Has Indian Supreme Court Raised the Question on the Established Practice of International Commercial Arbitration? A Critical Analysis of Judicial Contradictions within its Precedent

By Anchit Jain, fourth-year student at ICFAI University, Dehradun and Advocate Sanket Jha, Legal Practitioner at High Court, Mumbai

Introduction

Supreme Court felt trapped in its reasoning and unwillingly landed on a point that might have raised a global question on the approach of the Arbitration system of dispute resolution.

In the case of Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd, it was provided in the agreement’s clause 24.1(ii) that the Chairman & Managing Director (‘CMD’) will possess the exclusive power to appoint the sole arbitrator on the behalf of both the parties. Moreover, this exclusion clause barred another party from choosing the arbitrator. Applicants challenged the abovementioned clause before the Supreme Court u/s 11(6) of The Arbitration & Conciliation Act, 1996 (hereinafter referred to as ‘Act’) believing the agreed procedure in non-compliance with the Act and prayed for the appointment of a sole arbitrator.

The Court found self-interest as a biased element and reasoned it behind the disqualification of CMD. Court referred to its judgment in TRF Limited v Energo Engineering Projects Limited, where it was held that as per Section 12(5) of the Act, an ‘Managing Director’ cannot act as an arbitrator because of his ‘self-interest’ in the outcome of the award. Self-interest disfigures the credibility of an Arbitrator by questioning his ‘Impartiality and Independency’.

Thus, the Court held that a party can neither act as nor can nominate an arbitrator.

This piece will discuss, how this reasoning:

1. May have raised a global debate in appointment procedure of arbitration;

2. Is not settling amongst the various features of the Arbitration mechanism;

3. Is (or not) in consonance with other jurisdictions.

Tossing a Universal Debate

The Court raised the question on the objective of Arbitration, which if not answered then might have raised a global debate. Party Autonomy in Arbitration is the prima facie reason behind its objective of speedy dispute resolution. Parties have the liberty to customize their procedure as per their convenience. They can freely choose their arbitrator. Curtailing their right on the ground of self-interest has not only challenged the basic feature of arbitration but will also question all those agreements, in which parties have provided for the appointment of arbitrator(s) by their choice. In Perkins’s Judgment, the Court realized that self-interest, as reasoning, will ‘disentitle’ the cases of similar nature.

This question would be extended to every agreement where parties have provided to nominate a panel of 3 arbitrators as well. Autonomy is a privilege in arbitration for choosing an arbitrator.  If self-interest will bar the parties from nomination, then a party can never choose an arbitrator, because, directly or indirectly, every party has an interest in the outcome. Autonomy is the privilege of choosing this mechanism.

However, the Court (paragraph 16) referred again to TRF for handling this possible chaos. The Court read that balancing the powers between the parties is the ideal situation through which parties can mutually appoint an arbitrator. The court believed this equilibrium as a solution, although it looks like a self-contradictory statement.

If a party is barred from choosing an arbitrator on the ground of self-interest for eliminating biases, then the question is how parties choosing the arbitrator will ensure the exclusion of biases. On the contrary, the table may get more biased and raise a question on impartiality & independence of the Arbitrators. In this case, only the umpire might be a reasonable and fair person. Court, instead of resolving the dispute, made it more self-contradictory. This problem gets bigger in the case of the sole arbitrator, where both the parties look unsettled over the appointment.

Encouraging Judicial Interferences

Notably, all of this is contentiously ending up with parties seeking the Court’s intervention in the alleged dispute of Impartiality & Independence of Arbitrator. E.g. the case of Bharat Broadband Network Limited v. United Telecom Limited, where the Court upheld the appellant’s argument that as per Section 12(5)’s reasoning from the TRF’s judgment, the appointment made by the CMD stands void.

Arbitration ensures honest practices so that parties can rely on their arrangements and accept the award as a result of their logic and convenience. If parties have to approach the Court for an arbitrator’s appointment, so that the arbitration can commence, then it defeats the aim of a speedy resolution. Moreover, parties already have the right to appeal before the Court. This will never help the Courts in distressing the docket explosion, rather will increase the burden. This is breaching the Arbitration’s objective of minimising judicial interference.

