Unilateral Appointment of Arbitrator vis-à-vis Termination of Mandate

Posted on February 9, 2023/ Ashish Kumar and Urja Joshi/ Posted in Arbitration Law

By Ashish Kumar and Urja Joshi. The authors are students at NMIMS School of Law, Bangalore.

The Calcutta High Court (“Cal HC”) recently expounded the scope of Section 14(1)(a) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) in the judgment of Yashovardhan Sinha HUF v. Satyatej Vyapaar Pvt. Ltd.[i] The Section 14 of the 1996 Act is as under:

Failure or impossibility to act. — (1) The mandate of an arbitrator shall terminate if— (a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and (b) he withdraws from his office, or the parties agree to the termination of his mandate”.

The Section 14 of the 1996 Act prescribes the grounds for termination of mandate of arbitrator if the arbitrator becomes de jure or de facto unable to perform its duties and functions or withdraws from the office. The grounds for terminating the mandate of an Arbitral Tribunal or Sole Arbitrator (“Arbitrator”) due to the Arbitrator’s delay or inability to perform their duties under the Arbitration Agreement are enumerated under Section 14(1)(a). The unilateral appointment of arbitrator refers to appointment of sole arbitrator by one of the parties.

The Cal HC, through Yashovardhan, has ruled that if the court  determines that a dispute does not fall under one of the categories in which arbitration is not required and there is an issue regarding the arbitrability of dispute, the court may terminate the mandate of a unilaterally appointed Arbitrator and refuse to substitute the Arbitrator.

Factual Background and Contentions

In Yashovardhan, a petition under Section 14(1)(a) was moved against the Respondent, on account of the unilateral appointment of a Sole Arbitrator by the Respondent. The Sole Arbitrator accepted the appointment to arbitrate the dispute between the parties. However, the appointment was objected before the Cal HC, and the Arbitrator stayed the arbitral proceedings sine die.

The Petitioner contended that the Sole Arbitrator was unilaterally appointed by the Respondent without the consent of the Petitioner. On that basis, the mandate of such Arbitrator must be terminated due to the Arbitrator’s de jure inability to carry out his duties pursuant to Section 14(1)(a) of the 1996 Act.

Thus, the Cal HC was faced with the issue of whether it is permissible to terminate the mandate of a unilaterally appointed Arbitrator and appoint a substitute Arbitrator when the Arbitration Agreement itself was entered into in a fraudulent manner.

Analysis
While an Arbitration Agreement may call for arbitration by a Sole Arbitrator, generally, the appointment of such Sole Arbitrator cannot be made unilaterally by one of the parties to the arbitration proceedings. The Cal HC pointed out that this is necessary to ensure absolute fairness and impartiality in arbitration proceedings. The Petitioner submitted that the Respondent used forged stamps to prove the existence of an agreement between the Petitioner and the Respondent when none actually existed, and that the said agreement itself was a forgery. By natural implication, if there is no parent agreement, then there is no arbitration agreement, and the court cannot appoint a substitute Arbitrator under the statute. Consequently, if the parties have not entered into a valid Arbitration Agreement, the Court should not appoint an Arbitrator under Section 14(1) of the 1996 Act.

The Cal HC referred to the Supreme Court’s decision in TRF Ltd. v. Energo Engg. Projects Ltd.,[ii] in which the Appellant had entered into a purchase order with the Respondent to acquire specific items. The Appellant provided the Respondent with an advance bank guarantee and a performance bank guarantee in order to assure performance under the said agreement.

As disputes arose between the parties, the Appellant approached the High Court of Delhi (“Del HC”) for restraining the invocation of the bank guarantees. While the said matter was pending, the Appellant also sought the appointment of an arbitrator. Pursuant to this, the Supreme Court held that the person designated as arbitrator, who himself is ineligible under the 1996 Act to be appointed as arbitrator, cannot nominate an arbitrator.  

In Yashovardhan, the Cal HC had already determined that the Arbitrator was appointed in violation of the provisions of the 1996 Act and the principles of natural justice, including nemo judex in causa sua. The Cal HC noted that the mandate of a unilaterally appointed arbitrator can be challenged under Section 12, which prescribes the grounds for challenging the appointment of an arbitrator, read with Section 13, which provides the procedure for such challenge, on which parties are free to agree – failing which, the challenge must be made to the arbitral tribunal itself. The method for contesting the nomination of an arbitrator is outlined in Section 13 of the 1996 Act.

