Revamping Arbitral Appointments: Landmark Supreme Court Decisions Transforming India's Arbitration Landscape

Independence and impartiality of judges and adjudicators are fundamental to the justice dispensation process. This principle ensures that no person acts as a judge in their own cause. However, before the amendment of the Arbitration and Conciliation Act, 1996 (the Act), parties were allowed to unilaterally appoint arbitrators. This often resulted in parties with higher bargaining power having their disputes adjudicated by individuals with vested interests in the outcome. The 246th Law Commission Report (LC Report) recommended changes to the Act to address this issue.

Statutory Position Pre-Amendment

Before the amendment, the Act did not have strict guidelines to ensure the impartiality and independence of arbitrators:

1. Section 11(2): Allowed parties to agree on a procedure for appointing arbitrators.

2. Section 11(6): Allowed the Chief Justice or a designated person to take necessary measures if a party failed to act as required under the prescribed procedure.

3. Section 11(8): Gave the Chief Justice of India discretion to appoint an arbitrator, considering the required qualifications and ensuring an independent and impartial appointment.

4. Section 12(1): Required arbitrators to disclose any circumstances that might give rise to justifiable doubts concerning their appointment.

5. Section 12(3): Allowed the appointment of an arbitrator to be challenged if there were justifiable doubts regarding their independence or if they did not meet the prescribed qualifications.

6. Section 18: Required arbitrators to treat every party equally and without bias.

Mere apprehension of bias was not sufficient to set aside an arbitrator's appointment unless based on substantial evidence. Courts held that clauses allowing parties to appoint their employees as arbitrators did not automatically indicate bias.

The 246th Law Commission Report

The LC Report aimed to preserve the arbitral process's impartiality by balancing neutrality and party autonomy. It recommended:

1. Incorporating International Bar Association (IBA) guidelines through Schedule 5 and Schedule 7 to establish standards of independence and impartiality.

2. Introducing Section 12(5): Disqualifying any person whose relationship with the parties, counsel, or the subject-matter of the dispute falls under the categories set out in the Fifth Schedule.

The 2015 Amendments and IBA Guidelines

The 2015 amendments introduced Section 12(5) and the Fifth and Seventh Schedules to the Act:

1. Section 12(5): Disqualifies any individual whose relationship with the party, subject-matter of dispute, or counsel falls under the Seventh Schedule from being appointed as an arbitrator.

2. Fifth Schedule: Lists circumstances that raise justifiable doubts about an arbitrator's independence.

3. Seventh Schedule: Lists circumstances that lead to the de jure termination of an arbitrator.

The Supreme Court's interpretation in HRD Corp. v. GAIL [O.M.P. (T) (COMM.) 22/2017& IA Nos. 3579-3580/2017] distinguished the scope of the Fifth and Seventh Schedules, stating that while the Fifth Schedule raises justifiable doubts, the Seventh Schedule leads to statutory disqualification.

Judicial Treatment of Unilateral Appointment Clauses

1. TRF Ltd. v. Energo Engg. Projects Ltd.[(2017) 8 SCC 377]: Held that a person statutorily ineligible to act as an arbitrator could not nominate an arbitrator.

2. Bhayana Builders (P) Ltd. v. Oriental Structural Engineers (P) Ltd.[Case No. SPECIAL LEAVE PETITION (CIVIL) 7161/2018]: Distinguished TRF, allowing unilateral appointment if parties agreed to the procedure.

3. Bharat Broadband Network Ltd. v. United Telecoms Ltd. & Perkins Eastman Architects DPC v. HSCC (India) [2020 20 SCC 760] Ltd.: Affirmed the TRF principle, prohibiting interested persons from appointing arbitrators.

4. Lite Bite Foods (P) Ltd. v. Airports Authority of India [A.R.No103 OF 2019]: Confirmed the TRF and Perkins principles, allowing only two modes of appointing an arbitrator: by consent or court order.

Current Developments

High Courts have varied in their interpretations:

1. SMS Ltd. v. Rail Vikas Nigam Ltd.[ARB.P. 167/2019]: Set aside appointment procedures not broad-based, creating reasonable apprehension of bias.

2. Proddatur Cable TV Digi Services v. Siti Cable Network Ltd.[O.M.P. (T) (COMM.) 109/2019 and I.A. 17896/2019]: Terminated the mandate of a sole arbitrator appointed unilaterally, reinforcing the Perkins principle.

3. Afcons Infrastructure Ltd. v. Konkan Railway Corpn. Ltd.[ARBP-10-201-J-2-6-2020]: Set aside one-sided arbitration clauses, emphasizing neutrality.

Conclusion

The jurisprudence on unilateral appointment of arbitrators remains evolving, balancing party autonomy with the need for impartiality and independence in arbitration. Courts continue to refine the principles established in key cases to ensure fair and unbiased arbitral proceedings.

Author : Shweta Sabuji