Analyzing the redefined scope of challenging unilateral appointments from a broad-based panel
Abhishek Kurian and Tamanna Das Patnaik[i]
Unilateral appointments of arbitrators from broad-based panels has been a focal point of discussion in the arbitration regime for the past two years. However, given that the law regarding such appointments is yet to be adequately settled and clarified, no uniform practice has been established so far.
The authors firstly describe the position of unilateral appointment of arbitrators and the two conflicting opinions regarding the same, while delving into the concept of broad-based panel appointments. Next, the recent development in the Delhi High Court i.e. the case of Select Realty and its rationale is analysed. The authors finally list out a few suggestions, considering international practices, before concluding the article.
The Delhi High Court, recently in Select Realty v. Intec Capital, held that unilateral appointment of an arbitrator from a broad-based panel cannot be grounds to set aside the award under Section 34 of the Arbitration and Conciliation Act, 1996. Thereby, the court dismissed the application to set aside the award, stating that such an application was an abuse of the legal process.
The authors opine that this was a much needed decision in the sphere of unilateral appointments, as a challenge under Section 34 can be used by the losing party in an arbitration as a means to delay or escape liability. However, while the judgement clarifies this position, it raises the broader policy question as to whether unilateral appointment of arbitrators from a broad-based panel should be valid at all, and if yes, what should be the conditions for such validity.
Unilateral appointments- from an Indian Perspective
The validity of arbitration clauses providing for unilateral appointment has been in the grey for the last decade, and there are three kinds of identifiable positions regarding unilateral appointments that have been discussed by the courts.
1. Initially, clauses that give one of the parties the exclusive right to appoint the sole arbitrator had been held valid by courts in the past. In the case of Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd. and Ors, the Delhi High Court held that a clause conferring the right to nominate the sole arbitrator on one of the parties was valid. The judgement was distinguished from the Supreme Court's decision in TRF Limited v. Energo Engineering Projects Limited ("TRF"). The Court dealt with the question of whether the Managing Director, rendered statutorily ineligible to become an arbitrator himself, was eligible to nominate one. It was held that a mere right to appoint the arbitrator was valid as opposed to the right of an interested party to arbitrate on the very matter. Further, the power to nominate another individual as the sole arbitrator is obliterated when a person becomes disqualified, by the operation of law, to act as one himself.
2. Subsequently, after the judgement of Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd. ("Perkins"), the Supreme Court made it quite clear that such clauses cannot be held valid as this did not ensure fairness and equality to both parties.
The Supreme Court reaffirmed the principle that if only one party has the power to appoint a sole arbitrator, such choice will always have an element of exclusivity in determining the course for dispute resolution. The Court, through a logical extension of the ratio in TRF, reasoned that that no one with a vested interest in the outcome of the dispute should have the absolute authority of appointing the sole arbitrator.
3. The stance in judgements post Perkins has been uniform to the extent that clauses allowing one of the parties to appoint a sole arbitrator are declared to be unfair. Further, such appointments may raise doubts as to the independence and impartiality of the arbitrator owing to lack of mutuality. Interestingly, such a procedure of appointment has been distinguished from the 'broad-based panel' approach. This topic was briefly considered by the Supreme Court in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation(DMRC) where Voestalpine questioned the opposite party’s panel of five arbitrators, raising concerns about their neutrality. The Court ruled that the panel of arbitrators should be 'broad-based' and that the choice of picking one arbitrator among five was far too limited. However, it deemed it acceptable when the DMRC provided a panel of thirty-one arbitrators to choose from.
This position has been repeatedly reaffirmed even after the decision of Perkins, by the Supreme Court and the Delhi High Court in Central Organisation for Railway Electrification v. M/S ECI-SPIC-SMO-MCML (JV) ("Railway Electrification case") and M/S Iworld Business Solutions v. M/S Delhi Metro Rail Corporation (“M/S Iworld Solutions"). In both the cases, one party decided the panel of arbitrators and the other party was given the right to choose the arbitrator from the panel. The ratio of these decisions was that the advantage to one of the parties is negated by a counter-balance advantage to the other party who provides the panel of arbitrators to select from in the first instance.
