Unilateral Appointment of Arbitrators: Unfairness and Unequal Treatment of the Parties

Is a 2:1 decision perceived by the losing party as more legitimate than a decision by a sole arbitrator, because “three heads are better than one”? That makes no sense — quite the opposite … In the eyes of the losing party, the 2:1 decision is less legitimate than that of a sole arbitrator in whose selection the opponent had no more and no less than an equal say.

 

This has nothing to do per se with the choice between a sole arbitrator and a tribunal comprising three or more arbitrators. In either case, since every possible arbitrator is chosen jointly by the parties, or is appointed by a neutral institution, each is invested with an equal measure of confidence and an equal claim to moral authority. Not so when there are unilateral appointments. Disputants tend to be interested in one thing only: winning. They exercise their right of unilateral appointment, like everything else, with that overriding objective in view. The result is speculation about ways and means to shape a favourable tribunal, or at least to avoid a tribunal favourable to the other side — which is logically assumed to be speculating with the same fervour, and toward the same end.

 

Forgotten is the search for an arbitrator trusted by both sides….

The unilaterally nominated arbitrator is the product of realism, doubtless, indispensable in a complex world of inter-communal transactions, as a way of making arbitration acceptable — though in a manner which immediately dilutes its purity.

— Jan Paulsson1

The subject of appointment of the Arbitral Tribunal is a vexed issue that has in the past few years, since the 2015 amendments to the Arbitration Act in India, received considerable judicial scrutiny in the Supreme Court and the High Courts. The importance of appointing arbitrators in which both the parties have mutual confidence, and fairness and impartiality of the arbitrator, has been stressed in recent judgments of the Supreme Court in the context of whether a particular party to the dispute should have the power to act as an arbitrator or appoint a sole arbitrator. The Supreme Court has categorically laid down that where a party has an interest in the outcome of the decision, it is not entitled to appoint and/or to participate in any manner in the appointment of the arbitrator. In this regard, the importance of fairness of the arbitrator and absence of bias, as well as the concept of mutual confidence of the parties in the arbitrator, has been given primacy over the concept of party autonomy and the significance of the plain contractual text of the arbitration agreement, at least in the context of appointment of sole arbitrators. The genesis of this lies in the principle of equal treatment of parties, which is one of the core principles of justice deliverance.

 

The principle of “equal treatment” has a rich history in modern legal thought, that is inextricably linked to the right to a fair trial. The principle traces its roots as far back as the great Charter of Liberties, The Magna Carta Libertatum, in 1215, which is widely considered to have moved legal institutions across the globe, closer to the ideal of equal justice under law and “embedded equality within due process”.2 The landmark judgment of the French Cour De Cassation in Societes BKMI & Siemens v. Societe Dutco3 (hereinafter “DUTCO”) has clarified and strengthened its applicability to arbitrations. DUTCO commenced an International Chamber of Commerce (“ICC”) Arbitration, against BKMI and Siemens. A consortium was formed by them to construct a cement plant in Oman. The arbitration clause stated that “all disputes arising under the agreement would be settled by arbitration in Paris in accordance with the ICC Arbitration Rules, by three arbitrators appointed in accordance with those Rules”. The respondent BKMI and Siemens were asked to nominate an arbitrator jointly, to which they raised an objection. After rejecting this, the said parties were asked to make a joint nomination and the Tribunal was constituted. The Tribunal rendered a partial award after holding that it had been properly constituted. The respondents applied to the Cour De-Appel De Paris to have the award altered on the ground that the Tribunal was irregularly constituted, which was rejected by the appellate court. The parties therefore went to the Cour De Cassation, which reversed the Court of Appeal’s decision. It held that the principle of equality of parties in designation of the arbitrator is a matter of public policy and a party can waive the principle only after the dispute has arisen. Pursuant to this judgment institutional rules were revised, even those of the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA). They provide that the claimant(s) and the respondent(s) must jointly nominate their respective co-arbitrators; failing the joint appointment, by either side, the institution will appoint the entire Tribunal.2

 

In India, the principle in DUTCO3 has been applied in the landmark judgment of the Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd.4 The Court relied upon the observations in DUTCO case3 that,

An independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator.

