Introduction
The Supreme Court recently ruled that,
despite an express clause providing for an arbitrator, the court can appoint an
independent and impartial arbitrator under special circumstances.
Bipromasz Bipron Trading SA (BBT) filed
a petition(1) seeking referral of disputes against Bharat
Electronic Ltd (BEL) to an independent arbitrator. In its decision the Supreme
Court held that although, in general, the court must honour the express clause
in the arbitration agreement appointing an arbitrator, under special
circumstances (eg, a reasonable apprehension that the person mentioned in the
arbitration agreement as the arbitrator is unlikely to act independently or
impartially) the chief justice or his or her designate may exercise power under
Sections 11(4) and 11(6) of the Arbitration and Conciliation Act 1996 and may
refer the dispute to an independent arbitrator under Section 11(8) of the act.(2)
BEL, an Indian government company,
issued a purchase order to BBT, a Poland-based company, seeking to purchase
certain industrial goods or materials, including hydraulic motors, gyro units
and actuating cylinders. The purchase order was issued along with a document
titled "General Terms and Conditions of Purchase Order (Foreign)".
Clause 10 of the document governed arbitration, referring all disputes
concerning the purchase order to the chairman and managing director of BEL or
his nominee. While the performance of the contract was ongoing, BEL "put
on hold" pending supplies, directing BBT to not dispatch any pending
items. However, in response to BEL's subsequent communication, BBT sent out 10
units of gyro stabilisers, which were all rejected by BEL on the alleged ground
of being defective and not being of "Russian origin". This, among
other things, gave rise to a number of disputes between the parties.
Thereafter, the following chain of events occurred.
On May 20 2011 notice was sent through
counsel by the petitioner to the respondent seeking appointment of an independent and impartial sole
arbitrator. On June 29 2011, realising that the statutory period of 30 days had
expired with no reply from the respondent, the petitioner filed a sworn
affidavit in Poland New Delhi
Due to the new communication received,
a fresh affidavit was required. Hence, a petition was withheld to await a fresh
affidavit from Poland New Delhi
The petitioner called on the court to
intervene and appoint an independent arbitrator, as it was alleged that neither
the chairman nor his nominee would be able to act impartially - there would
always be a reasonable apprehension that the chairman would be favourably
inclined towards the respondent. Furthermore, the petitioners contended that
communication of the fact that the arbitrator had been appointed by the
respondent was made to the petitioner only through an email after the petition
for appointment of arbitrator before the Supreme Court had been filed. In view
of the same, the petition was maintainable.
As a rebuttal, the respondent argued
that the chairman had duly exercised his power and appointed an authority to
act as an arbitrator and that the order of the chairman had been communicated
to the petitioners, via fax, before the petition was filed. It was further
argued that the petitioner, having accepted the arbitration clause with
"open eyes", could not be permitted to avoid the same on the ground
of perceived partiality. Since the parties had once agreed on a named arbitrator,
they could not later resile therefrom.
In the light of the above, the Supreme
Court had to consider two issues:
·
whether the petition was maintainable in view of the
respondent's claim that the arbitrator had already been nominated before the
petition was filed; and
·
whether the court should allow the petition to appoint an
independent arbitrator to adjudicate on the dispute or honour the express
clause in the purchase order, referring the dispute to the chairman of BEL.
The Supreme Court allowed the petition and,
exercising its powers under Sections 11(4) and 11(6) of the act, appointed a
retired High Court judge as the sole arbitrator or to adjudicate the disputes
that had arisen between the parties, on such terms and conditions as the sole
arbitrator may deem fit and proper.
On the first issue, the Supreme Court took the
view that the petition was maintainable, as the intimation of the appointment
of the arbitrator was made to the petitioner only between July 26 and July 28
2011, following the filing of the petition on July 21 2011. The court arrived
at this view relying, among other things, on Section 3(2) of the act, which
provides that the communication is deemed to have been received only on the day
it is so delivered. Moreover, an official order takes effect only when it is
served on the person affected. However, if an order is passed but not
communicated to the party concerned, it does not create a legal right that can
be enforced through the court of law, as it does not become effective until it
is communicated. The order passed by a competent authority or by an appropriate
authority and kept with itself can be changed, modified or cancelled, thus
denuding such an order of the characteristics of a final order.
