I. INTRODUCTION

1. The Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) introduced new grounds for a challenge to the appointment of the arbitrator. Inter alia, the amendment inserted Section 12(5) to the Arbitration and Conciliation Act, 1996 (“Act”) which prescribed the ineligibility of an arbitrator having a relationship with the parties, or counsel, or with the subject matter of the dispute. The 2015 Amendment also made it mandatory under Section 12(1) for a proposed arbitrator to disclose in writing any past or present relationship / interest with any party or in relation to subject matter of the dispute. It further added the Fifth Schedule, which lists grounds to determine whether circumstances exist that give rise to justifiable doubts as to the independence and impartiality of the arbitrator; as well as the Seventh Schedule, which lists the categories of instances under which a person is ineligible to be appointed as arbitrator. 

2. Prior to the 2015 Amendment, the standard form of contracts of Public Sector Undertakings (“PSU”) and government entities usually contained arbitration clauses providing for unilateral appointment of arbitrators by the government / PSU. Such clauses typically provided for the arbitrator to either be a serving officer of the PSU, or to be appointed unilaterally by an officer of the PSU.

3. Pursuant to the 2015 Amendment, the Supreme Court of India (“Supreme Court”) in a catena of judgements held that such an appointment procedure to be impermissible and arbitrators appointed under such clauses to be ineligible.

(a) In TRF Limited v. Energo Engineering Projects Limited ((2017) 8 SCC 377) (“TRF”), the Supreme Court evaluated an arbitration clause which provided for disputes between the parties to be referred to a “sole arbitration of the Managing Director” or “his nominee”. The Supreme Court further held that the Managing Director is not eligible for appointment as an arbitrator pursuant to the Seventh Schedule to the Act.

(b) In a later decision of Perkins Eastmen Architects DPC and Anr v. HSCC (India) Limited ((2020) 20 SCC 760), the Supreme Court evaluated an appointment procedure where although the Managing Director did not himself act as an arbitrator, he had the power to unilaterally appoint a sole arbitrator. Referring to the TRF judgment, the Supreme Court held such a procedure for unilateral appointment of arbitrators to be impermissible on the ground that an appointment by one party will always have an element of exclusivity in determining or charting the course of arbitration. Therefore, a person having an interest in the outcome of the case must not have the power to appoint an arbitrator, which has to be taken as the essence of the 2015 Amendment.

(c) In Glock Asia Pacific Ltd. v. Union of India ((2023) 8 SCC 226), the Supreme Court evaluated an arbitration clause that authorized the Secretary of Ministry of Home Affairs, whose relationship with the Union of India is that of an employee, to nominate an officer of the Ministry of Law and Justice to act as a sole arbitrator. The Supreme Court found such an appointment procedure to be in conflict with the Seventh Schedule and Section 12(5) of the Act.

4. Pursuant to the 2015 Amendment and aforementioned judgments of the Supreme Court, it appears that PSUs have been amending the arbitration clauses in their general contracts. However, these contractual amendments still attempt to retain the PSU’s power to unilaterally appoint the arbitrator, while adding that if such unilateral appointment is not possible for any reason, the matter shall not be referred to arbitration at all. 

5. Recently, the Delhi High Court in Sriram Cables Pvt. Ltd. v. Union of India (2024 SCC OnLine Del 3074) (“Sriram Cables”) held that such an arbitration clause was also in conflict with Section 12(5) of the Act read with Seventh Schedule. 

II. BACKGROUND OF SRIRAM CABLES

6. In Sriram Cables, the dispute arose from Union of India’s wrongful invocation of bank guarantees which led Sriram Cables to invoke the arbitration clause contained in the General Clauses of Contract (“GCC”). After the arbitrator passed the award, an application under Section 34 of the Act was filed by Sriram Cables to set aside the award.

III. ISSUES

7. Before the High Court of Delhi, the first ground of challenge, amongst others, was the unilateral appointment of the arbitrator.

