Executability of the Ex-parte Award by Unilaterally appointed by Sole Arbitrator (Part-2): Law laid down by the Courts debarring ‘Unilateral Appointment of Sole Arbitrators'

The aspect of Unilateral Appointment of Arbitrator and its derelictious effect on neutrality, independence, and impartiality of Arbitral proceedings Supreme Court and other High Courts have discussed this issue threadbare in series of landmark judgments which will be discussed in detail in this essay which forms part of the series of short essays on executability of ex-parte award by a unilaterally appointed sole arbitrator.

In the case titled, TRF Limited Vs. Energo Engineering Projects Ltd.[1] Full Bench of Hon’ble Supreme Court led by Justice Deepak Mishra had the opportunity to reprise and articulate the course corrective effect introduction of Section 12(5) read with Schedule 7 of the Act. The issue before Hon’ble Full Bench of the Supreme Court was, “Whether a person who is ineligible to preside an Arbitral Tribunal on account of operation of law i.e. Section 12(5) read with Schedule 7 of the Act would be eligible to nominate another person as Arbitrator.” While comparing the unamended Section 12 of the Act with the amended Section 12 of the Act, post 2015 Amendment, Hon’ble Supreme Court ruled:

“12. Sub-Section (5) of Section 12, on which immense stress has been laid by the learned counsel for the appellant, as has been reproduced above, commences with a non-obstante clause. It categorically lays down that if a person whose relationship with the parties or the counsel for the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator. There is a qualifier which indicates that parties may subsequent    to     the         disputes    arisen       between    them, waive the applicability by express agreement in writing. The qualifier finds place in the proviso appended to sub-section 5 of Section 12. On a careful scrutiny of the proviso, it is discernible that there are fundamentally three components, namely the parties can waive the applicability of the sub-section; the said waiver can only take place subsequent to dispute having arisen between the parties; and such waiver must be by an express agreement in writing.”

Hon’ble Full Bench distinguished that the Arbitral Agreements where both sides are required to appoint one Arbitrator each who, in turn, appoint a Third Neutral Arbitrator with cases where the Arbitrator Clause gives full power to only one party to appoint a Sole Arbitrator in this matter. While appreciating the concern of the appellant that by virtue of Section 12(5) read with Schedule 7 of the Act an employee/official of a disputing party cannot act as an Arbitrator, such an employee/official cannot also appoint another Arbitrator unilaterally Hon’ble Apex Court observed:-

“53. The aforesaid authorities have been commended to us to establish the proposition that if the nomination of an arbitrator by an ineligible arbitrator is allowed, it would tantamount to carrying on the proceeding of arbitration by himself. According to learned counsel for the appellant, ineligibility strikes at the root of his power to arbitrate or get it arbitrated upon by a nominee.

54.    In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectablity. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so”.

The aspect of Unilateral Appointment of Arbitrator and its derelictious effect on neutrality, independence and impartiality of Arbitral proceedings Hon’ble Supreme Court discussed the issue threadbare in case title Perkins Eastman Architects DPC Vs. HSCC India Limited[2], Taking cue from ‘TRF Judgment’ the aspect which was taken up for consideration by the Apex Court in Perkins Eastman Judgment is where a Managing Director or any official or authority who is a disputing party may not be acting as an Arbitrator but empowered under the Arbitration Clause to appoint another person of choice or discretion as an Arbitrator. The Bench Observed:

“We thus have two categories of cases. The first, similar to the one dealt with in TRF Limited4 where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Limited, all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an Arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an Arbitrator.

While discussing the above-referred Voestalpine Judgment and Law Commission of India, 176th and 246th Report the Apex Court highlighted that the principles of procedural fairness, impartiality, and independence cannot be discarded at any stage of the proceedings. The Supreme Court Bench quoted in Perkins Judgment, “

“Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of consideration of the Arbitral Tribunal, it would be incongruous to say that “Parties Autonomy” can be exercised in complete disregard of these principles and even if the same has been agreed prior to the disputes having risen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of parties apparent agreement. A sensible law cannot, for instance, permit appointment of an Arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party,

even if this is what the parties agree…….

