India: Appointment Of ‘Interested Party' As An Arbitrator

POSITION OF LAW BEFORE 2015 AMENDMENT

In arbitration, the parties have the freedom to appoint any person as an arbitrator to adjudicate any dispute arising between them. This freedom of choice is stipulated by section 10(1) of Arbitration and Conciliations Act, 1996 which provides that, 'parties are free to choose the number of arbitrators.' It provides discretion with respect to number of arbitrators forming the adjudicating panel of a dispute. Further it is pertinent to note that, the provisions of Arbitration Act are silent upon any specific qualification of the arbitrator, thereby giving power to parties to decide upon it. This can be discerned from section 12 of the act which provides that 'an arbitrator maybe challenged if he does not possess the qualifications agreed by the parties.'

The parties have the discretion to mutually agree upon qualification criteria for appointment of an arbitrator. As per the general practice in India, the General Condition of Contract provides for the provision of appointment of party who is a member of the awarding company in the tender agreements and concessionaire agreements in India. In such agreements, the contractor is awarded the work through letter of award; therefore there can be an implied inference that it lacks the power to negotiate on this particular aspect.

246TH LAW COMMISSION REPORT AND THE AMENDMENT ACT 2015

In the 246th Law Commission Report, an amendment was proposed to section 12 of the Act which stipulates the grounds for challenging the arbitrator. The report suggested that, being an 'interested party' i.e. party having relationship as an employee, consultant, advisor etc. with any of the party qualifies as a ground of challenging the appointment. The report further noted that this should be the rule for all types of arbitrations including family matters. However, this is a waivable clause for which parties would have to put in an express declaration in the agreement or after the dispute has arisen.

The Report imbibes this amendment from the provisions of the 'Waivable and Non-waivable Red List' of the IBA Guidelines on Conflict of Interest.

This suggestion culminated into amendment of section 12 and addition of Schedule V and VII in the Arbitration and Conciliations (Amendment) Act 2015. Section 12(1)(b) read with Fifth Schedule mandates that the appointment made by any party which would give rise to justifiable doubts as to the independence or impartiality or arbitrator if he has a relationship with the parties or counsel or the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party, the same would give rise to justifiable doubts.

That further Section 12(5) read with Seventh Schedule provides that there shall not be any arbitrator's relationship with the parties or counsel who should also not be an employee, consultant, advisor or has any other past or present business relationship with a party. Such party should not be appointed as an arbitrator.

That applicability of the amended provisions is stipulated by section 1(2) read with 26 of the Amended Act by which provides that firstly, the amended provisions shall be deemed to have come into force on the 23rd October, 2015. And secondly, such amended provisions shall not apply to the arbitral proceedings commenced, before the amendment unless the parties otherwise agree.

RELEVANT CASE LAWS RELATING TO THE MATTER

The moot issue arises when agreement is pre-dated i.e. before 23rd October, 2015 and arbitration clause stipulates for appointment of an 'interested party' but the arbitration is invoked after amendment. Such case was first addressed by the Court in the case of Assignia- VIL JV v. Rail Vikas Nigam Limited,¹ as decided on 29.04.2016, wherein the petitioner invoked arbitration clause on 26.10.2015 with respect to dissatisfaction with termination of the contract. The Respondent contested that these claims should be settled by the already constituted arbitral tribunal on 11.04.2014. The clause provided that the presiding arbitrator shall necessarily be serving at railways. The Court held that, 'the request of respondent cannot be accepted as the arbitration is invoked after amended Act has come into operation. If the Respondent's request is allowed, the very purpose of amending the Act would be defeated.'

The Assignia case became the relying stone for Orissa Concrete and Allied Industries Ltd. v. Union of India & Ors.,² decided on 23.05.2016. As per the facts the petitioner sent invocation notice to respondent on 5th February, 2016, pursuant to which no arbitrator was appointed within 30 days. It was again communicated to respondent on 18th March 2016, when they finally appointed GM of South Central Railway as per the agreement. The Court held that, 'as per the amended Act, the petitioner is entitled to the appointment of an independent and impartial Arbitral Tribunal in as much as the respondent has forfeited its right to appoint an Arbitral Tribunal of its choice in view of Amendment of the Act. The party is entitled to the appointment of an independent and impartial arbitral tribunal as per Section 11(8) of the Act, if the party would be able to cross the hurdle of Section 26 of the Amended Act."

Further in the case of Vijay Anand & Associates Pvt. Ltd. v. Aman Hospitality Pvt. Ltd.,³ which was decided on 03.06.2016, the petitioner invoked the notice of arbitration on 27th January, 2016. The respondent appointed M/s Achal Kataria & Associates as the arbitrator to which petitioner did not agree on the basis of amendment of the Arbitration Act. The petitioner put forth that appointment of interested party after the amendment act would lead to failure of appointment process. Hence, party can approach court under Section 11. The Court held that, 'in case M/s Achal Kataria & Associates. The Court held that under no circumstances to exercise of power cannot be taken away the jurisdiction of this Court to appoint an arbitrator under Section 11(5) of the Arbitration and Conciliation Act, 1996 as sought by the Petitioner.'

Thus, as per the amended position of law, an interested party cannot be appointed by the parties unless parties expressly agree for doing so. But this question also arose with respect to the arbitration invoked before this amendment. This was addressed in the case of Era Infra Engineering Ltd. v. Aravali Power Company Pvt. Ltd.,⁴ which was decided on 29.07.2016. The arbitration was invoked prior to October 23, 2016. And as per the arbitration clause of GCC, CMD of NTPC was to be appointed as the arbitrator. But the petitioner in its invocation letter itself had requested for and independent arbitrator, other than CMD since he is involved in executive matter of the company. The Court held that, 'in the present case, no doubt, the invocation was on the basis of the un-amended Act but still under Section 12 of the Act would give the similar indication. The sole Arbitrator appointed by the respondent admittedly is CEO and Executive of the respondent – neutrality, to avoid any doubt in the mind of the petitioner and the reasons give in the petition, it would be appropriate that independent sole Arbitrator should be appointed as ultimately neutral person has merely to decide the dispute between the parties. Even, the object and scope of the Act says so, that an arbitration procedure should be fair and unbiased."

Therefore, it can be concluded that developments in law of arbitration are converging to make the process fairer, efficient and progressive. As per the amended Act, the Parties cannot choose an 'interested party' as an arbitrator. Such choice would lead to failure of appointment procedure which would give right to other party to approach the Court under section 11 for appointment of unbiased and qualified arbitrator.

Footnotes

1 Assignia - VIL JV v. Rail Vikas Nigam Limited, Arb. P. No. 677/2015.

2 Orissa Concrete and Allied Industries Ltd. v. Union of India & Ors., Arb. P. No. 174/2016.

3 Vijay Anand & Associates Pvt. Ltd. v. Aman Hospitality Pvt. Ltd., Arb. P. 138/2016.

4 Era Infra Engineering Ltd. v. Aravali Power Company Pvt. Ltd., Arb. P. 136/2016.

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