A Misturning on section 12(5) of the Arbitration Act? - Entrepreneur Generations

A few days ago we had highlighteda decision of the Bombay High Court in DBM Geotechnics v. BPCL where the High Court had drawn a distinction between the power to nominate an arbitrator and the choice of the nominee. The arbitration clause allowed an employee of a company to nominate another employee as an arbitrator. The Court held that the power to nominate continued to remain valid even if statutory bars now meant that another employee could not be an arbitrator.

The Supreme Court has now ruled on a similar point in TRF Ltd. v. Energo Engineering Projects (Civil Appeal 5306 of 2016 judgment dated 3 July 2017). The relevant arbitration clause contained in the contract between the parties provided: “Unless otherwise provided, any dispute or difference between the parties in connection with this agreement shall be referred to sole arbitration of the Managing Director of Buyer or his nominee…” The question was whether this clause was valid in view of section 12(5) of the Arbitration & Conciliation Act 1996 as amended in 2016. The appellant argued that the new provisions meant that the Managing Director could not be an arbitrator: if that is so he could not nominate another person as arbitrator either. The Respondent argued that while the Managing Director may be disqualified to act as an arbitrator he is not deprived of his right to nominate an arbitrator (of course the arbitrator actually nominated would have to be sufficiently independent). The answer given by the Court is this:

“In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated…”

This does not engage with the reasoning of the decision of the Bombay High Court we had highlighted earlier. With respect, that reasoning appears to be clearly more powerful. The formulation adopted by the Supreme Court, that it is “inconceivable in law that a person who is statutorily ineligible can nominate a person”, may give rise to difficulties. For instance, what happens in the case of contracts where one party is given a right to nominate an arbitrator? Are such clauses now to be considered invalid, even if the choice of a nominee is not hit by the bar on the basis of the principle laid down by the Supreme Court?

The Supreme Court referred to the decision in Firm of Pratapchand Nopaji in support of its conclusion. But that was a decision – not on the Arbitration Act at all, incidentally – which only held that that which cannot be done directly cannot be done indirectly either, and that what one does through another is as good as done by oneself. But this is a clearly inappropriate analogy. An arbitrator is never expected to simply adopt the views of the nominating party.

The reasoning of the Court extracted in the paragraph quoted above appears to be a significant departure from the language of section 12(5) and it is hard to find a reasonable argument to support this departure. For now, though, this is the law of the land, laid down by a Bench of three Judges of the Hon’ble Supreme Court of India.