TWO ROADS IN THE WOODS: ANALYSIS OF ARBITRATOR SUBSTITUTION UNDER SECTION 15

I. Introduction

“Like romance, arbitration rests on consent.”

The interpretation of substituting an arbitrator under Section 15 has varied across different High Courts [“HC”]. Section 15(2) of the Arbitration and Conciliation Act 1996 [“Arbitration Act”] states, “Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.”

The case of Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India [“Yashwith Constructions”] decided by the Supreme Court [“SC”] opened a can of worms for the meaning of “rules that were applicable to the appointment of the arbitrator.” This phrase is open to interpretation in one of the two ways -

“Same rules refer to the rules provided in the arbitration agreement for the appointment of the arbitrator.
It refers to the appointment of the arbitrator through Section 11(6) where there was a failure to appoint an arbitrator.”

This blog has been divided into multiple parts where first part introduces the SC ruling in Yashwith Constructions [A]; The second part discusses the differing opinions of the High Courts [“HC”] on multiple possible interpretations of “rules that were applicable to the appointment of the arbitrator ” [B]. Third, it examines how courts have erred brings in understanding the meaning of the phrase and an alternate interpretation is desirable which focuses on party autonomy [C].

A. Bringing clarity to Section 15(2): Yashwith Judgement

In the case of Yashwith Constructions, the dispute arose when the Managing Director [“MD”] of the company appointed an arbitrator pursuant to the arbitration clause. However, the arbitrator resigned. It was contended that the MD did not have the power to substitute the arbitrator after the first arbitrator resigned.

The court held that “rules” in Section 15(2) refer to how appointment of arbitrator was done originally. This could be construed in either of the two ways:

“The substitute arbitrator can be appointed according to the original agreement; or
Appointment can be done through the provision applicable at the initial stage.

The MD exercised his power within Section 15(2) of the Arbitration Act and thus, the appointment of the substitute arbitrator was done correctly.

In Yashwith Constructions, the petitioner sought the appointment of a substitute arbitrator by filing an application under Section 15(2) in conjunction with Section 11(5) of the Arbitration Act. The court ruled that the process of appointing a substitute arbitrator must align with the procedure applicable at the time of the original appointment.

The key issue revolved around interpreting the phrase “provision applicable at the initial stage,” which could be understood in two ways – The first way of interpreting this phrase is that arbitrator is appointed through a Section 11(6) application since the original arbitrator was appointed through this method. The second way of interpretation which is in volte-face of the first way of interpretation is that that the “provision applicable” refers to the terms of the original arbitration agreement, regardless of whether the initial appointment involved court intervention.

Since the SC has not provided clear guidance on the correct interpretation, there is uncertainty. To navigate this, several HC decisions offer helpful insights, as discussed in the next section.

B. Analysing Yashwith according to various High Court Judgments

i. Calcutta HC

In the case of Ramjee Power Construction Ltd. v. Damodar Valley Corporation [“Ramjee Power Construction Ltd.”], before the Calcutta HC. In the case of Ramjee Power Construction Ltd. v. Damodar Valley Corporation [“Ramjee Power Construction”], the Calcutta HC, the arbitrator was to be appointed by the Damodar Valley Corporation [“DVC”] however it did not make any efforts to appoint one. This led to Section 11(6) application being filed which led to appointment of an arbitrator. Due to unforeseen circumstances, the arbitrator resigned, leading to an application for substitution. DVC argued that substitution should follow the parties’ agreement. The court analysed Section 15(2) and held that if the legislature intended the substitute arbitrator to align with the parties’ method, it would have been explicitly stated. Interpreting Yashwith Constructions, the court clarified that “initial stage” refers to the conditions of the original appointment, not the agreement. The Calcutta HC emphasized that judgments must be read in context, noting the importance of the full statement rather than isolating the phrase “according to the original agreement.”

If a party fails to appoint an arbitrator and a Section 11 application is filed, the right to appoint an arbitrator is forfeited.

