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This guest post is authored by Nutan Keswani and Shikher Upadhyay, practicing advocates in Delhi.
1. INTRODUCTION
Arbitration, one of the oldest and most widely recognized mechanisms for alternative dispute resolution, is prized for its speed and cost-effectiveness. However, what is often lauded as a streamlined process can, at times, become unexpectedly prolonged and burdensome due to legal complexities and unforeseen delays. One such scenario arises when the appointed arbitrator either fails to perform their duties or withdraws from their role, triggering the need for “substitution” of the arbitrator.
While substituting an arbitrator may seem like a minor procedural step, it can become a drawn-out affair in India’s current legal landscape. Despite being a relatively simple requirement, the process of substituting an arbitrator often takes months, hindering the efficiency that arbitration is supposed to guarantee.
In this regard, Section 15 of the Arbitration and Conciliation Act, 1996 (“Act”) provides for the termination of an arbitrator’s mandate under the following circumstances: (i) failure to perform duties in accordance with Section 14 of the Act, (ii) a successful challenge to arbitrator’s eligibility under Section 13 of the Act, (iii) withdrawal from the office, or (iv) an agreement between parties.
Section 15(2) provides that “where the mandate of an arbitrator is terminated, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.” On the surface, this provision seems straightforward. Yet, the central issue—which rules should govern the substitution process—has been subject of significant judicial debate in India.
This blog aims to explore the legal quagmire surrounding the interpretation of “rules” in Section 15(2) of the Act and the complexities that arise when trying to determine the appropriate procedure for substitution of an arbitrator.
2. UNDERSTANDING SECTION 15(2) OF THE ACT THROUGH JUDICIAL PRECEDENTS
In a series of landmark rulings, the Supreme Court and various High Courts have grappled with the issue of appointing substitute arbitrators, particularly when the original arbitrator resigns or is otherwise unable to continue. The issue revolves around whether the statutory provisions of the Act or the terms of the arbitration agreement should govern the process of appointing a substitute arbitrator. This conflict has led to some notable judgments, which we examine below.
In the landmark case of Yashwith Construction P. Ltd. vs. Simplex Concrete Piles India Ltd. and Ors. (“Yashwith Construction”), the Supreme Court examined the scope of Section 15(2) of the Act. The dispute arose after an arbitrator appointed by the parties resigned, prompting the petitioner therein to approach the court under Section 11 of the Act for the appointment of a substitute.
The petitioner argued that Section 15(2) of the Act required the substitute arbitrator to be appointed according to statutory rules, while the respondent contended that the substitution should follow the contractual clause, which mandated appointment of arbitrator by the ‘Managing Director’ of the respondent. The Supreme Court, however, sided with the respondent, stating that the appointment of substitute arbitrator must adhere to the original agreement or the provision applicable to the appointment at the initial stage. Section 11(6), it held, only applied when a party fails to act in terms of the arbitration agreement.
Similarly in Huawei Technologies Co. Ltd v. Sterlite Technologies Ltd., the Supreme Court dealt with the recusal of a sole arbitrator appointed by mutual consent under the arbitration clause therein. The aggrieved party sough a substitute arbitrator under Section 11(6) of the Act. The court dismissed this application, stating that the process of appointing a substitute arbitrator must be in accordance with the arbitration clause, and the applicant should first attempt to reach a mutual agreement with respondent before approaching the court under Section 11(6) of the Act.
In ACC Ltd. v. Global Cements Ltd., the arbitration clause specified a “named” arbitrator. When this arbitrator passed away, the Bombay High Court appointed a substitute arbitrator under Section 11(6) read with section 15(2) of the Act. On appeal, while the Supreme Court affirmed the view adopted in Yashwith Construction, holding that a substitute arbitrator must be appointed in the same manner as the original arbitrator. However, the court, noting the unique situation involving a named arbitrator, held that, in the absence of any prohibition, the court could step in under Section 11 of the Act to appoint a substitute when the original arbitrator was named by the parties.
