Who appoints the Arbitrator of a Company?

[By Anchit Jain and Lovish Jain]

Anchit is a student at ICFAI University, Dehradun and Lovish is a CS (Executive) Candidate.

Prelude

In the present era of increasing disputes mainly in the corporate sector and inextricable compliance requirements, alternate dispute resolution through arbitration is the new preference of the parties to settle the same, but on the contrary various judgments and rulings in past on the matter of corporate disputes and their resolution through arbitration didn’t prove to be of much utility as the very significant topic of ‘Appointment of Arbitrator in a Company’ and the procedure for the same is more into chaos these days.

In the very article, authors powered their views on the unaddressed topic of ‘Appointment of Arbitrator in a Company’ and what are the implications of recent rulings of the court i.e. “how the board of directors specifically ‘managing director’, is not eligible to appoint an arbitrator in the company.”

Authors endeavour to guide the issue and also provide a possible solution which encompasses the delegation of authority of arbitrator’s appointment and procedure to be followed for the same on the shoulders of ‘Appointing Authority’ or the other possible way is a route through ‘Institutional Arbitration’.

Asymmetrical Arbitration Clause

An Asymmetrical Arbitration Clause allows a party to single-handedly choose an arbitrator(s) for the resolution of a dispute.[i] This clause is aggressively disputed as the other party has no say in the abovementioned decision making.

On the question of a party’s autonomy over the asymmetrical arbitration clause, the Delhi High Court in the case of Proddatur Cable TV Digi Services v. Citi Cable Network Limited[ii] held that a company is run by the ‘collective’ efforts of directors i.e. ‘Board of Directors’ (Board) and Board performs in the good faith of the company. Section 166[iii] prohibits a director’s involvement from a situation where he has a direct or an indirect interest that conflicts or possibly may conflict with the interest of the company. The Court said that it was natural that the Board will have an interest in the outcome of Arbitration, and thus, based on the Supreme Court’s ruling in the Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.[iv], Court restricted a person who has an interest in the outcome of a dispute and consequently held that the Managing Director must not have the power to appoint a sole arbitrator.

If consideration is given to only one party on the matter of the appointment of an arbitrator, it may violate the soul of arbitration i.e. an arbitrator must be impartial and independent and both the parties should equally contribute in the appointment of an arbitrator.

Impartiality and Independence

The Supreme Court, in the case of Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited[v], ruled that impartiality and independence are the hallmarks of any arbitration proceedings. The judgment cites the 246th Law Commission’s Report[vi] in which the 57th paragraph states that party autonomy cannot be stretched to a point where it negates the very basic impartiality and independence of the adjudicators. In Voestalpine[vii], Supreme Court relied on the Cour de Cassation, France’s judgment of 1972 in Consorts Ury’ which also reiterated that An independent mind is indispensable in the exercise of judicial power, whatever that source of power may be, and it is one of the essential qualities of an arbitrator”.

The current position draws a debate between two basic features of Arbitration- ‘Independence & Impartiality’ and ‘Party Autonomy’. This debate needs to end for the settlement of this conflict as it is a barrier in the Indian practice of Arbitration.

What will be the procedure of appointing an arbitrator and who will effectuate it: An Inadequate Precedent

The article now needs to enlighten the view on the act of appointment of the arbitrator, to which Perkins[viii] held that both parties nominating their respective arbitrator would balance the situation. This does not bring the concept of sole arbitrator to an end as the cases of Perkins[ix] and Proddatur[x] also ended with the Court appointing Judges as the replacement for the sole arbitrators.

Balancing the power between both parties is the answer to ‘How’, and involvement of both the parties answers ‘Who’. In the Institutional arbitration method, arbitrators are provided by the institution. The situation is conciliated when both the parties opted for Institution and the arbitrators provided are impartial and independent. But when ad-hoc is the pattern, then the arbitrators have to be chosen by the parties. This is a stage where Proddatur’s[xi] judgment fails to provide an answer and instead creates a barrier, especially for a company that is a party in a dispute.

Ineligible Board of Directors and Inapplicable Article of Association

Proddatur[xii] held that a company is run by none other than the directors collectively. This excluded the collective decision of the Board from nominating an arbitrator because Section 166(4)[xiii] restricts a director’s participation in a situation that attracts his direct or indirect interest. Moreover, Perkins[xiv] relies on the principle of “Qui facit per alium facit per se” (what one does through another is done by oneself). Both these factors bar a company from nominating and appointing authority for nominating an arbitrator. Proddatur[xv] explicitly excludes the Board, the governing authority of the company, and forgets to clarify ‘who’ from a company can nominate an arbitrator.

