TRF Ltd. & Perkins: Limiting ‘Freedom of Contract’ and the Choking of Party Autonomy
– Ajar Rab*
In 2017, a three-judge bench of the Supreme Court of India in TRF Limited v. Energo Engineering Projects Limited (“TRF”) had the occasion to interpret the much-lauded Arbitration and Conciliation (Amendment) Act, 2015, incorporating the IBA Guidelines on Conflict of Interest into Schedule V and Schedule VII of the Arbitration and Conciliation Act, 1996 (“Act”) concerning the independence and impartiality of arbitrators. Subsequently, last year, a division bench of the same court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Limited (“Perkins”) affirmed the decision in TRF and extended the scope of independence and impartiality to the arbitral clause itself, in effect holding clauses containing the unilateral appointment of sole arbitrator invalid.
Before analyzing the said judgments, it is necessary to take a step back and revisit one of the core principles of arbitration, i.e., party autonomy. Party autonomy as a concept means the freedom of the parties to (a) choose the arbitrator(s) and their method of appointment; (b) select the applicable law; (c) choose the procedural rules; and (d) choose the seat of arbitration. Though obvious, parties agree to have their disputes resolved through arbitration as it gives them the flexibility and option to tailor the dispute resolution process in light of the commercial understanding between the parties without the cumbersome and confusing procedural rules of each country, as opposed to a court, where the judge, the law, the procedure, and the jurisdiction are not subject to the choice of a party.
Arbitration also offers the advantage of appointing experts or persons well versed with the commercial realities as well as legal nuances in a particular field or industry. It is in this context that the freedom to choose the method of appointment of arbitrators and the arbitrators remains a core part of the entire arbitral process, as it allows the party having an interest in the dispute, the liberty to choose in a certain sense ‘its own judge.’ Though it should be clarified that such liberty does not mean that a party may choose a judge/arbitrator with the objective of such arbitrator serving the interest of the party appointing him/ her but only because a party feels that such a person is best suited, qualified, knowledgeable, etc. for the resolution of the dispute.
If the aforesaid rationale is taken to its logical end, then it is easy to appreciate the objective of introducing Schedule V and Schedule VII of the Act. While Schedule V provides for a list of instances requiring disclosures by the arbitrator, Schedule VII provides a list of circumstances where an individual falling in the said list would become ineligible to be appointed as an arbitrator. The rationale being that such a person is assumed to have a conflict of interest and, hence, likely to favour one party.
Now to turn to the two judgments. Briefly put, in TRF the arbitral clause provided for arbitration by the Managing Director or his nominee. The court held that if a person designated as an arbitrator falls within Schedule VII of the Act, such a person is not only ineligible to be an arbitrator but is also ineligible to nominate an arbitrator. This conclusion underscores the distinction between independence and impartiality of the arbitrator while adjudicating the dispute and the independence and impartiality of the party appointing the arbitrator.
The court referred to various precedents and even quoted the reference to freedom of contract, and the possibility of waiving the impediment in Section 12(5), and yet, it still concluded that once an arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. By recognising the possibility of waiver, the court recognised the superiority of the contract or mutual agreement of the parties over the mandate of Schedule VII. However, the court curtailed the ‘freedom of contract’ on the limited ground of qui facit per alium facit per se (what cannot be done directly, cannot be done indirectly).
In the present case, the arbitral clause granting the right of appointment to only one party was not the result of a freely negotiated contract but was contained in a standard template providing the general terms and conditions of the purchase order. Therefore, it could be argued that the facts warranted the conclusion in the present case that an ineligible person should not be allowed to nominate an arbitrator. However, such a conclusion cannot mean, as a general proposition of law, that any person, including one of the parties to the dispute, does not have the right to nominate an arbitrator, as a party to the dispute would always fall within Schedule VII of the Act.
In Perkins, the court took the judgment in TRF a step further and held that unilateral appointments of a sole arbitrator are invalid as the appointing authority would have an interest in the outcome of the dispute or the decision of the dispute. Curiously, while the court at length discussed the principle of independence and impartiality of the arbitrator and also the rule against bias in all judicial and quasi-judicial proceedings, it applied the principle to the power to appoint an arbitrator on a vague assumption of bias of the arbitrator in favour of the appointing party exercising the right to a unilateral appointment.
