Wednesday, December 17, 2014

Substitution of Arbitrator(s) by Indian Courts: Aiding, not Intervening

Below is a guest post from Bharatendu Agarwal. Bharatendu did his Bachelors from NLU, Jodhpur and Masters in International Arbitration from Stockholm University. He is currently interning at SIAC.

An earlier post on this blog discussed the Bombay High Court’s decision dealing with the issue of delay in rendering an arbitral award. Here, the Delhi High Court’s decision of terminating a tribunal’s mandate on account of delay in the arbitral proceedings had been highlighted.

In the recent decision of Union of India (UOI) v. U.P. State Bridge Corporation Ltd.[1] the Supreme Court addressed a similar issues with primary focus on the issue of appointing substitute arbitrator(s)/tribunal. This post aims to briefly map out the relevant issues, arguments and legal nuances involved, followed by a short analysis on the case.

Brief Facts and Procedural History

The case revolves around an agreement entered into between the Railway Authority of India (the ‘Railway Authority’) and a Contractor (collectively referred to as the ‘Parties’) for the construction of a railway bridge across river Ganges. This agreement was subject to certain terms and conditions, which provided for an arbitration agreement. The relevant portion of the arbitration agreement reads as follows:-
64.(1)(i) Demand for Arbitration - In the event of any dispute or difference between the parties as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account or as to the withholding by the Railway of any certificate to which the contractor may claim to be entitled to, or if the Railway fails to make a decision within 120 days, then and in any such case, but except in any of the expected matters referred to in Clause 63 of these conditions, the contractor, after 120 days but within 180 days of his presenting his final claim on disputed matters, shall demand in writing the dispute or difference be referred to arbitration.
64.(3)(a)(ii) In cases not covered by Clause 64(3)(a)(i), the Arbitral Tribunal shall consist of a panel of three Gazetted Railway Officers not below JA grade, as the arbitrators. For this purpose, the Railway will send a panel of more than 3 names of Gazetted Railway Officers of one or more departments of the Railway to the contractor who will be asked to suggest to General Manager upto 2 names out of the panel for appointment as contractor's nominee. The General Manager shall appoint at least one out of them as the contractor's nominee and will, also simultaneously appoint the balance number of arbitrators either from the panel or from outside the panel, duly indicating the presiding arbitrator from amongst the 3 arbitrators so appointed. While nominating the arbitrators it will be necessary to ensure that one of them is from the Accounts department.
64.(3)(a)(iii) If one or more of the arbitrators appointed as above refuses to act as arbitrator, withdraws from his office as arbitrator, or vacates his/their office/offices or is/are unable or unwilling to perform his functions as arbitrator for any reason whatsoever or dies or in the opinion of the General Manager fails to act without undue delay, the General Manager shall appoint new arbitrator/arbitrators to act in his/their place in the same manner in which the earlier arbitrator/arbitrators had been appointed. Such re-constituted Tribunal may, at its discretion, proceed with the reference from the stage at which it was left by the previous arbitrator(s).
After a while some dispute arose between the Parties and pursuant to the arbitration agreement an arbitral tribunal (the ‘Tribunal’) was constituted in 2007. After the Tribunal’s constitution, four years passed, however the arbitral proceedings were still pending on account of transfers, retirements and adjournments. Frustrated by the delay the Contractor, in accordance with Section 14(2) of the Arbitration and Conciliation Act, 1996 (the ‘Act’), approached the Patna High Court (the ‘High Court’) so as to seek fulfilment of a vacancy in the Tribunal. By the time the Contractor’s application was taken up by the High Court the said vacancy was filled up by the Railway Authority. In light of the developments, the High Court issued an order by which it gave the Tribunal a lifeline and ordered for the arbitral proceedings to be completed within three months from the date of receipt of the order. The High Court, however, also stated that in case the proceedings were not completed within the stipulated duration, the Contractor would be at liberty to approach the High Court again which would then be forced to pass appropriate orders in accordance with the Act.

