Appointment of Arbitrator: Rule of Procedure or Law, A Conundrum

UNCITRAL[1] is the grund norm for arbitration law for any country. A robust paradigm shift is witnessed through introducing recent amendments in the Indian Arbitration Law.

The law on Arbitration, Arbitration & Conciliation Act, 1996 (hereinafter referred as Act) has seen maximum judicial interventions explicitly going against the ethos of section 5 of the Act, 1996.

Be it, the question of appointment of an arbitrator, granting interim relief, recourse against arbitral award or filing the first appeal so on and so far. The amendments of 2015 were introduced by incorporating the recommendations of Justice A. P. Shah Committee & of 2019 were introduced by incorporating the recommendations of Justice B. N. Sri Krishna Committee. These amendments were incorporated to improve the ranking of India in the list of other countries on the parameters of ease of doing business and enforcements of contracts & contractual obligations.

Party autonomy and minimal judicial intervention in the whole arbitration process is the bedrock of basic jurisprudence of Arbitration. This article is an attempt to examine whether judicial intervention is permissible while making an appointment or securing the appointment of an arbitrator, if yes then up to what extent.

Chapter III, section 11 of the Act deals with the appointment of Arbitrator. Parties are free to appoint an arbitrator(s) of their own choice. They can appoint Arbitrator as per the rules of procedure agreed upon by them. They may go for sole arbitrator mechanism or two arbitrators headed by presiding Arbitrator. Section 11(6), (6A) & (6B) of the Act envisages the scenario where parties fail to appoint an arbitrator as per their rules of procedure as agreed upon by them or the two appointed arbitrators fail to appoint the presiding Arbitrator within the prescribed time limit of 30 days in the statute.

Section 11(6A), (6B) of the Act was introduced through 2015 amendment but same is omitted vide 2019 amendment, though the date of notification of omission of section 11(6A) & (6B) of the Act is yet to be notified. Hence, for that purpose, section 11 (6A) & (6B) exist in the statute book and the rule of law unless the Arbitral Institutions (hereinafter referred as AI) is established and notified. 2019 Amendment actually envisages a shift from ad-hoc Arbitration to institutional setup and thus enunciates the institutionalization of the arbitral process.

Therefore unless AIs are notified, the old regime of appointment of arbitrators by High courts (in case of domestic arbitrations) and Supreme Court (in case of International commercial arbitrations) shall continue. Section 11(6) and (6A) unlike other provisions of the Act may be summarised as a naked usurpation of the legislative functions under the thin guise of interpretation & construction of the statute.

Unlike in civil suit, when a plaint is filed, the defendant files preliminary objections[2], in arbitration matters too, before going into merits of the case and adjudicating upon the claims and counter-claims of the parties to the agreement, the tribunal adjudicates upon certain preliminary threshold issues or objections under section 16 of the Act. Section 16 of the Act crystalizes the doctrine of Kompetenz Kompetenz, meaning thereby, arbitral tribunal is competent enough to rule on its jurisdiction and all other objections connected with it. These threshold issues may be as follows:

1. Limitation;
2. Jurisdiction;
3. Plea of res judicata;
4. Plea of estoppel;
5. Existence of arbitration agreement;
6. Existence of dispute;
7. Such dispute is covered under the arbitration clause;
8. Issue whether a particular dispute can be arbitrated or not so on and so for.

There are issues which need detailed examination on the merits of the case, which require leading of evidences by the parties. There are some issues which do not require detail examination and can be decided prima facie.

Konkan Railway regime and section 11(6) landscape

The issue which cropped up for determination while making an appointment or for that matter for securing the appointment of an arbitrator under section 11(6) of the Act actually started clogging the expeditious disposal of arbitrations. Under the thin guise of making an appointment, the judicial forums started detailed examinations lead by evidence and examinations of witnesses, inspection and discovery of documents etc. while deciding the threshold issues.

Apex court has been vexed with these puzzling questions since the enactment of the Act. In famous Konkan Railway Corporation Ltd. v. Mehul Constructions co.[3] & Konkan Railway v. Rani Constructions (P) Ltd.[4]the moot question arose before the courts while making appointments under section 11(6) of the Act, the nature of power to be exercised under the said clause. In this case, it was opined that it is an administrative power in nature, wherein appointing courts or their delegates are not supposed to apply judicial mind. It was premised on the ideation that section 11(6) is a trigger (kick-start) to the Arbitration and nothing else.

The purpose of engaging the highest judicial office in making appointments of Arbitrator is to maintain the integrity and sanctity of the arbitral process by ensuring impartiality and lack of biasness which forms the very foundation of ADR mechanism. This was further held that the scope and limits of section 11 (6) of the Act are merely to fill the leftover gap and complete the appointment process of the Arbitrator as expeditiously as possible.