The court relied on the 246th Law Commission Report on the neutrality of arbitrators, made several references to the independence and impartiality of the arbitral process, and even recognized the onerous duty to appoint an independent and impartial adjudicator in unilateral appointments but disregarded the freedom of contract and method agreed upon by the parties on the ground of natural justice, without any further analysis. Interestingly, it reiterated the point that regardless of the method of appointment of the arbitrator, the arbitrator is to be independent of the parties, which is the true import and objective of Schedule V and Schedule VII of the Act.
Unfortunately, both judgments blur the distinction between (a) freedom of contract; (b) unconscionability of a contract; (c) party autonomy in choosing the arbitrator; and (d) the objective of Schedule V and Schedule VII of the Act, which, inter-alia, sought to remedy the unilateral appointment of officers of the same government department or company as arbitrators, thereby ensuring independent and impartial justice delivery.
Therefore, the Supreme Court, in both cases, mixed up the following issues:
- Freedom of Contract – arbitration is a creature of consent, and if the parties willingly sign an agreement in writing (which is the mandate of Section 7 of the Act), the court cannot substitute its judgment in place of the choice of the parties. Such court intervention is exactly what Section 5 of the Act intends to restrict. The limited circumstance in which the court is required to undertake such an exercise is either in case of fraud or unconscionability, i.e., when the contract is null and void. The other circumstances could be when the contract is inoperative or incapable of being performed.
Therefore, by substituting its own judgment in place of an express choice of parties and a possible waiver of the right of appointment by one party, the courts have seriously stifled party autonomy and ignored the mandate of non-intervention enshrined in Section 5 of the Act.
- Choice of arbitrator – One of the possibly extreme consequences of the judgment in TRF and Perkins read together is that parties in effect should never choose arbitrators and should always go to court for such appointments or an arbitral institution. This is a death knell to the concept of party autonomy, the arbitral process, the mandate of limited court intervention, and the dream of a pro-arbitration regime, especially in international arbitrations. As discussed previously, parties choose an arbitrator for various reasons, and the profiling of arbitrators prior to appointment is an internationally recognised norm. In fact, the arbitrators are appointed by the parties based on a strategic decision arrived at after their profiling and the likelihood of them being sympathetic to the appointing party’s case.
- Questions of Substantive Law – Another important distinction that merits some discussion is whether the invalidity of unilateral appointments stems from the unconscionability of contract or the unfairness of procedure. If the invalidity pertains to unconscionability, then such invalidity can only arise if unilateral appointments stem from an unequal bargaining power with respect to the arbitration agreement itself. For example, consumer contracts, standard form contracts, etc. However, in commercial transactions between parties, there is no such presumption of unequal bargaining power and hence the ‘freedom of contract’.
Further, even if the entire contract is struck down on the ground of unconscionability, such unconscionability would not automatically extend to the arbitration agreement itself due to the doctrine of separability. The court made no such analysis or gave no reasoning as to why unilateral appointments could amount to an unfair bargain. Though it could have confined the invalidity of clauses to standard form templates and contracts wherein there are no negotiations, such as with government departments (which were the facts in Perkins), it made no such distinction despite mentioning the large ramifications of the court’s conclusion.
It would have been ideal if the court had provided some insight into how the court had the power to strike down an arbitrator’s appointment under the mandate of Section 14 of the Act, when questions of invalidity, on an assumption of unconscionability, ought to be decided by the arbitral tribunal under Section 16 of the Act. Therefore, the court has no power to rule on the invalidity of an arbitral clause, especially after the 2015 Amendment requiring only a prima facie view.
Conversely, if the invalidity is a question of procedure, then the suitable remedy is a challenge to the arbitrator or an application under Section 34 for setting aside of the award on the ground of procedural unfairness.
