Provisions Regarding Appointment of Arbitrator in the Arbitration and Conciliation Act, 1996

Arbitration is a process of alternate dispute resolution in which any dispute between the parties is submitted willingly to one or more arbitrators, who then make a binding award in the dispute. Such arbitrators are selected by the parties themselves in most cases. The Arbitration act[1] has provided for an exhaustive procedure for the appointment of the arbitrator. Chapter III of Part I of the act deals with the composition of the arbitral tribunal.

Number of Arbitrators

Section 10, which corresponds to Article 10 of the UNCITRAL Model Law[2] provides that the parties shall be free to determine the number of the arbitrators, making sure that they are odd in number. This has been done so as to avoid any deadlock in the arbitration award which can be a possibility in case of even number of arbitrators. However, the Supreme Court in N. P. Lohia case[3] stated that any agreement that allows for the parties to select even number of arbitrators will not be invalid or void and cannot be the sole ground for rendering arbitration agreement invalid. The section further clarifies that in absence of the number of arbitrators in the agreement, only a sole arbitrator shall be appointed.

Appointment of Arbitrator

Section 11 provides for the detailed procedure for the appointment of arbitrator in case the parties fail to appoint arbitrators for any reason.

Nationality of Arbitrators:

As far as the nationality of the arbitrator is concerned, section 11(1) provides that a person of any nationality can be appointed as an arbitrator. Here too, if the parties have provided for the nationality of the arbitrators in their arbitration agreement, then the provisions of the agreement shall hold precedence. Further, in section 11(9), the Act provides that in any international commercial arbitration, the supreme court, or any person/institution designated by it, may appoint sole or third arbitrator of a nationality that is different from the nationalities of the parties. This provision provides a discretionary power to the Supreme Court. In Malaysian Airlines case[4] the court held that according to section 11(9) the word ‘may’ must not be interpreted as shall.

Jurisdiction of the Courts:

Section 11(10), which was inserted in the 2015 amendment, provides that with respect to the provisions of subsections (4), (5), or (6), powers to make appropriate rules to deal with these matters have been entrusted to the Supreme Court or the High Courts. Thus, the respective High Courts or the Supreme Court can make their own schemes as per their requirements. With regard to the jurisdictions, in the 2015 amendment, it was provided that where ever the arbitration proceedings is an international commercial arbitration, with respect to the provisions of this section 11, the Supreme Court will have jurisdiction. In all other arbitration proceedings, other than international commercial arbitration, the respective High Court will have jurisdiction. Further, section 11(11) provides that where the request under subsection (4), (5) or (6) has been made in more than one High Courts, the High Court to whom the request was made the first will be the competent court to adjudicate upon that request.

Procedure of Appointment:

For the procedure of appointment, Section 11(2) provides that, subject to subsection (6), if the parties have agreed upon the procedure for appointment of the arbitrator in their agreement, then that procedure shall have precedence over the remaining provisions of the section. This shall be the recurring theme of the section. The agreement executed by the parties has to be given prime importance in case of any arbitration proceedings[5]. Only when the agreement is silent over any provision or the parties are not in consensus regarding the same, then shall the provisions of section 11 take preference. It should be noted that there are two prerequisites[6] to the appointment of the arbitrators stated by the court, that is, firstly, there should be a dispute existing between the parties to the agreement and secondly, that the arbitrator should be appointed as per the needs of the dispute.

In case of appointment of sole arbitrator, section 11(5) provides that subject to the provisions of subsection (2), the parties have to appoint the arbitrator within 30 days from the receipt of request by one party. Where the parties fail to appoint arbitrator within 30 days from the request of the party, the Supreme Court or the High Court or person designated by them can appoint the sole arbitrator upon the request of the party. In Iron and Steel Co. case[7], the court stated that section 11(5) will only come into force when there is no agreement between the parties as per section 11(2) of the act and if such an agreement has been made then section 11(5) will not be applicable.

When there are more than one arbitrators to be appointed, the sections 11(3) and 11(4) come into precedence. Section 11(3) provides that in case there are three arbitrators, each party shall appoint one arbitrator and the two appointed arbitrators shall then appoint a third arbitrator. This third arbitrator shall be the presiding arbitrator. There is no compulsion that this appointment of the third arbitrator shall be made by the two arbitrators in writing[8] Section 11(4) furthers this provision by stating that in case the parties fail to appoint the two arbitrators or the two arbitrators fail to appoint the third arbitrator within 30 days respectively, then the appointment shall be made by the Supreme Court or the High Court on request of the parties. This part had been amended[9] where the expression ‘Chief Justice of India’ and ‘Chief Justice of High Court’ used in earlier provision has been replaced with Supreme Court or High Court, respectively. As far as the appointment procedure is concerned,  section 11(6) provides for the contingencies for the appointment procedure, giving powers to the Supreme Court or the High Court to take necessary measures, when the parties or the two arbitrators fail to act as per the required procedure as mentioned in section 11(2). The term ‘necessary’ includes those things that are reasonably required to be done for the intended task. Subsection (6) provides for three conditions for the applicability of this section which are:

• When a party fails to act as required under that procedure; or
• When the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
• When a person, including an institution, fails to perform any function entrusted to him or it under that procedure.

