Examining the Enforceability of Asymmetric Arbitrator Appointment Clauses: Balancing Party Autonomy and Procedural Fairness
Introduction
In international arbitration, the concept of party autonomy usually conflicts with procedural fairness that is mandated to be balanced by courts and tribunals.[1] Asymmetric arbitrator appointment clauses are an evident example of this situation. Asymmetric arbitrator appointment clauses, also known as unilateral appointment clauses, are provisions in arbitration agreements that give one party disproportionately greater or unilateral rights in the appointment process of an arbitrator. In the absence of such clauses, the standard practice is based on party equality giving them equal say in appointment process.
These provisions, which grant one party superior rights in the arbitrator selection process, challenge the fundamental notion of equality between parties and confidence in the arbitrator on which the entire arbitration proceedings depend. The debate is complicated by the fact that proponents argue that these clauses are necessary to ensure the autonomy of the parties to tailor the arbitration process as per the specific needs and interests of each party. In contrast, these clauses undermine the neutrality and independence of an arbitral tribunal. With the continuing shift towards arbitration as a pivotal mode of alternate dispute resolution in the global as well as the Indian landscape, the enforceability of such clauses becomes problematic; consequently, calling into question the limits on freedom to contract and integrity of the arbitral process.
This article aims to address these issues across a number of legal systems including India dealing with legal and ethical implications of asymmetric arbitrator appointment clauses and explores various conflicting claims about party autonomy, equality and the overall legitimacy of such clauses.
Page Contents
The intersection and conflict of arbitration principles
Independence and impartiality are among the fundamental principles of arbitration as enshrined in the Arbitration and Conciliation Act, 1996. Section 18[2] of the Act lays paramount emphasis on equal treatment of parties and affording them full opportunity to present their cases. The arbitral tribunal’s independence and impartiality are essential features of the arbitral process that ensure fairness in the arbitral proceedings. These principles, stemming from natural justice tenets, are inextricably related to the validity as well as enforceability of arbitral awards.
Conversely, party autonomy is often referred to as the “ground norm” and backbone of arbitration, allowing for self-determination by parties concerning how to resolve their disputes including the appointment process. This concept stems from the contractual nature of arbitration, embracing flexibility and allowing parties’ involvement in the process. However, a tension arises when such principles clash in context of one-sided appointment provisions granting an exclusive right to one party to appoint the arbitral tribunal or majority of it.
The process of appointing the arbitrator is a very important part of the entire arbitration proceeding, as it directly affects the composition and integrity of the arbitral tribunal. Usually, arbitration agreements set out a mutually agreed process for arbitrator appointment involving specified qualifications or a system of each party picking an arbitrator and those appointees jointly naming a presiding arbitrator. This approach is intended to ensure independence and impartiality of the arbitral tribunal.
Asymmetric arbitration clauses, however, depart from this norm by providing for one party alone to appoint the arbitrator or a majority thereof. These clauses can be drafted in various forms, such as unilateral clauses, where one party has the exclusive right to appoint all the arbitrators; majority clauses, where one party has the right to choose the majority of the arbitrators; or limited objection clauses, where the other party has a restricted set of grounds to object to the appointment of the arbitrator.
This conflict between procedural fairness and party autonomy raises fundamental questions about the nature of arbitration itself. On one hand, respecting autonomy of parties may mean recognizing asymmetrical clauses as valid expressions of their wills. On the other hand, such clauses potentially undermine the essential principles of equality and impartiality that are essential to the legitimacy of any arbitral process.
The task for courts and arbitral institutions lies in striking a sensitive balance between these competing concepts. This balancing act needs to take into account not just the instantaneous interest of the parties but also the wider implications for the integrity and credibility of arbitration as a dispute resolution mechanism. As such, the enforceability of asymmetric arbitrator appointment clauses serves as a litmus test for the adaptability and resilience of arbitration in the face of evolving industrial practices and legal scenarios.
Legal position in India
i. Early Stance and Evolution
The Indian legal stance on asymmetric arbitrator appointment clauses has undergone significant evolution. Initially, the courts took a lenient approach towards asymmetric appointment clauses, showing tolerance with some asymmetry between the parties to an arbitration agreement such as in TRF Ltd. v. Energo Engineering Projects Ltd.[3], where the Supreme Court implicitly validated asymmetric arbitrator appointment clause.
