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Rahul Jacob*
I. INTRODUCTION
After the 2015 Amendment, Section 12 of the Arbitration and Conciliation Act, 1996 (‘the Act’), facilitates unbiased arbitration. According to the amendment, prospective arbitrators are mandated to disclose their respective interests, if any, under the Fifth and Seventh Schedules of the Act. These help ensure that the arbitrators are independent and impartial. In other words, if the arbitrators fall under the Fifth Schedule, it raises justifiable doubts concerning their independence. Further, if arbitrators fall under any of the categories like being a current employee, advisor, or consultant of one of the parties and other grounds as mentioned in the Seventh Schedule, they become ineligible to arbitrate the dispute.
The Indian judiciary has continuously highlighted the necessity of neutrality in arbitration. For instance, in TRF Ltd. v. Enero Engineering Projects, (‘TRF’), the Supreme Court held that an arbitrator who has become ineligible has no power to appoint another arbitrator. Likewise, with a similar objective, the unilateral appointment of arbitrators by one party has been held to be bad in law, according to the decision of the Apex Court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd (‘Perkins’). In a recent development, the Delhi High Court in Telecommunications Consultants India Ltd. v. Shivaa Trading (‘Shivaa’) dealt with an interesting question of law wherein a party that had unilaterally appointed an arbitrator was challenging their appointment in a petition to set aside their award. The article shall break down the respective facts of the case at hand and proceed to critically analyze the judgment to show why the court is wrong in several facets. To substantiate this, a four-fold argument is presented. The article will show that the Delhi HC judgement ignored statutory requirements; the principle of estoppel, and misapplied and misinterpreted precedent and legislative intent concerning the unilateral appointment of arbitrators. To sum up, the article concludes that the judgement is not only bad in law; but also a symptom of the misplaced Indian jurisprudence on arbitrator bias and unilateral appointments.
II. FACTUAL BACKGROUND
Telecommunications Consultants India and Shivaa Trading, the parties to the instant case, had entered into a MoU, under which several work orders were issued for the completion of the underlying work. Due to multiple defaults by the respondent, Telecommunications Consultants terminated the contract. Thereafter, the latter invoked the arbitration clause of the MoU, which gave the Managing Director (‘MD’) of the party (petitioner herein) the right to appoint an arbitrator. The MD appointed the arbitrator, after which arbitral proceedings were conducted. This culminated in the passing of an award against the petitioner.
Telecommunications Consultants approached the Delhi High Court under a Section 34 application under the Act to set aside the award. The only ground that has been raised is concerning the ineligibility of the arbitrator, as their appointment is against Section 12(5) of the Act. The moot question before the court was whether the party that had appointed the arbitrator, after taking part in the arbitration proceedings, without challenging their appointment during the course of proceedings, later challenge or contest one’s appointment in a set-aside petition.
The court, surprisingly, ruled in the affirmative by stating that a party can challenge one’s appointment in a s.34 petition. The reason is that once the arbitrator is found to be ineligible according to Section 12(5) of the Act, the arbitrator has no jurisdiction to carry on the proceedings. The court found the arbitrator to be ineligible as they were appointed by the MD, thereby falling within the teeth of the ratio passed in Perkins, which, as earlier stated, considered unilateral appointment to be bad in law. A major emphasis on arriving at this conclusion was placed on the case of Bharat Broadband Network Ltd. v. United Telecoms Ltd. (‘BBNL’), where a party who appointed the Arbitrator itself subsequently challenged the appointment under s.12(5) of the Act. This article will also subsequently show why this reliance is misplaced and why such an approach sets a bad precedent.
III. WHY THE DELHI HC IS WRONG ON SO MANY COUNTS
To substantiate why the judgment of the court is wrong on several facets, a four-folded argument is presented on the grounds of non-conformity with the statutory requirements, the principle of estoppel, misapplication of precedent cases and misinterpreting the legislative intent concerning the unilateral appointment of arbitrators.
Firstly, it should be noted that a challenge to an arbitrator can only be made under Sections 13 and 14 of the Act. If a challenge under Section 13 remains unsuccessful, it is only this party that is entitled to raise a challenge concerning the arbitrator under Section 34. This can be seen from the applicability of Section 13(5) of the Act. s.13(4) read with s.13(5) make it clear that a s.34 challenge is after a procedural challenge under s.13(2). But, in the present factual matrix, the party that has raised its contention concerning the appointment of the arbitrator has not complied with this statutory requirement and thus is not entitled to raise any sort of objection concerning the jurisdiction of the arbitrator.
