Introduction
Arbitration being the cornerstone of commercial dispute resolution, has gained prominence as a preferred mechanism, offering an alternative due to its efficiency, cost effectiveness, and flexibility. Central to its legitimacy is the tenet of neutrality ensuring impartialness and independence of adjudicators. However, concerns about the impartiality and the independence of arbitrators have emerged around the unilateral appointments. Section 12 of the Arbitration and Conciliation Act, 1966 deals with the grounds for disqualification of the arbitrator subject to conditions. The section established a non-negotiable mandate to ensure neutrality and maintain party autonomy as the doctrine of arbitration. This section’s clause 5 deals with mandatory disclosures with circumstances which are likely to give justifiable doubts to their impartiality.
A contentious issue arises while appointing authority unilaterally appoints an arbitrator. While section 12(5) read with the seventh schedule of the Act – enumerates relationships that are likely to affect the neutrality of the arbitrator’s independence. The proviso also allows both parties to explicitly waive such disqualification after the dispute arises with the consent. This provision reflects the legislative intent to allow and prioritize procedural integrity if the parties are willing to expressly waiver their rights over autonomy to appoint. Party autonomy being the core pillars of arbitration contours the proceedings by allowing substantial freedom. Nevertheless, this autonomy must adhere to limits to ensure stability in the process of appointment of arbitrators.
Judicial Evolution and Expanding Interpretation
One of the landmark judgements, the TRF Ltd v. Energo Engineering Project Ltd. (2017) struck out the root of unilateral appointments relying on the principles of natural justice and holding it that an ineligible arbitrator under the seventh schedule cannot appoint another arbitrator. The reasoning was extended and clarified in the Perkins Eastman Architects DPC v. HSCC (India)Ltd. case, which has been significant in addressing the validity of unilateral appointment under the section, observing party’s authority to unilaterally appoint a sole arbitrator inherently creates a conflict of interest and undermines the principle of impartiality. Perkins Eastman (Appellant) challenged the appointment under Section 12(5) of the Arbitration Act, arguing that the Chairman and Managing Director's unilateral power to appoint an arbitrator was unfair and biased. The case dealt primarily with the two issues of whether the present arbitration is an International Commercial Arbitration (No, it is not) and the power by the Court to make an appointment of an arbitrator if one is not ex-facie valid (yes, court has the jurisdiction). The rationale behind it is that the any person whose relationship fall within the categories specified in Seventh Schedule is ineligible to be appointed as an arbitrator himself, and even to appoint another arbitrator. The MD cannot be appointed himself and not appoint another person as a sole arbitrator. The court relied on the maxim “qui facit per alium facit per se”, as something which cannot be done directly may not be done indirectly by engaging another outside the prohibited area to do the illegal act within the prohibited area, as there are justifiable doubts on the independence and impartiality of the person nominated. The judgement has taken reliance on the 246th Law Commission Report about the Neutrality of Arbitrator and the Voestapline Schienen Gmbh v. Delhi Metro Rail Corpn. Ltd (2017) 4 SCC 665. The aforementioned judgement discussed 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 the contract and before arising of the disputes” and lays reliance on several international judgements as well to discuss on impartiality and independence. Arguably, Voestapline did not bar government employees serving as arbitrators on reasoning that such experience personnels have less likelihood of bias. It mandated private parties to select/ nominate an arbitrator from a narrow, pre-defined panel, curated by the other party, which can create a legitimate perception of partiality, ultimately invalidating such clauses. The party autonomy is “counter-balanced” by one party formulating the panel and other appointing from the select panel. Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (2020) 14 SCC 712 (CORE I) judgement also re-iterated the same sentiment and validated the one party’s right to select individuals as arbitrators as per the arbitration clause by “counter-balancing.” The courts have been in a cross whether to balance party autonomy or neutrality. The CORE II judgement gravitates the constitutional and administrative principles imposed on arbitration law and much high burden is places on the parties to ensure the appointment to be fair and just. Party still have a chip to play to challenge the tribunal’s actions on constitutional law grounds as well via Article 14 of the Constitution and adhering to the principles of natural justice, in potentially interpreting the provisions of the act.
