Ayushi Yelimineti [1]
Introduction
The practice of selecting an arbitrator from a given pool of arbitrators gained much discourse after the judgement given in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. (“Voestalpine”). This practice essentially looks like one party providing the other with a pool of arbitrators, followed by the other party nominating arbitrators to be appointed from this given pool. While there can be many variations and nuances to this practice, the guiding principles remain what was laid down in Voestalpine. The Court in Voestalpine upheld the practice but highlighted that the arbitrator panel should be broad so that the party choosing from this panel has enough flexibility to exercise its right to appoint an arbitrator. However, this left a lot of ambiguity, and since then, courts have expressed concerns regarding the possible ill effects of such a practice and taken conflicting stances. While such a practice does give some say to the party selecting the arbitrators from the pool chosen, it could still be unfair as this pool could be entirely comprised of arbitrators who would be inclined to rule in one party’s favour. In Perkins Eastman Architects DPC v. HSCC (India) Ltd. The Apex Court exercised its powers under S. 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) by appointing an independent arbitrator when the procedure laid down raised doubts on the independence and impartiality of the arbitrator to be nominated. Thus, the Apex Court reiterated the principles of equality and fairness and reiterated the invalidity of unilateral appointment of arbitrators. Equality and fairness are important principles to be kept in mind when appointing an arbitrator, but at the same time, party autonomy remains the brooding spirit of arbitration. In this article, we will first trace the Court’s different approaches to this practice, analyse it from the contours of arbitration and highlight the lingering grey area.
The Conflicting Approaches
In Voestalpine, the arbitration clause was such that it was laid down that the Respondent would choose a panel of five persons, and then both the parties would have to choose their nominee arbitrator from the said panel. The appointed arbitrators would then appoint the presiding arbitrator of the tribunal. The Apex Court reflected that a panel of five arbitrators is limited, and there should be a broader list. A fresh list, which contained thirty-one names, was then forwarded, and the Court observed that this gave the Petitioner a broader choice and a fair say in the appointment process. Thus, this point emerged to be crucial to keep in mind when dealing with similar situations. This was followed by another development in the judgement laid down in Central Organisation for Railway Electrification v ECI-SPIC-SMO-MCML (JV) (“CORE”). In this case, the arbitration clause mandated that the Respondent nominate two arbitrators from a pool of four individuals. The general manager of CORE would choose one arbitrator from the two nominees and would also appoint the other two arbitrators. The Apex Court upheld this clause, noting that the Respondent’s power to choose two nominees from the given pool counter-balances the powers rested upon the petitioner, further highlighting that the choice of the parties must be given importance.
Following this, Courts echoed the ambiguity in the stance to be taken with regard to the selection of arbitrators from a select panel given. The Delhi High Court, in Margo Networks Pvt. Ltd. and Another v Railtel Corporation of India Ltd. (“Margo”), faced a similar clause where the Railway Authority was to form a panel of ten persons comprising its former employees. The Court found the clause to be unliteral and ordered the formation of an independent panel. It noted that the factual conspectus involved in CORE was quite different from the one in the given case and is thus not applicable. Further, the Court noted that “counterbalancing" could not be said to have been achieved when one party is entitled to appoint 2/3rd of the arbitral tribunal unilaterally. The Delhi High Court in Taleda Square Pvt Ltd Vs. Rail Land Development Authority again raised questions on the correctness of the judgement laid down in CORE and observed that the Petitioner should not be compelled to select its nominee arbitrator from a limited panel maintained by the Respondent. Finally, in Union of India v M/s. Tantia Constructions Limited and JSW Steel Ltd. v. South Western Railway, the Apex Court referred CORE to a larger bench. It was announced that a new five-judge bench would hear this reference.
Analysis through the Contours of Arbitration
Section 11 (2) of the Act states that subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators, which means that parties are free to insert a clause that involves the selection of an arbitrator from a given pool of individuals. However, when the Court in Voestalpine upheld this practice, it reiterated strongly that there was a need for the panel to be broad to ensure equality in the process of appointment of arbitrators. It can then be argued that it is the duty of the Court to constitute an independent and impartial panel when the panel given is limited and restrictive. There arises a need to balance party autonomy and equality in such proceedings and Courts have made different interpretations of this balancing point. While party autonomy is said to be the backbone of arbitration, and minimal judicial interference is one of the most important principles of arbitration, the purpose of this efficient dispute resolution remains defeated if there is no fairness or equality in proceedings. Having an equal say in the appointment of arbitrators has a substantial impact on the fairness of proceedings, and a breach of this fairness warrants the protection given by Courts. Further, there is a possibility that such clauses would create apprehensions in the minds of parties and discourage them from pursuing arbitration.