- Assumption of Bias – the rationale of the court in the two judgments proceeds on the assumption that by appointing an arbitrator an arbitrator is going to be biased in favour of the party appointing him or her. Such an assumption is contrary to the fundamental principle of party autonomy and the flexibility arbitration affords to parties. More importantly, such an assumption should then be extended to a tribunal comprising three arbitrators where parties nominate the arbitrator of their choice. Further, as a policy consideration, where will the court draw the line in assuming bias because a party-appointed arbitrator may then influence the choice of the chair/third arbitrator.
It is well recognized and established that party-appointed arbitrators owe no obligation to the party which appointed him or her and that such an arbitrator has a duty to remain independent and impartial throughout the arbitral process. Therefore, the judgments gravely underscore several duties of the arbitrators, namely (a) equal treatment of parties enshrined under Article 16 of the Model Law and Section 16 of the Act, and (b) the internationally recognized duty to render an enforceable award. Even in the case of unilateral appointments, no reasonable arbitrator would risk a challenge to the award on the ground of bias, unfairness, or unequal treatment.
- Interest in the Outcome of the Dispute – perhaps the gravest conclusion of these judgments is that a party having an interest in the dispute should not be allowed to appoint an arbitrator. Such a sweeping conclusion in effect robs arbitration in India of the fundamental principles of arbitration of party autonomy and the freedom to choose an arbitrator. Logically, all parties in any dispute have an interest in the outcome. Had the court objected to unilateral appointment on the ground of unconscionability, that would still be in consonance with the idea of fairness, but to reject the power of appointment of an arbitrator on the ground of having an interest in the outcome of the dispute appears to be a misapplication of the purpose of Schedule V and VII of the Act.
- Forum Shopping – As a matter of practice, every counsel is aware of the practice of filing cases before a more favourable bench or a more favourable jurisdiction. Such a choice is unilateral and exclusive in the hands of the party initiating the litigation, subject to procedural rules, and such bench or judges are expected to remain independent or impartial despite the strategic choice of selecting the forum being extremely obvious. In such cases, no objection is ever made on the unilateral choice of choosing the forum and as a logical corollary, the bench. Therefore, to discount unilateral appointments on the lack of “counter balance” (in Perkins) of strategic advantage to one of the parties cannot be the ground for invalidating unilateral appointments.
- Possibility of Challenge – One of the key distinctions between litigation and arbitration is the option of the parties to challenge the arbitrators on the apprehension of bias or lack of independence or impartiality, whereas, such possibility is non-existent in court litigation except to formally complain about a judge or request a transfer of the matter. Hence, by merely appointing an arbitrator unilaterally, an assumption of unfairness cannot be made. In fact, the onus on such an arbitrator to ensure fairness is far higher, especially with respect to the non-appointing party. Therefore, instead of looking down upon a unilateral appointment, the same should be welcome by the non-appointing party, as such parties will have more strategic advantage in terms of challenging the arbitrator at any time and a higher chance of having the award set aside.
- Efficiency – it may be argued that upholding unilateral appointments may reduce the efficiency of the arbitral process by incentivising a needless challenge to the appointed arbitrator and also providing an additional ground for filing an application for setting aside of the award. While that may be true, the strength of the argument is reduced, as discussed above, by the mandate of Schedules V and VII to ensure independence and impartiality, the duty of the arbitrator to render an enforceable award, and the fact that an arbitrator would be more conscious of such allegations of bias.
On the contrary, mutually appointed sole arbitrator clauses most often result in stalemates and ultimately force one of the parties to approach the court or arbitral institution for the appointment. A unilateral appointment of the sole arbitrator prevents such a stalemate and hence, furthers efficiency.
Therefore, if India is to ever truly realise the dream of being an arbitration hub, it needs to internalize arbitration and its nuances first. It cannot extend traditional jurisprudence and litigation concepts to a flexible and consent-based system of dispute resolution. While the judgments in TRF and Perkins may have had the right intent in mind, the practical implication may, in effect, choke party autonomy.
* Ajar Rab is a Partner at Rab & Rab Associates LLP, a Visiting Professor at National Law School of India University, Bangalore and Adjunct Visiting Professor at National University of Juridical Sciences, Kolkata. He is also an International Policy Consultant at Lexidale.