Tuesday, June 27, 2017

The amended Arbitration Act: The Power to Nominate and the Choice of the Nominee

The Bombay High Court in DBM Geotechnics v. Bharat Petroleum Corporation Ltd. recently decided a short but important point arising out of the recent Amendments to the Arbitration & Conciliation Act, 1996. In particular, the Court had to consider how the bar on a party’s employees serving as arbitrators had to be construed.

The relevant arbitration clause between the parties before the Bombay High Court was that disputes will be referred:

[t]o the sole arbitration of the Director (Marketing Division) of the Corporation or some officer of the Corporation who may be nominated by the Director (Marketing Division)… In the event of the arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, the Director (Marketing Division) as aforesaid at the time of such transfer, vacation of office or inability to act may in the discretion of the Director (Marketing Division) designate another person to act as an Arbitrator… It is also the term of this contract that no person other than the Director (Marketing Division) or a person nominated by such Director (Marketing Division) of the Corporation aforesaid shall act as Arbitrator…

Thus, the clause provided: (a) the Director Marketing, or another officer of the corporation nominated by the Director will be sole arbitrator, (b) if the arbitrator to whom the matter is originally referred in unable to act, then another person may be designated, and (c) in any event, the sole arbitrator must be either the Director or a person nominated by the Director.

The question was whether the power to nominate would survive, given that part (a) no longer can be fulfilled due to the bar introduced by the 2016 Amendment on employees serving as arbitrators.  

DBM argued that the power of nomination was unworkable, because part (b) above could come into the picture only if there was indeed a nomination in terms of part (a), and that nominee was unable to act. In circumstances where part (a) was incapable of being complied with (and indeed, BPCL did not at all nominate any employee first), the entire nomination procedure must fall. In other words, the Court could conceivably have held as a matter of interpretation, part (b) of the arbitration clause above remained in place. Textually, that would have been problematic because the application of part (b) contemplates in the first place that there is a nomination under part (a): if that nomination is itself impossible, there can be no question of part (b) applying.

The Court’s answer to this argument is instructive, because the Court does not simply decide the question on an interpretation of this particular (somewhat intricate) clause: rather, the Court draws a conceptual distinction between the power to nominate and the choice of the nominee. It holds:

The parties before me had, as I have pointed out earlier, clearly agreed that the power to nominate would vest in BPCL’s DM alone. It is true too that the clause also said that the DM, in exercising that power, was to draw from a specified class of persons (himself or a BPCL employee). It just so happens that because of the operation of the amended statute combined with a want of consent from DBM, the eligibility of both those sets of persons was rendered impossible. In fact, as Mr Joshi says, the DM’s ‘power to nominate’ cannot be dependent on the DBM’s granting or not granting consent, and this is what the Applicant’s argument amounts to: had DBM consented, there would have been no question of the BPCL’s DM being divested of his power to nominate. I believe Mr Joshi is correct in saying that by withholding consent and then relying on the statutory bar, DBM cannot argue that the power to nominate itself has completely gone. The DM does not, for want of DBM’s consent, stand stripped of all his nominating power. He must exercise that power in the manner that the law requires, i.e., by appointing an independent and neutral Arbitrator. It is perhaps true that as a result of this, the latter portion of clause 19(a) may require to be severed, but there is no difficulty in doing this, nor is this impermissible…

This may well be important in construing other clauses which prescribe a arbitration before an employee of a company/corporation – if the clause provides for nomination by the company/corporation and further prescribes that the choice of a nominee is to be an employee, that clause cannot be considered as ineffective even in light of the amendment, and it cannot be contended that the appointment must now only be by the Court under section 11. The power to nominate itself would survive, notwithstanding the limitations on the choice of the nominee.

[Interestingly, DBM did not argue that the clause itself would be ineffective. It only argued that BPCL’s power to nominate is ineffective; and the nomination must therefore be made by the Court under section 11. This strategic choice may well have saved it from an order as to costs. On costs, the Court indicated, “The amendments to the Code of Civil Procedure, 1908 introduced by the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 require that, as a general rules, costs must follow the event, and that reasons must be given if costs are not awarded against the party that fails. I decline to award costs in this case having regard to the fact that the issue raised was limited, and since Mr Doctor very fairly did not suggest that the entire arbitration clause was ousted. No costs.” This, and certain other orders of the Commercial Court, appear to indicate that orders as to costs need not be made if the case set up is reasonable and not frivolous (even if not ultimately successful). With respect, this approach to costs may need further consideration. The new costs provisions do mirror some of the rules in the English CPR. The fact that a case set up is not frivolous or unarguable may be a factor going to the quantum of the costs, rather than to the question of whether to levy costs of not itself.] 


2 comments:

Badrinath Srinivasan said...

The decision was right on both the counts. Just wondering if a similar arguments is made in the Bombay High Court in similar facts. Would the judge still not follow "costs follow the event" rule? Another issue is why did the court have to rely on the Commercial Courts Act when the Arbitration and Conciliation Act, 1996 has a detailed provision on costs in S 31A?

Mihir Naniwadekar said...

Probably this was aan arbitration motion in the commercial court, and given that the two coats provisions are identical they quoted one. I disagree that costs should not be imposed simply because the case was argued in a balanced manner etc. Costs follow the event must mean that as an ordinary matter, a winning party is entitled to costs simply because it is the winning party, even if the case was close and fairly contested. English courts refer to costs on a standard basis or costs on an indemity basis...