Rule against bias is one of the fundamental principles of natural justice. The courts have held that impartiality would be absent in an individual naturally interested in the outcome or decision in respect of the dispute and possibility of bias is directly relatable to the interest the person appointing an arbitrator has in the outcome of the dispute declaring that such appointments to be impermissible. Following that jurisprudence recently, a five judge bench of the Supreme Court of India in the Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)(CORE II) took a decision on the unilateral appointment of arbitrators and selection of arbitrators from a panel of arbitrators curated by Indian public sector undertakings. They weight on the foundations underlying UNCITRAL Model Law, securing its pedestal of a quasi-judicial function and alternative private dispute resolution. The Indian Arbitration and Conciliation Act, 1996 being heavily reliant on the UNCITRAL Model, held its principles intact. The decision unriddled the conundrum by clarifying the unfair bargaining power the state and its instrumentalities held in the private-public contracts. It cleared the room and stood ground for tribunal’s independence in appointment of arbitrators. The judgement held the principle of party equality will apply at the stage of appointment of arbitrators as well. Arbitral proceedings are built on the foundation of independence and impartiality.
Expanding the Scope: Judicial Overreach or Necessary Intervention?
The Act does not direct address the unilateral appointment of the arbitrator but annuls the arbitrators with specific relationships. Party autonomy being a cardinal principle gives liberty to agree on procedure for appointing authorities. Arguably, these judgements are expanding the scope of section 12(5) beyond the intent of the statute, invalidating the specified relationship between the arbitrator and the parties, or at the interest of the arbitrator with the dispute. The lines seems to blur between the statutory interpretation and judicial legislation.
Law and Economics Perspective
From the law and economics lens, the question of unilateral appointments relies on the principles of efficiency, fairness, cost. The independence of arbitrator is essential to foster trust in the proceeding.
Cost
Unilateral appointments, come attached at its tail with the perception of bias which strains away parties from choosing arbitration as a dispute resolution mechanism. Need comes for the additional safeguards or regulations to be facilitated which in turn add stricter cost to maintain the criteria and checks and balances intact, in thus diminishing its efficiency. The transitory cost in arbitration not only comes by the long term venture of monetary arbitration costs, but as well as the investment of time, energy and efforts by the parties of it. The appointment of an arbitrator unilaterally imposes more additional burden and cost to the whole game as such flawed appointments often challenge or prolong the resolution process like dropping and anchor to the moving ship. Stirring away from the fundamentals of arbitration, and implementing a biased – unilateral appointment of the arbitrator adds to the losing the trust in the ability and the efficiency of alternative dispute resolution. The judiciary has acknowledged such cost imposed by the court’s ruling CORE I judgement and prima facie disagreed in the three judge bench in Union of India v. Tantia Constructions Ltd, was referred to a higher bench. The imposition of unilateral appointments, often results in appeals adding cost of increased litigations, burden to the courts, delayed gratification for the parties.
Benefits
By enforcing neutrality through Section 12(5), the Act minimizes these inefficiencies and enhances arbitration’s attractiveness. A prohibition on such appointments streamlines the process by pre-empting conflicts, thus reducing transaction costs and promoting quicker dispute resolution. In terms of abiding by the principles of arbitration and acting in good faith and fairness, is not merely fulfilling the moral imperative but also the economic good. Parties engaged in such proceedings more will adopt this methodology of dispute resolution more. The addition of the section 12 clause 5 via the 2015 amendment added the prohibition/ bar on the selection of arbitrators by a unilateral appointment unless expressly accepted by a written agreement. It aimed to enhance procedural fairness, increasing encouragement of broader participation in arbitration. It continues to contribute more to the overall efficiency in the ecosystem, with the speedy disposal mechanism of this dispute resolution.
