Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. 2019 SCC Online 1517 (Decided on 26 November 2019)
The contract entered into between the parties was for planning and designing, etc. for All India Institute of Medical Sciences in Andhra Pradesh. The contact contained Clause 24 for ‘dispute resolution’ which empowered the Chairman and Managing Director of the respondent company to appoint a sole arbitrator. The Chairman and Managing Director were called upon to appoint a sole arbitrator within 30 days from the receipt of request for the same. However, no appointment of an arbitrator was made within thirty days but a letter was addressed by Chief General Manager of the respondent appointing the sole arbitrator.
- Whether the arbitration would be an International Commercial Arbitration or not?
- Whether a case is made out for exercise of power by the Court to make an appointment of an arbitrator?
- Whether the power can be exercised by the Court under Section 11 of the Arbitration Act when the appointment of an arbitrator has already been made?
The Court answered the first issue in the affirmative and held that since the lead member of the Consortium Company i.e. Applicant No.1 is an architectural firm having its registered office in New York, requirements of Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (“Act”) are satisfied and the arbitration in the present case would be an “International Commercial Arbitration”. The Court relied on Larsen and Toubro Limited SCOMI Engineering BHD v Mumbai Metropolitan Region Development Authority (2019) 2 SCC 271. In L&T, the lead member in the consortium was an entity registered in India. It was held in L&T that “Association” and “Body of individuals” referred to in Section 2(1)(f) of the Act would be separate categories. However, pertinent to mention that, the lead member of the Association in L&T being an Indian entity, the “Central Management and Control” of the Association was held to be in a country other than India.
While dealing with the second issue the Court discussed the judgement in TRF Limited v Energo Engineering Projects Limited (2017) 8 SCC 377. In TRF, a three Judges Bench considered whether the appointment of an arbitrator made by the Managing Director of the respondent was a valid one. The Court had examined a clause which nominated the Managing Director himself to be the sole arbitrator with an additional power to appoint another person to act as an arbitrator. It was held in TRF that the Managing Director was ineligible by operation of law to act as an arbitrator as he would have an interest in the outcome of the dispute and once the identity of the Managing Director as a sole arbitrator was lost, his power to appoint someone else as an arbitrator was also obliterated.
In TRF, the Managing Director thus had two capacities under said Clause, the first as an arbitrator and the second as an appointing authority. In the present case, the Court was concerned with only one capacity of the Chairman and Managing Director and that is as an appointing authority.
The Court held that if in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases.
The Court, in the present case, expanded the ratio laid down in TRF and held that a person having an interest in the dispute must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator.
It further explained that cases where both the parties could nominate their respective arbitrators were completely different because whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has the right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. It observed that this has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 and recognised by the decision in TRF.
While dealing with the last issue, the Court relied on Walter Bau AG, Legal Successor of the Original Contractor, Dyckerhoff and Widmann, A.G. v Municipal Corporation of Greater Mumbai and another (2015) 3 SCC 800 and held that unless the appointment of the arbitrator is ex facie valid and such appointment satisfies the Court exercising jurisdiction under Section 11(6) of the Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11(6) cannot be countenanced in law. Such an appointment, therefore, will not inhibit the exercise of jurisdiction by this Court under Section 11(6) of the Act. Therefore, it cannot be held that the present proceeding is not maintainable in law.
The Supreme Court finally appointed a sole arbitrator to decide all the disputes arising out of the agreement between the parties subject to the mandatory declaration made under the amended Section 12 of the Act with respect to independence and impartiality and the ability to devote sufficient time to complete the arbitration within the period as per Section 29A of the Act.
The judgement bolsters the ratio laid down in TRF (2017, SC). The findings not only impose a requirement of independence and impartiality on part of the arbitrator so appointed, but also on the person making such an appointment.
A number of contracts across the country including government contracts, contracts with financial institutions etc have unilateral arbitrator appointment clauses. These clauses vest exclusive power with the government entity to appoint the former employee as a sole arbitrator. In light of the decision in the present case, unambiguously, no officer of the contracting party will have the right to make such an appointment. The only option available will be to act through a person/entity who is not directly affiliated and who has no direct interest in the outcome of the dispute.
Even where a clause permits a contracting party to unilaterally appoint a sole arbitrator, the decision appears to disbar any officers of the party from making such an appointment. Therefore, the most reasonable option for the party then appears to be to designate arbitration institutions to make such appointments.