It will not be out of place to mention that parties can also raise objections concerning the jurisdiction of the arbitral tribunal under Section 16 of the Act (concerning the tribunal’s competence to rule on its jurisdiction). However, this remedy has also not been availed of. According to Section 16 (2) of the Act, a plea stating that the tribunal does not have jurisdiction shall not be raised after the statement of defence. If the concerned arbitrator rules against the said plea, the aggrieved party can make an application under Section 34 for setting aside the award. But in the facts of the instant case, no such plea has been raised. Without recourse to the statutory mechanism given under Sections 13(5) and 16(6), the said provisions lose their effect.
In this regard, the Supreme Court in Quippo Construction Equipment Ltd. v. Janardan Nirman Pvt. Ltd., expressly laid down that where a party has an opportunity to object and fails to object, it shall be considered that the party has waived its right to object. The court arrived at this reasoning by taking a conjoint reading of Section 4 (concerning waivers of objections) and Section 16 of the Act. A similar reasoning was also reached by the Calcutta High Court in t of Sarkar Enterprise v. Garden Reach Shipbuilders and Engineers. Therefore, in light of the above provisions and judgments, allowing a party to raise any objection concerning the jurisdiction of the arbitrator in a set-aside petition renders Sections 4, 13, 14 and 16 otiose. The question of the applicability of Section 12(5) of the Act thus does not arise after an award has been passed.
Even on first principles, the grounds for intervention under Section 34 are very limited in nature. Allowing a party to raise such an objection at such a stage expands the jurisdiction of the court under Section 34, which is against the objective of the Act - of minimal court intervention, something that has been repeatedly held by the courts. Moreover, as a settled principle, the law assists only those who are vigilant and not those who sleep over their rights.
Secondly, it should also be noted that the party that appoints the arbitrator should be estopped from raising such a plea after the completion of arbitration proceedings. Such a process allows a party to approbate and reprobate during the course of the proceedings, which is against the law and a catena of judgments, the most recent being Mumtaz Yarud Dowla Wakf v. M/s Badam Balakrishna Hotel Pvt. Ltd.
While relying on several precedents, the Hon’ble Supreme Court has clarified that as a principle of equity, a party will be precluded from invalidating any transaction or terms of a contract after knowingly accepting and reaping the benefits that flow from this. This rule is essentially one of estoppel; that a person is impeded from asserting a right that they otherwise would have had when it was their duty to speak. If the said principle is to apply to the facts of the instant case at hand, it can be evidently seen that the spirit of the above-mentioned principle is diminished.
This rule is enforced in the interest of equity, which ensures that the fundamentals of right and good conscience are not violated. The correct approach to such situations was taken in the case of Kanodia Infratech Limited v. Dalmia Cement (Bharat Limited) and Arjun Mall Retail Holdings Pvt. Ltd. v. Gunocen Inc., wherein, in a similar factual matrix, it was held that a party cannot challenge an arbitral award on the ground of a unilateral appointment if it had failed to challenge the appointment at an earlier stage. In effect, this would mean a deemed waiver under Section 4 of the Act and the limited scope of the court under a Section 34 application.
Thirdly, the reliance on BBNL is wholly misplaced. The Court relies on BBNL to say:
“just as in Bharat Broadband, in the present case as well, the party that had appointed the Arbitrator had itself subsequently challenged the award on the ground that the Arbitrator was ineligible to act as such, in light of Section 12(5) of the A&C Act.
However, this has been distinguished this from the facts of the instant case. In BBNL, the arbitration clause stipulated therein provided that all disputes shall be referred to the sole arbitration of the MD of the respondent therein, who shall also be eligible to appoint another arbitrator. In BBNL, the court by rightly and squarely following the judgment passed in TRF, held that since the MD fell within one of the categories of the Seventh Schedule, they become de jure ineligible and, thus, is not empowered to appoint any other arbitrator for the adjudication of disputes as well.
This is where the difference arises. The issue before the court in BBNL was on the validity of an appointment of an arbitrator who was appointed by an ineligible arbitrator. Whereas in Shivaa, the case was about whether an arbitrator would be ineligible merely by being appointed by the MD. However, the Court in Shivaa does not appreciate this distinction and nevertheless relies on BBNL to hold that the arbitral tribunal lacked jurisdiction. Evidently, these cases are materially different, thus underlying why BBNL cannot be applied to the present case.