However, jurisprudential landscape evolved over time, with the Supreme Court becoming more pro-active in protecting integrity of arbitral proceedings. The landmark judgment in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[4] emphasized the vital importance of independence and impartiality, advocating for equal rights in appointment process.
ii. Divergent Views
Notwithstanding the Perkins judgment, divergent views were exhibited within the Indian judiciary. Cases like Central Organisation for Railway Electrification v. M/S ECI-SPIC-SMO-MCML (JV)[5] and Union of India v Parmar Construction Company[6], reaffirmed the principle of party autonomy, asserting that parties are bound by contractually agreed appointment procedures. Conversely, in Taleda Square Private Limited v. Rail Land Development Authority[7] the Delhi High Court advocated for a broad-based panel and counter-balancing approach which was further reinforced in Sri Ganesh Engineering Works v. Northern Railway & Anr.[8]
These divergent perspectives reflect the ongoing tension between party autonomy and procedural fairness in arbitration with the courts trying to reconcile these competing principles.
iii. Recent Developments and Future Trajectory
The legal position on unilateral appointment clauses remains unsettled, with a five-judge bench of the Supreme Court currently considering the issue in Central Organisation for Railway Electrification, JSW Steel Limited v. M/S ECI-SPIC-SMO-MCML (JV).[9] The court’s decision to defer judgment, pending the recommendations of an expert committee constituted by the Union Government, signals recognition of the issue’s complexity and far-reaching implications.
The anticipated outcome of this case is poised to have significant implications for the future of arbitrator appointment procedures in India as it may potentially reshape the boundaries of party autonomy in arbitration agreements and redefine the limits of acceptable asymmetry in the arbitral process.
International position on unilateral appointment clauses
Asymmetric appointment clauses have been under increasing scrutiny in the international scenario, with a growing consensus that such provisions potentially undermine the impartiality, independence, and fairness of arbitral proceedings.
Several national jurisdictions have implemented legislative measures to address this issue such as in Germany, Section 1034(2) of the Code of Civil Procedure (ZPO)[10] allows a disadvantaged party to petition the court for arbitrator appointment if the agreed procedure grants disproportionate control to one party. Similarly, Article 1028 of the Dutch Code of Civil Procedure[11] permits court intervention in cases of preferential treatment in arbitrator appointments.
International arbitral institutions have also developed mechanisms to mitigate challenges associated with unilateral appointment clauses. The International Chamber of Commerce (ICC) Rules, under Article 12(6)[12], mandate joint nominations in multi-party arbitrations. Article 12.8[13] empowers the ICC Court to appoint the entire tribunal, potentially overriding unilateral nomination rights stipulated in the agreement.
The London Court of International Arbitration (LCIA) Rules adopt a comparable approach. Article 8.1[14] authorizes the LCIA Court to select the entire panel, disregarding any unilateral entitlements. The World Intellectual Property Organization (WIPO) Arbitration Rules, in Article 16(a)[15], restrict parties to joint nominations for sole arbitrators in the absence of a mutually agreed appointment procedure.
These provisions in international arbitration laws and institutional rules reflect a global consensus on the need to protect the independence and impartiality of arbitral tribunals. This course demonstrates a willingness to prioritize these fundamental principles over party autonomy while unilateral appointment clauses threaten to compromise the integrity of the arbitral process. As the international arbitration landscape keeps evolving, it is likely that more jurisdictions and institutions will adopt similar measures to safeguard the fairness and independence of arbitral proceedings, potentially reshaping the future of arbitrator appointment mechanisms globally.
Challenges to unilateral appointments
Unilateral arbitrator appointment clauses have increasingly faced scrutiny and legal challenges in recent years, with critics arguing that these clauses undermine the fundamental principles of arbitration, particularly the notion of procedural fairness and party equality.
The primary challenge stems from the potential for bias. When one party has the sole right to appoint an arbitrator, there’s a perceived risk that the chosen arbitrator may favor the appointing party. The integrity of the arbitral process is directly dependent on the neutrality of the arbitrators and the perception of neutrality. This concern is particularly acute in disputes characterized by significant power asymmetries, such as employer-employee or corporation-consumer conflicts.
Another significant challenge arises from potential violations of public policy. Some jurisdictions have deemed unilateral appointment clauses contrary to public policy, viewing them as an unfair advantage that contravenes the spirit of arbitration as a consensual dispute resolution mechanism. This perspective aligns with the Singapore Court of Appeal’s assertion in Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd.[16] that “The appointment process is a crucial part of ensuring the integrity of the arbitral process and the independence and impartiality of the arbitral tribunal.
The doctrine of unconscionability, an equitable remedy developed in contract law, presents another significant challenge. Courts may find such clauses unconscionable, particularly when there exists a significant imbalance of power between the parties. This doctrine intersects with public policy concerns and questions of procedural fairness, addressing both the fairness of the contract formation process and the substantive fairness of the terms. The Ninth Circuit Court of Appeals in Chavarria v. Ralphs Grocery Co.[17] held that a unilateral appointment clause was “so one-sided as to be unconscionable under the circumstances.”
Lastly, enforcement challenges also loom large. Courts across various jurisdictions have shown reluctance to enforce awards resulting from arbitrations where one party had unilateral appointment rights, citing due process and fairness concerns. This aligns with Article V(1)(d) of the New York Convention[18], which permits challenges to awards based on lack of independence and impartiality in the appointment process.
These multifaceted challenges to unilateral appointment clauses reflect a growing global consensus on the need to safeguard the fundamental principles of arbitration, echoing the evolving jurisprudence discussed in previous sections.
