Is Appointment Of Arbitrator By Ineligible Person Valid?Supreme Court Refers Issue To Larger Bench
The Supreme Court has referred to larger bench the issue whether the appointment of an arbitrator by a person, who is disqualified to be an arbitrator as per Section 12(5) of the Arbitration Act, is valid.A bench comprising Justices RF Nariman, Navin Sinha and KM Joseph doubted the correctness of the decision in Central Organisation for Railway Electrification vs.M/s ECI-SPIC-SMO-MCML (JV)...
The Supreme Court has referred to larger bench the issue whether the appointment of an arbitrator by a person, who is disqualified to be an arbitrator as per Section 12(5) of the Arbitration Act, is valid.
A bench comprising Justices RF Nariman, Navin Sinha and KM Joseph doubted the correctness of the decision in Central Organisation for Railway Electrification vs.M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company and referred the issue to larger bench.
In the decision delivered on December 17, 2019 in Central Organization of Railway Electrification, a division bench comprising Justices R Banumathi and AS Bopanna had held that such appointments by an authority who is disqualified from being an arbitrator can be valid depending on the facts.
On the other hand, an earlier decision delivered by a 2-judge bench headed by Justice Nariman in the case Bharat Broadband Network Ltd vs United Telecoms Ltd(April 2019) had held that he appointment of arbitrator by a person who himself is ineligible to be an arbitrator as per Section 12(5) of the Arbitration and Conciliation Act 1996 is void ab initio.
On January 11, 2021, a three judge bench headed by Justice Nariman observed that it prima facie disagreed with the decision in Central Organisation for Railway Electrification vs.M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company.
"We have perused the aforesaid judgment and prima facie disagree with it for the basic reason that once the appointing authority itself is incapacitated from referring the matter toarbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case
We therefore request the Hon'ble Chief Justice to constitute a larger Bench to look into the correctness of this judgment", the bench ordered in the case Union of India v Tantia Constructions Ltd.
The bench headed by Justice Rohinton Nariman was hearing the Centre's SLP against a March 12, 2020 judgment of the Calcutta High Court, where the High Court had noted that the provisions of Section 12(5) as well as Seventh Schedule of the Arbitration Act 1996 admittedly being squarely applicable to the case, the General manager of the Railway cannot appoint any existing Railway Officer as the Arbitrator to adjudicate the disputes and differences of the parties.
Hearing an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, the petitioner before the High Court had prayed for an order for constitution of the Arbitral Tribunal. The facts giving rise to the application were that the respondent, Metro Railway, Kolkata awarded a contract in favour of the petitioner to execute some civil engineering work. As per Clause 64 of the General Conditions of Contract dated February, 2001 published by the Eastern Railway Engineering Division, all disputes and differences arising between the parties would be adjudicated through arbitration.
It may be noted that by virtue of the Arbitration and Conciliation (Amendment) Act, 2015 (w.e.f. 23.10.2015), Section 12(5) was inserted in the 1996 Act, which reads as under:
"(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing"
Entry 1 of the said Schedule mentions the situation where 'The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party'
Central Organisation for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company
In Central Organisation for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company, a three-judge bench headed by Justice R. Banumathi was hearing appeals against the orders of the Allahabad High Court by which the High Court rejected the contention of the appellant that the arbitrator is to be appointed as per General Conditions 64 (3)(a)(ii) and 64 (3)(b) of the Contract and appointed Justice Rajesh Dayal Khare as the sole arbitrator for resolving the dispute between the parties.
The bench, also comprising Justices A. S. Bopanna and Hrishikesh Roy, noted that subsequently, after coming into force of the Arbitration Amendment, the Government of India, Ministry of Railways made a modification to Clause 64 of the General Conditions of Contract and issued a notification dated 16.11.2016 for implementation of modification. The modified Clause 64(3)(a)(ii) (where applicability of Section 12(5) has been waived off) inter alia provided that in cases where the total value of all claims exceeds Rs. 1 crore, the Arbitral Tribunal shall consist of a panel of three gazetted Railway Officers not below JA (Junior Administrative) Grade or two Railway Gazetted Officers not below JA Grade and a retired Railway Officer, retired not below the rank of Senior Administrative (SA) Grade officer as arbitrators. The procedure for constitution of the Arbitral Tribunal is provided thereon. Clause 64(3)(b) deals with the appointment of arbitrator where applicability of Section 12(5) of the Arbitration and Conciliation Act has not been waived off. Clause 64(3)(b) stipulates that the Arbitral Tribunal shall consist of a panel of three retired railway officers not below the rank of Senior Administrative Officer as the arbitrators as per the procedure indicated thereon.
