2020 (1) TMI 1670 - HC - Indian Laws

Company cannot unilaterally appoint arbitrator when it has interest in dispute outcome, mandate terminated

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Delhi HC terminated the mandate of an arbitrator appointed by the respondent company and ordered court appointment of a new arbitrator. Following SC ... Seeking a declaration that the mandate of the Arbitrator appointed by the respondent be terminated and an Arbitrator be appointed by this Court in accordance with the provisions of the Act - eligibility of the 'Company' referred to in the Arbitration Clause between the parties, to unilaterally appoint a Sole Arbitrator to adjudicate the disputes between the parties. The principle contention of the petitioner is that in view of the recent judgment of the Supreme Court in the case of Perkins [2019 (11) TMI 1154 - SUPREME COURT], the 'Company' as provided in the Arbitration Clause between the parties herein cannot unilaterally appoint an Arbitrator. HELD THAT:- This Court finds merit in the contention of the petitioner. Supreme court in the case of Perkins [2019 (11) TMI 1154 - SUPREME COURT] was concerned with an Arbitration Clause wherein the CMD of the respondent was designated to appoint a Sole Arbitrator. Supreme Court after examining the said clause held that there could be two categories of cases, one where the Managing Director himself is made as an Arbitrator with an additional power to appoint any other person as an Arbitrator and the second where the Managing Director is not to act as an Arbitrator himself but is empowered to appoint any other person of his choice or discretion as an Arbitrator. The Supreme Court in the case of Perkins [2019 (11) TMI 1154 - SUPREME COURT] thus relying on the rationale of the decision in TRF Limited [2017 (7) TMI 1288 - SUPREME COURT] observed that if the test is the interest of the Appointing Authority in the outcome of the dispute then similar ineligibility would always arise even in the second category of cases. It was observed that if the interest that the authority has in the outcome of the dispute is taken to be the basis for possibility of bias, it will always be present irrespective of whether the matter stands under the first or the second category of cases. The Supreme Court also significantly noted that they were conscious that if such a deduction was drawn from the decision in TRF Limited, in all cases with similar clauses, a party to the agreement would be disentitled to make a unilateral appointment. Following the ratio of the judgment in the case of Perkins, it is clear that a unilateral appointment by an authority which is interested in the outcome or decision of the dispute is impermissible in law. The Arbitration Clause in the present case empowers the company to appoint a Sole Arbitrator. It can hardly be disputed that the 'Company' acting through its Board of Directors will have an interest in the outcome of the dispute. In the opinion of this Court, the clause is directly hit by the law laid down in the case of Perkins and the petition deserves to be allowed. The Arbitration Clause empowering the 'Company' to appoint the Sole Arbitrator in the present case would be vitiated in the light of the law laid down by the Supreme Court in the case of Perkins. As a corollary to that, the ineligibility of the Company would translate and percolate to the Arbitrator appointed by the Company and thus the Arbitrator presently conducting the arbitration proceedings is declared to be ineligible to act as an Arbitrator - Since the present Arbitrator has become de jure unable to perform her functions as an Arbitrator, the mandate of the present Arbitrator is terminated, substituting by another Arbitrator. Petition allowed. Issues Involved:1. Termination of the mandate of the unilaterally appointed Arbitrator.2. Appointment of a new Arbitrator by the Court.3. Applicability of the Supreme Court judgments in Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd. and Bharat Broadband Network Limited vs. United Telecoms Limited.4. Validity of the unilateral appointment of an Arbitrator by the respondent.5. Applicability of Section 12(5) and Section 14 of the Arbitration and Conciliation Act, 1996.6. Autonomy of parties in arbitration agreements.7. Waiver of objections under Section 12(5) of the Act.Detailed Analysis:1. Termination of the mandate of the unilaterally appointed Arbitrator:The petitioner sought the termination of the Arbitrator's mandate appointed unilaterally by the respondent, citing the Supreme Court's judgment in Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd., which renders such appointments invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996. The petitioner argued that the Arbitrator's mandate stands terminated de jure due to the unilateral appointment by an interested party.2. Appointment of a new Arbitrator by the Court:The petitioner requested the Court to appoint a new Arbitrator in accordance with the Act. The Court, agreeing with the petitioner, terminated the mandate of the existing Arbitrator and appointed Mr. Justice Mukul Mudgal, former Judge of the Delhi High Court, as the new Sole Arbitrator. The Arbitrator was directed to provide a disclosure under Section 12 of the Act before entering upon reference and his fee was fixed as per the Fourth Schedule of the Act.3. Applicability of the Supreme Court judgments in Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd. and Bharat Broadband Network Limited vs. United Telecoms Limited:The petitioner contended that the case is covered by the judgments in Perkins and Bharat Broadband Network Limited vs. United Telecoms Limited, which invalidated unilateral appointments of Arbitrators by interested parties. The Court found merit in this argument, noting that the principle laid down in Perkins applies to the present case, as the respondent's unilateral appointment of the Arbitrator is impermissible in law.4. Validity of the unilateral appointment of an Arbitrator by the respondent:The respondent argued that the appointment of the Arbitrator was in accordance with the agreed procedure in the Distribution Agreement. However, the Court held that the unilateral appointment by an interested party is invalid, as it compromises the fairness and impartiality of the arbitration process, aligning with the Supreme Court's reasoning in Perkins.5. Applicability of Section 12(5) and Section 14 of the Arbitration and Conciliation Act, 1996:The Court emphasized that Section 12(5) of the Act, which starts with a non-obstante clause, applies notwithstanding any prior agreement to the contrary. The relevant date for the applicability of Section 12(5) is the date of commencement of arbitration, not the date of the agreement. Since the arbitration commenced after the amendment, Section 12(5) applies, rendering the respondent's appointment of the Arbitrator invalid. Consequently, Section 14 of the Act is invoked, terminating the Arbitrator's mandate de jure.6. Autonomy of parties in arbitration agreements:While the respondent emphasized party autonomy in choosing arbitration procedures, the Court highlighted that fairness, transparency, and impartiality are equally important. The Supreme Court's decision in Perkins underscores that an interested party cannot unilaterally appoint an Arbitrator, as this undermines the arbitration's integrity.7. Waiver of objections under Section 12(5) of the Act:The respondent argued that the petitioner waived its objections by not raising them under Section 13 of the Act. The Court clarified that objections under Section 13 differ from those under Section 12(5) read with Section 14. The petitioner did not waive its rights under Section 12(5) by not filing objections before the Arbitral Tribunal.Conclusion:The Court allowed the petition, terminated the mandate of the unilaterally appointed Arbitrator, and appointed Mr. Justice Mukul Mudgal as the new Sole Arbitrator. The judgment reinforced the principle that unilateral appointments by interested parties are invalid, ensuring fairness and impartiality in arbitration proceedings.