Supreme Court clarifies the scope of International Commercial Arbitration and the impartiality of arbitrators: Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (26 November 2019)

Date of the Judgment: 26 November 2019
Citation: Not Available
Judges: Uday Umesh Lalit, J., Indu Malhotra, J.
Can a party to a contract appoint an arbitrator when that party has an interest in the outcome of the dispute? The Supreme Court of India addressed this critical question in a set of arbitration applications, clarifying the scope of "International Commercial Arbitration" and emphasizing the need for impartiality in the appointment of arbitrators. The Court held that a party with an interest in the dispute cannot appoint a sole arbitrator, reinforcing the principles of fairness and independence in arbitration proceedings. The bench comprised of Justice Uday Umesh Lalit and Justice Indu Malhotra.

Case Background

The case involves a dispute between Perkins Eastman Architects DPC & Anr. (the Applicants), a consortium of architectural firms, and HSCC (India) Ltd. (the Respondent), a government executing agency. The Respondent had issued a Request for Proposals (RFP) for architectural planning and design work for All India Institute of Medical Sciences (AIIMS) projects at Guntur, Andhra Pradesh; Kalyani, West Bengal; and Nagpur, Maharashtra. The Applicants' consortium was awarded the projects, with contracts signed on 22 May 2017.

Shortly after signing the contracts, disputes arose. The Respondent issued a stop-work notice on 3 November 2017, followed by a termination notice on 11 January 2019, alleging non-compliance by the Applicants. The Applicants denied these allegations and invoked the dispute resolution clause (Clause 24) of the contract on 11 April 2019, claiming Rs. 20.95 crores.

Clause 24 of the contract stipulated a multi-tiered dispute resolution process. It required the Design Consultant to first appeal to the CGM, HSCC, then to the Director (Engg.), HSCC, and finally to the CMD, HSCC for the appointment of an arbitrator. The Applicants alleged that the Respondent failed to adhere to this process, particularly in the appointment of an arbitrator. The Respondent, on the other hand, claimed that it followed the procedure and appointed Major General K.T. Gajria as the sole arbitrator on 30 July 2019.

Timeline:

Course of Proceedings

The Applicants, dissatisfied with the Respondent's handling of the dispute resolution process, filed applications under Section 11(6) of the Arbitration and Conciliation Act, 1996, read with the Appointment of Arbitrators by the Chief Justice of India Scheme, 1996, before the Supreme Court. They sought the appointment of an independent arbitrator, arguing that the Respondent's appointed arbitrator was not valid.

Legal Framework

The legal framework for this case is primarily based on the Arbitration and Conciliation Act, 1996 (the Act), specifically:

• Section 2(1)(f) of the Act defines "International Commercial Arbitration." It states that an arbitration is considered international if at least one of the parties is an individual or body corporate whose central management and control is exercised in any country other than India.
• Section 11(6) of the Act empowers the Supreme Court to appoint an arbitrator if the agreed procedure for appointment is not followed.
• Section 11(12)(a) of the Act states that where the matter is international commercial arbitration, the power of appointment of arbitrator is with the Supreme Court.
• Clause 24 of the contract between the parties outlines the dispute resolution mechanism, including the appointment of an arbitrator by the Chairman and Managing Director (CMD) of the Respondent.

The Court also considered the implications of the Arbitration and Conciliation (Amendment) Act, 2015, which introduced the Fifth and Seventh Schedules to the Act. These schedules provide guidelines for determining the independence and impartiality of arbitrators.

Arguments

Applicants' Submissions:

• The Applicants argued that the Respondent failed to adhere to the agreed procedure under Clause 24 for appointing an arbitrator.
• They contended that the appointment of the arbitrator by the Chief General Manager (CGM) of the Respondent, instead of the CMD, was invalid.
• They submitted that the appointment was made beyond the 30-day period stipulated in the contract.
• The Applicants emphasized that the CMD of the Respondent, who was empowered to appoint the arbitrator, would have an interest in the outcome of the dispute, thus compromising the impartiality of the process.
• They argued that the arbitration was an "International Commercial Arbitration" since one of the consortium members, Perkins Eastman Architects DPC, was a foreign entity.
• The Applicants relied on the decisions in Walter Bau AG, Legal Successor of the Original Contractor, Dyckerhoff and Widmann, A.G. v. Municipal Corporation of Greater Mumbai and another [(2015) 3 SCC 800] and TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] to argue that an interested party cannot appoint an arbitrator.
• They also cited Larsen and Toubro Limited SCOMI Engineering BHD v. Mumbai Metropolitan Region Development Authority [(2019) 2 SCC 271] to support their claim that the arbitration was an International Commercial Arbitration.

Respondent's Submissions:

• The Respondent countered that the appointment of Major General K.T. Gajria was in accordance with Clause 24 of the contract.
• They asserted that the appointment was made by the CMD and merely communicated by the CGM.
• They argued that the appointment was made on the first working day after the 30-day period expired, making it a valid appointment.
• The Respondent contended that the arbitration was not an "International Commercial Arbitration."

Innovativeness of the Argument: The Applicants' argument was innovative in that it extended the principle laid down in TRF Limited to cases where the appointing authority, though not the arbitrator himself, has an interest in the outcome of the dispute.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the arbitration in the present case is an "International Commercial Arbitration" under Section 2(1)(f) of the Act.
2. Whether a case is made out for the Court to exercise its power under Section 11 of the Act to appoint an arbitrator.