In fact, when the party appointing an adjudicator in the suit, the duty to appoint an impartial and independent adjudicator is that much more onerous and the right to natural justice cannot be said to have been waived only on the basis of a “Prior:- Agreement between the parties at the time of Contract or before arising out of the disputes”.

In the case titled, Bharat Broadband Network Vs. United Telecoms Limited[3], while dealing with an issue of Section 12(5) read with Schedule 7 qua unilateral appointment of arbitrator by official of the disputing company, the Bench led by Justice R. F. Nariman dealt with an issue wherein during the pendency of arbitral proceedings before a Sole Arbitrator who was unilaterally appointed by CMD of Bharat Broadband Network, an application was moved before the Arbitrator by the Bharat Broadband Network company that in the light of TRF Limited the Tribunal would be de jure unable to perform the function as Arbitrator and that he should withdraw from the arbitration so that an application under Section 11 of the Act can be filed before the High Court. The plea was rejected by the Arbitrator. When Bharat Broadband Network approached Delhi High Court, the High Court rejected the plea of the Bharat Broadband Network on the ground that since the Sole Arbitrator was appointed by Bharat Broadband Network itself, it is estopped from making a plea for removal of the arbitrator. While discussing Voestalpine Schienen Hon’ble Supreme Court ruled that,

“Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non-obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the 7th Schedule. The sub-Section then declares that such person shall be “ineligible” to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the 7th Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes having arisen between them, waive the applicability of this sub-section by an “express agreement in writing”. The express agreement in writing” has reference to a person who is interdicted by the 7th Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the 7th Schedule.

In the case titled, Dharma Prasthanam Vs. M/s Madhok Construction Pvt. Ltd.[4] Hon’ble Supreme Court while dealing with the aspect of ‘Unilateral Appointment of Arbitrator’ even in the pre-2015 Amendment period ruled,

“A unilateral appointment as well as a unilateral reference, both will be illegal. It would make a difference if in respect of a unilateral appointment and reference if the other party had submitted to the jurisdiction of an arbitrator so appointed and if the rights which it has under such an agreement has been waived, then an arbitrator so appointed may proceed with the reference and the party submitting to his jurisdiction and participating in the proceedings before him may later on not be allowed to raise any objection in with regard to such appointment of arbitrator.”

In the case titled, Haryana Space Application Centre (HARSAC) and Anr. Vs. Pan India Consultants[5], the Full Bench of Hon’ble Supreme Court dealt with a case where the petitioner appointed the Principal Secretary of the State as Nominee Arbitrator and arbitral proceedings were going on in for more than 4 years, Full Bench of Hon’ble Supreme Court ruled that the application of Section 12(5) read with Schedule 7 of the Act is mandatory and not derogable. The Apex Court ruled,

“We are of the view that the appointment of the Principal Secretary, Government of Haryana as the nominee arbitrator of HARSAC which is a Nodal Agency of the Government of Haryana, would be invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996 (as amended by the 2015 Amendment Act) provides that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties, or cousel falls within any of the categories specified in the 7th Schedule, shall be ineligible to be appointed as an arbitrator………

The arbitrator is a manager, director or part of the management of has a similar controlling influence, in an affiliate of one of the parties if the affiliate  is  directly  involved  in  the  matters  in  dispute  in  the arbitration………Section 12(5) read with the 7th Schedule is a mandatory and non- derogable provision of the Act. In the facts of the present case, the Principal Secretary to the Government of Haryana would be ineligible to be appointed as an arbitrator, since he would have a controlling influence on the Appellant Company being a nodal agency of the State.

The Counsel for both parties during the course of hearing have consented to the substitution of the existing tribunal, by the appointment of a Sole Arbitrator to complete the arbitral proceedings.”

