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India – Supreme Court Appoints Arbitrator Of Neutral Nationality In Exercise Of Its Default Powers Of Appointment.

16 July, 2014

 

 

The Supreme Court of India, in a different dispute between Reliance Industries Limited and the Union of India, recently delivered an important decision concerning the exercise of the court’s default power of appointment of arbitrators pursuant to Section 9 of the Arbitration Act. In circumstances where the parties’ nominated arbitrators could not agree on the appointment of a presiding arbitrator, the Chief Justice of the Supreme Court exercised his discretion to appoint a presiding arbitrator of neutral nationality in an attempt to ensure, to the extent possible, an appearance of neutrality.

 

The Supreme Court’s approach is a welcome development, and offers important flexibility in appropriate cases for the Indian courts in departing from the more usual practice of appointing retired senior Indian judges as arbitrators.

 

Facts of the Case

 

Reliance Industries, Niko Resources and British Petroleum (the “Petitioners“) were parties to a Production Sharing Contract (“PSC“) with the Union of India (the “Respondent“) relating to certain hydrocarbon reserves. A dispute arose between the Petitioners and the Respondent in relation to the Petitioners’ entitlement to cost recovery. The PSC provided for disputes to be referred to ad-hoc arbitration under the UNCITRAL Rules of Arbitration (the “UNCITRAL Rules“) before a panel of three arbitrators. As operator under the PSC, Reliance served notice of arbitration and appointed an arbitrator on behalf of the Petitioners. The Respondent, who initially refused to participate in the arbitration, also ultimately appointed an arbitrator. The parties’ nominated arbitrators could not agree on a suitable third and presiding arbitrator and so the Petitioners applied to the Supreme Court to make the appointment under section 11(6) of the Arbitration Act.The Petitioners argued that the presiding arbitrator should be of neutral nationality whereas the Respondent argued in favour of appointing an Indian arbitrator. The PSC containing the arbitration agreement provided some guidance on this issue. Article 33.5 of the PSC provided that where arbitration was initiated and one of the parties refused to appoint an arbitrator, then the counterparty could approach the Chief Justice of India to appoint an arbitrator of a neutral nationality. Article 33.6 of the PSC allowed the parties to approach the Chief Justice of India to appoint an arbitrator where the party-appointed arbitrators were unable to agree on a presiding arbitrator. However, the latter clause did not expressly provide that the presiding arbitrator had to be of neutral nationality.

 

Analysis

 

A key contention of the Petitioners was that a non-Indian arbitrator should be appointed since such an appointment would instil a sense of impartiality and neutrality. The Petitioners also relied on the UNCITRAL Rules – which encourages appointing the presiding arbitrator from a neutral nationality – in support of its argument. The Petitioners referred to Article 33.5 of the PSC – which mandated neutrality of nationality in the context of party appointed arbitrators – and argued that the same philosophy should be applied even to the appointment of a presiding arbitrator.

 

The Respondent on the other hand argued that Article 33.6 of the PSC dealing with the appointment of the presiding arbitrator was intentionally drafted to avoid reference to appointing an arbitrator of neutral nationality. The Respondent argued that the underlying dispute involved issues of Indian law and it was therefore advisable to appoint an Indian arbitrator as a presiding arbitrator.

 

Decision

 

The Supreme Court noted that under section 11(9) of the Act, the court is empowered (but not obliged) to appoint an arbitrator of a nationality other than the nationality of the parties involved in the litigation. The Supreme Court made reference to international arbitral practice and recognised that appointing a presiding arbitrator of a neutral nationality had become a practice that was almost universally accepted in the international arbitration space. The court also observed that in international arbitration, the surest method of ensuring at least the appearance of neutrality was to appoint a sole or third arbitrator from a nationality other than that of the parties to the arbitration. In this context, and on the facts of the case, the Supreme Court decided in favor of appointing a presiding arbitrator of neutral nationality. (The Court made clear, however, that whilst appointing an arbitrator of neutral nationality may be desirable in various instances, it was not a requirement for all cases.) The Court went on to appoint James Spigelman AC QC, former Chief Justice of New South Wales, Australia, and then, following problems with that appointment, it appointed Michael McHugh AC QC, a former justice of the High Court of Australia and a former non-permanent justice of the Court of Final Appeal in Hong Kong.

 

herbert smith Freehills

 

For further information, please contact:

 

Nicholas Peacock, Partner, Herbert Smith Freehills

nicholas.peacock@hsf.com

 

Alistair Henderson, Partner, Herbert Smith Freehills

alastair.henderson@hsf.com

 
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