The Supreme Court of India determined the issue relating to the appointment of arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996.
Date of Judgment:
November 26, 2019.
Justice Uday Umesh Lalit
Justice Indu Malhotra
Applicants: Perkins Eastman Architects DPC &Anr.
Respondent: HSCC (India) Ltd.
Section 2 (1) (f) (iii), the Arbitration and Conciliation Act, 1996–This Section states that “International Commercial Arbitration” refers to an arbitration that deals with disputes arising from legal relationships, whether contractual or not, that are considered commercial under Indian law.
Section 11, the Arbitration and Conciliation Act, 1996 – This section deals with the appointment of arbitrators.
Section 11 (6), the Arbitration and Conciliation Act, 1996 – This section states that if a party fails to act as required by the appointment procedure, or if the parties or the two appointed arbitrators fail to reach an agreement as required by the procedure, or if a person or institution fails to perform any function entrusted to them, the appointment shall be made by the arbitral institution designated by the Supreme Court in cases of international commercial arbitration, or by the High Court, as the case may be.
Section 12, the Arbitration and Conciliation Act, 1996 – This Section states the provisions related to the grounds for challenging an arbitrator.
- An agreement was formed between "a consortium of applicants" that is Perkins Eastman Architects DPC, an architectural firm and Edifice Consultants Private Limited, [“applicants” in the arbitration application] and Hospital Services Consultancy Co. Ltd. [Respondents in the proceedings].
- There was an arbitration clause, detailing the resolution of any disputes contained in the contract. The arbitration clause specifically provided that, any difference, dispute, or issue will be handled by arbitration by a sole arbitrator, whose appointment is determined by the Chief Managing Director of the Respondent and, that the appointment of such sole arbitrator will be made within 30 days after a request for arbitration is received.
- In a letter dated 28.06.2019, the Applicant requested that the Chief Managing Director of the Respondent for the appointment of a sole arbitrator, when a disagreement arose between the parties.
- The Applicant asserted that no arbitrator was appointed within 30 days of filing the complaint. On the 30th of July, 2019 (a couple of days after the 30-day deadline had passed), the Chief General Manager addressed a letter claiming to have appointed a sole arbitrator.
- The Applicant filed an application under Section 11 (6) before the Supreme Court, contesting the appointment on the grounds of delay in appointment and the requirement of an independent and impartial arbitrator to be appointed.
- Whether or not the arbitration in this case will be an International Commercial Arbitration?
- Whether a case can be made for the Court to exercise its power to appoint an arbitrator?
- To begin with,due to the issue of delay in appointment. The Applicant argued that the CMD could not have appointed the sole arbitrator. The Applicant made this argument based on the Act's Fifth and Seventh Schedules. The Fifth and Seventh Schedules are drawn from Section 12 of the Act, which establishes grounds for a challenge to an arbitrator.
- The Supreme Court dismissed the argument of appointment delay due to hyper-technicality. But the issue of the Respondent's CMD appointing an arbitrator was extensively debated. It was noted that he was to appoint a sole arbitrator and not act as one. The Arbitration Clause expressly prohibited any other method of appointing an arbitrator.
- According to the Court, the CMD could not have appointed a sole arbitrator as he cannot himself be appointed as one because "what cannot be done directly cannot be done indirectly."
- It was decided that the CMD's appointment would be invalid. This was because the reason for ineligibility was the appointing authority's connection to the dispute, i.e., the interest he would have in the decision's outcome – in this case, because he was the CMD of one of the parties. The Court noted that ineligibility affects an arbitrator's ability to arbitrate and appoint a nominee.
- During this discussion, the Court contrasted the facts with a scenario where both parties choose arbitrators. The latter situation would necessitate a different approach because any advantage gained by a party by nominating an arbitrator of their choice would be offset by equal power.
- The Supreme Court concludes its discussion on this issue by stating that if there are reasonable doubts about the nominee's independence and impartiality, and if other circumstances warrant it, the Court may appoint an independent arbitrator.
- While discussing the power of the Supreme Court under Section 11 of the Act, briefly, the Court defined its S. 11 powers. The Court cited Walter Bau AG v. Municipal Corporation of Greater Mumbai and Anr. to hold that accepting an arbitrator's appointment as ousting jurisdiction under S. 11 (6) is unconstitutional unless the appointment is ex-facie valid and the Court is satisfied. Simply put, the appointment must be valid on its face and satisfy theCourt.
- To the extent that a party had submitted to the arbitrator's jurisdiction, the Court could not exercise its jurisdiction under S.11. This distinction therefore limits the Court's powers under S. 11.
- Section 11 (12) (a) read with Section 11 (6) provides that an application for appointment of arbitrator can only be made before the Supreme Court if it is an international commercial arbitration. This meant determining whether this particular dispute arose from an international commercial arbitration. The Court made it clear that despite their joint and several liability, Perkins Eastman remained the lead member.
- As per Section 2 (1) (f) (iii) of the Act, an "association" is a consortium of two or more bodies corporate, at least one of which is a body corporate incorporated in a country other than India. As a result, the consortium was found to be covered by Section 2 (1) (f) (iii) and Section 11 (6).
The Supreme Court stated that there is a case to be made to hear the Applicants' instant application. The application was granted, and the ruling clarifies three important legal points. This decision has far-reaching implications, particularly for government contracts that frequently include one-sided arbitration clauses.
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- Which Act deals with the processes of arbitration and conciliation in India?
- Under which Section of the 1996 Act is “association” defined?