Courts not to appoint a substitute arbitrator only in cases of clear prohibition in the Agreement #indianlaws

Whenever parties agree for arbitration and even name a specific arbitrator with no specific provision for appointment of another arbitrator on the recusal/withdrawal of the said arbitrator, the said omission is made up by Section 15(2) of the Act and unless arbitration agreement between the parties provide a categorical prohibition or debarment in resolving a question or dispute or difference between the parties by a substitute arbitrator in case of death or the named arbitrator or non-availability of the said arbitrator, Courts have the power to appoint substitute arbitrator, as provided under Section 15(2) of the Arbitration Act

Courts not to appoint a substitute arbitrator only in cases of clear prohibition in the Agreement

In the event of resignation of appointed arbitrator, whether a substitute arbitrator can be appointed, was the subject matter of adjudication in the instant matter. In the present case, after the resignation of named arbitrator, High Court pursuant to application made to it under Section 11 of the Arbitration and Conciliation Act, 1996 (Act), appointed an arbitrator which became the subject matter of challenge.

It was argued that under Section 15(2) of the Arbitration and Conciliation Act,( hereinafter referred to as the ‘Act’) 1996, where the mandate of a named arbitrator terminates, there being no rules that would apply to the appointment of the arbitrator being replaced, the said Section would have no application. On the contrary, the appointment of substituted arbitrator was favoured on the ground that the mandate of Section 89 of the Code of Civil Procedure (CPC) requires a Court to attempt to either settle disputes raised in a suit by the means outlined by the Section or refer them to arbitration, in which case the arbitration shall be deemed as if it is an arbitration commenced under the Arbitration and Conciliation Act, 1996.

Section 15 of the Act deals with termination of mandate and substitution of arbitrator. Section 15(2) states that a substitute arbitrator shall be appointed as per the rules that were applicable to the appointment of the arbitrator being replaced. It was observed that this provision (Section 15(2)) would thus have to be given liberal interpretation so as to apply to all possible circumstances under which the mandate may be terminated.

It was further observed that the legislative policy embodied in Sections 14 and 15 of the Act is to facilitate the parties to resolve the dispute by way of arbitration. If the arbitration clause clearly spells out any prohibition or debarment, the court has to keep its hands off and there is no question of persuading or pressurising the parties to resolve the dispute by a substitute arbitrator. However, in the absence of such debarment or prohibition of appointment of a substitute arbitrator, the Court’s duty is to give effect to the policy of law that is to promote efficacy of arbitration.

Where arbitration agreement does not specifically bar the appointment of another arbitrator on the recusal/withdrawal of the earlier arbitrator appointed by the parties with mutual agreement, Section 15(2) of the Act would be attracted and a substitute arbitrator could be appointed according to ‘Rules’ that govern the field. In the instant case, it was the agreement between the parties which was treated as ‘Rules’ for the purposes of Section 15(2) of the Act.

It was held that Section 15(2) of the Act is to be interpreted keeping in mind the ethos of the arbitration generally and also in the light of the spirit behind Section 89 of the CPC in particular.

In Section 89 of the CPC, the Court asks the parties to choose one or the other ADR methods, including arbitration, and the parties choose arbitration as their option. At the same time, once the parties agree for arbitration under the Act and the matter is referred to arbitration, thereafter the situation is almost at par with what is contemplated in Section 89 of the CPC. In a suit which is filed in the Court, when the parties agree for deciding the disputes by means of arbitration, they agree that the court of law may stay its hands off such a dispute as the parties have chosen alternate method i.e. one of the forms of ADR. When in a pending suit the parties agree for reference to arbitration, though there is no arbitration agreement when the suit was filed, they have consciously preferred arbitration over the court process.

In the above situation, Section 89 of the CPC also springs into action, which provides for ‘settlement of disputes outside the Court’. As per this provision, where it appears to the Court that there exists elements of a settlement which may be acceptable to the parties, the Court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the Court may re-formulate the terms of a possible settlement and refer the same for – a) arbitration; b) conciliation; c) judicial settlement, including settlement through lok adalat; or d) mediation.

Resort to arbitration in a pending suit by the orders of the Court would only be when parties agree for settlement of their dispute through arbitration, in contra-distinction to the Alternate Dispute Mechanism through the process of mediation where the Judge has the discretion to send the parties for mediation, without even obtaining the consent of the parties. Thus, reference to arbitration is by means of agreement between the parties.

Once arbitration agreement was entered into between the parties, that too in a pending suit, the intention of the parties was to settle the matter through arbitration and not to come back to the Court again for decision of the same dispute by court adjudicatory process. Whenever parties agree for arbitration and even name a specific arbitrator with no specific provision for appointment of another arbitrator on the recusal/withdrawal of the said arbitrator, the said omission is made up by Section 15(2) of the Act and unless arbitration agreement between the parties provide a categorical prohibition or debarment in resolving a question or dispute or difference between the parties by a substitute arbitrator in case of death or the named arbitrator or non-availability of the said arbitrator, Courts have the power to appoint substitute arbitrator, as provided under Section 15(2) when given liberal interpretation so as to apply to all possible circumstances under which the mandate of the earlier arbitrator may be terminated.

[Shailesh Dhairyawan vs. Mohan Balkrishna Lulla]

(SC, 16.10.2015)

Civil Appeal No. 8731 of 2015