1. The Arbitration and Conciliation Act, 1996 (“the Act”) saw several amendments made to it in the year 2015. The main objective of making these amendments, was to bridge the shortcomings in the working of the Act and to further smoothen the rough edges of the same. One of the amendments made, was to section 12 of the Act, which was primarily based on the discussion that had been enumerated in the 246th Law Commission Report.1 It is pertinent to note that these discussions specifically dealt with the subject of “neutrality of arbitrators” and more importantly, discussed the importance of impartiality and independence of the arbitrators.
2. Bearing this factor in mind, the amended section 12 of the Act, laid down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute came within the purview of any of the classifications specified in the seventh schedule, would be ineligible to be appointed as an arbitrator.
3. The aforesaid discussion in the Law Commission Reports as well as the amended Section 12 of the Act therefore indicated that, in order for an appointment of an arbitrator to be valid, the appointment ought to satisfy the test of independence and neutrality. In other words, a test had been laid down, to determine the eligibility of an arbitrator to adjudicate upon a particular dispute.
4. It is apposite to highlight that, the aforesaid test propounded in the Law Commission Reports, finds judicial sanction in a few judgments pronounced by the Supreme Court, namely, Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Limited 2 , TRF Ltd. v. Energo Engineering Products Ltd 3 and more recently in Perkins Eastman Architects DPC & Anr. V. HSCC (India) Ltd. 4 .
5. The first and foremost judicial pronouncement that fulfilled the test discussed in the Law Commission Reports was that of TRF Ltd. v. Energo Engineering Products Ltd 5 (“TRF Judgment”). The facts therein were, that the Managing Director (“MD”) of one of the parties had not only been named as the arbitrator but, was also given the unilateral power to nominate any other person as an Arbitrator. Upon hearing the parties, the Supreme Court was pleased to hold that an arbitrator who is ineligible by operation of law, cannot nominate another as an arbitrator.
6. It is pertinent to note that subsequent to this judgment, several arbitrations came to a standstill as several litigants claimed that they were governed by the said judgment and consequently section 12 of the Act. Therefore, they sought declarations from the concerned Courts in light of the TRF judgment, that the mandate of the sole arbitrators had de jure terminated. However, despite this clear finding by the Supreme Court, several High Courts gave contradictory judgments 6 basis their interpretation of the TRF judgment and went on to hold that the concerned arbitration clauses in the said agreements were indeed valid. This led to an ambiguity as to whether an MD was ineligible to appoint an arbitrator or not.
7. However, much to the respite of all litigants, recently, the Supreme Court through one of its latest and landmark judgments i.e. Perkins Eastman Architects DPC & Anr. V. HSCC (India) Ltd. 7 (“Perkins”), has taken forward the TRF judgment and essentially bridged the gap that the TRF judgment fell short in doing. Vide this judgment, the Supreme Court had the opportunity to adjudicate upon a matter where the arbitration clause only empowered the MD of the concerned party to appoint an arbitrator of his choice. It is relevant to highlight that this arbitration clause was slightly different from the clause that was referred to in the TRF judgment wherein, the MD was not only vested with the power to unilaterally appoint an arbitrator but was also nominated as an arbitrator. Therefore, Perkins removes any kind of ambiguity possible and directly addresses a very pertinent issue and also puts to rest all the various interpretations that were being given by various High Courts.
8. As aforementioned, several High Courts were not inclined to accept that the TRF judgment ought to be read in manner that meant that the MD could not appoint an Arbitrator irrespective of whether he himself had been named as an Arbitrator or he was merely the appointing authority. Further, they were also not inclined to interpret the TRF judgment to mean that the power of one party to appoint a Sole Arbitrator had been taken away by it.
9. However, vide this landmark decision the Supreme Court has therefore followed/clarified the TRF Judgment, in explicit terms and held that an appointee or a person who has an interest in the concerned dispute or in the outcome of the dispute at hand would be precluded from making the appointment of an arbitrator and that such an individual ought not to have any role in charting out the course for the dispute resolution. Therefore, a person who is vested in the outcome of the concerned proceedings cannot be eligible to appoint a person to adjudicate the same. Such appointment shall only lead to a high possibility of arbitrary findings and would therefore fail the test of fairness and impartiality.
10. In this regard it is also apposite to discuss the judgment of Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Limited 8 , wherein, the Delhi Metro Rail Corporation Limited (“DMRC”) had awarded a contract to Voestalpine Schienen Gmbh (“Voestalpine”) for supply of rails. Pursuant to certain disputes arising between the parties, Voestalpine sought for its claims to be determined by an Arbitral Tribunal as per clause 9.2 of the General Condition of Contracts (“GCC”) therein. This clause of the GCC stipulated that three arbitrators were to be appointed from a panel that was to be set up by DMRC and consist of engineers serving or retired. Further, DMRC was to furnish 5 names of such qualified persons out of a panel of 31 persons to Voestalpine.
