India’s Public Sector Undertakings (“PSU”) are involved in a large number of disputes as the same is a natural corollary of being a major contributor to an economy’s GDP. Appointment of an arbitrator for matters involving PSU’s has forever been heavily debated amongst various Courts and academics because of the fact that PSU’s have been notorious for appointing their current or former employees as Arbitrators. How the same affects independence and impartiality of arbitral proceedings merits little explanation.
Independence and impartiality constitute the very foundation for sound Arbitral proceedings. The impartiality of an arbitrator resonates the most with the quality of the arbitral award eventually passed. Another germane issue that is preserved by an equitable arbitrator is that party autonomy in arbitratral proceedings is preserved, which by far, is the most imperative feature of the entire arbitration machinery. Before the Arbitration and Conciliation (Amendment) Act, 2015 Amendment Act“) came into being, the law was straight about the fact that disputes have to be referred to the named arbitrator and the named arbitrator alone and a party had only a small window to take the defensive that the named arbitrator is impartial. Before the Amendment Act came into being, an arbitrator’s appointment could be challenged if there were circumstances “that give rise to justifiable doubts as to his independence or impartiality“, however, the Act did not lay down any statutory guidance on what these ‘circumstance’ were and hence the same had to be decided on a case to case basis which prevented streamlining of this gaping issue.
Considering this issue caused plenty of ruckus in court rooms, a strong necessity was felt to amend the law in this regard.
Amendments to the Arbitration Act 1996
The Law Commission of India (“Commission“) submitted its’ 246th Report (“report”), recommending pathbreaking amendments to the Arbitration and Conciliation Act 1996 (“1996 Act“). The reasons mentioned by the Commission were aimed, inter alia, at making settlement of disputes through arbitration, cost and time effective.
The commission in the report also addressed the issue of “neutrality of arbitrators” as the same is highly crucial for effective arbitration proceedings. Consequently, two schedules were added to the Amendment Act namely: The Fifth and the Seventh Schedule that contain 34 and 19 grounds respectively, adopted from the IBA Guidelines on Conflict of Interest in International Arbitration, 2010.
- Fifth Schedule serves as a “guide” in determining whether justifiable doubts as to arbitrators’ independence and impartiality exist or not as under Section 12(1)(a) of the Act.
- Seventh Schedule contains ‘ineligibility’ grounds. If the arbitrator is found to fall within any of the 19 categories specified, he would be deemed ‘ineligible‘ for appointment pursuant to Section 12(5) of the Act or, if already appointed, his appointment would be void (parties may opt to waive the sub-section and therefore the Seventh Schedule but only by means of an express written agreement, once the dispute has arisen).
Following are some of the modes of Appointment of arbitrators by PSU’s along with their status post the Amendment Act:
- Sole arbitrator is a ‘named person’ (within the disputing Government entity/PSU – Invalid
The “named person” is usually an officer occupying a high post or designation and was the most commonly found arbitrator appointment procedure in PSU contracts. The legality of these clauses was recognized by the Supreme Court but in the pre-amendment era. However, presently, these clauses are no longer permissible under Section 12(5) read with Entry 1 of the Seventh Schedule. As already stated, the parties can opt out of the application of Schedule Seven by an expressly written agreement and only once some dispute has arisen.
- Sole arbitrator is a ‘named person’ outside the disputing PSU, but is employed within the general Government apparatus – Valid
Such clauses are valid as the arbitrator is not directly related to the disputing PSU but rather, is employed with a Government Department or a different PSU. As long as none of the other grounds listed in the Fifth and Seventh Schedule are not attracted, the eligibility of the arbitrator stands good in the eyes of law.
- Either sole or party-nominated arbitrator is a former employee of the disputing PSU – Valid
There has been some uncertainty surrounding to this issue as various courts have taken dissenting stands for instance:
- Delhi Court has held that the appointment of current and/or retired employees of one of the disputing party as arbitrators would “definitely give rise to justifiable doubt[s] as to his independence and impartiality”. Contrarily,
- Punjab and Haryana High Court has held that former employees are not de-facto barred from being arbitrators under the Act, given: (i) they do not have any other past business relationship with the party; and (ii) no justifiable doubts as to their impartiality exist or have been raised by the party aggrieved.
