ISSUES INVOLVED IN THE APPOINTMENT OF ARBITRATOR

[Mr. M. GOVINDARAJAN]

INTRODUCTION

Arbitration is a method of settlement of disputes by way of an alternative to the normal judicial method which is activated by instituting legal proceedings. Arbitration is, thus, an alternative dispute resolution. Of all forms of other alternative dispute resolution mechanisms, like conciliation, mediations, negotiations, etc., arbitration has become the most dominant form of Alternative dispute resolution.  The Arbitration and Conciliation Act, 1996 is enacted on line with the provisions of international standard of arbitration.  An arbitration proceeding has many stages.  Arbitration is based on the agreement clause put forth by the parties to the agreement as to the appointment of arbitrator etc., In this article the various issues involved in the appointment of arbitrator is discussed in details with reference to decided case laws.

PROVISIONS FOR APPOINTMENT OF ARBITRATOR

The parties are free to determine the number of arbitrators. Section 10(1) provides that the parties are free to determine the number of arbitrators provided such number shall be an even number.  If there is no such agreement the Arbitral Tribunal shall consist of a sole arbitrator.

Section 11 deals with the appointment of arbitrators.

• A person of any nationality may be an arbitrator, unless otherwise agreed by the parties – Sec. 11(1);
• The parties are free to agree on a procedure for appointing the arbitrator or arbitrators – Sec. 11(2);
• If there is no agreement, in an arbitration with three arbitrators, each party shall appoint one arbitrator and the two appointed arbitrators shall appoint the third arbitrator who shall act as the Presiding Arbitrator – Sec. 11(3);
• In the above case if a party fails to appoint an arbitrator within thirty days from the receipt of request to do so from the other party or the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made upon request of a party, by the Chief Justice or any person or institution designated by him – Sec. 11(4);
• In an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice/his designate – Sec. 11(5);
• Under an appointment procedure agreed upon by the parties-

1. A party fails to act as required under the procedure; or
2. The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under the procedure; or
3. A person, including an institution, fails to perform any function entrusted to him or it under that procedure

A party may request the Chief Justice/his designate to take necessary measure unless the agreement or the appointment procedure provides other means for securing the appointment – Sec. 11(6);

• The decision of the Chief Justice/his designate in appointing an arbitrator is final-Sec. 11(7);
• The Chief Justice/his designate while appointing an arbitrator shall take regard to-

• Any qualifications required of the arbitrator by the agreement of the parties; and
• Other considerations as are likely to secure the appointment of an independent and impartial arbitrator- Sec. 11(8);

• In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Chief Justice/his designate may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities – Sec.11(9);

Section 12 deals with the ground for challenge of the appointment of arbiter.  This section provides that where a person is approached in connection with his possible appointment as an arbitrator, he shall decide in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.  An arbitrator may be challenged only if –

• Circumstances exist that give rise to justifiable doubts as to his independence or impartiality; or
• He does not possess the qualifications agreed to by the parties.

A party may challenge an arbitrator appointed by him, or in whose appointment he has participated only for reasons of which he becomes aware after the appointment has been made.

Section 15 deals with the substitution of arbitrator.  It provides that where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.

Conditions precedent for appointment of arbitrator

The condition precedent for appointment of arbitrator is there should be an agreement between the parties, in which there is an arbitration clause to resolve the disputes by appointing an arbitrator.  The procedure of appointment of arbitrator may be there. The number of arbitrators may be indicated the agreement. The number of arbitration shall be of even number. In case the arbitrator(s) could not be appointed by the parties to the agreement the Court may appoint the arbitrator at the request of either of the parties. The following case laws are illustrative as to the requirements for appointment of arbitrator.

In ‘Shyam Sundar Agarwal V. P. Narotham Rao’ – (2011) CLA 105 (Snr.) AP 2 it was held that the existence of an arbitration agreement is a condition precedent for appointment of arbitrator in terms of Section 11(6).  The intention of the parties as to whether they agreed for resolving their disputes through arbitration could be gathered from the terms of the agreement and surrounding circumstances including conduct of parties.

 In ‘Bharat Rasiklal Ashra V. Gautam Rasiklal Ashra and another’ – 2014 (5) TMI 372 - Supreme Court of India it was held that it is well settled that an arbitrator can be appointed under Section 11 only if there is an agreement in regard to the contract in question. When serious allegations of fraud and fabrication are made, it is not possible for the court to proceed to appoint an arbitrator without deciding the said issue which related to the very validity of the arbitration agreement.  The legislature has entrusted the power of appointment of an arbitrator to the holders of high judicial officers like the Chief Judge or Judge of the Supreme Court/High Court with a view that they can identify and effectively deal with false or vexatious claims made, only to protract the proceedings or defeat arbitration.  If a party is found to have falsely contended that the contract was forged/fabricated, the Chief Justice or his designate may subject such party to heavy costs so that such false claims are discouraged.