The Grey Area remains
Discourse over the unilateral appointment of arbitrators has been ongoing for years, and it has been well-established that the unilateral appointment of arbitrators is invalid. However, can it be said that the appointment of an arbitrator from a given pool is a loophole in the above-mentioned saga? In CORE, not only did the Respondent have the power to appoint 2/3rd of the panel but also to choose a restrictive list of four individuals from which the petitioner had to nominate one. The tribunal formed would consist solely of arbitrators suggested or chosen by the Respondent. Even the one arbitrator that is to be chosen based on the Petitioner’s nomination is to be selected from a limited pool of four individuals listed by the Respondent. It is hard to argue that such a clause provides for any counterbalancing or follows the guideline laid in Voestalpine, which provides for having a “broad panel”. There is no clarity as to what exactly can be construed to be counterbalancing and what number of individuals make a panel broad. These vague terms have not been coupled with any objective directions, and subsequently, there has been a cloud of ambiguity when dealing with such clauses. A dominant party could greatly benefit from such a clause and constitute an arbitral tribunal largely based on its selection, which could still be upheld. Thus, it can be argued that judicial protection given to parties in an arbitration proceeding against the unilateral appointment of arbitrators is flimsy, and the practice of unilateral appointment of arbitrators still remains, albeit with some scrutiny. Moreover, this ambiguity has prevailed for years, which has led to an unclear idea as to what such a clause should provide for. Two parties that mutually find it best to include the clause would still lack clarity as to what is valid, which could prevent them from including it altogether. Party autonomy then would also suffer in the midst of this grey area.
International Standards
Equality in appointment of arbitrators is a well-recognised principle internationally and different jurisdictions have set their own standards and norms. The French Cour de cassation’s ruling on appointment of arbitrators in Siemens AG and BKMIIndustrienlagen GmbH v. Dutco Consortium Construction Co. (“Ducto”) served an important precedent for appointment of arbitrators. It held that parties cannot choose to waive their right of equality in appointment of arbitrators before a dispute arises and that the principle of equality in designation of arbitrators is a matter of public policy. Thus, according to the ruling any agreed method for appointing an arbitral tribunal that does not guarantee strict equality of all parties may not be applied against a party until all parties affirm their pre-agreed designation method after the dispute has arisen.
Moreover, Article 18 of the UNICTRAL Model Law on International Commercial Arbitration states that parties shall be treated with equality and each party shall be given a full opportunity of presenting his case. Article 34(2)(a)(iv) also provides that an arbitral award can be set aside if the arbitral tribunal is not in accordance with the agreement of the parties, unless such agreement was barred by law, and in the absence of such agreement, the tribunal constituted was not in accordance with this Law. Under the amended International Chamber of Commerce Arbitration Rules (“ICA”), 2021, Article 12(9) provides that notwithstanding any agreement between the parties on the method of the constitution of the arbitral tribunal, in exceptional circumstances the International Court of Arbitration (“ICA”) can appoint each member of the tribunal to avoid a significant risk of unequal treatment and unfairness that may affect the validity of the award.
It is undisputed that internationally, there has been a stern protection given to the principle of equality in the appointment of arbitrators. While different forums have also made allowance for the principle of party autonomy, it often comes secondary to the principle of equality in the appointment procedures. For example, as mentioned, Article 12(9) ICC Rules gives the ICA the discretion to appoint members of the tribunal no matter what the parties have agreed to if it grossly threatens the equality of the parties. Although, in Ducto, party autonomy was allowed to undermine the principle of equality if consented to after the dispute has arisen. Thus, if parties are allowed to waive their right, they must know what is it entirely that they are consenting to keeping the dispute in mind.
Way Forward
While finding a balance between fairness and upholding party autonomy can be tricky, it is the much-needed call of the hour. With increasing uncertainty about arbitration clauses mandating selection from a pool of arbitrators, there is a greater tendency to approach the courts, which hampers the efficiency and smooth functioning of arbitration proceedings. Such a situation also leaves scope for parties to abuse the proceedings and have an unfair advantage by means of a clause resting them with disproportionate power. An equal say in the appointment of arbitrators is an important part of fair arbitration proceedings, and a potentially biased arbitral panel goes against the fundamentals of justice. While arbitration is to be more flexible than the traditional proceedings in Courts, these fundamentals must not be bargained with. The author argues that by aligning with the global standards as discussed, the Judiciary can offer firm protection to the principle of equality. and if it is allowed to be waived completely, there must be the consent of the parties after the dispute has arisen as held in the Ducto case, so they have a holistic idea of the proceedings with context to the dispute at hand. There is much anticipation that CORE being referred to a five-judge bench would provide answers to some crucial questions raised and clear the prevailing ambiguity. Meanwhile, the grey area in the practice of appointing arbitrators from a given pool continues to linger.
[1] Ayushi is a fourth-year student at Dr. Ram Manohar Lohiya National Law University, Lucknow. She is interested in dispute resolution and is also actively exploring other others of law.