If such person becomes ineligible to be nominated as an Arbitrator, the provisions of Section 12(5), which is to maintain the two hallmarks of arbitration, i.e. impartiality and independence of the Arbitrator and Section 14(1)(a) of the 1996 Act lie against such appointee.  Ordinarily, to terminate an Arbitrator’s mandate, the parties must either agree to terminate the Arbitrator’s appointment or seek judicial intervention if the Arbitrator becomes de jure and de facto unable to perform his functions, fails to perform his duties without delay, or withdraws from the office.

Interplay of Section 11 and Section 14 of the 1996 Act

Section 11 of the 1996 Act provides for the procedure of the appointment of arbitrators. The said section outlines that a person of any nationality may be an arbitrator, unless otherwise agreed by the parties. It further deals with the contingency wherein the parties fail to appoint an arbitrator by mutual consent.  

In Yashovardhan, the Cal HC concluded that the parties intended to resolve any potential disagreements arising under the agreement entered into between the Petitioner and the Respondent through arbitration. By necessary implication, the parties also intended to select a substitute Arbitrator under Section 14(1) of the 1996 Act. The Cal HC further ruled that substitution of the Arbitrator must be made in accordance with Section 11 of the 1996 Act, but that courts can opt out of doing so if they determine a dispute is not subject to mandatory arbitration. Despite the verbiage of Section 14 reading “must be substituted”, it is axiomatic that any appointment of Arbitrator, even in the case of a substitution, must be made keeping the principles of Section 11 of the 1996 Act in mind.

However, in Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal,[iii] the Supreme Court noted that Section 11 of the 1996 Act does not apply if the arbitrator is replaced owing to absence of written agreement between the parties on the procedure for appointing an arbitrator(s), the parties are free to agree on a procedure by mutual consent or inclusive agreement and the dispute can be referred to an Arbitrator who can be appointed by mutual consent and that the substitution of arbitrator cannot be executed by way of a motion made out under Section 11 of the 1996 Act. This same principle was reiterated by the Del HC in Shri Ram Pistons & Rings Ltd v. M/S. Kaushik Fabricators.[iv]

The Supreme Court ruled in Perkins Eastman Architects DPC v. HSCC[v] that a person who is ineligible under the 1996 Act cannot concurrently appoint an arbitrator, and that the Court has the jurisdiction to interfere under Section 11, unless the appointment appears to be lawful, and the Court is satisfied with it. The Bombay High Court’s decision in Lite Bite Foods (P) Ltd. v. Airports Authority of India[vi] defined Perkins further by holding that an arbitrator may only be constituted in two ways: first, by consent of the parties; or second, by court order. Similarly, in Shriram Transport Finance Co. Ltd. v. Narender Singh,[vii] the Del HC stated that the 1996 Act does not allow for the unilateral appointment of an Arbitrator. The Supreme Court ruled in Swadesh Kumar Agarwal that substitution of an arbitrator cannot be carried out by an application filed under Section 11 of the 1996 Act. The Delhi High Court reiterated this concept in Shri Ram Pistons & Rings Ltd.

Conclusion

The findings of Yashovardhan are two-fold. First: The mandate of an Arbitration may be terminated under Section 14(1)(a) on account of the Arbitration being de jure unable to perform their functions when the said Arbitrator has been unilaterally appointed by just one of the parties to the Arbitration Agreement; Second: The procedure for substitution of Arbitrator will not be according to Section 11 of the 1996 Act.

The Cal HC failed to consider the holdings of Swadesh Kumar Agarwal, Shri Ram Pistons & Rings Ltd, Perkins, Lite Bite Foods and Shriram Transport in making its final decision on the second issue.  The Cal HC further emphasised that appointing a Sole Arbitrator requires either the consent of all parties involved in such arbitration proceedings or for such Sole Arbitrator to be appointed pursuant to either party to an Arbitration Agreement applying for the appointment of an Arbitrator under Section 11 of the 1996 Act.  Therefore, the issue of whether the appointment of a substitute Arbitrator is as per Section 11 of the 1996 Act is still up for debate and merits judicial consideration in view of the ruling in and merits judicial consideration in view of the ruling in Yashovardhan.

[i] Yashovardhan Sinha HUF v. Satyatej Vyapaar Pvt. Ltd., 2022 SCC Online Cal 2386.

[ii] TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

[iii] Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, 2017 SCC OnLine MP 1180.

[iv] Shri Ram Pistons & Rings Ltd v. M/S. Kaushik Fabricators, 2020 SCC OnLine Del 2145.

[v] Perkins Eastman Architects DPC v. HSCC, 2019 SCC Online SC 1517.

[vi] Lite Bite Foods (P) Ltd. v. Airports Authority of India, 2019 SCC OnLine Bom 5163.

[vii] Shriram Transport Finance Co. Ltd. v. Narender Singh, 2022 SCC OnLine Del 3412.