Unilateral Appointment of Arbitrator

Arbitration has become an increasingly popular method of dispute resolution, offering a private, efficient and flexible alternative to traditional court litigation. An important element in arbitration is the selection of arbitrators, who must be impartial and independent to ensure a fair process. However, the issue of unilateral appointment of arbitrator, where one party has the exclusive right to appoint the arbitrator, raises significant concerns about impartiality and fairness.

Understanding Unilateral Appointment of Arbitrator

Unilateral appointment of arbitrators occurs when the arbitration agreement grants one party the sole right to appoint the arbitrator. This arrangement can be problematic as it raises questions about the neutrality and independence of the appointed arbitrator. The party with the power to appoint may choose someone who is biased or has a conflict of interest, undermining the integrity of the arbitration process.

Legal Framework and International Perspectives on Unilateral Appointment of Arbitrator

UNCITRAL Model Law on International Commercial Arbitration

The UNCITRAL Model Law on International Commercial Arbitration, which serves as a template for arbitration laws in many jurisdictions, emphasises the importance of arbitrator impartiality and independence. Article 12 of the Model Law states that an arbitrator may be challenged if there are justifiable doubts about their impartiality or independence. This provision aims to prevent unilateral appointments that could compromise the fairness of the arbitration process.

International Chamber of Commerce (ICC)

The ICC Rules of Arbitration also stress the importance of impartiality and independence of arbitrators. Under the ICC Rules, arbitrators must disclose any circumstances that might call into question their impartiality or independence. The ICC Court of Arbitration has the authority to confirm or reject arbitrators to ensure that the tribunal is unbiased.

Indian Legal Framework on Unilateral Appointment of Arbitrator

In India, the Arbitration and Conciliation Act, 1996 (the “Act”) governs arbitration proceedings. The Act is based on the UNCITRAL Model Law and includes provisions to ensure the independence and impartiality of arbitrators. Section 12 of the Act mandates that arbitrators disclose any circumstances that might give rise to justifiable doubts regarding their impartiality or independence. Despite these provisions, the issue of unilateral appointment of arbitrators has been contentious in Indian jurisprudence.

Interpretation of Unilateral Appointment of Arbitrator by Indian Courts

Indian courts have shown divided opinions regarding the unilateral appointment of arbitrators. Two primary approaches have emerged: one emphasising fairness, transparency and impartiality and the other strictly adhering to the agreed contractual procedures.

TRF Ltd. v. Energo Engg. Projects Ltd (“TRF”)

In TRF Ltd. v. Energo Engg. Projects Ltd., the Supreme Court addressed the issue of unilateral appointment where a party’s Managing Director was appointed as the arbitrator. The Court held that a party interested in the dispute cannot unilaterally appoint an arbitrator. It further ruled that if the Managing Director is ineligible to act as an arbitrator, he cannot nominate another arbitrator. The principle established was that the power of nomination collapses if the power-holder is ineligible.

Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd (“Voestalpine”)

The Supreme Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd emphasised the need for a “broad-based” panel of arbitrators. The Court ruled that a panel cannot be deemed invalid as long as the arbitrators are impartial and the choices are broad enough to ensure fairness. This decision reinforced the importance of maintaining a balanced approach in the appointment process.

Perkins Eastman Architects DPC v. HSCC (India) Ltd. (“Perkins”)

In Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Supreme Court stressed that independence and impartiality are paramount in arbitration. It held that a fair procedure requires both parties to have the right to appoint an arbitrator. The Court adopted a “counter-balance” approach to ensure both parties have equal rights in the appointment process.

Subsequent High Court Decisions

The Delhi High Court has followed the principles laid down by the Supreme Court, reiterating the need for impartiality and transparency. Cases like Proddatur Cable TV Digi Services v. Siti Cable Network Ltd., Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited and others have upheld the prohibition on unilateral appointments, emphasising a transparent and fair procedure.

Divergent Approach in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) and Union of India v. Parmar Construction Company

Contrary to the above cases, the Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) and Union of India v. Parmar Construction Company upheld party autonomy by enforcing the contractual procedure for appointing arbitrators. The Court ruled that if the contract specifies the appointment procedure, it must be followed strictly, reinforcing the importance of adhering to agreed terms.

Delhi High Court’s Recent Decision Adopting the First Approach:

The Delhi High Court’s decision in Taleda Square Private Limited v. Rail Land Development Authority reaffirmed the importance of independence and impartiality in arbitration. In this case, the dispute resolution clause allowed the respondent to unilaterally appoint the presiding arbitrator from a panel maintained by it. The claimant, however, nominated an arbitrator outside the respondent’s panel, leading to a dispute over the validity of the appointment procedure.

Need for a Broad-based Approach

The Court emphasised that a restrictive panel could undermine the right to a fair choice of arbitrator, citing Voestalpine. It stressed the importance of having a broad-based panel to ensure neutrality and fairness.

Establishing a Counter-balance Approach

The Court highlighted the necessity of a counter-balance approach to maintain neutrality, referring to cases like Margo Networks Pvt. Ltd. & Anr. v. Railtel Corporation of India Ltd. The right of the respondent to appoint two-thirds of the arbitrators was deemed insufficient to ensure impartiality, leading the Court to appoint independent arbitrators for both parties.

Similar Propositions in Sri Ganesh Engineering Works v. Northern Railway & Anr

In Sri Ganesh Engineering Works v. Northern Railway & Anr, the Delhi High Court reiterated the need for a broad-based panel and counter-balancing approach, consistent with TRF and Perkins. The Court held that the unilateral appointment procedure in the contract was invalid as it did not ensure impartiality.

Way Ahead on Unilateral Appointment of Arbitrator

The judiciary and legislature have consistently aimed to balance party autonomy with the principles of natural justice. The judgments in Taleda Square and Ganesh Engineering reflect this approach, emphasising the need for fairness and impartiality in arbitration. These judgments address concerns of bias and ensure the sanctity of arbitral proceedings.

The 246th Report of the Law Commission of India

The 246th Report of the Law Commission of India reinforces the need for a minimum level of independence and impartiality in arbitration, regardless of party agreements. This is essential to maintain public policy and a fair arbitration framework in India.

Limits to Party Autonomy

There are inherent limits to party autonomy, particularly regarding the independence of arbitrators. The Indian judiciary has sought to balance party autonomy with impartiality to protect the arbitral process from biases and ensure fair outcomes.

The Need for Supreme Court Clarification on Unilateral Appointment of Arbitrator

Given the divergent approaches, a five-judge bench of the Supreme Court is set to address the issue of unilateral appointment of arbitrators. This bench will examine the validity of the Central Organisation case and provide clarity on the limits of party autonomy in arbitration agreements. The matter has been deferred pending consideration by an expert committee constituted by the Union Government.

Conclusion

The unilateral appointment of arbitrators poses significant challenges to the fairness and integrity of arbitration proceedings. While party autonomy is a cornerstone of arbitration, it must be balanced with the principles of impartiality and independence. Indian courts have taken varying approaches to address this issue, highlighting the need for a consistent and clear legal framework.

Legislative amendments, judicial clarity and fair appointment procedures are essential to ensure that arbitration remains a credible and effective method of dispute resolution. By addressing the concerns associated with unilateral appointments, the arbitration community can uphold the integrity of the process and maintain confidence in arbitral awards.