Developing on the existing jurisprudence, the Calcutta High Court in Ramji Power Construction Ltd. v. Damodar Valley Corporation Ltd. adopted a different stance. The Court held that if the original arbitrator was appointed by the court under Section 11, the substitute must also be appointed in the same manner. The Court distinguished the judgment in Yashwith Construction and interpreted Section 15(2) as requiring that the same procedure be followed for the appointment of a substitute arbitrator, even when the original arbitrator was court-appointed.
This view was further reinforced in Union of India and Ors. v. Uttar Pradesh State Bridge Corporation Ltd. where the Supreme Court clarified that while the appointment of a substitute arbitrator generally follows the terms of the original agreement, however if the first arbitrator was appointed by the default procedure under Section 11, the substitution must also follow the same procedure. This was based on the rationale that once the right to appoint an arbitrator is forfeited, the court takes over the appointment and the said right cannot be revived subsequently for substitution of an arbitrator in terms of Section 15 of the Act.
This ratio established in the aforesaid cases has been followed in several subsequent rulings. Notably, in Tricolour Hotels Ltd. and Ors. v. Dinesh Jain & Ors., Mithilesh Kumar Aggarwal v. Athena Infrastructure Ltd., and GMR Ambala Chandigarh Expressways Pvt. Ltd. v. National Highway Authority of India and Ors., the Delhi High Court has upheld the principle that the appointment of a substitute arbitrator should align with the original arbitration agreement. Similarly, in Ignatius Tony Pereira v. Pifran Sanjivan Fernandes and SAP India Private Limited v. Cox & Kings Ltd., the Bombay High Court followed the same line of reasoning, emphasizing adherence to the original agreement in the substitution process. The Allahabad High Court in Tirath Kumar v. Rakesh Kumar Mishra and Ors. also supported this view, reinforcing the consistency of the judicial approach.
3. CONFLICTING RECENT RULINGS ON SUBSTITUTION OF ARBITRATORS
Despite the clarity offered by the Supreme Court and multiple High Courts in the above cases, recent judgments, particularly from the Delhi High Court, have raised questions about the consistency of the approach.
In M/s Raj Chawal and Co. Stock and Share Brokers v. Nine Media and Information Services Ltd. and Anr. the Delhi High Court dismissed a petition for appointment of a substitute arbitrator. The court found that the petitioner had bypassed the terms of the arbitration agreement by approaching the court directly, despite the fact that the original arbitrator was appointed by the court under Section 11 of the Act.
Similarly, in Mother Boon Foods Pvt. Ltd. v. Ready Roti India Pvt. Ltd. the court dismissed the petition on the grounds that the applicant failed to first communicate with the respondent to find a mutually agreeable substitute. It was held that:
“The occasion for this Court to step in and appoint an arbitrator under Section 11 (6) of the 1996 Act arises only where the parties are unable to agree on the arbitrator who has to deal with the matter. Absent such failure of the parties to arrive at an agreement, this Court cannot assume jurisdiction and appoint an arbitrator on its own.”
Further in EMCO Ltd. v. Delhi Transco Ltd., the Delhi High Court made a sweeping observation that if an arbitrator withdraws, the arbitral proceedings should be recommenced in terms of Section 21 of Act, unless the parties agree otherwise. This ruling, however, failed to differentiate between a party-appointed and court appointed original arbitrator, creating potential confusion for future cases.
4. CONCLUDING REMARKS – CALL FOR CLARITY
These divergent rulings highlight an ongoing judicial dilemma. While the general principle is that the appointment of a substitute arbitrator should follow the terms of the arbitration agreement, a shift occurs when the original arbitrator was appointed by the court under Section 11 of the Act. In such cases, subsequent appointments must also be made through the court, under Section 11, to ensure consistency with the statutory process.
The conflicting judgments, particularly from the Delhi High Court, suggest a need for greater clarity in the law regarding the appointment of substitute arbitrators, particularly when the original appointment was court-directed. Given the varying interpretation and an unclear understanding of how these rulings may apply to a specific case, navigating the process can become risky. Until this is resolved, parties must tread carefully and consider seeking judicial intervention to ensure that the substitution process follows the correct legal framework.
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