In the case of Jaydeb Purakait v. Indusind Bank Ltd [“Jaydeb Purakait”], the issue arose when the court reconstituted the arbitral tribunal after overturning a prior verdict. The respondent’s failure to appoint an arbitrator within a reasonable timeframe led the court to conclude that while appointments must follow the arbitration agreement, once Section 11 is invoked, the party irreversibly loses its right to appoint under the agreement. Thus, the respondent forfeited the right to appoint an arbitrator.

ii. Delhi HC

The Delhi HC has taken a similar view in the case of GMR Ambala Chandigarh Expressways Pvt. Ltd v. National Highway Authority of India. The dispute arose when there was a failure to appoint a third arbitrator which led to Section 11 application being moved. However, due to death of court appointed arbitrator, there was an application of substitution of arbitrator. The court decided that if any party fails to nominate an arbitrator and subsequently files an application under “Section 11(6), the right to substitute the arbitrator” is forfeited. The parties cannot take advantage of their own refusal to appoint an arbitrator.

In the case of Mithilesh Kumar Aggarwal v. Athena Infrastructure, the Delhi HC relied on the Calcutta HC’s decision to conclude that if the party fails to appoint an arbitrator then right of either party stands extinguished and substitute arbitrator must be appointed in the same way.

iii. Bombay HC

The Bombay HC in the case of Ignatius Tony Pereira v. Pifran Sanjivan Fernandes [“Ignatius Tony Pereira”]had to decide on an application where the Arbitrator was appointed via Section 11(6). However, due to some exigency a fresh application for substitution had to be filed. The court strictly relied on the judgments of Ramjee Power Construction and Yaswith to come to the conclusion that fresh process will not be carried out and the appointment of arbitrator would be done according to the confines of Section 11.

In the case of Shane Duff v. Essel Sports Private Limited, the Bombay HC held that the appointment of the arbitrator was done through a company petition and the party could not exercise its power of appointing an arbitrator under the agreement. Consequently, substitution under Section 15(2) combined with Section 11(6) of the Arbitration Act is not permissible, as Section 11(6) is applicable only when there is a failure to appoint an arbitrator.

iv. Jharkhand HC

In Central Coalfields Limited v. Eastern India Powertech, the dispute arose when the parties failed to appoint an arbitrator after a disagreement emerged. This led to the filing of an application under Section 11(6) for the appointment of an arbitrator. Subsequently, the death of the appointed arbitrator necessitated the substitution of the arbitrator, raising the question of whether the replacement should be appointed as per the arbitration agreement or through court intervention. The court ultimately held that Section 15(2) allows for the substitution of an arbitrator according to the rules applicable at the time of the original appointment, which may extend beyond the arbitration agreement itself.

v. Madras HC

In Fibroplast Marine Private Limited v. Ashok Leyland Limited [“Fibroplast Marine”], the Madras High Court ruled that the death of an arbitrator does not revive the right to appoint a new arbitrator if the initial appointment was made through a Section 11(6) application. The court cited the principle from Ramjee Power Construction, which establishes that once Section 11 is invoked, the right to appoint under the arbitration agreement is extinguished and cannot be revived, even if the arbitrator’s mandate is terminated.

vi. Allahabad HC

The Allahabad HC aligned with the view of Bombay and Calcutta High Courts regarding the forfeiture of the right to appoint an arbitrator once a Section 11(6) application is filed. In Tirath Ram Sumer Kumar v. Rakesh Kumar Mishra,” the court addressed the substitution of an arbitrator following their death and held that the respondent’s right to appoint an arbitrator was forfeited after the earlier Section 11(6) application. Justice Rajan Roy emphasised that once the prerequisites under Section 11(6) are satisfied and an arbitrator is appointed by the court, any subsequent substitution under Section 15(2) must also proceed under Section 11(6). He further noted that an arbitrator’s death satisfies clause (c) of Section 11(6) as they are unable to perform their duties, leaving no scope for the respondent to regain the right to appoint under the arbitration agreement.

In the case of Food Corporation of India and Ors. v. P Roy, the court explained why the right to appoint a substituted arbitrator under the arbitration agreement does not revive when the previous arbitrator was appointed through a Section 11(6) application. The reasoning aimed to prevent adjudicatory delays. While courts should prioritize mutual consent, if the parties fail to exercise this opportunity, the statutory mechanism must be followed.