Lately, in the case titled, Jaipur Jila Dugdh Utpadak Sehkari Sangh Ltd. Vs. Ajay Sales and Suppliers[6], the Supreme Court Bench headed by HMJ M R Shah dealt with a case where the Arbitration Clause dated 31.03.2015 provided for appointment of Sangh’s Chairman as Sole Arbitrator. When the dispute arose and Arbitration was invoked on 19.10.2019, the respondent approached High Court of Rajasthan which under Section 11 of The Act where a fresh Arbitrator was appointed. When the High Court’s order was challenged before the Supreme Court with a plea that the Arbitration Clause pre-existed the 2015 Amendment of The Act and inclusion of Section 12(5) and Schedule 7 Hon’ble Supreme Court while dismissing the petition challenging the High Court order ruled that,

“So far as the submission on behalf of the petitioners that the agreement was prior to the insertion of Sub-Section 5 of Section 12 read with 7th Schedule to the Act and therefore the disqualification under Sub-Section 5 of Section 12 read with 7th Schedule to the Act shall not be applicable and that once an arbitrator-Chairman started the arbitration proceedings thereafter the High Court is not justified in appointing an Arbitrator are concerned the aforesaid has no substance and can to be accepted in view of the decision of this Court in TRF Limited Judgment(supra), Bharat Broadband Network Judgment(supra), Voestalpine Schienen Judgment (supra). In the aforesaid decisions this Court had an occasion to consider in detail the object and purpose of insertion of Sub-Section 5 of Section 12 read with 7th Schedule to the Act. In the case of Voestalpine Schienen Judgment(supra) it is observed and held by this Court that the main purpose for amending the provision was to provide for ‘Neutrality of Arbitrators’. It is further observed that in order to achieve this, Sub-section 5 of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute falls under any of the categories specified in the 7th Schedule, he shall be ineligible to be appointed as an arbitrator. It is further observed that in such an eventuality i.e. when the arbitration clause finds foul with the amended provisions (Sub-Section 5) of Section 12 read with 7th Schedule the appointment of an Arbitrator would be beyond pale of the arbitration agreement, empowering the Court to appoint such arbitrator as may be permissible. It is further observed that , that would be the effect of non- obstante clause contained in Sub-Section5 of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement……….

It is further observed and held by this Court in the aforesaid decision that independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which shall apply to all judicial and quasi-judicial proceedings. It is further observed that it is for this reason that notwithstanding the fact that the relationship between the parties, to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator’s appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator would render him ineligible to conduct the arbitration”.

In another case titled, Ellora Papermills Vs. State of M.P.[7], Hon’ble Supreme Court on 04.01.2022 dealt with a matter wherein the dispute pertained to year 1993-94 and the Arbitral Tribunal consisting of officers of State of MP was constituted much prior to the promulgation of the 2015 Amendment and inclusion of Section 12(5) and 7th Schedule w.e.f. 23.10.2015. High Court did not interfere with the Tribunal citing the reason that the Tribunal started functioning prior to 23.10.2015 and that the appellant had already participated in the proceedings. Hon’ble Supreme Court while relying on TRF Limited, Bharat Broadband, Voestalpine and Ajay Sales Judgments stressed that the ‘Neutrality of Arbitrators’, their independence, and impartiality is critical for the entire process. The Bench reiterated,

“Though, the Law Commission discussed the aforesaid aspect under the heading “Neutrality of Arbitrators”, the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In the international sphere, the “appearance of neutrality” is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term “neutrality” used is relatable to the impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term “Neutrality of Arbitrators” is commonly used in this context as well……..

Keeping in mind the afore-quoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for the neutrality of arbitrators. In order to achieve this, sub-Section 5 of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the 7th Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventuality i.e. when the arbitration clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond the pale of the arbitration agreement, empowering the Court to appoint such arbitrator(s) as may be permissible. That would be the effect of non-obstante clause contained in sub-Section 5 of Section 12 and the other party cannot insist on the appointment of the arbitrator in terms of an arbitration agreement.