Fourthly, the Court in Shivaa relies on Perkins to reiterate that unilateral appointment of arbitrators is bad in law. While this area of law remains unsettled, this article argues that Perkins (and thus Shivaa) misconstrued the 2015 Amendment, thus effectively negating party autonomy. The court in Perkins went ahead to hold that even if an arbitrator is merely appointed by one of the parties that fell under the Seventh Schedule of the Act, the appointed arbitrator would be de jure ineligible. The court arrived at this conclusion by stating that if the objective of the 2015 Amendment was to remove any sort of bias, the said reasoning shall also flow to cases where a person who cannot become an arbitrator cannot nominate an arbitrator as well, thus eliminating unilateral appointments of arbitrators.
This is where Perkins missed the point. The 246th Law Commission Report (which formed the basis of the 2015 Amendment) rightly underlined the need for a balance between party autonomy independence and impartiality of arbitrators by stating that party autonomy cannot be stretched to annul the due process of law. This can be seen from the insertion of the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration in the Fifth and Seventh Schedule of the Act, which in effect provides a mechanism for ‘checks and balances’ concerning arbitrators.
The objective of the 2015 Amendment, as can be seen from the insertion of the Fifth and Seventh Schedule and the disclosure of interest of a prospective arbitrator, was to remove any suspicion of bias among arbitrators, and not from the source of their appointment or in the court’s words “by an interested party”. To interpret the objective of the Act to mean that bias can be traced to the source of appointment would negate legislative intent.
The unintended effect that flows from the reasoning of Perkins is a complete bar on unilateral appointment of arbitrators, which neither the Model Law nor the Act prohibits, as it currently stands. Rather, the correct approach would be to not blind-sight the ‘checks and balance’ mechanism that has been provided in the Act. That is to say, a party should be allowed to unilaterally appoint an arbitrator, provided the concerned arbitrator meets the objective criteria and requirements as provided for in the Seventh Schedule. In fact, in TRF, the Supreme Court had expressly noted that the authority to nominate arbitrators cannot be called into question; rather, the nomination would only be examined under the lens of procedural compliance and eligibility under the Act.
In this approach, the principle of party autonomy as well as the objective of the 2015 Amendment are well-balanced and given effect. With there being no bar or restriction under the Act to unilaterally appoint an arbitrator, and with TRF and Perkins not expressly dealing with the question of unilateral appointments, holding all unilateral appointments of arbitrators and tracing bias to the source of appointment will run counter to the legislative intent.
Had there been legislative intent to make unilateral appointments invalid, it would have found its way directly into the provisions of the Act. Thus, Shivaa’s reliance on Perkins is incorrect, and the settled principle of party autonomy, that forms the backbone of arbitration, has been severely impacted by the unintended effect of the ratio as laid down in Perkins i.e., all unilateral appointments of arbitrators are bad in law.
Such conduct of allowing the party to raise such an objection in a set-aside petition only goes to illustrate a case of an afterthought only to suit its convenience and interest, which should be disallowed. It should be highlighted that such an approach not only surmounts the ever-increasing cost that is associated with arbitration at today’s point in time but also disrupts and turns the entire arbitration process redundant. Since arbitration is meant to resolve disputes quickly and at a much cheaper rate, such an afterthought disregards these objectives.
IV. CONCLUSION
Therefore, the Delhi HC’s approach in Shivaa undermines Sections 13, 14, and 16 of the Act by permitting post-award challenges to the appointment of arbitrators, thereby upending the established arbitration framework. It also allows the court's intervention under a set-aside petition to have a broader scope. By ignoring the legislative intent of the 2015 Amendment, which focuses on removing bias through mandatory disclosures rather than the source of appointment, this judgment misinterprets and incorrectly applies precedents like BBNL and Perkins, which as highlighted above do not apply to the present factual matrix. Because of such failure to draw the key lines of differences, the essence of party autonomy is ruptured. Such challenges after participating in arbitration encourage afterthought objections, raising arbitration costs and turning the entire set of arbitration proceedings futile and only act as a barrier to making India a hub for arbitration.
*Rahul Jacob is a 4th year student at the Institute of Law, Nirma University.
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