Arbitration is an alternative dispute resolution mode that allows the parties to settle their disputes outside the courtrooms. This process is voluntary in nature, and in most cases, the parties have control over the procedure of proceedings before the arbitrator. This phenomenon has been recognized by the Arbitration and Conciliation Act, 1996 (A&C Act) of India. Section 11 of this Act lays down the procedure for the appointment of arbitrators by the parties. This Section recognizes the parties’ autonomy in deciding who shall preside over the case and render a final and binding decision/award.
According to Section 11 of the A&C Act, a person of any nationality is eligible for an appointment as an arbitrator unless the parties decide otherwise. The parties are allowed to agree on a procedure for the appointment of the arbitrator for deciding their dispute. However, if the parties fail to mutually decide a procedure, the Act lays down the procedure for appointment. As per Section 11(3), in case of an arbitration requiring three arbitrators, each party will appoint one arbitrator, and the two selected arbitrators shall appoint a third arbitrator who will be the presiding arbitrator. In the event, the parties are unable to appoint the arbitration panel according to the procedure given in Section 11(3) within 30 days from the date of receipt of a request from one party to the other or if the two appointed arbitrators fail to agree on the presiding arbitrator, then within 30 days from their appointment, a request shall be made to the concerned High Court or the Supreme Court, as the case may be, or any person or institution designated by such Court to make the appointment of the arbitrator. Similarly, in case the arbitration requires a sole arbitrator, a request shall be made to the High Court or the Supreme Court or any person or institution designated by such Court to appoint the arbitrator for that arbitration.
As mentioned above, Section 11 of the Act lays down the procedure for the appointment of arbitrators in the absence of an agreement between the parties. In 2015, several amendments were made to the A&C Act including, an amendment in Section 11. When the parties fail to appoint an arbitrator according to their decided procedure or when the appointed arbitrators fail to appoint a third arbitrator, or any of the conditions given in Section 11(6) are fulfilled, the 2015 amendment through the insertion of sub-section (6A) and (6B) to Section 11, has limited the scope of enquiry by the Supreme Court or the High Court to “the examination of the existence of an arbitration agreement.” It was based on recommendations of the Law Commission of India in its 246th report proposing confining the jurisdictions of the Courts. This means that the concerned Courts were not allowed to examine the validity of any clause of the arbitration agreement but only determine whether an agreement exists or not. The intent behind this amendment was to reduce the drastically increasing delay in resolving disputes through arbitration caused by the courts' interference. The amendment was based on the principle of ‘kompetenz- kompetenz’, i.e. the arbitral tribunal has the power to decide its own jurisdiction as substantiated by Section 16 of the Act.
Post the 2015 amendment, Courts in India adhered to the limited scope introduced thereby. For example, in Mayavati Trading v. Pradyuat Deb Burman, the Supreme Court reiterated that Section 11(6A) requires the Courts to restrict itself to the examination of the existence of an arbitration agreement. Thus, the Courts have to interpret Section 11(6A) provisions in a narrow sense as intended by the legislature. However, with the passage of time, the Courts deemed it necessary to evaluate the validity of the arbitration agreement and not just its existence.
In Oriental Insurance Company Ltd. v. Nabheram Power and Steel Pvt. Ltd., the Apex Court assessed the existence of and examined if all the conditions provided in the contract were fulfilled to invoke the arbitration clause. Similarly, in Brightstar Telecommunications v. I-world Digital Solutions Pvt. Ltd., the Court held that the power of examination under Section 11(6A) includes evaluating the correlation between the existence of arbitration agreement between the parties and the transactions undertaken by them. Subsequently, the Court began to decide whether a particular transaction is governed by the arbitration agreement and its validity on many occasions.
There was a difference of opinion in different precedents, and it was realised that the 2015 amendment was contrary to its object as the Courts were repeatedly called upon, and their interpretations were inconsistent with the amendment. Thus, the amendment failed to achieve its objective of reducing the Court’s interference and providing speedy settlement of disputes vis-a-vis the insertion of sub-section (6A) to Section 11.
On the other hand, section 11(6B) clarifies that when the Supreme Court or the High Court, as the case may be, designates any person or institution the authority to appoint arbitrators, it shall not be regarded as an exercise of its judicial power. Therefore, the designation of a person or institution under Section 11 by the Courts is an administrative power and not a judicial power.
The amendment of 2015 remained ineffective to curb the role of Courts in arbitration proceedings. Consequently, the government established a High-Level Committee under the Chairmanship of Justice B.N. Srikrishna to examine the effectiveness of existing arbitration procedure, the functioning and efficiency of arbitral tribunals, and recommend measures for promoting institutional arbitration in India. Based on these recommendations, the legislature enacted the Arbitration and Conciliation (Amendment) Act, 2019, which came into force on 9th August 2019.