SBP Patel judgment charted a new territory for section 11(6)

Thereafter in the matter of SBP vs. Patel Engineering[5] the issue which was expounded again under this section while making an appointment of Arbitrator was the nature of the power of the court. The appointing power of the Arbitrator under this section was coloured as judicial power in nature. The seven judge’s constitutional bench overruled Konkan Railway judgment. The contours of judicial power imports various threshold issues to be adjudicated upon before making an appointment or securing the appointment of an arbitrator.

This case laid the foundation of one of the essential dictum; namely, the court has all the powers to examine all the prerequisites/conditions precedent for initiation of arbitration proceedings. It was held in the said case that the doctrine of Kompetenz Kompetenz would have no operation where the appointment of Arbitrator is secured through court mechanism by invoking section 11(6) of the Act. This doctrine operates in those arbitration proceedings where parties themselves appoint Arbitrator.

In another case, National Insurance v. Boghra Polyfab[6]the court explored the full dimensions of the said section. Dual test of examination and validity of any arbitration agreement while exercising the appointing power under the said section came before the court for deliberation and consideration. In the light of this test, the court discussed at a great length, the implications of allowable permissible pre arbitral, judicial intervention. The word used in section 11(6) is examination.

The word examination in its colloquial meaning and construction denotes something beyond mere recognition or introduction. In legal parlance, it denotes the application of judicial mind. Implying the concept of examination of the arbitration agreement, it becomes necessary to scrutinize whether arbitration agreement exists or not. If yes, whether such agreement is void, voidable or valid. Chapter II of the Indian Contract Act, 1872 (section 13 to 30) are the instances at the touchstone of which section 11(6) of the Act is supposed to be examined. In Boghra Polyfab case, Justice Ravindran categorized the issues to be examined at the very threshold of appointing stage into the following three:

1. Threshold issues which appointing authority must examine:
2. existence of the arbitration agreement;
3. appointing authority jurisdiction;
4. whether the applicant is a party to the agreement or not;
5. Threshold issues which appointing authority may examine:
6. Whether the claim is a stale claim or live claim;
7. Existence of dispute;
8. Whether parties concluded contract/transaction by recording satisfaction of their mutual right and contractual obligations etc.;
9. Whether such dispute is covered under the arbitration clause for resolution;
10. Threshold issues which Arbitral Tribunal must examine:
11. Issue of jurisdiction
12. Limitation;
13. Whether such dispute is subject to Arbitration or not[7]
14. All the issues connected with jurisdiction so on and so far.

It is again to reiterate that each of the threshold issues which comes up for adjudication before the appointing authority, i.e. the courts are to be adjudicated prima facie or parties are supposed to lead evidence and prove them through detail examination.

In the matter of KSS Kssiipl Consortium v. GAIL[8] the court said that while making an appointment of an arbitrator, the court is duty-bound to determine important twin aspects before making such appointment, i.e. arbitrability of the dispute and enforceability of the claim. In the matter of Dura Felguera SA v. Gangavaram Port Ltd.,[9]it was inclined by the court that the appointing authority must look into the aspects before making an appointment under section 11(6) of the Act, whether dispute (when the application is moved for the appointment of Arbitrator by one of the parties to the agreement) exists or not, if yes whether such dispute is covered by arbitration clause for resolution or not.

In United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd.[10], the Apex court while relying upon Dura Felguera case, emphasized, that the appointing authority is supposed to look into the existence of arbitration agreement which invariably includes legal scrutiny of its validity too. Beyond which courts are not required to look into any of the aspects. Perhaps that is the reason that the Act under section 11(13) gives a time span of 30 days only for the disposal of section 11(6) application.

The case law as laid down in Patel Engineering and Boghra Polyfab was legislatively overruled by 2015 amendment by incorporating section 11(6A). Law Commission Report 246, which actually laid the foundation of 2015 Arbitration amendment expressly permeated that section 11(6) (6A) is merely a rule of procedure for appointment of arbitrators. The right to appoint Arbitrator is basically a right available to the parties of the agreement, thus by allowing the appointing authority, i.e. courts to rule upon threshold objections raised is nothing but a clear cut attempt to re-write the statute in the court coined language which invariably tantamount to impermissible judicial intervention.

This goes against the very basic tenet of arbitration law and process hijacking party autonomy and giving it a shape, size and colour of adjudication as litigation by courts. The purpose of such legislative mandate was simple; the arbitral process should not be thwarted at the threshold when a preliminary objection is raised while making an application under section 11(6A) of the Act is made.

In Picasso Digital Media (P) Ltd. v. Pick-A-cent consultancy (P) Ltd.[11]Delhi High Court for the very first time interpreted the newly inserted clause (6A) of Section 11 of the Act and held that the appointing authority under the said clause required to examine existence and validity of an arbitration agreement, nothing more nothing less.

