WHETHER A COURT IS HAVING POWER TO APPOINT AN ARBITRATOR OTHER THAN THE NAMED ARBITRATOR

[Mr. M. GOVINDARAJAN]

Section 7 of the Arbitration and Conciliation Act, 1996 provides for arbitration agreement. According to this section ‘arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes which have arises or which may arise between them in respect of a defined legal relationship, whether contractual or not.  An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.  The agreement is said to be in writing if it is contained in-

-          A document signed by the parties;

-          An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

-          An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other;

-          The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 10 of the Act provides for appointment of arbitrators. The parties are free to determine the number of arbitrators provided that such number shall not be an even number. Failing the determination as indicated above the arbitral tribunal shall consist of a sole arbitrator. 

The appointment of an arbitrator can be challenged only on one or more of the following grounds:

-          That circumstances exist which give rise to justifiable doubts as to his independence or impartiality; or

-          That he does not possess the qualifications agreed to by the parties.

                        Where the agreement itself specifies the arbitrator, it is obligatory on the part of the Court to refer it only to the arbitrator named in the agreement. In ‘Punjab Agricultural University V. Association Construction’ – (2003) 3 RAJ 431 (P&H) the named person has to be appointed at the initial stage. The challenge as to his lack of independence or impartiality has to be presented before him under Section 16.   The Chief Justice cannot begin with selecting and appoint any other persons. The named person was an officer of the University.  It was held that it is not open to the Court to ignore such an agreement clause and appoint another person as an arbitrator.

                        In ‘Chief Engineer, Madras Zone, M.E.S.,V. G. Ramachandra Reddy & Co’ – AIR 1994 Mad 265 it was held that the court cannot be called upon to appoint an independent arbitrator on the ground of bias only because the person designated in the agreement was an employee of the company against whom the arbitration was sought.  It was not possible for the court to presume any bias and therefore the parties were asked to abide by the arbitration clause.  In ‘Ghaziabad Development Authority V. Elnique Construction’ –AIR 1997 All 341 it was held that vague and ambiguous words in the agreement should be ignored and intention of the parties should be made effective through clear statements in the contract.

                        But when bias is likely to be there then it is open to challenge the appointment of named arbitrator.  In ‘Bipromasz Birpon Trading SA V. Bharat Electronics Limited’ –2012 (7) TMI 383 - SUPREME COURT OF INDIA the respondent has entered into a contract with the petitioner by way of placing a purchase order for the supply of Hydraulic Motor, Actuating Cylinder, EL Motor EDM, Converted and GYRO unit.   The contract contained an arbitration clause under which the Chairman-cum-Managing Director of the respondent company was appointed as the sole arbitrator. A dispute arised on the appointment of the sole arbitrator between the petitioner and the respondent company. The petitioner approached the Supreme Court for the appointment of arbitrator.  The respondent contended before the Supreme Court that as per the contract only the Chairman-cum-Managing Director o their company can be appointed as an arbitrator and prayed the court to reject the petition on the ground that the Court would have no power to make an appointment of an arbitrator other than Chairman-cum-Managing Director or his designates. 

The petitioner pleaded before the Supreme Court as follows:

• The named arbitrator is the direct subordinate to the Chairman-cum-Managing Director and employee of the respondent;
• The CMD is the controlling authority of all the employees, who have been dealing with the subject matter in the present dispute and also controlling authority of the named arbitrator;
• Apprehending that the arbitrator would not act independently the petitioner issued a notice on 20.05.2011 in which it has been pointed out that  while the entire process of the performance of the contract was going on, the CMD had issued a letter on 05.06.2009 to the petitioner stating that as per the company’s directives all pending supplies as on that date  were ‘put on hold’;
• After that communications no communication was issued to the petitioner for supply of the goods as per the purchase order dated 03.12.2009;
• Even subsequently, there were difficulties when further lot of 24 units were supplied.

The Court held that the Court would have power to appoint  person other than the named arbitrator, upon examination of the relevant facts, which would tend to indicate that the named arbitrator is not likely to be impartial.   In the present case the Court was of the opinion that it would not be unreasonable for the petitioner to entertain the plea that the arbitrator appointed by the respondent would not be impartial.   The CMD itself would not be able to act independently and impartially being amenable to the directions issued by the Ministry of Defence.The court relied its own judgement in ‘Denel (Proprietary) Limited V. Bharat Electronics Limited’ 2010 (5) TMI 660 - SUPREME COURT OF INDIA in which the arbitrator appointed under the arbitration clause is the Managing Director of the Company against whom the dispute is raised. In addition to the said fact, the said Managing Director of Bharat Electronics Limited which is a government company is also bound by the direction/instruction issued by his superior authorities. It is also the case of the respondent in the reply to the notice issued by the respondent, though it is liable to pay the amount due under the purchase orders, it is not in a position to settle the due sonly because of the directions issued by the Ministry of Defence, Government of India. It only shows that the Managing Director may not be in a position to independently decide the dispute between the parties.

The Supreme Court is of the opinion that the facts in the present case are similar and therefore a similar course needs to be adopted.