As the 2019 amendment was meant to promote institutional arbitration in India and providing space for arbitral tribunals to function effectively, the 2019 amendment omitted sub-section (6A) of Section 11. The High- level Committee, after a thorough review of the institutional arbitration mechanism in India, recommended that the appointment of arbitrators must be made by the arbitral institutions elected by the Courts, and Courts should not appoint arbitrators to ensure speedy settlement of disputes. Thus, the Courts must not be called upon to determine the existence of an arbitration agreement.
In Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, the Supreme Court stated that only the arbitral tribunal could decide preliminary questions related to the proceedings. The process of appointment of arbitrators is to conducted within the institution, and neither the Supreme Court nor the High Courts shall be required to appoint arbitrators as described in the pre-amendment procedure. The Courts do not have to determine whether an arbitration agreement exists or not. Furthermore, it was held that the statutory position under the A&C Act, 1996 prior to the 2015 amendment is now overruled by the legislative measure of amending Section 11 in 2019.
While the parties to the dispute have been given the autonomy to decide the procedure for the appointment of arbitrators, principles of natural justice require that all the parties be given an equal opportunity to hear and represent their interests. The limits of party autonomy cannot be extended to violate the rights of the other party who may be in a weaker position. Judicial intervention has led to the imposition of some limitations on the freedom of parties to decide the procedure for the appointment of arbitrators. However, these limitations have been imposed only in the interest of justice and fair procedure.
For example, the Courts have held that a person interested in the outcome of the arbitration proceedings must not be allowed to appoint the sole arbitrator on their own even if the contract between the parties otherwise stipulates.
This issue came before the Supreme Court in Perkins Eastman Architects DPC & Anr. v HSCC (India) Ltd. In this case, the Respondent appointed a sole arbitrator unilaterally by invoking the arbitration clause of their agreement. The Appellant challenged the appointment under Section 11(6) read with Section 11(12) of the A&C Act, 1996. The Court held that an arbitration clause that empowers one of the parties to appoint the sole arbitrator is invalid and bad in law. If a party has an interest in the outcome of the arbitration, it cannot appoint a sole arbitrator on its own. The Court relied on the judgement rendered in TRF Ltd. V. Energo Projects Ltd. and even referred to a number of law commission reports and precedents concerning the neutrality of arbitrators, scope of party autonomy, independence and impartiality of the arbitrator when an arbitral tribunal is constituted and held that in the name of party autonomy, no person can override the need of appointing an impartial and independent arbitrator. The reasoning behind this decision was the elimination of bias, which will always remain present notwithstanding that the arbitration clause allows the appointment of a sole arbitrator by one of the parties. However, the Court categorically stated that arbitration clauses that permit both the parties to nominate one arbitrator each are different and are valid. A party shall not be allowed to take undue advantage by nominating a sole arbitrator of its choice.
In Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), A Joint Venture Company, according to the dispute resolution clause of the contract between the parties, the Central Organisation for Railway Electrification COFRE was allowed to appoint the arbitral tribunal. Subsequently, COFRE created a panel of four serving railway electrification officers and requested the ECI to select two arbitrators from the panel. The ECI approached the Bombay High Court, contending that the arbitrators sought to be appointed were not neutral and proposed the name of a retired Railway Board officer as the arbitrator. The High Court accepted the contentions of ECI, and the Court appointed a retired Judge as the arbitrator. This decision was challenged before the Supreme Court by COFRE, and the Court held that the ECI itself invoked arbitration under clause 64 of the contract and was thus not justified in seeking the appointment of a sole arbitrator against the terms of the arbitration agreement. Further, it was also held that the High Court was not justified in appointing an independent arbitrator ignoring the procedure for appointment of the arbitrators prescribed under the arbitration agreement.
The procedure for the appointment of arbitrators is crucial for the effective disposal of the dispute through arbitration. An appointed arbitrator must be impartial, independent and neutral to do justice. According to the A&C Act, 1996, the parties are free to decide on the procedure for the appointment of arbitrators. However, in case the parties fail to agree or fail to appoint an arbitrator, the Supreme Court or the High Court shall have the power to designate an institution for appointing the arbitrators as amended by the Amendment Act of 2019.
However, the procedure adopted must be fair, reasonable and must not be unjust. Each party should be given an equal and fair opportunity to be heard and represent their grievances. If the arbitrator's appointment is faulty, then the arbitral award passed can be challenged, and it will give rise to increased instances of judicial intervention. The Supreme Court's decision in the Perkins case is a step towards reducing abuse of power by the more advantageous party than the other. The basic feature of arbitration is the voluntariness of the parties, and no party can compel the other to appoint an arbitrator on its terms.