In Vidya Drolia & others v. Durga Trading Corporation[12], it was made pretty clear and concrete that the validity of an arbitration agreement is a distinct issue and existence of such agreement is a different fact. The appointing authority courts under section 11(6) of the Act is tasked with the duty to mere examine/scrutinize existence of arbitration agreement and not supposed to look into its validity.

In another significant ruling in the matter of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.[13] where the appointing court under the said clause was grappled with the issue of examining the existence of an arbitration agreement where the agreement is non-stamped or insufficiently stamped. Indian Stamp Act, 1899 is the premier law of revenue generation of respective state governments.

Section 2(14) read with section 3 of the Stamp Act defines the term instrument; every document through which any right, liability is created or purports to be created. Section 33 of the Stamp Act relates to examination & impounding of instruments if same is not duly stamped or sufficiently stamped. If the arbitration agreement is a standalone agreement & not the one contained in a contract, the issue of registration or stamping would not arise.

And a court seized of a petition under section 11 (6A) of the Act, 1996 can proceed and appoint the Arbitrator. Therefore, under section 33 of the Indian Stamp Act, a legal duty is cast upon the courts while dealing with non-stamped instruments to examine and impound the same. Further to add, section 35 of the Stamp Act, 1899 says that non-stamped instruments cannot be acted upon unless the stamp duty is paid in relation thereto.

Here comes the interplay of section 11(6A) of the Act, 1996 and section 35 of the Indian Stamp Act, 1899. The consequence of not paying stamp duty on a particular instrument may be tagged as curable defect and looking into the aims/object of the Stamp Act; it is one tool to secure revenue for the state on certain classes of instruments. Further to elaborate, the issue of appropriate stamp duty itself could lead to another fold of litigation and by which parties to the agreement may suffer consequential damages.

Section 38 of the Indian Stamp Act, 1899 provides a statutory mandate, and thus a statutory duty is casted upon the courts dealing with such instruments not to act upon such instruments or arbitration clause therein unless same is cured by paying proper payable stamp duty in relation thereto.

In the matter of Uttrakhand Purv Sainik Kalyan Nigam v. Northern Coal Field Ltd[14]. Apex court examined the nature and scope of section 11 (6A) of the Act in the light of the limitation issue. The issue of limitation is a mixed question of both fact and law. To trigger the law of limitation, one has to travel and trace the fact when the cause of action actually arose. In commercial matters, cause of action may be any one of the following dates depending

1. breach of contract;
2. failure of formal negotiation (where the contract provides dispute resolution through the formal mode of negotiation before invoking arbitration clause)
3. Invocation of the bank guarantee etc.

To delve into these questions, a mixed factual and legal matrix is required to be thought of. And for that matter, there may be situations/circumstances which demand detailed analysis of both facts and law. In other words, to fix the limitation issue, it can be inferred that parties are supposed to lead evidence and examine a witness if any for that purpose. Such an important issue cannot be adjudicated prima facie; it must be decided on merits.

In Uttrakhand Purv Sainik Case, the court made it explicitly clear that the appointing authority is devoid of any such jurisdiction to adjudicate upon limitation issues of the case.

In the matter of Indian Oil Corporation v. SPS Engineering Ltd.[15], Apex Court got an opportunity to look into the plea of res judicata as one of the routine manner threshold issues. In this particular judgment, it was opined that those issues which cannot be decided prima facie, meaning thereby without leading any evidence on that matter but decided only and only on the basis of the material produced on the record are the subject matter of adjudication at the appointing arbitrator stage.

On the contrary, those issues which needs detailed deliberations, to prove or disprove them evidences pertaining to them are supposed to lead and examination of parties, the discovery of documents etc. are to be conducted can be decided by the Arbitrator on the merits of the case. Plea of res judicata operates as a bar as to the pendency of any other proceeding between same parties before same forum for same cause of action/terms of dispute to avoid multiplicity of proceedings.

Plea of res judicata is raised by the respondent challenging the very jurisdiction/maintainability of the matter if the subsequent matter is substantially in issue which is already pending before appropriate forum for adjudication. Therefore, whether a particular dispute is substantially in issue or not it requires issue framing. Before issue framing, such a plea cannot be examined. And for that matter, detailed analysis on evidence and examination of parties is the must. Therefore, a plea of res judicata cannot be examined at the Arbitrator appointing stage.

In Mayawati Trading Pvt. Ltd. v. Pradyut Debburman[16] the court reiterated the purpose of section 11 (6A) of the Act, its aims, object, legislative intent and the mandate. In Mayawati case, the court discussed at length both the insertion of clause 6A as well its omission with effect from a future date which is yet to be notified. Since the sole objective of 2019 amendment is to inject the institutional arbitration mechanism by replacing the ad-hoc arbitration system, therefore separate provisioning has been made for the creation of Arbitral Council of India (ACI) a statutory body tasked with accreditation and grading of Arbitral Institutions (AIs)[17].