To give a sense of finality to the provisions of the subsections (4), (5) and (6) mentioned above, the act provides for Section 11(7) which renders the appointment decision made by the respective court final and non-appealable. Thus, the decision made by the courts or person designated by them has been made final and only an appeal to Supreme Court by way of Special Leave Petition can lie from such an order for appointment of arbitrator as stated in section 11(7). Further, section 11(13) made it incumbent upon the Supreme Court or the High Court or person designated by them to dispute of the application for appointment of arbitrator within 60 days from the date of service of notice on the opposite party.

Fee Structure:

Section 11(14), as inserted by the 2015 amendment[10] attempts to fix limits on the fee payable to the arbitrator and empowers the high court to frame such rule as may be necessary considering the rates specified in Fourth Schedule to the act. The 2015 amendment to the act also brought in section 11A which accords the power to amend the Fourth Schedule to the Central Government, by notification in the Official Gazette, whenever it is necessary and expedient

Qualifications of the Arbitrator

As far as the question of the qualifications of the arbitrator is concerned, section 11(8) provides that respective court shall give due regards to the qualifications of the arbitrator as per the agreement of the parties.  It also provides for the power to the court to seek written disclosure from the arbitrator regarding his qualifications as per the provisions of section 12(1) and in the manner mentioned in the Sixth Schedule.

The 2019 amendment[11] has provided for the detailed qualifications of the persons who can be appointed as arbitrators in the Eight Schedule. It states that a person will not be qualified to be an arbitrator unless has been:

• an advocate within the meaning of the Advocates Act, 1961 having ten years of practice experience as an advocate;
• a chartered accountant within the meaning of the Chartered Accountants Act, 1949 having ten years of experience;
• a cost accountant within the meaning of the Cost and Works Accountants Act, 1959 having ten years of experience;
• a company secretary within the meaning of the Company Secretaries Act,1980 having ten years of experience;
• an officer of the Indian Legal Service;
• an officer with law degree having ten years of experience in the legal matters in the Government, autonomous body, public sector undertaking or at a senior level managerial position in private sector;
• an officer with engineering degree having ten years of experience as an engineer in the Government, autonomous body, public sector undertaking or at a senior level managerial position in the private sector or self-employed;
• an officer having senior level experience of administration in the Central Government or State Government or having experience of senior level management of a public sector undertaking or a Government company or a private company of repute;
• a person having educational qualification at degree level with ten years of experience in a scientific or technical stream in the fields of telecom, information technology, intellectual property rights or other specialized areas in the Government, autonomous body, public sector undertaking or a senior level managerial position in a private sector, as the case may be.

The schedule also prescribes general norms applicable to arbitrators such as that the arbitrator must be impartial and neutral and avoid entering into any financial business or other relationship that is likely to affect impartiality or might reasonably create an appearance of partiality or bias amongst the parties and the arbitrator must be conversant with the Constitution of India, principles of natural justice, equity, common and customary laws, commercial laws, labour laws, law of torts, making and enforcing the arbitral awards, domestic and international legal system on arbitration and international best practices and that the arbitrator should be capable of suggesting, recommending or writing a reasoned and enforceable arbitral award in any dispute which comes before him for adjudication.

Independence and Impartiality of the Arbitrator

Section 12 makes the declaration on the part of the arbitration about his independence and impartiality more exhaustive. Ideally, an arbitrator is supposed to be independent and impartial in the interests of justice. This section casts a duty on the parties to make sure that the arbitrator which has to be appointed is willing to be appointed and does not have any disqualification that might hamper their independence and impartiality. In Keshav Singh case[12], the court stated that independence and impartiality are two different things. “The test for independence is an objective one as the relations are easy to determine. The test for impartiality, however, is a subjective one as it is rather a mental attitude which is not easily determinable. An arbitrator may be independent in the sense that he might not have any relations with the parties but may not be impartial as he might have bias in favour of or against any party.”

The circumstances which the potential arbitrator has to disclose in writing are:

1. Existence of any relationship or interest with the parties or the subject matter of dispute which is likely to give justifiable doubts as to the independence and impartiality.
2. Any circumstances that may affect his ability to devote sufficient time and complete the proceedings within 12 months.

