The appointment of Arbitrators by Public Sector Undertakings (PSUs) has been a long-standing issue. PSUs contribute significantly to India’s GDP, inevitably making them a party to numerous disputes. However, the Dispute Resolution clauses in PSU contracts have been plagued by redundant and contentious norms of appointing arbitrators who are current or former employees of the PSU. This practice has been brought to the notice of Courts plenty of times. The Courts have usually furthered the practice of neutrality. However, recent judgments have allowed ex-employees of the party organization to act as arbitrators. Such decisions are an affront to the very principle of fairness. Further, considering the unequal bargaining power in a PSU Contract between a Private Contractor and a PSU, such judicial pronouncements hold the potential to undermine the interests of the private parties.
This Blog Post critically analyzes the Central Organization for Railway Electrification judgment, which forms the crux of the issue at hand. Further, this Blog Post investigates the judicial trends at both the Supreme Court and High Court levels on the question of the appointment of employees and ex-employees as arbitrators in disputes involving PSUs. Lastly, this Blog Post stresses the need for a more uniform system that aligns with the principles enshrined in the Arbitration and Conciliation Act, 1996, to protect the rights and interests of private entities in a PSU Dispute.
One of, if not the most pivotal aspects of a transparent arbitration, is the presence of a neutral, independent arbitrator. Indian jurisprudence endows the mechanism for the same viaSection 11 of the Arbitration and Conciliation Act, 1996 (hereinafter the “Act”). Section 11(5) of the Act confers jurisdiction for the appointment of an arbitrator into the hands of Courts, provided that the conflicting parties cannot reach a consensus in deciding on an arbitrator within thirty days from receipt of a request by one party from the other party. The respective Section has witnessed two-fold changes via theArbitration and Conciliation (Amendment) Act, 2015, and theArbitration and Conciliation (Amendment) Act, 2019. Before 2015, in circumstances where the parties did not make the appointment, it was made by the Chief Justices of High Courts. In the case of international commercial arbitrations, the appointment was made by the Chief Justice of India. The 2015 Amendment to the Act effectively entrusted the responsibility of appointing an arbitrator to the Supreme Court or any person or institution designated by the Supreme Court. With the 2019 amendment, the arbitral institution (as designated by the Supreme Court) now has the power to choose an arbitrator in accordance withSection 11 of the Act. However, the extent of judicial intervention remains ambiguous even with the latest changes to the Act.
InEnvirad Projects Pvt. Ltd. v. NTPC Ltd., the Delhi High Court has reiterated that the appointment of arbitrators should not be unilateral. In this case, the arbitration clause stated that, in case of a dispute, the matter should be referred to a sole arbitrator who would be the General Manager of NTPC limited. If the General Manager is unable or unwilling to act, the arbitration may be conducted by a different sole arbitrator appointed by the Chairman and Managing Director of NTPC Limited. The Court did not uphold such a clause. Similarly, the Courts’ stance on sole arbitrators has remained consistent throughout the years, as seen inTRF Ltd. v. Energo Engineering Projects (TRF case) andPerkins Eastman Architects DPC v. HSCC (India) Ltd. However, the Supreme Court inCentral Organization for Railway Electrification v. ECI-SPIC-SMO-MCML (Central Railway case) allowed ex-employees of the party organization to act as arbitrators. Although the Supreme Court inUnion of India v. M/S Tantia Constructions Limited (Tantia case) has requested for the constitution of a larger bench to look into the correctness of the Central Railway judgment, a larger bench still has not been constituted and, therefore, the Central Railway case stands as the rule. Several High Courts, while dealing with a similar issue, have gone ahead and followed the principle laid down in the Central Railway case, thereby creating a line of judgments upholding a lopsided approach favoring PSUs over private entities.