However, these judgements have faced their own share of criticism as it is argued that both the parties are not involved in the selection of the panel, and hence the process lacks mutuality. This implies that the appointment would in essence still be the decision of the party that pre-decided the panel, as the appointing party would have a limited choice.
Select Realty v. Intec Capital - Factual Matrix and Judgement
Select Realty and Intec Capital entered into a loan agreement containing an arbitration clause, which provided that in the event of a dispute, it shall be referred to a sole arbitrator from a Schedule of six arbitrators, according to their order of preference. It had also been specified that if a dispute arose, no separate consent of the parties would be required for the appointment. Subsequently, when disputes arose, Intec appointed an arbitrator from the list. Select Realty neither opposed the appointment nor took part in the arbitral proceedings. However, when the arbitrator passed an award, it sought to set aside the same under Section 34(2)(a)(ii) of the Arbitration and Conciliation Act, 1996, claiming that the arbitration agreement is not valid. It also urged the Court to question the unilateral appointment of the arbitrator by relying on the Perkins case.
The Court remarked that the Perkins judgment was clearly distinguishable from the instant case since in the former, the award was not sought to be challenged under Section 34. The Court further observed that the Perkins judgment could not be relied upon since the agreement in the instant case did not confer the right on either party to unilaterally appoint the arbitrator. On the contrary, both the parties themselves had intentionally worked out the arrangement by stipulating that an arbitrator would be selected from the Schedule according to the order of preference. Since Intec Capital had merely adhered to this arrangement when it appointed the arbitrator, the challenge under Section 34 was rejected.
Critical Analysis of the Case
It was argued by Select Realty that clauses allowing unilateral appointment are not valid arbitration clauses, placing reliance on the judgement of Perkins. The bench distinguished the present case by asserting that it was a case of setting aside the arbitral award, contrary to Perkins, where an application was made under Section 11. This decision would essentially mean that unilateral clauses could be challenged only during the stage of appointment of the arbitrator and not once an award is granted. The authors opine that such a holding is a positive development in the Indian arbitration regime as this would ensure that the challenge does not render the arbitral award nullified, once the proceedings are completed.
Apart from its validity, one of the major concerns regarding such clauses is that it may lead to appointment of biased arbitrators, thereby hampering the independence and impartiality of the arbitrator. However, through a detailed analysis of the required standards of independence and impartiality, it can be established that there is a high threshold for removing an arbitrator on such grounds.
This was discussed in the case of HRD Corporation v. GAIL, where the SC observed that arbitrators are assumed to objectively judge both the parties. Furthermore, mere appointment by one of the parties is not sufficient grounds to conclude lack of independence or impartiality. A third person must be able to reasonably infer that an arbitrator is biased.
Independence of an arbitrator is to be determined by considering the relationship between the arbitrator and the party, and it can be determined on an objective level. Impartiality, on the other hand is based on the actual or apparent bias of an arbitrator International Arbitration, A. Redfern and M. Hunter, 6th ed., 2015 at page 255]. Both of these factors can be adequately checked by a careful evaluation of the grounds mentioned under the Fifth and Seventh Schedule, and through the disclosures made under the Sixth Schedule which have been derived from the IBA Guidelines. Further, even in the case of M/S Iworld Solutions, it was observed that the circumstances must be such that give rise to doubts regarding the independence of the arbitrator.
The blanket ban on the unilateral appointment of sole arbitrators will result in parties increasingly relying on courts to appoint an arbitrator. This will defeat the whole purpose of arbitration, which is to provide fast and cost-effective resolution of disputes and decrease dependence on courts. Moreover, this will also undermine party autonomy and prohibit the conduct of bona-fide proceedings by unilaterally appointed sole arbitrators.