Balancing party autonomy and principle of equal treatment
The concept of party autonomy in arbitration allows parties to tailor the arbitration process to their specific requirements including the freedom to determine procedural rules, select arbitrators, and choose the governing law. This foundational concept reflects parties’ capacity to shape dispute resolution mechanism to fit their commercial relationship and particular needs.
However, this autonomy must be judiciously balanced against the principle of equal treatment enshrined in Article 18 of the UNCITRAL Model Law[19], which has been adopted verbatim by many states. It unequivocally mandates that “the parties shall be treated with equality and each party shall be given a full opportunity for presenting its case.” This stipulation serves as a cornerstone of procedural fairness, guiding arbitral tribunal’s conduct and influencing parties’ agreements.
The interplay between party autonomy and equal treatment becomes particularly complex in cases involving asymmetric arbitrator appointment clauses. These clauses, which grant one party the unilateral power to appoint an arbitrator, pose significant challenges to maintaining equitable treatment. Nevertheless, there are ways to mitigate the risks and maintain a semblance of equality.
Firstly, the arbitration agreement can emphasize independence and neutrality of arbitrators through the selection of arbitrators with strong reputations for fairness and integrity. By introducing a neutral institution into the appointment process an additional degree of credibility and fairness may be added. Moreover, mandating the disclosure by the appointing party of the chosen arbitrator’s background, possible conflicts of interest, or any previous relationships with the party can further help to mitigate potential abuse.
Furthermore, procedural safeguards such as provision for non-appointing party to challenge the appointment based on valid grounds can help prevent abuse of asymmetrical appointment power. While these measures might not completely eliminate the inherent asymmetry, they could attenuate related risks and provide some level of protection which is consistent with equal treatment principle.
Conclusion
The debate around asymmetric arbitrator appointment clause reflects the ongoing tussle between Party Autonomy and Procedural Fairness in International Arbitration. As discussed in this article, the enforceability of these clauses and their recognition in Arbitration process is in a state of flux, with different Nations and arbitration institutions struggling with their enforceability and implications.
In India, the legal landscape of unilateral appointment clause has evolved from initial acceptance to extensive scrutiny, culminating in the pending decision of a five-judge bench of the Apex Court. This anticipated ruling will have a significant effect on the procedures related to the appointment of the arbitrator. Internationally there is a growing consensus among nations to safeguard the independence and impartiality of the arbitral tribunals, with many jurisdictions and institutions introducing measures to overcome the risk associated with the asymmetric appointment clause.
There are multiple challenges to these clauses, ranging from concerns related to biasness and violations of public policy to issues of unconscionability and enforcement difficulties. These challenges showcase the significant importance of maintaining the integrity of arbitration process and ensuring equality among parties. As the Arbitration society continues to navigate these multifaceted challenges, striking a delicate balance between respecting party autonomy and upholding principles of equality and fairness must be prioritize. Enhanced disclosure requirements, involvement of neutral institutions in the appointment process, and efficient challenge mechanisms can be the potential solutions to these issues.
Ultimately, the solution to these challenges will have a far-reaching implication for the practice of arbitration globally. It will require thoughtful consideration of commercial realities, legal principles, and ethical standards. Maintaining arbitration’s efficacy and credibility as a preferred dispute resolution method will depend on how smoothly it handles issues like asymmetric appointment clauses. The ongoing debate surrounding these clauses acts as a reminder of the dynamic nature of Arbitration law and practice. It emphasizes the need for continuous dialogue among practitioners, scholars, and policymakers to ensure that arbitration remains a fair, effective, and reliable process for settling international disputes.
Notes:-
[1]A. B. Rohatgi, Arbitration: Eclipse and Resurgence, 25 J. Indian L. Inst. 475, 475-91 (1983), http://www.jstor.org/stable/45148509.
[2] The Arbitration and Conciliation Act, No. 26 of 1996, § 18, (India).
[3] TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377
[4] Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.
[5] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.
[6] Union of India v. Parmar Construction Co., (2019) 15 SCC 682.
[7] Taleda Square (P) Ltd. v. Rail Land Development Authority, 2023 SCC OnLine Del 6321.
[8] Sri Ganesh Engineering Works v. Northern Railway, 2023 SCC OnLine Del 7574.
[9] Supra note 5.
[10] German Code of Civil Procedure, s. 1034(2).
[11] Dutch Code of Civil Procedure, Art. 1028.
[12] 2017 ICC Rules, Art 12(6).
[13] 2017 ICC Rules, Art 12.8.
[14] 2014 LCIA Rules, Art 8.1.
[15] 2002 WIPO, Art 16(a).
[16] Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd, 2007 SGCA 28.
[17] Chavarria v. Ralphs Grocery Co., 2013 United States Court of Appeals for the Ninth Circuit 733 F.3d 916.
[18] Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. V(1)(d), June 10, 1958, 330 U.N.T.S. 38.
[19] UNCITRAL Model Law on International Commercial Arbitration art. 18, U.N. Doc. A/40/17, annex I (1985).
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This article is co-authored by Avantika Raghuwanshi and Ashish Rawat. Both are undergraduate students at Chanakya National Law University, Patna.