2. The Two Diverging Perspectives
a. The TRF case
In the TRF case, the Apex Court primarily dealt with unilateral appointments of arbitrators in the light ofSection 11(6) of the Act. The substantial point of contention was whether an arbitrator disqualified by law is eligible to appoint the prospective arbitrator further. The Apex Court relied on its past judgments and the principle of qui facit per alium facit per se (he who acts through another does the act himself) in the present case. The Court opined that if an ineligible person is endowed with the responsibility of appointing the arbitrator, it will harbor the idea of using a nominee’s appointment to carry out conduct that is illegal or outside of what is allowed or permitted in the eyes of the law.
The facts in brief are: the Respondent issued a purchase order to the Appellants. The Appellants provided an advance bank guarantee and a performance bank guarantee to ensure the performance under the purchase order. A halt was imposed on the encashment of the aforementioned bank guarantee due to a controversy between the parties. An arbitration was initiated in the Delhi High Court in respect of Clause 33 of the General Terms and Conditions of the Purchase Order (GTCPO). In the High Court, the Appellants contended that the arbitrator must be appointed outside or “de hors” to the procedure or terms established in the purchase order. The Respondent opposed the Appellants on the ground that it is contrary to the binding contractual terms. Consequently, a former Supreme Court judge was nominated as the sole arbitrator under Clause 33(d) of the GTCPO. The Appellants preferred to submit an Application underSections 11(5) and 11(6) of the Act for the appointment of an arbitrator under Section 11(2) of the Act after the appointment had already been made. The said foundation was set up on the premise that the Managing Director was no longer qualified to serve as an arbitrator underSection 12(5) of the Act, read with the Schedule V and VII of the Act, and as a logical consequence, he had no power to appoint an arbitrator. The High Court was inclined to name the former Judge as the sole arbitrator to settle disagreements between the parties.
However, the Apex Court ruled that if the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Thus, the view expressed by the High Court became unsustainable. Consequently, the three-judge bench of the Supreme Court reached the consensus that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as perSection 12(5) of the Act, and thus, the Supreme Court ruled against unilateral appointments of the arbitrator. Therefore, in the present case, the ineligible arbitrator, like the Managing Director, was held to be incompetent to nominate an arbitrator, irrespective of their objectivity or individual respectability.
b. The Central Railway case
The case predominantly analyzed the locus of High Courts in the procedure for appointment of an arbitrator when the same is commenced in contravention to the procedure governed as perGeneral Conditions of Contract (GCC). The issue’s genesis can be traced back to the order of theAllahabad High Court against the Appellant. The Appellant entered into a contract with the Respondent company, which entailed an arbitration clause modified due to the aftermath of the Arbitration and Conciliation (Amendment) Act, 2015. The said modification enshrined the procedure for the constitution of the Arbitral Tribunal. The modified clause also stated that: “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,” if the comprehensive claim is over Rs. 1 crore.
The primary contention of the Appellant was that the act of the High Court of appointing a sole arbitrator is in clear contravention toClauses 64(3)(a)(i), 64(3)(a)(ii) and 64(3)(b) of the GCC. The Respondent contended on the neutrality of the arbitrator as the list of the panel of arbitrators put forth by the Appellant consisted of all serving employees of the arbitrator, thereby raising reasonable apprehensions regarding the transparency of the arbitrator and their ineligibility because ofSection 12(5) read with Schedule VII of the Act. It was also submitted that the panel of arbitrators proposed by the Appellant comprising of retired employees of the Appellant were also not eligible to be appointed as arbitrators underSection 12(5) read with Schedule VII of the Act as Appellant’s employees are expressly made ineligible.
The Apex Court held that, in the present case, since the value of the work contract is worth more than Rs. 165 crores, Clause 64(3)(a)(i) of the GCC is not applicable. The rationale is that the modified Clause 64(3)(a)(i) inter alia provided that in case where the total value of all claims in question added together does not exceed Rs. 1 crore, the clause will be applicable. The Supreme Court reiterated the principle — as exhibited in theVoestalpine case — by stating that merely because one is a retired officer of a company that is a party to the dispute does not render them ineligible for the post of an arbitrator. Finally, the Apex Court held that the High Court was not justified in appointing a sole independent arbitrator ignoring Clauses 64(3)(a)(ii) and 64(3) (b) of the GCC and held that the Courts do not have unfettered power in appointing the arbitrators. The Appellant was directed to send a novel panel of four retired officers in terms of Clause 64(3)(b) of the GCC within thirty days from the day of the respective judgment.
