I. Introduction:

Independence and impartiality of an arbitral tribunal is the hallmark of arbitral proceedings, and is fundamental to principles of natural justice. As provided under Section 18 of the Arbitration and Conciliation Act, 1996 (“Act”), it is essential that the parties are treated equally and given full opportunity to present their respective cases.

Another key element of arbitration is party autonomy, which has been described as a grund norm and the backbone of arbitrations.  Party autonomy entails that parties should have the freedom to fashion their own dispute resolution procedure. In Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd.,^[1] (“Centrotrade”), the Supreme Court laid down the essential characteristics of party autonomy which was later affirmed in the case of PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd.^[2] The Court in Centrotrade stated that:

“Be that as it may, the legal position as we understand it is that the parties to an arbitration agreement have the autonomy to decide not only on the procedural law to be followed but also the substantive law…”

The principle of party autonomy appears somewhat at odds with independence and impartiality of arbitrators when one considers the issue of unilateral appointment of arbitrators, i.e., a situation where parties agree by contract that only one party would have the exclusive right to appoint the arbitral tribunal. In order to ensure compliance of the underlying spirit and the principles of arbitration, the Indian courts in a catena of cases have undertaken pro-active steps in upholding the sanctity of arbitral proceedings and have not completely endorsed unilateral appointment of arbitrators.

II. Interpretation of Unilateral Appointments by Indian Courts:

There has been a conflict of opinions within the Indian courts with respect to the unilateral appointment of arbitrators. The courts have interpreted a dispute resolution clause with respect to the appointment of arbitrators in two views. The first approach is focused on ensuring that the principles of fairness, transparency and impartiality are followed in appointing an arbitrator. Whereas, the second approach is more restricted towards strict adherence to the procedure agreed by the parties in the contract.

The Supreme Court in the case of TRF Ltd. v. Energo Engg. Projects Ltd (“TRF”)^[3] dealt with the issue of unilateral appointment where the Managing Director of a party was appointed as the arbitrator to the dispute. The Supreme Court stated that a party that is interested in the dispute or shares a conflict cannot be eligible to be appointed as an arbitrator without giving due regard to the choices of the other party. Further, it was stated that since the power of the Managing Director is ineligible to act as an arbitrator, its power to nominate any other individual as an arbitrator also stands obliterated. It was stated that “once the infrastructure collapses, the superstructure is bound to collapse.” The case of TRF laid down the foundation for barring unilateral appointments after the 2015 amendment to the Arbitration & Conciliation Act, 2015.

The principles laid down in TRF were affirmed in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd (“Voestalpine”)^[4]. In this case, the Supreme Court focused on the principle of establishing a “broad based” approach for the appointment of the arbitrator in a dispute. The dispute resolution clause in the given case prescribed that the arbitrator will be nominated from a selected panel of prospective names maintained by the other party. Aggrieved by this, the question of unilateral appointment was raised before the court given that the Claimant did not have enough choice to nominate an arbitrator. The Supreme Court held that a panel of prospective arbitrators cannot be prima facie stated invalid as long they are not interested or in conflict with the dispute and the choices of arbitrators are broad enough for the party to choose from.

Following the same line, the landmark judgment of Perkins Eastman Architects DPC v. HSCC (India)^[5] Ltd. (“Perkins”) was passed by the Supreme Court stating the importance of independence and impartiality of an arbitrator in a given dispute. That can only be achieved when both parties can nominate respective arbitrators of their choice. Emphasis was laid on adopting a “counter balance” approach where both parties have equal rights to nominate an arbitrator.

The case of TRF, Voestalpine and Perkins opened the gates for challenging the clauses, especially in the government contract, that empowered an authority to nominate arbitrators based out of a set panel. The Delhi High Court in a series of judgments such as Proddatur Cable TV Digi Services v. Siti Cable Network Ltd^[6], Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited^[7], Envirad Projects Pvt. Ltd. vs NTPC Ltd.^[8], Birla Cable v. Bharat Sanchar Nigam^[9], and M/S Larsen & Toubro Limited vs M/S National Highways Authority^[10] have reiterated the principles prohibiting unilateral appointments established by the Supreme Court in the abovementioned cases. The common consensus followed throughout the cases is that there is a need to adopt a transparent and fair procedure approach when parties are nominating an arbitrator.

