Appointment of Arbitrators: SC battling self created demons?

A recent reported judgment, Voestalpine Schinen GmbH vs. Delhi Metro Rail Corporation (2017) 4 SCC 665, makes an interesting read. Of course, it is one of the first decisions of the Supreme Court interpreting the amending provisions in S. 12 of the Arbitration and Conciliation Act, 1996 and must be of interest – but it is of even more significance because of what the court orders without reference to the dispute before it.

In brief, the controversy was simple – and would be recurring in the Indian PSUs context. The arbitration clause provided that a three member tribunal would be selected in the following fashion: DMRC would maintain a panel of arbitrators – serving or retired engineers of government departments or of public sector undertakings. It would send a name of 5 from the panel to Voestalpine to select one, after making its own selection from that 5. The two so chosen will then select the third from the same 5 names.

Voestalpine contended that appointment of arbitrators who are serving or retired engineers from “government departments or public sector undertakings” is contrary to the mandate of independence and impartiality, in particular in light of the new amended provision of S. 12(5) read with the Schedules. The argument was rejected, and it is not difficult to see why. It would indeed be a violence to the words in the statute to suggest that every retired employee of any government entity is barred from being an arbitrator in every government or PSU arbitration. Whether so should have been the law or not, as far as the law currently stands, it is difficult to accept such a broad proposition.

The court emphatically and without any ambiguity held that the contention of Voestalpine must be rejected and that such appointment won’t be contrary to the Red or Orange list of IBA Guideline. But then, it went to do two further things – which clearly indicate that the apex court found the result it reached unsatisfactory.

First, the court accepted an offer made by the AG on behalf of the government. Probably realising that the SC will be tempted to find fairer solutions than it finds on application of the law, the AG offered that there were 31 names in the panel maintained by DMRC – none of whom were past or present employees – and instead of 5, Voestalpine could make its choice from the 31. Second, and most interesting, without reference to the present case, the apex court ordered DMRC to revise its panel, accept engineers from private sector, add lawyers and retired judges and also probably accounting professionals. In addition, it ordered that in the future in such contracts, the choice to the opposite party would be to select from the entire panel.

One may question the legal basis of such orders, but doing full justice is a mandate the SC holds under the Constitution. In the present context what is of interest is that these search for solutions are becoming increasingly necessary only because of the SC’s approval of unequal appointment rights in an arbitration agreement. The SC has had multiple occasions to rule on the validity of such unequal appointment rights, but it has chosen to bless them under the principles of pacta sunt servada. What is problematic is that under Indian law, unequal appointment rights (including unilateral appointment right) has not even raised sufficient judicial eyebrows. Such clauses are considered against international public policy in France and are statutorily barred in Germany. If there was ever an apt example to demonstrate what one means by “justice should not only be done, it should seen to be done”, this would be it.

Sadly, even the law commission missed this in its report. In an otherwise extremely well researched and comprehensive report – which targeted (hopefully fatally) the practice of appointing employee arbitrators by Indian PSUs, it failed to target the unilateral and / or unequal right of appointment. There is no good reason why such clauses should be enforced by courts.

The solution that the SC attempts to find in this case is visibly an outreach and too limited – it orders one amongst innumerable government departments and PSUs to make its unilateral right more fair than it contractually is. This approach will, of course, not solve the problem. It is impossible to make fair an approach that itself is inherently flawed and unjust. Giving one of the parties the exclusive right (or even an unequal right) to appoint the tribunal that will determine the disputes between them should offend the sense of justice in any jurisdiction – and must be held to be against the public policy.

It is essential for the survival of arbitration as a viable and meaningful alternate to courts (extremely important in Indian context given the immeasurable pressure on the judiciary), that challenge to award must not become a re-litigation of the dispute. In order to achieve that, we will need to achieve an attitude of deference to results of arbitration. This will come if we trust the arbitration process. That trust, in turn, is completely dependent on the robustness of not only the qualification but also the manner of appointment of arbitrators. Today, in multiple contracts with unequal bargaining power, one of the parties retains the sole appointing right. They then appoint people who will qualify the legal tests, but will nonetheless serve their interests. In addition, having blocked access to courts through an arbitration clause, they act with impunity in their dealings with the other contracting party. The menace is serious and the SC needs to revisit its approval to such clauses – tailoring a remedy outside the law in one of the cases that happens to reach its door is likely to be insufficient.

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