3. Critical Analysis of the Central Railway Judgment: A Tale of Misplaced Precedents
It is important to note that the Court in the TRF case placed importance on the evident partiality that a Managing Director would have in a matter concerning their party organization. It is a common understanding that an employee or even an ex-employee of an organization would have an interest or a likelihood of interest in their organization. Due to this, their reasoning may be skewed by such interest, and such a person, when given the power to appoint another person as an arbitrator, would also do so without being neutral. While the TRF case dealt with a factual scenario concerning the appointment of a sole arbitrator, the Central Railway case dealt with a situation where a panel of arbitrators is to be appointed/nominated. The principle of neutrality and independence must remain constant and unwavering irrespective of whether there is a sole arbitrator or a panel of arbitrators. However, the Central Railway case entirely misplaced the principle laid down in the TRF case.
The TRF case states that the Court is not concerned with a scenario where one party may nominate an arbitrator, and the other may appoint another arbitrator. It further stated that if a clause requires parties to nominate their respective arbitrators, their authority to nominate cannot be questioned. The Court here did not condone a situation where one party would forward a list of arbitrators consisting of present or ex-employees of its organization. Appointing a sole arbitrator who is an employee or providing a list that only contains employees or ex-employees would result in almost the same outcome – a situation where the arbitrating body may be inclined towards the interests of their party organization. Limiting the choice to only employees or ex-employees does not provide the other party a fair chance to nominate an arbitrator whom they believe would redress their dispute neutrally. In both scenarios, as mentioned above, regardless of whom the other party nominates, the said arbitrator would have a likelihood of bias. The TRF case also provided that procedural compliance and the “eligibility of the arbitrator” can be questioned in circumstances where both parties can nominate an arbitrator.
On the contrary, the Central Railway case only focused on the first part, i.e., when both parties have the right to nominate an arbitrator, such a nomination is upheld irrespective of whether the arbitrator(s) is linked to either of the parties or the dispute. The Court ignored the question of the arbitrator’s eligibility, especially when the arbitrator is linked to a party involved in the same dispute. Thus, the interpretation of the TRF case in the Central Railway case is incorrect.
The Central Railway case placed reliance on the Voestalpine case to justify appointing ex-employees as arbitrators. In the Voestalpine case, the arbitration clause stated: “For this purpose the Purchaser will make out a panel of engineers with the requisite qualifications and professional experience. This panel will be of serving or retired engineers of ‘Government Departments or of Public Sector Undertakings’.” It is necessary to note that this clause provides for serving or retired engineers from “any” government department or “any” PSU, and not just engineers from the Delhi Metro Rail Corporation (DMRL; who are the Respondent in the Voestalpine case). The Court held that if the arbitrator is a government employee or ex-government employee, that by itself will not make him ineligible. It is always beneficial to have arbitrators who have expertise in the subject matter, and such engineers could provide more practical insights into the dispute. It is imperative to note that an employee under the Central Government or the Central Public Works Department cannot be considered as someone connected with the Respondent – DMRC. This reduces the propensity of bias. If it is believed that any and every government employee would have an interest in the matter, no person who works or has worked in any capacity with the Government or any PSU would be eligible to act as an arbitrator even when they are not remotely connected with the party in the same dispute. The Court also stated clearly that the 2015 Amendment to the Act restricts a person who is an employee or has had any past or present business with DMRC from acting as an arbitrator.
In light of the clarification mentioned above on the Voestalpine case, it is vividly evident that the Central Railway case conveniently relied on the principle laid down in the Voestalpine case without considering the nature of the clauses in question in both cases. In the Central Railway case, the list of arbitrators consisted of Railway Gazetted Officers in a dispute where an organizational unit of Central Railways of India was a party. Unlike in the Voestalpine case, the arbitration clause did not provide for the panel of arbitrators to consist of “any” government or PSU employee. Therefore, relying upon the Voestalpine case as a justification to validate the appointment of present and ex-employees of the party organization as arbitrators were unjust.
