19 March 2020
by Naval Sharma and Saurajay Nanda
Tuli & Co
The Arbitration and Conciliation Act 1996 ('A&C Act') was amended by the Arbitration and Conciliation (Amendment) Act 2015 ('Amendment Act'). Apart from other changes, the Amendment Act amended §12 of the A&C Act and introduced the 5th, 6th, and 7th Schedule with the objective of securing the impartiality of arbitrators and improving the legitimacy of the arbitration process in India.
Following the Amendment Act, a question arose in the matter of TRF Limited v Energo Projects Limited1 as to whether the arbitration clause, in a contract, which contemplates any disputes being referred to arbitration before the Managing Director ('MD') of a party to the arbitration or any other arbitrator appointed by such MD, falls foul of §12 of the Amendment Act. The Supreme Court of India ('SC'), ruled that if the person, in this case the MD, himself becomes ineligible to act as an arbitrator as per §12(5), then he would also be ineligible to appoint an arbitrator.
A slightly different factual situation came before the SC in the case of Perkins Eastman Architects DPC & Anr v HSCC (India) Ltd2. In this case, the arbitration clause allowed the Chief Managing Director ('CMD') of one of the parties to the arbitration to appoint a sole arbitrator in case of a dispute. Even in these circumstances, the SC held that the principles in TRF Limited would continue to apply and no person interested in the outcome of the arbitration proceedings should be allowed to unilaterally appoint a sole arbitrator.
As a consequence of this decision, questions emerged as to what would be the fate of pending arbitrations presided over by an unilaterally appointed arbitrator.
This issue was looked into in detail by the Delhi High Court in the case of Proddatur Cable TV Digi Services v SITI Cables Network Ltd3. Proddatur Cable TV Digi Services ('Proddatur' ) had entered into a distribution agreement with SITI Cables Network Ltd ('SITI'). Certain disputes arose between Proddatur and SITI. Proddatur appointed a lawyer as its arbitrator, which was rejected by SITI and replaced by another individual on the basis of Clause 13.2 which gave SITI the power to unilaterally appoint a sole arbitrator.
Following the decision of the SC in the case of Perkins Eastman, the issue of the arbitrator being de jure incapable, as per §14(1)(a) of the A&C Act, was brought to the notice of the arbitrator, who took the position that she would continue unless there was a judicial order terminating her mandate. This led to Proddatur moving the Delhi High Court.
Some of the contentions raised by SITI before the Delhi High Court are summarized below:
Party autonomy forms the cornerstone of arbitrations, and Proddatur had exercised that autonomy while entering into the agreement in question and agreeing on the appointment procedure, as allowed by §7 of the A&C Act.
Proddatur, instead of filing objections under §13 of the A&C Act before the Arbitrator, chose to participate in the proceedings, which amounts to a waiver of any objections it may have had under §12(5) of the A&C Act.
Perkins Eastman would not apply in this case since the clauses are differently worded. In the case at hand, the right was given to the "Company", acting through its Board of Directors, and not the MD, for making such appointments.
The issue before the court, as framed by it, was determining the "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 Delhi High Court looked into the underlying basis of the decision of the SC in Perkins Eastman and concluded that what was sought to be avoided was in fact the appointment of a sole arbitrator by a person having an interest in the outcome of the dispute. On this basis, it ruled that even SITI, acting through its Board of Directors, was not eligible to unilaterally appoint a sole arbitrator as it was an interested party.
The High Court then referred to the decision of the SC in Bharat Broadband Network Limited v United Telecoms Limited4, to decide what would happen to pending arbitrations in light of a decision by the SC. In that case, it was held that as soon as a judgment clarifying matters is pronounced, §14 of the A&C Act would come into play, automatically leading to the termination of the mandate de jure.
Given this position of law, and while relying on Perkins Eastman, the Delhi High Court declared that the mandate of the arbitrator had terminated de jure, and appointed another sole arbitrator in her stead.
Concluding Remarks
With the decision in Proddatur, pending arbitrations presided over by unilaterally appointed arbitrators may be in jeopardy, and parties involved may consider undertaking remedial steps.
Footnotes
1 TRF Limited v Energo Projects Limited [(2017) 8 SCC 377].
2 Perkins Eastman Architects DPC & Anr v HSCC (India) Ltd [AIR 2020 SC 59].
3 Proddatur Cable TV Digi Services v SITI Cables Network Ltd [2020 SCC Online Del 350]
4 Bharat Broadband Network Limited v United Telecoms Limited [(2019) 5 SCC 755]
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