In the case titled, SMS Limited Vs. Rail Vikas Nigam Limited[8], wherein Hon’ble Delhi High Court dealt with an aspect where Railways claimed that it is offering a panel of 37 names for selection of the Arbitrator but the same was opposed by the plaintiff company as the proposed Arbitrators were primarily retired Railway Officers and few of them were from other PSUs. While referring to Voestalpine Judgment and Perkins Eastman Judgment of Hon’ble Supreme Court it was ruled by Hon’ble Delhi High Court that,

“It is pertinent to note that in case of Perkins Eastmen the Supreme Court while dealing with the application under Order 7 Rule 6 read with Section 11(12)(a) of the Act held that as per scheme of Section 11 of the Act if there are justifiable doubts as to the independence and impartiality of the person nominated and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, an appointment can be made by the Court,”

In the case titled, Proddatur Cable TV Digi Services Vs. Siti Cable Network Ltd.[9], Hon’ble High Court of Delhi dealt with a case where the appointment of the Arbitrator was challenged on the ground that the Arbitrator was ‘Unilaterally Appointed’ in violation of TRF Judgment and Perkins Eastman Judgment of the Hon’ble Supreme Court. The relevant para of the judgment of the Hon’ble High Court is reproduced as under:

“Lastly the reliance of the respondent on the judgment of the Supreme Court in the case of Central Organisation is also of no avail to the respondent. In the said case, the Supreme Court was dealing with an arbitration clause which required a panel of arbitrators to be provided by the Railways to the other party to the contract, in terms of clause 64.3(a)(ii) of the GCC. The Court held that since one party was to provide a panel and the other party had the choice to shortlist the Arbitrator of its choice from the panel and only from the shortlisted names, Railways was bound to appoint at least one Arbitrator to constitute the Arbitral Tribunal, the parties had a level playing filed. The Arbitrator appointed by the Railways of its choice was balanced by the second Arbitrator being of the choice of the other party. Thus, the elements of fairness, transparency, and impartiality were taken care of.”

In the case titled, City Lifeline Travels Pvt. Ltd. Vs. Delhi Jal Board[10],

Hon’ble High Court of Delhi ruled that,

“The contention that the decision in the case of Perkins Eastman ought to be read in a restrictive manner is not persuasive. On the contrary, the said decision must be read in expansive manner. The efficacy of arbitration as an alternate dispute resolution mechanism rests on the foundation that the disputes would be adjudicated by independent and impartial arbitrators. The decision in Perkins Eastman recognizes the importance of ensuring that Arbitrators not be appointed by persons who are otherwise interested in the matter so as to obviate any doubt as to the impartiality and independence of the Arbitral Tribunal. The necessity for instituting necessary safeguards for the same cannot be understated.”

In the case titled, Abraham Memorial Education Trust Vs. Prodigy Development Institution Delhi[11], dated 03.03.2021 Hon’ble High Court dealt with the award which was passed Ex-Parte by ‘Unilaterally Appointed Arbitrator’ and held,

“Since the Arbitrator’s appointment was contrary to the provisions of Arbitration Agreement and Act, the unilateral reference of disputes and the proceedings before the Sole Arbitrator are void ab initio and the award so rendered is a nullity in law. Hence, the impugned award cannot be sustained and the Court has no hesitation in setting aside the award and it is ordered accordingly.”

In case title M/s Fam Bhagat Infratech Private Limited Vs. Alok Kumar Agarwal[12], Hon’ble High Court while dealing with the challenge to Arbitral Clause which provided that ‘Unilateral Appointment of Arbitrator’ ruled,

“Clearly, in view of the law laid down by the Supreme Court in Perkins Eastman and Bharat Broadband as well as Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the 7th Schedule thereto, Clause 9.1 is rendered unsustainable in law, as it confers exclusive jurisdiction to one of the parties to the arbitration agreement to appoint the arbitrator.

