When the appointment of a sole arbitrator is invalid

By Karthik Somasundram and Sneha Jaisingh, Bharucha & Partners

Disputes arose from the termination of a design consulting contract between HSCC (India) Limited and a consortium consisting of Perkins New York and Edifice Mumbai (consortium), for the planning, designing and specifications of two branches of the All India Institute of Medical Sciences in Andhra Pradesh and in West Bengal. HSCC had followed up a stop-work notice with a termination notice, which prompted the consortium to institute grievance procedures under the dispute resolution clause and claim damages. However, neither did the director (engineering) of HSCC rule on the claim, nor did the chief managing director appoint a sole arbitrator within 30 days. Two days after the expiry of the time limit the chief general manager of HSCC on behalf of the managing director purported to appoint a sole arbitrator. The consortium applied to the Supreme Court under sections 11(6) and 11(12)(a) of the Arbitration and Conciliation Act 1996 (act), to appoint a sole arbitrator.

sole arbitrator
Karthik Somasundram
Bharucha & Partners

HSCC argued that the application was groundless as a sole arbitrator had already been appointed and the Supreme Court could not appoint an arbitrator as the dispute was not an international commercial arbitration. The Supreme Court in the case of Perkins Eastman Architects DPC & Anr. v HSCC (India) Ltd., had to rule whether it had jurisdiction by determining if the consortium was an association whose central management and control was exercised in a country other than India under section 2(f)(iii) of the act, and whether therefore the dispute was an international commercial arbitration.

The court noted that the consortium was an association of incorporated entities of which Perkins was the lead member. Perkins was incorporated in the US and was in charge of submitting the bid, responding to queries and representing the consortium. Relying on its earlier judgment in the Larsen & Toubro Ltd. SCOMI Engineering BHD case in 2019, the court ruled that the consortium was an association with central management and control outside India and therefore the arbitration would appear to be an international commercial arbitration.

sole arbitrator
Sneha Jaisingh
Bharucha & Partners

The delay in appointing the sole arbitrator was not considerable and that alone would not call for the court to interfere and appoint a replacement arbitrator. However, the consortium argued that as the managing director of HSCC had an interest in the dispute and was disqualified by the seventh schedule to the act, he was also disqualified from appointing a sole arbitrator. The appointment therefore was not valid.

In the case of TRF Ltd (2017), where a managing director had the option to act as an arbitrator or appoint another in his stead, the court had ruled that a person disqualified or rendered ineligible by operation of law was not allowed to nominate another, as it would amount to carrying on the proceedings himself. Therefore, an arbitrator appointed by a disqualified person is also ineligible by virtue of section 12(5) and the seventh schedule to the act. A statutorily disqualified person cannot do indirectly that which cannot be done directly. Once the infrastructure collapses, the superstructure is bound to collapse, the court held. Relying on that earlier ruling, the court held that as the possibility of interest in the outcome of the dispute was the basis for the disqualification, the ineligible person would not be eligible to appoint another as a sole arbitrator, and influence the course of the dispute resolution process. However, the situation would be different in case of multi-member tribunals, as the arbitrators nominated by the other parties would counter the biases of a disqualified person’s nominee. These are the effects of the additions of the fifth and seventh schedules to the act in 2015.

The court also noted the recommendations of the 246th Report of the Law Commission, and the obiter dicta in its earlier judgments in Voestalpine Schienen Gmbh and Bharat Broadband Network Limited, that the independence and impartiality of arbitrators were paramount and, if circumstances warrant, appointments can be made by courts by ignoring prescribed procedure. It is imperative to create a healthy arbitration environment.

The court also ruled that it could appoint an arbitrator even if a previous appointment had already been made but had not come into effect. Challenges to an appointment need not await the commencement of arbitration and be made before the arbitrator. The law will not permit an invalid appointment to continue as a fait accompli and deny the jurisdiction of the court under section 11 of the act. Unless the appointment of an arbitrator is valid and satisfies its conscience, the court will exercise its power to make a substitute appointment.

Karthik Somasundram and Sneha Jaisingh are partners at Bharucha & Partners.

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