In ‘Jagdish Chander V. Ramesh Chander’ – 2007 (4) TMI 624 - SUPREME COURT  it was held that the existence of an arbitration agreement as defined under Section 7 of the Act is a condition precedent for exercise of power to appoint an arbitrator/arbitral tribunal under Section 11 of the Act by the Chief Justice or his designate. It is not possible to appoint arbitrator to settle the disputes between the parties in the absence of an arbitral agreement or mutual consent.

In ‘Sarvesh Chopra Builders (P) Limited V. Union of India’ – 2008 (7) TMI 943 - DELHI HIGH COURT it was held that the parties are bound by arbitration agreement. Who shall be the arbitrator is also the subject matter of agreement between the parties. It is not prescribed for one party to resile from the agreement and say that the matter be not adjudicated by the arbitrator as provided in the agreement and another sole arbitrator should be appointed.

In ‘Patiapalan Mohapatra V. SE Eastern Circle’ – (2008) 24 CLA (Snr.) (Ori.) 10 it was held that if a question is raised about existence of arbitration clause at the stage of application for appointment of an arbitrator the Chief Justice or his designate has to decided whether an arbitration clause actually exist in the agreement between the parties.

In ‘UOI V. Onkar Nath Balla & Sons’ – 2009 (4) TMI 898 - Supreme Court of India it was held that the court without considering that whether any dispute exists between the parties could not have appointed an arbitrator.

In ‘Gujarat Security Services V. DSC Limited’ – 2009 (9) TMI 908 - DELHI HIGH COURT it was held that the prayer of the petitioner for appointment of sole independent arbitrator different from the one given in the arbitration clause is not tenable and cannot be granted since once the parties have agreed upon a named arbitrator they are bound by the arbitration clause.

Arbitration clause in trust deed                                                                      

In ‘Chhaya Sriram V. Deepak C. Shriram’ – 2008 (2) TMI 852 - DELHI HIGH COURT it was held that the settler and trustees can create a trust but they cannot create a binding contract between the beneficiaries in the settlement of dispute and cannot say that all disputes between the beneficiaries shall be decided by arbitration. Therefore the arbitration clause in the trust deed relief upon by the applicant is binding on the beneficiaries and the application for appointment of arbitrator is not maintainable.

Number of arbitrators

Where the arbitration clause in the agreement between the parties is silent as to the number of arbitrators, Section 10 (5) would apply which provide that arbitral tribunal is to consist of a sole arbitrator in default of the determination of number as held by the Supreme Court in ‘Sime Darby Engineering SDN.BHD V. Engineers India Limited’ – 2009 (7) TMI 1199 - Supreme Court of India. The plea as to the appointment of panel of three arbitrators raised on the basis of use of the expression ‘arbitrator(s)’ in the arbitration clause of the arbitration agreement is not tenable.

Sole arbitrator in international commercial arbitration

Where under the arbitration clause, disputes were to be referred to a sole arbitrator and the parties failed to appoint an arbitrator it would be for the Chief Justice of India/his designate Judge to appoint the sole arbitrator in an international commercial arbitration as held by the Supreme Court in ‘Reva Electric Car Co. (P) Limited V. Green Mobile’ – 2012 (10) TMI 270 - SUPREME COURT.

In ‘Omnia Technologies (P) Limited V. W.M.A. Van Loosreek’ – 2011 (3) TMI 1511 - Supreme Court of India it was held that where the parties to an original international commercial agreement containing arbitration clause have finally agreed to the appointment of sole arbitrator by the Chief Justice of India/his designate to adjudicate all disputes between them under the original agreement as well as termination agreement including the dispute as to the existence of arbitral dispute, the designate Judge will have no reason not to make appointment of sole arbitrator to adjudicate the disputes between the parties.

