The 1996 Arbitration and Conciliation Act is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. Though a marked improvement compared to its predecessor (1940), the legislation has witnessed several issues and challenges in its implementation. One of the main issues which arises relates to the appointment of an employee as an arbitrator in the arbitration proceedings. Two rival questions are bound to come up in this backdrop i.e. the question as to the extent of a court’s interference with the arbitration procedure agreed upon by the parties and, on the other hand, concerns regarding the impartiality and independence of the arbitrator, is also to be considered. In this post, the authors look into the issues raised above by analyzing the decision of the Hon’ble Supreme Court in the case of Aravali Power Company v Era Infra Engineering.
The Respondent (M/s. Era Infra Engineering Ltd) was awarded the construction work of a permanent township for Indira Gandhi Super Thermal Power Project at Jhajjar, Haryana. A contract consisting of the General Conditions of Contract (GCC) was signed. This contract contained an arbitration clause (Clause 56) which read as:
“There will be no objections, if the Arbitrator so appointed is an employee of NTPC Limited (formerly National Thermal Power Corporation Ltd.), and that he had to deal with the matters to which the contract relates and that in the course of his duties as such he had expressed views on all or any of the matters in disputes or difference.”
However, owing to a lot of delays which occurred over the course of the project, the Appellant (Aravali Power Company Pvt. Ltd.) cancelled the remaining works. The Respondent alleged that the delays were not attributable to them and invoked arbitration. They further stated that the arbitrator so appointed be a retired High Court judge which was not in consonance with the arbitration clause which stipulated that an employee of NTPC would be the sole arbitrator. The CEO of the Appellant was appointed as the sole arbitrator by the Appellant pursuant to the General Conditions of Contract (GCC).
The arbitrator fixed the date of hearing wherein the Respondent sought an extension of one month. Subsequently, the Respondent objected to the appointment of the arbitrator. The arbitrator rejected the objection on the ground that the Respondent had participated in the previous arbitral proceedings without any protest. The Respondent approached the High Court of Delhi where the arbitration proceedings were stayed and the appointment of the arbitrator was set aside. The decision of the High Court was challenged by the Appellant.
Issue before the Court
Whether appointing an employee of one of the parties as an arbitrator prior to the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter, “Amendment Act”) came into force, renders such appointment invalid and unenforceable?
The division bench of the Supreme Court undertook an analysis of the statutory provisions and the judgments dealing with the appointment of an employee of a party to the arbitration agreement as an arbitrator. Section 12(1) of the 1996 Act requires an arbitrator to disclose in writing any circumstances that give rise to justifiable doubts as to his independence or impartiality. Section 12(3) states that the appointment of an arbitrator can also be challenged on this ground. The general rule is that courts should give effect to the provisions of the arbitration agreement as observed in Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Co. Ltd. But where the independence and impartiality of the arbitrator is in doubt, the court has the power to make alternative arrangements which has been laid down in Union of India v. Singh Builders Syndicate. Thus, referring the dispute to the arbitrator stipulated in the arbitration agreement shall be the rule and nominating an independent arbitrator an exception.
In its previous decisions, the Supreme Court has held that no provision of the 1996 Act suggests that any provision in an arbitration agreement naming the arbitrator will be invalid if such named arbitrator is an employee of one of the parties to the arbitration agreement. However, a situation may arise where there is a justifiable apprehension of the independence or impartiality of the employee arbitrator. This is possible (i) if such person was the controlling or dealing authority in regard to the subject contract, or (ii) if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject-matter of the dispute.
In the present case, the Court considered both the scenarios where the appointment of employee as an arbitrator gives rise to justifiable doubts with respect to his independence or impartiality. With respect to the first ground, the Court held that in light of the facts placed before it, the arbitrator in the present matter cannot be said to be a dealing authority with respect to the contract. Further, the arbitrator held the position of the CEO and was in no way subordinate to the officer whose decision is the subject matter of dispute. In fact, the decision, which could be a subject matter of dispute, was that of his subordinates. Hence, there was no justifiable apprehension as to the independence or impartiality of the named arbitrator and his appointment was valid.
Dealing with the question of the applicability of the Amendment Act, the Court held that the arbitration proceedings were invoked on 29.07.2015 and the amendment to the 1996 Act was deemed to have come into force on 23.10.2015 and, therefore, the instant case would be governed by the pre-amendment Act. The Court also clarified that in post-amendment cases, if the appointment of the arbitrator is contrary to the amended provisions, it would be illegal, notwithstanding the fact that it is in conformity with the arbitration clause.
The Supreme Court has once again upheld the validity of an arbitration clause providing for the appointment of an employee of one of the parties as an arbitrator. Generally, the provision of an employee arbitrator is found in contracts where the government is one of the parties. However, it can also be found in contracts where both parties are private. Nevertheless, an important factor that must be considered in such cases is that it provides one party with leverage; the party that has the power to appoint an arbitrator has an undue advantage over the other party as the arbitrator is an employee working for the party. This, in turn, is a sufficient ground for a prima facie apprehension as to his independence or impartiality. This practice has also been frowned upon by the Law Commission of India in its 246th Report. The courts have also concurred with the opinion of the Law Commission in the case of Union of India v. M/s Singh Builders Syndicate wherein a recommendation was made that the government should phase out arbitration clauses that nominate an employee as the arbitrator.
This was a chance before the Court to effectively do away with the appointment of employee as an arbitrator which would have been in consonance with the latest amendments that try to limit the practice by means of various restrictions. Since, the role of the court in arbitration matters is limited and the independence and impartiality of the arbitrator is of paramount significance, this was a golden opportunity for the court to settle the matter. However, this opportunity has been allowed to slip by.