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DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

LUCKNOW

Final Draft

APPOINTMENT OF ARBITRATOR SOLELY BY ONE PARTY

SUBMITTED BY:

Ashish Singh

Roll No. 36

Semester VIII, B.A. LL.B. (Hons.)

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TABLE OF CONTENTS

Acknowledgement.....................................................................2

Introduction............................................................................... 2

Named Person or Authority as an Arbitrator..............................4

Appointment of Employees as Arbitrators.................................5

Current Scenario........................................................................ 6

Conclusion................................................................................. 8

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Acknowledgement
The successful completion of this project is the result of constant and rigorous hard work of
weeks, browsing through the different websites and consulting various books of renowned
authors and reading different journals by eminent scholars of related subject.

First and foremost, I would like to thank my Subject professor, Mr. Prasenjit Kundu who was
always there to guide me with the project outlines and whose effective sense of understanding
of the subject and imparting the same to me goes a long way down to the eventual
compilation of the project.

I would also like to thank other college staff, notably the print out department and my friends
who were ever present. Eventually I would also like to thank my parents whose constant
blessing is indispensable for any activity I undertake.

Ashish Singh

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Introduction
Arbitration, world over is a tool to resolve a dispute between two parties privately by an
independent party. Being an alternate dispute resolution mechanism and possibly a lesstime
consuming for resolution of disputes by the method of arbitration.

Arbitration may be defined as the process by which a dispute or difference between two or
more parties as to their mutual legal rights and liabilities is referred to and determined
judicially and with binding effect by the application of law by one or more persons (the
arbitral tribunal) instead of by a court of law1

There can be reference to arbitration only if there is an arbitration agreement between the
parties. The Act makes it clear that an arbitrator can be appointed under the Act at the
instance of a party to an arbitration agreement only in respect of disputes with another party
to the arbitration agreement. If there is a dispute between parties to an arbitration agreement,
with other parties to the arbitration agreement as also non parties to the arbitration agreement,
reference to arbitration or appointment of arbitrator can be only with respect to the parties to
the arbitration agreement and not the non-parties.2

An arbitration agreement is collateral to the substantial stipulation of the contract. It is merely


procedural and ancillary to the contract and it is a mode of settling the disputes, though the
agreement to do so is itself subject to the discretion of the court. It is distinguishable from
other clauses in the contract. It embodies an agreement of both parties with consensus ad
idem that if any dispute arises with regard to the obligations undertaken therein which one
party has undertaken towards the other, such a dispute shall be settled by a tribunal of their
own constitution.3 It is the procedural machinery which is activated when disputes arise
between parties regarding their rights and liabilities.4

1 Halsburys Laws of England (Butterworths, 4th edition, 1991) para 332 and 601.

2 S.N. Prasad, Hitek Industries (Bihar) Limited v. Monnet Finance Limited, (2011) 1 SCC
320.

3 K. Sasidharan v. Kerala State Film Development Corporation, (1994) 4 SCC 135.

4 National Thermal Power Corporation v. Singer Company, (1992) 3 SCC 551.

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Arbitrations begin with each side naming an arbitrator. References are occasionally made to
the fundamental right to name ones arbitrator.

But there is no such right. Moreover, if it existed, it would certainly not be fundamental. The
original concept that legitimates arbitration is that of an arbitrator in whom both parties have
confidence. It is quite unlikely that a party will have confidence in an unknown arbitrator
selected by its unloved opponent.

Sec 10(1) of the Arbitration Act, 1996 leaves it to the parties to decide on the number of
arbitrators, provided the same is not an even number. This section has been widely exploited
more so in lending agreements, as therein, the clause pertaining to arbitration solely allows
the lender to appoint arbitrator. Usually in any lending agreement, the lender has the majority
bargaining power. This leads to the borrower having no other choice but to accede to the
lenders demands and sign on the dotted lines. However, the question that arises is, is it at all
tenable to give the right to appoint an arbitrator solely to the lender or should the borrower
have any say in this? Does this not make the lender the moving spirit behind resolution of
disputes which in turn can affect the award itself?