Despite the High Court’s direction, the proceedings were not completed within the stipulated three month duration and the Contractor again approached the High Court alleging non-cooperative attitude of the Tribunal members. The Railway Authority disputed this contention by stating that the proceedings could not be completed within time due the extreme urgency of the members of the Tribunal. After considering the Parties respective arguments and materials on record the High Court concluded that the delay in the proceeding was intentional and the Tribunal members continued their dilatory tactics regardless of the Court’s order. Most of the times one or the other member of the Tribunal were not available and they saw to it that the three month time expired. The Court went on to state that:-
“these facts also disclose a very sorry state of affairs that the members of the arbitral tribunal are inept and ineffectual by any standard, completely negligent towards their duties and having no sanctity for any law or for the orders of the High Court, which are binding upon them.”[2]
Based on these findings the High Court terminated the mandate of Tribunal and appointed a sole arbitrator to conduct the arbitration expeditiously.

Proceedings before the Supreme Court

The Railway Authority appealed against the High Court’s decision in the Supreme Court arguing that the High Court could not appoint the sole arbitrator as it was not empowered to constitute a tribunal of its own, that too, contrary to the arbitration agreement. Even if the tribunal’s mandate was to be terminated, a fresh tribunal could only be constituted in accordance with the arbitration agreement, i.e. in accordance with Clause 64(3)(a)(iii).

On the other hand, the Contractor defended the High Court’s decision arguing that in circumstances where the very purpose of arbitration was frustrated by the Tribunal members, who were dragging the proceedings, the Court was not powerless to travel beyond the framework of the arbitration agreement and appoint an arbitrator. The Contractor supported its argument by reliance on North Eastern Railway v. Tripple Engineering Works, (the ‘Tripple Engineering’ case) another recent Supreme Court decision.

The Issue

Based on the Parties’ arguments the Supreme Court categorized the issue as follows:-
“[w]hether .. a course of action has to be necessarily adopted by the High Court in all cases, while dealing with an application [u]nder Section 11 of the Act or there is a room for play in the joints and the High Court is not divested of exercising discretion under some circumstances?”[3]
Deliberations by the Supreme Court

At the outset, the Supreme Court highlighted that to decipher the answer to the issue Sections 11(6) & (8) (appointment of arbitrators), 14 (failure or impossibility to act), 15 (termination of mandate and substitution of arbitrator) & 32 (termination of proceedings) of the Act were the relevant sections.

The Supreme Court mentioned that Section 14(2) allowed a party to approach the Court to seek termination of mandate ‘when there is a failure on the part of the Arbitral Tribunal to act and it is unable to perform its function either de jure or de fact’.[4] Accordingly, the decision of the High Court to terminate the Tribunal’s mandate, on account of its ‘cavalier manner’, was flawless.[5]

Moving on to Section 15, the Supreme Court acknowledged that ordinarily, pursuant to Section 15(2), substitute arbitrators have to be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.[6] At this point, however, the Court raised the question as to whether there could arise circumstances in which there would be deviation from this approach. This led the Court to the case of the Tripple Engineering case, which it discussed in length.

The Tripple Engineering case had facts very similar to the case at hand and the Supreme Court in that case had made reference to a series of judgements before stating that:-
“[t]he power of the Court under the Act has to be exercised to effectuate the remedy provided thereunder and to facilitate the mechanism contemplated therein. In a situation where the procedure and process under the Act has been rendered futile, the power of the Court to depart from the agreed terms of appointment of arbitrators must be acknowledged in the light of the several decisions noticed by us.”

