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Quasi-Unilateral Appointment of Arbitrators: Where Did India Get it Wrong?

[Himanshu and Umang are students at NALSAR University of Law.]


In November 2019, the Supreme Court of India (Supreme Court), in Perkins Eastman Architects DPC & Anr. v. HSCC Ltd. (Perkins), called for an end to the practice of a party unilaterally appointing the sole arbitrator. The Apex Court has set the record straight and has synced the Indian Arbitration law with the international norm. While the law is now clear on the validity of the unilateral appointment of a sole arbitrator by a party, there is still uncertainty when it comes to the validity of quasi-unilateral appointments. Quasi-unilateral appointment procedures envisage a situation wherein a fixed number of names will be forwarded by one party to the other upon invocation of the arbitration clause. Both parties are to nominate their arbitrator candidate from this panel of names. The two chosen nominees shall then together appoint the presiding arbitrator from the same panel. In this context, the authors shall discuss the latest developments in Indian case laws, argue against the current position of law, and conclude by highlighting why such a change is desirable.


Recent developments in Indian courts’ position on quasi-unilateral appointments


The current uncertainty as to the validity of such appointment procedure stems from the judgement of the Supreme Court, post Perkins, in Central Organisation for Railway Electrification v. M/s ECI-SPIC-SMO-SMO-MCML (JV) (CORE v. ECI). Here, the arbitration agreement allowed CORE to unilaterally prepare a list of four retired railway officers, and ECI had to select two arbitrator nominees from this list. The General Manager of CORE had to appoint at least one arbitrator from ECI’s nominees and could appoint the balance arbitrators from within or outside the list to formulate a tribunal. The Apex Court ruled that this mechanism is valid as any advantage CORE obtained from unilaterally preparing the list is counterbalanced by ECI’s right to choose from that list.


Another source of concern is the pre-Perkins decision of the SC in Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation (Voestalpine). Here, the Apex Court ruled that a unilaterally prepared list of thirty-one potential arbitrators, comprising only of retired government or public sector entity employees, is not ‘broad-based’. It ruled that the list must also include accountants, private sector employees and other people from various backgrounds to make it sufficiently ‘broad-based’. The Supreme Court held that such a broad list unilaterally prepared by one party would be valid and ensured independence and impartiality in the appointment of arbitrators.


Consequently, the Delhi High Court has followed this Supreme Court decision in BVSR-KVR v. Rail Vikas Nigam Ltd. (BVSR) and SMS Ltd. v. Rail Vikas Nigam Ltd. (SMS), even after Perkins. Like in Voestalpine, the High Court ruled that a list of arbitrators comprising of only government employees is not ‘broad-based’, thus invalid. On the other hand, if the list of potential arbitrators, unilaterally provided by a party, is broad-based, consisting of people from various professional backgrounds, courts will give effect to it.


Quasi-unilateral appointment of arbitrators vis-à-vis Supreme Court’s decision in Perkins


The authors argue that the current position of the Supreme Court for quasi-unilateral appointments falls afoul of the ratio of Perkins.


In Perkins, the Supreme Court held that to ensure impartiality, a person who has an interest in the outcome of the dispute must neither be an arbitrator himself nor appoint another arbitrator. It ruled that no party to the dispute must have a unilateral right to appoint an arbitrator. The Apex Court drew a distinction to situations involving three-member tribunals, wherein any advantage a party may derive by nominating an arbitrator of its choice would get counterbalanced by an equal power with the other party. The central concern of the court was to ensure that no party gets a disproportional share in charting the course of the dispute resolution process.


It is surprising that courts have not had these concerns when it comes to quasi-unilateral appointments. An arbitration agreement that limits a party’s choice of arbitrator to a list made by the other party, albeit broad-based, effectively allows only one party to determine the composition of the tribunal. The party preparing the list can strategically staff the list with arbitrators who it feels will be more sympathetic to its position. This is even more pertinent when the law is not certain about a particular issue in dispute, as parties can choose those people that favour its interpretation of law over the other possible interpretation. This situation can be best captured by Prof. Martin Hunter’s words, “when I am representing a client in an arbitration, what I am really looking for in a party-nominated arbitrator is someone with the maximum predisposition towards my client, but with the minimum appearance of bias” (Martin Hunter, Ethics of the International Arbitrator, 53 Arbitration 219, 1987, pp 222-223). In Jan Paulsson’s article ‘Moral Hazard in International Dispute Resolution’, he states, based on two studies, that 95% of the dissenting opinion in awards is written by the arbitrator nominated by the losing party, acknowledging that part of this percentage is due to the arbitrators seeing certain positions of law or facts in the same way as their appointing parties.


Therefore, the freedom of the other party to choose from such a list of arbitrators would be artificial and there is no real counterbalancing of advantage, contrary to the decision of the Supreme Court in CORE v. ECI. Only one party to the dispute would have a near exclusive role in stirring the dispute resolution process. This is in contravention with the observations in Perkins and hence such quasi-unilateral appointments must no longer be considered valid in India.


The Supreme Court in Perkins based its decision on the fundamental principle that a person having an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator unilaterally. The court failed to note how such clauses also violate the right of parties to equality. Had the court in Perkins based its decision on party equality, it is highly likely that quasi-unilateral appointments would now share the same fate as that of unilateral appointments.


It is an accepted position that while enacting the Indian Arbitration and Conciliation Act (Act), the basic structure of the UNCITRAL Model Law on International Commercial Arbitration was kept in mind. Section 18 is a verbatim adoption of Article 18 of the Model Law. The Analytical Commentary on the Model Law states that the fundamental requirements of Article 18 must be followed by the parties when using their freedom under Article 19(1) to lay down the rules of procedure. The use of the words, “Subject to this part” at the beginning of Section19(1) of the Act clearly indicates this limitation on Party Autonomy.


Section 18 of the Act mandates parties be treated equally at all stages of the arbitral proceedings. Under Section 21 of the Act, the arbitral proceedings commence when the respondent receives the notice for arbitration. The appointment of the tribunal is a step that falls after the commencement of proceedings. Therefore, in line with Section 18, parties must have the opportunity to participate in the formation of the arbitral tribunal on equal terms. Such an opportunity is extremely important given that the arbitral tribunal is in charge of steering the entire arbitral process. The Supreme Court in CORE v. ECI found that the unilateral power of the appellant to prepare the list and nominate an arbitrator is counter-balanced by the power of the respondent to choose another name from the list as arbitrator. However, is this a real choice or an artificial one? As discussed above, a list strategically prepared by only one party would place the other party at a disadvantage. A disadvantage where they would only be provided with an artificial choice of choosing one arbitrator. Therefore, this practice allows a party to have a disproportional influence on the composition of the tribunal, violating the fundamental requirements of Section 18. All arbitration agreements that allow for such quasi-unilateral appointments should thus, be found invalid.


Conclusion


The authors have shown how the current position of India on quasi-unilateral arbitrator appointments is anything but clear. Moreover, it has been demonstrated how these clauses violate party equality in the arbitral process. A Supreme Court ruling against these clauses would not only increase trust in the arbitral process and reduce the risk of challenges to arbitrators, but also sync India’s practice with international practice. Given the importance of equality of the parties, numerous national laws provide for court intervention where the agreed upon procedure gives only one party an unfair influence on the composition of the tribunal (for example, Section 1034(2) ZPO in Germany and Article 1028, Netherlands CCP). Should the Supreme Court find itself faced with such a clause in the future, it is hoped that the court will keep the aims of the Act in mind, specifically Section 18, and render such clauses invalid.

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