By: Deborshi Sarkar
INTRODUCTION
Recently, the Hon’ble Calcutta High Court in Mcleod Russel v. Aditya Birla Finance Limited (hereinafter, ‘McLeod Russel’) has upheld a unilateral appointment of a sole arbitrator. The Court, while adjudicating on an application for termination of the arbitrator’s mandate took a steep deviation from the existing jurisprudence being followed by High Courts across the country. Surprisingly, while dealing with a similar arbitration agreement, this Court previously invalidated an arbitrator’s mandate owing to his unilateral appointment. However, in McLeod Russel the Hon’ble Court upheld such an appointment notably under two broad interpretations. Firstly, the Court deviated from the settled jurisprudence surrounding unilateral appointment in TRF case, Bharat Broadband case and Perkins case on the basis of a persona designate approach. Secondly, the Court inferred an explicit waiver as provided in the proviso of Section 12(5) of the Arbitration and Conciliation Act, 1996 (hereinafter, ‘the Act’) from the written pleadings filed by the parties and their participation in the proceedings. In this context, the article highlights the fallacy in the persona designate approach adopted by the Court in McLeod Russel. Further, it also analyses the position with respect to written pleadings filed by parties constituting a waiver to Section 12(5) of the Act.
UNILATERAL APPOINTMENT VIS À VIS SECTION 12(5) OF THE ACT
Prior to the 2015 Amendment to the Act, a mere apprehension of bias devoid of sufficient evidence did not constitute a valid ground for the removal of an arbitrator. Further, the Courts repeatedly upheld arbitration clauses that postulated an employee of the company to act as an arbitrator or appointment of arbitrators to be made by such an employee. The 2015 Amendment to the Act was made in order to preserve a greater degree of impartiality and neutrality in arbitration proceedings. The amendment inter alia introduced Section 12(5) which deals with de jure ineligibility of a person to act as an arbitrator owing to the Seventh schedule. In other words a person would be barred from being appointed as an arbitrator only by virtue of any prohibited relationship enshrined in the seventh schedule. Subsequent to the 2015 amendment, the Apex Court faced the issue of a unilateral appointment for the first time in TRF Ltd. v. Energo Engineering Projects Ltd. (hereinafter, ‘TRF’). In TRF the arbitration agreement stipulated the Managing Director from one of the parties to act as the arbitrator and further allowed him to appoint an arbitrator in his place. The Apex Court held that by virtue of Section 12(5) the Managing Director would not only be barred from acting as the arbitrator, such bar would also prevent any unilateral appointment that is made by him. The Apex Court ratiocinated that any appointment made by an ineligible person would tantamount to carrying on the proceedings by him. Placing heavy reliance on TRF, the Apex Court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (hereinafter, ‘Perkins’) sealed the fate for all forms of unilateral appointment of an arbitrator. Further, it is also imperative to note that a claim of de jure ineligibility of an arbitrator cannot be made before the arbitrator himself. When the ineligibility arises under the Seventh schedule the same renders the arbitrator de jure unable to perform its functions and thereby rendering it ineffective to rule on its own jurisdiction. A party may file an application for the termination of the arbitrator’s mandate and appointment of a new arbitrator under Section 14 of the Act. The Apex Court in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. v. Ajay Sales & Suppliers (hereinafter, ‘Jaipur Zila’) noted, “where a person becomes ineligible to be appointed as an arbitrator there is no question of challenge to such arbitrator before such arbitrator”.
CAN A UNILATERAL APPOINTMENT BE VALID[1] ?
The Hon’ble Calcutta High Court in McLeod Russel has held that all forms of unilateral appointment are not invalid. The Court observed that impermissibility of unilateral appointments must only be perceived as an appointment of arbitrator being made by a person who is himself disqualified under the seventh schedule. Further, the Court has also construed pleadings filed by parties as a valid waiver to Section 12(5) of the Act. This view requires further consideration as the Court has turned a blind eye to the settled jurisprudence governing unilateral appointment of an arbitrator in India. In order to analyse the fallacies in the present judgment, the author has aims to draw an analogy between the settled law and the two below-mentioned approaches adopted by the Court in McLeod Russel.
