PERKINS EASTMAN ARCHITECTS DPC & ANR. VS HSCC (INDIA) LTD. BY - OINDRILA MITRA & PARTH SRIVASTAVA
PERKINS
EASTMAN ARCHITECTS DPC & ANR. VS HSCC (INDIA) LTD.
AUTHORED BY - OINDRILA MITRA & PARTH SRIVASTAVA,
KIIT School of Law, Bhubaneshwar, KIIT Deemed University.
ABSTRACT
The case Perkins Eastman Architects DPC & Another v. HSCC
(India) Ltd. (2019) addresses significant issues related to the
appointment of arbitrators under Indian arbitration law, particularly under the
Arbitration and Conciliation Act, 1996 (as amended in 2015). The
dispute arose between Perkins Eastman Architects, a U.S.-based firm, and HSCC
(India) Ltd., an Indian public sector company, over a contractual disagreement.
HSCC, as per the terms of the contract, sought to appoint a sole arbitrator,
who was an employee of the company, to resolve the dispute.
This ruling has far-reaching
implications for the arbitration landscape in India, strengthening the
principles of fairness and impartiality in the arbitral process and reinforcing
the need for an independent arbitrator free from conflicts of interest. The
decision is seen as a step forward in promoting confidence in India's
arbitration regime, aligning it with international standards.
INTRODUCTION
Perkins Eastman Architects DPC & Another v. HSCC
(India) Ltd., is a landmark judgement of the Supreme Court of India of the year
2019. It is a significant development in Indian arbitration law which goes to
the roots of the problem which has been one of the subjects of controversy in
arbitration practice - unilateral
appointment of arbitrators by an interested party. The case affects the fundamental principles of neutrality, impartiality, and
equality in the selection of
arbitrators as well as strengthens the rights of parties to an arbitration in
expecting a fair adjudicatory process free from bias or conflicts of interest.
The controversy arose out of a contract dispute between Perkins Eastman
Architects DPC, a United States-based architecture firm, and HSCC (India) Ltd.,
a public sector undertaking engaged in healthcare consultancy.
It was specified that the parties would arbitrate
disputes, and HSCC was given unilateral power to appoint one single arbitrator.
Perkins Eastman objected to the arrangement arguing that the fact that HSCC was
a party to the dispute compromised the notion of fairness and neutrality of the
arbitral process. Whether appointment by a party interested of sole arbitrator
is valid under the Arbitration
and Conciliation Act, 1996 on the
provisions especially in view of the 2015 amendment by incorporation of Section 12(5) was the question of law which had been hovering at
the door steps of the Apex Court. This rule, which promotes impartiality,
prohibits direct parties with an interest in the dispute from appointing
arbitrators unilaterally, unless the party directly affected provides
particular consent.
BACKGROUND
The Perkins
Eastman Architects DPC is a
design and architecture firm incorporated in the United States. The company has
extensive experience in designing health and education facilities. HSCC is a public sector undertaking of the Government of
India. HSCC is involved in consultancy services, mainly through the health
sector. HSCC undertakes architectural designing, engineering, and project
management for diverse healthcare projects pan-India. The two parties entered
into an agreement where Perkins Eastman was to be appointed by HSCC for
architectural consultancy work for a project on healthcare. Like most
commercial contracts, the arbitration clause that provided all disputes arising
to be dealt with through arbitration had been included in the contract.
The clause at issue was of a form whereby HSCC
(India) Ltd. was handed a unilateral
discretion to select the sole
arbitrator in case any dispute arose between the parties. That kind of a clause
which hands over exclusive arbitration selection rights to one party is fairly
common in contracts involving a public sector entity or a large corporate. This
is the type of clause that is usually considered to favor arbitration because
it reduces the requirement of prolonged negotiations in the selection of an
arbitrator. However, it does give rise to related questions of impartiality
because the party able to select that arbitrator would have alleged unfair
leverage within the framework of the arbitration process.
A dispute arose between the respondent Perkins
Eastman and HSCC in the execution of the contract. The particulars of the
dispute themselves formed no central issue of adjudication of the Supreme
Court; instead, the matter in controversy was the matter of appointment of the
arbitrator. Again, on the basis of the arbitration clause, HSCC attempted to
single-handedly appoint a sole arbitrator for deciding its dispute with the
respondent.
But Perkins Eastman objected to the appointment on
the ground that it was unjust and against the principle
of neutrality and impartiality of arbitration. They contended that HSCC being an interested party in
the dispute, would not appoint an independent and impartial person as an
arbitrator. So it was despatched to the Supreme Court of India for
determination.