In the case titled, M/s India Cements Capital Limited Vs. William[13], Hon’ble Kerala High Court at para no. 20 observed that,

20."Petitioner’s contention that if an award is declared to be a nullity in execution proceedings, it will amount to adding one more ground to Section 34 of the Act is totally unacceptable. As mentioned earlier, Section 34 of the Act provides seven grounds to set aside an award. If the expression “set aside” is understood correctly, there will not be any lack of clarity or obfuscation. Ordinarily, the expression “set aside” is understood as meaning abandon, abjure, abrogate, discard, dispense with, to omit, reject, repudiate, etc. The term “set aside” is defined in Black’s Law Dictionary (8th Edition) as vb.(of a court) to annul or vacate ( a judgment, order, etc.). The term “set aside” in the legal parlance means, to cancel, annul or revoke a judgment or order. It is an indisputable proposition that in order to set aside a decree or order or award, there must be one in existence. In other words, a decree or award not in existence cannot be set aside. No one can seek to set aside a decree or award which is not in existence. That exercise will be as futile, rather as impossible, as one attempting to commit feticide of an unborn fetus. Therefore, what is provided in Section 34 of the Act is the only ways and means to set aside an award made in an arbitral proceeding. As succinctly stated by the Hon’ble Supreme Court, what is sought to be achieved by taking recourse to Section 47 of the Code is to make a declaration that the decree(here, an award) sought to be executed is a nullity. In other words, seeking a pronouncement that there is no executable decree of award at all. If the end result of an adjudication under Section 47 of the Code is entering a finding that there is no decree or award at all, there cannot be a question of setting aside such a decree of award in that proceedings. Therefore, the contention of the revision petitioner that the declaration of nullity of an award in a proceeding under Section 47 of the Code will tantamount to adding one more ground to Section 34 of the Act is legally incorrect and therefore, not acceptable.”

The celebrated judgments of TRF Limited, Perkins Eastman Hon’ble Supreme Court have been relied by other High Courts as well.

In the case titled, Ravi Realcons Pvt. Ltd. Vs. Chief Engineer and Anr.[14] Hon’ble High Court of Calcutta observed,

“In the light of judgments in TRF Limited and Perkins Eastman in Section 12(5) of the Arbitration and Conciliation Act, it is clear that a person who may have an interest in the outcome of the dispute should not be made an Arbitrator.”

While distinguishing the judgment of CORE judgments of Hon’ble Supreme Court on facts this Bench went on to rule that,

“The judgments in CORE judgment are justiciable on facts as the same relate to the appointment of an arbitrator as per Arbitration Clause has not dehorsed the ratio of Perkins Eastman.

In the case titled, Priya Mallaiseth Vs. VLCC Healthcare Limited[15], Hon’ble Delhi High Court ruled,

“The arbitration agreement between the parties as noted above is not in dispute. Firstly considering Mr. Sethna’s second contention that Clause 13.1 when it confers an authority on the respondent to appoint an arbitrator, it would be rendered bad in law in view of the principles of law as laid down by the Supreme Court in Perkins Eastman needs acceptance adverting to the principles of law as laid down in these decisions. Applying these principles the respondent cannot have a unilateral authority to appoint an arbitral tribunal.”

Owing to inherent illegality in ‘Unilateral Appointment of Sole Arbitrators’ by one of the disputing parties is now so well established by Parliament and the Hon’ble Supreme Court that in several cases the parties themselves concede to this Legal Position and accept that unilateral appointment made by them may be set aside. In the case titled Ekta Medical Systems Private Limited Vs. Institute of Liver and Biliary Sciences[16], when the petitioner raised the issue of unilateral appointment and carrying on of arbitral proceedings in violation of Section 12(5) read with Schedule 7 of the Act while citing Perkins Eastman. Ld. Counsel for respondent, simply conceded to the legal position and paved the way for appointment of a neutral arbitrator by the High Court. Hon’ble Delhi High Court ruled that,

“The petitioners, by this petition, seek termination of the mandate of the arbitrator, presently in seisin of the disputes between the parties in view of Section 12(5) of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”) read with judgments of the Supreme Court in Bharat Broadband Network Ltd. Vs. United Telecoms Ltd., Perkins Eastman Architects DPC vs. HSCC(India) Ltd. And Haryana Space Application Centre Vs. Pan India Consultants Pvt. Ltd……..

Mr. Sanjay Poddar, learned Senior Counsel for the respondent, fairly concedes to the applicability of Section 12(5) of the 1996 Act as well as the aforesaid decisions and, therefore submits that this Court may appoint an arbitrator in place of the arbitrator presently in seisin of the disputes.”

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