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To Appoint or Not to Appoint an Arbitrator: The Court’s Dilemma

Updated: Feb 9

by Ashish Kumar, Rhythm Buaria, Advocate *

Abstract

Recently, the Delhi High Court (hereinafter ‘DHC’) in M/s Vindhya Vasini Construction Co v. M/s Bharat Heavy Electricals Ltd. held that the court could not appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996(hereinafter ‘The Act’) if the arbitration agreement stipulated appointment of only specified persons as arbitrators to the exclusion of all others at the discretion of one party. Consequently, the parties were left to pursue other remedies available in law. In Vindhya Vasini, the court was confronted with an arbitration clause under which the Head, Technical Board of Governance (hereinafter ‘Head, TBG’) of Bharat Heavy Electricals Limited (hereinafter ‘BHEL’) or his nominee alone could be appointed as an arbitrator. The arbitration clause also stated that in the event that the aforementioned persons could not act as arbitrators, the dispute(s) could not be referred to arbitration at all.

Factual Background

Vindhya Vasini Construction filed an application under Section 11(6) of the Act before the DHC, seeking the appointment of an arbitrator to resolve disputes arising under the work order issued by the BHEL for their 440/220 KV sub-station in Uttar Pradesh. Vindhya Vasini Construction contended that the arbitration clause which prescribes non-referral of dispute(s) to arbitration if the Head, TBG of BHEL or his nominee cannot act as an arbitrator is severable from the rest of the arbitration agreement. Therefore, despite the 2015 Amendment (contemplated under the arbitration agreement) which made appointment of persons employed or connected in any capacity with one of the parties as arbitrators illegal under Section 12(5) of the Act (the court retained the power to appoint an arbitrator. Vindhya Vasini Construction also pressed into service the Supreme Court’s 2014 judgement in Enercon (India) Limited v. Enercon GMBH in support of its submission that the court should interpret arbitration agreements to encourage arbitration rather than dissuade parties from arbitration.
BHEL on the other hand argued that the arbitration agreement contemplates appointment of only the Head, TBG of BHEL or his nominee and in their absence no other. Therefore, to give full effect to the arbitration agreement in this case would mean that the disputes are not referred to arbitration at all since the arbitration agreement had become inoperative on account of change in law. BHEL, inter alia, placed reliance on the Supreme Court judgement in TRF Limited vs Energo Engineering Projects Ltd.and the DHC’s judgement in Capacite Infra Projects Limited v. Ramprastha Promoters & Developers Limited in support of its contentions. In TRF Limited, the SCI held that if a person was ineligible to appointed as an arbitrator as per the amended Section 12(5) of the Arbitration Act then he would also be ineligible to appoint any other person as an arbitrator. BHEL argued that the facts in its case were identical which precluded appointment of an arbitrator all together including by the court.

High Court’s Ruling in Vindhya Vasini Construction

The DHC, in coming to its finding, relied on Vidya Drolia vs Durga Trading Corporation wherein it was held that arbitration is voluntary in nature and the parties have the autonomy to decide whether they want to refer the dispute to arbitration or not, and that the parties can stipulate the conditions for the procedure for arbitration. The DHC observed that in the present case the arbitration agreement stipulated a conditional acceptance of referring disputes to arbitration. Therefore, in the absence of the conditions in the arbitration agreement being satisfied, even the court could not appoint an arbitrator. The DHC also held that since the conditions stipulated in the arbitration agreement were incapable of being fulfilled, the parties would have to opt for ordinary civil remedy as the parties could not appoint an arbitrator in accordance with the procedure stipulated in the Agreement. The DHC also referred to Newton Engineering which dealt with a similar arbitration agreement wherein the court held that the arbitration agreement would not survive as the procedure for the appointment could not be adhered to on account of statutory bar. In view of the above, the DHC held that the arbitration agreement could not be severed and therefore, the arbitration agreement was not capable of being enforced through the court.

Analysis and Conclusion

The DHC’s reliance on the Newton Engineering case to observe that the arbitration agreement would cease to operate when the conditions mentioned in the arbitration agreement are not complied with is flawed for two reasons. In the Newton Engineering case, the court refused to appoint an arbitrator because the agreement specified that the arbitrator would be an officer holdinga certain post in the IOCL. However, that post had been abolished during the term of the agreement, so the agreement was no longer capable of being given the determined effect. In the Vindhya Vasini Construction, the fact was not the non-availability of the persons nominated under the arbitration agreement but their ineligibility on account of change in law, a circumstance envisaged under the arbitration agreement. Since the parties had agreed to be governed by any amendments to the Arbitration Act, the parties were bound to resolve their disputes by arbitration, albeit, within the new statutory framework. Secondly, Newton Engineering was decided before the 2015 amendment to the Arbitration Act and therefore cannot be said to be an authority on the issue of non-appointment of an arbitrator on account of ineligibility due to changes in law. Pertinently, the 2015 amendment was brought about to ensure independence and impartiality of arbitrators (see Section 12(5) of the Act). The 2015 amendment to Section 12(5) of the Arbitration and Conciliation Act brought about a significant change by introducing prescribed eligibility criteria for arbitrators for the first time. According to the amended provision, a person is considered ineligible to be appointed as an arbitrator if any of the following conditions apply to their prior relationship:
With the parties involved in the arbitration.
With the counsel representing the parties.
With the subject matter of the dispute.
These new grounds for challenging the appointment of an arbitrator are detailed in the Seventh Schedule of the Act. The amendment aimed to enhance transparency and impartiality in the arbitration process by addressing potential conflicts of interest that could arise from a person's prior connections with the parties, counsel, or subject matter under dispute.Surprisingly, the decision of a coordinate bench of the DHC in Mahalakshmi Infra Projects Private Ltd vs NTPC Ltd and M/s T.K. Engineering Consortium Pvt. Ltd. versus The Director (Projects) Rites Ltd. & Anr which dealt with a similar arbitration clause was not brought to the court’s attention in Vindhya Vasini. In Mahalakshmi, the DHC held that the effect of Section 12(5) of the Arbitration Act would not only invalidate the appointment of an arbitrator as contemplated under the arbitration agreement if it were contrary to the amended law but also invalidate the consequential term of non-referral to arbitration if the prescribed authorities could not be appointed or act as arbitrators. It is submitted that Mahalakshmi lays down the correct law and significantly advances the pro-arbitration policy which lies at the soul of the Arbitration Act and the recent statutory amendments beginning in 2015. The choice of the parties to refer a dispute to arbitration cannot be repelled on account of amendments to the law to remedy a lacuna. It remains to be seen in which way the Supreme Court rules on this issue but till then the fate of parties to similar arbitration agreements before the DHC will remain uncertain.
Interestingly, the Supreme Court of India (SCI) is yet to conclusively decide on the application of Section 12(5) of the Arbitration Act, as different benches have expressed varying viewpoints. This has led to the framing of the following issues for reference to a 5-judge bench to settle the law on this matter:
· Whether a person ineligible to be appointed as an arbitrator can still appoint an arbitrator?
· The doubt arises from a 2-judge bench decision in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company ("CORE"), which conflicts with the view taken in a 3-judge bench decision in JSW Steel Limited v. Southwestern Railway & Anr ("JSW Steel").
· The doubt was further reinforced by concerns raised by a 3-judge bench in Union of India vs Tantia Construction ("Tantia") in January 2021.

*Ashish Kumar is a fourth year student at NMIMS University and Rhythm Buaria is an Advocate, practicing commercial and matrimonial disputes before courts in Delhi at the time of publication of this blog.

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