[Abhishek Gupta is a third year B.A., LL.B. (Hons.) student at National Law University, Delhi]
In arbitration, the interplay between party autonomy and procedural fairness often presents complex legal challenges. A key issue arises when considering whether an ineligible arbitrator should have the authority to nominate an arbitrator. This question places party autonomy, a fundamental principle of arbitration allowing parties to shape the process, directly at odds with procedural fairness, which ensures impartiality and justice within the proceedings.
Neutrality of arbitrators i.e. their independence and impartiality, is sine qua non to ensure adherence to principles of natural justice. Considering this, it is important to ascertain whether permitting an ineligible arbitrator to nominate another arbitrator compromises this neutrality and violates the principle of natural justice.
The background of the issue lies in landmark judgments of the Supreme Court (“Court”) given in TRF Ltd. v. Energo Engg. Projects Ltd. (2017) (“TRF”) and Perkins Eastman Architects DPC v. HSCC (India) Ltd (2020) (“Perkins”). The Court in these cases ruled that a person who is himself ineligible cannot nominate an arbitrator. However, in the case of Central Organisation for Railway Electrification v. ECI-SPIC SMO MCML (V) (2019) (“CORE”), the Court held that an ineligible arbitrator can appoint an arbitrator. However, the Court in the case of Union of India v. Tantia Constructions Ltd. (2021) (“Tantia Construction”), prima facie disagreed with the ruling in CORE and referred the case to a larger five judge bench.
This article firstly traces the judicial precedents regarding the issue and explores how the law on point has evolved. The article secondly argues that CORE misapplied the ratio given in TRF and Perkins. Lastly, the article makes a case that ineligible arbitrators must not be permitted to nominate arbitrators.
Judicial Precedents
In a bid to equip the parties with effective remedies in case of unfair arbitrator appointment, the act was amended in 2015 to introduce fifth and seventh schedule which enabled an objective test for the independence and impartiality of potential arbitrators. However, the criteria given in these schedules only applies to the ‘appointed arbitrator’ and not to ‘appointing authority.’ Therefore, there is no explicit bar on an ineligible arbitrator appointing an arbitrator. However, the judicial decisions have not limited their inquiry to ‘appointed arbitrator’ but also extended it to ‘appointing authority.’
One of the first decisions of the court on the issue was of TRF. It was a three-judge bench where the arbitration clause provided that any dispute “shall be referred to sole arbitration of the Managing Director of buyer or his nominee.” It was agreed by both the parties that managing director was disqualified to act as an arbitrator. However, the question arose whether he could nominate an arbitrator. The Court ruled that when an arbitrator becomes ineligible to act as an arbitrator under section 12(5) of the act, he could not nominate someone else. Misra J. gave the metaphor of a building that “once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated.”
However, the Court also clarified that a situation where both the parties appoint their respective arbitrator is a different situation. Perkins further explained this ratio by stating that where both parties have the advantage of nominating an arbitrator of their choice and observed that the advantage of one party in appointing an arbitrator would get counter-balanced by equal power with the other party.
CORE has used this ratio to rule that an ineligible arbitrator can nominate another person as an arbitrator. In this case, a panel of four retired railway officers was sent for selection as arbitrators. One party was asked to choose any two names from this panel, and then the General Manager, who himself was ineligible would appoint one of these as their nominee.
Therefore, the Court relying on TRF and Perkins reasoned that the General Manager’s authority to appoint an arbitrator is counterbalanced by the other party’s power to choose two potential nominees from the provided panel. Therefore, in essence the Court ruled that an ineligible arbitrator can appoint an arbitrator.
In Tantia Construction, the Court prima facie disagreed with CORE “for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case.”
