Person Interested In Outcome Of Dispute Can't Appoint Arbitrator: Kerala High Court Nullifies Appointment Made By Kerala Government For Its Wholly Owned Undertaking

The court held that the Government of Kerala being the holder of 99.99% of the equity shares with voting rights of a company had an interest in the dispute. Consequently, it held that this inherent interest made the Government of Kerala disqualified under Section 12(5) read with the Seventh Schedule of the Arbitration Act to appoint the sole arbitrator.

Brief Facts:

The matter pertained to an agreement executed between Groupl Services Pvt. Ltd. (“Petitioner”) and Kerala Academy for Skills Excellence (“Respondent No. 2”), a Government of Kerala undertaking. The Petitioner was tasked with establishing a Centre of Excellence in Security Sector (“CEIS”) to provide employability skills to personnel in the security sector. Despite initiating work to establish CEIS, disagreements surfaced between the Petitioner and the Respondent No. 2. This eventually resulted in Respondent No. 2 sending a termination notice and making a demand payment of Rs. 55,57,475.36 for rent, maintenance, and property tax from the Petitioner.

In response, the Petitioner denied liability for the demanded amount and requested release from the project and contract, alongside compensation for investments made and return of the bank guarantee. Subsequently, the Respondent No. 2 referred the dispute to arbitration as per Clause 37(2) of the agreement. The Government of Kerala appointed Dr Sunil Vsudevan (“Respondent No. 1”) as the sole Arbitrator to resolve the dispute between the Petitioner and the Respondent No. 2.

Feeling aggrieved, the Petitioner approached the Kerala High Court (“High Court”) under Section 14(2) read with Section 12(5) of the Arbitration and Conciliation Act (“Arbitration Act”) to challenge the appointment of the arbitrator. It alleged biased conduct by the sole arbitrator, claiming unfair treatment and favouritism towards the Respondent No. 1. Further, it argued that there was a conflict of interest. It contended that the government, being the 100% shareholder of the Respondent No. 2, has an interest in the dispute.

Observations by the High Court:

The High Court noted that the Respondent No. 2 was wholly owned by the Government of Kerala, under the administrative Department of Labour and Skills, and was managed by a Board of Directors comprised of Secretaries of specific Departments and industrial experts. The Director's Report of the year 2020-21 provided evidence that the Minister of Labour, Skills, and Excise, Government of Kerala, served as the Chairman and Director of the Respondent No. 2 company, alongside other senior IAS officers acting as Directors. Additionally, it noted that as of March 2020, 99.99% of the equity shares with voting rights of the Respondent No. 2 were held by the Governor of Kerala.

The High Court referred to Section 12(5) of the Arbitration Act and held that a person with an interest in the subject matter of the dispute under any of the contingencies enumerated in the Seventh Schedule of the Act is disqualified from being appointed as an arbitrator. While noting that the sole arbitrator, a retired government servant, might not directly fall under the proscriptions of the Seventh Schedule, the High Court held that the arbitrator was unilaterally appointed by the Government of Kerala. It held that this appointment was against the decision of the Supreme Court in Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd.

The Supreme Court in Perkins Eastman held that a person with an interest in the outcome or decision of the dispute should not have the power to appoint a sole arbitrator. Given the relationship between Respondent No. 2 and the Government of Kerala, the High Court held that the appointment of the sole arbitrator by the government, which is in control and management of the Respondent No. 2, was legally invalid.

Citation: 2024 LiveLaw Ker 261

Case Title: Groupl Services Private Limited vs Dr. Sunil Vsudevan and Anr.

Case Number: ARB.P. NO. 5 OF 2023

Advocate for the Petitioner: P.Martin Jose; Thomas P. Kuruvilla P. Prijith; R. Githesh; Ajay Ben Jose Manjunath Menon and Harikrishnan S. S. Sreekumar (Sr.).

Advocate for the Respondent: Pradeep Joy; Anjaly Ann Josep and Dharmya M.S.

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