Unilateral Appointment of Arbitrator: Balancing the Principle of Mutuality and the Contra Proferentem Rule

-Intisar Aslam*

Winner, 1st RGNUL Arbitration Essay Writing Competition

“When I am representing a client in an arbitration, what I am really looking for in a party-nominated arbitrator is someone with the maximum predisposition towards my client, but with the minimum appearance of bias.”

Prof. Martin Hunter[1]

Introduction

The appointment of an arbitrator is a cornerstone of all the arbitration proceedings across the world. However, this appointment has been marred by blemishes of unilateral appointment i.e. an arbitrator is appointed as per the choice of only one party. This is reflective of the fact that the principle of mutuality, which is the linchpin of a valid arbitration agreement, is being discarded by the parties to the agreement. Although the Supreme Court has made attempts to solve this conundrum by declaring all such unilateral appointments invalid[2] yet the appointment of an arbitrator from a “broad-based” panel appears to pose a cause of concern for the parties. Through a catena of judgments, this legal position has been pushed into a state of conflict, thus, requiring a revisit and clearing of clouds of “unfair” appointment of arbitrators by the apex court. This essay seeks to discuss a series of conflicting judgments given by the Indian Courts and why reconsideration is required. It further goes on to argue for expanding the scope of application of the rule of contra proferentem or the “interpretation against the draftsman”. This doctrine of contractual interpretation is applicable to contracts where the terms incorporated within are biased, unfair, or ambiguous. Thus, itcalls for such an interpretation of the contract that works against the party who has drafted it.  The essay  lastly concludes by demanding adherence to the provisions of UNCITRAL Model Law[3] on which the Indian Arbitration and Conciliation Act, 1996[4] is based.

A Background of Conflicting Judgements

In the earlier times, when Arbitration was newly introduced in India, the appointment of a sole arbitrator on the choice of only one party was held to be valid in the eyes of law. This is substantiated by the judgement of the Delhi High Court in the case of Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd. and Ors.[5] As time passed, the law of arbitration in India gained popularity and new developments and issues emerged. This led to the case of TRF Limited v. Energo Engineering Infrastructure Ltd.[6] (“TRF”) wherein the Supreme Court held that if a person was statutorily disqualified from acting as an arbitrator in a particular dispute, then he/she cannot nominate any other person as a sole arbitrator for the same dispute between the parties. In this case, the arbitral clause incorporated that only the Managing Partner of the Respondent Company or the Nominee of the same was to act as a sole arbitrator, however, by virtue of Section 12(5)[7] of the Arbitration & Conciliation Act (“A & C Act”), 1996 coupled with the Seventh schedule[8] of the same, he was disqualified to be a sole arbitrator. The same principle has been upheld and followed in the case of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.[9] (“Perkins”). These cases, pro tempore, have cleared the air surrounding the confusion as to the unilateral appointment of the arbitrator. The reason is, that the above-mentioned cases specifically talked about the appointment of persons who were ineligible to act as an arbitrator. Nevertheless, the act of invalidating all the arbitral clauses that prima facie seem to be “biased”, “unfair” or “partial” does not hold much water. This is corroborated by the fact that in the “TRF” Case, a nominee appointed by the disqualified arbitrator was still legally competent to act as an arbitrator. However, owing to the assumption that a disqualified arbitrator’s nominee would, by default, become disqualified is a “prima facie” case of fallacious inference of the presence of partiality and biasness.

                In addition to the above-mentioned judgments vis-à-vis unilateral appointments, another “unlabelled” appointment that has been held “valid” by the courts recently is the quasi-unilateral appointment of arbitrators. One of the issues raised before the Supreme Court was whether the selection of a panel of arbitrators by one party and the subsequent selection of the arbitrators from the same, by the other party, would render the appointment invalid. In the case of Central Organisation for Railway Electrification v. M/s ECI-SPIC-SMO-SMO-MCML (JV)[10] (“CORE v. ECI”), the court held such an appointment valid. As per the arbitration agreement between CORE and ECI, the former had prepared a list of four retired railway officers and the latter was supposed to select two out of them. From these two, the General Manager had to select one of the nominees of ECI and the other could have been any choice from within or outside the list to appoint the tribunal. The rationale provided by the court was that the dominance that CORE might have obtained by appointing the panel would have been neutralized by the selection performed by the ECI. However, this rationale does not stand tall and fails to pass the test of mutuality on grounds of the CORE having an upper hand in the initial selection of the panel which might be in its favour completely.