Konkan Railway case regime relied on section 11(6) power as administrative power and SBV Patel Engineering case coloured said power as judicial power. Nature of administrative power imports the idea of executive and managerial functions. It brings the concept of managing, conducting or superintending any proceeding. Administrative functions of any authority embark upon mere performing managerial actions; however, judicial powers involve adjudicating a matter applying basic tenets of law, being discretionary in nature and invites judicial decision making too.

But section 11(6A) stage must ascertain whether a real/genuine/bonafide dispute exists or not. Mere identification of arbitration agreement does not suffice to proceed under section 11(6) of the Act. The courts as appointing authority under the said clause are entrusted with the duty of further ascertaining whether a particular dispute is covered under the arbitration clause for adjudication or not.

Further to add, the appointing authority may choose to decide upon the aspect whether the claim is dead or stale, whether parties have by recording accord & satisfaction exhausted all the rights and obligations oozing out of such contract/agreement or not. Giving discharge vouchers, No claim certificate, accepting full & final receipt etc. all these pleas cannot be examined by the court tagged with the mere power of appointing arbitrators.

Other Jurisdictions & Appointment of Arbitrators

United Kingdom

In the U.K., in case, where one of the parties to the agreement makes default in appointing Arbitrator the other party may appoint his Arbitrator as sole Arbitrator after giving notice of 7 days to the former of his intention to do so. And U.K. law provisions that defaulting party may apply to the court to set aside the appointment if deems fit.

Hong Kong and Singapore

In both the jurisdictions, committee of Hong-Kong International Arbitration Centre (HKIAC) & Singapore International Arbitration Centre (SIAC) makes such appointment of Arbitrator.

Such a procedure is akin to Article 11 of UNCITRAL, model law on Arbitration. Such a procedure gives impetus to institutionalism in arbitration business. It is noteworthy to mention that there is not court interference in the recommendations made by the appointing committee of the Arbitrators.

Law Commission Report 246 and in pursuant thereof the amendments introduced in line therewith in 2015 & 2019 in the arbitration Act envisages adopting Model Law UNCITRAL in both letters as well in spirits so that ranking of the country in the spheres of ease of doing business and performance and execution of contracts can be improved and India may culminate into a super speciality centre as Hong-Kong and Singapore jurisdictions when it comes to International Commercial Arbitrations and to give an acceleration and dynamics to domestic entrepreneurs by resorting expeditious redressed of business and commercial disputes through ADR mechanics.

Conclusion

To propel economic growth of any nation and provide a congenial ecosystem for business houses be it domestic or international, dispute resolution through Arbitration now a days gaining momentum. A successful arbitration model rests on two hinges basically, party autonomy and least judicial intervention. As said earlier too, party autonomy is the bedrock of the Arbitration. To encapsulate and imbibe this basis dictum section 11(6A) & (6B) is omitted so that role of courts can be reduced.

Now a million dollar question will arise as to the roles and responsibilities, powers and duties of AIs while making appointments of Arbitrator. Whether AIs are supposed to look into those threshold issues and examine the same or not. Omitting the clause (6A) & (6B) would raise many more queries as to the jurisdiction of AIs while appointing arbitrators.

But as of now introducing amendments through these sub clauses India has given green signal to the global community that in coming years it is going to be a hub of Arbitration where roles of any judicial forum is minimized at a great length. However, it is a very premature stage to comment whether these amendments are recipe for disaster or not, it will purely depend upon the interpretation and construction of the clauses of the statue by bar/bench in future.

By

Bharat Bhushan Pandey
Deputy Legal Advisor
Legal Department
ONGC Ltd.

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[1] United Nations Commission on International Trade Law

[2] Order VII rule 11, the Code of Civil Procedure, 1908.

[3] (2000) 7 SCC 201

[4] (2002) 2 SCC 388

[5] (2005) 8 SCC 618

[6] (2009) 1 SCC 267

[7] In line with the list (of matters which are arbitrable and which not) as given in Afcon Case.

[8] (2015) 4 SCC 210

[9] (2017) 9 SCC 729

[10](2019) 5 SCC 362

[11] (2016) SCC Online Del 5581

[12] (2019) SCC Online SC 358

[13] (2019) 9 SCC 209, decided on 10.04.2019

[14] (2020) 2 SCC 455

[15] SLP(C) 11903/2010

[16] (2019) 8 SCC 714, decided on 05.09.2019.

[17] Section 43 (I) of the Arbitration & Conciliation, Act 1996.