8. In this case, the arbitration clause in the GCC read as follows

     9. Arbitration

(a) ln the event of any question, dispute or difference arising under these conditions or any special conditions of contract, or in connection with this contract (except as to any matters the decision of which is specially provided for by these or the special conditions) the same shal1 be referred to the sole arbitration of a Gazetted Railway Officer appointed to be the arbitrator, by the General Manager in the case of contracts entered into by the Zonal Railways and Production Units; by any Member of the Railway Board, in the case of contracts entered into by the Railway Board and by the Head of the Organisation in respect of contracts entered into by the other Organisations under the Ministry of Railways. The Gazetted Railway Officer to be appointed as arbitrator however wil1 not be one of those who had an opportunity to deal with the matters to which the contract relates or who in the course of their duties as railway servant have expressed views on all or any of the matters under dispute or difference. The award of the arbitrator shall be final and binding on the parties to this contract.

(b) ln the event of the arbitrator dying, neglecting or refusing to act or resigning or being unable to act for any reason, or his award being set aside by the court for any reason, it shal1 be lawful for the authority appointing the arbitrator to appoint another arbitrator in place of the outgoing arbitrator in the manner aforesaid.

(c) It is further a term of this contract that no person other than the person appointed by the authority as aforesaid should act as arbitrator and that if for any reason that is not possible, the matter is not to be referred to arbitration at all.”

9. Sub-clause (a) stipulated a unilateral appointment of the sole arbitrator. As stated at [3], such a unilateral appointment was held to be impermissible and the arbitrator appointed under such procedure was held to be ineligible pursuant to the 2015 Amendment and judgments of the Supreme Court.

10. However, sub-clause (c) stipulated that no person other than the person appointed by the Respondent should act as arbitrator, and if the same is not possible for any reason, the dispute would not be referred to arbitration at all. Such a clause had not been tested by the Supreme Court in TRF, Perkins or Glock.

IV. JUDGEMENT

11. The Single Judge of the High Court of Delhi (“Court”) highlighted that even though the parties under arbitration have autonomy to choose the arbitrator ; fairness, transparency and impartiality are equally important incidents of an arbitrator’s appointment. Party autonomy is not unbridled, and the appointment of the arbitrator has to meet the pre-requisite of his neutrality and impartiality which are the bedrock on which the arbitration rests.

12. While relying on Perkins and TRF, the Court highlighted the importance of Section 12 read with Fifth, Sixth and Seventh Schedule to ensure the impartiality and independence of the arbitrator. The Court held that the procedure for appointment in this case was “one way” and the power to single-handedly decide the arbitrator rested with Union of India. There never existed even a shred of counterbalancing of this unilateral power as Sriram Cables had no role to play in the appointment. Referring to sub-clause (c) of the arbitration clause, the Court noted that this was a “My way or High Way” attitude.

13. The Court held that “Such unilateral appointment arbitrators have been judicial/y proscribed, irrespective of whether the arbitrator appointed is not biased and or not prejudiced. The procedure for appointment of arbitrator was Unilateral with no participation by the petitioner, is hit by Section 12(5) read with Seventh Schedule of the Act, 1996.”

14. The Court also noted that the Petitioner had neither waived the applicability of Section 12(5) nor raised an objection to the unilateral appointment. For this, the Court relied on Hindustan Zinc Limited v. Ajmer Vidyut Vitran Nigam Ltd. ((2019) 17 SCC 82) that an objection for unilateral appointment can be raised at any stage, including an appeal under Section 37 of the Act.

15. The Court therefore concluded that the procedure for appointment of arbitrator was unilateral. Furthermore, the arbitrator was an ex-employee of the Respondent which is against the express mandate of Section 12 read with Seventh Schedule of the Act. Thus, the arbitrator inherently lacked jurisdiction, which vitiates the entire arbitration proceedings, making the award non-est.

V. ANALYSIS AND CONCLUSION

16. Although the question is yet to be finally determined by the Supreme Court, cases challenging similar clauses have been filed before different High Courts of India. In Dilip Buildcon Limited v. South Eastern Coalfields Limited (2023 SCC OnLine Chh 2956) a similar clause had to be evaluated by the Chhattisgarh High Court, however, the Chhattisgarh High Court did not adjudicate upon this question and asked to parties to fulfil the pre-conditions to the arbitration first keeping question of law open to be determined.

17. The judgment of Sriram Cables sets an example that courts in India may not be inclined to uphold such appointment procedures. The judgment is of great significance for parties contracting with government entities and PSUs that insist on such clauses.

Authors: Yasharth Misra and Sanchit Suri