Indian Courts have consistently maintained the position that unilateral appointment of an arbitrator is legally untenable and bad in law. It was reasoned by the Courts that when one party unilaterally appoints an arbitrator, it creates an imbalance of power, leading to reasonable concerns about the arbitrator's impartiality. As the independence and the impartiality of an arbitrator is essential for the arbitration process, any unilateral appointment of an arbitrator was deemed to be invalid. However, in a stark departure from established Indian legal precedent, the Calcutta High Court in Mcleod Russel India Ltd. v. Aditya Birla Finance Ltd.[i] (Mcleod) upheld the unilateral appointment of a sole arbitrator and asserted that not all unilateral arbitrator appointments are inherently invalid. In this article, we explore the Court's rationale and the implications of the decision regarding the appointment of arbitrators in the McLeod case.
Factual Background
Disputes arose between Mcleod Russel India Ltd. (MRIL) and Aditya Birla Finance Limited (ABFL) out of an agreement wherein the arbitration clause conferred a unilateral right of appointment of arbitrator on ABFL. Consequently, ABFL proceeded to appoint an arbitrator. Subsequently, the arbitration proceedings continued for nearly two years, and thereafter MRIL filed an application under the Arbitration and Conciliation Act, 1996 (Act) to terminate the mandate of the arbitrator. It was argued by MRIL that the appointment of the arbitrator is inherently illegal as it was a unilateral appointment by ABFL. Pertinently, no "express agreement in writing" to waive the ineligibility of the arbitrator was executed between the parties, as mandated under the Act[ii].
ABFL contended that the objection to the arbitrator's appointment was raised at an advanced stage as an afterthought. It was argued that MRIL had initially accepted the arbitrator without challenge and actively engaged in the arbitration process for a period of two years. Consequently, the arbitrator's appointment remains legally valid.
The issue before the High Court was whether the pleadings of the parties can constitute a ‘written agreement’ to waive the invalidity of the unilateral appointment of the arbitrator.
Decision of the High Court
The Court ruled in Mcleod that an appointment cannot be said to be invalid merely because it has been made unilaterally. The legal framework outlined in the Act dictates the criteria for terminating an arbitrator's appointment, whether initiated by one of the parties or raised by the Tribunal itself. Any challenge to the appointment made by the parties must be substantiated with reasons that give rise to 'justifiable doubts' regarding the arbitrator's impartiality or independence. To guide this determination, the Act's Seventh Schedule lays down factors to ascertain whether there are justifiable doubts towards the independence / impartiality of the arbitrator. The Court differentiated its stance from previous Supreme Court rulings in Bharat Broadband v. United Telecoms Ltd., Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. and others v. M/s Ajay Sales & Suppliers, and TRF Ltd. v. Energo Engg. Projects Ltd, emphasizing that these cases pertained to arbitration clauses allowing the CMD/MD of one party to act as an arbitrator, unlike the current scenario where unilateral appointment of an impartial arbitrator was permissible. The Court reasoned that these precedents established that if an arbitrator becomes disqualified due to statutory reasons, they also lose their right to nominate another arbitrator. However, the Court clarified that unilateral appointments are not universally impermissible. An arbitrator will only become ineligible if they fall under the Seventh Schedule's disqualifications and not merely due to being unilaterally appointed. Additionally, the Court distinguished Perkins by noting that there was no express agreement in that case, and the agreement was executed before the TRF judgment, making it distinguishable based on these factors.
The Court ruled that a unilaterally appointed arbitrator would become ineligible only if his relationship directly fell under the Seventh Schedule of the Act and not merely because he had been unilaterally appointed. In Mcleod, the arbitrator so appointed was a retired High Court judge who was not otherwise ineligible under the Seventh Schedule, and therefore the appointment was held to be valid by the High Court.
The Court also discussed the scope of “written agreement” to overcome the invalidity of unilateral appointment of arbitrator. The court held that in order to qualify as a “written agreement” the elements of a ‘promise’ under the Indian Contract have to be met. Therefore, a “written agreement” should not necessarily be limited to a formal agreement executed between the parties but also include exchanges in writing, emails, telex etc. and therefore could be inferred from written pleadings filed by MRIL in the arbitration proceedings. Therefore, even assuming the said appointment was invalid for falling within any of the categories mentioned in the Seventh Schedule of the Act, the same stood cured in view of the written pleadings filed by MRIL.
Our thoughts
The legal landscape regarding the unilateral appointment of arbitrators in India is well-established and unambiguous. Key Supreme Court rulings in cases like TRF, Bharat Broadband, and Jaipur Zila Parishad, have left no room for doubt that any individual with a vested interest in the dispute’s outcome is not only disqualified from being appointed as an arbitrator but is also barred from appointing one unilaterally. This rationale was further amplified in Perkins Eastman Architects DPC and Anr. v. HSCC India Ltd. where the Court extended the ineligibility to all unilateral appointments.
However, taking an exception to the above, the High Court in Mcleod held that the above judgements are distinguishable. The Court held that that the earlier judgments were applicable in situations involving a specific individual designated as an arbitrator, either as the intended appointee or possessing the authority to nominate one. Moreover, these judgments did not involve circumstances where there was a written, explicit agreement to waive the disqualification associated with a unilateral appointment, as was the case in McLeod.
Courts have also held that the term ‘express agreement in writing’, as per the Act, should not be misconstrued as mandating the execution of a formal agreement. The Supreme Court's pronouncement in Bharat Broadband reinforces this stand, emphasizing that such actions do not imply an implicit waiver of the arbitrator's ineligibility under the Act. It underscores the critical importance of an explicit written agreement where parties unequivocally demonstrate their trust in the appointed arbitrator, signifying their intent to waive any ineligibility concerns. One can argue that merely filing written pleadings, applications in arbitration proceedings, or engaging in activities stemming from these filings cannot be equated with an express written agreement.
The Bharat Broadband judgement also differentiates between an ‘express agreement in writing’ for the validation of unilateral arbitrator appointments and the broader requirement of a 'written agreement' for an arbitration clause’. The former is a specific concept limited to the definition under the Indian Contract Act, while the latter encompasses a wider range, including the conduct of the parties. The recent decision in Mcleod has taken a more liberal interpretation by including pleadings made during arbitration proceedings under the umbrella of 'express agreement in writing’.
The Calcutta High Court's decision in Mcleod represents a departure from the well-established legal principles governing unilateral arbitrator appointments. Post-Mcleod, the Indian Courts' approach to unilateral appointments may exhibit subtle differences from the prior regime. Parties alleging arbitrator bias under the Seventh Schedule of the Act will now bear the burden of proving the absence of an express agreement to waive ineligibility, including the definition under the Indian Contract Act. The future may reveal whether the Mcleod decision will face a challenge before the Supreme Court, potentially reshaping the landscape of unilateral arbitrator appointments in India.
Authors: Bodhisattwa Majumder and Altamash Qureshi
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[i] Mcleod Russel India Ltd. vs Aditya Birla Finance Ltd.
[ii] Section 12(5): Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.