"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Monday, January 24, 2011

Unilateral Appointment of Arbitral Tribunal

One of the fundamental features of arbitration is that the disputing parties reach a consensus and constitute the arbitral tribunal jointly. But what happens if the arbitration clause provides that one of the parties would unilaterally constitute the arbitral tribunal? We shall see a real life situation.

The English daily Hindustan Times has organised an event called as the Tree of Wishes event. The arbitration clause contained in the Terms and Conditions for the event reads:
"The event shall be governed by and construed in accordance with the laws of India. Any disputes, differences and, or, any other matters in relation to and arising out of the event and, or, pertaining to the rules and regulations and, or, the Terms and Conditions shall be referred to arbitration under the Arbitration & Conciliation Act, 1996. The arbitral tribunal shall consist of a sole arbitrator to be appointed by HTML. The venue of arbitration shall be New Delhi and the proceedings of such arbitration shall be in English Language only."(emphasis not in the original)
The clause thus provides that HTML (HT Media Limited) would appoint the sole arbitrator. The question is whether this portion of the arbitration clause would be valid or not. In other words, in case any dispute arises, whether HTML can appoint an arbitrator even if the other disputing party disapproves of the arbitrator so appointed?

If the Arbitrator Appointed is an Employee of the Appointing Party: For the answer to this question, we first look into the case of Indian Oil Corporation v. Raja Transport. The case has already been analysed in this blog in Augist 2009. In that case, the arbitration clause provided that the Indian Oil Corporation would have the right to appoint one of its officers as the arbitrator. Raja Transport objected to this clause on the ground that there was a chance that the arbitrator may be biased. The Supreme Court rejected the contention and upheld the validity of the arbitration clause (the grounds on which the court upheld the clause are in the August 2009 post). The court also held:
"The position may be different where the person named as the Arbitrator is an employee of a company or body or individual other than the state and its instrumentalities. For example, if the Director of a private company (which is a party to the Arbitration agreement), is named as the Arbitrator, there may be valid and reasonable apprehension of bias in view of his position and interest, and he may be unsuitable to act as an Arbitrator in an arbitration involving his company."
Thus, the position is clear that HT Media Limited (HTML) cannot appoint its one of own officers as the arbitrator. But what if chooses to appoint a third person as an arbitrator? Would that appointment be valid?

If the Arbitrator Appointed is not an Employee of the Appointing Party but is Third Party: In A.V.N. Tubes Ltd. vs Bharatia Cutler Hammer Ltd., the arbitration clause in challenge read as follows:
"WITHOUT prejudice to the above Clause 17, of the Contract the Company, M/s. Avn Tubes Limited, reserves its right to go in for arbitration, if any dispute so arisen is not mutually settled within 3 months of such notice given by the Company to the Contractor. And, the award of the Arbitrator, to be appointed by the Company, M/s. Avn Tubes Limited, shall be final and binding on both the Company and the Contractor."
The Delhi High Court held that the above agreement was not enforceable because it was cumulatively unilateral as:
  1. the agreement only granted the right of AVN Tubes to refer the dispute to arbitration
  2. the procedure to be followed in the agreement entitles only VN Tubes to invoke arbitration
  3. the other party had no say in the appointment of arbitrator
The court made an observation seems to answer the issue under analysis:
The cumulative effect of all the three clauses is that it is unilateral agreement. In case any one of the clauses alone had been there, that by itself may not have made the agreement unilateral.” (emphasis not in the original)
[The AVN Tubes case was applied in Emmsons International Ltd. v. Metal Distributors (UK) And Anr. II (2005) BC 465: 2005 (1) CTLJ 39 Del.] Thus, according to the court, the mere fact that the clause granted exclusive right to one party to constitute the tribunal, that itself would not render the arbitration clause unenforceable.

In Jindal Exports Ltd v. Fuerst Day Lawson Ltd., it was the contention of Jindal that since the arbitration clause was unilateral, it was not enforceable. The court rejected the contention of Jindal after analysing several English cases and the Indian cases on the point. 

Thus, the clause quoted above would be valid as per the existing cases on the subject.

Notwithstanding the approval by the English courts of such unilateral arbitration clauses, what is the difference between reference by a dispute by a private entity to its own employee and reference by it to a third person whom it can influence?


Roshita said...

This is piece of information I was looking for, and I found it I guess...

Now, Since I am not a Lawyer by profession, I would like to know that can Arbitration Proceedings held illegal if the contract itself is voiable in court of law?

The case here is employer-employee dispute where employer invoked the Arbitration clause (The sole arbitrator will be appointed by the employer only, and decision will be binding on both the parties) in the contract where "post employment trade restriction" is also one of the condition.

Would appreciate a quick reply, Thanks & Regards


Badrinath Srinivasan said...

@ Roshita, thanks for the comments. Pl. note that our reply below is a response to a hypothetical question and we offer no legal advice.

It is not clear if the query pertains to the legality of the arbitration proceedings if the contract is void or if the contract is voidable. We assume that the query pertains to pertains to the legality of the arbitration proceedings when the contract is invalid. We also assume that 1. The agreement is a service agreement between the employer and the employee. The agreement contains, inter alia, provisions pertaining to "post employment trade restriction" 2. The employer has invoked the arbitration clause. The agreement gives a unilateral right to the employee to appoint the arbitrator.
3. The arbitral tribunal has already been constituted.

A mere allegation that the Main Agreement is invalid does not render the arbitration proceedings invalid. This is because of a fiction created in arbitration law known as separability of the arbitration clause. Merely because the main agreement is invalid does not render the arbitration clause, and therefore the arbitration proceedings, void. This fiction is created so as to promote arbitration as a means of resolving disputes. Further, if the arbitration clause is not treated so, a party could always approach the courts and thereby use it as a dilatory tactic. Therefore, arbitration law [in this case, Section 16(1) of the Arbitration and Conciliation Act, 1996] treats an arbitration clause contained in the Main Agreement “as an agreement independent of the other terms of the [Main Agreement];”

Consequently, any objection regarding the validity of the Main Agreement both need to be made before the arbitral tribunal.

Rhea said...

Hi. I dont think the cases mentioned refer per se to the validity of appointment of arbitrator by only one party. They talk more about the validity of unilateral reference to arbitration. Now say, if there is a right to reference to arbitration (unilateral or bilateral), will the right of appointment of the arbitrator given to just one party hold good in law? This question of mine is still unanswered.

Badrinath Srinivasan said...

@ Rhea... These clauses refer to the right of one party to constitute the tribunal even if the other party invoked arbitration. It is the other way around... In fact such clauses which give the right of one party to constitute the tribunal is common esply. in government contracts.

Kishore Kumaar said...

Five years down, I still come here to get my unilateral appointment research fixed! Nice post Badri. Should have thanked you earlier!
-Kishore Kumaar

Kishore Kumaar said...

Five years down, I still come here to get my unilateral appointment research fixed! Nice post Badri. Should have thanked you earlier!
-Kishore Kumaar

shrey said...

Respected Sir, my query is, what right the other party has if the party having the right to unilaterally appoint the arbitrator, on a request by other party, denies to do so?
Thank you.