The Persona Designate Approach
Clause 3 of the arbitration agreement between McLeod Russel and Aditya Birla Finance Ltd. inter alia bestowed the power of appointing a sole arbitrator on the latter. However, the clause was devoid of a declaration with respect to any designated official from Aditya Birla Finance Ltd. to act as an appointing authority. Such an absence formed the Court’s basis for a persona designate approach. In other words, the appointment clauses in TRF, Bharat Broadband, Perkins and Jaipur Zila Parishad allowed a designated official from one of the parties to either act as an arbitrator or to appoint another person as an arbitrator. Furthermore, as such designated persons were incapacitated from acting as an arbitrator by virtue of Section 12(5) read with the Seventh schedule, the Hon’ble Court in the present case construed such ineligibility to be the only factor jeopardizing their power of appointment. In other words, the persona designate approach formulated by the Court in McLeod Russel is based on the premise that the ineligibility of a person to appoint an arbitrator would only arise out of his ineligibility under the seventh schedule to act as an arbitrator.
The pertinent question that needs to be addressed here is whether the Court in McLeod Russel has erred in construing such a person centric approach from the above-mentioned decisions that headline the jurisprudence surrounding the unilateral appointment of arbitrators in India. Such an approach holds up in the pre-Perkins scenario. In TRF and Bharat Broadband, the Apex Court was faced with a scenario wherein the official designated as an arbitrator was barred by the seventh schedule. The Apex Court in these decisions rightly extended the ineligibility to their power of appointment as the same would be tantamount to carrying out the proceeding by such ineligible arbitrators themselves and something which might not be done directly cannot also be done indirectly. Thereby it can safely be inferred that the ineligibility as an appointing authority in these cases solely stemmed from the express bar in Section 12 (5) read with the seventh schedule. However, in Perkins the Apex Court has extended the ambit of the provision and notably set the contours of preventing any form of unilateral appointment.
In Perkins the Apex Court adjudicated on a clause which granted a designated official from one of the parties to appoint an arbitrator. Such designated official was himself barred under the seventh schedule from being appointed as an arbitrator. Placing heavy reliance on TRF, the Apex Court in Perkins held that a person who is ineligible to act as an arbitrator would pass the poisoned chalice of such ineligibility to any other person he appoints. However, it is pertinent to note that in determining such ineligibility, the Apex Court in Perkins did not bear any allegiance to the seventh schedule. Instead, the Apex Court formulated the apprehension of bias solely from the arbitrator’s interest in the outcome of the dispute. In other words, Perkins laid down that if a person has an interest in the outcome of a dispute, it would render such person ineligible to act as an arbitrator and also to appoint an arbitrator. Such ineligibility would persist notwithstanding the fact such person is not barred under the seventh schedule from being appointed as an arbitrator himself. [2]
It can always be asserted that any person or official from either party entrusted with the power to ap[3] point an arbitrator will have an interest in the outcome of the dispute and will thus be barred from making an appointment. Therewith, it is safe to assert that the Court in McLeod Russel wrongly deviated from the settled jurisprudence in Perkins and held that unilateral appointments must be construed impermissible only when the appointment is being made by a person who is barred under the seventh schedule. Such a deviation was indeed conscious as the Court observed “Therefore, Perkins amplifies and extends the disqualification under section 12(5) to all unilateral appointments divorced from any of the categories specified in the Seventh Schedule”. In McLeod Russel the clause pertaining to appointment allowed Aditya Birla Finance Ltd. to appoint a sole arbitrator. Owing to the interpretation in Perkins, it can conveniently be contended that the person responsible for appointment of the arbitrator would inherently have an interest in the outcome of the dispute by the very virtue of his being affiliated to the entity. The Court has erred in adapting such a person-centric approach and has in fact turned a blind eye to the inherent invalidity of any form of unilateral appointment as upheld in Perkins.
Deborshi Sarkar is a 5th year law student at Symbiosis Law School, Noida
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