11. However, Voestalpine was of the opinion that neither did this panel prepared by DMRC qualify as independent arbitrators nor was it in consonance with the amended section 12 of the Act. Upon hearing the parties at length, discussing the amendments made to the Act (specifically section 12) in detail and also referring to the discussions stated in the Law Commission Reports, the Supreme Court interalia held that, section 12 had been amended with the intention to induce neutrality of the arbitrators and also their independence and impartiality. In light of this observation, the Supreme Court further held that the choice given to Voestalpine was limited to choose one out of the five names that had been forwarded by DMRC. Thus, giving Voestalpine no free choice to nominate a person out of the entire panel created by DMRC. Further, the discretion to choose 5 persons was with DMRC and therefore left room for suspicion in the mind of Voestalpine that DMRC may have chosen its own favorites. Hence, the Supreme Court observed that such a clause which gave rise to such suspicion and further curtailed the freedom of one party’s right to free choice, ought to deleted and instead choice ought to be given to both parties to nominate any person from the entire panel of arbitrators.
12. Furthermore, the Supreme Court also held that keeping in mind the objective of the amendments that had been brought into effect and also to instill confidence in the mind of the parties involved in a dispute, it was essential to ensure that the panel was not only broad based but also ought to consist of persons who were from other fields as well. This would ensure that there is no misapprehension that the principle of impartiality and independence would be discarded at any stage of the arbitral proceedings.
13. It is pertinent to note herein that, although many may argue that Voestalpine runs parallelly to the TRF judgment and Perkins. This, ought not to be the popular understanding as Voestalpine while retaining the power to indirectly control the appointment of arbitrators emphasises that such power must be exercised keeping in mind the principles of independence and impartiality.
14. Although the Supreme Court vide the aforesaid judgments has stated that the independence and impartiality along with the party’s right to choose is of utmost importance, it has recently, in yet another decision i.e. Railways case, in complete contradiction to Voestalpine stated that, a panel of four arbitrators (comprising of current and past employees) who had been appointed by the Ministry of Railways was valid and very much enforceable. The rationale by the Supreme Court behind this finding was that owing to one party having the right to choose an arbitrator from the concerned panel, the power to appoint an arbitrator by the other party has been counter balanced by an equal power in favor of the other party.
15. In Voestalpine, the preexisting panel was directed to be deleted and a new panel was sought to be created including not only serving and retired engineers of the government departments and public sector undertakings but also engineers of prominence and high repute from the private sector as well as persons with legal background like judges and lawyers of repute as there could be disputes which were purely legal in nature or were with respect to accountancy. Thus, envisaging the necessity to include persons from such fields as well. The Supreme Court was also of the opinion that the parties should be allowed to choose from the entire wider panel instead of choice being limited to a more restricted panel in terms of numbers. However, not only does the Railway Case destroy this rationale of Voestalpine but, also does not necessitate the need to delete the preexisting panel or make it broad-based. Instead, it affirms the four-member panel that the Ministry of Railways sent to the party i.e. the contractor and very nonchalantly directs it to select two from the four suggested names and communicate the same to the Ministry of Railways within 30 (thirty) days from the receipt of the names of the nominees.
16. It is pertinent to note that this judgment of the Supreme Court is completely contrary to its earlier three judgments as, in all the other three judgments, specifically Voestalpine, the Supreme Court had not only stressed multiple times upon the independence and impartiality of the arbitrator but also harped on the issue that even if one party has been given the power to constitute a panel of arbitrators that another party is to choose from, such panel much necessarily be a broad-based one. More importantly, as aforementioned, the Supreme Court in Voestalpine had deleted the pre-existing panel on the ground that a panel of arbitrators comprising of only engineers or employees (present or retired) shall make room for suspicion and also give rise to the apprehension that the principle of impartiality and independence would be discarded at any stage of the arbitral proceedings. However, a reading of the of the Railways case shall indicate that although, the aforementioned judgments have been quoted in it, the Supreme Court arrives at a completely different finding that in no way is in consonance with either the TRF judgment, Perkins or more importantly Voestalpine. This is thus, very much against the hallmarks of arbitration proceedings i.e. independence and impartiality and therefore, the panel ought to have been expanded to include members from all fields.
17. Nevertheless, a perusal of the TRF Judgment, Perkins and Voestalpine shall clearly indicate, that all three of them have a common thread that runs through them i.e., the importance of upholding not only the neutrality of arbitrators but more importantly upholding the independence and impartiality of the concerned arbitrators. Consequently, the power to unilaterally appoint an arbitrator (which was earlier permissible under law), has now been done away with, in light of the prevalent discussions in the Law Commission Reports as well as the judicial pronouncements of the Supreme Court.
18. Therefore, this comes as a welcome change in the arbitration field as, not only does this decision send out a positive signal to the international business community but also creates a healthy arbitration environment and conducive arbitration culture in the country. However, it shall be interesting to see if this question of law is referred to a larger Bench for adjudication. Till such time, the law now stands well settled in so far as appointment of an Arbitrator by an MD is concerned i.e. the MD being ineligible himself to be an Arbitrator can neither be an Arbitrator himself nor is he eligible to appoint an Arbitrator. This, as aforementioned, completely does away with the appointment of sole Arbitrators by either party to an agreement.