The 1996 Act was enacted initially without giving
commensurate protection to the impartiality of arbitrators. Consequently,
parties at a higher bargaining power either resorted to clauses in contracts
that permitted unilateral appointments of the arbitral tribunal or simply
proceeded to appoint the arbitrators themselves. Such practices have been
criticized for long as running against the principles of fair arbitration since
the appointing power exercised a great influence over the arbitral process.
Section 12(5) most clearly states:
The Fifth Schedule to the Act clearly puts persons with whom any
relationship or any connection with the parties or the subject of dispute shall
automatically debar them from nomination as arbitrators. It comprises anybody
having some direct or indirect interest in the outcome of the dispute or having
some prior relationship with one of the parties which may raise an apprehension
of bias in his mind. Section 12(5) is the proviso which allows the
disqualification only if dispensed with by explicit agreement in writing
between the parties after the disputes have arisen. The arbitration became more
normative by placing Section 12(5) in which the pre-condition of biasness of an
arbitrator was removed and the independence of an arbitrator was ensured.
Similarly, the Supreme Court has to face the same question of law in the case
of TRF Ltd. v. Energo
Engineering Projects Ltd. (2017) before arriving at the present judgment in the Perkins Eastman case. The
arbitration clause in the TRF case stated that one party itself had also got a
right to appoint an arbitrator and it being ineligible to act as the arbitrator
himself could also appoint another.
Held, under Section 12(5) of the Act, that the right
to appoint an arbitrator stood forfeited contemporaneously with the
ineligibility of the party concerned to become an arbitrator. Further, it was
held that allowing an ineligible person to make an appointment would defeat the
very purpose of ensuring impartiality. Therefore, the above principle developed
in case of TRF Ltd. was rightly applied in Perkins Eastman and thus it laid
down that a party with an interest could not participate in the direct or
indirect selection of an arbitrator.
JUDGEMENT
In its ruling, the Supreme Court ruled in favor of Perkins Eastman. It concluded that HSCC
(India) Ltd. was ineligible to unilaterally appoint an arbitrator because it
held an interest in the resolution of the dispute. HSCC's interest in the monetized resolution of the
dispute was determinative of its ineligibility. The reasoning here is centered
on a standard of neutrality and impartiality required for a fair arbitration
process.
The Fifth Schedule sets out circumstances where an arbitrator has a
relationship with either a party, their associates, or is interested in the
resolution of the case through financial or personal interests. The Court
determined that HSCC had an interest in the result of the resolution of the
dispute. Because HSCC had an interest in the result of the dispute, it was
ineligible to unilaterally appoint an arbitrator.
The Court explained that it is not right to allow
one party, particularly a party with a direct, manifested interest in the
dispute, to unilaterally appoint an arbitrator. It explained that if a party
with substantial interests were to appoint an arbitrator, it would cause
conflicts regarding that arbitrator's impartiality and independence. Surely an
arbitrator, because of its appointment by the interested party, would be biased
in favor of that party.
The judgment relies on natural
justice principles, which rest
on the notion that the adjudicator cannot have bias. An arbitrator appointed
unilaterally by the interested party violates the tenets of natural justice and
procedural fairness. As the Court states, the arbitration process is supposed
to resolve disputes as an alternative process. Hence, these two parties in
dispute must be neutral, for, without it, the entire arbitration process is
encumbered. Last but least, the Court ensures neutrality is maintained so the
integrity of arbitration is kept.
In Perkins Eastman, the Supreme Court expanded on
the logic of TRF when it held that HSCC, as a disqualified party under Section
12(5), could not elect an arbitrator unilaterally. The Court further clarified
that a party to a dispute, with a vested interest in the case, could not elect
an arbitrator for either itself or on behalf of another.
The Supreme Court also tackled the issue of consent
and waiver under Section 12(5). Section 12(5) provides the ability for
arbitrators to be disqualified pursuant to section 12(5) to be waived by both
parties providing express written consent "after the dispute has
arisen." In this case, neither party provided such written consent that
waived the requirements of Section 12(5). Thus, the appointment of the
arbitrator by HSCC without Perkins Eastman's consent was viod ab intio.
ANALYSIS
The
fundamental idea that guided the Supreme Court's decision was that arbitration,
regarded as an alternative method of dispute resolution, must be neutral and
independent, just as judges must not be impartial. Arbitrators are
essentially judges who should not display bias or have a conflict of interest
affecting their impartiality. The decision illustrates that permitting an
interested party to appoint the arbitrator unilaterally both contravenes this
principle and jeopardizes the basis of the arbitration process as being fair,
reasonable and impartial.
