The notion of independence and impartiality of the adjudicators, be it in the identity of judges or arbitrators, is a hallmark of any adjudicatory process. Nemo iudex in causa sua, meaning that no person should be a judge in his own cause, is a cardinal principle of natural justice, regardless of whether the proceedings are judicial or quasi-judicial in nature.
Until recently, the Arbitration and Conciliation Act 1996 (‘Indian Arbitration Act’) allowed one of the parties to the arbitration agreement to unilaterally appoint a sole arbitrator, who could even be its employee or his nominee. This often raised strong apprehensions of biased awards in favour of the appointing party and, thus compromised the above-said cardinal principle of the natural justice.
However, after a streak of decisions, Indian courts have recently shifted their stance and now hold such one-sided clauses strictly invalid. This post examines this altered legal position in India vis-à-vis several other jurisdictions and also analyzes its impact on other parts of Indian arbitration law.
I. Indian legal position – the shift
Foremost, in TRF Limited v. Energo Engineering Projects Ltd (‘TRF Ltd’), the arbitration clause empowered the managing director of Energo or his nominee to act as the sole arbitrator. The Supreme Court of India first held the appointment of managing director as invalid and thereafter, strongly opined that, once a person has become ineligible to act as arbitrator, he can also not nominate another person despite the arbitration agreement providing such a power. The Court metaphorically observed that ‘once the infrastructure collapses, the superstructure is bound to collapse’. Moreover, the Court adopted a strict approach and concluded that the invalidity of the unilateral appointment of the sole arbitrator would follow regardless of factors like disclosure, objectivity, impartiality, or any other such circumstances.
Ensuing it, in Bharat Broadband Network Limited v. United Telecoms Limited, the Court held a clause similar to the one in TRF Ltd invalid and the appointment void ab initio. Pertinently, in this decision the Court held that this invalidity would have a retrospective effect.
Recently, in Perkins Eastman Architects DPC & Anr v HSCC (India) Ltd the Court held a clause empowering only a nominee of the Chief General Manager of HSCC to act as the sole arbitrator invalid. The Court observed that ‘if the interest that a party has in the outcome of the dispute is taken to be the basis for the possibility of bias, it will always be present’, regardless of whether the clause empowers the officer of such a party to act as an arbitrator or to appoint anyone (like in TRF Ltd) or only empowers its officer to appoint a sole arbitrator.
II. India’s position vis-à-vis other jurisdictions
This shift of the Indian legal position now resembles the legal positions in several other jurisdictions like Switzerland, the Netherlands, Germany, France, the United Kingdom, and the USA.
In some of these jurisdictions, the local legislation expressly invalidates the reservation of unequal powers in the arbitrator-selection process, whereas in others the invalidity has been recognized through judicial precedents. For example, unlike India, article 1028 of the Netherlands Code of Civil Procedure and section1034(2) of the German Code of Civil Procedure expressly allows the disadvantaged party to ignore a clause that privileges one party in appointing arbitrators.
On the other hand, like India, in the jurisdictions like the USA, France, and Switzerland, the courts have held such unequal clauses as unconscionable and invalid. For example, in the US case Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc the court remarked that ‘[w]here arbitrators are not appointed by a neutral party, such as the AAA, both parties must have an equal right to participate in the appointment process.’
Interestingly, the English Arbitration Act 1996 adopts a slightly different position. Its section 17(2) states that, where the opposite party fails to nominate its arbitrator, an arbitrator appointed by one of the parties may be appointed to act as a sole arbitrator. Thus, implicitly, a party is first barred from unilaterally appointing the sole arbitrator, albeit allows so subsequently. Contrarily, unless the parties have agreed otherwise, the Indian Arbitration Act only empowers a party to apply to the jurisdictional court for the appointment of an arbitrator in such circumstances [section 11(6) of the Act].
Moving forward, a closer look demonstrates that in jurisdictions like the USA, the unilateral appointment is generally invalidated in consumer and employer-employee disputes. However, Indian courts have, until now, not decided whether the nature of a dispute will bring any laxity in the present strict invalidity where the only exception is to distinctly and ‘expressly agree in writing’ as provided by the proviso to section 12(5) of the Indian Arbitration Act.
Lastly, it may also be noted that only manifestly unequal clauses and not mere inequality in the appointment process will invalidate the composition of the arbitral tribunal. For example, in France, the Court of Cassation held that a clause making the opposite party appoint an arbitrator from a pre-agreed list is valid [Judgment of 31 January 2002, 2003: 2 Gaz. Pal., Cahiers de l’arbitrage 303]. Similarly, the Supreme Court of India in Voestalpine Schienen GmbH v Delhi Metro Rail Corporation Ltd held that if the party provides a broad panel of independent arbitrators from which the opposite party should choose, the appointment would stand valid. Thus, only clauses that allow the unilateral appointment of a sole arbitrator or of the presiding arbitrator in a three-member arbitral tribunal would be invalid.
III. Impact of the shifted position on the arbitrations in India
This re-defined legal position governing the unilateral appointment of a sole arbitrator in India has far-reaching implications. Talking of consequential constraints, unless institutional arbitration permeates the Indian arbitration environment, the cessation of a unilateral appointment is likely to increase resort to courts for the appointment of arbitrators as, once a dispute arises, the parties often lose trust and fail to agree on a sole arbitrator. Further, the retrospective invalidity of unilateral appointments has put all the pending arbitral proceedings on the back-burner and makes the efforts and costs employed by parties redundant regardless of the stage at which their proceedings are pending.
On the other hand, talking of merits, these decisions annihilate the practice of appointing biased arbitrators and of securing one-sided arbitral awards which were particularly rampant in standard forms of contracts and arbitrations involving governmental corporations. It shows India’s pro-arbitration approach and its attempt to also mitigate past mischiefs and misuses made of the party autonomy in the appointment process of an arbitrator. Further, the invalidity of one-sided appointments will also act as a tool against the repetitive appointment of an arbitrator and may also incentivize third-party funding because a funder often considers a unilaterally appointed arbitrator a bottleneck for funding the opposite party.
However, weighing the merits and demerits, the author opines that blanket invalidity with retrospective applicability may be excessive. It must be remembered that where, on the one hand, the present streak of decisions acts as an antidote against past mischiefs and safeguards the faith of parties in the arbitral process, on the other hand, it also frustrates bona-fide proceedings despite them having been carried by the independently appointed sole arbitrators.
IV. Concluding remarks
It may be noted that, interestingly, Indian courts have presently reasoned the invalidity of such inequitable clauses only on the independence of the arbitral tribunal being essential to the arbitral process. However, additional support may also be found from contract law principles like the possibility of abuse of the arbitral process due to gross disparity between the agreeing parties [section 3.2.7 of the UNIDROIT Principles of International Commercial Contracts, 2010], the consequent absence of mutuality between the parties, and the invalidity securing equal treatment of the parties in the arbitral proceedings, which is a mandatory principle of the arbitral proceedings [Article 18, UNICITRAL Model Law on the International Arbitration Law, 1985].
Further, Indian courts have adopted a protectionist approach over the past untrammelled party autonomy in the appointment process. The courts have attempted to foster the faith of the parties in the arbitral proceedings and strictly reinforce the notion of justice that justice must not only be done, but it must also appear to have been done. Having said this, it would be interesting to see if Indian courts will relax the strict invalidity, considering otherwise objectivity of the arbitrators and the nature of the disputes between the parties.
Pareekshit Bishnoi is an Advocate at the Supreme Court of India, Delhi.