 

This judgment came in the context of an arbitration clause which gave powers to the Chairman and Managing Director of HSCC (India) to appoint an arbitrator. The Court held, relying upon the judgment in TRF Ltd.5 that even in a case where the Managing Director was only empowered or authorised to appoint an arbitrator, even in such a case, because of the interest that he would be said to have in the outcome of the result in the disputes, the element of invalidity would be directly relatable to and arise from such an interest, and if there was such a possibility of bias, it would be there in either category, whether the party acts as the arbitrator itself or when it is only empowered to appoint an arbitrator. The Court thus reiterated the principle in the Bharat Broadband judgment6 and applied it also to situations where the party had the power to appoint a sole arbitrator. In Bharat Broadband Network Ltd. v. United Telecoms Ltd.6 the arbitration clause provided that if any disputes arise then they shall be referred to the sole arbitration of the CMD, BBNL, and if the CMD is unable and/or unwilling to act, then to the sole arbitration of some other person appointed by the CMD. The said procedure of appointment was challenged on the ground of violation of Section of the amended Arbitration Act in 2015, read with Seventh Schedule thereto. The Court held that under the new provision of Section what is clear is that where under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. In such a scenario, the party can straightaway apply under Section for declaration of the same and for a declaration that the mandate of the arbitrator stands terminated under Section of the Act itself.

 

These three decisions make it abundantly clear that the 2015 amendments lay down a clear position that where a party has an interest in the outcome of the decision, it is not entitled to appoint and/or to participate in any manner in the appointment of the arbitrator. The judgment in TRF Ltd.5, Bharat Broadband6 and Perkins4 are a welcome step in the direction of a fair arbitration, in consonance with the principles of fair trial, and removing any effect of impartiality or bias in the arbitrator’s decision. It has created much needed clarity in law, and a positive interpretation of the purpose and effect of the 2015 amendments.

 

The key question that arises therefore is, whether and to what extent, the principles laid down in these judgments should be made applicable to the issue of validity of party appointed arbitrators in the case of multi-arbitrator tribunals, such as a three-member Arbitral Tribunal. The question that needs to be answered is whether the same principle extends, and should extend, to appointments made by a party in an Arbitral Tribunal comprising of three members, wherein one party appoints their nominee, the other party appoints their nominee, and the two nominees appoint a third arbitrator. This question requires serious consideration. Currently, the above principles are not considered to be applicable in the context of arbitrator appointments made by the parties in a three-member Arbitral Tribunal. The Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)7, a joint venture company observed at para 35, relying on para 21 of the Perkins4 judgment, that in a three-member panel, the right to appoint arbitrator by the party is counterbalanced by the other side also by appointing an arbitrator of its choice and, therefore, it is allowed.

 

Going a step further, recent judgments of the Supreme Court have held as valid such contractual clauses where the Government is a party, allowing it to give a panel of names, consisting of ex-government employees, from which the opposite party has to nominate its arbitrator. In Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd.8 the Arbitral Panel consisted of three members, of which one was to be nominated from the list of arbitrators given by DMRC by the petitioner company, Voestalpine. The panel of arbitrators drawn by DMRC consisted of persons who had worked in the Railways under the Central Government, or the Central Works Departments or public sector undertakings. However, it was not acceptable to the petitioner as the petitioner felt that the panel prepared by DMRC consisted of serving and/or retired engineers, either of DMRC or of the government departments or public sector undertakings, who did not qualify as independent arbitrators. The Supreme Court considered the amendments made in the 2015 Act, as well as the recommendations of the Law Commission on the subject of “Neutrality of Arbitrators”. At paras 15 to 23 of the judgment, the Supreme Court discussed in detail, the principles regarding independence and impartiality of the arbitrators, and it held that: (SCC pp. 687-88, para 20)

  1. 20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature, and the source of an arbitrator’s appointment is deduced from the agreement entered between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration. The genesis behind this rationale is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interests of the parties and not to act in, or so as to further, the particular interest of either party. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial.

