Background
In employment contracts its common to see very strong one-sided terms and conditions which are mostly in favour of the Employer. The employee is rather at a very disadvantageous position; he has no option but to sign on the dotted lines. Among others one of the most crucial clauses is the disputes resolution clause. Typically, the disputes resolution clause in an employment agreement mentions arbitration by a sole arbitrator, as a means to decide any dispute between the employer and the employee. The appointment of the arbitrator rests with in the sole discretion of the employer.
Typically, such an arbitration clause reads like, “the disputes between the Company and the employee would be governed under the Indian Arbitration Act 1996. Any dispute between the company and the employee would be referred to the decision of the Managing Director of the Company or a person nominated by him.”
Such clauses are arbitration clauses with a named arbitrator. In light of the aforesaid background, the validity of such an arbitration clause with named arbitrator or with exclusive power of one party (generally employer) to appoint one arbitrator is being discussed below.
Scheme of the Arbitration Act vis-à-vis choice of sole arbitrator
S. 12 of the Arbitration and Conciliation Act, 1996 [hereinafter as “Arbitration Act”] lays down the grounds of challenge of an arbitrator if there has been any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality. It further says that the grounds stated in the Fifth Schedule would be the guide in determining whether the circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.
Sub section 5 of section 12[Introduced by 2015 Amendment Act w.e.f. 23.10.2015] of the Arbitration Act further states that any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.
Schedule V which is a corresponding provision for S. 12 (1) (b) of the Act, lays down the grounds which give rise to justifiable doubts as to the independence or impartiality of the arbitrators. One of the grounds mentioned therein is that the arbitrator must not be an employee, consultant, advisor, or has any other past or present business relationship with a party.
Schedule VII which is the corresponding provision for S. 12(5) of the Act, lays down which relationship would make the arbitrator ineligible for the purposes of appointment.
A simple interpretation of the aforesaid provisions would indicate that the relationship of the arbitrator has to be completely impartial and independent and there can not be any ‘justifiable doubts’ on his integrity based on any relationship between him and the party appointing him. Furthermore, there are express ineligibility of an arbitrator if he was an employee or have had past or present business relationship with one of the parties in dispute.
Recent decisions of the Supreme Court
TRF Limited v. Energo Projects Limited
A three judge bench of Justice Deepak Mishra, Justice A.M. Khanwilkar, and Justice M. M. Shantanagoudar of the Hon’ble Supreme Court in the matter of TRF Limited v. Energo Projects Limited, (2017) 8 SCC 377, observed that in view of the 2015 amendment to the Arbitration Act i.e. insertion of S. 12(5) and Schedule V and VII, the Managing Director of a party or his nominee, would not be eligible to act as an arbitrator. The Apex Court had clarified that once the Managing Director of a party becomes ineligible by operation of law, he cannot nominate another person as an arbitrator either. It is relevant to mention here that the agreement including the arbitration agreement in this case, were executed before the Arbitration Amendment Act 2015. The Apex Court held as under:
“54. Once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in S. 12 (5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without a plinth or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as arbitrator is obliterated.”
It was however clarified that even after invalidation of the part of the arbitration clause with respect to the named arbitrator, a part of the same survived which showed intention of the parties to arbitrate. Hence a S. 11 application for appointment of arbitrator was maintainable.
Bharat Broadband Network Limited v. United Telecoms Limited
In the case of Bharat Broadband Network Limited v. United Telecoms Limited, (2019) 5 SCC 755, the Apex court was dealing with a matter under S. 12 (5) of the Act wherein an application had been made for termination of mandate of a de-jure ineligible arbitrator. After appreciating the scheme of the Arbitration Act, more particularly the interplay of S. 12, 13 and 14, the Apex Court in para 17 held that if a person is ineligible to be appointed as an arbitrator, the challenge does not lie before the arbitrator. Such a case falls under S. 12(5) and the S. 14(1)(a) gets attracted. The arbitrator becomes as a matter of law (de jure) unable to perform the functions under S. 12 (5) being ineligible to be appointed as an arbitrator. This mandate automatically terminates and he shall be substituted by another arbitrator under S. 14(1) itself. The Court held that appointment of the sole arbitrator by one party who was himself de jure ineligible to be appointed as an arbitrator, is void ab initio. Consequently, it was further held that an award passed by such an arbitrator is also void. It is pertinent to note that the Court categorically stated that the judgment of TRF nowhere stated that it would apply prospectively only.[para 18]
Perkins Eastman Architects DPC v. HSCC (India) Ltd.
