The Arbitration Clause empowering the “Company‟ to appoint the Sole Arbitrator in the present case would be vitiated in the light of the law laid down by the Supreme Court in the case of Perkins
|Case name:||Proddatur Digi Cable Services V/s Siti Cable Network Limited|
|Case number:||O.M.P. (T) (COMM.) 109/2019 and I.A. 17896/2019|
|Court:||The High Court of Delhi|
|Bench:||Hon’ble Ms. Justice Jyoti Singh|
|Relevant Act/Sections:||Section 7, 12(5), 13 ,14, 15 and 21 of the Arbitration and Conciliation Act, 1996|
- BRIEF FACTS AND PROCEDURAL HISTORY:
- The present petition has been filed under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996 seeking a declaration that the mandate of the Arbitrator appointed by the respondent be terminated and an Arbitrator be appointed by this Court in accordance with the provisions of the Act.
- The present petition arises out of a Distribution Agreement entered into between the parties on 03.08.2015. Clause 13 of the Agreement provides for resolution of the disputes between the parties by way of arbitration
- Certain disputes arose between the petitioner and the respondent as to the amounts due to the petitioner during the subsistence of the Distribution Agreement. It is the petitioner’s case that all his efforts to amicably recover the amount from the respondent failed and upon which the petitioner invoked the Arbitration Clause, vide notice dated 29.10.2018. The petitioner nominated an advocate as his Arbitrator. The respondent replied to the notice on 28.11.2018 and disagreed with the name proposed by the petitioner. Placing reliance on clause 13.2 of the Agreement and claiming power to unilaterally nominate the Arbitrator, the respondent appointed Ms. Charu Ambwani as the Arbitrator.
- On 09.01.2019, the petitioner requested the Arbitrator vide a letter to enter upon reference and on 19.01.2019, the first procedural hearing was conducted. The petitioner avers that on 10.01.2019, the Arbitrator addressed a letter to the counsels for the parties seeking consent of the petitioner to her appointment alongwith a disclosure under Section 12 of the Act. The petitioner responded vide a letter dated 14.01.2019 declining consent to her appointment.
- The petitioner avers that through its counsel it sent an email dated 28.01.2019 to the Arbitrator pointing out that objections regarding procedure and jurisdiction would be raised in due course by the petitioner as per provisions of the Act. On 26.11.2019, the Supreme Court delivered its judgment in Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd. 2019 SCC Online SC 1517 in view of which the unilateral appointment of the Arbitrator by the respondent is vitiated under Section 12(5) of the Act.
- The petitioner avers that in view of the said judgment, the petitioner conveyed to the nominated Arbitrator not to proceed with the arbitration as her mandate stands terminated de jure. The Arbitrator vide an email dated 07.12.2019 communicated that she would continue with the proceeding unless there was a judicial order terminating her mandate. Hence the petitioner has filed the present petition.
- ISSUES BEFORE THE COURT:
- Whether unilateral appointment of an arbitrator by a party to the arbitration agreement is permissible?
- Whether there is a distinction between “Managing Director” and “Company” when the power of appointment of arbitrator is conferred?
- RATIO OF THE COURT:
- The contention of the counsel for the petitioner is that the case of the petitioner is squarely covered by the judgment in the case of Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd. 2019 SCC Online SC 1517 and Bharat Broadband Network Limited vs. United Telecoms Limited (2019) 5 SCC 755. He contends that it is undisputed that the respondent had unilaterally appointed the Arbitrator and thus the appointment is vitiated in terms of the above judgment.
- Learned counsel also submits that the arbitration clause envisages the appointment of a Sole Arbitrator by the “Company‟ i.e. the respondent herein. Moreover, the Supreme Court has clearly held that where only one party has a right to appoint a Sole Arbitrator, its choice will always have an element of exclusivity in determining the course of dispute resolution. Thus, the person who has an interest in the outcome or decision of the dispute must not have power to appoint a Sole Arbitrator.
- Learned counsel also contends that the applicability of de jure termination under Section 12(5) to on-going arbitrations has also been settled by the Supreme Court in the case of Bharat Broadband (supra).
- In the said case the issue had arisen in the context of applicability of the judgment of the Supreme Court in TRF Limited vs. Energo Projects Limited (2017) 8 SCC 377 to an on-going arbitration. The Supreme Court held that as soon as a clarificatory judgment is pronounced, Section 14 of the Act comes into play, automatically terminating the mandate de jure.
- On the other hand, learned counsel for the respondent contends that the autonomy of the parties to the choice of procedure as contained in an Arbitration Agreement is a foundation pillar of arbitration. Parties are at liberty to choose the procedure for arbitration including but not limited to the appointment of an arbitrator. Reliance is placed on the judgment of the Supreme Court in the case of Centrotrade Minerals & Metal Inc vs. Hindustan Copper Ltd. (2017) 2 SCC 228 and it is submitted that the judgment was delivered post the 2015 amendment to the Act. It is also argued that post the Amendment Act, 2015, a Coordinate Bench of this Court has upheld the right of a party to an Arbitration Agreement to appoint a Sole Arbitrator.
