Unilateral arbitrator appointments are not harmonious with the law

In two recent judgments of its Bombay[1] and Aurangabad[2] benches, the Bombay High Court has re-emphasized the importance of mutuality in the appointment of independent arbitrators as required by Section 12(5) of the Arbitration and Conciliation Act, 1996 (the Arbitration Act).

Summary

In both instances the Court was faced with arbitration clauses that restricted the ability/ power of one of the parties from freely appointing an arbitrator of their choice. In one case, the arbitration clause provided for unilateral appointment of an arbitrator by one party alone. In the other cases, involving the Railways, the arbitration clauses provided for arbitration before current and/or retired Railways’ officers either nominated by the concerned Railways authority or to be selected out of a panel exclusively prepared by the concerned Railways authority.

Jurisprudence

The Courts discussed various precedents:

• In Voestalpine Schienen GMBH vs. Delhi Metro Rail Corporation Limited[3], the Supreme Court had held that when an arbitral tribunal is to be selected out of a panel of arbitrators, such panel should be broad based and should contain persons from a variety of backgrounds.
• Subsequently, in TRF Limited vs. Energo Engineering Projects Limited[4] the Supreme Court held that if the person to be appointed as arbitrator becomes ineligible to act as an arbitrator, then he also becomes ineligible to nominate another person as arbitrator.
• In Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Limited[5] the Supreme Court held that a person having interest in the dispute is disentitled from being appointed as an arbitrator and is also disentitled from appointing a person of his choice or discretion as an arbitrator.
• However, in Central Organisation For Railway Electrification vs. ECI-SPIC-SMO-MCML (JV)[6] (“CORE”) it was held that since the arbitration agreement provided for appointment of an arbitral tribunal consisting of three arbitrators to be selected from a panel of serving or retired railway officers, the appointment should be in terms of the agreement.

Findings

Both benches of the Bombay High Court concluded that the unilateral appointment of arbitrators by one party fell foul of Section 12(5) of the Arbitration Act and that it was incumbent on the Court to constitute an independent arbitral tribunal. The decision of the Supreme Court in CORE was distinguished on the ground that the issue dealt with therein was limited to whether retired railway officers are eligible to be appointed as arbitrators and whether the General Manager is eligible to nominate arbitrators. It did not deal with the validity of the arbitration clause and/or whether it was in conformity with the principles laid down in TRF (supra) and Perkins (supra).

Analysis

The Bombay High Court’s decisions re-emphasize that there are certain minimum levels of mutuality, independence and impartiality that should be inherent in the process of arbitrator appointments regardless of the parties’ apparent agreement. As such, the appointment of an independent and impartial arbitral tribunal requires a proper jugalbandhi (literally – entwined twins), a duet between two solo musicians who are on an equal footing.

How such mutuality is to be achieved with respect to arbitrator appointments requires some consideration on the part of parties. It is crucial that commercial parties are aware of the contours within which they can exercise their party autonomy insofar as arbitrator appointments are concerned. A failure in achieving the necessary thresholds of mutuality may result in recasting the band that was due at the gig.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Alok Jain, Partner, Email – alokjain@elp-in.com
Ashna Contractor, Principal Associate – Email – ashnacontractor@elp-in.com
Anuli Mandlik, Associate – Email – anulimandlik@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein. 

References:
[1] Judgment dated 27.03.2024 in tagged matters being (i) Arbitration Application (L) No. 6984 of 2023 – Telex Advertising Pvt. Ltd. vs. Central Railway; (ii) Commercial Arbitration Application (L) No. 30940 of 2023 – N.P. Enterprises vs. General Manager, Western Railway & Ors.; and (iii) Arbitration Petition (Civil Appellate Jurisdiction) No. 44 of 2024 – Anjali Hotels Pvt. Ltd. vs. Airport Authority of India, Pune.
[2] 2024 SCC OnLine Bom 995 – judgment dated 03.04.2024 in Arbitration Application No. 26 of 2023 – S.N. Naik & Brothers vs. Union of India.
[3] (2017) 4 SCC 665
[4] (2017) 8 SCC 377
[5] (2020) 20 SCC 760
[6] (2020) 14 SCC 712