A Misturning on section 12(5) of the Arbitration Act?

A few days ago
we had highlighted
a decision of the Bombay High Court in DBM
Geotechnics v. BPCL
where the High Court had drawn a distinction between
the power to nominate an arbitrator and the choice of the nominee. The
arbitration clause allowed an employee of a company to nominate another
employee as an arbitrator. The Court held that the power to nominate continued
to remain valid even if statutory bars now meant that another employee could
not be an arbitrator.

The Supreme
Court has now ruled on a similar point in TRF
Ltd. v. Energo Engineering Projects
(Civil Appeal 5306 of 2016 judgment
dated 3 July 2017). The relevant arbitration clause contained in the contract
between the parties provided: “Unless
otherwise provided, any dispute or difference between the parties in connection
with this agreement shall be referred to sole arbitration of the Managing
Director
of Buyer or his nominee
…” The question was whether this
clause was valid in view of section 12(5) of the Arbitration & Conciliation
Act 1996 as amended in 2016. The appellant argued that the new provisions meant
that the Managing Director could not be an arbitrator: if that is so he could not
nominate another person as arbitrator either. The Respondent argued that while
the Managing Director may be disqualified to act as an arbitrator he is not
deprived of his right to nominate an arbitrator (of course the arbitrator
actually nominated would have to be sufficiently independent). The answer given
by the Court is this:

In such a context, the fulcrum of the
controversy would be, can an ineligible arbitrator, like the Managing Director,
nominate an arbitrator, who may be otherwise eligible and a respectable person.
As stated earlier, we are neither concerned with the objectivity nor the
individual respectability. We are only concerned with the authority or the
power of the Managing Director. By our analysis, we are obligated to arrive at
the conclusion that once the arbitrator has become ineligible by operation
of law, he cannot nominate another as an arbitrator
. The arbitrator becomes
ineligible as per prescription contained in Section 12(5) of the Act. It is
inconceivable in law that person who is statutorily ineligible can nominate a
person
. Needless to say, once the infrastructure collapses, the superstructure
is bound to collapse. One cannot have a building without the plinth. Or to put
it differently, once the identity of the Managing Director as the sole
arbitrator is lost, the power to nominate someone else as an arbitrator is
obliterated…

This does not
engage with the reasoning of the decision of the Bombay High Court we had highlighted
earlier. With respect, that reasoning appears to be clearly more powerful. The
formulation adopted by the Supreme Court, that it is “inconceivable in law that
a person who is statutorily ineligible can nominate a person”, may give rise to
difficulties. For instance, what happens in the case of contracts where one
party is given a right to nominate an arbitrator? Are such clauses now to be
considered invalid, even if the choice of a nominee is not hit by the bar on
the basis of the principle laid down by the Supreme Court?

The Supreme
Court referred to the decision in Firm of
Pratapchand Nopaji
in support of its conclusion. But that was a decision –
not on the Arbitration Act at all, incidentally – which only held that that
which cannot be done directly cannot be done indirectly either, and that what
one does through another is as good as done by oneself. But this is a clearly
inappropriate analogy. An arbitrator is never expected to simply adopt the
views of the nominating party.

The reasoning of
the Court extracted in the paragraph quoted above appears to be a significant
departure from the language of section 12(5) and it is hard to find a
reasonable argument to support this departure. For now, though, this is the law
of the land, laid down by a Bench of three Judges of the Hon’ble Supreme Court
of India.


About the author

Mihir Naniwadekar

4 comments

  • OFFHAND (to share own viewpoint)
    "Arbitration' is a well accepted concept;a vehicle to facilitate resolution of any dispute between the contracting parties. Generally speaking, naming an arbitrator, is left to the wish and will of the contracting parties. If so, and if both parties have expressly agreed to and named an arbitrator, and also agreed to the named arbitrator appointing a nominee for the purpose then, such nominee should be treated to have taken the place of the named arbitrator and been agreed to act accordingly. Unless, of course, either party has a reservation on the ground of 'independence' and objects thereto.. In other words, no enactment should come in the way of both parties, had they agreed to such nominee acting as arbitrator.

  • "For instance, what happens in the case of contracts where one party is given a right to nominate an arbitrator? Are such clauses now to be considered invalid, even if the choice of a nominee is not hit by the bar on the basis of the principle laid down by the Supreme Court?"

    I think the issue which you raise is quite valid. However, in my opinion the Supreme Court does clarify that its decision is based on the subtle distinction in the case i.e. where the Managing Director was the "named sole arbitrator" in the case.

    Therefore, it is quite clear that the judgment would not apply to cases where a party has been granted the right to appoint an arbitrator as per the arbitration agreement.

    Reference may be had to para 53 of the Judgment: "At the cost of repetition, we may state that when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto. But, here is a case where the Managing Director is the “named sole arbitrator” and he has also been conferred with the power to nominate one who can be the arbitrator in his place. Thus, there is subtle distinction."

  • You are right that para 53 clarifies that the situation of three arbitrators isn't covered by the principle. My concern is that the judgment makes no attempt to explain why the principle is different. What about a situation where there is one sole arbitrator to be nominated by a party? Is there now to be a scenario where we distinguish between various clauses such as "sole arbitrator nominated by party 1", "sole Arbitrator nominated by party 1 actig through its MD", "sole arbitrator appointed by MD of party 1", "sole arbitrator being MD or being another person nominated by THE MD of party 1"? Are we to hold all such clauses ineffective? If we are to make a distinction, what is the bass of excluding any of the above clauses? For, a party cannot appoint itself as arbitrator: does this mean that all clauses about unilateral sole appointment are invalid? In case of sole arbitrators, have we moved on from independence and impartiality of arbitrator, to independence and impartiality of the nominating authority? The Court, with respect, hardly even attempts to begin engaging with these questions, and offers no principled basis whatsoever for its decision.

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