Arbitration Clause Interpretation: Supreme Court Rules on Appointment of Arbitrator

The case of Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd. revolved around the interpretation of an arbitration clause in a contractual dispute. The Supreme Court was called upon to determine whether the appointment of an arbitrator by the respondent was valid and if the petitioners had the right to seek independent arbitration under Section 11(6) of the Arbitration and Conciliation Act, 1996.

The case raised critical questions about neutrality in arbitration, the power of a party to appoint an arbitrator, and the extent of judicial intervention in arbitration proceedings. The judgment set a precedent on the independence and impartiality of arbitrators, particularly in government contracts.

Background of the Case

Perkins Eastman Architects DPC, a New York-based architectural firm, along with Edifice Consultants Private Limited, a Mumbai-based firm, formed a consortium that was awarded a contract by HSCC (India) Ltd. for designing and planning the All India Institute of Medical Sciences (AIIMS) at Guntur, Andhra Pradesh.

The contract contained an arbitration clause (Clause 24) that stipulated a dispute resolution process, including the appointment of a sole arbitrator by the Chairman and Managing Director (CMD) of HSCC. When disputes arose, the petitioners invoked arbitration and sought the appointment of an independent arbitrator. However, the CMD of HSCC appointed Major General K.T. Gajria as the sole arbitrator. The petitioners challenged this appointment, arguing that the CMD, being an interested party, could not have the exclusive power to appoint an arbitrator.

Petitioner’s Arguments (Perkins Eastman Architects DPC & Anr.)

The petitioners contended:

• The appointment of the arbitrator by the CMD of HSCC was invalid as it lacked impartiality.
• The arbitration clause granted excessive discretion to one party, violating principles of neutrality.
• Under Section 12(5) of the Arbitration and Conciliation Act, 1996, an interested party could not appoint an arbitrator.
• The Supreme Court had the power under Section 11(6) to intervene and appoint an independent arbitrator.

Respondent’s Arguments (HSCC India Ltd.)

HSCC defended the arbitrator’s appointment on the following grounds:

• The contract explicitly allowed the CMD to appoint an arbitrator.
• The appointment was made within the stipulated time, and no undue influence was exercised.
• The petitioners were contractually bound by the agreed dispute resolution mechanism.
• There was no statutory or legal violation in the appointment of Major General K.T. Gajria as the arbitrator.

Supreme Court’s Judgment

The Supreme Court ruled in favor of the petitioners, holding that the appointment of the arbitrator by an interested party was legally impermissible. The key observations of the Court were:

• The principle of neutrality and independence in arbitration must be upheld to ensure fairness in dispute resolution.
• The CMD of HSCC, being an interested party in the dispute, could not have the exclusive power to appoint the arbitrator.
• Under Section 12(5) of the Arbitration and Conciliation Act, 1996, any arbitrator appointed by an interested party is disqualified unless expressly waived by both parties.
• Reliance was placed on the case of TRF Ltd. vs. Energo Engineering Projects Ltd., where the Court had ruled that an ineligible person could not nominate another arbitrator.
• Given the circumstances, the Court exercised its power under Section 11(6) to appoint Dr. Justice A.K. Sikri, former Supreme Court judge, as the sole arbitrator.

The Court stated:

“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.”

Key Takeaways

• Arbitration clauses must ensure neutrality and fairness in the appointment process.
• A party to a dispute cannot have the exclusive right to appoint an arbitrator, as it violates principles of impartiality.
• The Supreme Court has the authority to appoint an independent arbitrator when contractual appointments violate statutory provisions.
• The judgment strengthens safeguards against bias in arbitration, especially in government contracts.
• The ruling reinforces the principle that procedural fairness in arbitration is as crucial as substantive justice.

This decision sets an important precedent on arbitration law in India, ensuring transparency and fairness in dispute resolution mechanisms.

Petitioner Name: Perkins Eastman Architects DPC & Anr..
Respondent Name: HSCC (India) Ltd..
Judgment By: Justice Uday Umesh Lalit, Justice Indu Malhotra.
Place Of Incident: India.
Judgment Date: 26-11-2019.

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