Character of Arbitrator

Supreme Court quoted the 246th Law Commission Report which reads, “Party Autonomy cannot be stretched up to a point where it negates the very basic feature of Arbitrator’s Impartial and Independent character.” If the Court’s reasoning of ‘Tit for Tat’ by balancing the powers amongst the parties will be considered then it will weaken the Commission’s recommendations for ethical procedures. The report emphasizes on not appointing a party or its nominee as the arbitrator even if the same has been agreed between the parties. The reason is to ensure the Impartial & Independent character of the Arbitrator.

Court referred the judgment of Voestapline Schienen Gmbh v. Delhi Metro Rail Corpn. Ltd, which declared Impartiality and Independency as the hallmarks of an arbitration Proceeding. Court, in both the cases, referred to the UK’s Supreme Court’s decision in Jivraj v. Hashwani which backed the ‘Impartial’ character in an Arbitrator and agreed that an arbitrator’s contract for personal service does not ask him for anyone’s personal service. The Indian judgments, also quoted the Cour de Cassation, France’s judgment, delivered in 1972 in Consorts Ury  which focused on the ‘Independent’ character of the Arbitrator and held that an independent mind is the essential quality of an arbitrator for exercising judicial power. These Foreign Judgments of the respective apex Courts allow a party to appoint an arbitrator, but both of them have asked to ensure the Impartial and Independent character of an arbitrator.

Asymmetrical Arbitration Clause

Interestingly, International Arbitration validates the Asymmetrical Arbitration Clause. India’s dissent to this global practice has again weakened its ambition of becoming a global hub of arbitration. This difference with the international approach will be another reason in the list where India as a seat to any International Commercial Arbitration will disappoint the parties on the global standards. The Case of Perkins falls under the jurisdiction of International Commercial Arbitration, where the appellant, the foreign party took the advantage of Indian precedents, against the settled principle of the Asymmetrical Arbitration Clause, despite its prior consent on the Agreement.

Inadequate Reasoning

The Court disqualified the party from making a nomination based on ‘qui facit per alium facit per se’ (what one does through another is done by oneself) from the case of Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons, but it is pertinent that this case was neither of arbitration nor dealt with any similar issue around the present case. It appears inappropriate to bar the objectives of the Act, through which the referred case was decided. The Court disqualified the party, on whom a pendulum of self-interest swung and did not lay, who is eligible to make the appointment on the party’s behalf. This inadequacy in precedent will take the parties before the court for further clarification which will again breach the arbitration’s objective of minimum court’s intervention.

Test of Arbitrator

The US Court in the case of Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc held that the parties must have equal rights to participate in the selection process of the arbitrators. Thus, it is important to ascertain the rationality status of arbitrators.

However, besides the reasoning of the Indian Court, (i) ‘Complying with the concept of Asymmetrical Arbitration Clause and stimulating it with the Indian public policy’ or (ii) ‘Defining a test of Impartial and Independent Arbitrator for a fair arbitration’, seems as few suitable alternatives.

In the current case, the Agreement was mutually agreed between the parties, all that was required to be ensured was the hallmarks of Impartiality and Independence of Arbitrator. This can be tested through Schedule V and VII or by the received information under Schedule VI of the Act. The same test can allow parties to appoint the arbitrator, as strict emphasis on the abovementioned Schedule will keep the parties cautious about their decision on the fair appointment of an arbitrator.

Conclusion

Supreme Court lacked in complying with the pervasive values i.e. limiting the party’s autonomy and the asymmetrical arbitration clause weakened the objective of minimum judicial intervention. All of this will somewhere damage India’s goal of becoming a global hub of Arbitration. Self-interest is debatable, but this precedent questions the functioning of Arbitration like Party Autonomy and the Court’s intervention. The jurisprudence of Arbitration relies on the UNCITRAL’s Model law which is convenient because of its pervasive uniformity. It is established that all the states operate with the model law and less than the whole have ratified the New York Convention. Thus, it will be suitable for the judicial bodies across the globe to interpret the precedents in a universally accepted version. All that has to be cared about are the public policies of the respective states, which should also be tried to be updated with the prevailing developments. If Arbitration has to comfort the Judiciary then alike Tax or Finance, regular legislative amendments in Arbitration has to be given due attention. Till then, all that can be done is the precedential inclination towards the pervasive schemes.

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