Designation of non-judicial institution to appoint arbitrator under Arbitration and Conciliation (Amendment) Bill, 2018: Concerns

 Introduction

Under the Arbitration & Conciliation Act, 1996 (the “Principal Act”), the parties are free to appoint arbitrators.  In case of disagreement on an appointment, the parties can request, in case of international arbitration, the Supreme Court and in case of domestic arbitration, the concerned High Court, or any person or institution designated by such court, to appoint an arbitrator.

The Arbitration and Conciliation (Amendment) Bill, 2018 (the “Bill”) was introduced in Lok Sabha on 18/7/2018 and passed on 10/8/2018.  As the Bill was not passed by the Rajya Sabha, with the dissolution of the Sixteenth Lok Sabha, it lapsed. After constitution of the seventeenth Lok Sabha, the Bill is likely to be reintroduced.

The provisions of the Bill did not allow the parties, in case they disagreed on appointment, to anymore directly approach the Supreme Court or the High Court, as the case may be, for any purpose.  Instead, they were required to approach the designated arbitral institution with a request to make the appointment.

The proposal that designated arbitral Institutions should make the appointment aimed at minimizing the need to approach the Courts for the appointment of arbitrators. This could unburden the Supreme Court or the High Court from considering applications for appointment of arbitrator. The objective though laudable, amendment proposed appeared to run counter to law pronounced by Supreme Court and could thus prove counterproductive.

Historical overview of power to appoint arbitrator

Under the Principal Act as originally enacted, in case of disagreement on appointment, the power to appoint arbitrator was conferred on the Chief Justice of the Supreme Court / High Court or any person or institution designated by him. Initially, the judicial pronouncements treated the said power of Chief Justice to be administrative in nature and an opinion prevailed that while appointing an arbitrator, the Chief Justice /his designate did not act as a judicial authority[1]. 

In SPB & Co. v. Patel Engineering [2] a Bench of 7 Judges of Supreme Court by a majority of 6:1 reversed the aforesaid view to hold that while appointing an arbitrator, the Chief Justice discharged judicial or quasi judicial function and not merely administrative act.  Patel Engineering held that while appointing arbitrator Chief Justice is bound to decide whether he has jurisdiction, whether there is an arbitration agreement, whether the applicant before him is a party, whether the conditions for exercise of power have been fulfilled and if an arbitrator is to be appointed, who is the fit person. The court held:

“The appointment of an arbitrator against the opposition of one of the parties on the ground that the Chief Justice had no jurisdiction or on the ground that there was no arbitration agreement, or on the ground that there was no dispute subsisting which was capable of being arbitrated upon or that the conditions for exercise of power under Section 11(6) of the Act do not exist or that the qualification contemplated for the arbitrator by the parties cannot be ignored and has to be borne in mind, are all adjudications which affect the rights of parties. It cannot be said that when the Chief Justice decides that he has jurisdiction to proceed with the matter, that there is an arbitration agreement and that one of the parties to it has failed to act according to the procedure agreed upon, he is not adjudicating on the rights of the party which is raising these objections.”

Chief Justice could not delegate the judicial function to an institution

In Patel Engineering to contend that the appointment of arbitrator did not involve discharge of judicial function, it was pointed out that Chief Justice could designate any person or institution like the Chamber of Commerce or the Institute of Engineers which are not judicial authorities, to discharge said function. Repelling the said contention, the bench held:

“The very scheme, if it involves an adjudicatory process, restricts the power of the Chief Justice to designate, by excluding the designation of a non-judicial institution or a non-judicial authority to perform the functions. For, under our dispensation, no judicial or quasi-judicial decision can be rendered by an institution if it is not a judicial authority, court or a quasi-judicial tribunal....the designation contemplated is not for the purpose of deciding the preliminary facts justifying the exercise of power to appoint an arbitrator, but only for the purpose of nominating to the Chief Justice a suitable person to be appointed as arbitrator, especially, in the context of Section 11(8) of the Act. One of the objects of conferring power on the highest judicial authority in the State or in the country for constituting the Arbitral Tribunal, is to ensure credibility in the entire arbitration process and looked at from that point of view, it is difficult to accept the contention that the Chief Justice could designate a non-judicial body like the Chamber of Commerce to decide on the existence of an arbitration agreement and so on, which are decisions, normally, judicial or quasi-judicial in nature. Where a Chief Justice designates not a Judge, but another person or an institution to nominate an Arbitral Tribunal, that can be done only after questions as to jurisdiction, existence of the agreement and the like, are decided first by him or his nominee Judge and what is left to be done is only to nominate the members for constituting the Arbitral Tribunal... there is an ocean of difference between an institution which has no judicial functions and an authority or person who is already exercising judicial power in his capacity as a judicial authority. Therefore, only a Judge of the Supreme Court or a Judge of the High Court could respectively be equated with the Chief Justice of India or the Chief Justice of the High Court while exercising power under Section 11(6) of the Act as designated by the Chief Justice. A non-judicial body or institution cannot be equated with a Judge of the High Court or a Judge of the Supreme Court and it has to be held that the designation contemplated by Section 11(6) of the Act is not a designation to an institution that is incompetent to perform judicial functions. Under our dispensation a non-judicial authority cannot exercise judicial powers.”

