[Sumit Chatterjee is a final year student at the National Law School of India University (NLSIU), Bangalore]
On 18 January 2022, a single judge of the Delhi High Court upheld the prohibition on unilateral appointment of arbitrators by parties in Envirad Projects v NTPC Ltd., rejecting the validity of the arbitral clause providing NTPC with the exclusive right to appoint the sole arbitrator. The judgement continues the restriction placed on parties to unilaterally reserve the right to appoint the arbitrator in any dispute, and stands on the shoulders of the Supreme Court decisions in TRF v Energo and Perkins Eastman v HSCC, which first established the same.
The decision illustrates the fascinating tension between the principle of party autonomy and the importance of independence and impartiality of arbitrators, and how it affects the appointment of arbitrators. Specifically, the Court, while exercising its powers under section 11 of the Arbitration and Conciliation Act 1996 (‘1996 Act’), has emphasized the need to ensure that the arbitrator deciding the dispute be unbiased and impartial, when intervening in the choice of arbitrator made by the parties.
This post will seek to analyse the decision of the Delhi High Court in Envirad Projects, and its impact on cementing the position of law established by Perkins. It will first provide a brief factual background of the case, with a particular focus on the arbitration clause between the parties. It will then cover the decision of the Delhi High Court, and engage with the conflict between party autonomy and the need for impartial arbitrators, as brought forth in Perkins.
Factual background of the case
After successfully winning the bid to undertake a civil construction project for NTPC, Envirad Projects faced a number of hurdles in completing the work within the prescribed timelines as set out under the contract between the parties. As a result of the delay, NTPC took over the construction of the project, but disagreements arose between the parties with respect to an unfair levy of liquidated damages, and non-payment of dues. In light of the same, Envirad Projects served a notice of arbitration on NTPC, citing clause 56 of the contract, and requested for appointment of the arbitrator for the adjudication of the dispute. Clause 56 of the contract stipulated that any dispute between the parties will be adjudicated by either the General Manager (‘GM’) of NTPC in the capacity of a sole arbitrator, or in cases where the GM is unable to undertake the role, by a nominee chosen by the GM of NTPC. After no response was received from NTPC regarding the notice of arbitration, Envirad Projects filed a petition under section 11(6) of the 1996 before the Delhi High Court, for appointment of the sole arbitrator.
Envirad Projects: Reinforcing the position post Perkins
In allowing the petition filed by Envirad Projects, the single judge, Justice S.K. Kait, relied on the Supreme Court decision in Perkins to declare that any appointment which would hamper the “unbiased adjudication of dispute between the parties” cannot be sustained. The Court held that a unilateral right to conduct arbitrator appointments provided to any party will be tantamount to a dereliction from the fairness and impartiality of the arbitral process.
In arriving at this conclusion, the Court also referred to the decision in Mahalakshmi Infraprojects v NTPC, where the Delhi High Court had grappled with an identical arbitral clause, as was found in the present case. The Court in Mahalakshmi struck down the appointment carried out under the same clause, as it vested NTPC with the exclusive right to conduct the appointment process. It recognized that upon bestowing such a right on one of the parties, the very foundation of the sole arbitrator’s duties in adjudicating the dispute fairly would be severely jeopardized. Placing reliance on Perkins, it held that any appointment made under such a clause would violate the independence and impartiality standards laid down in section 12 of the 1996 Act.
The decision of the Court in Envirad Projects buttresses the interpretation of section 12 of the 1996 Act, which was first provided by the Supreme Court in TRF, and developed further in Perkins. The Supreme Court, in both these decisions, engaged critically with the clash between the right of parties to choose their arbitrator, and the need to ensure a fair and impartial arbitral process, which is fleshed out below.
The principle of party autonomy, one of the fundamental principles of arbitration, allows the parties to shape the arbitral process, and provides ample flexibility to parties in terms of procedural regularities. Within this right falls the prerogative of the parties to agree upon the composition of the arbitral tribunal, and this element of choice is usually contained in the arbitration clause between the parties. However, the fairness of the arbitral process, emphasized by section 12 of the 1996 Act, depends on independent and impartial arbitrators, and acts as a constraint on any abuse of party autonomy.
In TRF, the Supreme Court held that any appointment as arbitrator of a person having direct or indirect relations with either or both of the parties will fall within the purview of the restrictions under section 12 and, correspondingly, under the fifth and seventh schedule of the Act. It barred the Chief Managing Director (who was vested with the power to arbitrate, or nominate an arbitrator) from having any say over the nomination as well, as it held that any nomination would be a case of allowing the interested party to affect the appointment indirectly.
The Supreme Court took this analysis one step further in Perkins, where it dealt with a clause that only provided the interested party with a power to nominate. It held that the ineligibility of the related party would continue to exist, and thus strike at the root of the party’s involvement in the appointment process altogether. It distinguished the case with a scenario where both parties appoint their own arbitrators, or nominate based on consensus as, in such a scenario, the advantage gained by any party is proportionately and fairly balanced.
Conclusion
The threshold of justifiable doubts to an arbitrator’s independence and impartiality under section 12 is one which underscores the high threshold of ensuring that the adjudication of any dispute through arbitration is conducted by a fair and impartial tribunal. By upholding the rationale in TRF and Perkins, the Delhi High Court has, in Envirad Projects, demonstrated that any usurpation of the right to appoint or nominate arbitrators by one of the parties strikes at the heart of the fairness of the arbitral process, and will find no reprieve from courts under the principle of party autonomy.
– Sumit Chatterjee