Additional Concerns Raised by TRF v. Energo

[Guest post by Agnish Aditya, who is a 4th Year B.B.A LL.B student at NLU Odisha]

The Supreme Court ruling in TRF v Energo Engineering Projects (“Energo”) has been covered in this blog twice (here and here). Mr. Naniwadekar’s post gave an overview of the judgment and Amitav’s post raised pertinent concerns regarding the Court’s jurisdiction under Section 11 of the Arbitration and Conciliation Act, 1996 (the “Act”). However, there are certain other concerns which the judgment raises with regards to unilateral appointments, and additional arguments can be made against the ruling on those issues. Since the facts and the judgment have already been covered in the previous blog posts, I shall restrict this post only to my arguments.

Inaccuracies in the Judgment

The decision in Energo is a result of misplaced reliance and creates practical absurdities. The reasoning of the Court, with regards to the ineligibility of the Managing Director to appoint an arbitrator, is flawed for two reasons. First, the Court’s reliance on State of Orissa v. Commissioner of Land Records is flawed, as the judgment does not pertain to the relationship between an arbitrator and his nominator (which is a contractual relationship), but rather to the statutory relationship between the Board of Revenue and its delegate commissioner (which is a statutory one). The nominated arbitrator is required to act impartially under the Act; however, the commissioner is required to act as a delegate under the law and, hence, the reliance on the said case is not proper. As pointed out in Mr. Naniwadekar’s post, the reliance on Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty is also misplaced as it does not pertain to the case at hand (or the Act) at all.

In addition, there is no statutory basis for the conclusion that the nominee arbitrator acts as an agent or designate of the nominator. The arbitrator has the statutory obligation to act in a fair and impartial manner. And if he acts to the contrary, there are adequate procedural safeguards at the enforcement and vacatur stage.

Secondly, following from above, there exists no basis for differentiating a nominator who is disqualified in law and a nominator who is not. The nominee arbitrator is not acting as a designate of the nominator, but has to act impartially under the statutory mandate. As per the Court’s and the appellant’s own admission, the nominee arbitrator himself was not disqualified by law and, thus, there was no reason to find his appointment illegal. It must be noted though, that the Court did not rule on the nominee arbitrator’s eligibility, but rather on the eligibility of the Managing Director to appoint the arbitrator.

Fear of Unilateral Appointments as a Basis for Distinguishing Them

It can be argued that one of the key considerations of this judgment was the fact that the Managing Director was the “named sole arbitrator”. This can be inferred from the fact that the Court clearly distinguishes a situation where both parties can nominate arbitrators from unilateral appointments [See Para 53 of the judgment; also pointed out by a commentator in Mr. Naniwadekar’s post]. In the former case, the nominator’s “authority to nominate cannot be questioned”, while in the case of unilateral appointment the nominator’s authority can be challenged.

As pointed out above, the Act does not distinguish between unilateral appointments and other forms of appointments. The Act clearly lays down that “the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.”  Even though the Act does not fetter party autonomy to settle on unilateral appointments, unilateral appointments are subject to heated debates on their normativity. Professor Paulsson has made strong arguments against the right to unilateral appointments; he also argues that unilateral appointments reduce confidence in the arbitral process. He then goes to the extent of arguing that unilateral appointments must be completely done away with.

Apprehensions towards unilateral appointments, similar to Paulsson’s, could be a key factor behind distinguishing such appointments in Energo. It could be argued that the judgment in Energo distinguishes unilateral appointments in order to protect the arbitral process from the nominator’s choice of an arbitrator inclined towards its interests. However, it can be strongly argued that the Act provides ample safeguards at the vacatur stage and unnecessary intervention by the Courts at the referral and appointment stage is uncalled for [an argument which is made in this post against Paulsson’s views; see also this post which counters Paulsson’s views].

A More Practical Alternative to Energo’s Ruling

As argued above, there is no statutory backing or policy-backed necessity of distinguishing unilateral appointments. The Energo ruling renders a large number of contracts, stipulating unilateral appointments and having a disqualified nominator, unworkable. A viable alternative to this could have been to render the arbitration clause workable by removing the problematic portion. It is clear from the judgment that the Managing Director is ineligible to become the arbitrator, but in the alternative he could have appointed a sole arbitrator.

In Enercon (India) v Enercon GmbH, the Supreme Court held that when an intention to arbitrate is manifest, the Court must construe the arbitration clause in a manner that makes it workable. In the instant case, the Court’s flawed reasoning led it to ignore the consideration that the clause could have been interpreted alternatively to still allow the Managing Director to appoint the arbitrator unilaterally.

It is incongruous to distinguish between two arbitration clauses where one of them names the Managing Director as the sole arbitrator and the other does not. Energo’s ruling would have been more meaningful had the Court simply treated the Managing Director as the nominator, as it would have if the Managing Director was not the named sole arbitrator.

Amitav’s post rightly pointed out that the Court’s jurisdiction under section 11(6A) of the Act is limited to the examination of the existence of the arbitration agreement. The Court clearly went on to examine the validity of the arbitration clause in this case. Since Energo was decide by a three judge bench, it sets an erroneous precedent under the amended section 11.

It is necessary to distinguish Energo as a judgment pertaining to contracts that clearly stipulate that the nominator is an alternative to the nominee as a sole arbitrator. If its application extends to different fact scenarios, it might completely impede unilateral appointments and render them impossible. Parties might even get discouraged to settle on an unilateral appointment procedure for this reason. Nonetheless, in its own facts Energo creates a fallacy in the law that needs to be reconsidered, and also creates a bias against unilateral appointments.

– Agnish Aditya

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