Panel Of Arbitrator Proposed By Railways Would Have Certain Relationship With Railways, Violates 7th Schedule: Gauhati High Court

The 7th Schedule of the Arbitration and Conciliation Act, 1996, lists the categories of persons who are ineligible to be appointed as arbitrators due to potential conflicts of interest. These categories include individuals who have a familial relationship with any of the parties, or who have any financial or other interest in the outcome of the arbitration.

Brief Facts:

Durga Krishna Store Pvt Ltd's (Petitioner) bid, submitted in response to a tender for specific work, was accepted by an acceptance letter by Northeast Frontier Railway with the work scheduled for completion within 18 months. Subsequently, a contract agreement incorporating an arbitration clause was executed between the Petitioner and the Railways. However, the Railway authorities issued a termination notice and the contract was terminated around 07.12.2020. Following this, the Petitioner made a monetary claim. The Railways requested the Petitioner's consent for a waiver under Section 12(5) of the Arbitration and Conciliation Act, 1996, to appoint an arbitrator from their panel. The Petitioner did not respond. Subsequently, the Petitioner approached the High Court and filed an application under Section 11 of the Arbitration Act for the appointment of an arbitrator.

The Railways that the Petitioner failed to make the necessary progress in the project which resulted in the termination notice issued. It contended that parts of the Petitioner's claim, such as the refund of the security deposit and earnest money, were subject to forfeiture. Despite this, the final PVC bill was paid to the Petitioner, although the security deposit and earnest money remain pending. It further argued that, according to the Railway General Conditions of Contract (GCC), which form part of the contract, the Railways maintain a panel of arbitrators. It issued a letter requesting the Petitioner's consent for a waiver under Section 12(5) of the Arbitration Act but received no response. It submitted that the conditions in the GCC should be upheld, and thus, the appointment of the arbitrator should be at the discretion of the Railway authorities.

Observations by the High Court:

The High Court noted that Section 12(5) of the Arbitration Act stipulates that any individual whose relationship with the parties or the counsel falls under any category specified in the 7th Schedule shall be ineligible to be appointed as an arbitrator, despite any prior agreements to the contrary.

The High Court acknowledged that although the parties had an agreement regarding the arbitration process, appointing an arbitrator from the Railway panel would inherently involve individuals who have a relationship with the Railways, such as being former employees of any railway in the country. It held that this relationship would make them ineligible under the 7th Schedule of the Arbitration Act, as it could compromise the fairness of the arbitration process.

Considering that the Petitioner did not waive its right under Section 12(5), the High Court found it appropriate to appoint an independent arbitrator. The High Court proposed the name of Justice Achintya Malla Bujor Barua, a former Judge of the High Court, to serve as the sole arbitrator for adjudicating all disputes arising out of or in connection with the contract agreement.

The High Court instructed the Petitioner to comply with Section 11(8) of the Arbitration Act by taking necessary steps to enable the proposed arbitrator to provide a written disclosure as required by the provision.

Case Title: Durga Krishna Store Pvt Ltd Vs The Union Of India And 2 Ors

Case Number: Arb.P./14/2022

Citation: 2024 LiveLaw (Gau) 44

Advocate for the Petitioner: Mr. R Hussain

Advocate for the Respondent: ASSTT.S.G.I.

Date of Judgment: 05.06.2024

Click Here To Read/Download Order or Judgment