The bedrock of Arbitration as stipulated by the Arbitration and Conciliation Act, 1996 (“the Act”) is its inherent independence from the clutches of judicial restraints. When disputes between parties are to be adjudicated through the Alternate Dispute Resolution (“ADR”) mode of Arbitration, it is necessary that an impartial, neutral, unbiased and independent decision-making individual, or a group of such individuals, decide and settle the disputes. Such individual(s), who ‘arbitrate’ or settle the disputes between the parties without the involvement of Courts, are referred to as Arbitrator(s).
In furtherance of a truly judicial intervention-free adjudication mechanism, the parties to an Arbitration Agreement are at a liberty to appoint Arbitrator(s) of their choice, subject to fulfilment of certain conditions such as independence, neutrality, unbiasedness, and so on. Within India, the Act empowers the parties to mutually appoint Arbitrator(s) in conformity with the provisions of the Act for the composition of Arbitral Tribunal.
This Blog shall discuss the procedure, principles and conditions applicable for the appointment of Arbitrator(s) in India, as laid down by the Act.
PROVISIONS FOR APPOINTMENT UNDER THE ACT
Chapter III of the Act deals with the ‘Composition of Arbitral Tribunal’, which stipulates various provisions for appointment of Arbitrators, challenging such appointment, and termination of the mandate of Arbitrator.
Number of Arbitrators
Section 10 of the Act grants the liberty to the parties to determine the number of Arbitrators, not being an even number. However, if the parties fail to do so, the Arbitral Tribunal would only consist of a Sole Arbitrator.
Procedure for appointment of Arbitrator(s)
Similarly, the parties are at liberty to mutually agree on the procedure for appointing the Arbitrator(s) under Section 11(2) of the Act. As per sub-clause (1) of Section 11, a person of any nationality may be an Arbitrator, unless otherwise agreed by the parties. Section 11 further deals with the contingency wherein the parties fail to mutually agree on the procedure for appointment of Arbitrator(s).
Procedure for appointment when parties fail to mutually agree on the procedure
Section 11(3) of the Act states that if the Arbitral Tribunal is to consist of three Arbitrators, each party may appoint one Arbitrator, and the two appointed Arbitrators would thus appoint the third Arbitrator who shall act as the presiding Arbitrator.
However, a situation might arise where the parties fail to appoint even one Arbitrator within thirty days from the receipt of request, or the two appointed Arbitrators fail to agree on the third Arbitrator within thirty days from the date of their appointment. In such an event, the appointment would be made by the Supreme Court, the High Court or any institution designated by the Court upon request from a party to the dispute under Section 11(4) of the Act.
In an Arbitration consisting of Sole Arbitrator, if the parties fail to agree on the Arbitrator within thirty days from the receipt of request by one party, the appointment would finally be made by the Supreme Court, the High Court or any institution designated by the Court upon request from a party to the dispute as stipulated under Section 11(5) of the Act.
When agreed procedure for appointment of Arbitrator(s) is not followed
Section 11(6) of the Act lays down the remedy in case the appointment procedure agreed upon by the parties is not complied by either party, or the parties or appointed Arbitrators do not reach to an agreement as expected under the procedure, or the institution or any person fails to perform the function entrusted to him/it under that procedure.
In such a situation and in the absence of any other means provided in the agreement for securing the appointment, a party may request the Supreme Court, the High Court or any institution designated by the Court to take the necessary measure for appointment of Arbitrator(s).
Expeditious disposal of applications made to the Courts for appointment of Arbitrator(s)
Under Section 11(13) of the Act, the Supreme Court, High Court or any institution designated by the Court, to which an application has been made by a party for the appointment of Arbitrator(s), is required to expeditiously dispose such application with an endeavour to dispose the same within sixty days from the date of service of notice on the opposite party.
Disclosures to be made by the Arbitrator(s)
Under Section 12(1) of the Act, any person approached in connection with possible appointment as an Arbitrator shall make written disclosures on:
- Existence of any past or present relationship with, or interest in any of the parties, or in relation to the subject-matter in dispute, which is likely to give rise to justifiable doubts regarding their independence or impartiality; or
- Grounds which may affect his ability to devote sufficient time to the Arbitration and complete the Arbitration within twelve months.
In essence, Section 12 of the Act casts an obligation of the Arbitrator to disclose all circumstances, events or relations which would hinder their ability to conduct the Arbitration in an unbiased, neutral, impartial and independent manner.
The grounds which give rise to ‘justifiable doubts regarding independence or impartiality’ are laid down in the Fifth Schedule to the Act, and the grounds of ineligibility for appointment as an Arbitrator are provided in the Seventh Schedule to the Act.
INELIGIBILITY FOR APPOINTMENT AS ARBITRATOR
As provided under Section 12(1) of the Act, any person approached for the appointment as Arbitrator shall make certain disclosures with regards to their ability to act independently or impartially. To further enable parties to ensure impartiality and independence of the Arbitrator, Section 12(3) of the Act empowers a party to the Arbitration to challenge the appointment of an Arbitrator on the grounds of:
- Existence of circumstances which give rise to justifiable doubts as to his independence or impartiality; or
- The Arbitrator not possessing the qualifications agreed to by the parties.
Section 12(4) of the Act further enables a party who appointed an Arbitrator, or participated in the appointment, to challenge the appointment even after appointment has been made after he becomes aware of the aforementioned grounds to challenge.