Most of the Government organisations use standard form agreements containing standard
arbitration agreements in which appointment of arbitrators are mostly in their hands.

Named Person or Authority as an Arbitrator


The parties to an arbitration agreement may agree to refer their disputes to a specific person
and may either name him or give his designation in the agreement. For example, parties may
state that the Chief Engineer of the department shall act as the arbitrator. If the person
named therein or person holding the designation refuses to act as arbitrator and the parties
have not intended that the vacancy should not be supplied, in that event the court will have
jurisdiction to appoint another arbitrator. The basis for assuming such jurisdiction is that the
clause would otherwise be rendered inoperative.5

The agreement may provide for appointment for a named arbitrator. In normal circumstances
while exercising jurisdiction under Section 11(6) the Court would adhere to the terms of the
agreement as closely as possible. But where the Court believes on the basis of material placed
before it, that the arbitrator appointed by the respondent would not be independent and

5 State of West Bengal v. National Builders, AIR 1994 SC 200.

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impartial, the Chief Justice or his designate is not debarred from appointing an independent
arbitrator other than the named arbitrator, in terms of Section 11(8).

Where the agreement itself specifies and names the arbitrator, it is obligatory upon the court,
in case it is satisfied that the dispute ought to be referred to the arbitrator, to refer the dispute
to the arbitrator specified in the agreement. It is not open to the court to ignore the arbitration
clause and to appoint another person as an arbitrator. Only in cases where the arbitrator
specified and named in the agreement refuses or fails to act or where the agreement does not
specify the arbitrator and the parties cannot also agree upon an arbitrator, does the court get
the jurisdiction to appoint an arbitrator. The court is bound to refer the dispute only to the
arbitrator named and specified in the agreement.6

The court would always try to give effect to the terms of the arbitration agreement even
though the contracting party had failed to act according to the contract.7

Appointment of Employees as Arbitrators


The fifth and seventh Schedule of the Arbitration and Conciliation (Amendment) Act, 2015
specifically prohibit appointment of employees as arbitrators. An employee cannot be
appointed as an arbitrator for a period of three years after his retirement. Moreover, as per
section12 (5) of the Amendment Act, notwithstanding any prior agreement to the contrary,
any person whose relationship, with the parties or the 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. The parties can however, enter into a fresh written agreement
after disputes have arisen expressly waiving this condition.

Generally the arbitration clause provided in the contract names a departmental officer to act
as an arbitrator in the event of dispute arising between the parties. In the case of Union of
India v Singh Builders Syndicate8 observed that in overwhelming majority of cases, a
departmental officer is appointed as an arbitrator. In view of the resistance it brings out from
the other party when disputes arise and also in view of the emphasis of independence and

6 S. Rajan v. State of Kerala, (1992) 3 SCC 608.

7 G. Ramachandra Reddy and Co. v. Chief Engineer, AIR 1994 SC 2381.

8 (2009) 4 SCC 523.

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impartiality in the Act, Government as well as statutory authorities and Government
Companies should think of phasing out such arbitration clauses to encourage professionalism
in arbitration.

The Supreme Court has spelt out as to when an employee of an organisation or a company or
a government/public sector undertaking can or cannot be allowed to function as an arbitrator.9
In that case, the arbitration clause provided that the Indian Oil Corporation would have the
right to appoint one of its officers as the arbitrator. Raja Transport objected to this clause on
the ground that there was a chance that the arbitrator may be biased. The Supreme Court
rejected the contention and upheld the validity of the arbitration clause. It has been stated:

The fact that the named arbitrator is an employer of one of the parties is not ipso facto a
ground to raise a presumption of bias or partiality or lack of independence on his part. A
person, being an employee of one of the parties cannot per se a bar to his acting as an
arbitrator. Senior Officer(s) (usually head of department or equivalent) of a
government/statutory corporation/PSU not associated with the contract are considered to be
arbitrators, merely because their employer is a party to the agreement. However, if any
circumstances exist to create a reasonable apprehension about the impartiality or
independence of the agreed or named arbitrator the court has discretion not to appoint such
arbitrators.