             Contrary to the above case, the Supreme Court, in the case of Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation[11] (Voestalpine), held that a “broad list” of arbitrators unilaterally prepared by the choice of one party would be valid and would pass the test of fairness and impartiality. In this case, the arbitral clause provided that the respondent had to form a list of five arbitrators, and both parties were supposed to select one arbitrator each. However, the petitioner raised an objection to such procedure of appointment as in contravention to Section 12(5)[12] of the A&C Act in consonance with the Seventh Schedule of the same. Therefore, the respondent formulated a list of thirty-one serving and retired government officials as arbitrators and asked the petitioner to nominate thereafter. The court held such an appointment is valid in the eyes of law considering the elements of fairness, neutrality, and impartiality as the list was “broad-based”. This basically meant that unless a retired government employee was not directly connected with the government body, which was litigating, and the panel was “broad-based”, the quasi-unilateral appointment of arbitrators would be in congruence with the 2015 amendment[13] of the Arbitration Act. It is important to emphasize the point that the court, in this case, does not define the term “broad-based” panel and leaves it open to interpretation. It has been subjective in nature and hence, gives rise to a number of issues as the following issues are still unknown to make the list eligible to qualify as “broad-based”:

  1. Does the number of arbitrators qualify as “broad-based”?
  2. Does a person’s appointment as an arbitrator qualify as “broad-based” if they have any ties with the government or the previous employer?
  3. Which of the following qualifies as “broad-based”: Servicing employees or retiring employees, or both?

 These issues are evident from the fact that in the case of SMS Ltd. v. Rail Vikas Nigam Ltd.[14] (“SMS”), the Delhi High Court held that the panel of arbitrators (chosen by the respondent) failed to pass the test of neutrality and fairness as only eight out of the thirty-seven arbitrators were not the former employees of the Respondent.

Application of Section 12 in case of a Nominee of a disqualified Arbitrator

The moot question that remains unanswered is whether Section 12[15] of the A&C Act itself excludes the Nominee appointed by a disqualified arbitrator, to act as an arbitrator. The court has, indirectly, created an “invisible exception” to Section 12[16] of the A&C Act by excluding even those nominees who do not have any past or future relation with either of the parties. This not only denudes the person of his qualification to be appointed as an arbitrator but also enhances the burden of appointing a distinct arbitrator who otherwise would have been selected by the disqualified arbitrator. The argument against this could be that the sole arbitrator or the person appointing an arbitrator should not have any vested interest in the dispute or any relation with either of the parties. The former condition applies to the nominee and, therefore, in the absence of any relation or interest in the dispute, he ought to be qualified to act as an arbitrator. In the case of TRF[17], the Managing Partner had appointed a retired Judge of the Supreme Court who did not have any past or the then-present relation with either of the parties and was not statutorily disqualified to be an arbitrator. Yet, the court failed to acknowledge the same. Further, it has set an incorrect precedent by not conforming to the provisions of the legislation for future disputes.

The Contra Proferentem Rule: Application and Expansion of its Scope

The rule of contra proferentem has emerged from Insurance Law. It basically means that in case of ambiguous terms or clauses in the contract, the court would prefer an interpretation of that clause to be in favour of the party who had not drafted the agreement. To put it differently, the court, while interpreting ambiguous terms or clauses in a contract, would tilt the scales of justice by neutralising the negative impact on the party affected by the unfair and biased terms of the contract. . Although this doctrine has been often used in arbitration cases, its utility will have limited scope in agreements or clauses providing for a unilateral appointment.

