The amended Arbitration Act: The Power to Nominate and the Choice of the Nominee

The Bombay
High Court in DBM
Geotechnics v. Bharat Petroleum Corporation Ltd
. recently decided a short
but important point arising out of the recent Amendments to the Arbitration
& Conciliation Act, 1996. In particular, the Court had to consider how
 on a party’s employees
serving as arbitrators had to be construed.

relevant arbitration clause between the parties before the Bombay High Court
was that disputes will be referred:

[t]o the sole arbitration of the Director (Marketing Division) of
the Corporation or some officer of the Corporation who may be nominated by the
Director (Marketing Division)… In the event of the arbitrator to whom the
matter is originally referred being transferred or vacating his office or being
unable to act for any reason, the Director (Marketing Division) as aforesaid at
the time of such transfer, vacation of office or inability to act may in the
discretion of the Director (Marketing Division) designate another person to act
as an Arbitrator… It is also the term of this contract that no person other
than the Director (Marketing Division) or a person nominated by such Director
(Marketing Division) of the Corporation aforesaid shall act as Arbitrator…

the clause provided: (a) the Director Marketing, or another officer of the
corporation nominated by the Director will be sole arbitrator, (b) if the
arbitrator to whom the matter is originally referred in unable to act, then
another person may be designated, and (c) in any event, the sole arbitrator
must be either the Director or a person nominated by the Director.

question was whether the power to nominate would survive, given that part (a)
no longer can be fulfilled due to the bar introduced by the 2016 Amendment on
employees serving as arbitrators.  

argued that the power of nomination was unworkable, because part (b) above
could come into the picture only if there was indeed a nomination in terms of
part (a), and that nominee was unable to act. In circumstances where part (a)
was incapable of being complied with (and indeed, BPCL did not at all nominate
any employee first), the entire nomination procedure must fall. In other words,
the Court could conceivably have held as a matter of interpretation, part (b)
of the arbitration clause above remained in place. Textually, that would have
been problematic because the application of part (b) contemplates in the first
place that there is a nomination under part (a): if that nomination is itself
impossible, there can be no question of part (b) applying.

Court’s answer to this argument is instructive, because the Court does not
simply decide the question on an interpretation of this particular (somewhat
intricate) clause: rather, the Court draws a conceptual distinction between the
power to nominate and the choice of the nominee. It holds:

The parties before me had, as I have pointed out earlier, clearly
agreed that the power to nominate would vest in BPCL’s DM alone. It is true too
that the clause also said that the DM, in exercising that power, was to draw
from a specified class of persons (himself or a BPCL employee). It just so
happens that because of the operation of the amended statute combined with a
want of consent from DBM, the eligibility of both those sets of persons was
rendered impossible. In fact, as Mr Joshi says, the DM’s ‘power to nominate’
cannot be dependent on the DBM’s granting or not granting consent, and this is
what the Applicant’s argument amounts to: had DBM consented, there would have
been no question of the BPCL’s DM being divested of his power to nominate. I
believe Mr Joshi is correct in saying that by withholding consent and then
relying on the statutory bar, DBM cannot argue that the power to nominate
itself has completely gone. The DM does not, for want of DBM’s consent, stand
stripped of all his nominating power. He must exercise that power in the manner
that the law requires, i.e., by appointing an independent and neutral
Arbitrator. It is perhaps true that as a result of this, the latter portion of
clause 19(a) may require to be severed, but there is no difficulty in doing
this, nor is this impermissible…
may well be important in construing other clauses which prescribe a arbitration
before an employee of a company/corporation – if the clause provides for
nomination by the company/corporation and further prescribes that the choice of
a nominee is to be an employee, that clause cannot be considered as ineffective
even in light of the amendment, and it cannot be contended that the appointment
must now only be by the Court under section 11. The power to nominate itself
would survive, notwithstanding the limitations on the choice of the nominee.

DBM did not argue that the clause itself would be ineffective. It only argued
that BPCL’s power to nominate is ineffective; and the nomination must therefore
be made by the Court under section 11. This strategic choice may well have
saved it from an order as to costs. On costs, the Court indicated, “
The amendments to the Code of Civil
Procedure, 1908 introduced by the Commercial Courts, Commercial Division and
Commercial Appellate Division of High Courts Act, 2015 require that, as a
general rules, costs must follow the event, and that reasons must be given if
costs are not awarded against the party that fails. I decline to award costs in
this case having regard to the fact that the issue raised was limited, and
since Mr Doctor very fairly did not suggest that the entire arbitration clause
was ousted. No costs.
” This, and certain other orders of the Commercial
Court, appear to indicate that orders as to costs need not be made if the case
set up is reasonable and not frivolous (even if not ultimately successful).
With respect, this approach to costs may need further consideration. The new
costs provisions do mirror some of the rules in the English CPR. The fact that
a case set up is not frivolous or unarguable may be a factor going to the
quantum of the costs, rather than to the question of whether to levy costs of
not itself.] 

About the author

Mihir Naniwadekar


  • The decision was right on both the counts. Just wondering if a similar arguments is made in the Bombay High Court in similar facts. Would the judge still not follow "costs follow the event" rule? Another issue is why did the court have to rely on the Commercial Courts Act when the Arbitration and Conciliation Act, 1996 has a detailed provision on costs in S 31A?

  • Probably this was aan arbitration motion in the commercial court, and given that the two coats provisions are identical they quoted one. I disagree that costs should not be imposed simply because the case was argued in a balanced manner etc. Costs follow the event must mean that as an ordinary matter, a winning party is entitled to costs simply because it is the winning party, even if the case was close and fairly contested. English courts refer to costs on a standard basis or costs on an indemity basis…

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