Where a person enters into an arbitration agreement, he cannot later on say that the clause
was illegal or void. It is settled law that the parties are bound by the agreement entered into
between them including the arbitration clause. If the arbitration clause provided that the
arbitration proceedings shall be conducted only by a particular arbitrator appointed by the
respondent such a clause is not illegal clause and the petitioner is bound by that clause.10

Current Scenario
The recent case of the Loot (India) Pvt. Ltd. & Others v. Reliance Capital Limited & Others 11,
decided by the Bombay High Court pertains to the issues raised by a borrower on the

9 Indian Oil Corp. Ltd. v. Raja Transport (P) Ltd, (2009) 8 SCC 520.

10 Modi Rubber Ltd. v. Morgan Securities & Credit Pvt. Ltd., 2010 (4) RAJ 202.

11 Arbitration Petition No. 1178 of 2012.

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appointment of a sole arbitrator by the lender and the subsequent passing of award without
paying head to the objections raised by the borrower. However, in this case, the petitioners
did not question the right of the respondent to appoint a petitioner but question the
appointment of the arbitrator elected.

Section 18 of the Act relates to equal treatment of parties. Thus, any arbitral proceedings
shall have to give equal opportunity to parties to represent themselves. However, as has also
been ex-parte orders cannot be passed under the Act. On making out of a proper case, the
court is bound to consider the fact that even after serving of notices, the parties have not
appeared.

In the present case, even if the loan agreement allowed the lender to appoint an arbitrator, the
question remains that if at all the petitioners can raise an objection to the same. Herein, the
arbitrator had not intimated and/or exposed and/or informed such independence or
impartiality to both the parties in terms of section 12 of the Act. The Bombay High Court
stated obiter dicta that in case any objections are raised, the party who appoints such
arbitrator including the arbitrator needs to disclose about the independence and/or
impartiality. Only because the lender was empowered to appoint arbitrator, the same does not
give the right to not seek any consent and/or intimate the suggested name and/or name of
possible arbitrator.

Section 10 of the Act allows parties to appoint arbitrator with mutual consent. In the Loot
India case, when objections were raised regarding the appointment of arbitrator, evidently
there was no consent regarding appointment of the arbitrator, a point which should have not
been overlooked by the respondent. In the case of International Airport Authority v. KD Bali
12
& Anr the Supreme Court held that merely raising such averments and/or doubts about the
impartiality and/or independence of the arbitrator, itself is not sufficient as the was to
frustrate the arbitration proceedings. However, referring to this case in Loot India case, the
Bombay High Court stated that facts and circumstances of any case have to be seen as every
case is distinct and distinguishable.

Although, the Bombay High Court has not explicitly struck down the appointment of
arbitrator solely by the lender, yet it has upheld the necessity of paying heed to the
contentions raised by the borrower on the grounds of principles of natural justice. The timing

12 1988 AIR 1099.

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of raising objections is not important, however, the contentions are. The case goes a long way
in establishing that the usual high-handedness displayed by the lenders is oppressive and any
aggrieved party can raise a voice against it at the appropriated forum.

An alternative to avoid such disputes is to either name the arbitrator in the agreement itself or
decide on a panel of arbitrators. Mere mention of appointment of a sole arbitrator defeats the
very purpose of enactment of the Act which was to give equal opportunity to both parties and
to uphold the principle of natural justice.

Appointment of the arbitrator will not be open to a party, at least in government contracts, to
contend that appointment of a sole arbitrator only by one party to the dispute violates the
equitable principle that no man can be a judge in his own cause if that party had entered into
the contract with eyes wide open and had accepted the terms and conditions of the contract.13

Any challenge to the maintainability of the proceedings before the arbitral tribunal and to the
tribunals jurisdiction on the ground that the arbitration clause in the contract between the
parties is void and unenforceable law will be rejected. In Nandan Biomatrix Ltd. v. D1 Oils
Ltd., it was contended that appointment of a sole arbitrator only by one party to the dispute
violates the equitable principle that no man can be a judge in his own cause. Rejecting the
contention the Court held that the petitioner having accepted the terms and conditions of the
contract cannot now resile from the same.14

In National Highways Authority of India V. K.K. Sarin and others15 it was held that a party
alleging bias is required to first follow the procedure as laid down in Section 12 and 13. If the
party is unsuccessful, he has choice of either waiting till the stage of Section 34 or if he feels
bias can be summarily established or shown, should approach the court immediately under
Section 14 after the challenge being unsuccessful, for court to render a decision.