Within the judicial scenario, the Courts have always taken a proactive approach to ensure that the Arbitrator(s) so appointed are impartial and independent. In the case of TRF Limited. v. Energo Engineering Projects Limited, AIR 2017 SC 3889 (“TRF”), the Supreme Court held that a person who was designated as an Arbitrator and subsequently became ineligible under the Fifth or Seventh Schedule of the Act, could not nominate an Arbitrator himself.
Thereafter, the Supreme Court’s decision in Perkins Eastman Architects DPC & Anr. V. HSCC (India) Ltd 2019 (6) ARBLR 132 (SC) (“Perkins”) further clarified the position in law as laid down in the TRF case, and categorized two circumstances of ineligibility for appointment of Arbitrator as follows:
- TRF category, wherein the employee of the interested party was appointed as Arbitrator or was empowered to nominate the Arbitrator; and
- Perkins category, wherein only the employee of the interested party had the exclusive right of nomination of Sole Arbitrator.
The Supreme Court observed that, as per the TRF principle, an interested person who was disqualified from acting as or nominating an Arbitrator due to biasness, could not hold the exclusive right to nominate the Arbitrator, even though such interested person was not himself acting as the Arbitrator. The Supreme Court noted that the possibility of biasness would still subsist if such interested person would be exclusively responsible for nomination of the Arbitrator.
In the case of Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665, the agreed procedure for appointment of Arbitrators gave the Respondent the right to shortlist five names of prospective Arbitrators from the panel prepared by both the parties, and then each party would nominate an Arbitrator from the names shortlisted by the Respondent.
The Supreme Court held that the entire procedure of appointment of Arbitrator was contrary to Section 12(5) of the Act, as no free choice was given to the Petitioner to nominate an Arbitrator from the entire panel prepared by both the parties. The Supreme Court observed that the Petitioner did not possess the full freedom to nominate an Arbitrator of his choice which instilled the idea of biasness.
The Supreme Court further clarified on the applicability of Section 12(5) of the Act and the Seventh Schedule of the Act, which were introduced by the Arbitration (Amendment) Act, 2015, in the case of Bharat Broadband Network Limited v. United Telecoms Limited 2018 SCC OnLine SC 3276. The Supreme Court held that the said Section and Schedule shall have retrospective application and would not be confined to prospective application only.
APPOINTMENT OF SUBSTITUTE ARBITRATOR
Section 15 of the Act stipulates that the mandate of an Arbitrator may be terminated due to the following reasons:
- Appointment of the Arbitration challenged under Section 13 of the Act due to their ineligibility;
- Failure or impossibility to act under Section 14 of the Act;
- Withdrawal from office by the Arbitrator for any reason; or
- Pursuant to agreement of the parties.
In such an event of the mandate of an Arbitrator being terminated, Section 15(2) of the Act states that a substitute Arbitrator shall be appointed in accordance with the rules which were applicable to the appointment of the Arbitrator being replaced. The substitute Arbitrator may at his discretion choose to re-conduct any hearings previously held by the replaced Arbitrator.
In the case of Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. (Special Leave Petition (Civil) No. 11279 of 2006 dated 03.07.2006), the Supreme Court clarified the scope of “rules” of appointment which would be applicable for the appointment of the substitute Arbitrator under Section 15(2) of the Act, as not confined only to statutory rules but to include the agreed procedure for appointment or any Institutional Rules chosen by the parties. The Supreme Court held that:
“The term “rules” in Section 15(2) obviously referred to the provision for appointment, contained in the arbitration agreement or any Rules of any Institution under which the disputes were referred to arbitration. …
When Section 15(2) says that a substitute arbitrator can be appointed according to the rules that were applicable for the appointment of the arbitrator originally, it is not confined to an appointment under any statutory rule or rule framed under the Act or under the Scheme. It only means that the appointment of the substitute arbitrator must be done according to the original agreement or provision applicable to the appointment of the arbitrator at the initial stage.”
The entire ADR mechanism of Arbitration revolves around independence, impartiality and neutrality of Arbitrators, to ensure that the dispute so heard and settled by the Arbitral Tribunal is completely unbiased and in accordance with the principles of natural justice.
A prominent feature of Arbitration is the freedom of parties to choose their own procedure for appointment of Arbitrator, which directly or indirectly grants the freedom to appoint the Arbitrator of their choice. However, it is necessary to ensure that such freedom does not traverse beyond the principles of natural justice and result into appointment of a biased Arbitrator, which would subsequently lead to a biased or impartial award.
Therefore, to maintain the sanctity of Arbitral proceedings in India, the Act has encapsulated various provisions pertaining to the appointment and ineligibility of Arbitrators, the grounds to challenge the appointment, termination of the Arbitrator’s mandate and appointment of substitute Arbitrators. Such provisions have developed over the years through legislative amendments and judicial precedents to uphold the principle of party autonomy and neutrality.
The position of the judiciary with regards to appointment and ineligibility of Arbitrators portray that the Indian legal system is striving towards making India a pro-Arbitration regime, to promote Arbitration as the preferred mode of dispute resolution.
Additionally, the amendments brought to the Act vide the Arbitration (Amendment) Act, 2015 and the Arbitration (Amendment) Act, 2019 with regards to ineligibility of Arbitrators, grounds for challenge and the prohibited relationships for appointment as an Arbitrator, have proven beneficial to the parties for the appointment of a neutral Arbitrator and challenge any appointment on the grounds so laid down. Altogether, such judicial and legislative measures fortify India’s position as a preferred Arbitration hub.
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