- It is next contended that under Section 7 of the Act, parties can decide on the procedure for appointment of the Arbitrator. The petitioner by executing the Distribution Agreement had on its free will and without coercion agreed for appointment of the Arbitrator as per the terms of clause 13. The respondent in appointing the Arbitrator has acted in terms of the agreement between the parties. It is also contended that right of one party to an arbitration agreement, to appoint a Sole Arbitrator has been in existence and has been upheld by the courts in various judgments.
- Learned counsel for the respondent contends that the petitioner had chosen not to file objections under Section 13 of the Act before the Arbitrator and participated in the proceedings. Therefore, the petitioner is deemed to have waived its objections under Section 12(5) of the Act. It is also argued that the Arbitration Agreement in the instant case was entered into on 30.08.2015, before the Amendment of Act, 2016 came into force and thus the judgment of Perkins (supra) will not apply to the present case.
- It is further contended by the respondent that 246th Law Commission Report deemed it fit not to recommend any change on the issue of appointment of an Arbitrator by one party to the agreement, on the ground that there has been a long practice to that effect. It is observed in the Report that the intention of Section 12(5) of the Act was not to prohibit unilateral appointment of an Arbitrator.
- Learned counsel seeks to distinguish the judgment of the Supreme Court in the case of Perkins (supra) on the ground that the facts of the present case are not the same. It is argued that the Arbitration clause examined by the Supreme Court was distinct from the clause in the instant matter. In the said case, the arbitration clause provided for the Managing Director of one party to appoint an Arbitrator, whereas in the instant case the “Company” has to appoint the Arbitrator.
- The Court held that the issue that arises for consideration before this Court is the eligibility of the “Company” referred to in the Arbitration Clause between the parties, to unilaterally appoint a Sole Arbitrator to adjudicate the disputes between the parties. Following the ratio of the judgment in the case of Perkins (supra), it is clear that a unilateral appointment by an authority which is interested in the outcome or decision of the dispute is impermissible in law. The Arbitration Clause in the present case empowers the company to appoint a Sole Arbitrator. It can hardly be disputed that the “Company‟ acting through its Board of Directors will have an interest in the outcome of the dispute. In the opinion of this Court, the clause is directly hit by the law laid down in the case of Perkins (supra) and the petition deserves to be allowed.
- The Court observed that the respondent is right in its contention that the autonomy of the parties to the choice of procedure is the foundational pillar of arbitration and that the petitioner had entered into the Distribution Agreement with the Arbitration Clause, out of its free will. Party autonomy is important but at the same time fairness, transparency and impartiality are virtues which are equally important. If the Authority appointing an Arbitrator is the Head or an employee of a party to the agreement then its interest in its outcome is only natural. It goes without saying that once such an Authority or a person appoints an Arbitrator, the same ineligibility would translate to the Arbitrator so appointed. The procedure laid down in the Arbitration Clause cannot be permitted to override considerations of impartiality and fairness in arbitration proceedings.
- Thus, in the present case, the Company is run by none other than the Directors collectively. Duties of the Directors have been stipulated in Section 166 of the Companies Act, 2013. A bare perusal of the duties clearly reveals that the Director at all times, has to act in good faith to promote the objects of the Company and in the best interest of the Company, its employees and the shareholders. A Director shall not involve in a situation in which he may have a direct or an indirect interest that conflicts or possibly may conflict with the interest of the Company. It goes without saying that the Directors of the Company as a part of the Board of the Directors would be interested in the outcome of the Arbitration proceedings.
- The Company therefore, acting through its Board of Directors would suffer the ineligibility under Section 12(5) read with Schedule VII of the Act. The same ineligibility would also apply to any person appointed by the said Company. Thus, in my view, for the purposes of Section 11(6) and Section 12(5) read with Schedule VII, there cannot be a distinction based on the appointing authority being a Company.
- Concluding, the relevant date to decide the applicability of Section 12(5) is not the date of the agreement but the date on which the Arbitration commences. By virtue of Section 21 of the Act, the Arbitration commences when the notice invoking arbitration is sent. In the present case, the notice invoking the arbitration agreement was sent by the petitioner on 28.10.2018, which is after the insertion of Section 12(5) of the Act by the Amendment Act, 2016. Thus, there is no doubt that Section 12(5) would apply to the present case and the Company is debarred in law from appointing the Arbitrator.
- However, the Arbitration Clause wherein one party was to draw up a panel of Arbitrators from which the other party was to choose is permissible as per Voestalpine Schienen GMBH vs. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665.
- DECISION HELD BY COURT:
- In my view, none of the contentions raised by the respondent can be sustained.
- As a corollary to that, the ineligibility of the Company would translate and percolate to the Arbitrator appointed by the Company and thus the Arbitrator presently conducting the arbitration proceedings is declared to be ineligible to act as an Arbitrator.
- Since the present Arbitrator has become de jure unable to perform her functions as an Arbitrator, I hereby terminate the mandate of the present Arbitrator and substitute by another Arbitrator.
- Mr. Justice Mukul Mudgal, former Judge of this Court, is appointed as a Sole Arbitrator to adjudicate the disputes between the parties.
- The learned Arbitrator shall give disclosure under Section 12 of the Act before entering upon reference.
- Fee of the Arbitrator shall be fixed as per Fourth Schedule of the Act.
- The petition is allowed in the aforesaid terms. All pending applications are accordingly disposed of.