CORE Misapplied TRF and Perkins
The Court in CORE seems to have misapplied the ratio given in Perkins and TRF. In both these cases, the Court held that a situation where both the parties had the autonomy to nominate their respective arbitrators is a different situation and the bar did not apply since the advantage to any party gets counterbalanced by the equal power to other party. The Court in TRF and Perkins was referring to a situation where both the parties could nominate respective arbitrators of their choice and had equal power to nominate which gets counterbalanced and not a situation where one of the parties control the panel out of which the arbitrators are to be selected from the other party. In the latter situation, there is no counterbalancing of powers. This was the case in CORE where one of the parties had the power to decide the panel out of which the other party had to select arbitrators. Therefore, there was no equal power between the parties that could get counter-balanced. Following the reasoning of TRF and Perkins, if an ineligible arbitrator does not have the authority to appoint a sole arbitrator, by the same logic he should not be able to select the panel of arbitrators for the other party to choose from. Therefore, the Court in CORE failed to comprehensively appreciate the ratio given in Perkins and TRF and ruled out that ineligible arbitrators can nominate an arbitrator.
Whether an Ineligible Arbitrator Should Have the Power to Nominate?
The 246th Law Commission Report noted that in a bid to uphold party autonomy or the binding nature of contracts, the aspect of procedural fairness was being lost. The Commission observed that the right to natural justice cannot be waived merely based on a prior agreement at the time of formation of contract but before the dispute have arisen between the parties. However, it is against the principles of natural justice that an arbitrator who is himself ineligible gets the power to nominate someone else.
In the case of Bharat Broadband Network Limited v. United Telecoms Limited, the Court relying on TRF ruled that section 12(5) read with Seventh Schedule makes it clear that if an arbitrator falls within one of the categories mentioned in Seventh Schedule, he becomes ‘ineligible’ to act as an arbitrator. Once he becomes ineligible, it is clear that under section 14(1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as ‘ineligible.’ The legal effect of being declared as de jure ineligible meant that an arbitrator cannot perform his functions as an arbitrator and therefore, there arises no question of nominating another person to arbitrate. The Court also made it clear that an appointment made by an ineligible person is void ab initio.
The practice also violates the Latin phrase Qui facit per alium facit per se. The phrase states that what one does through another is done by oneself to hold that once the arbitrator becomes ineligible, he cannot nominate another person to arbitrate. In the case of Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons (1975), the Court held that if something cannot be done directly, it may not be done indirectly by engaging another person from the outside. There are cases from administrative law, in which the court had concluded that an order passed by a delegate is an order passed by one who delegated. In the case of Roop Chand v. State of Punjab, the Court was concerned with government’s power to decide an appeal which could be delegated to an officer under the statute. The question that arose was whether an order deciding the appeal was the order of the government or the officer. The Court referred to the source of the power and noted the power can, therefore, be exercised only in terms of the statute and not otherwise. The Court noted that “it would follow that an order made in exercise of that power will be the order of the Government for no one else has the right under the statute to exercise the power.” Therefore, when an arbitrator nominates another person to arbitrate, he is delegating the powers granted to him. The decision of such nominated arbitrator would therefore be the decision of the arbitrator who nominated another person. Applying this logic to the case at hand, it would be clear that an ineligible arbitrator cannot nominate since the decision rendered by such nominated arbitrator would be the decision of the ineligible arbitrator. However, the arbitrator on account of being ineligible was not competent to arbitrate in the first place. Therefore, an ineligible arbitrator should not have the power to nominate.
Conclusion
The Court in Tantia has rightly referred the contrasting position in TRF and Pekins on one side and CORE on the other to be decided in the case of JSW Steel Ltd. v. South Western Railway (“JSW Steel”). The issue is at the crossroads of ensuring party autonomy and procedural fairness.
The judicial precedents in TRF and Perkins highlight the importance of maintaining this balance by ensuring that an arbitrator who is ineligible cannot influence the arbitration process, thereby upholding the principles of natural justice. The misapplication of these precedents in the CORE case undermines this balance, leading to potential biases and conflicts of interest.
The court should makes clear the rules for such cases where the appointing arbitrator is ineligible. The court could make a case for appointment of an independent appointing authority in case the appointing authority is deemed ineligible. This would safeguard the aspect of procedural fairness and will also help the parties to go forward with the arbitration.
As the Court prepares to address this issue in JSW Steel, it is necessary that the Court decides keeping in mind the aspect of procedural fairness since “Justice should not only be done, but manifestly seen to be done.”
– Abhishek Gupta