Appointment of Substitute Arbitrators in India

[Dhruv S. Patel is an advocate practising in Gujarat and is associated with the Chambers of Adv. Jaideep B. Verma.]

The appointment of substitute arbitrators in India has not been as straightforward as one would like to imagine. Since the last two decades, the Supreme Court of India and several High Courts have focused on the interpretation of various aspects pertaining to such appointments by aiming to strike a balance between the letter of law and the spirit of alternative dispute resolution. The objective of this post is to discuss the development of the law pertaining to the appointment of a substitute arbitrator under Indian law and to highlight certain aspects thereof which may require further interpretation.

The appointment of substitute arbitrators is governed by section 15 of the Arbitration and Conciliation Act, 1996 (‘Act’) which essentially provides that when the mandate of an arbitrator terminates, then a substitute arbitrator shall be appointed according to “the rules that were applicable to the appointment of the arbitrator being replaced.”

Key Judicial Precedents

Rules applicable to the appointment of the arbitrator being replaced

In Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd., the Supreme Court interpreted this phrase of section 15 (2) of the Act. In this case, when a dispute arose between Yashwith and Simplex, the managing director of Simplex was appointed as the arbitrator who ultimately resigned and appointed a substitute arbitrator as his replacement. This appointment was challenged by Yashwith before the Andhra Pradesh High Court by moving an application under section 15(2) read with section 11 of the Act. The principal argument advanced by Yashwith before the High Court was that the term “rules” in section 15 (2) referred only to statutory rules of appointment of an arbitrator. However, the High Court rejected this argument and dismissed the application stating that there was no occasion for the High Court to invoke its powers under section 11 (6). This decision was challenged by Yashwith before the Supreme Court. The Supreme Court upheld the decision of the Andhra Pradesh High Court and categorically held as follows:

  1. The term “rules” used in section 15 (2) is not confined to statutory rules under the Act;
  2. The said term must be interpreted to mean that the substitute arbitrator must be appointed according to the terms of the arbitration agreement or the rules that were applicable to the appointment of the original arbitrator at the initial stage; and
  3. In case of absence of any provision as to the appointment of the substitute arbitrator in the arbitration agreement, the jurisdiction under section 11(6) can be attracted only when there is a failure in appointing the substitute arbitrator in accordance with the appointment procedure contemplated in the arbitration agreement.

This position of law was ratified by the Supreme Court in National Highways Authority of India v. Bumhiway DDB Ltd. In this case, the Supreme Court also categorically held that the High Court cannot assume jurisdiction under section 11 (6) of the Act to appoint a substitute arbitrator unless and until the pre-conditions stipulated in clauses (a), (b) or (c) of section 11 (6) are satisfied.

Death of named arbitrators before the commencement of arbitration proceedings

In ACC Limited v. Global Cements Limited, the Supreme Court dealt with a case wherein the arbitrators named in the arbitration agreement between ACC Limited and Global died before a dispute arose between the parties and, consequently, before the arbitration proceedings could commence. Therefore, Global filed an application under section 15(2) read with section 11 of the Act before the Bombay High Court for the appointment of a substitute arbitrator. ACC Limited argued that the arbitration agreement between the parties did not survive since the named arbitrators were no longer available. The Bombay High Court negated this argument and appointed a substitute arbitrator. This appointment was challenged by ACC Limited before the Supreme Court. The Supreme Court held that the arbitration agreement would survive in spite of the death of the named arbitrators since the phrase used in the agreement was “if any dispute shall arise … at any time”. The appointment of the substitute arbitrator by the Bombay High Court was upheld by the Supreme Court on the following grounds:

  1. The arbitration agreement did not provide for the procedure to appoint substitute arbitrator;
  2. At the same time, the arbitration agreement also did not create a bar on the appointment of a substitute arbitrator; and
  3. Under the facts and circumstances of the case the parties could not have appointed anyone after the death of the named arbitrators.

Distinction between ‘refusal’ and ‘withdrawal’

In SBP and Co. v. Patel Engineering. Ltd, one of the two arbitrators named in the arbitration agreement declined the appointment and refused to arbitrate the dispute and, pursuant to an application filed before the Bombay High Court, a substitute arbitrator was appointed. In these circumstances, the Supreme Court considered whether either the High Court or the parties to the agreement had the power to appoint a substitute arbitrator in such a case, i.e., where each party is supposed to appoint an arbitrator who would in turn appoint the third arbitrator. The Supreme Court made a distinction between ‘refusal’ to arbitrate and ‘withdrawal’ from office as is stipulated in section 15 (1) of the Act. The Supreme Court held that in the present matter the arbitrator had refused to arbitrate the matter and, consequently, section 15(2) of the Act will not apply. Further, since the arbitration agreement did not stipulate the procedure for the appointment of a substitute arbitrator, the Supreme Court observed that neither the parties nor the High Court would have the power to appoint the substitute arbitrator and, therefore, held that the remaining arbitrator would act as the sole arbitrator and conduct the arbitration.