Third arbitrator

In ‘Thyssen Krupp Industries India (P) Limited V. S.D. Industries’ – 2010 (9) TMI 1245 - BOMBAY HIGH COURT  it was held that what does the expression ‘fail to agree’ used in clause (b) of Section 16(4) indicate?  Sub-section (4) would come into play only if the two arbitrators ‘fail to agree’ on the third arbitrator within 30 days from the date of their appointment. The expression ‘fail to agree’ indicates a disagreement between the arbitrators on the name of the third arbitrator. There can be a failure to agree between the two arbitrators about the appointment of a third arbitrator only if and when the third arbitrator is named/identified by one of the arbitrators.  In the absence thereof, there is nothing for them to agree to conversely nothing for them to fail to agree about. Thus where the arbitration proposed the name of a third arbitrator, the question of arbitration having ‘failed to agree’ on the appointment of the third arbitrator does not arise.

Forfeiture of right                                  

In ‘Denel Property Limited V. Government of India’ – 2012 (1) TMI 105 - SUPREME COURT it was held where the respondent, having the right to appoint an arbitrator under the arbitration agreement has failed to appoint an arbitrator within 30 days  and before the petitioner moved the Court for appointment of arbitrator, the right of the respondent to appoint arbitrator is forfeited.

In ‘Dakshin Shelters (P) Limited V. Geeta S. Johari’ – 2014 (5) TMI 373 - Supreme Court of India it was held that the right of the party to appoint its arbitrator in terms of the agreement gets extinguished once it failed to appoint the arbitrator on receipt of notice. The designate Judge need not give an opportunity to him to nominate the arbitrator.

In ‘T.R.P. Marketing (P) Limited V. Kingsbury Personal Care (P) Limited’ – (2008) 27 CLA (Snr.) AP 21 it was held that the fact that one of the parties has given a shorter duration for contemplation by the opposite party will not hinder the exercise, as a right in that respect has been conferred and recognized by Section 11(5) and the opposite party is entitled to take time up to 30 days for taking the required action. If a party rushes and seeks the Chief Justice or his designate even before the expiry of that 30 days period for appointment of arbitrator, then such an exercise can be objected to or faulted. 

Role of court

In ‘Mahindra Lifespace Developers Limited V. New General Eastern Spinning & Housing Co. Limited’ – (2008) CLA 27 (Snr.) (Bom) 12 it was held that while considering application for appointment of arbitrator, there is limited scope for the High Court to play larger role in entertaining contention of the parties as the contentions are left open to be urged before the arbitrator in terms of Section 16.

Jurisdiction issues

The following case laws discussed with the various issues in jurisdiction:

In ‘Som Datt Builders (P) Limited V. State of Punjab’ – 2005 (9) TMI 617 - Punjab and Haryana High Court it was held when the arbitral tribunal is already seized of the disputes between the parties to the arbitration agreement, constitution of another arbitral tribunal in respect of those same issues which are already pending before the arbitral tribunal for adjudication would be without jurisdiction.

In ‘Antrix Corporation Limited V. Devas Multimedia (P) Limited’ – 2013 (5) TMI 402 - SUPREME COURT the Supreme Court held that where an arbitrator has already been appointed and intimation thereof has been conveyed to other party, a separate application under Section 11(6) for appointment of an arbitrator is not maintainable. Once the power has been exercised under the arbitration agreement, there is no power left to, once again, refer the same dispute to arbitration under Section 11 unless the order closing the proceedings is subsequently set aside.

In ‘T.R.P. Marketing (P) Limited V. Kingsbury  Personal Care (P) Limited’ – (2008) 27 CLA (Snr.) AP21 it was held  that where the parties were located in two different states and consciously took decisions to resolve their dispute subject or jurisdiction of a court specified in the agreement, other courts would have no territorial jurisdiction to entertain arbitration application.

In ‘Krebs Biochemicals & Industries Limited V. Nannapaneni Venkat Rao, Co-op Sugars Limited’ – 2009 (27) CLA (Snr.) AP 11 it was held that even if the agreement is terminated, or an agreement is invalid or arbitration clause itself is invalid, the jurisdiction of the Chief Justice/his designate to appoint an arbitrator is not taken away. The question of validity of an agreement of arbitration clause cannot be decided by Chief Justice/his designate while considering an application under Section 11(6).

In ‘Bhagawan Doss & Sons V. Union of India’ – 2009 (27) CLA (Snr.) (P&H) 2 it was held that the appointment of arbitrator after filing of the petition under Section 11(6) is non est in the eyes of the law and would not prevent the appointment of independent arbitrator by Court.

Power of Chief Justice

In the earlier period it was held that the power of the Chief Justice/his designate is an administrative power. Now the same has been changed by many a decision.  The following case laws further discussed the powers of the Chief Justice/his designate.

In ‘SBP & Co., V. Patel Engineering Limited’ – 2005 (10) TMI 495 - SUPREME COURT it was held that the power exercised by the Chief Justice of the High Court under Section 11(6) of the Act is not an administrative power but judicial power. The power under Section 11(6) of the Act in its entirety could be delegated by the Chief Justice of the High Court only to another Judge of that High Court.