The determiner for the validity of such an appointment procedure can be the subject-matter of the dispute, which in turn would help in evaluating the bargaining power of each party. As mentioned above, the parties have adequate means of ensuring that the arbitrators are unbiased, and therefore rather than the independence of the arbitrator, the court must determine whether the contract was conscionable.
In Murray v. United and Commercial Workers Union, the 4th Circuit U.S. Court declared that the method of appointment where arbitrators were to be selected from a list unilaterally decided by the employer was not valid. Even in the case of Beltran v. Aupaircare, the 10th Circuit Court held that a clause merely allowing one of the parties the right to choose the arbitrator is unconscionable. The intention of such legislation is that in employment and consumer contracts, there can be unavoidable instances of unequal bargaining power as they are usually standard form agreements.
However, barring consumer and employment disputes, the arbitrator appointment mechanism decided by the parties should not be declared invalid unless it is manifestly inequitable [Gary B. Born, International Commercial Arbitration (3rd ed. 2020) Chapter 12, Pg 1880]. This stance is corroborated in US case laws of Willis v. Nationwide Debt Settlement Group, and Davis v. Global Client Solutions, where unilateral arbitral appointments were held to be valid.
In the event parties had equal bargaining power, unconscionability and duress cannot be concluded and hence, the independence of the arbitrator shall be assumed. Therefore, the court should go on to clarify the category of the disputes where unilateral appointments should be disallowed.
Furthermore, the courts should also clarify the validity of the use of a broad-based panel for the appointment of arbitrators. The ideal distinction should be that when the panel has been mutually decided by both the parties for prospective arbitrators, such clauses and subsequent arbitral awards cannot be challenged for want of mutuality. However, in the event the panel has been decided by one party, the other party has a restricted right of choosing from the panel of arbitrators. Such a clause can be rendered void, as such an arrangement lacks mutual consent.
The courts have faced a conundrum in balancing the principles of party autonomy on one side and mutuality and equal treatment on the other. The disparity regarding the exact position of unilateral appointment mechanisms and appointment from broad-based panels continues to exist as the courts are yet to take a uniform stance. Quite recently in the case of Sanjiv Dutta v Bikaji Maintenance Compine, the Delhi District Court allowed a Section 34 petition and set aside the award, as one of the parties had unilaterally appointed the sole arbitrator. The court relied on the judgement of Proddatur Cable TV Digi Services v. Siti Cable Network Ltd. to conclude that unilateral appointments are impermissible in law. These judgements indicate that such appointments should be declared invalid irrespective of whether they are challenged before or after the award has been passed.
Therefore, the courts have a responsibility of not just clarifying the ideal stance to be taken on such appointments but also drawing the lines for valid broad-based panels. Moreover, in the event the courts decide to give heed to the challenge, they should be entertained only when the challenging party has brought up the challenge to the arbitrator at the outset of the arbitration and has refused to participate in the arbitration. Currently, such a mechanism is under consideration, and was discussed in the case of Union of India v. Tantia Constructions Ltd. The bench disagreed with the reasoning in the Railway Electrification case and has thereby requested for the constitution of a larger bench to assess the correctness of the judgement.
It is imperative to ensure uniformity in courts, that this dichotomy is resolved by either declaring such clauses as invalid and unenforceable, or by segregating the categories of disputes when unilateral appointment from broad-based panels is to be allowed. Until then, there would be multiple challenges to such appointments, which would only add to the burden of the courts, essentially nullifying the purpose of arbitration.
Abhishek Kurian is a third-year law student at National Law University, Odisha. He is currently an editor with the NLUO ADR E-newsletter and has a keen interest in Arbitration, Mediation and IBC. His interests include music and basketball. Tamanna Das Patnaik is a second year law student at National Law University, Odisha. She is an avid reader and is interested in Corporate law, Arbitration, Mediation and Intellectual Property.