Employees’ power to act as and nominate arbitrators

By Vivek Vashi and Parinaz Vakil, Bharucha & Partners
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Bombay High Court in DBM Geotechnics & Constructions Pvt Ltd v Bharat Petroleum Corporation Ltd recently considered how the bar on the appointment of a party’s employees as arbitrators is to be interpreted, in light of amendments to the Arbitration and Conciliation Act, 1996.

Vivek VashiMainstay of litigation teamBharucha & Partners
Vivek Vashi
Mainstay of litigation team
Bharucha & Partners

In this case, the parties had agreed that the power to nominate an arbitrator (necessarily an employee of Bharat Petroleum) would vest exclusively in the director of the company’s marketing division (DM), to be exercised in the event that he himself did not act as arbitrator. However, the amendment to section 12(5) read with the newly introduced seventh schedule to the act has resulted in any employee of Bharat Petroleum being ineligible to act as arbitrator, save with the consent of DBM, i.e. by its waiving of section 12(5) of the act, and this consent had been refused.

The high court observed that DBM’s refusal to consent was directed at the DM’s nominee for arbitrator and not at the DM, as the person empowered by the contract to make the nomination. The DM, who was still vested with powers of appointment, was required to exercise this power in accordance with law, i.e. by appointing an independent and neutral arbitrator. The court held that the DM’s right to appoint an arbitrator could not be invalidated, but that the portion of the arbitration clause that specified the pool of nominees could be severed from the arbitration clause in view of the introduction of the seventh schedule.

Parinaz VakilSenior associateBharucha & Partners
Parinaz Vakil
Senior associate
Bharucha & Partners

However, a similar issue arose before the Supreme Court in TRF Ltd v Energo Engineering Projects Ltd, where Energo, which procures bulk material handling equipment for installation in thermal power plants, issued a purchase order to TRF for the manufacturing, supply, commissioning, performance guarantee, etc., for goods.

Disputes arose between the parties and the arbitration clause in the purchase order was sought to be invoked. It read as follows: “33. Resolution of dispute/arbitration … d. Unless otherwise provided, any dispute or difference between the parties in connection with this agreement shall be referred to sole arbitration of the Managing Director of Buyer or his nominee”.

However, in view of the section 12(5) of the amended act, read with the seventh schedule, Energo’s managing director (MD) was ineligible to act as arbitrator. Accordingly, the question before the Supreme Court was whether the MD, despite becoming ineligible by operation of law, was still eligible to nominate an arbitrator, who may be otherwise eligible.

TRF contended that: (a) once an employer is declared disqualified in law, a nominee by the employer is legally unacceptable as ineligibility strikes at the root of the employer’s power to arbitrate or have it arbitrated by a nominee; (b) to suggest that the MD’s nominee was validly appointed would create an anomalous situation not countenanced in law as the portion of the arbitration agreement dealing with the appointment of arbitrators was effectively void; and (c) granting such liberty would result in prohibited actions being done illegally by means of the appointment of a nominee.

Energo on the other hand contended that: (a) a person would be eligible to act as arbitrator unless they fell within the categories specified in the seventh schedule, which read together with the fifth schedule constitute the only guide in determining whether circumstances give rise to justifiable doubts as to the independence and impartiality of an arbitrator; (b) the grounds in the fifth and seventh schedules pertain to the appointed arbitrator alone and not to the appointing authority; (c) an appointed arbitrator cannot automatically stand disqualified merely because the named arbitrator has become ineligible to be arbitrator, as the appointed arbitrator retains the right to nominate an independent and neutral arbitrator; (d) the roles to act as and nominate an arbitrator operate in two independent spheres; and (e) a challenge to an appointment can only be made before the arbitral tribunal under section 13 of the act.

The Supreme Court upheld TRF’s submissions. Holding that it is inconceivable in law that a person who is statutorily ineligible can nominate someone to act as arbitrator, the court stated that “once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without a plinth… once the identity of the [MD] as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated”.

The Supreme Court did not consider the decision in the DBM Geotechnics case, and the decision in the TRF case, having been delivered by a full bench of the Supreme Court, is presently the law of the land.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Parinaz Vakil is a senior associate.

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