In ‘General Manager, South Central Railway V. Ashok Engineering Co.’ – 2008 (3) TMI 653 - Andhra Pradesh High Court it was held that the District Court does not have power to appoint arbitrator as in terms of Section 11(6). The power exercised by the Chief Justice of India and Chief Justice of High Court is a judicial power and not an administrative power and such power can be delegated by them only to another judge of that court and not to a District court.

In ‘San-A Trading Co. Limited V. IC Textiles Limited’ – 2006 (4) TMI 491 - Supreme Court of India it was held that where the arbitration clause provides for appointment of a sole arbitrator and he had refused to act, then the agreement clause stands exhausted and then the provisions of Section 15 would be attracted and it would be for the court under Section 11(6) to appoint an arbitrator on the procedure laid down in Section 11(6) being followed unless there is an agreement in the contract debar appointment of any other arbitrator in case of named arbitrator refused to act.  ***

Role of appointing authority

In ‘NTPC Limited V. Wig Brothers Builders & Engineers Limited’ – 2009 (4) TMI 899 - DELHI HIGH COURT it was held that an appointing authority is not to perform any adjudicatory functions. It has but one role that is to make the appointment and all contentious issues including those in respect of the existence of dispute have to be decided by arbitral tribunal under Section 16.

Limitation

The procedure prescribed under Section 11 for approaching the court for appointment of arbitrator being mandatory, the question of party preferring an application under Section 11 (4) or Section 11(6) to the Chief Justice or his designate does not arise unless the procedure of giving notice is followed and without such procedure being followed there would be no cause of action for the petition. Thus the limitation for filing an application under Section 11(4) would commence running only from the expiry of 30 days from the receipt of request mentioned in clause (a) or (b) thereof and limitation for an application under Section 11(6) would commence running from the happening of the contingencies mentioned in clause (a) or (b) or (c) thereof.

In ‘Rajesh Kumar Garg V. MCD’ – 2008 (3) TMI 655 - DELHI HIGH COURT it was held that where in terms of contract final bill was required to be submitted within three months of completion of work, seeking appointment of arbitrator for reference of alleged disputes after expiry of 6 to 8 years from the date of accrual of cause of action would be stale and barred by limitation.

Eligibility of arbitrator

In ‘Northern Railway Administration V. Patel Engineering Co. Limited’ 2008 (8) TMI 801 - SUPREME COURT  it was held that where the High Court has not kept in view the twin requirement of Section 11(8) while making the appointment of arbitrator(s), the appointment becomes vulnerable.

In ‘Indian Oil Corporation V. Raja Transport (P) Limited’ – 2009 (8) TMI 1075 - SUPREME COURT it was held that a condition in the arbitrator agreement that no person other than director or his nominee shall act as arbitrator is liable to interfere with the power of the Chief Justice or his designate under Section 11(8) to appoint a suitable person as arbitrator in appropriate cases and, therefore, such part of arbitration clause is liable to be ignored being contrary to the Act.  Where there is material to create a reasonable apprehension that the person mentioned in the arbitration agreement as the arbitrator is not likely to act independently or impartiality or of the named person is not available, the Chief Justice or his designate may, after recording reasons for not following the agreed procedure of referring the dispute to the named arbitrator, appoint an independent arbitrator in accordance with Section 11(8).

Named arbitrator

The agreement may provide for appointment for a named arbitrator.  In normal circumstances while exercising jurisdiction under Section 11(6) the Court would adhere to the terms of the agreement as closely as possible. But where the Court believes on the basis of material placed before it, that the arbitrator appointed by the respondent would not be independent and impartial, the Chief Justice or his designate is not debarred from appointing an independent arbitrator other than the named arbitrator, in terms of Section 11(8).

In ‘Union of India V. Singh Builders Syndicate’ – 2009 (2) TMI 794 - Supreme Court of India it was held that the arbitration clause provides for appointment of senior officers of one party as arbitrator. A provision for serving officers of one party being appointed as arbitrator brings out considerable resistance from the other party when dispute arises having regard to the emphasis on independence and impartiality in the Act.  The Government, statutory authorities and government companies should think of phasing out arbitrations clause providing for giving officers and encourage professionalism in arbitration.

