Unequal Influence of Parties in the Process of Appointment of Arbitrators: Conundrum in India’s Legal Position

In the case of  Central Organisation For Railways Electrification v. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company (“Railway Case”), wherein the appointment of arbitrators was in the control of only one of the parties i.e. the railway establishment. The other party i.e. the contractors could only choose its arbitrator from the four names contained the pool of arbitrators maintained by the railway establishment. These names in the pool comprised of serving and retired officers of Railway establishment. The appointment of such arbitrators is ineligible as provided under Section 12(5) read with seventh schedule of the Arbitration and Conciliation Act, 1996 (“the Act”).
In this blog, I will discuss the improper waiver of Section 12(5) of the Act (a); domination of one party in the process of appointment of arbitrator, violates the Equal treatment of parties (b); appointment of ineligible arbitrators defeats the requirement of having neutral and independent arbitrators for a fair arbitration proceeding (c).
A. Improper waiver of Section 12(5) of the Act
The Act under Section 12(5) provides that a person who falls under any of the criteria mentioned in the seventh schedule of the Act is ineligible to be appointed as an arbitrator. The proviso clause of the aforesaid section permits to waive the applicability of Section 12(5). This waiver allows the appointment of arbitrator even if they fall under any of the ineligibility criteria. The waiver of Section 12(5) can be made after the dispute has arisen. Further, it has to be in writing agreed by both the parties and this was confirmed by the decision of Bharat Broadband Network Limited vs United Telecoms Limited. But the contract in the railway case already provided for a waiver of Section 12(5), this means that the waiver was made even before the dispute had arisen between the parties and this is not valid. But the court failed to consider this and still allowed the appointment of arbitrators who were ineligible.
B. Domination of one party in the appointment of arbitrator violates the Equal treatment of parties
The basic premise is that each party must be conferred with the right to appoint an arbitrator of its choice. The system of pool that the railway establishment had adopted for the appointment of arbitrators denied the other party a right to choose its arbitrator. It is not contested that if a party creates a pool for itself to appoint an arbitrator, but making the other party choose an arbitrator from its pool is deplorable. In this backdrop, the practice of the railway establishment of drawing a very small pool of four names and forwarding the same to the other party to select an arbitrator, in effect amount to the tribunal being appointed solely by the Railway Establishment. Thus, the consent of the other party and its right to choose a party-appointed arbitrator is only illusionary and cannot be termed less than a mirage.
The principle of equal treatment of parties as set out under Section 18 of the Act guarantees procedural equality to parties. This principle is internationally recognized and ensures that each party must have equal rights to choose its arbitrator and parties should have an equal influence in the process of constituting the arbitral tribunal. This practice of pool system as used by the Railway establishment violates the equal treatment of the contracting parties. As it does not gives one of the parties to have an equal right to choose its arbitrator. This creates supremacy of one party over other. Arbitration is based on the pillars of fairness and equality which is not demonstrated through the Railway case.
C. Appointment of ineligible arbitrators
It is a fundamental principle that arbitrators must be neutral and independent of the parties throughout the course of the proceedings. The right of party autonomy present with the parties should not be used in a fashion that violates the basic tenets of arbitration, one of them being fairness.
If the clause which dealt with the appointment of arbitrator in the Railway case is tested on the touchstone of Section 12(5) along with seventh schedule in particular, a party cannot be permitted to appoint arbitrators with whom it has current or past relations. After the Act has made amendments and moved forward by instilling independence and neutrality requirements for an arbitrator to boost the confidence of the parties and specifically having curtailed the practice of departmental arbitrations, hence a party cannot be allowed to appoint arbitrators which are made ineligible under the Act. In this backdrop, it can be seen that primarily neither can the Railway establishment appoint its serving or retired officers as arbitrators and nor can it thrust the other party to choose an arbitrator from a self-created pool of ineligible arbitrators. Such an appointment of arbitrator by the railway establishment and making the contractor’s appointment of arbitrator defective as well, the appointment of the presiding arbitrator made by the two ineligible party-appointed arbitrators will thus render it defective. Now, if such a tribunal is appointed, it would defeat the purpose of the independence and neutrality requirements of an arbitrator provided in the Act and would also hamper the finality of the award.
The Supreme Court in the Railway case has relied on the decisions of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. (“Voestalpine”), TRF Ltd. v. Energo Engineering(“TRF”), Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd(“Perkins”) but the court has reached a decision that is completely different and it seems that the court did not consider the ratio of the aforesaid judgments. In TRF and Perkins, the court made it clear that a person who is ineligible under Section 12(5) and seventh schedule of the Act cannot be appointed as an arbitrator. But in the Railway case, the court allowed serving and retired officers of the railway to be appointed as arbitrators which in my humble submission disregards the decision of TRF and Perkins. Further, in Voestalpine it was decided that the pool of arbitrators must be broad-based. But in the Railway case, the pool of four arbitrators which is very small was indeed accepted by the court thus again disregarding the decision and principle laid down in Voestalpine.
In the context of TRF and Perkins, India advanced towards syncing its arbitration laws according to the international standards. But after the decision in the Railway case, the position of India seems to be unclear and offsets it from the independence and neutrality requirements of the Act along with the best international practice. Thus, in the light of the discussion made hereinabove for the reasons of violation of equal treatment, improper waiver of Section 12(5) of the Act and appointment of ineligible arbitrators needs a relook.

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