An Overview Of The Supreme Court's Interpretation On Unilateral Appointment Of Arbitrators

The amendments introduced to the Arbitration and Conciliation Act, 1996 ("ACA"), starting from the amendments brought in 2015, have sought to further neutrality, independence, fairness and transparency in the arbitrator selection process. In this backdrop, this article seeks to highlight certain key decisions of the Supreme Court on the issue.

In Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Ltd AIR 2017 SC 939, the Supreme Court found the selection of 5 potential arbitrators by only one party from amongst a larger panel (as opposed to allowing the parties to select its arbitrators from the whole panel) to be invalid and limiting. In coming to this conclusion, the Court also stated that it was imperative that the panel of arbitrators be broad based comprising of professionals of diverse background. One of the primary objectives of the Court to reach this conclusion was "to send positive signals to the international business community, in order to create healthy arbitration environment and conducive arbitration culture in this country."

In the facts of the case, the nominee of the parties and the umpire were to be chosen from among 5 potential arbitrators selected by the respondent from the whole panel of arbitrators - comprising of serving and retired engineers either of the respondent or the government department or PSUs. The Supreme Court found the selection process to be adverse and bad in law due to lack of free choice with the appellant to nominate an arbitrator from the entire panel which also created suspicion that the Respondent would have picked its own favorites. As per the court, choice should have been given to both parties to choose from a full panel of arbitrators and for the two arbitrators to choose the third arbitrator from the whole panel. To prevent misapprehension of impartiality and independence, the Court found that the arbitrator panel should be broad based to include persons with other professional background such as engineers, judges, lawyers, accountants.

As regards the issue of appointment of a sole arbitrator, two cases namely - TRF Ltd. v. Energo Engineering Products Ltd (2017) 8 SCC 377 and Perkins Eastman Architects v HSCC (India) Ltd, AIR 2020 SC 59 lay down the jurisprudence.

In TRF Ltd. case (supra) the question for consideration before the Apex Court related to the eligibility of a person to appoint an arbitrator, who himself had become ineligible to be appointed as an arbitrator. As per the arbitration clause in the case, only the Managing Director or his nominee could be the sole arbitrator. The Court disagreed with the submission of TRF Ltd that ineligibility of the arbitrator only attached to the functioning of an arbitrator and not to the contractual power to nominate a neutral third party as a sole arbitrator. The Court held that once an arbitrator is prohibited by operation of law, his authority to nominate someone else also ceases. The overarching rationale being that since the managing director was interested in the outcome, his choice of arbitrator was also rendered unsuitable.

The Perkins case (supra), dealt with a situation where the managing director or officer was not to himself act as an arbitrator but was solely empowered or authorized to appoint a person of his choice. The unilateral appointment of sole arbitrator by one of the parties was found to be ineligible by operation of law inasmuch as the Court found that exclusivity in choice always had an element in determining or charting the course for dispute resolution. In other words, exclusivity of choice created bias. The court found that the element of invalidity is directly relatable to and arises from the interest in the outcome or decision. It was further held that interest in the outcome, if taken to be the basis of a possible bias, is present regardless of whether the fact situation falls under the TRF Ltd case (supra) or in the Perkins case (supra). Thus, Supreme Court found the principle affirmed in the TRF Ltd. case (surpra) to be equally applicable to a person who was also disentitled or ineligible merely to make an appointment.

The last key decision of Supreme Court on the issue is that of Central Organisation for Railway Electricification v. ECI-SPIC-SMO-MCML, 2020 (1) ARBLR 19 (SC) which pertained to the legality of selection process of an arbitration tribunal. As per the contract, the railways (Appellant) would select a panel of 4 officers, out of which the contractor (Respondent) was required to nominate and send at least two names out of the panel to the railways for selecting the contractor's nominees. The appellant was permitted to appoint the balance 2 arbitrators from the panel or outside the panel. In disregard of the issue of bias in the selection process of the arbitrators - wherein railways with a higher bargaining power could not only select the initial panel of 4 officers, but also nominate its own arbitrator and the presiding officer from outside the panel - ultimately making the selection process restrictive for the contractor, the court found the right of the appellant in forming of arbitral tribunal to be counter-balanced by the respondent's power to choose any two from out of the four names. Thus, the selection process of constituting the arbitral tribunal was found to be appropriate.

The afore-stated justification appears to be an attempt by the Supreme Court to ensure adherence to the principle of non- exclusivity of choice in appointing the arbitrator – which was affirmed by the Supreme Court in the other aforesaid decisions. However, for the reasons stated above, the railways (Appellant) had greater leeway in selecting its arbitrators and the court, in effect, failed to ensure a fair and balanced constitution of the arbitral tribunal thereby diluting the principle of law affirmed in TRF Ltd case (supra) and Perkins case (supra).

As per the author, the decision of Central Organisation for Railway Electricification (supra) is a step back in India's efforts to be an arbitration conducive and friendly hub and it would be better if this position of law is revisited either through a ruling of the Supreme Court by a larger bench or through a legislative amendment so as to minimize the potential of bias and to ensure constitution of a fair and balanced arbitral tribunal.

[The author is a practicing Lawyer at the Supreme Court of India. Views expressed therein are personal]