Friday, October 1, 2010

Bombay High Court on the Appointment of Arbitrators

Section 11 of the Indian Arbitration Act, 1996, has been subject of much controversy; primarily on the issue of whether the power of Chief Justice to appoint arbitrators provided therein, is judicial or administrative in nature. While that question gave rise to many issues of policy and the scheme of the Act as a whole, a narrower but equally interesting aspect of the provision seems to have gone unnoticed thus far. This issue was recently considered by the Bombay High Court in Thyssen Krupp v. SD Industries, coming to an interesting conclusion, on even more interesting reasoning.

Section 11(4) of the 1996 Arbitration Act reads-

(4) If the appointment procedure in sub-section (3) applies and

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment,

the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him. [emphases supplied]

In the case in question, the two parties had each appointed an arbitrator, who appointed the third arbitrator three years after their appointments. The appellant contended that this appointment of the third arbitrator was illegal, since after the 30-day period, only the Chief Justice may appoint an arbitrator, upon the request of a party. Hence, it was contended that the appointment of the third arbitrator was bad in law, and the award deserved to be set aside [there was also a challenge on merits, the grounds of which are not relevant for the discussion here].

The High Court, speaking through Justice Vazifdar, rejected this contention, primarily on the text of section 11(4). The Court noted the difference between the phrases ‘fails to appoint’ and ‘fails to agree’, and observed that the legislature having used different language, must be presumed to have meant different things by the phrases. In the opinion of the Court, the mere failure of the arbitrators to appoint a third arbitrator doesn’t give rise to the Chief Justice’s powers. For the last part of the provision to apply, there must be “a disagreement between the arbitrators on the name of the third arbitrator”. In the words of the Court,

There can be a failure to agree between the two arbitrators about the appointment of a third arbitrator only if and when the third arbitrator is named/identified by one of the arbitrators. In the absence thereof, there is nothing for them to agree to conversely nothing for them to fail to agree about. In the present case neither of the arbitrators proposed the name of a third arbitrator. The question of the said arbitrators having failed to agree on the appointment of the third arbitrator therefore does not arise.

The Court also drew support from the 1940 Arbitration Act as making a similar distinction. Finally, it rejected the contention that such an interpretation would result in neither party having any remedy if the arbitrators took no steps towards appointing the third arbitrator. The Court observed that if there is such inaction, it would amount to a failure of the arbitrators to act without undue delay, which would be a ground for terminating their appointment under section 14 and 15 of the Act.

Now, on a first reading, this decision seems to be based on a sound reading of the provision, and also pro-arbitration. However, a closer reading, some doubts arise about its propriety on text; and also just how much it will assist arbitral proceedings.

First, while the Court is right in noting the difference between failing to ‘appoint’ and failing to ‘agree’, the meaning which the Court imputes to this difference is dubious. Another simpler reason for the different language could be that there is no requirement of consent or agreement in the appointment of arbitrators by parties. Since the first act is a mere act of appointment, the provision speaks of the parties failing to ‘appoint’. However, the second part of the provision requires an agreement, leading the legislature to speak of the failure to ‘agree’. Thus, in both cases, the legislature meant ‘failing to do what is necessary to constitute the tribunal’. In fact, ‘failing to agree’ can have two possible meanings- the absence of an agreement, or the presence of a disagreement. The Court has imparted to the phrase the latter of these two meanings, without explaining why it cannot have the former meaning. Juxtaposing ‘agree’ with ‘appoint’ doesn’t answer the question of which of these two meanings of ‘fail to agree’ the legislature intended.

Secondly, there seems to be another reading of this delightfully ambiguous provision which would have led to the same conclusion on the facts of the case. In the case of a failure to agree on a third arbitrator, the provision states that ‘the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him’ [emphases supplied]. Now, ‘shall’, as used here, may qualify (i) the entire process of appointment on the request of a party, or (ii) only the very act of appointment by the Chief Justice or designated authority, leaving it to the discretion of parties whether or not to make the request. If it qualifies the entire process, it means that the arbitrators do not retain the power to appoint a third arbitrator after the thirty day period, necessarily requiring the Chief Justice to step in. However, this would do violence to the provision; since it would render ‘request of the party’ irrelevant (there is no point in requiring a request if the process is mandatory). Hence, the appropriate interpretation seems to be that shall only qualifies the Chief Justice’s appointment, and that the party has the discretion to request the Chief Justice after the thirty day period. However, till such time as the request is made (after which the appointment is mandatory), the arbitrators retain the power to appoint a third arbitrator. If this were not the case, after the thirty day period, the arbitration would be in limbo, unless one of the parties requested the appointment of a third arbitrator by the Chief Justice. More importantly, there would be no option available to the parties to allow more time to the arbitrators due to some special circumstances or some other justified reason.

If this interpretation is accepted, it was open to the Court to hold that no request had been made by either party to the Chief Justice, and hence the arbitrators retained the power to appoint the third arbitrator even three years after their own appointment. It is submitted, with all due respect, that this would have achieved the same result, but on a sounder interpretation of the provision. While the Court’s interpretation is of interest from the purely textual viewpoint, as pointed out above, it seems suspect. Also, it creates a situation where, unless arbitrators disagree (as opposed to fail to appoint) a third arbitrator, a party has no option but to go to court to get the mandate of the arbitrators terminated. Thus, far from reducing the Court’s intervention (which the decision appears to do at first glance), it necessitates it.

3 comments:

Parul said...

The ruling in this decision definitely does not seem to be pro-arbitration! I think the practical effect of the judgment will actually lead to a pro-delay situation (as mentioned by Shantanu - the judgment translates into the process of appointed arbitrators appointing their third arbitrator at leisure with no time limit).

Admittedly the 1996 Act does not clearly provide for a situation where the arbitrators "fail to appoint" the third arbitrator. But I think the Court had an excellent opportunity to fill this lacuna by looking at the legislative intent underlying Section 8 of the 1940 Act. The Court does not seem to have appreciated the full import of Section 8 of the 1940 Act - for one, Section 8(1)(b) which provides for cases where arbitrators refuse or fail to act was completely ignored. Secondly, while on the one hand emphasizing the use of different expressions in Section 8(1) of the 1940 Act, the Court did not take its analysis of Section 8(1) to its logical conclusion. In spite of the use of different expressions in Sections 8(1)(a), (b) and (c), the 1940 Act provided for the same remedy to parties for all 3 situations. To my mind, this negates the distinction between failure to appoint and failure to agree as two situations having different implications and/or solutions. The interpretation provide by the Court, however, will only ensure that Parties have no solution if the arbitrators appointed by them are refusing to discharge their responsibility of expeditiously appointing the 3rd arbitrator.

Renganath said...

One other thing - recourse to S.14/15 would also mean the necessity of deciding what that ubiquitous but happily amorphous phrase "undue delay" means. Are 2 additional months (twice the statutory period) undue? Would 4 months be undue? We would then be led from one grey phrase to another - "facts and circumstances of the case".. now, which facts are relevant, which aren't ? Again, terminating the mandate would set the clock back - new arbitrators, new failures to agree... The best way of avoiding all this, that too within the scheme of the Act, and as per the intention of the legislators, and to the satisfaction of the industry, would have been to follow the course suggested in the write-up - of leaving it to the parties to extend time.

Vivaan said...

My question is why does high take take 9 to 1 year to appoint an Arbitory. Is it really so tough to just appoint an arbitory that high court Judge takes 1 year to appoint just and arbitory.

When will India process smoothen where people will get Justice on time .