Enlargement of scope of enquiry by the Chief Justice delayed appointment 

As an offshoot of the decision in Patel Engineering, the scope of enquiry by the Chief Justice while appointing arbitrator was enlarged. The Chief Justice had to decide existence of arbitration agreement. It also had to decide whether the party applying for appointment was party to such agreement, whether the claim was dead or live, whether the parties had concluded the contract by recording satisfaction of their mutual rights and obligations.  To determine existence of arbitration agreement, the court also had to satisfy if the document containing the arbitration agreement was sufficiently stamped. The expanse of jurisdiction of Chief Justice while appointing arbitrator lead to delay in appointments.

2015 Amendment

The Arbitration & Conciliation (Amendment) Act, 2015 (“2015 Amendment”) which amended the Principle Act with effect from 23/10/2015, sought to curb this problem. By said Amendment the power to appoint arbitrator, in case of disagreement between the parties, came to be conferred on the Supreme Court or any person/institution designated by it in case of international arbitration and on High Court or any person/institution designated by it in case of the domestic arbitration, instead of concerned Chief Justices. The amendment also provided that while considering an application for appointment of Arbitrator, the court shall confine to the examination of existence of an arbitration agreement.  The 2015 Amendment also incorporated a provision that designation of any person or institution by the Supreme Court / High Court for the purpose of appointment of arbitrator shall not be regarded as a delegation of judicial power by the court. 

The 2015 Amendment does not appear to have impacted the position of law settled by Patel Engineering that the appointing authority (now being the Supreme Court or the High Court) while appointing arbitrator discharges judicial or quasi judicial function.  

Reconciling Patel Engineering and the 2015 Amendment, it appears that while the Supreme Court / High Court could designate any person or institution for appointing the arbitrator, the authority of such person or institution could not extend to determination of questions as to jurisdiction, existence of arbitration agreement and the like. Consequently, in case parties do not agree on questions as to jurisdiction, existence of the agreement and the like, such questions has to be decided by the Supreme Court / High Court and only after such determination, the nomination of arbitrator/s could be left to the designated persons / institution, if any. 

Judicial interpretation rendered 2015 Amendment ineffective

Judicial pronouncements concerning 2015 Amendment show that the Amendment to the extent it sought to limit the scope of enquiry while making appointment has failed to meet its objective. The courts continues to treat the function of appointment of an arbitrator as a judicial one and not merely administrative function[3]. The scope of consideration by the court while appointing arbitrator continues to be wide enough.  The courts are required to examine if  the agreement between the parties stood discharged, thus leaving no live claim or if the discharge claimed was because of any undue influence or coercion[4]. The court continues to be enjoined to examine if the arbitration agreement is sufficiently stamped[5]; if it does not cover the claim raised or claim constitutes an excepted matter;[6] or if the subject matter is incapable of arbitration[7]. 

The amendment proposed under the Bill

The recent Bill sought to further amend the Principal Act by providing inter alia that the Supreme Court or the High Court would designate Arbitral Institutions, to discharge the function of appointment of arbitrator.  For international commercial arbitration the appointment would be made by institution designated by the Supreme Court. For domestic arbitration, the appointment would be made by the institution designated by the concerned High Court.  In case there are no arbitral institutions available, the Chief Justice of the concerned High Court may maintain a panel of arbitrators to perform the functions of arbitral institutions.

The anomaly

The Bill to the extent it provided that in case of disagreement on appointment, the appointment would be made by the designated arbitral institution, without providing the parties a recourse to seek adjudication of questions as to jurisdiction, existence of the agreement and the like, appeared to be anomalous.  If the parties are not provided a statutory recourse for determination of questions as to jurisdiction, existence of the agreement and the like which requires discharge of judicial functions, they may invoke original civil or writ jurisdiction to seek such determination, which may only add to delays and defeat the very objective.

Solution

The problem may be overcome by whittling down the scope of enquiry for appointing arbitrator only to examine physical existence of arbitration agreement and leave all other questions as to its admissibility of document containing arbitration agreement, its coverage, etc. to be determined by the arbitrator.  Here also the difficulty would be that the adjudication of even physical existence of arbitration agreement, in case of dispute, may involve judicial function, which in view of Patel Engineering may not be delegated to the arbitral institution. A possible solution is to amend the law to specifically confer limited/defined judicial power on the arbitral institution to determine questions as to jurisdiction etc. Otherwise, a time-bound recourse before judicial authority should be provided to the parties to seek adjudication of questions as to jurisdiction, existence of agreement and the like, in case such disputes are raised before the designated arbitral institution, exercises its power to nominate the arbitrator.