Arbitration In IndiaAppointment of an “Affiliate” Arbitrator Not eligible under Seventh Schedule

BOMBAY HIGH COURT 

Afcons Infrastructure Limited v. Konkan Railway Corporation Limited

 ARBITRATION PETITION NO. 10 OF 2019 | DATE: 02.06.2020 

FACTS 

On 21.05.2005, the Respondent floated a tender notice for construction of B.G. Single Line Tunnels on the Katra-Laole, section of Udhampur- Shrinagar- Baramulla Rail Link Project. Soon after, on 12.12.2005, a Contract bearing No. KR/PD/J&K/CONT/TUNNEL/T-38/47/2/2005 was executed between the Respondent and the Petitioner, whose bid was accepted.

The stipulated clause in the contract between the Petitioner and Respondent regarding arbitration are as under:

“Clause 46.0: The contractor shall sign the arbitration agreement along with the contract. The standing Arbitral Tribunal clauses shall in force from the date of signature of the Arbitration Agreement. The details pertaining to Arbitral Tribunal is included in the relevant annexure.”

Annexure P: Arbitral Tribunal reads as under:

“1.0 :- The Arbitration Tribunal (hereinafter referred to as the “TRIBUNAL”) shall be established on the date of signing of supplementary agreement.  

1.1 :- The Arbitral Tribunal shall consist of a panel of three Gazetted Railway. Officers not below JA Grade, as the Arbitrators. For this purpose, the Corporation will send a panel of more than 3 names of Gazetted Railway Officers of one or more departments of the Railway, to the Contractor who will be asked to suggest to Managing Director KRCL, up to 2 names out of panel for appointment as Contractor’s nominee. The Managing Director/ KRCL shall appoint at least one out of them as the Contractor’s nominee and will, also simultaneously appoint the balance number of the Arbitrators either from the panel or from outside the panel, duly indicating the presiding Arbitrator from amongst the 3 Arbitrators so appointed. While nominating the Arbitrators, it will be necessary to ensure that one out of them is from the accounts department.

1.2 :- If the Contractor failed to select the members from the approved panel within 14 days of the date of signing of supplementary agreement, then upon the request of either or both parties, the Managing Director /KRCL shall select such member within 14 days of such request.

1.3 :- While nominating the panel of three arbitrators, it should be ensure that one member should be invariably from the Finance Department.

2.0 :- Reference to Arbitration:

2.1 :- Under clause 43 of the Standard General Conditions of Contract or Northern Railway, the Contractor has to prepare and furnish to the Engineer-in-charge and to Chief Engineer of Project, once in a month an account giving full and detailed particulars of all the claims for any additional expenses, to which the Contractors may consider himself entitled to an all extra and additional works ordered by the Engineer which he has executed during the preceding month. While submitting the said Monthly claim, if any dispute has arisen as regards execution of the works under the contract, the Contractor shall give full particulars of such disputes in the said submission.

2.2 :- The Contractor will submit a copy of the monthly claim to be furnished by the Contractor under Clause 43 of General Condition of Contract of Northern Railway, to Chief Engineer, along with particulars of any other disputes which may have arisen between the parties in respect of the execution of the Contract to the Arbitral Tribunal on a quarterly basis.

2.3 :- The parties while referring their claims to the TRIBUNAL shall submit all the relevant document in support of their claims and reasons for raising the dispute to the TRIBUNAL.

2.4 :- If the claims made by the Contractor in the said submission to Chief Engineer, is refuted or the payment is not made within one month from the date of the submission of the said monthly claim, a dispute would be deemed to have arisen between the parties. The Contractor, when the dispute arises or is deemed to have arisen, will communicate to the Arbitral Tribunal on a quarterly basis of the said refusal/ non -payment. The said communication will be the reference of the disputes to the arbitral tribunal appointed under the present agreement.”

The Petitioner notified the Respondent about the completion of the tunnel works as well as the expiration of the defect liability period through Letters dated 13.07.2016 and 17.08.2016. It also submitted full accounts of all claims to the Respondent vide a Letter dated 21.11.2016 and subsequently, Running Account Bills Nos. 112A, 112B and 112C accompanied by the Covering Letter dated 27.06.2017 were sent to the Respondent.

The Respondent disputed these claims vide its Letter dated 12.12.2017. On 04.01.2018, the Petitioner addressed a Letter to the Chief Engineer in accordance with the stipulation in the contract between itself and the Respondent. The Chief Engineer was called upon to give a final decision on the submitted claims within a period of 120 days from the date of receipt, failing which, the Petitioner would proceed with an appropriate dispute redressal. The Chief Engineer did not give his decision within the period and the Petitioner invoked arbitration vide its letter dated 02.07.2018.