If a company’s Articles of Association (AOA) provides that a Board is allowed to appoint a sole arbitrator, then that specific clause of the AOA cannot be given effect because u/s 6[xvi] it overrides the provision of The Act.[xvii]

One Possible Solution: Appointment of Appointing Authority

The Act[xviii] provides that the parties can choose their procedure[xix] and if the parties fail to agree on the appointment of the: (i) Umpire,[xx] (ii) Sole arbitrator[xxi] or, (iii) Arbitrator as per the procedure,[xxii] then the Supreme Court or the High Court, as the case may be, can make the appointment. The Act also provides that the Court, on its behalf, can ask a graded institution to appoint the arbitrator.[xxiii] In compliance with this provision[xxiv], the Supreme Court, for the first time, asked the ‘Mumbai Centre for International Arbitration’ to appoint an arbitrator on its behalf.[xxv]

Section 11 allows the parties to appoint an authority for appointing the arbitrator. Though the Supreme Court held[xxvi] that an appointing authority has to act within 30 days, it confirms that an appointment authority is a viable option available for the parties. The rules of International Chambers of Commerce also provide that if the parties have provided for a clause allotting appointing authority to the Institution, then it can appoint the arbitrator on behalf of the parties.[xxvii] The same kind of provision is available with the Permanent Court of Arbitration.[xxviii]

Thus, it can be said that parties can mutually agree on appointing authority who can further appoint the arbitrator for the parties. This is a common practice and eliminates the factor of the self-interest of parties and settles the chaos of appointment and appointing authority.  

If the aforementioned option does not work, then the Court remains the evergreen option for the appointment of an arbitrator. Section 11[xxix] allows a court to appoint an arbitrator on the application of the parties. Also, the Supreme Court in the case of Walter Bau AG, Legal Successor of the Original Contractor, Dyckerhoff and Widmann, A.G. v. Municipal Corporation of Greater Mumbai and another[xxx]held that Court’s jurisdiction to appoint an arbitrator can be barred when the appointment of arbitrator stands valid.

Conclusion

On a conclusive note, Perkins’s case closed the window for parties to appoint an arbitrator single-handedly. The said judgment inspired Praddatur’s[xxxi] case. To uphold the spirit of arbitration, the feature of party autonomy has been negotiated so that space for another feature of ‘impartiality and independence’ can survive. But, to settle both of these features, the Ad-hoc mechanism seems to get disturbed as courts’ inadequacy to define the nominating clause in the context of companies leaves the puzzle unsolved. This inextricable dilemma in sovereignly exercising the autonomy in appointing the sole arbitrator leads to shifting of preference of Institutional arbitration over Ad-hoc arbitration. The alleged position of appointing authority appears to bean appurtenant solution for the companies. But if this solution also leads to absurdity, then the Court is the next best authority to expunge the problem of appointment. Interference of the Court will also persecute another feature of ‘Minimal Judicial Interference’. This whole juncture in the arbitration is more like an ‘Old School Radio’ in which one switch always remains pressed and all buttons do never rest.

Endnotes:

[i] Ajar Rab, Appointment of Sole Arbitrator: Can a Modified Asymmetrical Arbitration Clause Avoid Court Appointment?, Kluwer Arbitration Blog (Mar. 29, 2020, 16:03 PM),  http://arbitrationblog.kluwerarbitration.com/2020/01/08/appointment-of-sole-arbitrator-can-a-modified-asymmetrical-arbitration-clause-avoid-court-appointment/

[ii] O.M.P. (T) (COMM.) 109/2019 and I.A. 17896/2019

[iii] The Companies Act, 2013

[iv] 2019 SCC Online SC 1517

[v] (2017) 4 SCC 665

[vi] Law Commission of India, Report Number 246 (Apr. 09, 2020, 06:19 PM), http://lawcommissionofindia.nic.in/reports/Report246.pdf

[vii] Supra Note 5

[viii] Supra Note 4

[ix] Supra Note 4

[x] Supra Note 2

[xi] Supra Note 2

[xii] Supra Note 2

[xiii] Supra Note 3

[xiv] Supra Note 4

[xv] Supra Note 2

[xvi] Supra Note 3

[xvii] Supra Note 3

[xviii] Supra Note 3

[xix] Section 11(2), The Arbitration and Conciliation Act, 1996

[xx] Section 11(4), The Arbitration and Conciliation Act, 1996

[xxi] Section 11(5), The Arbitration and Conciliation Act, 1996

[xxii] Section 11(6), The Arbitration and Conciliation Act, 1996

[xxiii] Section 11(3A), The Arbitration and Conciliation Act, 1996

[xxiv] Supra Note 23

[xxv] Ayushi Singhal, ‘Appointment Of Arbitrators In India – Finally Courts Divest Some Power’, Kluwer Arbitration Blog, (Apr. 09, 2020, 07:34 PM), http://arbitrationblog.kluwerarbitration.com/2017/09/05/appointment-arbitrators-india-finally-courts-di vest-power/

[xxvi] Bharat Sanchar Nigam Ltd. v. Motorola India Pvt. Ltd. 2008 (3) Arb LR 531, (Once a minimum of 30 days is expired and a petition is filed to the court, the appointing authority loses the right to make the appointment. Therefore, the appellant/BSNL has now lost its right to appoint any arbitrator for settling the disputes under the agreement.), para 15.

[xxvii] Rules of ICC as Appointing Authority in UNCITRAL or Other Arbitration Proceedings, International Court of Arbitration, (Apr. 09, 2020, 07:24 PM), https://iccwbo.org/content/uploads/sites/3/2017/12/2018-rules-of-icc-as-appointing-authority-english.pdf

[xxviii] Designation of Appointing Authority, Permanent Court of Arbitration, (Apr 04, 2020, 07:46 PM), https://pca-cpa.org/en/services/appointing-authority/designation-of-appointing-authority/

[xxix] The Arbitration and Conciliation Act 1996

[xxx] (2015) 3 SCC 800

[xxxi] Supra Note 2

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