Retrospective Termination of Sole Arbitrator: A Move Uncalled For?

[Prince Todi is a III year B.A. LL.B. (Hons.) student at Hidayatullah National Law University, Raipur, Chattisgarh]

On 20 January 2020, the Delhi High Court in held that the unilateral appointment of a sole arbitrator by an authority interested in the outcome of the dispute is impermissible. While the same principle has been laid down by the Supreme Court in earlier decisions of Perkins and TRF Ltd, the Delhi High Court in this case took a step forward towards intensifying institutional arbitration in India by providing for retrospective operation of the principle to pending arbitrations.

This post seeks to discuss the various facets of the case and provide an analysis of the implications that follow.

Brief Facts

The parties to the dispute entered into a distribution agreement. During the subsistence of the agreement, disputes arose pertaining to certain amounts due to Proddathur Cable. After several unsuccessful efforts towards recovery of monies, Proddathur Cable invoked the arbitration clause by way of a notice dated 29 October 2018 and nominated a sole arbitrator. Siti Cable, in turn, rejected the nomination and unilaterally appointed a different arbitrator. Proddathur Cable, while placing reliance on Perkins, disputed the unilateral appointment and filed a petition under sections 14 and 15 of the Arbitration and Conciliation Act, 1996 seeking termination of mandate of the sole arbitrator.

Decision of the Court

In its decision, the Court reiterated the fundamental principle that where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. But naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.

Besides this, there were additional issues that emerged from the contentions raise by the parties which are discussed below:

  1. Whether a ‘company’ is eligible to unilaterally appoint a sole arbitrator as against the managing director?

The Court, while relying on Bharat Broadband, reiterated that the fundamental reason behind the incompetence of a managing director to appoint a sole arbitrator is the interest he would have in the outcome of dispute. This interest takes the shape of bias and impartiality of the arbitrator, if appointed by him. Applying the above principle, the Court remarked that since a company is run by its board of directors, and a perusal of section 166 of Companies Act, 2013 provides the duties of the board as promoting interests and objects of the company, the company acting through its directors would have a definite interest in the outcome of dispute and, therefore, it would also suffer the ineligibility under section 12(5) of the Arbitration and Conciliation Act.

  1. Whether party autonomy can precede notions of fairness and impartiality?

The Court, while accepting that party autonomy is the foundation pillar of arbitration, held that fairness, transparency and impartiality are virtues which are equally important. If the authority appointing an arbitrator is the head or an employee of a party to the agreement, then its interest in its outcome is only natural. Further, the Court reiterated that once such an authority or a person appoints an arbitrator, the same ineligibility would translate to the arbitrator so appointed.

  1. How to determine the relevant date for the application of section 12(5) as introduced by the Amendment Act of 2015?

In this regard, the Court held that section 12(5) of the Arbitration and Conciliation Act itself begins with a non-obstante clause stipulating that the provision would apply notwithstanding any prior agreement to the contrary. Secondly, the relevant date to decide the applicability of section 12(5) is not the date of the agreement but the date on which the arbitration commences. By virtue of section 21 of the Arbitration and Conciliation Act, the arbitration commences when the notice invoking arbitration is sent. In the instant case, the arbitration was invoked on 29 October 2018, i.e. after the Amendment Act of 2015 and, therefore, the provisions of 12(5) were made applicable.

 

4) Whether the law laid down in Perkins has a retrospective application so as to affect the ongoing arbitrations?

The Court, in this regard, relied on the reasoning provided by the Supreme Court in TRF Ltd. and held that as soon as a clarificatory judgment is pronounced, section 14 of the Arbitration and Conciliation Act comes into play, thereby automatically terminating the mandate de jure.

Analysis

The principle as discussed above is in consonance with the maxim nemo judex in causa sua meaning that nobody should be a judge in his own cause. Further, since it applies to ongoing arbitration matters, de jure termination of mandate of sole arbitrator unilaterally appointed would follow under the provisions of section 12(5) read with section 14 of the Arbitration and Conciliation Act.

The author argues that even though the principle provides for fairness and impartiality, a more cautious approach should have been adopted by the Court in enabling retrospective application of this principle. This is essentially because the principle targets the “eligibility of arbitrator”, i.e., root of the matter, and this would have the effect of rendering the arbitral proceedings so conducted as void. It would place the parties in the same situation as existing prior to arbitral proceedings. For instance, if in an ongoing arbitration, the arbitral proceedings have reached the final stage, i.e., order has been reserved for further consideration by the sole arbitrator, and his mandate gets terminated, it is difficult to envisage how the substitute arbitrator would, without any delay, render the award.

Besides, any arbitral award made by such a tribunal shall, now, be liable to set aside under section 34 of the Arbitration and Conciliation Act, thereby increasing the prospect of litigation between parties. This would affect the basic rationale behind choosing arbitration over litigation, i.e., speedy disposal of disputes. Another implication could be the increase in costs involved in conducting the proceedings afresh.

To deal with the above situation, a possible solution could be a written agreement expressly entered into between the parties, recognizing the fallibility of the sole arbitrator and giving consent to continuance of proceedings by . Apart from that, the parties can also choose to waive the applicability of section 12(5) by virtue of proviso to section 12(5) of the Arbitration and Conciliation Act. The author opines that the sole arbitrator should, out of fairness, recuse himself from arbitral proceedings if he believes that he would not be able to render an unbiased award.

Conclusion

Fairness and impartiality of the arbitrator is of utmost concern for parties to an arbitral proceeding and the same finds merit in the common law maxim of nemo judex in causa sua. The Court has indeed taken a step forward towards improving the arbitration regime in India by recognizing the element of exclusivity involved in appointment of sole arbitrator. However, in the author’s opinion, its retrospective operation indicates an over-ambitious approach of the Court. The litigation between parties owing to de jure termination of mandate is likely to be intensified, which would ultimately defeat the very objective of choosing arbitration.

Prince Todi

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