APPOINTMENT OF A SOLE ARBITRATOR BY A ONE PARTY SINGULARLY IS ARBITRARY

The concept of one-sided contracts, wherein the leading party drafts favourable clauses to their advantage is quite a common practise, like the misuse of power by dominating parties in the contracts who seize the right to appoint a sole arbitrator, leaving the opposite party with no alternative but to succumb. However; the Hon’ble Supreme Court of India in the matter of Perkins Eastman Architects DPC & Anr. versus HSCC (India) Ltd. (decided on 26.11.2019)has reiterated that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.The Apex Court through this judgement would be instrumental inremoving this prevalent biasness in context to the dispute resolution clause of appointment of the sole arbitrator and they have reinstated the maxim Nemo Judex in causa Sua- “No one can be a judge in his own cause”

The main issues pertaining to the present case were:-

“….whether an arbitration clause authorising one of the parties to the contract, to appoint the “Sole Arbitrator” for adjudication of disputes, would be valid in law or not?. Another issue, inter alia,  before the court was as to what would be the consequence of a situation where the party so authorised to appoint the Sole Arbitrator under the contract, has failed to do so within a period of 30 days (or within the time period, if so, provided in the agreement) from the date of receipt of notice.”

In the present case the main clause of dispute resolution read as under:-

24.0 DISPUTE RESOLUTION 24.1 Except as otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, design, drawings and instructions herein before mentioned and as to the quality of services rendered for the works or as to any other question, claim, right, matter or thing whatsoever in any way arising out of or relating to the contract, design, drawings, specifications estimates instructions, orders or these conditions or otherwise concerning the works or the execution or failure to execute the same whether arising during the progress of the work or after the cancellation, termination, completion or abandonment thereof thereof shall be dealt with as mentioned hereinafter:

(i) If the Design Consultant considers any work demanded of him to be outside the requirements of the contract or disputes on any drawings, record or decision given in writing by HSCC on any matter in connection with arising out of the contract or carrying out of the work, to be unacceptable, he shall promptly within 15 days request CGM, HSCC in writing for written instruction or decision. There upon, the CGM, HSCC shall give his written instructions or decision within a period of one month from the receipt of the Design Consultant’s letter. If the CGM, HSCC fails to give his instructions or decision in writing within the aforesaid period or if the Design Consultant(s) is dissatisfied with the instructions or decision of the CGM, HSCC, the Design Consultants(s) may, within 15 days of the receipt of decision, appeal to the Director (Engg.) HSCC who shall offer an opportunity to the Design Consultant to be heard, if the latter so desires, and to offer evidence in support of his appeal. The Director (Engg.), HSCC shall give his decision within 30 days of receipt of .” 

Director of the respondent was called upon to appoint a sole arbitrator in terms of said Clause 24. However, no appointment of an arbitrator was made within thirty days but a letter was addressed by Chief General Manager of the respondent on 30.07.2019 purportedly appointing a sole arbitrator.As the appointment was beyond 30 days the petitioner moved to the Supreme Court for appointment of arbitrator, this being international commercial arbitration, attacking the arbitration clause giving complete discretion to the Chief General Manager of respondents to appoint the sole arbitrator. It was the petitioners stand that since the Chief General Manager of the respondent company would be interested in outcome/decision of the dispute, the pre-requisite of impartiality would be missing if the respondent were to appoint the arbitrator.

A similar issue was dealt with by the Supreme Court in a 2017 case called TRF Limited vs. Energo Projects Limited. In the said case, the Court had examined a clause which nominated the managing director himself to be the sole arbitrator and also empowered said managing partner to nominate another person to act as the sole arbitrator. The managing partner, by operation of law, became ineligible to act as an arbitrator. Therefore, the Court had held that “Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited4”. And in the present case also the court applied the same wherein the Court observed that if such deduction is drawn from the decision in TRF, all cases having clauses similar to that in Perkins, where a party to the agreement would be disentitled to make any appointment of an Arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an Arbitrator. The Court confirmed that the above position is the natural and logical deduction from TRF.

The recent trend of pro arbitration has been on the rise and with the present Judgement also the apex court has reinstated the same wherein it has been stated “Time has come to send positive signals to the international business community, in order to create healthy arbitration environment and conducive arbitration culture in this country. Further, as highlighted by the Law Commission also in its report, duty becomes more onerous in government contracts, where one of the parties to the dispute is the Government or public sector undertaking itself and the authority to appoint the arbitrator rests with it. In the instant case also, though choice is given by DMRC to the opposite party but it is limited to choose an arbitrator from the panel prepared by DMRC. It, therefore, becomes imperative to have a much broad-based panel, so that there is no misapprehension that principle of impartiality and independence would be discarded at any stage of the proceedings, specially at the stage of constitution of the Arbitral Tribunal..”.

In the other question i.e. whether court can exercise powers under Section 11 (6) of the Act when appointment of the Arbitrator has already been made by HSCC or whether PEA should be left to challenge such appointment at an appropriate stage in terms of the remedy available in law. While answering the said issue, the Hon’ble Supreme Court noted the opinion expressed by the Designated Judge in case of Walter Bau AG case ((2015) 3 SCC 800) to the following effect:-

“10. Unless the appointment of the arbitrator is ex facie valid and such appointment satisfies the Court exercising jurisdiction under Section 11(6) of the Arbitration Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11(6) cannot be countenanced in law.”

As the court had already held that appointment of sole arbitrator by the respondent being HSCC was not valid, hence the Court had the power to entertain the petition and accordingly, the court appointed an arbitrator for adjudication of the disputes between the parties and set aside the appointment by the respondent.

 

Conclusion:       

The apex court by the present judgment has put another feather in their cap for the pro Arbitral trend and this judgement would be instrumental in curbing misuse of power by one party over another in the contracts. This would promote the parties to appoint the sole arbitrator by mutual consent failing which, as per amended Act (post 2019 amendment), such appointment shall be made by Arbitral Institutions designated by Supreme Court or the High Court, as the case may be.

 

 

Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.