Supreme Court refuses to appoint a different arbitrator from the one agreed by the parties | Practical Law

Supreme Court refuses to appoint a different arbitrator from the one agreed by the parties | Practical Law

Rahul Kothari (Associate), Hariani & Co

Supreme Court refuses to appoint a different arbitrator from the one agreed by the parties

Published on 02 Oct 2009 • India
Rahul Kothari (Associate), Hariani & Co
The Indian Supreme Court has refused to alter an arbitration agreement which provided for one of the party’s employees to be appointed as the arbitrator. The parties entered into the contract with their eyes open and with full knowledge and comprehension of the arbitration agreement. As such, the court would not interfere and merely directed that the appointed person should be the arbitrator.

Background

Section 11 of the Arbitration and Conciliation Act, 1996 (ACA) deals with the appointment of arbitrators. Section 11(6) provides as follows:
"(6) Where, under an appointment procedure agreed upon by the parties -
(a) A party fails to act as required under that procedure; or
(b) The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) A person, including an institution, fails to perform any function entrusted to him or it under that procedure
a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment."

Facts

Indian Oil Corporation Ltd (IOCL) had signed an agreement with Raja Transport Pvt. Ltd (RTPL) whereby RTPL would be the retail dealer of IOCL's petroleum products. The agreement provided for the settlement of disputes through arbitration and stipulated that, in the event of a dispute, the matter would be referred to a sole arbitrator who would be the Director, Marketing of IOCL or some other officer of IOCL who might be nominated by the Director.
IOCL terminated the dealership causing a dispute to arise between the parties. RTPL commenced court proceedings, rather than arbitration as agreed. RTPL argued that since the arbitrator named in the agreement was an employee of IOCL, he would be biased and not impartial and was therefore not acceptable to RTPL.
The Chief Justice, Uttaranchal High Court held that there is an assumption that an employee of IOCL would be biased and partial and, therefore, that this would be prejudicial to the interest of one party. The parties were ordered, pursuant to section 11(6) of the ACA, to mutually appoint an independent arbitrator.
IOCL argued, through a Special Leave Petition to the Supreme Court, that once the parties had agreed that a particular person would be appointed as arbitrator in the event of a dispute, one party could not go back on that agreement for reasons of impartiality or bias.

Decision

The Supreme Court held that arbitration is a binding voluntary alternative dispute resolution process, in a private forum chosen by the parties. If a party, with open eyes and full knowledge and comprehension, enters into a contract containing an arbitration agreement providing for the other party's employee to be appointed as arbitrator, that party could not subsequently resile from that agreement.
A party cannot say he will be bound by only one part of the agreement and not the other part, unless the relevant part is void or impossible to perform and is severable from the remaining part of the agreement. A party cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named arbitrator contained in the arbitration clause.
The court held, that the power given under Section 11(6) was not intended to nullify the specific term of the arbitration agreement naming a particular person as arbitrator. It followed that, when an arbitration agreement names an individual as the arbitrator, the court should not interfere and should merely direct that the appointed person should be the arbitrator and that the dispute should be referred to him under arbitration.
Therefore, the appeal was allowed and the matter was decided in favour of IOCL. The order of the High Court was set aside and the dispute was ordered to be referred to the sole arbitrator, that is, the Director, Marketing of IOCL as provided for in the agreement.

Comment

This is an important judgment: it encourages alternative dispute resolution, in this case arbitration, and emphasises that courts should not interfere with contractually agreed mechanisms for the appointment of an arbitrator.
Another important facet of this judgment is that it confirms that, having consciously and mutually agreed to a particular term in the agreement, a party cannot at a later stage turnaround and dispute it. Parties should either accept an agreement as a whole, or reject it: the court will not allow them to enforce the terms of their bargain selectively.
This decision goes a long way in meeting the intent of the Legislature and deters parties from attempting to burden the courts with disputes where they have agreed to an alternative method of dispute resolution.

Case

Indian Oil Corporation Ltd. & Ors. (Appellant) VERSUS M/s Raja Transport Pvt. Ltd. (Respondent), Civil Appeal No. 5760/2009 [arising out of SLP (C) No. 26906/2008]