- The Madras High Court and the Delhi High Court have taken similar stand (retired official cannot be barred from being appointed as an arbitrator), although on different grounds.
However, the appointment of a former employee is not categorically contrary to the Amendment Act. Entry no. 1 in the fifth schedule and entry no. 1 in the seventh schedule are identical and they read as following: “Arbitrator’s relationship with the parties or counsel – 1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party. “It is clearly conceivable that the language of entry 1 indicates at a distinction. The bar in section 12(5) is to a person who is currently engaged as an employee, consultant, or advisor. There is no bar against a former employee, consultant, or advisor. The words “or has any other past or present business relationship with a party” does not include a former employee, consultant, or advisor of the party in its ambit as the word “other” refers to a relationship other than that of an employee, consultant, or advisor. Hence, the bar is applicable in respect of a person who has had a business relation with a party other than as an employee, consultant, or advisor. Furthermore, Entry no. 31 of the Fifth Schedule states as following: “The arbitrator had been associated within the past three years with a party or an affiliate of one of the parties in a professional capacity, such as a former employee or partner.”. The use of expression “former employee” indicates that if the proposed arbitrator has ceased to be an employee of the disputing party within the window of three years, there would be justifiable doubts to the independence or impartiality of the arbitrator and not otherwise. Additionally, is no such absolute bar as under the Seventh Schedule.
Voestalpine Schienen GmbH V Delhi Metro Rail Corporation Ltd (“Voestalpine case”)
Question before the Hon’ble Supreme Court – Validity of appointment of retired government employees as an arbitrator from a panel maintained by the disputing PSU.
The Court held that the mere fact that an individual has earlier rendered services to the disputing party would not de-facto malign the sanctity of such experienced and qualified individual’s independence. The Court further observed that for this very reason, the amendment act did not categorically bar the appointment of such individuals as arbitrators. The Court further observed that empaneling such experienced personnel’s serves the critical requirement of having the technical aspects of the dispute effectively resolved. The Court further observed that the respondent (PSU) should strive to empanel more and more experienced personnel’s, while constituting a panel of people who could be appointed as an arbitrator so as to give more choices to the other party while selecting an arbitrator.
- Arbitration clause provides for selection of the arbitrator by an ‘appointing authority’ who is a senior official of the disputing PSU – Valid
This practice is acceptable as long as the arbitrator eventually appointed is not in contravention of the conditions laid down in the amendment act. Traditionally, the persona designate would appoint a senior officer or departmental officer of the disputing PSU itself but the same is no more an acceptable practice in light of the amendment act.
- Arbitrator is appointed from a panel maintained by the disputing PSU – Valid
As already discussed, this is an acceptable mode of appointment as long as the Supreme Court guidelines in the in the Voestalpine case are followed.
The Court laid down two pertinent requirements for appointment of arbitrators from a panel maintained by a PSU:
- First, the panel must be ‘broad based’. For instance: individuals from other government PSUs and government undertakings that are unconnected with the disputing parties; individuals of high repute from the private sectors; other individuals from the legal community; and
- Second, the other party should have the leeway to opt from the ‘broad based’ panel, rather than a small short-list as in instant case. The Court in the instant case struck down that portion of the arbitration clause which required the PSU to prepare a short list of five arbitrators. This direction removes any apprehension of the Government picking its favourites.
While there is still some uncertainty surrounding this issue, PSU’s still need to take another look at the appointment process in their contracts to ensure that they are not in contravention with the Act due to their traditionally acceptable practices of appointment of arbitrators. Furthermore, both, domestic and foreign parties who are looking to enter into contracts with Indian Government entities and PSUs must take effective steps to inform themselves of the amended conflict of interest norms, to ensure that the arbitrator appointment process in their contract is enforceable and the purpose of the amended act, i.e. cost and time effective dispute redressal, is secured to the utmost extent by avoiding such avoidable court proceedings at the very inception of arbitral proceedings itself.