A deviation to this approach is seen in the cases of Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)^[11] (“Central Organisation”) and Union of India v. Parmar Construction Company^[12] (“Parmar Construction”). The Supreme Court in these cases held that if the procedure has been laid down within the contract, the parties are bound by it and arbitrator(s) shall be appointed in strict adherence to the said procedure, while endorsing party autonomy. The Supreme Court, while interpreting the arbitration clause given under agreements stated that when the provision of appointment has been specifically provided, the appointment should be in terms of the agreement. The Courts have held that parties cannot not divert from the terms that have been mutually agreed between the parties.

III. Delhi High Court’s Recent Decision Adopting the First Approach:

A recent case of the Delhi High Court titled Taleda Square Private Limited v. Rail Land Development Authority^[13] (“Taleda Square”) reiterated and pressed upon the principle of independence and impartiality of an arbitral tribunal to be of the utmost importance in ensuring the sanctity of the arbitral tribunal.

In the said case, the dispute resolution clause contained under a lease agreement executed in 2015 provided for reference to arbitration to a panel of three arbitrators. One of the conditions of the clause stated that parties can nominate an arbitrator only out of a list of panel arbitrators prepared by the Respondent. Moreover, once each of the parties has nominated the arbitrator, the Respondent would be solely entitled to appoint the presiding arbitrator to the dispute.

However, the Claimant in deviation to the aforesaid conditions, nominated its arbitrator independent of the panel suggested by the Respondent. The nomination was rejected by the Respondent on the grounds of failure to adopt the appointment procedure laid down in the agreement. Therefore, the Claimant approached the Delhi High Court under Section 11 of the Act for appointment of neutral arbitral tribunal for adjudication of its disputes. It was submitted that the Respondent has unilaterally chosen a panel of five arbitrators from the Claimant was asked to choose from.

Need for a Broad-based approach

The Respondent stated that the contract executed between the parties mandated a condition that a party can only nominate an arbitrator as per the panel maintained by the Respondent. Reliance was placed on the case of Central Organisation^[14] where the Supreme Court held that the authority of express provisions of an agreement shall be followed in appointment of arbitrators.

The Claimant submitted that nominating an arbitrator from a panel of five arbitrators is unilateral, restrictive and is violative of a broad-based approach established in parallel benches of the Delhi High Court.^[15] In this regard, reliance was placed on the case of Voestalpine^[16] to state that the choice to choose one out of five names chosen by only one party will not only hamper the right of free choice of the other party but also can be a valid ground for suspicion on the independence and impartiality of such arbitrator.

Establishing a Counter-balance approach

In order to maintain neutrality in proceedings, it becomes essential to formulate a counter-balance approach while nominating the arbitrator. This means that any interested or connected party cannot preside over the panel to settle the dispute.^[17] The Delhi High Court in the case of Taleda Square referred to the case of Margo Networks Pvt. Ltd. & Anr. v. Railtel Corporation of India Ltd.^[18] to state that unless a counter-balance approach has been achieved by the parties, the reference to arbitration will bear no fruit.^[19] In the Taleda Square case, the right of Respondent to appoint 2/3^rd of the members of the arbitral tribunal did not constitute a counter-balanced approach and it was held that this appointment procedure was invalid. The Delhi High Court appointed independent arbitrators for both of the parties to ensure fairness in procedure is maintained.

The Delhi High Court faced a similar proposition in the case of Sri Ganesh Engineering Works v. Northern Railway & Anr,^[20] (“Ganesh Engineering”) wherein the dispute resolution clause of the contract mandated constitution of an arbitral tribunal based out of a panel maintained by the Railways. The Delhi High Court reaffirmed the case of Central Organisation, TRF, and Perkins to reiterate that it is imperative to meet the twin essentials of broad-based panel and counter balancing approach to ensure that there is no misapprehension with respect to impartiality and independence of the arbitrators. Further, it was held that:

“Appointing two out of the three arbitrators would be appointed by the Railways and therefore the “counter balancing” will not be achieved and thus this appointment procedure cannot be sustained in law.”