The court stated:

“The Court may explore an opportunity of mutual consent at the very first instance. Upon failure, as in this case, Section 15(2) steps in to strengthen arbitration's essence for dispute resolution. Insurmountable delays must be curtailed by applying a pragmatic approach, consistent with Section 15(2)’s objective to proceed directly through the forum.”

C. Reinterpreting Yashwith

The Andhra Pradesh HC in the case of Gamesa Wind Turbines Pvt Ltd v. Mytrah Energy (India) [“Gamesa Wind Turbines”] had a volte-face with regards to the interpretation of Yashwith Constructions. The court disagreed with Calcutta HC and Bombay HC judgments on its interpretation of the term “rules” and “initial stage”.

In this case, an application was filed to appoint an arbitrator under Section 11 since Gamesa Wind Turbines failed to appoint one. One of the appointed arbitrators passed away due to which Gamesa Wind Turbines claimed that they have the right to nominate one arbitrator as there was an agreement between the parties. Gamesa Wind Turbines argued that the appointment of the vacant arbitrator was done as per Section 11 thus the reasoning of Ramjee Power Construction and Ignatius Tony Pereira must be followed. Gamesa Wind Turbines on the other hand argued that “rules” under Section 15(2) should be construed to mean “original rules” which would mean that the original agreement between the parties will be looked.

The court examined the framework of the Arbitration Act, emphasizing its intent to minimize judicial intervention and prioritize the party-driven nature of the arbitration process. The Chief Justice or their designate plays a role only as a necessary measure. When the arbitration agreement outlines a procedure for appointing an arbitrator, that procedure should be upheld. Unless explicitly restricted by the arbitration agreement, the process of appointment and substitution should be interpreted broadly. If a party fails to appoint an arbitrator and an application under Section 11 is filed, the court is empowered to appoint the arbitrator. Furthermore, if an arbitrator's mandate is terminated under Section 14 of the Arbitration Act, the process must recommence, and the party’s right to appoint an arbitrator is restored. Finally the court relied on Section 5 of the Arbitration Act which limits judicial intervention to specific provisions within Part I of the Act to come to the conclusion that the arbitration agreement should remain the primary guiding principle so as to minimize court’s involvement.

This interpretation according to the authors’ opinion is a plausible one, and it furthers the party process which is at the heart of every arbitration process. It satisfies both of the Yashwith Constructions conditions as the “initial stage” would mean to refer to the agreement itself. Ramjee Power Construction judgment created a distinction that if the party took no initiative to appoint an arbitrator then Section 11(6) application is filed then substitution will be done through the original mechanism, i.e. Section 11(6) application or party took steps to appoint an arbitrator which had to terminate its mandate as per Section 14 of the Arbitration Act. Such a distinction only exacerbates the problem in which court has to adjudicate if there was a failure to appoint or steps were taken. In the case of National Highway Authority of India v. Bumihiway DDB Ltd. (JV), the SC held that invocation of Section 11(6) is done when there is default of a party. When there is a need of substitution the default is assumed by the court which cannot be the correct position and the default must be seen in the light of whether there was a default in appointing the substitute arbitrator.

The consistent stance across most High Court is that the right to appoint a substituted arbitrator is extinguished once a Section 11(6) application has been filed. This was upheld in cases like Ramjee Power Construction, Jaydeb Purakait, and Fibroplast Marine, among others. However, the Andhra Pradesh HC in Gamesa Wind Turbines deviated, holding that the right to appoint a substituted arbitrator is not extinguished after a Section 11(6) application.

II. Conclusion

One of the reasons of courts being pro-active in cases where the party failed to take any action to appoint an arbitrator is because a lot of time would be wasted if the party is given the right to exercise its right to appoint the arbitrator especially if they did not exercise it the first time. The court does not want the party to take advantage of their own wrong. However, it would be in the interest of the parties that they get to exercise their right outlined in the agreement. The court should not intervene unless there is no other option, but to do so. If the court intervenes at the first instance, it will defeat the purpose of an alternate mechanism to dispute resolution. Giving the party an opportunity would help them rectify its mistake and would reduce the burden of the court to identify the cases where there was a failure by the party.