In Rajasthan Small Industries Corporation Limited v. Ganesh Containers Movers Syndicate 2019 (1) SC ALE 670, the Supreme Court of India decided the validity of the appointment of an arbitrator by the court of its own choice departing from the arbitration clause. The Court inter-alia held that mere neglect of an arbitrator to act or delay in passing the award by itself cannot be the ground to appoint another arbitrator in deviation from the terms agreed to by the parties. Detailed case analysis given below:
The Appellant granted a tender for maintenance and handling of a highway to the Respondent. Accordingly, a contract was executed amongst the parties. Later, certain disputes arose between the parties and the Respondent invoked the arbitration clause. The arbitration clause provided for arbitration by the Appellant’s Managing Director himself or his or her nominee for the sole arbitration. Resultantly, in 2005, a Sole Arbitrator was appointed. But in 2006, the Sole Arbitrator was removed on account of unsatisfactory progress of the arbitration and in his place, Chairman-cum-Managing Director of the Appellant was appointed to act as the Sole Arbitrator by the consent of both the parties. The Arbitration was not concluded for a long time and therefore, in 2015, the Respondent filed an application under Section 11(6) and Section 15 of the Arbitration and Conciliation Act, 1996 (‘Act’) before the High Court seeking appointment of an independent arbitrator. After this application was moved, the Sole Arbitrator passed an ex parte award in favour of the Appellant in 2016. The High Court taking view of the long prolongation of the matter before the Sole Arbitrator, allowed Respondent’s application and appointed a fresh arbitrator. This appointment was appealed before the Supreme Court in the present proceedings.
The Arbitration Clause in the Contract reads as under:
“4.20.1 All disputes and difference arising out of or in any way concerning this Contract, shall be referred to the Managing Director himself, herself or his or her nominees for the sole arbitration. There will be no objection to any such appointment on the ground that the person so appointed is an employee of the Corporation, that he has dealt with the matters to which the contract relates and that in the course of his duties. As such arbitration shall be final and binding on the parties to the contract. If the person to whom the matter was originally referred to for arbitration becomes unable to function on account of vacation of office, transfer, resignation, retirement from services, suspension or for any other reason, whatsoever, the Managing Director shall nominate another person to take over his function as soon as possible. Such person shall proceed further from the stage where the matter was left by his predecessor. The arbitrator shall give reasons for the award.”
Applicable Legal Principles
Section 11(6) of the Act
“Section 11 – Appointment of arbitrators
(6) Where, under an appointment procedure agreed upon by the parties,-
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.”
Section 15 of the Act
“Section 15 – Termination of mandate and substitution of arbitrator
(1) In addition to the circumstances referred to in section 13 or section 14, the mandate of an arbitrator shall terminate—
(a) where he withdraws from office for any reason; or
(b) by or pursuant to agreement of the parties
(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.
(3) Unless otherwise agreed by the parties, where an arbitrator is replaced under sub-section (2) , any hearings previously held may be repeated at the discretion of the arbitral tribunal.
(4) Unless otherwise agreed by the parties, an order or ruling of the arbitral tribunal made prior to the replacement of an arbitrator under this section shall not be invalid solely because there has been a change in the composition of the arbitral tribunal.”
Section 12(5) of the Act
“Section 12 – Grounds for challenge
(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.”
The Appellant contended as under:
- that the Respondent could not have moved the application for termination of mandate and appointment of a substitute arbitrator before the Court in view of the agreement between the parties where parties agreed that the dispute, differences between the parties to be resolved by the Managing Director or his nominee;
- that such an application is not maintainable in light of the competence of the Sole Arbitrator to adjudicate the dispute between the parties;
- that since a final Award has been passed by the Sole Arbitrator, the Respondent could only challenge the same by way of an appeal under Section 34 of the Act and therefore the Order of the High Court appointing a fresh arbitrator is liable to be set aside.
The Respondent contended as under:
- that the Arbitrator being the Manager/Director of the Appellant cannot be appointed as an arbitrator in view of Section 12 of 2015 Amendment Act;
- that the Respondent was justified in approaching the High Court for substitution or appointment of fresh arbitrator since for a long period of about ten years, no award has been passed and that the arbitrators were kept on changing for one reason or other;
- that the proceedings were accelerated, and Award came to be passed only when the Respondent approached the High Court for appointment of a fresh arbitrator.
The Court held as under:
- that when the parties have consciously agreed that the disputes or differences shall be referred to the Managing Director himself or his nominee for sole arbitration and having participated in the arbitral proceedings before Sole Arbitrator for quite some time, the Respondent cannot turn around and seek for appointment of an independent arbitrator;
- that the Respondent having participated in the proceedings before the Arbitrator for quite some time, is estopped from challenging the competence of the arbitrator;
- that the agreement between the parties was entered in 2000 and the arbitration proceedings commenced way back in 2009. Thus, the Respondent cannot invoke Section 12(5) of the Amendment 2015 which came into effect from 23 October 2015;
- that mere neglect of an arbitrator to act or delay in passing the award by itself cannot be the ground to appoint another arbitrator in deviation from the terms agreed to by the parties. Therefore, the High Court, was not right in appointing an independent arbitrator without keeping in view the terms of the agreement between the parties.
In view of the above, the Court set aside the impugned order of the High Court. Further, considering the facts of the case, in order to do complete justice between the parties, and in exercise of power under Article 142 of the Constitution of India, the Court set aside the Award and appointed the Managing Director of the Appellant as the Sole Arbitrator.
Section 15 of the Act finds its genesis in Article 15 of the UNCITRAL Model Law which states as under:
Article 15. Appointment of substitute arbitrator
Where the mandate of an arbitrator terminates under article 13 or 14 or because of his withdrawal from office for any other reason or because of the revocation of his mandate by agreement of the parties or in any other case of termination of his mandate, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.
The view taken the Supreme Court of India is in line with the Official Records of the General Assembly, (Fortieth Session, Supplement No. 17 (A/40/17), annex I, para. 147) cited in the UNCITRAL Digest of Case Law on the Model Law on International Commercial Arbitration which states as under:
“Pursuant to article 15, the appointment of a substitute arbitrator is governed by the rules that were applicable to the appointment of the arbitrator being replaced. Although article 15 is silent as to whether it is subject to any contrary agreement by the parties, the travaux préparatoires indicate that “the party autonomy recognized in article 11 for the original appointment of an arbitrator applied with equal force to the procedure of appointing the substitute arbitrator, since article 15 referred to the rules that were applicable to the appointment of the arbitrator being replaced.”
It is also pertinent to cite the Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration: Report of the Secretary-General UN, 1985 to understand the object behind this provision. As per the Commentary, whenever a substitute arbitrator needs to be appointed, this shall be done in accordance with the rules that were applicable to the appointment of the arbitrator being replaced, whether these rules are laid down in the arbitration agreement or, as suppletive rules, in the model law.
However, the Commentary also raise an interesting question as to whether a substitute arbitrator should be appointed at all considering the parties named a specific sole arbitrator in their original agreement, they may wish not to continue the arbitral proceedings without him.