Perkins Eastman Judgement: Impact on the Appointment of a Sole Arbitrator

The judgement examined whether a case was made out for the exercise of power by the Court to make an appointment of an arbitrator, alongside the question of whether the Chairman and Managing Director were ineligible to nominate an arbitrator. Taken further, the Court expounded on whether a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but also must not be eligible to appoint anyone else as an arbitrator.

The article will discuss the Perkins Eastman¹ judgement in context with other precedents on the matter of the appointment of a sole arbitrator.

It has been held in HRD Corporation vs GAIL¹ that when a person directly falls under Schedule VII, ineligibility goes to the root of the appointment as per prohibition under Section 12(5) read with Schedule VII and such person lacks inherent jurisdiction. In Bharat Broadband Network Limited vs United Telecoms Limited² held that a unilaterally appointed arbitrator is de jure ineligible to perform his functions and that his mandate is automatically terminated under Section 14(1)(a) of the Act. Further, any prior agreement to do away with this ineligibility would be wiped out by the non-obstante clause contained in Section 12(5), and the same can be cured only through an express waiver.

Similarly, in Yashovardhan Sinha and Ors. vs Satyatej Vyapaar Pvt. Ltd³. upholding the ratio in the preceding judgements cited supra held that there cannot unilateral appointment of a sole arbitrator by the Respondent as the same is illegal and defeats the very purpose of unbiased and impartial adjudication of the dispute between the parties. The guiding principle of arbitration is transparency, fairness, neutrality and independence in the selection process and hence, appointment of a sole arbitrator can either be with mutual consent of parties or by an order of the competent court.

In B.K. Consortium Engineers Private Limited vs Indian Institute of Management, Calcutta⁴, J Shekhar B. Saraf of the Calcutta High Court held that for arbitration to be seen as a viable dispute resolution mechanism and as an alternate recourse to litigation, the independence of arbitration process outside the purview of undue influence and favor needs to be ensured in both letter and spirit and in case of non-adherence to such principles, the courts must step in. The very basic essence of the principle laid down in the above-mentioned case laws is the natural justice principle of nemo judex in causa sua that is 'no one should be made a judge in his own case'. For arbitration decisions to be respected and accepted as decrees of the court, a similar level of integrity in the appointment of arbitrators must be ensured.

The same judge in Cholamandalam Investment and Finance Company Ltd. vs Amrapali Enterprises & Anr⁵. held that it is a settled principle of law that compliance with Section 12(5) read with Schedule VII is sine qua non for any arbitral reference to gain recognition and validity before the Courts. Also, the High Court discussed the passing of an award by a sole arbitrator and its status in the eyes of law. This award, within the fact matrix of the case, passed by a de jure ineligible arbitrator, the Court held, suffers from a permanent and indelible mark of bias and prejudice which cannot be washed away at any stage including the execution proceedings. In fact, as the arbitrator was de jure ineligible to perform his functions and therefore lacked inherent jurisdiction or competence to adjudicate the disputes in hand, the impugned award cannot be accorded the privileged status of an award. The Court maintained that an arbitral award passed by a unilaterally appointed arbitrator will not survive the Section 34 challenge.

Provisions of the Arbitration & Conciliation Act, 1996 under discussion

Sections 11 and 12 of the Arbitration Mediation and Conciliation Act, 1996 wherein the power to appoint an arbitrator was discussed by the Court within the understanding of independence, impartiality, neutrality and validity of the arbitral proceedings.

Section 11

11. Appointment of arbitrators.⁶ —

(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in sub-section (3) applies and—

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment,

the appointment shall be made, upon request of a party, by ¹[the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court];

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by ¹[the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court].

(6) Where, under an appointment procedure agreed upon by the parties,—

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure,

a party may request ¹[the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

²[(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgement, decree or order of any Court, confine to the examination of the existence of an Online arbitration agreement.

(6B) The designation of any person or institution by the Supreme Court or, as the case may be, the High Court, for the purposes of this section shall not be regarded as a delegation of judicial power by the Supreme Court or the High Court.]

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to ³[the Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court is final and no appeal including Letters Patent Appeal shall lie against such decision].

⁴(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—

(a) any qualifications required for the arbitrator by the agreement of the parties; and

(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.]