The Chief Justice or his designate cannot ignore the contractual terms between the parties and
appoint an arbitrator even when the person or authority named is available.

13 Societe Pepper Grenoble S.A.R.L v. Union of India, AIR 2004 Delhi 376.

14 Nandan Biomatrix Ltd. v. D1 Oils Ltd., (2009) 4 SCC 495.

15 (2009) 26 CLA-BL Supp (Snr.) 17 (Delhi).

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Conclusion
The only solution which will be reliable in all circumstances is that any arbitrator, no matter
the size of the tribunal, should be chosen jointly or selected by a neutral body. This aspect of
the process should no longer be misused as a sales argument for arbitration. Confidence-
enhancement is properly focused on procedural rights (the right to be heard, the opportunity
to confront the opponents case, equality of arms) rather than risking the ineluctable
contamination of the ideal that of an arbitrator trusted by both sides by notions of
constituency.

That said, recognizing the likelihood that this genie the right to appoint an arbitrator
cannot easily be put back into the bottle, there are ways of reducing contamination.

One involves the restriction of unilateral nominations by specific contractual limitation, such
as a requirement that no arbitrator may have the nationality of any party. In the absence of
such a restriction, a party may find it politically impossible not to name one of its nationals as
arbitrators. Worse, that nominee may feel subject to political pressures whether he or she
succumbs to them or fights them. Such restrictions, in other words, are capable of reducing
the risk of the subversion of arbitral authority.

It is now well settled by a series of decisions of this Court that arbitration agreements in
government contracts providing that an employee of the Department (usually a high official
unconnected with the work or the contract) will be the Arbitrator are neither void nor
unenforceable.

If a party, with open eyes and full knowledge and comprehension of the said provision enters
into a contract with a government/statutory corporation/public sector undertaking containing
an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrator,
he cannot subsequently turn around and contend that he is agreeable for settlement of

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disputes by arbitration, but not by the named arbitrator who is an employee of the other party.
No party can say he will be bound by only one part of the agreement and not the other part,
unless such other part is impossible of performance or is void being contrary to the provisions
of the Act, and such part is severable from the remaining part of the agreement. The
arbitration clause is a package which may provide for what disputes are arbitrable, at what
stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what
law would govern the parties etc. A party to the contract cannot claim the benefit of
arbitration under the arbitration clause, but ignore the appointment procedure relating to the
named Arbitrator contained in the arbitration clause.

There can however be a justifiable apprehension about the independence or impartiality of an


Employee-Arbitrator, if such person was the controlling or dealing authority in regard to the
subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior
rank in some other department) to the officer whose decision is the subject matter of the
dispute. Where however the named arbitrator though a senior officer of the
government/statutory body/government company, had nothing to do with execution of the
subject contract, there can be no justification for anyone doubting his independence or
impartiality, in the absence of any specific evidence. Therefore, senior officer/s (usually
heads of department or equivalent) of a government/statutory corporation/ public sector
undertaking, not associated with the contract, are considered to be independent and impartial
and are not barred from functioning as Arbitrators merely because their employer is a party to
the contract.

The position may be different where the person named as the Arbitrator is an employee of a
company or body or individual other than the state and its instrumentalities.

The Court recommended in series of cases that the public sector undertaking/ state and
central authorities to change their practice of nominating its employee as the arbitrator in
view of the avowed objectives of independence and impartiality of the arbitral process. But
the court does not seem to be clear in treating government departments/ PSUs differently
from private entities in the appointment of its own employees as arbitrators.

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