4. A Series of Incongruent Judicial Trends
Following the ratio given in the Central Railway case, various High Courts have pronounced judgments in similar factual scenarios holding that the agreement is sacrosanct. However, in January 2021, in the Tantia case, the Supreme Court prima facie disagreed with the Central Railway case. The reason provided by the Court was that “…once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case.” The Court further requested the Chief Justice of India to constitute a larger bench to investigate the correctness of the Central Railway case. Additionally, inIworld Business Solutions Private Ltd. v. Delhi Metro Rail Corporation Limited, the Delhi High Court held that it could not be concluded that the Tantia case has overturned the Central Railway case. The Delhi High Court ultimately placed reliance on the Central Railway case over the Tantia case. Thus, the Tantia case created a separate line of reasoning and a parallel perspective to the question of disqualification of arbitrators underSection 12(5) of the Act.
InITD-ITD CEM Joint Venture v. Kolkata Metro Rail Corporation Ltd., the Calcutta High Court dealt with a case where a dispute arose between the Petitioner, which is a private entity, and the Respondent, which is a public sector enterprise with the Ministry of Railways. Upon the dispute arising, the Petitioner referred the dispute to arbitration. The Respondent suggested a panel of five arbitrators consisting of the Railways’ retired personnel. The Petitioner nominated a person whose name was not on the list given by the Respondent. The Petitioner contended that the panel of arbitrators suggested by the Respondent is in contravention of Section 12(5) of the Act read with Schedule V and VII of the Act. However, the High Court followed the ratio in the Central Railway case. The High Court did mention that the Central Railway case has been deliberated upon by a Higher Bench (in the Tantia case) but has not been overruled yet. The High Court further held that the Petitioner could not prove how the ex-employees would have any vested interest or potential bias in the dispute and relied on the Voestalpine case.
InMinesh Chopra v. Delhi Metro Rail Corporation, an arbitrator was appointed after a dispute between the Parties. Consequent to the demise of the concerned arbitrator, the Respondent (DMRC), without the consent of the Petitioner, appointed another arbitrator as the substitute arbitrator. The Petitioner objected to this appointment, contending that it was illegal. The Respondent accepted the objection and mentioned in their prayer that the Respondent could opt for an arbitrator of its choice from a panel of arbitrators. The Petitioner opposed this request and requested the Court to appoint a substitute arbitrator. Since the agreement, in this case, did not contain a clause that required the Respondent to provide the Petitioner with a list for the panel of arbitrators, the Court assumed the responsibility to appoint an arbitrator. The Court held that the agreement is sacrosanct as held in the Central Railway case and, thus, the prayer to the Court to appoint a substitute arbitrator was allowed.
InExcel Engineering Enterprises v. General Manager Southern Railway, as the dispute arose between the parties, the Petitioner sought the appointment of an Arbitrator. As per the arbitration clause of the agreement executed between the parties, the dispute settlement in connection with the contract will be dealt with and governed by Clauses 63 and 64 of GCC. As per Clause 64(3)(a)(ii) of the GCC, the Arbitral Tribunal shall consist of a panel of three officers retired not below the rank of Senior Administrative Grade (SAG) officer. The Respondents sent names within sixty days of receipt of a written and valid demand for arbitration. After receipt of the request from the Petitioner, the Respondents asked the Petitioner for a waiver of the amended Section 12(5) of the Act that was amended as per the 2015 Amendment. As the Petitioner did not accept the waiver for the applicability of the amended Section 12 (5) of the Act, the Respondents sent a list of four Retired Railway Officers and requested the Petitioner to select any two persons as their choice and intimate within 30 days for constitution of Arbitral Tribunal. Without choosing any of them, the present Petition was filed. The Court relied on the Central Railway case and held that, because of the Modified GCC, there is no prohibition on appointing retired employees as arbitrators as the Apex Court has already held that the Arbitrators can be appointed only as per the contract governing the parties.