In its Letter dated 02.07.2018, the Petitioner pointed out that the procedure laid down in the arbitration agreement for constitutional of Arbitral Tribunal was in contravention of Section 12 (5) read with the Fifth and Seventh Schedule of the Arbitration and Conciliation Act, 1996 (“the Act”) as amended by the Arbitration and Conciliation Amendment Act, 2015 (“the Amendment Act, 2015”).  In lieu of the same, the Petitioner further stated the procedure prescribed under Section 11 (3) of the Act would govern the constitution of the Arbitral Tribunal and nominated an arbitrator, calling upon the Respondent to do the same within a period of 30 days.

In its Reply dated 11.07.2018 to the abovementioned Letter, the Respondent informed that the case regarding appointment of an arbitrator for the subject contract is subjudice before the Hon’ble High Court of Jammu and Kashmir.

The Petitioner issued a communication dated 03.08.2018 that the reference in its 02.07.2018 letter is a fresh distinct reference to arbitration, unrelated to the earlier reference dated 27.06.2012 and only the latter is pending before the Hon’ble High Court of Jammu and Kashmir.

The Respondent rejected the nominee arbitrator appointed by the Petitioner vide Letter dated 29.08.2018 and asserted that the Arbitral Tribunal was formed as per the contract between them and the same was under challenge at the instance of the Petitioner in the Hon’ble High Court of Jammu and Kashmir (Petition No. 28 of 2012 under Section 11(3), (4) and (6) of Jammu and Kashmir Arbitration Conciliation Act, 1997). The Respondent pointed out that the Petitioner had also filed an application under Section 9 of the Act in the Court of Principal District Judge, Ramban (No. 25-22/11/2012).

Therefore, the Petitioner approached the Bombay High Court for exercise of the jurisdiction under Section 11(6) of the Act as the Respondent has refused to nominate its arbitrator.

ISSUES BEFORE THE COURT

The following issues were considered by the Bombay High Court:

1. Whether the Bombay High Court had jurisdiction to entertain and decide the petition for appointment of Arbitrator under Section 11 (6) of the Act?

2. Whether the procedure of appointment of Arbitral Tribunal contained in clause 1.1 of Annexure ‘P’ to the contract (extracted above) from amongst the panel of gazetted Railway Officers is in conformity with the provisions of the Act as amended by the Amendment Act, 2015?

OBSERVATION

ISSUE 1: 

The Respondent submitted that since the Petitioner had already invoked the jurisdiction of the Hon’ble High Court of Jammu and Kashmir for the same subject-matter, assailing the constitution of the Arbitral Tribunal, the Bombay High Court could not exercise the powers under Section 11 of the Act if it wanted to maintain the comity between Courts. This was inferred from the reading of Sections 11(12)(b), 2(1)(e) and 42 of the Act- only a High Court having original civil jurisdiction in the state would be the Court for the purpose of Part I of the Act; thus, the jurisdiction lies with the Hon’ble High Court of Jammu and Kashmir before which the Petitioner had already filed a petition.

The Petitioner submitted that with the statutory change, the clauses which provide for constitution of standing arbitral tribunal are in teeth of provisions of law and that the Petitioner cannot be deprived of the remedy of approaching the Bombay High Court since the dispute arose after the Amendment Act, 2015 came into effect. It placed reliance on the case ITD Cementation India Ltd. v. Konkan Railway Corporation Ltd. 2019 SCC OnLine Bom 5349 which enunciated the legal position as:

“34. Section 21 provides that unless otherwise agreed between the parties, the arbitral proceedings in respect of a particular dispute would commence on the date on which the request of that dispute being referred to the arbitrator, is received by the respondent.

35. Once a request has been made by a party for reference of the disputes to an arbitral tribunal, normally only in that event the respondent to whom such a request is made, would be required to accept the request and appoint an arbitral tribunal. In case the request is rejected then the party is entitled to approach the Court under Section 11 of the Act praying for appointment of arbitral tribunal.”

The Bombay High Court observed that:

“A conjoint reading of Section 21 of the Act with Section 26 of the Amendment Act, 2015, in the context of the provisions in the contract as regards reference of the dispute to arbitration, especially the time at which the dispute is deemed to have arisen (after the claim is either refuted or payment is not made by the Chief Engineer), it becomes crystal clear that arbitrable dispute between the parties can be deemed to have arisen with the invocation of the arbitration clause by the Petitioner on 2^nd July, 2018.”

The Bombay High Court referred to the Constitutional Bench Judgment of the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Incorporation (2012) 9 SCC 552 and concluded that the term “subject matter of arbitration” cannot be confused with “subject matter of the suit”.

It observed as under:

“In our opinion, the provision in Section 2(1)(e) has to be construed keeping in view the provisions in Section 20 which give recognition to party autonomy… In our view, the legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place.”

“…the upshot of the aforesaid consideration is that the fact that a request for constitution of arbitral Tribunal was made to the Jammu and Kashmir High Court in respect of a dispute which arose in the year 2012 would not preclude the Petitioner from approaching this Court for exercise of the power under Section 11 of the Act especially when the arbitrable dispute arose subsequent to the coming into force of the Amendment Act, 2015 and the consequent commencement of the arbitration proceedings post enforcement of the Amendment Act, 2015.”