(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, ⁵[the Supreme Court or the person or institution designated by that Court] may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

⁶[(10) The Supreme Court or, as the case may be, the High Court, may make such scheme as the said Court may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-section (6), to it.]

(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justices of different High Courts or their designates, ⁷[different High Courts or their designates, the High Court or its designate to whom the request has been first made] under the relevant sub-section shall alone be competent to decide on the request.

⁸[(12) (a) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and sub-section (10) arise in an international commercial arbitration, the reference to the "Supreme Court or, as the case may be, the High Court" in those sub-sections shall be construed as a reference to the "Supreme Court"; and

(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and sub-section (10) arise in any other arbitration, the reference to the Supreme Court or, as the case may be, the High Court in those sub-sections shall be construed as a reference to the "High Court" within whose local limits the principal Civil Court referred to in clause (e) of sub-section (1) of section 2 is situate, and where the High Court itself is the Court referred to in that clause, to that High Court.]

[(13) An application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such Court, as the case may be, as expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.

(14) For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.

Explanation.— For the removal of doubts, it is hereby clarified that this sub-section shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution.]

Section 12

12. Grounds for challenge⁷.—

[(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,—

(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and

(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.

Explanation 1.—The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

Explanation 2.—The disclosure shall be made by such person in the form specified in the Sixth Schedule.]

(3) An arbitrator may be challenged only if—

(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) he does not possess the qualifications agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

²[(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.]

The judgement discussed the following issues in some detail:

1) Whether the Chairman and Managing Director was ineligible to nominate an arbitrator i.e. whether a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but also must not be eligible to appoint anyone else as an arbitrator.

The Court observed that there were two categories of cases under consideration:

• Where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator
• Where the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator

The Court in regard to the first question, relying on TRF⁸ among others, held that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator and that the arbitrator becomes ineligible as per prescription contained in S. 12 (5). The ineligibility referred to was a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator.

If the interest that a person has in the outcome of the dispute is taken to be the basis of the possibility of bias, the Court held that it would always be present irrespective of whether the matter stands under the first or second category of cases. (Paras 18-24)

Under Sections 11 and 12 of the A & C Act, The Court held that by offering both parties an equal chance of nominating arbitrators of their choice, whatever advantage a party may derive by nominating an arbitrator of its choice would be offset by the opposite party asserting its right to choose. Conversely, where only one party has the right to appoint a sole arbitrator, there is an element of exclusivity in determining the course for online dispute resolution.

Thus, the Court ruled that the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. (Para 21)

The Court also underlined the importance of the independence and impartiality of the arbitrator and held that if there are justifiable doubts as to the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, then such an appointment could be made by the Court. (Para 23)

2) Whether power can be exercised by the Supreme Court under Section 11 of the Act when the appointment of an arbitrator has already been made by the Respondent?

The Court further expounded on Section 11(6) and discussed that the jurisdiction could be exercised even in cases where the appointment of an arbitrator has already been made. Unless this appointment is ex facie valid and such appointment satisfies the Court exercising jurisdiction under S. 11(6), the acceptance of such appointment as a fait accompli to debar the jurisdiction under S. 11(6) cannot be countenanced in law. (Para 26)

3) Whether the arbitration in the present case would be an international commercial arbitration i.e. whether the Supreme Court could exercise power to deal with the application under Section 11(6) read with Section 11 (12) (a) of the A&C Act, 1996.

During the proceedings, the Respondent did not dispute that it was a requisite condition to declare a lead member of the Consortium and that by aforesaid declaration Applicant 1 was shown to be the lead member of the Consortium. However, Clause 9 of the agreement conferred joint and several liability on both applicants for the execution of the project. The Court held that even if the liability of both applicants was stated to be joint and several, that by itself would not change the status of Applicant 1 as the lead member. (Para 11)

Section 2(1)(f)(iii) refers to two different sets of persons: an ‘association’ as distinct and separate from a ‘body of individuals’; an association referred to in S. 2(1)(f)(iii) would include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country other than India. In the facts of the present case, the Court held that the lead member of the Consortium i.e. Applicant 1 being an architectural firm having its registered office in New York, the requirements of S. 2 (1)(f) were satisfied and thus, the arbitration would be an “international commercial arbitration”. (Paras 12-13)