IV. Way Ahead:

The judiciary and legislature, time and again, have adopted pro-arbitration approaches by ensuring party autonomy and strict adherence to the principles of natural justice which entails neutrality of arbitrators. The judgment of Taleda Square and Ganesh Engineering is another example of such steps undertaken by the courts which upholds and reiterates the principles of fair and impartial arbitral proceedings barring parties from unilateral appointment of arbitrators. Such judgments, although deviating from the express terms for appointment of arbitrator(s) under an arbitration agreement, address the apprehension of bias in a manner so as to ensure the sanctity of the arbitral process and its transparency.

It is pertinent to mention the 246^th Report of the Law Commission of India which stated that “there are certain minimum levels of independence and impartiality that should be required of the arbitral process, regardless of the parties’ apparent agreement.” This reinforces the need for ensuring party autonomy and equal bargaining powers of the parties in an agreement.

There are limits to party autonomy and accordingly, there ought to be a minimum threshold of independence of an arbitrator that cannot be flushed away even if the parties have agreed for a different position in their contract. This is consistent with public policy and the need to ensure a fair, independent framework of arbitration law in India.

As there is a difference of opinion in approaches for appointment of arbitrators in such circumstances, it would be necessary for the same to be finally settled by the Supreme court. A five-judge bench of the Supreme Court has been posed with such issues revolving unilateral appointment of arbitrators^[21] and as such would be dealing with the validity of Central Organisation. Presently, the matter has been deferred pending consideration of provisions of the Act by an expert committee constituted by the Union Government.^[22]

There are limits to party autonomy and accordingly, there ought to be a minimum threshold of independence of an arbitrator that cannot be flushed away even if the parties have agreed for a different position in their contract. It is also critical for the arbitral process to be protected from one party overpowering the other in a commercial setup by unilaterally appointing an arbitrator. The catena of cases decided by the Supreme Court and the High Courts, it has been a settled practice to maintain a balance between party autonomy and impartiality of an arbitral tribunal and ensures the sanctity of the award to be rendered by the properly appointed arbitral tribunal. This is consistent with public policy and the need to ensure a fair, independent framework of arbitration law in India.

Footnotes:

[1] Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228.

[2] PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd., (2021) 7 SCC 1.

[3] TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

[4] Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665.

[5] Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760. Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

[6] Proddatur Cable TV Digi Services v. Siti Cable Network Ltd., 2020 SCC OnLine Del 350.

[7] Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited, 2017 SCC OnLine Del 8675.

[8] Envirad Projects (P) Ltd. v. NTPC Ltd., 2022 SCC OnLine Del 151.

[9] Birla Cable Ltd. v. BSNL, 2020 SCC OnLine Del 2287.

[10] M/S Larsen & Toubro Ltd. v. M/S National Highway Authority of India & Anr., 2020:DHC:3194.

[11] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.

[12] Union of India v. Parmar Construction Co., (2019) 15 SCC 682.

[13] Taleda Square (P) Ltd. v. Rail Land Development Authority, 2023 SCC OnLine Del 6321.

[14] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.

[15] Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited, 2017 SCC OnLine Del 8675; S.P. Singla Constructions (P) Ltd. v. Delhi Metro Rail Corporation Limited, 2017 SCC OnLine Del 10689.

[16] Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665.

[17] Poddatur Cable TV Digi Services v. SITI Cable Network Ltd., 2020 SCC OnLine Del 350.

[18] Margo Networks Pvt. Ltd. & Anr. v. Railtel Corporation of India Ltd., 2023 SCC OnLine Del 3906.

[19] Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd., (2020) 20 SCC 760.

[20] Sri Ganesh Engineering Works v. Northern Railway & Anr., 2023:DHC:8497.

[21] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.

[22] Id. Order dated Sept. 13, 2023.