Therefore, the Bombay High Court decided the first issue in the affirmative.

ISSUE 2: 

The Petitioner further submitted that the arbitration clauses in the contract violate the spirit of neutrality and impartiality imbibed in Section 12 read with the Fifth and Seventh Schedule of the Act as amended by the Amendment Act, 2015.

It sought to place to reliance on Voestalpine Schienen Gmbh v. Delhi Metro Rail Corp Ltd. (2017) 4 SCC 665, wherein the Supreme Court had observed that an arbitrator who is an employee, director, part of the management or someone who has a single controlling influence in an affiliate of one of the parties is rendered ineligible to act as an Arbitrator.

The Respondent placed reliance on the case Aravali Power Co. Pvt. Ltd. (2017) 15 SCC 32 in which the Supreme Court had observed that the fact that the named arbitrator happens to be an employee of one of the parties to the agreement has not by itself, before the Amendment Act came into force, rendered such appointment invalid and enforceable.

The Bombay High Court distinguished the facts of the case as the Supreme Court had made the above observation in the backdrop of the provisions of Section 12(1) of the Act as it stood before the amendment had come into force.

It advanced to accept the position that the Indian Railways qualifies as a parent entity of the Respondent and it can be said to be an “affiliate” of the former within the meaning under the Seventh Schedule of the Act. It answered the second issue in the negative as under:

“In the case at hand, as indicated above, the particular arbitral dispute has arisen after the Amendment Act, 2015 came into force. The provisions under the contract for constitution of the standing arbitral Tribunal (clause 1.1 extracted above) are in flagrant violation of the amended provisions of section 12 read in conjunction with the Fifth and Seventh Schedule of the Act introduced by the Amendment Act, 2015.”

“…in view of the amended provisions of the Act the officers of the Respondent or for that matter, Indian Railways are simply ineligible to be appointed as the Arbitrators.”

The Bombay High Court allowed the Petitioner to appoint its nominee arbitrator and directed the Respondent to appoint an independent nominee arbitrator in conformity with the provisions of the Act within four weeks.

CONCLUSION 

The Bombay High Court expressed and reiterated that impartiality and independence of the arbitrators is the very soul of the arbitration process. It undertook a thorough analysis of the procedure under the contract which allowed the Respondent to pick its own favourites from the panel of nominee arbitrators whereas the Petitioner deprived of free choice.

Particular emphasis was laid on the observations of the Supreme Court in Voestalpine Schienen Gmbh v. Delhi Metro Rail Corp Ltd. (2017) 4 SCC 665:

“25. Section 12 has been amended with the objective to induce neutrality of arbitrators viz. their independence and impartiality. The amended provision is enacted to identify the “circumstances” which give rise to “justifiable doubts” about the independence or impartiality of the arbitrator. If any of those circumstances as mentioned therein exists, it will give rise to justifiable apprehension of bias.

26. …it may also be mentioned herein that the Law Commission had proposed the incorporation of the Schedule which was drawn from the red and orange list of IBA guidelines on conflict of interest in international arbitration with the observation that the same would be treated as the guide “to determine whether circumstances exist which give rise to such justifiable doubts”.”

On this basis, the Bombay High Court held that the procedure of appointment under the contract militated against the principles of autonomy, neutrality and impartiality and that the prayer of the Petitioner to constitute an independent arbitral tribunal appeared justifiable.

AMLEGALS REMARKS 

Despite the repeated appraisal of arbitral clauses in contracts between parties by both the legislature and judiciary as the key to arbitration becoming the preferred mode for commercial dispute resolution as long as such clauses remain impartial, several Government organizations and Public Sector Undertakings have one-sided clauses for dispute resolution in their agreements. The Bombay High Court also took note of the same.

The Bombay High Court appreciated the positions of the Petitioner and Respondent and allowed the former to form an independent arbitral tribunal instead of directing it to comply with the biased and non-independent standing tribunal stipulated in their contract.

The Court also sought reliance on an important observation of the Supreme Court in Voestalpine Schienen Gmbh v. Delhi Metro Rail Corp Ltd. (2017) 4 SCC 665 regarding the intent of the legislature:

“26. It cannot be said that simply because the person is a retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (the party in dispute), he would be treated as ineligible to act as an arbitrator. Had this been the intention of the legislature, the Seventh Schedule would have covered such persons as well. Bias or even real likelihood of bias cannot be attributed to such highly qualified and experienced persons, simply on the ground that they served the Central Government or PSUs, even when they had no connection with DMRC. The very reason for empanelling these persons is to ensure that technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators.”

Therefore, the Bombay High Court placed its faith in the Amendment Act, 2015 that ensured impartiality and independence in the constitution and award of an Arbitral Tribunal.

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