[Abhinav Jain is a fourth year law student at USLLS, GGSIPU (Main Campus), New Delhi]
Party autonomy has always been the key element of arbitration that distinguishes it from regular court proceedings. Among other things, it includes the right of the parties to decide upon an appointment procedure of the arbitral tribunal. Court intervention through Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter, “the Act”) thus, being further limited, is still allowed where necessary in the interests of the public and of basic fairness. It’s a settled position that the court may disregard the agreed procedure to secure the appointment of an impartial arbitrator.
In any given appointment procedure, counterbalancing considerations of party autonomy and neutrality are at play: On one hand, there is an explicit consent and approval to this ‘allocation of power’ in the appointment provided for in the arbitration clause. On the other hand, an appointment procedure which gives more power in the hands of one party, may lead to the appearance, if not also the actuality, of bias in the decision making process, thereby putting at stake, the principles of natural justice.
In this article, the author will discuss four landmark judgments that have shaped the judicial position relating to the appointment procedure, while arguing that the recent-most on the issue, i.e., Central Railways vs. ECI-SPIC-SMO-MCML (hereinafter, “Central Railways”) is bad in law.
The TRF Judgment – Ineligible to Arbitrate, Ineligible to Nominate
In TRF vs. Energo Engineering (hereinafter, “TRF”), the Supreme Court held that a person, who has been held ineligible to arbitrate, is also de jure ineligible to nominate an arbitrator. The court implicitly equated the power and effect of nomination with that of delegation, while applying the maxim ‘Qui facit per alium facit per se’ (What one does through another is done by oneself). In this regard, the court observed that if the nomination of an arbitrator by an ineligible arbitrator, is allowed, it would tantamount to carrying on the proceeding of arbitration by the ineligible arbitrator himself:
“54. …Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. …”
The Voestapline Judgment – Nomination from a Panel
In Voestapline vs. DMRC (hereinafter, “Voestapline”), the arbitration clause provided for a panel of arbitrators of certain qualifications, to be maintained by DMRC. A list of five arbitrators from the panel would be forwarded by DMRC, from which both the parties would appoint their respective nominee arbitrators, who would then appoint the third/presiding arbitrator, also from the said list.
The court firstly held that Entry 1 of the Seventh Schedule pertains only to the relationship of the arbitrator with the parties to the dispute (DMRC), and does not bar employees of all government departments/undertakings, in general, having no connection with DMRC. Thus, the panel members, employees of the Railways, DDA and CPWD were not ineligible u/s 12(5) of the Act.
The court observed independence and impartiality of the arbitrators to be the hallmark of arbitration, the lack of which would render even contractually agreed arbitrators to be invalid. The court went on to hold that the procedure, wherein DMRC would unilaterally select a list of only five arbitrators from which the tribunal would be chosen , limited the options available to Voestapline, raising concerns about the neutrality and independence of the arbitrators appointed. Therefore, the court held that the parties should be free to nominate from the entire panel providing for a wider range.
The Perkins Judgment – Unilateral Appointment of Sole Arbitrator
The Supreme Court in Perkins Eastman vs. HSCC (hereinafter, “Perkins”), further developed and expanded on the reasoning in TRF, and held the unilateral appointment of a sole arbitrator as invalid. The court observed that the element of ineligibility in TRF arose due to the nominating person having an interest in the outcome of the dispute. Furthering on this reasoning, the court held that no person having an interest in the outcome must “have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator”.
The court, following the TRF decision, also carved out an exception where both the parties have equal nominating powers, and observed:
“16. …cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party.”
Effect on The Pending Disputes
As clarified in Bharat Broadband v. United Telecoms, an ineligibility flowing from the Seventh Schedule would terminate the mandate of the arbitrator, and this effect would also extend to appointments that had already been made before the TRF decision. The same principle was followed for the law laid down in Perkins Eastman, by the Delhi High Court in Proddatur Cable vs. Siti Cable .