The
Perkins Eastman case applied this exact same reasoning to conclude that HSCC,
which was disqualified under Section 12(5) due to its interest in the dispute,
is not allowed to make their own appointment based precisely on their
disqualification. When an individual cannot be an arbitrator due to a conflict
of interest, the apparent neutrality of an appointment of another person by
that individual is still suspect, and the arbitrator's impartiality expected
under the 2015 amendments would be violated.
This
decision is particularly significant for arbitration in India in general, but
is most relevant in the context of contracts with public sector undertakings
(PSUs) or the government, as those contracts often contain clauses that allow
either party to unilaterally make an appointment of an arbitrator. As many such
contracts are skewed towards the government or PSUs, it is evident that there
could be a violation of the fairness of the arbitral process based on such
clauses. The Perkins Eastman judgment confirms that, even in the case of an
arbitration clause that gives unilateral appointment rights, appointments must
still comply with the notions of fairness and impartiality that were added
improvements to the process in the 2015 amendments.
The
judgement serves as a cautionary note, for while arbitration and enforcement of
arbitration being a private process for resolution of disputes, it is not
removed from the natural justice paradigms and terms of public policy. The
Court noted the fairness, and, as is uncontestably required, that the arbitral
process must be free and apparent, or the process would therefore have 'the
potential to compromise part of the integrity and credibility of arbitration as
an alternative to litigation.'
The
Perkins Eastman judgment is potentially important regarding the 'drafting of
arbitration clauses in contracts' - notably contracts with a public sector
entity, or even in larger corporations who have, traditionally - even
historically, reserved the right to make a unilateral appointment of an
arbitrator. The judgment suggests the need for careful and deliberate
consideration - particularly of arbitration clauses in contracts that contain
unilateral appointment provisions. If unilateral appointment provisions exist -
those may be suspect, at least, under Perkins Eastman as a decision precedent,
walling out the validity of provisions unless both parties consent in writing
to arbitrator appointments after the dispute arises.
This
decision represents an important development in the context of commercial
arbitration and public sector undertakings, indicating a movement toward more
equal systems of arbitration that will limit the influence that one party has
over the makeup of the arbitral tribunal. Going forward, the parties to the
contract will need to draft arbitration clauses in configurations that comply
with the directions implied by the Supreme Court to reflect impartiality and
neutrality, or risk having their clauses invalidated.
CONCLUSION
The
judgment in Perkins Eastman Architects DPC & Another v. HSCC (India)
Ltd. will not be underestimated as it is a groundbreaking judgment of
arbitration law in India, which reaffirms the paramount principles of
impartiality, fairness, and independence in the arbitral process. The Supreme
Court has taken a strong stance when it held that a party who has a direct
stake in the outcome of a dispute cannot unilaterally appoint an arbitrator,
thereby bolstering the integrity of arbitral proceedings. The judgment builds
on the precedent set by TRF Ltd. v. Energo Engineering Projects Ltd. and
extends its reasoning to prohibit unilateral appointments by interested parties
that dilute the integrity of arbitration by positing that, regardless of the
parties’ prior agreement, the appointment of the arbitrator by the interested
party was “against public policy.”
The
significance of this ruling, especially concerning obligations to arbitrate
disputes on the part of public sector and government agencies, where
institutions often state unilateral arbitration clauses, cannot be understated.
The ruling implies precise standards about how such unilateral arbitration
clauses react with the principles dictated by Section 12(5), of the Arbitration
and Conciliation Act, 1996, as amended by the 2015 amendments, where
it can be definitively stated that there cannot be even a perceptible conflict
of interest, and that all arbitrators appointed are, must be, and must be
perceived to be independent.
The
Perkins Eastman judgment builds confidence in arbitration as a legitimate
alternative to litigation by making the process clear and impartial; and most
importantly, it necessarily acts as a protection against the coercive control
that could be exercised by the party seeking the appointment of the arbitrator.
The judgment enhances the parties’ confidence in arbitration as a proper and
desirable method of resolving disputes, rather than as an unpredictable and
controlling disadvantage exercised by one party.
The
Supreme Court’s judgment undoubtedly contributes to what is a progressive and
major step in arbitration law in India, developing an even greater fair and
balanced context for commercial dispute resolution, particularly in those cases
where public sector entities are involved.
REFERENCES
6.
Perkins Eastman Architects D.P.C. v.
H.S.C.C. (India) Ltd., 2019 S.C.C. Online SC 1517 (India).
7.
The Arbitration and Conciliation Act,
No.26, Acts of Parliament, 1996 (India)