 

Having held so, the Court went on to examine whether appointment from a panel of government employees and/or ex-government employees is valid. It held that this by itself may not make such a person ineligible because the panel consists of persons who have worked in the Railways under the Central Government, or the Central Public Works Departments, or public sector undertakings, and therefore, they cannot be treated as employees or consultants or advisor of the respondent DMRC. The Court went on to hold that if this argument is accepted, then no person who had either worked in any capacity with the Central Government or other autonomous or public sector undertakings would be eligible to act as an arbitrator, even when he is not remotely connected with the party in question, like DMRC in that case. It held that the amended provision put an embargo on a person to act as an arbitrator, who is the employee to the party in dispute, or a consultant or an advisor or has had any past or present relationship with DMRC, which was not the case.

 

The Court while clearly asserting the importance of independence and impartiality in appointment of arbitrators, and it being the cornerstone of consideration of validity of such appointments, did not lay down a clear test and, instead, drew an artificial line. It held that on the one hand, the employees of the government body which are litigating, are not allowed, but the employees of other government organisations are allowed, when in fact these employees would also perhaps fall foul of the same test as DMRC’s employees which are discussed in detail in the said judgment. The Court then eventually held that only five names as suggested in the panel are not broad-based enough, and therefore, DMRC should give broadness to its panel, which has already been given by DMRC by giving names of 31 persons. The judgment thus held that as long as an ex-government employee is not directly connected with the government body, which is litigating, and the panel is broad-based enough, the said procedure of appointment of arbitrators would not fall out of the requirements of the 2015 amendments of the .

 

The above judgment was applied in the judgment of the Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)7, a joint venture company, albeit with a result which was perhaps unintended by the Voestalpine8 judgment. In this case the appellant, which fell under the Ministry of Railways, sent a letter with the names of four serving railway officers and the respondent was asked to select any two names from the list of four railway officers and communicate them to the appellant. As per the arbitration clause, then the appellant would select the nominee of the respondent from the two names given by the respondent and appoint the other arbitrators also from the three members panel and indicate the presiding arbitrator from amongst the three arbitrators. The respondent disagreed with the said procedure and refused to select the two arbitrators and refused to waive its right under Section of the amended Arbitration Act. It filed a petition under Section of the Act to the High Court, for appointment of an arbitrator. The High Court rejected9 the arguments of the appellant that the arbitrator has to be appointed only from the panel of arbitrators and appointed a retired High Court Judge as the arbitrator. In appeal, the Supreme Court held that the High Court is not justified in appointing any independent arbitrator dehors the procedure for appointment of the arbitrator, as prescribed under Clause 64(b) of the General Conditions of Contract. The Court held, relying on a passage in Voestalpine8 that simply because a person is a retired officer from the Government, he would not be rendered ineligible to act as an arbitrator. Based on this, the Supreme Court held that the very reason for empaneling the retired railway officers is to ensure that the technical aspects of the disputes are suitably resolved by utilising their expertise and merely because they are retired employees who have worked in the Railways, it does not make them ineligible to act as arbitrators. This judgment goes contrary to the judgment in Voestalpine8, wherein the independence and impartiality of the arbitrator was stressed and the Court held that the employees in that case of DMRC (which was a party), serving of retired, cannot be appointed as an arbitrator. In this case, the Supreme Court upheld the appointment of employees of the Railways wherein the appellant in question, was falling under the aegis of the Ministry of Railways. On the issue whether the General Manager can be given the power to appoint the arbitrator, the judgment goes contrary to the Supreme Court’s judgment in Perkins4, as even the presiding arbitrator was to be appointed by the General Manager. The Court held in this context that: (Central Organisation for Railway Electrification case7, SCC pp. 731-32, para 38)