               Unilateral appointment violates the principle of mutuality and party autonomy. The court needs to review this through the lens of an unconscionable contract. As the autonomy or the choice of one of the parties gets limited, rather gets ignored, the other party gets into a dominant position due to having a relationship with the appointed panel of arbitrators (if any). This further leads to an unequal bargaining power between the parties and the doctrine of inequality of bargaining power comes into the picture. By virtue of the agreement eventually turning into an unconscionable agreement, the rule of contra proferentem has to be employed to protect the interest of the weaker party. Also, this is relevant in case of consumer disputes as big manufacturers and service providers have a greater say in the agreement, hence, leading to unequal bargaining power. The welfare of the consumers is of paramount importance which is also the object of the Consumer Protection Act, 2019[18]. Therefore, it is high time that Indian Courts employ the rule of contra proferentem in nullifying the validity of the quasi-unilateral appointment of arbitrators as well due to issues discussed earlier in the paper.

          At the same time, the obstacle that needs to be addressed is the limited scope of the rule in the present-day world. Therefore, the judicial system must, firstly, expand the limitation of the rule to include arbitral clauses within it. Although it is needless to say the same because the arbitral clause is itself part of the contract, however, since the rule is more applicable to ambiguous or vague terms, there is a need for judicial precedents to extend the limit of the rule. This can only be done by a thorough examination and consideration by courts of such arbitral clauses which call for the unilateral appointment of an arbitrator, thus, making the terms “unfair”. It is a tendency of the party, who is drafting the contract, to incorporate terms that favor their own selves. Thus, an element of ambiguity, vagueness, and unfairness is added to the contract. This favoring element should not breach a reasonable threshold that the terms of the contract become unfair to one party, thus, introducing one party as dominating and the other as weaker. Such a situation, itself, gives rise to the applicability of the Contra Proferentem Rule. To substantiate this, the case of Houghton v. Trafalgar Insurance[19] comes into the picture. In this case, a five-seater car met with an accident that carried six people in it. The insurance policy contained an exemption clause  such that it exempted the defendant from any liability arising out of an accident in case of breaching the standard seating limit of five people. The question before the court was whether the vague term ‘load’, in the exemption clause, constituted people in the car.  The court applied the rule of contra proferentem and held that  the meaning of the exemption clause being ambiguous, it could only  be interpreted in the interests of  the insurers. By the same token, any clause crossing the threshold limit of ‘fairness’, ‘ambiguity’, or ‘vagueness’, should be subjected to the rule of Contra proferentem. Failing this, one of the parties would be in a disadvantaged position, thus, violating the principles of a fair and valid contract. Therefore, there is not only the need for the applicability of the rule of contra proferentem but also the expansion of its limitation to arbitral clauses.

Taking Cue from UNCITRAL Model Law

The A&C Act, 1996[20] has been enacted along the lines of the UNCITRAL Model Law[21] on International Commercial Arbitration, 1985 (“UNCITRAL Model Law”). Section 18[22] of the A&C Act and Article 18[23] of the UNCITRAL Model Law provides for the equal treatment of the parties throughout all the stages of the arbitral proceedings. Furthermore, as per Section 21[24] of the A&C Act, the commencement of Arbitration begins with the issuing of a notice of arbitration to the respondent. Since the appointment of an arbitration tribunal is a procedure that follows the commencement of arbitral proceedings, it can be concluded that the appointment of an arbitrator is an implicit procedure under Section 18[25] of the A&C Act i.e. equal treatment of parties. Therefore, both parties have an equal say in the appointment of an arbitrator. The principle that the Supreme Court adopted in the case of CORE v. ECI[26] establishes equality between the parties which is nothing but a figment of one’s imagination. Thus, the court should not only uphold the fundamental provisions of the Model Law but should also seek to maintain and restore the faith of the “weaker parties” by adhering to the Indian legislation.