A Fifth schedule, listing the grounds that give rise to justifiable doubt to independence and impartiality of arbitrator has been inserted by the 2015 amendment.[13] A person falling under any of the grounds mentioned in the schedule is unlikely to be independent and impartial in all respects. The amendment also alters section 12(5) stating that if the arbitrator’s relationship with the parties or the counsel or the subject matter of dispute falls in any of the categories mentioned in the Seventh schedule, the person would be ineligible to act as an arbitrator.

The grounds mentioned in the Fifth and Seventh schedule are the same and are enumerated below.

Arbitrator’s relationship with the parties or counsel

1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.
4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.
5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
6. The arbitrator’s law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.
7. The arbitrator’s law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.
8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.
9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.
11. The arbitrator is a legal representative of an entity that is a party in the arbitration.
12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom.

Relationship of the arbitrator to the dispute

15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
16. The arbitrator has previous involvement in the case.

Arbitrator’s direct or indirect interest in the dispute

17. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.
18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.
19. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.

Challenge to the Arbitrator’s Appointment

Once an arbitrator has been appointed, his appointment can be challenged by any of the parties on the grounds prescribed in section 12. Section 12(3) provides for the grounds on which the appointment may be challenged which are:

1. There are justifiable doubts as to his independence or impartiality, or,
2. The arbitrator does not possess the qualifications agreed upon by the parties.

The section 12(4) even provides that the party appointing him may challenge his appointment in future but is limited to reasons of which the party becomes aware of after the appointment has been made.

The procedure to make such a challenge has been enumerated in section 13 of the act. This section 13(1) provides that the parties have the freedom to choose the procedure for challenging an arbitrator if they want to in their own agreement. This procedure shall override the rest of the provisions of the section. However, the section 13(4) provides that in case the procedure mentioned in the agreement is not successful, then the arbitration proceedings will continue on with the same arbitral tribunal. This has been incorporated to avoid frivolous use of delay tactics by any of the parties.

If however, the arbitration agreement between the parties does not contain any provision for the same, then the provisions of 13(2) shall come into play. According to this, any party that is challenging the appointment of the arbitrator will have to send a written statement of reasons for challenge to the arbitral tribunal within 15 days of being aware of the circumstances of 12(3) or the constitution of the tribunal.This right to challenge will be waived off if not challenge is made within 15 days. Further, 13(3) provides that once the written statement has been presented, the tribunal shall decide on the challenge unless the challenged arbitrator withdraws from his office, or when the other party also accepts the challenge in which case the arbitrator has to mandatorily vacate his office. The decision made by the tribunal will be final and not subject to any review by the courts.

When the challenge is rejected, the arbitration proceedings shall continue and the tribunal shall make an award. This award can be applied to be set aside as per the provisions mentioned in section 34 of the Act by the party challenging the arbitrator.

Conclusion

For the success of any arbitration proceeding, it is highly imperative that there should be minimal disputes regarding its procedural aspects. Since the appointment of arbitrator is the first stage of the proceedings, care should be taken during such an appointment so as to prevent unnecessary disputes or delays. The act has provided a detailed procedure for the appointment of the arbitrator keeping in mind all the contingencies and time limits which might prevail during the process. Further, the act has accorded liberty to the parties to prescribe their own procedure, which will prevail over the provisions of the act. Through these provisions, the act has strived to make the appointment process in arbitration more ordered and less arduous.

[1]The Arbitration and Conciliation Act, 1996 [Act No. 26 of 1996]

[2]UNCITRAL Model Law on International Commercial Arbitration, UN Document A/40/17, 21 June 1985.

[3]N.P. Lohia vs. Nikunj Kumar Lohia [AIR 2002 SC 1139]

[4]Malaysian Airlines Systems vs. Stic travels Ltd. [(2011) 1 CompLJ 217 (SC)]

[5]Iron and Steel Co. Ltd. vs. Tiwari Road Lines [(2007) 5 SCC 703]

[6]Union of India vs. D.N. Bhalla [(2009) 7 SCC 350]

[7]Supra 5

[8]Grid corporation of Orissa vs. AES Corporation, [2002 (3) ArbLR 486 SC]

[9]The Arbitration and Conciliation Amendment Act, 2015.

[10]Ibid.

[11]The Arbitration and Conciliation Amendment Act, 2019.

[12]Keshav Singh vs. Indian Engineering Corporation [AIR 1972 SC 1528]

[13] Supra 9

This article has been written by Aditya Srivastava, Final Year Student at Law Centre II, Faculty of Law, University of Delhi.

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