In ‘Indian Oil Corporation V. Raja Transport (P) Limited’ – 2009 (8) TMI 1075 - SUPREME COURT it was held that fact the named arbitrator is an employer of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part. A person, being an employee of one of the parties cannot per se a bar to his acting as an arbitrator. Senior Officer(s) (usually head of department or equivalent) of a government/statutory corporation/PSU not associated with the contract are considered to be arbitrators, merely because their employer is a party to the agreement. However, if any circumstances exist to create a reasonable apprehension about the impartiality or independence of the agreed or named arbitrator the court has discretion not to appoint such arbitrators

Bias of the arbitrator

Either of the parties to the agreement may challenge the appointment of arbitrator on the ground of bias on the part of the arbitrator.  At the initial stage itself a party cannot agitate on the biased nature of the arbitrator.

In ‘National Highways Authority of India V. K.K. Sarin and others’ – (2009) 26 CLA-BL Supp (Snr.) 17 (Delhi) it was held that a party alleging bias is required to first follow the procedure as laid down in Section 12 and 13. If the party is unsuccessful, he has choice of either waiting till the stage of Section 34 or if he feels bias can be summarily established or shown, should approach the court immediately under Section 14 after the challenge being unsuccessful, for court to render a decision.

Substituted arbitrator

Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator as held by the Supreme Court in ‘NBCC Limited V. JG Engineering (P) Limited’ – 2010 (1) TMI 1140 - Supreme Court of India

In ‘Bangalore Housing Development & Investments V. IBC Knowledge Park (P) Limited’ – (2010) 28 CLA (Snr.) Kar 7 it was held that the petition filed under Section 11(6) for appointment of arbitrator in the vacancy that arose due to the withdrawal of originally appointed arbitrator would not be maintainable where the petition is filed without calling upon the respondent to fill up the vacancy as required under Section 11(4) (a).

In ‘ACC Limited V. Global Cements Limited’ – 2012 (6) TMI 431 - SUPREME COURT OF INDIA it was held that arbitration clause would have life so long as any question or dispute or difference between the parties exits unless the language of the clause clearly expresses an intention to the contrary. Where arbitration clause in the agreement does not prohibit or debar the parties in appointing a substitute arbitrator in place of a named arbitrator, parties can persuade the Court for appoint of an arbitrator under the clause.

Deviation from the methodology

In ‘Gelsellschaft Fur Biotechnologische Forschun GMBH V. Kopan Laboratories Limited’ – (2004) 13 SCC 630, the Supreme Court noted that the learned Single Judge of the Bombay High Court while hearing the appeal under Section 8 of the Act directed the claims/disputes of the parties to be referred to the sole arbitration of a retired Chief Justice with the venue at Bombay, despite the fact under the arbitration agreement, it has been indicated that any dispute, controversy or claim arising out of or in relation to the agreement would be International Chamber of Commerce, Paris with the venue of arbitration in Bombay. The Supreme Court held that when there was a deviation from the methodology for appointment of an arbitrator it was incumbent on the part of the Chief Justice to assign reasons for such directions.

Appeal against the order of Chief Justice/his designate

The Act does not provide for an appeal against the order of Chief Justice or his designate made under Section 11(4) or Section 11(5) or Section 11(6) as held by the Supreme Court in ‘Punjab Agri Industries Corporation Limited V. Kewal Singh Dhillon’ – 2008 (8) TMI 876 - Supreme Court of India.  On the other hand Section 11(7) makes it clear that a decision of the designate under Sub sections (4), (5) or (6) of Section11 is final. As no appeal was maintainable against the order of the designate and as his order was final, the only course available to the appellant was to challenge the order, even if it is a judicial order, by a writ petition under Article 227 of the Constitution of India.

Over riding effect              

In ‘Gujarat Urja Vikash Nigam Limited V. Essar Power Limited’ – 2008 (3) TMI 654 - Supreme Court of India it was held that where there is a provision for arbitration in the agreement between the parties and had the State Electricity Act not been enacted meanwhile, there could not doubt that the arbitration would have to be done in accordance with the Act, but since with coming into force of the State Act all adjudication of disputes between the licencees and generating companies can only be done by the State Commission or the arbitrator appointed by it.  The State Act will prevail over Section 11 only with regard to the authority which can adjudicate or arbitrate such dispute but for the arbitration procedure.

CONCLUSION

In this article the provisions relating to the appointment of arbitrator, conditions precedent for the appointment of the parties, role of courts in appointing the arbitrator, the role of the parties to the agreement for the appointment of arbitrator,  jurisdiction issues, appointment of substituted arbitrators etc., were discussed in detail, though it may not be exhaustive. Still more issues may arise in this regard in future which may depend upon the facts and circumstances of the cases.