A Critique of TRF Ltd. v. Energo Engineering Projects Ltd.

[This article is authored by Tanya Varshney, Associate at Khaitan & Co.]

Keywords: Arbitrator, Section 11(6), Fifth and Seventh Schedule.

Introduction

The agreement between TRF Ltd. and Energo Engineering stipulated that the Managing Director of the buyer (Energo, in this case) was to act as the arbitrator or nominate an arbitrator to the dispute. This is prima facie, a valid arbitration clause. TRF Ltd. challenged the neutrality and impartiality of the arbitrator in Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) application before the High Court of Delhi. The matter reached the Supreme Court by way of an appeal by special leave to determine whether it is “justified to repel the submissions that once the arbitrator becomes ineligible to preside over the dispute by operation of law, can he then nominate another arbitrator, and that whether a Court seized of a matter under Section 11(6) of the Act can extend its jurisdiction to decide a plea that pertains to disqualification of the arbitrator? “. This article critically analyses the Supreme Court’s holding in the case TRF Ltd. v. Energo Engineering Projects Ltd. on these issues with respect to its possible impact on arbitration proceedings in India.

Disqualified Arbitrator Cannot Appoint a New Arbitrator

The present case was initiated in the High Court of Delhi, where the court observed that since the appointment of a sole arbitrator has not been expressly included in the Seventh Schedule of the Act, it was not the intention of the legislature to include that as a ground for challenge. The High Court further observed that although the Managing Director acting as the arbitrator would have fallen under the Seventh Schedule and been disqualified, the arbitrator who was appointed by the Managing Director did not have the same disputed relationship with the parties, which would lead to his disqualification under the provisions of the Act. Further, the High Court also observed that after examining the situation, there were no “justifiable doubts as to the independence and impartiality” of the arbitrator.

At the Supreme Court, the argument presented by TRF Ltd. was that since the Managing Director is ineligible to act as the arbitrator under Section 12(5) read with Seventh Schedule of the Act, it automatically makes him ineligible to nominate another arbitrator as well. Another issue before the Court was that whether TRF could challenge the mandate of the arbitrator appointed by the Managing Director under Section 11(5) and 11(6) seeking the appointment of a new arbitrator. The Supreme Court relied on the maxim ‘Qui Facit Per Alium Facit Per Se’ which means ‘what one does through another is done by oneself’ and accordingly held that an arbitrator who is disqualified under Section 12(5) read with Seventh Schedule is ineligible to appoint a person to arbitrate.

The Supreme Court’s judgement raises a few concerns. The grounds for an arbitrator to be disqualified are explicitly laid out in the Seventh Schedule. Further, more grounds that do not automatically disqualify but raise a concern are also stated in the Fifth Schedule. The Supreme Court establishes its judicial supremacy by going beyond the intent of the legislature by exercising their discretion and adding another ground for the disqualification of arbitrators. Further, an arbitral tribunal is a separate forum for dispute resolution. The legislature had clearly intended minimum judicial intervention in matters of arbitration, but time and again, the courts exercise their power and intervene, nonetheless. In this case, the arbitrator appointed by the Managing Director had issued a letter satisfying the prerequisites under the Sixth Schedule, and the Appellants (TRF Ltd.) did not raise any concerns as to the impartiality of the arbitrator but simply raised this as a general legal issue.

Flaws in the Judgement

The Supreme Court in the present case has adjudicated on merits an application under Section 11. This is certainly not what the provision empowers the courts to do. The Appellants (TRF Ltd.) presented an application to the Delhi High Court to appoint an arbitrator under Section 11(5) read with Section 11(6). The case was decided at the High Court, and the Managing Director was held to be eligible to be appointed as an arbitrator or nominate an arbitrator. The Supreme Court was seized of the matter by an appeal by special leave. The Court, relying on various case laws, speaks about the “failure of procedure” of the arbitration clause under Section 11(6) and moves on to decide that since the Managing Director is ineligible to act as the arbitrator, thereby his power to nominate the arbitrator is also nullified. It is humbly submitted that the Court’s reasoning is flawed due to the fact that the appointment procedure had been duly complied with by the parties. The Court seems to have done this by creating a distinction between the Managing Director’s eligibility and the eligibility of a person nominated by the Managing Director.

Under the procedure established by the Act, a challenge to the mandate of the arbitrator can only be made under Sections 12 and 13 before the arbitral tribunal. In the present case, the Supreme Court has impliedly allowed contravention of this procedure by deciding on merits and indirectly adjudicating upon the eligibility of appointment of the arbitrator. Whether or not he was the Managing Director or his designate is humbly submitted to be an irrelevant consideration, and this is an artificial distinction created by the Court to support its stance to adjudicate upon this matter under Section 11.

The Supreme Court places reliance on Datar Switchgears Ltd. v. Tata Finance Ltd., where the Appellant contended that there was failure of procedure of appointment under Section 11(6) because the arbitrator was appointed after a period of 30 days and the Respondent unilaterally appointed the arbitrator without notifying the Appellant of the same. The Court in the Datar Switchgears case explained that failure of procedure was when a party or the arbitrator(s), who were bound to nominate the other arbitrators, refuse or fail to do so. The Court accordingly held that the appointment made by the Respondent was invalid. However, in the present case, the contract between the parties stipulated that the Managing Director of the buyer or his nominee was to act as the arbitrator. In accordance with the clause, an arbitrator was nominated by the Managing Director. Thus, it cannot be said that the parties failed to appoint an arbitrator with respect to the procedure which was decided previously by the parties, and there seems to be no failure of the procedure.

Further, Section 11(6) specifically lays out three conditions where the Court may interfere with the appointment of arbitrator – (a) where a party fails to act as required under the appointment procedure agreed by the parties; (b) where, under the appointment procedure, no agreement is reached; and (c) where there is a failure to perform the functions as required by the appointment of the procedure. None of the conditions laid out in Section 11(6) were satisfied in the present case. The parties to the present case had agreed to the appointment procedure in Clause 33, and the arbitrator was appointed accordingly. Moreover, the amended Act has limited the judiciary’s role in the appointment of arbitrators by way of Section 6A. It says that the courts while considering applications under Section 11(4), 11(5) or 11(6), must confine to the examination of the existence of an arbitration agreement. This amendment was also in response to the judgement in the case of SBP & Co. v. Patel Engineering Ltd , which held that the appointment of arbitrator is a judicial function. Section 6A uses the words ‘existence of an arbitration agreement’ and not whether the arbitration agreement is valid. The legislature’s intent was to minimize the role of the judiciary in the appointment procedure by reducing the role of the courts to the examination of the existence of the arbitration agreement.

Conclusion

In the present case, the Court relied on the reasoning that the biased opinion of the Managing Director acting as the arbitrator would also be exercised by way of him nominating the arbitrator as well. However, the Court, by way of this judgement, has expanded the scope of judicial intervention into matters of arbitration. According to the Act, any challenge to the mandate of the arbitrator is to be made to the arbitral tribunal itself. There are limited grounds to invoke the jurisdiction of courts; however, by way of an application under Section 11, the Supreme Court in the present case has ruled upon the ineligibility of a nominated arbitrator. The Court has also indirectly added another ground for the disqualification of the arbitrator under the reasoning of “delegated authority” and opened more doors for such applications under Section 11 rather than following the ordinary procedure. Interpretations of this judgement by future cases could ultimately set a dangerous precedent for matters relating to the appointment of arbitrators and challenges to the arbitrators.