The Court also considered the sub-issue of whether the appointment of the arbitrator by the Respondent was valid.

Treatment of the Issue by the Court:

Authorities

The Supreme Court relied on the following authorities:

The Court also considered the Law Commission Report No. 246, which emphasized the need for impartial and independent arbitrators.

Judgment

The Supreme Court held that the arbitration in this case was an "International Commercial Arbitration" because the lead member of the consortium, Applicant No. 1, was a foreign entity. The Court also held that the appointment of the arbitrator by the Respondent was invalid, as the CMD, who was empowered to appoint the arbitrator, would have an interest in the outcome of the dispute.

What weighed in the mind of the Court?

The Court's decision was primarily driven by the need to ensure impartiality and independence in arbitration proceedings. The Court emphasized that a party with an interest in the outcome of the dispute should not have the power to appoint a sole arbitrator. This principle was derived from the legislative intent behind the 2015 Amendment to the Arbitration Act and the decisions in TRF Limited and other cases. The Court's reasoning was also influenced by the Law Commission's report, which highlighted the importance of neutral arbitrators, especially in government contracts.

Logical Reasoning:

The Court considered the argument that the appointment was made on the next working day and that the appointment was conveyed by the CGM but held that the core issue was the interest of the appointing authority, which could not be overlooked.

The Court rejected the argument that the Respondent’s appointment was valid because the spirit of the Arbitration and Conciliation (Amendment) Act, 2015, and the decisions in TRF Limited and Voestalpine Schienen Gmbh required that the arbitrator be independent and impartial. The Court also considered the Law Commission Report No. 246, which emphasized the need for impartial and independent arbitrators, especially in government contracts.

The Court quoted from the judgment in TRF Limited:

“...once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator.”

The Court also quoted from the Law Commission Report No. 246:

“The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes.”

The Court stated:

"Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator."

There were no dissenting opinions.

Key Takeaways

• A party with an interest in the outcome of a dispute cannot appoint a sole arbitrator.
• The principle of impartiality and independence of arbitrators is paramount in arbitration proceedings.
• The definition of "International Commercial Arbitration" under Section 2(1)(f) of the Act includes cases where a lead member of a consortium is a foreign entity.
• The Supreme Court can exercise its power under Section 11 of the Act to appoint an arbitrator if the agreed procedure is not followed or if the appointment is not valid.

Directions

The Supreme Court annulled the appointment of the arbitrator made by the Respondent and appointed Dr. Justice A.K. Sikri, former Judge of the Supreme Court, as the sole arbitrator for all three cases. The Court directed that the arbitrator's fees and expenses be shared equally by the parties.

Development of Law

The Supreme Court's decision in this case reinforces the principle established in TRF Limited, extending it to situations where the appointing authority, though not the arbitrator himself, has an interest in the outcome of the dispute. This case clarifies the scope of "International Commercial Arbitration" and emphasizes the need for strict adherence to the principles of impartiality and independence in arbitration proceedings. The ratio decidendi of the case is that a person who has an interest in the outcome of the dispute cannot have the power to appoint a sole arbitrator.

Conclusion

The Supreme Court's judgment in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. underscores the importance of impartiality and independence in arbitration proceedings. By clarifying the definition of "International Commercial Arbitration" and holding that an interested party cannot appoint a sole arbitrator, the Court has reinforced the principles of fairness and transparency in dispute resolution. The court's decision to appoint an independent arbitrator ensures that the arbitration process is free from bias and promotes confidence in the arbitration system.

Category:

Parent Category: Arbitration and Conciliation Act, 1996

• Child Category: Section 2(1)(f), Arbitration and Conciliation Act, 1996
• Child Category: Section 11, Arbitration and Conciliation Act, 1996
• Child Category: International Commercial Arbitration
• Child Category: Impartiality of Arbitrators

FAQ

Q: What is "International Commercial Arbitration" according to this judgment?

A: According to this judgment, an arbitration is considered "International Commercial Arbitration" if one of the parties is a company or an individual whose central management and control is exercised in a country other than India. In the case of a consortium, the lead member's place of incorporation is considered.

Q: Can a party to a contract appoint an arbitrator if they have an interest in the outcome of the dispute?

A: No, this judgment makes it clear that a party with an interest in the outcome of a dispute cannot appoint a sole arbitrator. This is to ensure impartiality and fairness in the arbitration process.

Q: What happens if the agreed procedure for appointing an arbitrator is not followed?

A: If the agreed procedure for appointing an arbitrator is not followed, or if the appointment is invalid due to bias, the Supreme Court can exercise its power under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an independent arbitrator.

Q: What is the significance of the 2015 Amendment to the Arbitration Act?

A: The 2015 Amendment introduced the Fifth and Seventh Schedules to the Act, which provide guidelines for determiningthe independence and impartiality of arbitrators. This amendment reinforces the need for neutral arbitrators in arbitration proceedings.

Q: What was the main issue in this case?

A: The main issue was whether the arbitration was an "International Commercial Arbitration" and whether the appointment of the arbitrator by the Respondent was valid, given that the appointing authority had an interest in the outcome of the dispute.

Q: What was the final decision of the Supreme Court in this case?

A: The Supreme Court held that the arbitration was an "International Commercial Arbitration," and the appointment of the arbitrator by the Respondent was invalid. The Court appointed an independent arbitrator to resolve the dispute.