The appellant had awarded work contract of Rs.165,67,98,570/- to the respondent-Company by an agreement dated 20.09.2010 which contains the arbitration clause. A contention was raised on behalf of the respondent-company that the General Manager himself becoming ineligible by operation of law to be appointed as arbitrator, is not eligible to nominate the arbitrator.
Stand of the counsel for the respondent was that by virtue of Section 12(5) read with Schedule VII of the Act, General Manager himself is made ineligible to be appointed as an arbitrator and hence, he cannot nominate any other person to be an arbitrator. "The essence of the submission is 'that which cannot be done directly, may not be done indirectly'. In support of his contention, the learned counsel for the respondent placed reliance upon TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377...In TRF Limited, though the court observed that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator, in para (50), the Court has discussed about another situation where both the parties could nominate respective arbitrators of their choice and that it would get counter-balanced by equal power with the other party", noted the bench.
The bench further appreciated that considering the decision in TRF Limited, in Perkins Eastman Architects DPC and another v. HSCC (India) Limited (2019) SCC Online SC 1517, the Supreme Court observed that there are two categories of cases. The first, similar to the one dealt with in TRF Limited where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself; but is authorised to appoint any other person of his choice or discretion as an arbitrator. Observing that if in the first category, the Managing Director was found incompetent similar invalidity will always arise even in the second category of cases.
"After referring to para (50) of the decision in TRF Limited, in Perkins Eastman, the Supreme Court referred to a different situation where both parties have the advantage of nominating an arbitrator of their choice and observed that the advantage of one party in appointing an arbitrator would get counter-balanced by equal power with the other party", said the bench.
In the present matter, after the respondent had sent the letter dated 27.07.2018 calling upon the appellant to constitute Arbitral Tribunal, the appellant sent the communication dated 24.09.2018 nominating the panel of serving officers of Junior Administrative Grade to act as arbitrators and asked the respondent to select any two from the list and communicate to the office of the General Manager. By the letter dated 26.09.2018, the respondent conveyed their disagreement in waiving the applicability of Section 12(5) of the Amendment Act, 2015. In response to the respondent's letter dated 26.09.2018, the appellant has sent a panel of four retired Railway Officers to act as arbitrators giving the details of those retired officers and requesting the respondent to select any two from the list and communicate to the office of the General Manager.
"Since the respondent has been given the power to select two names from out of the four names of the panel, the power of the appellant nominating its arbitrator gets counter-balanced by the power of choice given to the respondent. Thus, the power of the General Manager to nominate the arbitrator is counter-balanced by the power of the respondent to select any of the two nominees from out of the four names suggested from the panel of the retired officers. In view of the modified Clauses 64(3)(a)(ii) and 64(3)(b) of GCC, it cannot therefore be said that the General Manager has become ineligible to act as the arbitrator. We do not find any merit in the contrary contention of the respondent. The decision in TRF Limited is not applicable to the present case", the bench had asserted.
"There is an express provision in the modified clauses of General Conditions of Contract, as per Clauses 64(3)(a)(ii) and 64(3)(b), the Arbitral Tribunal shall consist of a panel of three Gazetted Railway Officers [Clause 64(3)(a)(ii)] and three retired Railway Officers retired not below the rank of Senior Administrative Grade Officers [Clause 64(3)(b)]. When the agreement specifically provides for appointment of Arbitral Tribunal consisting of three arbitrators from out of the panel serving or retired Railway Officers, the appointment of the arbitrators should be in terms of the agreement as agreed by the parties. That being the conditions in the agreement between the parties and the General Conditions of the Contract, the High Court was not justified in appointing an independent sole arbitrator ignoring Clauses 64(3)(a)(ii) and 64(3)(b) of the General Conditions of Contract and the impugned orders cannot be sustained", the court had held, Setting aside the impugned orders.
The appellant was directed to send a fresh panel of four retired officers in terms of Clause 64(3)(b) of the General Conditions of Contract within a period of thirty days from today under intimation to the respondent-contractor. "The respondent- contractor shall select two from the four suggested names and communicate to the appellant within thirty days from the date of receipt of the names of the nominees. Upon receipt of the communication from the respondent, the appellant shall constitute the Arbitral Tribunal in terms of Clause 64(3)(b) of the General Conditions of Contract within thirty days from the date of the receipt of the communication from the respondent", it was directed.