When the appointment at the initial stage is made under section 11(6) of the Act

In Ramjee Power Construction Ltd. v. Damodar Valley Corporation, the Calcutta High Court considered that, whether upon the death, resignation or termination of mandate of an arbitrator appointed by the High Court under section 11 (6) of the Act, should the substitute arbitrator be appointed in accordance with the arbitration agreement or by the High Court under section 11 (6)? The Calcutta High Court observed that once an application was moved under section 11(6) to appoint the original arbitrator, the right of the parties to appoint an arbitrator gets extinguished, which cannot be revived on the death, resignation of termination of mandate of the arbitrator. Considering the legislative intent underlying section 15(2), the Calcutta High Court held that in such situations the High Court will have the power to appoint the substitute arbitrator since the said process of appointment was the rule of appointment applicable at the initial stage. This decision has been followed by the Allahabad High Court in M/s Tirath Ram Sumer Kumar v. Rakesh Kumar Mishra and very recently in Food Corporation of India v. M/S P. Roy and Co. In M/S Tirath the Allahabad High Court categorically held that neither Yashwith nor ACC Limited lay down that for the appointment of substitute arbitrator the parties must follow the procedure contemplated in the arbitration agreement before the High Court can assume jurisdiction under Section 11 (6).

Analysis

Firstly, the interpretation of the term “rules” in section 15 (2) of the Act undertaken by the Supreme Court in Yashwith and subsequently in National Highways Authority of India upholds the sanctity of party autonomy and protects the right of the parties to arbitration to voluntarily appoint the substitute arbitrator with minimum judicial intervention, which are the cornerstones of alternative dispute resolution.

Secondly, in ACC Limited the Supreme Court had upheld the jurisdiction of the High Court to appoint a substitute arbitrator under section 11 (6) of the Act only because the said appointment could not be secured in any other way, considering the facts and circumstances of the case.

Thirdly, when the named arbitrator refuses to arbitrate, neither the parties to the arbitration agreement nor the High Court shall have the power to appoint a substitute arbitrator. In SBP and Co., the arbitration could continue since there was a second arbitrator who could proceed with the arbitration. However, if the law laid down in the decision is applied to a case where sole arbitrator refuses to arbitrate the dispute, then the arbitration agreement would stand unassailably frustrated. In the author’s opinion, the law and judicial interpretation seems to be deficient in this area.

Lastly, as the current trend would indicate, judicial intervention seems to have expanded in the appointment of substitute arbitrators, as can be observed in Ramjee, M/s Tirath and Food Corporation of India. The Supreme Court is yet to ratify the ratio laid down in these judgments. However, in the author’s opinion, the appointment of the original arbitrator under section 11 (6) of the Act should not be inferred to mean that the parties have also waived their right to appoint a substitute arbitrator by submitting to the jurisdiction of the High Court. This seems to be a rather mischievous interpretation under the guise of ascertaining the legislative intent, which drastically expands the scope of judicial intervention in such appointments. The parties must be given an opportunity to appoint a substitute arbitrator even in such cases, either according to the arbitration agreement or the process of appointment contained in sub-sections (3), (4) or (5) of section 11 of the Act. These judgments of Calcutta High Court and Allahabad High Court seem to be at loggerheads with the judgment of the Supreme Court in National Highways Authority of India.

Concluding Remark

In light of this discussion, it would be prudent on the part of the parties to arbitration agreements to include a procedure for the appointment of substitute arbitrator in the agreement to steer away from the growing judicial intervention and to maintain the sanctity of party autonomy in such appointments.

– Dhruv S. Patel

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2 comments

  • “…………………..it would be prudent on the part of the parties to ARBITRATION AGREEMENTS TO INCLUDE A PROCEDURE for the appointment of substitute arbitrator IN THE AGREEMENT in the agreement TO STEER AWAY FROM THE GROWING JUDICIAL INTERVENTION AND TO MAINTAIN THE SANCTITY OF PARTY AUTONOMY IN SUCH APPOINTMENTS.”

    < More prudently, guided by the rare ' common sense', judicial intervention must be specifically prohibited by the law itself in all such and other matters in which the letter -rather than the spirit,- of the clearly drafted terms and conditions of the cotract agreement that should prevail and be strictly abided by the parties (including those having direct so also indirect concerns / vested rights and interests ; thereby , render the objective of ' arbitration', an exclusive domain, fulfilled to the core !?!

  • “Key Judicial Precedents”< ? None of the cited court cases could be rightly construed to squarely cover a situation, as herein, in which the extant provisions are of no assistance in a given case. If one were to proceed on the premise that it is only the parties to the contract- agreement, and only they, not even a court, – have to find a practical solution and decide how best to effectuate the original intent to have all related disputes, then the way forward could be nothing else except to suggest a mutual dialogue and conciliation between selves !?!

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