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?