The main issues which fell for consideration before the Hon’ble Supreme Court were:

1. Whether in light of the pending arbitral proceeding the respondents were right in approaching the Hon’ble High Court for appointment of a substitute arbitrator.
2. Whether by virtue of section 12 of the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”), the Chairman cum- Managing Director has become ineligible to act as the arbitrator.
3. Whether in light of the arbitration agreement entered into between the parties, whereby the parties had agreed to appoint Managing Director or his nominee as the sole arbitrator, the Hon’ble High Court was right in terminating the mandate of the arbitral tribunal and appoint another arbitrator.

Facts in brief

The parties had entered into an agreement which contained the following arbitration clause:

“4.20.1    All disputes and difference arising out of or in any way concerning this Contract, shall be referred to the Managing Director himself, herself or his or her nominees for the sole arbitration. There will be no objection to any such appointment on the ground that the person so appointed is an employee of the Corporation, that he has dealt with the matters to which the contract relates and that in the course of his duties. As such arbitration shall be final and binding on the parties to the contract. If the person to whom the matter was originally referred to for arbitration becomes unable to function on account of vacation of office, transfer, resignation, retirement from services, suspension or for any other reason, whatsoever, the Managing Director shall nominate another person to take over his function as soon as possible. Such person shall proceed further from the stage where the matter was left by his predecessor. The arbitrator shall give reasons for the award.”

Dispute arose between the parties and the respondent requested for appointment of an arbitrator as per the arbitration clause. An arbitrator was appointed on February 21, 2005 however he was replaced, and a substitute arbitrator (the Chairman cum Managing Director of the appellant) was appointed on March 26, 2009. For various reasons the arbitral proceedings could not be completed, and the proceedings continued fixing dates of hearing till August 17, 2011.

On February 7, 2013 the respondent sent a legal notice to the appellant stating therein the eve after so many requests the arbitrator has not passed any award and called upon the appellants to pay the amount in question. The appellants replied to this letter on March 19, 2013 that since the arbitrator appointed has been transferred, he could not pass any award and denied their liability to pay any amount.

On May 13, 2015 the respondents filed an application under section 11(6) and section 15 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). 

On being brought to notice of the arbitration application pending before the Hon’ble High Court, the arbitral tribunal adjourned the hearing to January 13, 2016 as a last opportunity for hearing. On January 13, 2016 the arbitrator refused the respondent’s request for adjournment on the ground of pending application before the Hon’ble High Court and passed an ex-parte award on January 21, 2016.

High Court Ruling

The Hon’ble High Court allowing the application under section 11(6) and section 15 of the Arbitration Act appointed a substitute arbitrator and held that the arbitral tribunal had speeded up the the proceeding to frustrate the arbitration proceedings.

Judgment and analysis

The Hon’ble Supreme Court deciding on the first issue held that, “When the parties have consciously agreed that the disputes or differences shall be referred to the Managing Director himself or his nominee for sole arbitration and having participated in the arbitral proceedings before for quite some time, the respondent cannot turn round and seek for appointment of an independent arbitrator.

The respondent having participated in the proceedings before the arbitral tribunal for quite some time and also having expressed faith in the sole arbitrator, is not justified in challenging the appointment of the Managing Director of the appellant-Corporation as the sole arbitrator.”

It was also observed that the respondents had not placed anything on record to show that the arbitrator had not acted independently or impartially and the mere fact that he is the Chairman cum- Managing Director is not a ground to raise presumption of bias or lack of independence. It was further pointed out that the arbitration clause mentioned clearly mentioned that no objections shall lie on this ground.

The Hon’ble Supreme Court deciding on the second issue held that the Amendment Act would not apply to arbitration proceedings commenced prior to the Amendment Act unless the parties have otherwise agreed to it and in the instant case the parties had not agreed otherwise and there would be no application of section 12(5) of the Arbitration Act.

Deciding on the third issue the Hon’ble Supreme Court held that “…the High Court, in our view, was not right in appointing an independent arbitrator without keeping in view the terms of the agreement between the parties and therefore, the impugned order appointing an independent arbitrator/retired District Judge is not sustainable.” 

Further, the Court held that mere neglect of an arbitrator to act or delay in passing the award by itself cannot be the ground to appoint another arbitrator in deviation from the terms agreed to by the parties.