In the case of Perkins Eastman Architects DPC v. HSCC (India) Ltd. ,2019 SCC OnLine SC 1517 a two judge bench of Justice U.U. Lalit and Justice Indu Malhotra was dealing with an application under S. 11(6) read with S. 11(12 a) of the Act for appointment of a sole arbitrator. It was a case of a contract between a consortium of private contractors on one side and the Ministry of Health and Family Welfare, Government of India on the other. The dispute resolution clause mentioned arbitration by a sole arbitrator, as a dispute resolution mechanism if all preceding efforts to mitigate the disputes failed. The CMD of the HSCC had the sole discretion of appointment of the arbitrator. The Applicants contended that the Respondent failed to appoint the arbitrator within the 30 days period and hence prayed for an appointment of the arbitrator. It was further contended that the power to appoint arbitrator was with the Chairman and Managing Director however the appointment though belated, was made by the Chief General Manager. The Applicant cited Waalter Bau AG, Legal Successor of the Original Contractor, Dycherhoff and Widmann A.G vs. Municipal Corporation of Greater Mumbai, (2015) 3 SCC 800 and TRF Limited vs. Energo Engineering Projects Limited (2017) 8 SCC 377. .
After analysing para 50 of the judgment in TRF, the Apex Court observed that in a case where only one party has a right to appoint the sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. This has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited.
The Supreme Court in para 20 of the judgement held as under:
“20. We thus have two categories of cases. The first, similar to the one dealt with in TRF Limited 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. 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. We are conscious that if such deduction is drawn from the decision of this Court in TRF Limited, all cases having clauses similar to that with which we are presently concerned, 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.
21. But, in our view that has to be the logical deduction from TRF Limited. Paragraph 50 of the decision shows that this Court was concerned with the issue, “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator” The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, 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. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited.”
In para 23 of its judgment, the Apex Court further relied upon para 48 (vii) of its decision in Indian Oil Corporation Ltd. Vs. Raja Transport (P) Ltd. (2009) 8 SCC 520 to observe that if there are justifiable doubts of the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, such appointment can be made by the Court.
The Apex Court further relied upon the judgment of a coordinate bench in Voestalpine Schienen GmbH vs. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665 and in Bharat Broadband Network Limited vs United Telecoms Limited, (2019) 5 SCC 755 while enunciating the principles of independence and impartiality of the arbitrator. The Court further mulled over the question whether the court could interfere in an Application filed under S. 11 or it must leave the question to be decided by the arbitrator. Agreeing with the ratio in Walter Bau and TRF, the court held that there was no hinderance in terms of exercising the power under S. 11, since the appointment of arbitrator was ex facie invalid. The Apex Court annulled the unilateral appointment of the arbitrator and exercised the power vested under S. 11 to appoint Justice Sikri [Retd.] as an arbitrator.
Proddatur Cable TV Digi Services Vs. Siti Cable Network Limited
A single judge bench of the Delhi High Court in the case of Proddatur Cable TV Digi Services Vs. Siti Cable Network Limited, 2020 SCC OnLine Del 350 while dealing with an application under S. 14 read with S. 15 of the Arbitration Act, relied upon the judgement of Apex Court in Perkins[supra] and has categorically held in para 23 held as under:
“23. Thus, following the ratio of the judgment in the case of Perkins (supra), it is clear that a unilateral appointment by an authority which is interested in the outcome or decision of the dispute is impermissible in law. The Arbitration Clause in the present case empowers the company to appoint a Sole Arbitrator. It can hardly be disputed that the „Company‟ acting through its Board of Directors will have an interest in the outcome of the dispute. In the opinion of this Court, the clause is directly hit by the law laid down in the case of Perkins (supra) and the petition deserves to be allowed.”
Furthermore, the High Court clarified that the judgment in Bharat Broadband [supra] has held that the judgment in Perkins is application to on-going arbitrations and as such in the case of unilateral appointment of arbitrator, Section 14 of the Act gets attracted leading to termination of the mandate of the Arbitrator de-jure.
Conclusion
The stand taken by the courts against unilateral appointment of arbitrators is a step ahead in establishing party autonomy and fairness in dispute resolution matters involving employment issues. The law has been bolstered with the 2015 Amendment Act to the Arbitration and Conciliation Act 1996. The Amendment Act has been interpreted in its true spirit by the Court to hold that the ineligibility of such named arbitrator goes to the root of the matter who is automatically disqualified from being appointed. This has been held to even apply to the on-going arbitrations. The Courts have been inclined to appoint a sole arbitrator whenever any S. 11 Application has been filed. With the streamlining of the arbitration mechanism in India by recent amendments, more particularly setting timelines for the adjudication of the disputes, arbitration can be seen as a viable mechanism for dispute resolution for the employment disputes.
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