InVSK Technologies Private Limited v. Delhi Jal Board, a dispute arose between the parties, leading to the Petitioner issuing a notice for invoking arbitration. It also suggested that a former Chief Justice of the Delhi High Court be appointed as an arbitrator. The name of the sole arbitrator, as suggested by the Petitioner, was not accepted by the Respondent. The Respondent proposed the names of two persons who should be appointed as arbitrators. However, the same was not acceptable to the Petitioner since they had no say in such a selection. Due to this, the Petitioner moved an application before the Delhi High Court for the appointment of an arbitrator. After the Petitioner had filed the present Application, the Respondent nominated one of the two arbitrators it had proposed earlier. The Petitioner contended that the appointment was unilateral. The Court relied on the decision in the Tantia case and appointed a sole arbitrator in the present case.
5. Power, Parity, and PSUs
A common thread binding the judgments mentioned above is that one party to the dispute is a private entity –a contractor, a private joint venture, a private limited company, and other private entities. The other party is a government organization or undertaking. One of the biggest obstacles in Alternative Dispute Resolution (ADR) mechanisms is to ensure that both parties have equal bargaining power during dispute resolution. However, when it comes to PSU disputes, the parties lack equal negotiating power during the contract drafting stage. The clauses are lopsided and unfavorable to one party, usually the private party. Private contractors generally agree to such unfair terms and conditions to obtain a significant government contract.
As explained earlier, a neutral arbitrator would form the foundation of a fair and just arbitration. In addition to endangering the sanctity of the mechanism of an arbitration process, the arbitrator’s bias also has social-economic repercussions. In disputes between private entities and PSUs, the power dynamic is already grave; the presence of an arbitrator bias (who is otherwise supposed to be a neutral facilitator) renders the private entities at the behest of PSUs. This predicament has a disadvantageous ripple effect on various bodies, such as those ranging from private entities to the employees and other workers of the private entities alongside other organizations/entities that are involved with these private entities for a particular project.
In significant infrastructure or construction disputes where a large amount of money is at stake, appointing arbitrators with potential loyalties towards their employer would lead to the contractor incurring huge losses. Challenging the appointment of such an arbitrator would also result in varying results in the present scenario. While certain High Courts hold that the contract is supreme, some Courts have struck down lopsided clauses. Such incongruency and inconsistency further add to the plight of the private party. A dispute which could have been resolved at an arbitration stage is then derailed by litigation which results from unequal say in the appointment of arbitrators, thereby leading to further economic losses and defeating the very purpose of the arbitration.
The arbitration landscape in India has been pro-neutrality and has, through various judicial pronouncements, reiterated its stance against unilateral appointments. However, such an approach has been limited to scenarios where both parties do not have the power to nominate. The Central Railway case is an affront to the neutrality principle and arbitrators’ independence. It has birthed many judicial precedents, specifically in cases involving Government bodies and PSUs, where the private entity has been deprived of its right to nominate a neutral arbitrator. Time and again, Courts have stated that the “contract is sacrosanct.” Although this principle might be true in certain instances, the Court must act upon clauses that are lopsided and unfair. Such a trend of judgments that favor the PSUs over private entities could result in the latter incurring heavy losses due to the appointment of arbitrators who would otherwise be ineligible. Therefore, it is paramount that the Supreme Court constitutes a larger bench to decide upon the validity of the Central Railway case as soon as possible and set a fair and just precedent.
About the Authors
Ms. Harshita Tyagi and Shambhavi Pant are 3rd Year BLS LLB Students from SVKM’s Pravin Gandhi College of Law, Mumbai. Ms. Tyagi is an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Muskaan Singh
Senior Editor: Pushpit Singh
Associate Editor: Vedant Bisht
Junior Editor: Manav Ganapathy
Preferred Method of Citation
Harshita Tyagi and Shambhavi Pant, “Neutrality in Appointment of Arbitrators under PSU Contracts: An Analysis of Inconsistent Judicial Trends” (IJPIEL, 22 July 2022)