  1. … In response to the respondent’s letter dated 26-9-2018, the appellant has sent a panel of four retired Railway Officers to act as arbitrators giving the details of those retired officers and requesting the respondent to select any two from the list and communicate to the office of the General Manager. Since the respondent has been given the power to select two names from out of the four names of the panel, the power of the appellant nominating its arbitrator gets counterbalanced by the power of choice given to the respondent. Thus, the power of the General Manager to nominate the arbitrator is counterbalanced by the power of the respondent to select any of the two nominees from out of the four names suggested from the panel of the retired officers. In view of the modified Clauses 64(3)(a)(ii) and 64(3)(b) of GCC, it cannot therefore be said that the General Manager has become ineligible to act as the arbitrator. We do not find any merit in the contrary contention of the respondent. The decision in TRF Ltd.5 is not applicable to the present case.

 

Even otherwise also in this case, the panel was only a panel of four arbitrators which was not a broad-based panel, as laid down in Voestalpine8 judgment.

Thus, on the one hand, the Court has reiterated the importance of independence and impartiality of arbitrators. However, on the other hand, it seems as a practical way out, keeping in mind the prevalent practices and preferences, the court has allowed for certain exceptions. The difficulty in this approach is that whether a panel is “broad based” or not in itself is a subjective test which runs the risk of getting diluted, and thereby diluting the core principle which it seeks to protect, which is to ensure independence and impartiality of the arbitrators appointed. This is the effect also of the Railway Electrification7 judgment has had, while it sought to apply the principle, laid down in the Voestalpine8 judgment.

In the case of either sole arbitrator or a Tribunal comprising of three or more arbitrators, where the tribunal is either jointly chosen by the parties or appointed by a neutral institution, there is equal measure of confidence in the arbitrators. But this is not so when there are unilateral appointments, and therein lies the problem. As Jan Paulsson, states,

Parties tend to be interested in one thing only: winning. They exercise the right of unilateral appointment, like everything else, with that overriding objective in view. The result is speculation about ways and means to shape a favorable tribunal, or at least to avoid a tribunal favorable to the other side — which is logically assumed to be speculating with the same fervor, and towards the same end … We must confront an uncomfortable fact. Two recent studies at commercial arbitration revealed that the dissenting opinions were almost invariably (in more than 95% of cases returned by the arbitrators nominated by the losing party. The fact that the dissenting arbitrators are always those who have been appointed by the party aggrieved by the majority decision does not in or itself point to a failure of ethics. It may simply be that the appointing party have made an accurate reading of how the nominee is likely to view certain propositions of law or circumstances of facts. The problem is that the inevitability of such calculations proves the unilateral appointments are inconsistent with the fundamental premise of arbitration, the mutual confidence in arbitrators. Of course, we must live with compromises. The unilaterally appointed arbitrator is the product of realism, doubtless, indispensable in a complex world of inter-communal transactions, as a way of making arbitration acceptable — though in a manner which immediately dilutes its purity. Although the practice of giving the parties the right to nominate its arbitrator, is a practical way of making arbitration more acceptable and serves the need of the party to be comfortable with the process, eventually, he must keep in mind that the benchmark is to have a completely independently nominated Arbitral Tribunal. It is important to keep the benchmark in mind, so that through education and spread of knowledge, over a period, one can reach this benchmark, and not give into the doubtless insecurities of the parties appointing the arbitrator. The party’s attachment to the practice of unilateral appointment is ill-conceived.1

 

There are several reasons for the parties to want to have the power to nominate its own arbitrator to an Arbitral Tribunal consisting of three members or more. Primarily, perhaps it gives a greater sense of control over the proceedings to the party and makes it feel that the arbitrator nominated by the party will help it win its case, but this then equally applies to the expectations of the other side which has nominated its own arbitrator. The purpose it serves perhaps is thus only to give psychological comfort to the party rather than any particular advantage. In any case if indeed one party was to have any such advantage, then it would defeat the basic purpose of having a fair and impartial mechanism to resolve disputes. Secondly, there are other factors where a party either feels that it may be that the arbitrator appointed by it would have a better understanding in terms of any specialised skill or knowledge, but then that could be taken care of even if appointments are made by an independent party or institution, and for that purpose alone there is no necessity perhaps to have unilateral appointments. As an extension of the first point above a party may also feel that an arbitrator nominated by it may have a better understanding of its case, or from a particular cultural understanding point of view, but this purpose can also be well achieved by other mature mechanisms. In fact, the net result of the exercise of unilateral appointments may well only turn out to be counter-productive to the parties as it prevents the free flow and exchange of thoughts between the arbitrators on account of mutual mistrust. As Hans Smit comments,

