh Schedule that lays out ineligibilities of a person to be appointed as an arbitrator, the Fifth Schedule sets out a list of justifiable doubts vis a vis the independence and impartiality of arbitrators. It is germane to note that there is neither a whisper on unilateral appointment in either of the two schedules nor the A&C Act places any restriction on a party to appoint an arbitrator. This casts a doubt as to whether the Legislature intended to put a blanket ban on unilateral appointment of arbitrator?

To say that, all unilateral appointments are automatically nullified under section 12(5) seems to be an overstretch of the Legislative intent and the mandate of section 12(5) which is within the guard-rails of the Seventh Schedule. However, had this been the legislative intent, the presence of the proviso to 12(5) giving discretion to the parties from departing from the procedure will be futile and pointless. A reading of the proviso to Section 12(5) allows the parties to the agreement to waive the applicability of section 12(5) by an express agreement in writing. The effect of the proviso enables consenting parties to make Section 12(5) completely inapplicable after the disputes have arisen between the parties by an agreement in writing. This once again demonstrates the due regard to party autonomy under the A&C Act.

The A&C Act is a complete code in itself that thoroughly checks the impartiality of an arbitrator and prevents any existing/potential conflict of interest. Under the mandate of section 11(8) read with section 12 of the A&C Act, an arbitrator is bound to make thorough disclosures which are likely to secure the appointment of an independent and impartial arbitrator. Furthermore, under Section 11(2) of the A&C Act, the parties are permitted to select the procedure for appointment of arbitrator. In any event, the principles of natural justice and fair play are guaranteed under the A&C Act, and the appointment of arbitrator unilaterally, if coupled with biasness and impartiality is susceptible to challenge on the grounds more particularly detailed in Section 12 and Section 16 of the A&C Act. However, the now settled position of law as laid down by the Courts on unilateral appointment results in the significant encroachment on the principle of party autonomy. It is for this reason, the blanket ban against the right of one party to appoint an arbitrator requires to be revisited.

Partiality in the case of unilateral appointments can be assessed by way of a careful scrutiny of the bargaining powers of the party or by appreciating the cogent evidence on the alleged partiality and biasness of the arbitrator would be a desirable method to balance the principles of party autonomy without compromising on the actual concerns regarding independence and impartiality of the arbitrator. Merely because the parties have agreed upon a procedure to appoint an arbitrator unilaterally, that cannot by itself be a ground to suggest that the appointment is bad in law. The concept of biasness and impartiality can only be ascertained during the continuance of the proceedings before the arbitrator and a presumption to hold that such arbitrator will be partial in favour of the appointing party is erroneous, unjustified and unreasonable to say the least.

Now let us imagine a scenario in a small claim arbitration wherein the parties in their commercial wisdom have agreed on a procedure for appointment of arbitrator pursuant to which one party is conferred with the right to exercise its power for appointment of arbitrator. Cost efficiency is paramount in such arbitration proceedings given the fact that stakes are not high. Holding the arbitration proceedings conducted and concluded between such parties as invalid merely because parties in exercise of their party autonomy have chosen a process for unilateral appointment of arbitrator is, contrary to the basic principle of arbitration mechanism which is, cost-efficient settlement of disputes. Patently, the award passed in such a scenario would be unenforceable and a nullity in law, relegating the parties to a similar position that existed before invocation of the arbitration thereby making the entire arbitration proceeding a futile exercise with the additional burden of costs. In such circumstances, it becomes incumbent upon the Court to carve out a path in order to save and give life to such an award passed by an Arbitrator unilaterally appointed in exercise of party autonomy principle.

Party Autonomy: The driving force of an Arbitration proceeding

One of the underlying reasons why parties choose Arbitration is because of its flexibility owing to the participation of the parties to mutually decide upon a procedure. Right from the appointment of an arbitrator, party autonomy is the driving force for effective adjudication of disputes between the parties.

Needless to mention, appointment of an arbitrator by one party to an agreement in itself qualifies to be a procedure agreed upon between the parties and is a creature of party autonomy.

All things considered, the settled principle of law on unilateral appointment of arbitrator is definitely not the desirable one and contrary to the legislative intent. It is therefore absolutely necessary for the Supreme Court to revisit and clarify the law on unilateral appointments. The ratio decidendi in Perkins disallowing an ineligible person to act or appoint an Arbitrator needs to be distinguished from a scenario wherein the Parties themselves act on a fair and impartial procedure allowing a party to solely appoint an Arbitrator. Infact, the legislature in its rationality and prudence, deemed it worthy to entrust the manner and procedure for appointment of arbitrator to the parties to the dispute. For the reasons stated above, the blanket ban on the unilateral appointment of arbitrator by one party to the Agreement ought to be reconsidered and reviewed especially when the parties, in their commercial wisdom have agreed on a fair and an equitable procedure for appointment of arbitrator.

Authors are practising Advocates and veiws are personal.