In a recent Judgment pronounced on 3rd July 2017 in TLF Limited Vs Energo Engineering Projects Limited (2017 SCC Online) 692 , a three Judge Bench of Supreme Court of India has settled the law by holding that a disqualified person under Schedule V or VII to be appointed as an arbitrator, is not eligible to appoint an arbitrator also. That means if a person is disqualified to be appointed as the arbitrator in view of S.12 (5) read with Schedule V and Schedule VII, of the Arbitration and Conciliation Act, 1996, he also cannot act as an appointing authority, even though the contract provides for the same.

The said Judgment is a very progressive step towards a neutral and truly independent arbitration system. If this system continues then in India, sole arbitrators can be appointed only either by the parties jointly or by the court under S.11 or by the Arbitral Institutions only. Hence if any Company is using such one sided arbitration clauses, they should amend the same, to avoid unnecessary future litigations relating to appointment of arbitrator.

Normally in case of a sole arbitrator, he/she can be either appointed by both the parties or in case of a disagreement by the Court, in case of an adhoc arbitration or by the arbitral Institution in case of an Institutional Arbitration. But in India, we have a practice of empowering one party to be the arbitrator appointing authority, by the contracting parties, with full powers to nominate or appoint an arbitrator. These arbitration agreements were incorporated in the contracts by Government departments, Public Sector under takings and Finance companies. Such arbitration clauses were misused by various big companies, which appointed their own past or present staff members or panel lawyers as arbitrators. Such an appointment, many times ended up in a protracted arbitration proceeding or one sided awards. Hence the stake holders started losing their confidence on the arbitration process itself. Unfortunately, courts in India, upheld those on sided arbitration agreements on the ground that the parties entered such an arbitration agreement keeping their eyes open and hence the court cannot interfere.

But the Arbitration and conciliation (Amendment) Act,2015 brought in many progressive changes to ensure neutrality of arbitrators and to ensure an efficient arbitration regime. One of the most important change is the introduction of Schedule V & VII by which certain category of persons were disqualified to be appointed as arbitrators. These schedules are very similar to the IBA Rules on Conflict of interest in International Arbitrations, which is the first guideline prepared by International Bar Association (IBA) to ensure neutrality in International Arbitrations. These Schedules took away the procedure of appointing present & past staff members as arbitrators. In addition to that the mandatory declaration to be filed by the arbitrators under S.12(5) has made the arbitrators to disclose their relationship with the parties as well as counsels appearing for parties in the arbitration, that has generated a lot of confidence on the arbitration mechanism. But still, the one-sided arbitration agreements which empowered one of the party to appoint the sole arbitrator continues to exist. That means the arbitration clause between the parties will make one of the parties, the appointing authority of a sole arbitrator. This practice made arbitrators tilting towards the appointing party to get future arbitration assignments and ultimately, the arbitration award loses the essential character of neutrality

The contract between the parties had an Arbitration clause in its General terms and conditions of the purchase order (GTCPO), which provided that the Managing Director of Energo Engineering Projects Limited either by himself or his nominee shall be the sole arbitrator to resolve any disputes between the parties to the contract. Hence when disputes arose Energo Engineering appointed a former Chief Justice of a High Court as sole arbitrator. Even though TLF Limited did not have any allegations towards the retired judge who was appointed as the arbitrator, preferred an application under Section 11(5) read with section 11(6) of the Act for appointment of an Arbitrator in the High court. High court dismissed the application on the ground that the Amendment Act 2015 even though prohibits certain category of persons getting appointed as arbitrators, by way of Schedule V and VII, the power of such prohibited person to nominate or appoint a different person as arbitrator is not fettered or abrogated. The High Court also observed that prior to the amendment the practice of one party appointing an arbitrator was well recognized and the amendment Act did not deal with the said issue. But the Supreme Court of India, expanded the scope of the amendment Act, by giving a larger interpretation to the Vth & VIIth Schedule of the Arbitration and Conciliation Act,1996. Hence Indian Arbitration regime is getting better and better each day.