 

The presence of a partisan arbitrator on a panel will normally reduce, if not eliminate, the free exchange of ideas amongst the members of the panel. The chair will be less receptive to arguments that appear to be moved by partisan considerations or made join one of the arbitrators.10

 

Further experienced practitioners, such as Professor Van Den Berg have made reports where it is evidenced that an elevated number of dissents are produced by the arbitrator that was unilaterally appointed by the party, who loses the arbitration. Dissents are used then to also challenge the arbitral award, and it affects the speedy enforcement of the same.

 

Party autonomy and practical necessities or preferences of parties are a factor to consider for the purpose of lending acceptability to arbitration as a mechanism for alternate dispute resolution, but at the same time, equally, if not more, the key aspect that needs to be examined and considered is to reduce the possibility of doubt concerning the neutrality, impartiality, and independence of arbitrators. Perhaps the best solution is to have appointments to be made by a neutral body, which is impartial, reputed, and effective. Alternatively, as a middle way, such an institution (a neutral body) can even formulate a list of arbitrators that are duly vetted, and the parties can then be made to select from that list. This would reduce the chances of the arbitrator being biased towards the appointing party. Either which way, the need of the hour is to evolve a suitable framework for appointments to multi-arbitrator panels. The endeavour of the present discussion is to highlight that the evolution of the law in this area, which was started by the judgments in TRF Ltd.5, Bharat Broadband6 and Perkins4, is required to be taken to its logical conclusion by a well-considered decision of the courts in this regard, which evolves a suitable framework, after looking into all the competing factors. This would further strengthen arbitration as a mechanism for alternate dispute resolution, in the same way in which the judgments in Bharat Broadband6 and Perkins4 have done.

———

*The article has been published with kind permission of SCC Online cited as (2022) 3 SCC J-32

Advocate, Supreme Court of India.

1 Professor Jan Paulsson, “Moral Hazard in International Dispute Resolution”, Inaugural Lecture 29-4-2010, TDM 2 (2011), <www.transnational-dispute-management.com>.

2 Maxi Scherer, Dharshini Prasad and Dina Prokic, “The Principle of Equal Treatment in International Arbitration”, Available at SSRN: <https://ssrn.com/abstract=3377237>.

3 (1992) XV Yearbook Com. Arb 124, decided on 7-1-1992.

4 (2020) 20 SCC 760 : 2019 SCC OnLine SC 1517.

5 TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

6 Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755.

5 TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

4 Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760 : 2019 SCC OnLine SC 1517.

7 (2020) 14 SCC 712.

4 Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760 : 2019 SCC OnLine SC 1517.

8 (2017) 4 SCC 665.

7 (2020) 14 SCC 712.

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

9 ECI-SPIC-SMO-MCML (JV) v. Central Organisation for Railway Electrification, 2019 SCC OnLine All 2404.

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

4 Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760 : 2019 SCC OnLine SC 1517.

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

5 TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

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

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

1 Professor Jan Paulsson, “Moral Hazard in International Dispute Resolution”, Inaugural Lecture 29-4-2010, TDM 2 (2011), <www.transnational-dispute-management.com>.

10 Duarte, Herman, “Unilateral Appointments of Arbitrators: Perverse Incentives in International Arbitration?” (20-5-2012). Latin American and the Caribbean Law and Economics Association Annual Conference, XVI edition, Available at SSRN: <https://ssrn.com/abstract=2063186> or <http://dx.doi.org/10.2139/ssrn.2063186>.

5 TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

6 Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755.

4 Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760 : 2019 SCC OnLine SC 1517.

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