Supreme Court on the Ineligibility to Nominate an Arbitrator: A Critique

[Guest
post by Amitav Singh,
5th
year student at the National University of Advanced Legal Studies (NUALS),
Kochi]
In the judgement of TRF Ltd. v. Energo Engineering Projects
rendered earlier this month, the Supreme Court (“Court”) has decided that a
person who was required by the contract to arbitrate (but for the ineligibility
by the operation of law), also becomes ineligible to nominate some other person
as an arbitrator. In the last few years we have seen some prominent pro-arbitration
decisions given by the Court, but this one comes as surprise, for it does not
go down well with the principles of arbitration and intention of the
legislature. But, before we begin analysing the grounds on which this decision
is based, let us first examine the factual matrix that gave rise to this issue
before the Court.
Facts
TRF Limited (“TRF”), the appellant, invoked
the arbitration clause to settle the disputes related to encashment of bank
guarantees. However, during the process, TRF raised an objection which was
rejected by Energo Engineering Projects Limited (“Energo”), the respondents,
with regard to the procedure for appointment of an arbitrator which stated: “dispute shall be referred to sole
arbitration of the Managing Director of Buyer or his nominee”
. Thereafter, TRF
moved a petition under section 11(5) read with section 11(6) of the Arbitration
and Conciliation Act, 1996 (the “Act”) invoking the power of the court to
appoint an arbitrator when parties fail to appoint one in accordance with the
procedure agreed between them.
The reason why TRF objected to the
procedure of appointment was because the named arbitrator i.e. the Managing Director (“MD”) had become ineligible under section
12(5) of the Act which states that a person whose relationship with parties or
counsel or the subject matter falls under any of the categories mention in
Schedule VII shall be ineligible to be appointed as an arbitrator.
TRF contended that since the MD himself had
become ineligible to act as an arbitrator he could not nominate another person
as arbitrator.
Decision
The Court agreed with the contention of TRF
and held that the “ineligibility strikes
at the root of his power to arbitrate or get it arbitrated upon by a nominee
”.
It seems that there are two misplaced concerns which led to this decision.
First, if an ineligible named arbitrator is allowed to nominate, then that
would amount to ‘delegation of authority’, which would create a precarious
situation because the nominee would be acting on behalf of the MD whose
identity as a sole arbitrator is already lost. It is not clear on what basis the
Court decided that nominating someone as an arbitrator is equivalent to
delegating power to arbitrate. In the cases of delegation there are two
authorities – superior and subordinate. The superior authority delegates
certain functions to a subordinate authority which the latter exercises in the
shadows of the former. However, there is nothing to suggest that when a person
is nominated as an arbitrator, his actions are controlled by the one nominating
him. There is no superior-subordinate kind of relationship. The nominee acts in
his own power as an arbitrator free from anyone controlling his decision making
power.
Second, if the Court allows the nominee to
act as an arbitrator, then that would violate the principle embodied in the
maxim, “Qui facit per alium facit per se”, which means that what cannot be done
directly may not be done indirectly. In this case, since MD had become ineligible,
by appointing someone else as an arbitrator he would be carrying out the
proceeding himself. However, the Court’s reliance on this principle seems problematic.  How is the present case different from the
one in which the parties agree to give power to the MD, but without naming him
as an arbitrator, to nominate? Can this procedure also be challenged on the
basis of this principle? After all, the MD, who himself cannot be an arbitrator
even if he wanted to, is doing things indirectly by nominating another person. There
is no authority that suggests that an arbitrator acts on behalf of the person
who nominated him. An arbitrator is supposed to be independent who adjudicates
using his own discretion.
Surprisingly, the Court, in order to
support these two concerns, has relied upon completely unrelated cases which do
not deal with arbitration at all. One can only surmise what made the Court take
succour from them.
This case becomes interesting because even
though the nominee had made disclosures as to any grounds that would raise
justifiable doubts and was independent, the Court still revoked his appointment
merely because he was a nominee of an ineligible MD. In this case the Court
failed to realise that MD was acting in two different capacities – an
arbitrator and an authority to nominate. This point was raised by Energo, but
for reasons best known to the court, was not discussed at all. Interestingly,
this case is a departure from the Bombay High Court’s decision in DBM Geotechnics v BPCL where on a similar
issue High Court held that the director of the company was not stripped of his
right to nominate.
The grounds for disqualification are
clearly indicated in Schedules V and VII of the Act. They are concerned with
the arbitrator and his impartiality, and not that of the one appointing him. In
this case, by revoking the nominated arbitrator’s authority the Court has added
a new ground for ineligibility which was otherwise not present, i.e. an arbitrator appointed by an ineligibly
named arbitrator according to the agreed terms in the contract, is also
ineligible.
Treading
the wrong path
Besides the central issue discussed above,
another issue that was raised by Energo was that the application under section
11(5) and (6) of the Act in the present case is not maintainable. In order to
address this issue the Court adverted to mainly three cases, that are, Datar
Switchgears Limited v Tata Finance Ltd. & Anr.
, Newton Engineering & Chemicals Ltd. v
Indian Oil Corporation Ltd. & Ors.
and Deep Trading Company v Indian Oil
Corporation & Ors.
wherein an application under section 11 was held
to be maintainable. However, if we carefully examine these case laws, we find
that none of them effectively support the decision of the Court in the present case
that the application under section 11(5) read with section 11(6) of the Act is
maintainable. On the basis of the above mentioned cases, on which the Court has
relied, we find that in those cases section 11 application was held
maintainable because either both the parties failed to appoint an arbitrator
within the prescribed time period provided under section 11, or the procedure
for appointment of arbitrator had ceased to exist, which is not the reason in
the present case.
In the instant case, because of the
operation of section 12(5) it was alleged that the MD’s nominee cannot act as
an arbitrator. The Court, after alluding to item nos. 1, 5 and 12 in Schedule
VII read with section 12(5), held that the arbitration clause dealing with
procedure of appointment has become inoperative altogether. An important question
comes to mind: isn’t it going beyond what is provided under section 11(6-A)
that examination should be confined to the existence of arbitration agreement?
In the present case, whether MD was ineligible or not was quite straight
forward. But, what if the allegation had been based on item nos. 7 or 10 or 18 of
schedule VII wherein adjudicating authority would be required to analyse the
facts and circumstances in order to ascertain whether arbitrator or his firm or
his close family member has any ‘significant’ commercial interest? By analysing
such facts and circumstances wouldn’t courts be circumventing the procedural
requirement under section 13 and going against the intention of the
legislature?
In the instant case, it is neither the
failure to appoint an arbitrator within prescribed time frame nor procedure of
appointment ceasing to exist, but a bar created by section 12(5) for which a
separate procedure under section 13 is laid down. This decision has potential
to create confusion as to whether to approach court under section 11 if the
named arbitrator is alleged to be barred by section 12(5) or challenge under
section 13.
The bottom line is that, according to this
decision, if a person is appointed as an arbitrator by an ineligible named
arbitrator, his mandate can be terminated even if he is impartial. Another
implication that this decision carries, which is likely to give rise to
practical problems in the future, is the availability of section 11 in favour
of the aggrieved party, without having to (a) challenge the arbitrator directly
before the arbitrator, and (b) without having to wait until the final award under
section 34. Would this mean that in all
cases of bias, now, the ‘aggrieved’ party can simply file a section 11 petition
without raising the ground of bias before the arbitrator? Now, unless this position
is changed by the Court, it has become the law of the land. 
– Amitav Singh

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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