In view of the above, the court held that even
if the order appointing the arbitrator was passed before the date on which the
petition was filed, since it was not delivered to the affected party (ie, the
petitioner) on the same day, (as there was no proof of the respondent having
faxed the order appointing the arbitrator to the petitioner), it was deemed to
be received on the day on which it was delivered (ie, through email), following
the filing of the petition.
On the second issue, at the outset the court
examined the position that where the arbitration agreement clearly envisages
the appointment of the presiding officer, and there is no specification that
the arbitrator must be a different person depending upon the nature of the
dispute, it is not for the court to ignore the same and invoke the exercise of
its power under the act. The court further took the view that it was not bound
to appoint the chairman or his nominee in view of the arbitration clause.
The court referred to observations in the
following judgments, which carved out an exception to the general rule that
courts should always follow the choice of arbitrator detailed in an arbitration
clause:
·
Northern Railway Administration, Ministry of Railway, New
Delhi v Patel Engineering Company Ltd;(4) and
The court relied on the following observations
made in such judgments:
·
In exercise of its power under Section 11(6) of the act, the
court must take into consideration the provision contained in Section 11(8) of
the act which requires that when appointing an arbitrator, the appointing
statutory authority will have due regard to any qualifications required of the
arbitrator by the agreement of the parties and other considerations as are
likely to secure the appointment of an independent and impartial arbitrator.
·
While the rule shall be to refer disputes to the named
arbitrator, ignoring the named arbitrator and deviating from this rule in
nominating an independent arbitrator will be in the nature of an exception to
the rule to be resorted to only for valid reasons, such as a reasonable
apprehension that the arbitrator is unlikely to act independently or
impartially, or if the named arbitrator is not available.
The court opined that it has the power to make
an appointment of an arbitrator other than the named arbitrator on the
examination of the relevant facts, which tend to indicate that the named
arbitrator is likely to be partial. In the court's view, as the chairman was
the controlling authority of all the employees, he had also been dealing with
the contract, and therefore could not act as an impartial arbitrator.
Considering the factual circumstances, and drawing analogy from Denel
(Proprietary) Limited v Bharat
Electronics Limited,(6) the court adopted a similar course of
action. While allowing the petition, it appointed a retired Chief Justice of
the Madras High Court as the sole arbitrator.
Comment
Taking a practical view of the scenario, government companies such as BEL generally enter into standard contracts providing for an in-house authority as a sole arbitrator. While such contracts are "agreed" between the parties, the party entering into the agreement with such companies may not generally have an equal bargaining power. Therefore, arbitration under such circumstances may be reduced to a sham. Hence, through its ruling in Bipromasz, the Supreme Court has recognised the principle of party autonomy insofar as the parties agree on a named arbitrator. However, the court has also laid down an exception to this rule by stating that where the factual circumstances are peculiar to a case (eg, reasonable apprehension of impartiality), the court may exercise its power to appoint an arbitrator in spite of the express choice of the parties.
Taking a practical view of the scenario, government companies such as BEL generally enter into standard contracts providing for an in-house authority as a sole arbitrator. While such contracts are "agreed" between the parties, the party entering into the agreement with such companies may not generally have an equal bargaining power. Therefore, arbitration under such circumstances may be reduced to a sham. Hence, through its ruling in Bipromasz, the Supreme Court has recognised the principle of party autonomy insofar as the parties agree on a named arbitrator. However, the court has also laid down an exception to this rule by stating that where the factual circumstances are peculiar to a case (eg, reasonable apprehension of impartiality), the court may exercise its power to appoint an arbitrator in spite of the express choice of the parties.
Through this ruling, the court struck a
balance to the extent that it could not interpose and interdict the appointment
of an arbitrator whom the parties have chosen under the terms of the contract.
However, in order to protect the sanctity of the arbitration process, it may
appoint an arbitrator in a special set of circumstances if the arbitration
would otherwise be rendered void
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