In a recent judgment delivered by the Hon’ble Supreme Court, the position on the appointment of arbitrator by parties has become unclear. In the context of unilateral appointment of an arbitrator, where one party can only appoint an arbitrator from a pool-based system created by the other party hampers the principle of equal treatment. Further, in light of the Arbitration and Conciliation Act, 1996, the waiver of Section 12(5) has not been properly considered by the court, keeping in mind the requirements stipulated in the Act. The Hon’ble Apex Court allowed the appointment of arbitrators who are ineligible as per the independence and neutrality requirements of an arbitrator as provided in the Act. This decision by the court has formed a mist on the aspect of appointment of arbitrators by the parties, which calls for reconsideration.
In the case of Central Organisation For Railways Electrification v. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company (“Railways Electrification”), 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 their arbitrator from the four names contained in 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 the Seventh Schedule of the Arbitration and Conciliation Act, 1996 (“the Act”).
In this article, 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
Section 12(5) of the Act 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 aforesaid section’s proviso clause enables the parties 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. According to the requirements of the proviso clause, 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. However, in Railways Electrification, the contract 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. Such a waiver stands contrary to the mandate of the proviso clause of section 12(5) and is invalid. But the court failed to take into account the requirements of a waiver as provided in the proviso clause of section 12(5) of the Act and allowed the appointment of arbitrators who were ineligible.
B. Domination of one party in 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. In Railways Electrification, the arbitrators were appointed through a system of pool. The pool was created by the railway establishment, which comprised of serving and retired railway officers, and the other party had to choose from it. 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, amounts to the tribunal being appointed solely by and of 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. Accordingly, 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. The practice of pool system, as used by the Railway establishment, violates the equal treatment of the other party as it does not give one of the parties an equal right to choose its arbitrator thus creates supremacy of one party over another party. Arbitration is based on the pillars of fairness and equality, which is not demonstrated through Railways Electrification.
C. Appointment of ineligible arbitrators
It is a fundamental requirement that arbitrators must remain neutral and independent throughout the arbitral proceedings. A party cannot be permitted to appoint arbitrators with whom it has current or past relations. The Act has made amendments and moved forward by instilling independence and neutrality requirements for an arbitrator to boost the parties confidence and specifically curtailed the practice of departmental arbitrations. Hence a party cannot be allowed to appoint arbitrators that 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, nor can it thrust the other party to choose an arbitrator from a self-created pool of ineligible arbitrators. Therefore, on the touchstone of Section 12(5) along with the Seventh Schedule of the Act, the appointment of arbitrator in the Railways Electrification is invalid. Such a tribunal consisting of ineligible arbitrators would defeat the purpose of the independence and neutrality requirements of an arbitrator provided in the Act.
The Hon’ble Supreme Court in Railways Electrification 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 the Seventh Schedule of the Act cannot be appointed as an arbitrator. But in Railways Electrification, 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 Railways Electrification, the pool of four arbitrators is narrow, but it was accepted by the court, thus disregarding the decision of Voestalpine.
Globally it is settled that parties must have an equal influence in the process of appointment of arbitrators. Further, it is internationally recognized that an arbitrator must be neutral and independent of the parties. In this light, after the decision of TRF and Perkins, India advanced towards syncing its arbitration laws according to the international standards. But after the decision of the Hon’ble Supreme Court in Railways Electrification, India’s position seems to be unclear. It offsets it from the independence and neutrality requirements of the Act and 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, the decision needs a relook.