Is Party Appointed Arbitrator Practice coming to an End?

On 26 November, 2019, “the division bench of the Hon’ble Supreme Court comprising Justice Uday Umesh Lalit and Justice Indu Malhotra has passed a landmark and most discussed judgement in the matter of Perkins Eastman Architects DPC & Another v HSCC (India) Limited under section 11(6) read with Section 11 (12)(a) of the Arbitration and Conciliation Act, 1996” which decided that neither side with a vested interest in the result of the case cannot nominate the only arbitrator.

Factual Matrix

  • On 15 July, 2016, the request for proposal was issued by the respondent (“HSCC”) for the planning and designing the campus of “All India Institute of Medical Sciences at Guntur, Andhra Pradesh”.
  • The consortium of the Applicants namely, the applicant (“Perkins Eastman Architects DPC”), a firm of architects with a permanent office in New York and “Edifice Consultants Private Limited” entered into an agreement with Respondent (HSCC India Ltd.) on 22 May, 2017 in which a dispute resolution was added under clause 24.
  • Clause 24 provides, in the event of a dispute, the respondent firm will designate a lone arbitrator, whose decision will be final and binding. And the arbitrator resigns or unable to declare award, the respondent can appoint another sole arbitrator for the purpose. It was further declared that the solitary arbitrator designated by the respondent company should be the only one to act as the arbitrator. The arbitration will be conducted in accordance with the “Arbitration and Conciliation Act, 1996”
  • Within 6 days of the entering into the contract, the respondent claimed that the application had failed in executing the performance of the agreement which would certainly result in the injunction notice dated 03 November, 2017.
  • Further, the applicant contented that the respondent is trying to sabotage the project on purpose.
  • Later, the termination notice was issued by the respondent claiming “non-compliance of contractual obligations” on behalf of the applicant on 20 February, 2019 which was denied by the applicant.
  • On 11 April, 2019, the advocates of the applicants issued a “notice for the waiver of the clause 24 and raising a claim of Rs. 20 crores”.
  • Under Clause 24 of the contract, a decision on the abovementioned notice was expected to be made within one month, but the Respondent provided a communication after 30 days intimating that a reply to the notice would be submitted within 30 days.
  • “An appeal was filed by the applicant under Director (Engineering)” regarding clause 24. However, the director (Engineering) has failed to discharge the duties.
  • On 28 June, 2019, the respondent appointed a sole arbitrator but no appointed was made within the required time. However, the appointed was made more than a month later by respondent appointing “Major General K.T. Gajria”.
  • Aggrieved applicant approached the Hon’ble Supreme Court of India under “Section 11(6) read with Section 11(12)(a) of the Act”, requesting the appointment of a single arbitrator in accordance with the provisions of the parties’ agreement.

Issues

  1. The arbitration in this case is really an “International Commercial Arbitration” within the meaning of “Section 2(1)(f) of the Act”?
  2. Whether court has the authority to appoint an arbitrator?

Arguments raised by the Applicant

  • The sole arbitrator was incorrectly designated the respondent’s “Chief General Manager”.
  • The appointment lasted longer than the contract’s time limit.
  • “An independent and impartial arbitrator should be appointed.
  • The judgement of Supreme Court in the case of Walter Bau AG, Dyckerhoff and Widmann, A.G. v. Municipal Corporation and another” [1] and “TRF Limited v. Energo Engineering Projects Limited” [2] was laid down.
  • In this case, the arbitration will be an International Commercial Arbitration according to the Court’s judgement in the matter of Larsen and Toubro Limited SCOMI Engineering BHD v. Mumbai Metropolitan Region Development Authority” [3]

Arguments raised by the Respondent

  • The arbitrator’s appointment was made by the respondent’s “Chairman and Managing Director”, but it was communicated via the “Chief General Manager”, therefore there were no flaws.
  • The “appointment was made on the first available working day” since the time in terms of the authorization dated 28 June, 2019 expired.
  • Since “all applicants were collectively and severally responsible for the project’s execution”, this was not an International Commercial Arbitration case.

Judgement

The judgement of the Hon’ble Supreme Court,

Regarding issue first, the “section 2(1)(f) of the Act is satisfied and the arbitration in the present case would be an International Commercial Arbitration”.

Regarding issue second, the court relayed upon the decision laid in the case of Walter Bau AG3” and “TRF Limited” and observed that when the parties have interest in the dispute, they shall not appoint the sole arbitrator.

The Supreme Court also cited the decision in the Indian Oil case [4], which held that there could be fair doubts about the neutrality of the designated arbitrator, the competent court should select an unbiased arbitrator.

The Supreme Court had ruled that under the altered section 12 of the Act, the court of competent jurisdiction has the power to nominate the arbitrator, subject to compulsory decree.

References

  1. (2015) 3 SCC 800
  2. (2017) 8 SCC 377
  3. 2019) 2 SCC 271
  4. (2009) 8 SCC 520

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