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Interested Persons Cannot Appoint Sole Arbitrator

Background

Rule against bias is one of the fundamental principles of natural justice which applies to all proceedings, compliance with which is the pivot point of a judicial process. This principle has been reinforced by the Supreme Court of India, on November 26, 2019, in the case of Perkins Eastman Architects DPC v. HSCC (India) Limited[1], wherein the Apex Court reiterated that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.

In the said case, as per clause 24 of the contract executed between parties, the Chairman and Managing Director(“CMD“) of HSCC (India) Limited (“HSCC“) was authorised to appoint the sole arbitrator within 30 days from receipt of notice from Perkins Eastman (“PEA“). It was PEA’s stand that since the CMD of HSCC would be interested in outcome/decision of the dispute, the pre-requisite of impartiality would be missing if the HSCC were to appoint the sole arbitrator.

TRF Limited vs. Energo Projects Limited

A similar issue was dealt with by the Supreme Court in a 2017 case called TRF Limited vs. Energo Projects Limited[2]. In the said case, the Court had examined a clause which nominated the managing director himself to be the sole arbitrator and also empowered said managing partner to nominate another person to act as the sole arbitrator. The managing partner, by operation of law, became ineligible to act as an arbitrator. Therefore, the Court had held that once the identity of the managing director as the sole arbitrator was lost, the power to nominate someone else by him was also obliterated.

Findings of the Court

The Court in Perkins discussed the two situations at length – the first is similar to TRF where the managing director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the managing director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator.

The Court observed that if, in the first category of cases, the managing director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases.

The Court observed that if such deduction is drawn from the decision in TRF, all cases having clauses similar to that in Perkins, where a party to the agreement would be disentitled to make any appointment of an Arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an Arbitrator. The Court confirmed that the above position is the natural and logical deduction from TRF.

The Court also differentiated the above case from cases where both parties could nominate respective arbitrators of their choice. In such a case, whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party.

The Apex Court, while placing reliance upon the judgment in TRF, observed that in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Further, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator and that must be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 and recognised by the decision of the Court in TRF.

[1] Arbitration Application No.32 of 2019
[2] (2017) 8 SCC 377

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