Unilateral appointments under threat

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Unilateral appointment

The Supreme Court, in Perkins Eastman Architects DPC & Anr v HSCC (India), delivered a landmark judgment in November 2019, where it held that arbitration clauses that allow one party to unilaterally appoint a sole arbitrator would be invalid. Subsequently, Delhi High Court, in Proddatur Cable TV Digi Services v Siti Cable Network Limited, followed the law laid down by the Supreme Court’s two-judge bench decision in Perkins. The Supreme Court’s reasoning in the Perkins case requires reconsideration.

Disputes arose between the parties and, via a letter dated 26 June 2019, the chief managing director of the respondent, HSCC (India), was called on to appoint a sole arbitrator in accordance with clause 24 of the contract. No appointment of an arbitrator was made within 30 days, but a letter addressed by the chief general manager of the respondent, on 30 July 2019, appointed major general KT Gajria as the sole arbitrator.

The applicant, Perkins, filed an application under section 11(6) read with section 11(12)(a) of the Arbitration & Conciliation Act, 1996, before the Supreme Court to appoint an independent and impartial arbitrator, as the appointment of KT Gajria was beyond the prescribed period, and therefore the appointment was illegal.

Relying on the decision of TRF Limited v Energo Engineering Projects, the unilateral appointment made by the respondent was set aside by the Supreme Court and it appointed Justice (retired) AK Sikri as sole arbitrator, exercising the powers conferred by section 11(6) of the act. The Supreme Court in Perkins drew its reasoning from the TRF judgment, where it was held that as the managing director became ineligible by operation of law to act as an arbitrator, he could not nominate another person to act as an arbitrator, and that once the identity of the managing director as the sole arbitrator was lost, the power to nominate someone else as an arbitrator was also gone.

Divergence of clauses

Interestingly, the Supreme Court made no distinction between the arbitration clauses in TRF and Perkins. A close reading of both the arbitration clauses suggest that in Perkins, the dispute resolution clause provided the right to the chief managing director of HSCC to appoint an arbitrator, while the arbitration clause in TRF gave the power to the managing director of the buyer or his nominee to act as the arbitrator. Thus, the arbitration clause in Perkins can be clearly distinguished from TRF, and the Supreme Court did not appreciate the same.

Significantly, the Arbitration & Conciliation (Amendment) Act, 2015, addressed several issues that plagued the arbitration regime in India, but nowhere suggests a legislative intent to make an arbitrator’s appointment dependent upon his appointer’s eligibility.

The author disagrees with the reasoning of the Supreme Court because the legislative intention behind the amendment act, along with insertion of section 12(5) in the act, was to ensure neutrality of arbitrators, and not about the impartiality/ineligibility of an appointing authority.

Furthermore, the Supreme Court, by extending the principle laid down in TRF to Perkins (when both arbitration clauses were drafted differently), made it clear that whether or not the chief managing director of the respondent was to act as the appointing authority, or preside as sole arbitrator, the principle should be applied generally to every unilateral arbitral clause. In other words, the Supreme Court has adopted a universal application, which has jeopardized the future of unilateral appointments.

Legislative action needed

A major pitfall of mutual appointments is that often parties are not able to reciprocally appoint a sole arbitrator and, therefore, either of the parties approach the court for such appointments. As a result, the very objective behind the enactment of the act, which is to provide speedy disposal of arbitral disputes with the least court interference, stands defeated due to court intervention because of non-mutuality in the appointment of a sole arbitrator.

Moreover, after the decision of the Supreme Court in Perkins, many unilateral appointments have been challenged in courts, although such unilateral clauses would reduce court intervention and deter guerrilla tactics of delay by parties. Hence, a much-needed legislative intervention is required on the aspect of unilateral clauses, otherwise every time a unilateral appointment takes place the matter will be dragged to the courts.

Notably, the court failed to respect the autonomy of the parties. When two parties consent to have speedy adjudication of arbitral disputes along with the freedom to determine the procedure for the appointment of a sole arbitrator, the Supreme Court, by interfering in the procedural aspects, has neglected one of the fundamental principles of arbitration i.e., party autonomy.

Soumyajit Saha
National University of Study and Research in Law
Ranchi

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