This article was first published in Bar and Bench on : 27 Dec, 2019 , 11:17 am
In TRF Limited v. Energo Engineering Projects Ltd. [(2017) 8 SCC 377], a three-judge bench of the Supreme Court had, to our mind, decisively ruled against unilateral appointments of arbitrators. However, the Delhi High Court had decided otherwise in the matters of DK Gupta v. Renu Munjal [2017 SCC OnLine Del 12385] and Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd. [(2018) 249 DLT 619]. The Delhi High Court in D K Gupta distinguished TRF on facts and held ‘there exists no bar under the Act which restrains a party to appoint an Arbitrator. Rather section 11(2) of the Arbitration and Conciliation Act, 1996, empowers the parties to agree on a procedure for appointment of an arbitrator‘. This view was upheld in Bhayana Builders.
The ambiguity surrounding the interpretation of TRF was finally put to rest by the Supreme Court in the matter of Perkins Eastman Architects DPC v. HSCC (India) Limited [2019 (9) SCC OnLine SC 1517]. The Supreme Court held that there were two categories of cases. The first category comprises a case where the managing director is himself named as the arbitrator and also has the power to appoint any other person as an arbitrator. The second category comprises a situation when a managing director is merely empowered to appoint an arbitrator, but does not act as an arbitrator himself. The Court was of the view that the invalidity touched both categories. The Court was ‘conscious’ that its interpretation of TRF would disentitle a party from appointing an arbitrator. But this, in the Court’s view, was the ‘logical deduction’ from TRF. By sequitur unilateral appointment of an arbitrator by one party was invalid in law.
The Voestalpine Exception
In 2017, in the matter of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. [(2017) 4 SCC 665], the Supreme Court had upheld the power of a party to appoint a panel of arbitrators for the other party to select therefrom.
The Court in Voestalpine upheld the right of one party to appoint a panel of arbitrators. However, the Court made this subject to several riders. The panel had to be broad-based. The appointing party of the panel could not hand-pick a few persons from the list and select an arbitrator, nor require the other party to select from the hand-picked list and finally the two arbitrators were not permitted to pick the third arbitrator from the short hand-picked list. The entire broad-based list had to be available for selection of arbitrator to all concerned. In the peculiar facts of the Voestalpine case, the Court required the appointing party i.e. DMRC to use the entire panel of 31 arbitrators, as opposed to hand-picking a mere 5 therefrom. Though the Court was of the view that ex-employees of the Central Government would not be automatically ineligible to be arbitrators, they could however not be employees, ex-employees, consultants, advisors or in any manner related to the appointing party i.e. DMRC. Furthermore, the persons who are ultimately chosen as arbitrators from the full broad-based list would need to disclose their interest in terms of Section 12 of the Arbitration and Conciliation Act, 1996. [Emphasis supplied by the authors]
This judgement had, unfortunately, not been considered in the TRF judgement. While, the Court in Perkins cited Voestalpine, it did not clarify its position with regard to the legality of appointment of a panel by one party, thereby impliedly creating an exception for the appointment of a panel of arbitrator by one party.
This created some confusion on the scope of both judgements. However, the Bombay High Court in the matter of Lite Bite Foods Pvt. Ltd. v. Airports Authority of India [2019 SCC OnLine Bom 5163] succinctly explained the different spheres of these judgements. The Court observed – “In summary, the legal principles are these: (a) An officer or employee of one party cannot be the arbitrator or, upon eligibility, the person empowered to appoint an arbitrator. This is the TRF Ltd category or rule. (b) Where the arbitration clause provides for nomination by each side, and for the appointment of an umpire by the two nominee arbitrators, of a person from a panel: (i) that panel cannot be hand-picked by one side; and (ii) it must be broad-based and inclusive, not narrowly tailored to persons from a particular category. The opponent and the two nominee arbitrators must have the plenitude of choice. This is the rule in Voestalpine Schienen. Conceivably, a broad-based panel commonly agreed in the contract by both sides would serve the purpose. (c) A clause that confers on one party’s employee the sole right to appoint an arbitrator, though that employee is himself not to the arbitrator, is also not valid, and this is a logical and inescapable extension of the TRF Ltd doctrine. It makes no difference whether this power is to be exercised by choosing from a panel or otherwise. This is the rule in Eastman Perkins‘.
The Railway Electrification Dilemma
Just two weeks after the decision of Lite Bites, a three-judge Bench of the Supreme Court ruled again. This time in the matter of Central Organisation For Railways Electrification v. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company [2019 SCC OnLine SC 1635] (‘Railway Electrification Case’). The Court held that a panel of five arbitrators appointed by the Ministry of Railways, comprising their current and past employees, was valid and enforceable. Since the other party could choose an arbitrator from the panel, the power to appoint an arbitrator by one party was counter-balanced by an equal power in favour of the other party.
Ironically, the Court in arriving at its decision relies on the judgements of TRF, Perkins and Voestalpine. The Court quotes from these decisions, but arrives at a completely different finding.
In TRF the three-judge bench held that a person who is ineligible by the bar of Section 12(5) could not appoint another as an arbitrator. In allowing employees and ex-employees of the appointing party to be part of the panel, the Court in the Railway Electrification Case ignores the ineligibility criteria propounded by TRF (and clarified by Perkins). This aspect, in our respectful submission, would require re-consideration by a larger bench since both TRF and Railway Electrification are three-judge bench decisions. Although the Court in Railway Electrification appears to rely on Voestalpine, in reality it has over-ruled Voestalpine on several important aspects including broad-basing the panel and requiring the chosen arbitrator to pass the test of s.12(5). Also, the Court in Railway Electification has failed to consider, despite the same having been argued, that the waiver of Section 12(5) could only be made after the dispute has arisen.
The Court in Voestalpine had also observed that the “(t)ime has come to send positive signals to the international business community‘. With the decision in Perkins, India was poised to take the lead in setting new standards in fairness in arbitral appointments. But that may now have to await another day or judgement.
Payal Chawla is the founder of JusContractus, a Delhi based full service law firm, with primary focus on arbitrations. She is also a Director of the Nani Palkhivala Arbitration Centre. Ms. Hina Shaheen is an advocate at JusContractus.
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