          Post-2015 Amendment[27], the provisions of the Act requires a written disclosure from the appointed arbitrator in consonance with Section 11(8)[28] of the A&C Act, 1996 and the IBA Guidelines on Conflicts of Interest in International Arbitration[29]. This written disclosure would ensure the impartiality and fairness of the appointed arbitrator, thus, protecting the party from a prejudiced decision. Although the amendment has widened the scope of challenging the appointment of an arbitrator, the onus of disclosing any ‘future’ relationship remains on the arbitrator.  An arbitrator may disclose any past or present relationship with the party, however, any prospective relationship might remain undisclosed. This is evident from the Hawaiian case of Noel Madamba Contacting Co v. Romero and A&B Green Building, LLC[30]. In this case, the Supreme Court of Hawaii set aside the arbitrator’s decision due to the arbitrator’s failure to disclose his prospective relationship with the law firm which was going to represent one of the parties in arbitration. Thus, such a potential future relationship was regarded as an element of partiality on part of the arbitrator. Thus, India not only requires the disclosure of any past or present relationship but also an inclusion of the “prospective relationship” that may arise during the course of proceedings.

The Conclusion

India is trying to tread a path towards making itself a global arbitration hub in the future. With a series of conflicting judgments and a lack of any settled rule of law, it will be difficult for India to achieve this milestone. Investors all over the world would be averse to choosing India as a seat of arbitration. Furthermore, the quasi-unilateral appointments of arbitrators would discourage them due to the fear of biasness, partiality, and unfairness in the resolution of the dispute. The principle of mutuality and party autonomy are two sacrosanct principles that have been time and again wielded by courts all over the world. Unless these are given priority, challenges to the appointment of arbitrators are bound to arise. Such challenges would also lead to piling of such cases at the disposal of already-burdened courts. This would in turn affect the “speedy resolution of disputes”- the aim for which the Indian Arbitration statute was enacted. Thus, it is imperative for the apex court of India to remove this chasm of unilateral appointment by declaring particular clauses as invalid while at the same addressing and identifying particular issues and disputes when the “broad-based” panel of arbitrators can be permitted.


*Intisar Aslam is a student of National University of Study and Research in Law, Ranchi. He can be reached at intisaraslam0503@gmail.com and on LinkedIn.

[1] 53 Martin Hunter, Ethics Of The International Arbitrator 222-223 (1987).

[2] Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665.

[3] Uncitral Model Law On International Commercial Arbitration,  https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-09955_e_ebook.pdf (last visited May 31st, 2022).

[4] Arbitration and Conciliation Act, 26 India (1996).

[5] Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd., (2018) SCC OnLine Del 7634.

[6] TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

[7] supra note 4, § 12 cl. 5, at 1.

[8] supra note 4, at 1.

[9] Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

[10] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.

[11] supra note 2, at 1.

[12] supra note 7, at 2.

[13] Arbitration and Conciliation Act of 1996, amended by The Arbitration and Conciliation Act, 2015.Wrong citation

[14] SMS Ltd. v. Rail Vikas Nigam Limited, (2020) SCC OnLine Del 77.

[15] supra note 4, at 1.

[16] See id.

[17] supra note 6, at 2.

[18] Consumer Protection Act, 35 India (2019).

[19] Houghton v. Trafalgar Insurance Co Ltd., (1954) 1 QB 247.

[20] supra note 4, at 1.

[21] supra note 3, at 1.

[22] supra note 4, § 18, at 1.

[23] supra note 3, art. 18, at 1.

[24] supra note 4, § 21, at 1.

[25] supra note 20.

[26] supra note 10, at 2.

[27] supra note 13, at 3.

[28] supra note 4, at 1.

[29] International Bar Council, IBA Guidelines on Conflicts of Interest in International Arbitration (Issued on October 23, 2014).

[30] Noel Madamba Contacting Co v. Romero and A&B Green Building, LLC, (2015) SCWC 12-00007780.


Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.