The Central Railways Judgment – Bad in Law?
This Perkins exception became critical in the Supreme Court decision of Central Railways, wherein arbitration jurisprudence was moved towards party autonomy, and away from the overarching principles of natural justice that had been glorified in the 246th Law Commission Report.
In this case, the clause provided for 4 retired Senior Railway Officers empanelled by the Railways, from which ECI would choose two persons. Out of these two, one would be selected by the General Manager of the Railways as ECI’s nominee arbitrator. The remaining two arbitrators would be selected by the General Manager not being limited to the list. Relying on the Voestapline and Perkins decisions, the court ruled the panel members to be eligible u/s 12(5) of the Act, and the appointment procedure to be valid, respectively. The author argues that the Supreme Court has wrongly applied the aforesaid decisions.
In Central Railways, reliance was placed on Voestapline to contend that retired employees would not be ineligible. However, it is important to notice that Voestapline had distinguished between employees of the disputing parties therein (DMRC), from government employees of other departments, and had held Railways’ employees to be eligible only to the extent that they had no connection with the disputing parties:
“25. It cannot be said that simply because the person is retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (party in dispute), he would be treated as ineligible to act as an arbitrator. …”
Reliance was also placed on PWD Haryana vs. G.F. Toll Road, wherein the Supreme Court held Entry 1 of the Fifth and Seventh Schedules to not include past employees ‘provided that there are no justifiable doubts as to his independence and impartiality’. Though distinguishably, this case does not deal with panel appointment, a person employed 10 years ago in the State of Haryana was held not ineligible as the nominee arbitrator for the PWD Haryana, The court observed, while drawing a narrow interpretation:
“3.10 …The word “other” used in Entry 1, would indicate a relationship other than an employee, consultant or an advisor. The word “other” cannot be used to widen the scope of the entry to include past/former employees.”
The Delhi High Court in Afcons Infrastructure vs. Rail Vikas Nigam, despite observing former employees to not be disqualified u/s 12(5) of the Act, had considered the fact that all the persons suggested, vide the arbitration clause, in the panel of only five persons, being retired employees “however remote” would give rise to apprehensions regarding impartiality of the tribunal. The court thus, appointed its own arbitrator. Similarly, all the persons provided in the Central Railways list being former employees, it would give rise to justifiable apprehensions against neutrality of the tribunal, liable to be invalidated u/s 12(3)(a) of the Act.
For the issue of appointment procedure, the court justified the clause based on the exception carved in Perkins. The court in Perkins observed that any interested party “must not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator”; subject to the exception wherein both the parties have equal and counter-balancing powers in the nomination process.
The Central Railways clause has 3 important aspects:
(i) ECI’s namesake role/power bound by the superseding discretion of the Railways vide its unilaterally selected panel of only four persons.
(ii) Railways’ discretion to appoint any one of the two nominations of ECI.
(iii) ECI’s aforesaid namesake role only exists in the minority, since the other 2 arbitrators are appointed by the Railways.
On ECI’s contention of the General Manager’s ineligibility to nominate u/s 12(5) of the Act, the court considered the minimal role of ECI to have counterbalanced the General Manager’s nominating powers. The court thereby wrongly invoked the Perkins exception, even though the clause clearly does not delineate equal or counter-balancing powers to the parties, as shown above.
Therefore, the author argues the Voestapline and Perkins decisions to have been wrongly applied, and that their correct application would render the Central Railways decision bad in law. Further, the Voestapline judgment would, in any case, render such a narrow panel invalid. In fact, in a recent order dated 11 January 2021, a three-judge bench of the Supreme Court expressed prima facie disagreement with the Central Railways judgment, and requested the constitution of a larger bench to look into its correctness.
In conclusion, while the unilateral appointment of a sole arbitrator is clearly invalid, the validity of panel nomination, especially in a unilaterally selected panel, would depend on the exact procedure as set out in the agreement, balancing the consideration of neutrality and party autonomy.