A few of the decisions so noted in the case were:-

The Supreme Court particularly quoted some paragraphs from Union of India v. Singh Builders Syndicate, the relevant parts for our discussion are:-
“The object of the alternative dispute resolution process of arbitration is to have expeditious and effective disposal of the disputes through a private forum of the parties' choice. If the Arbitral Tribunal ... is made non-functional on account of the action or inaction or delay ... the Chief Justice or his designate, required to exercise power Under Section 11 of the Act, can step in and pass appropriate orders ... [T]he matter has now been pending for nearly ten years from the date when the demand for arbitration was first made with virtually no progress ... The delays and frequent changes in the Arbitral Tribunal make a mockery of the process of arbitration.”

Findings of the Supreme Court

Taking a note of the case laws mentioned above the Court pointed out that the classical notion that the respective authority while exercising its power under Section 11 of the Act must appoint the arbitrator as per the agreement between the parties has seen a significant erosion in recent past. The provisions of the Act have to be applied purposively and hence the appointment of arbitrator by the court, of its own choice, departing from the arbitration clause, has become an acceptable proposition of law which can be termed as a legal principle established by a series of judgments.[8]

Concluding it findings the Supreme Court stated that courts were not powerless under Section 11 and could spring into action to constitute an arbitral tribunal so as to ensure that interest of parties were equally protected.[9]


This decision of the Supreme Court is a welcoming decision in the context of the arbitral regime in India. Indian courts of late have been very particular not to repeat their mistakes by poorly interpreting the provisions of the Act and interfering in the arbitral proceedings. This decision, in fact, is a very informed one because the Supreme Court realized that the issue of delay in arbitral proceedings on account of the tribunal itself was often encountered in arbitration in India, particularly where the arbitration clause provided for appointment of serving officers. Although the same issue had been dealt with in bits and pieces before, with this decision the Supreme Court has set the record straight once and for all.

With its decision the Supreme Court in fact brings the position of the Act akin to the position taken by leading arbitral institutions of the world, for example, the International Chamber of Commerce (the ‘ICC’) and the London Court of International Arbitration (the ‘LCIA’). Article 15(4) ICC Rules 2012 and Article 11(1) LCIA Rules 2014 both state that in situations where replacements have to be made, discretion vests with the institution as to decide whether or not to follow the original nominating process. Similar provisions can be found in the Stockholm Chamber of Commerce Rules[10] and the UNCITRAL Rules.[11]

The most direct implication of this decision will be that arbitration proceedings will no longer suffer because of an irresponsible or lackadaisical tribunal. In general, proceedings will be completed within a reasonable time frame. Besides, the decision will also push those who are not full time arbitrators or arbitration practitioner to adopt a professional approach. Additionally, it would discourage counsels to indulge in dilatory tactics by seeking outrageous extensions under the patronage of the tribunal. All in all the Supreme Court has sought to ensure that one of the fundamental features of arbitration, i.e. expeditiousness, remains intact.

The decision indicates a continuing trend on the part of Indian courts to develop and project India as an arbitration friendly jurisdiction. Despite being modelled on the UNCITRAL Model Law on International Commercial Arbitration (the ‘Model Law’), in the past there had been instances where interpretation of the Act’s provisions were far from what was envisioned by its drafters (there is, however, an interesting post by Advocate Sujoy Chatterjee on the extent of making reference the Model Law to interpret the provision of the Act).  Therefore, in conclusion, it can be said that unlike several earlier instances, this time when the court took the matter in its own hands it was too aid, and not intervene in the arbitration.

[1] Civil Appeal No. 8860 of 2014 (Arising out of Special Leave Petition (Civil) No. 20183 of 2012) decided on 16.09.2014
[2] U.P. State Bridge Corporation Ltd.v. The Union of India, 2012(1)ARBLR390(Patna) at paragraph 11
[3] Supra note 1, paragraph 15
[4] Ibid, paragraph 13
[5] Ibid
[6] Ibid, paragraphs 14, 15
[7] In this case the Supreme Court also recommended to the government that they should consider phasing out arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration.
[8] Supra note 1, paragraph 21
[9] Ibid, paragraph 22
[10] Article 17(1) SCC 2010 Rules
[11] Article 14(2) UNCITRAL Rules 2010

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