Delhi High Court: Whether Unilateral Appointment Of An Arbitrator By A Company Which Is Interested In The Outcome Of The Dispute Is Impermissible?

Delhi-High-Court

In Proddatur Cable TV Digi Services v. SITI Cable Network Limited in O.M.P. (T) (COMM.) 109/2019 decided on 20 Jan 2020, the Delhi High Court was called to decide the eligibility of a ‘Company’ referred to in the Arbitration Clause between the parties, to unilaterally appoint a Sole Arbitrator to adjudicate the disputes between the parties.

The Court was deciding a petition filed under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996 (Act) by Proddatur seeking a declaration that the mandate of the Arbitrator appointed by SITI Cable be terminated and an Arbitrator be appointed by the Court in accordance with the provisions of the Act. An application is made to the Court under Section 14(2) of the Act to determine whether the mandate of an arbitrator has terminated as he/she has, in law, become de jure or de facto unable to perform his functions because he is ineligible to be appointed as such under Section 12(5) of the Act. The arbitration clause between the parties reads as under:-

13.2 All disputes or differences whatsoever which shall at any time hereafter (whether during the continuance and in force of this Agreement in this regard or upon or after discharges or determination) arise between the parties hereto or their respective successors in title and assigns touching or concerning this Agreement or its interpretation or effect or as to the rights, duties, responsibilities and liabilities of the parties or either of them under or by virtue of this Agreement or otherwise as to any other matter in any way connected with, arising out of or in relation to the subject matter of this Agreement shall at first be subjected to an attempt at resolution by mutual amicable discussion, failing which the same shall be referred for Arbitration by the sole arbitrator appointed by the Company, within thirty days of the invocation of the arbitration, under the provisions of the Arbitration and Conciliation Act, 1996, read with rules made thereunder.

The principle contention of Proddatur was that in view of the recent judgment of the Supreme Court in the case of Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd. 2019 SCC Online SC 1517, the ‘Company’ as provided in the Arbitration Clause between the parties cannot unilaterally appoint an Arbitrator.

The Supreme court in the case of Perkins (supra) was concerned with an Arbitration Clause wherein the CMD of the respondent in that case was designated to appoint a Sole Arbitrator. The Court after examining the said clause held that there could be two categories of cases:-

  • one where the Managing Director himself is made as an Arbitrator with an additional power to appoint any other person as an Arbitrator; and
  • second where the Managing Director is not to act as an Arbitrator himself but is empowered to appoint any other person of his choice or discretion as an Arbitrator.

For drawing above inferences, the Court relied on its earlier dictum in TRF Limited vs. Energo Projects Limited (2017) 8 SCC 377 in which case the Arbitration Clause fell in the first category. In the case of TRF Limited, the Supreme Court had held that the Managing Director was incompetent because of the interest that he would have in the outcome of the dispute. Thus, the element of ineligibility was relatable to the interest that he had in the decision.

In Perkins, the Supreme Court thus relying on the rationale of its decision in TRF Limited observed that if the test is the interest of the Appointing Authority in the outcome of the dispute then similar ineligibility would always arise even in the second category of cases. It was observed that if the interest that the authority has in the outcome of the dispute is taken to be the basis for possibility of bias, it will always be present irrespective of whether the matter stands under the first or the second category of cases. The Supreme Court also significantly noted that they were conscious that if such a deduction was drawn from the decision in TRF Limited, in all cases with similar clauses, a party to the agreement would be disentitled to make a unilateral appointment. Thus, following the ratio of the judgment in the case of Perkins, the Delhi High Court observed that a unilateral appointment by an authority which is interested in the outcome or decision of the dispute is impermissible in law.

In view of the law laid down by the Supreme Court in Perkins, the Delhi High Court observed that it can hardly be disputed that the ‘Company’ acting through its Board of Directors will have an interest in the outcome of the dispute. Thus, the Court held that the arbitration clause in the instant case was directly hit by the law laid down in the case of Perkins and allowed Proddatur petition appointing a new arbitrator.

The Delhi High Court further observed that the underlying principle in arbitration no doubt is party autonomy but at the same time fairness, transparency and impartiality are virtues which are equally important. If the Authority appointing an Arbitrator is the Head or an employee of a party to the agreement, then its interest in its outcome is only natural. It goes without saying that once such an Authority or a person appoints an Arbitrator, the same ineligibility would translate to the Arbitrator so appointed. The procedure laid down in the Arbitration Clause cannot be permitted to override considerations of impartiality and fairness in arbitration proceedings.

SITI Cable further argued that in the Arbitration Clause before the Supreme Court in the case of Perkins was with regard to the power of a Managing Director to appoint an Arbitrator whereas in the present case, the clause empowers the Company to appoint the arbitrator. The Court rejected this argument on two counts:- First and foremost, in Court’s view, one has to see the rationale and the reasoning behind the judgment in the case of Perkins. The Supreme Court held that the Managing Director was ineligible from appointing an Arbitrator on the simple logic that a Managing Director of a Company would always have an interest in the outcome of the arbitration proceedings. The interest in this context takes the shape of bias and partiality. As a natural corollary, if the Managing Director suffers this disability, even if he was to appoint another person as an Arbitrator, the thread of biasness, partiality and interest in the outcome of the dispute would continue to run. Seen in this light, the Court held that it can hardly be argued that the judgment in Perkins will not apply only because the designated Authority empowered to appoint an Arbitrator is other than a Managing Director. Moreover, Company is run by the Board of Directors.

The Court relied on the definition of the ‘Board of Directors’ as provided under Section 2(10) of the Companies Act, 2013 which reads as under:

“2(10) “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.”

Thus, the Company is run none other than the Directors collectively. Further, the Duties of the Directors have been stipulated in Section 166 of the Companies Act, 2013. On co-joint reading of the above, the Court concluded that the duties clearly reveals that the Director at all times, has to act in good faith to promote the objects of the Company and in the best interest of the Company, its employees and the shareholders. A Director shall not involve in a situation in which he may have a direct or an indirect interest that conflicts or possibly may conflict with the interest of the Company. It goes without saying that the Directors of the Company as a part of the Board of the Directors would be interested in the outcome of the Arbitration proceedings. The Company therefore, acting through its Board of Directors would suffer the ineligibility under Section 12(5) read with Schedule VII of the Act. The same ineligibility would also apply to any person appointed by the said Company. In view thereof, the Court held that for the purposes of Section 11(6) and Section 12(5) read with Schedule VII, there cannot be a distinction based on the appointing authority being a Company.

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