June 26 2012
The Supreme Court recently ruled that, despite an express clause providing for an arbitrator, the court can appoint an independent and impartial arbitrator under special circumstances.
Bipromasz Bipron Trading SA (BBT) filed a petition(1) seeking referral of disputes against Bharat Electronic Ltd (BEL) to an independent arbitrator. In its decision the Supreme Court held that although, in general, the court must honour the express clause in the arbitration agreement appointing an arbitrator, under special circumstances (eg, a reasonable apprehension that the person mentioned in the arbitration agreement as the arbitrator is unlikely to act independently or impartially) the chief justice or his or her designate may exercise power under Sections 11(4) and 11(6) of the Arbitration and Conciliation Act 1996 and may refer the dispute to an independent arbitrator under Section 11(8) of the act.(2)
BEL, an Indian government company, issued a purchase order to BBT, a Poland-based company, seeking to purchase certain industrial goods or materials, including hydraulic motors, gyro units and actuating cylinders. The purchase order was issued along with a document titled "General Terms and Conditions of Purchase Order (Foreign)". Clause 10 of the document governed arbitration, referring all disputes concerning the purchase order to the chairman and managing director of BEL or his nominee. While the performance of the contract was ongoing, BEL "put on hold" pending supplies, directing BBT to not dispatch any pending items. However, in response to BEL's subsequent communication, BBT sent out 10 units of gyro stabilisers, which were all rejected by BEL on the alleged ground of being defective and not being of "Russian origin". This, among other things, gave rise to a number of disputes between the parties. Thereafter, the following chain of events occurred.
On May 20 2011 notice was sent through counsel by the petitioner to the respondent seeking appointment of an independent and impartial sole arbitrator. On June 29 2011, realising that the statutory period of 30 days had expired with no reply from the respondent, the petitioner filed a sworn affidavit in Poland requesting appointment of an arbitrator.(3) The same day, the respondent sent a reply to the advocate at New Delhi (which was received on July 1 2011) stating that the correspondence was being placed before the chairman and managing director.
Due to the new communication received, a fresh affidavit was required. Hence, a petition was withheld to await a fresh affidavit from Poland. On July 8 2011 the petitioner sent further notice to the respondent stating that the action would be improper. On July 21 2011 the petition at hand seeking the appointment of an arbitrator was filed. On July 26 2011 the respondent sent an email to the counsel of the petitioner in New Delhi, attaching a letter from the counsel (dated the same day) along with a letter from the respondent (dated July 19 2011) stating that the arbitrator had been appointed. The hard copy of this letter was received by the counsel for the petitioner in New Delhi on July 28 2011.
The petitioner called on the court to intervene and appoint an independent arbitrator, as it was alleged that neither the chairman nor his nominee would be able to act impartially - there would always be a reasonable apprehension that the chairman would be favourably inclined towards the respondent. Furthermore, the petitioners contended that communication of the fact that the arbitrator had been appointed by the respondent was made to the petitioner only through an email after the petition for appointment of arbitrator before the Supreme Court had been filed. In view of the same, the petition was maintainable.
As a rebuttal, the respondent argued that the chairman had duly exercised his power and appointed an authority to act as an arbitrator and that the order of the chairman had been communicated to the petitioners, via fax, before the petition was filed. It was further argued that the petitioner, having accepted the arbitration clause with "open eyes", could not be permitted to avoid the same on the ground of perceived partiality. Since the parties had once agreed on a named arbitrator, they could not later resile therefrom.
In the light of the above, the Supreme Court had to consider two issues:
The Supreme Court allowed the petition and, exercising its powers under Sections 11(4) and 11(6) of the act, appointed a retired High Court judge as the sole arbitrator or to adjudicate the disputes that had arisen between the parties, on such terms and conditions as the sole arbitrator may deem fit and proper.
On the first issue, the Supreme Court took the view that the petition was maintainable, as the intimation of the appointment of the arbitrator was made to the petitioner only between July 26 and July 28 2011, following the filing of the petition on July 21 2011. The court arrived at this view relying, among other things, on Section 3(2) of the act, which provides that the communication is deemed to have been received only on the day it is so delivered. Moreover, an official order takes effect only when it is served on the person affected. However, if an order is passed but not communicated to the party concerned, it does not create a legal right that can be enforced through the court of law, as it does not become effective until it is communicated. The order passed by a competent authority or by an appropriate authority and kept with itself can be changed, modified or cancelled, thus denuding such an order of the characteristics of a final order.
In view of the above, the court held that even if the order appointing the arbitrator was passed before the date on which the petition was filed, since it was not delivered to the affected party (ie, the petitioner) on the same day, (as there was no proof of the respondent having faxed the order appointing the arbitrator to the petitioner), it was deemed to be received on the day on which it was delivered (ie, through email), following the filing of the petition.
On the second issue, at the outset the court examined the position that where the arbitration agreement clearly envisages the appointment of the presiding officer, and there is no specification that the arbitrator must be a different person depending upon the nature of the dispute, it is not for the court to ignore the same and invoke the exercise of its power under the act. The court further took the view that it was not bound to appoint the chairman or his nominee in view of the arbitration clause.
The court referred to observations in the following judgments, which carved out an exception to the general rule that courts should always follow the choice of arbitrator detailed in an arbitration clause:
The court relied on the following observations made in such judgments:
The court opined that it has the power to make an appointment of an arbitrator other than the named arbitrator on the examination of the relevant facts, which tend to indicate that the named arbitrator is likely to be partial. In the court's view, as the chairman was the controlling authority of all the employees, he had also been dealing with the contract, and therefore could not act as an impartial arbitrator. Considering the factual circumstances, and drawing analogy from Denel (Proprietary) Limited v Bharat Electronics Limited,(6) the court adopted a similar course of action. While allowing the petition, it appointed a retired Chief Justice of the Madras High Court as the sole arbitrator.
Taking a practical view of the scenario, government companies such as BEL generally enter into standard contracts providing for an in-house authority as a sole arbitrator. While such contracts are "agreed" between the parties, the party entering into the agreement with such companies may not generally have an equal bargaining power. Therefore, arbitration under such circumstances may be reduced to a sham. Hence, through its ruling in Bipromasz, the Supreme Court has recognised the principle of party autonomy insofar as the parties agree on a named arbitrator. However, the court has also laid down an exception to this rule by stating that where the factual circumstances are peculiar to a case (eg, reasonable apprehension of impartiality), the court may exercise its power to appoint an arbitrator in spite of the express choice of the parties.
Through this ruling, the court struck a balance to the extent that it could not interpose and interdict the appointment of an arbitrator whom the parties have chosen under the terms of the contract. However, in order to protect the sanctity of the arbitration process, it may appoint an arbitrator in a special set of circumstances if the arbitration would otherwise be rendered void.
For further information on this topic please contact Jasleen K Oberoi or Ayush Sharma at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (firstname.lastname@example.org or email@example.com).
(2) Section 11 of the act provides for appointment of arbitrators and sets in place a procedural mechanism empowering the chief justice or his or her designate to appoint an arbitrator where there is a lack of unanimity between the parties or if the appointment procedure elected by the parties fails. The act is available at http://keralamediation.gov.in/AC%20Act.pdf.
(3) Section 11(4) of the act provides that where a party fails to appoint an arbitrator within 30 days of the receipt of request to do so from the other party, the chief justice or his or her designate may make an appointment.
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