Alternative Dispute Resolution

TRF Ltd. v. Energo Engineering Projects Ltd.

(2017) 8 SCC 377

Citation: (2017) 8 SCC 377
Court: Supreme Court of India
Date: 3 July 2017
Bench: Dipak Misra and A.M. Khanwilkar, JJ.

Facts

TRF Ltd. entered into a contract with Energo Engineering containing an arbitration clause.
The clause provided that disputes would be referred to:
the Managing Director of one contracting party as sole arbitrator; or
a person nominated by the Managing Director.
Disputes arose after the 2015 amendments came into force.
Section 12(5) and the Seventh Schedule made the Managing Director ineligible because of his direct relationship with and interest in one party.
The Managing Director did not propose to act personally.
Instead, he nominated another person as sole arbitrator.
TRF challenged the nomination.
Energo argued that:
although the Managing Director could not personally act;
his separate contractual power to nominate another person survived;
the nominee was independently eligible; and
the agreed appointment mechanism should be respected.

Issue

Whether an ineligible named arbitrator can nominate another arbitrator.
Whether the power to act and the power to nominate are legally separable.
What effect Section 12(5) has on the contractual appointment mechanism.

Rule

A person falling within the Seventh Schedule is legally ineligible to act as arbitrator.
The disqualification operates notwithstanding a prior contractual agreement.
Where the appointment clause identifies a person as:
the intended arbitrator; and
the source of authority to nominate a substitute, the nomination power is inseparably connected with that disqualified status.
A person who is legally incapable of acting as arbitrator cannot unilaterally determine who will act in their place.
The principle prevents an interested party from controlling the tribunal indirectly after losing the ability to control it directly.

Application

The Managing Director was unquestionably ineligible to serve personally.
As an officer of one contracting party, he fell within the statutory prohibition.
The Court examined whether his power to nominate was an independent administrative power.
It concluded that the clause made him the central source of arbitral authority.
His nomination power flowed from the same contractual position that made him ineligible.
Allowing him to nominate would preserve the very influence that Section 12(5) intended to eliminate.
The Court used the principle that what cannot be done directly should not be achieved indirectly.
The issue was not whether the nominee was personally dishonest or connected.
The defect arose from the unilateral source of appointment.
Independence includes public confidence in how the tribunal is constituted.
Once the Managing Director became legally incapable of being the arbitrator, he became incapable of exercising the derivative power to choose another sole arbitrator.
The Court rejected the argument that contractual autonomy justified the nomination.
Section 12(5) begins with a non-obstante clause and overrides prior agreements.
Only an express written waiver after disputes arise can restore an otherwise prohibited arrangement.
No such waiver existed.
The Court therefore appointed an independent arbitrator.
TRF originally concerned a clause where the interested official was also the named arbitrator.
Perkins Eastman later extended the principle to cases where the interested person is not named as arbitrator but possesses exclusive power to appoint the sole arbitrator.
CORE and Bhadra now confirm the broader equality and waiver consequences.

Conclusion

The Supreme Court held that the ineligible Managing Director could neither act as arbitrator nor nominate another sole arbitrator.
His nomination was invalid.
An independent arbitrator was appointed through the judicial process.
Use this case for: a person statutorily ineligible to arbitrate cannot retain indirect control by nominating the substitute arbitrator.