A Game Theory Grid: Prisoner’s Dilemma
The appointment of arbitrators and the court’s reaction when placed in a prisoner’s dilemma points out to parties reacting in the game as the appointments to be equitable or unilateral and such appointments being challenged or not challenged.
Situation 1: Both the parties enter dispute resolution, but the arbitrator is appointed unilaterally. If such appointment fails to be challenged it is a breakdown in the resolution system and disregard to the arbitral principles.
Situation 2: Both parties enter an arbitration for conflict resolution and the arbitrator is chosen unilaterally. This gives rise to a challenge which adds burden to the court system defeating the purpose as well as inefficiency in a so-called quicker system. This is a situation that plays the worst off. The challenge successfully remedied will only add unnecessary burden to courts while the challenge not reminded simply breaks down the trust of the court as well as the alternative dispute resolution system.
Situation 3: Parties entering a just arbitrator appointment, and the proceedings goes smooth without any challenges, with fairness and neutrality. This is the best outcome of the game where parties are in full efficiency and completing the ultimate object of the procedure in the right way.
Situation 4: Parties ends up being part of a fair, equitable and just proceeding which a neutral arbitral but to add clutches to the dispute resolution such appointment is challenged. This rises to a situation of adding inefficiency and paralysis to the aim of the alternative dispute resolution. It fails to fulfil the objective of reducing the court’s burden.
Section 12(5) of the Act just plays as a wild card player in smoothening down the unilateral appointments to be valid and avoid unnecessary court intervention when consented by both parties in written.
The Balancing Act: Party Autonomy and Procedural Integrity
Section 18 of the Act, based on Article 18 of the Model Law, stipulating the equal treatment of parties and one of the keystones of arbitration, has been contested with respect to its in its position in chapter V which discusses the conduct of the arbitral proceeding and its in-applicability during the unilateral appointment by Justice Narasimha in the CORE II judgement. He put forth a that the principle of equality is not absolute and is restricted to the conduct of the proceeding only. While, giving pedestal and weight to the founding principles of arbitration Justice Roy put forth a different perspective that principle of equality applies at all stages of the arbitration proceedings, including at the stage of appointment of arbitrators.
With Section 12(5) strikes delicately the balance of curbing unilateral appointments but also providing a leeway to parties to prioritise their autonomy if anything is so expressed in written. The section 12 of the Act provides grounds for disqualification of the arbitrator in schedule V and VII to the International Bar Association’s Guidelines on Conflict of Interest in International Arbitration. Orange and Red Lists, along with a way for an express waiver via clause 5. Despite that jJudicial pronouncements consistently emphasize that autonomy must yield to procedural integrity to preserve the legitimacy of the arbitration process.
In aim to materialise the precedent of undesirability of unilateral appointment of arbitrators, courts again and again exemplify this claim. In my opinion, the courts through the judgement of Perkins and CORE II aimed to ensure the safeguarding of procedure alongside aligning with the international standards and frameworks. But, unfortunately the judiciary takes two steps ahead in interpreting the statute. Section 12(5) read with the seventh schedule aims to eliminate the appointment of arbitrators having listed down relationships which reduces down the fairness, transparency and neutrality of the parties and the to-be appointed arbitrator. There needs to be careful consideration of the relationship of the arbitrator to the dispute rather than blatantly disposing off all the arbitrators appointed on a unilateral basis. Or the other flip side, the legislation brings in the provision explicitly inapplicability of all unilateral appointments.
The legislature must step in to provide clarity, ensuring that arbitration remains an efficient, equitable, and autonomous dispute resolution mechanism. By addressing existing ambiguities and promoting reforms, India can strengthen its arbitration framework, aligning it with global best practices while preserving the delicate equilibrium between neutrality and autonomy.
This article has been co-authored by Aishni Kalra and Rishabh Mehta, students at the Gujarat National Law University. This blog is part of the RSRR's Rolling Blog Series.
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