IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA Arb. Case No. 94 of 2017 Date of Decision: 16.3.2018 . [ Sh. [ENTITY] Petitioner Versus State of HP and Ors. Respondents. Coram Hon'ble Mr. Justice [ENTITY], Judge. Whether approved for reporting1? Yes. For the petitioner: Mr. [ENTITY], Advocate. For the respondent: Mr. [ENTITY], Additional Advocate General and Mr. [ENTITY], Deputy Advocate r General. [ENTITY], J. (Oral)
By way of instant petition having been filed under [SECTION] of the [ACT] (in short "the Act"), a prayer has been made on behalf of the petitioner-claimant, for appointment of an Arbitrator to adjudicate the dispute pertaining to work namely "Up-gradation of main rural link Pali to Shilag (L-033) and Shilag to Baragaon (L-034) Km. 0/0 to 11/0 (SH:- C/O RPFD, passing places, R/walls, Edging, M/t., C.D., Essential V-
shape drain & essential Parapets etc., in KM.0/0 to 11/0) under PMGSY/Bharat Nirman Yojna Package No. HP-08-[SECTION]5 (phase-VI additional), in terms of clause
2. Briefly stated facts as emerge from the record are that the petitioner-claimant, who is a class-1 Government Contractor, entered into an Whether reporters of the Local papers are allowed to see the judgment?
agreement with respondent No.3 vide agreement No. 2 for the work referred herein above, at a contract price of Rs. 2, 34, 39,199/-. Though pursuant to aforesaid award letter made/issued in favour of the petitioner-claimant, he .
started work on the site, but fact remains that work in question could not be completed within the stipulated time. During execution of work, petitioner-
claimant expressed certain difficulties and accordingly, intimated the department, rather requested it to provide him with all mandatory permissions for carrying out work through the forest land. Since petitioner-claimant was unable to execute the work within the stipulated period, work done by him, was not measured, as a consequence of which, dispute arose inter-se parties.
Petitioner invoked clause-24 of agreement (Annexure P-1), which provides for disputes redressal system. Vide communication dated 23.9.2017 i.e. Annexure P-2, petitioner sent a communication to Chief Engineer, Mandi Zone, HPPWD, Mandi, raising therein his claim qua the dispute allegedly arose inter-se the parties. Perusal of Annexure P-3 i.e. communication dated 5.8.2007, clearly suggests that respondent-department acceding to the aforesaid request having been made by the petitioner-claimant by invoking clause-24 of the agreement, constituted a technical committee consisting of three officers for necessary verification of measurement as claimed by the petitioner under the [ACT] in respect of work "Up-gradation of main rural link Pali to Shilag (L-033) and Shilag to Baragaon (L-034) Km. 0/0 to 11/0 (SH: C/O RPFD, R/Wall, B/Wall, M/T CD, essential V-Shape drain & essential parapets and road signboard etc. in KM.0/0 to 11/0)" under PMGSY/Bharat Nirman Yojna (Phase-VI additional) Package No. 08-[SECTION]5. Since respondent-
department despite there being constitution of technical committee in terms of clause-24 of the agreement, failed to render its decision with the specified period of 45 days, petitioner-claimant vide communication dated 13.9.2017, .
addressed to the Engineer-in-Chief. HPPWD, [ENTITY], Shimla, made a request for appointment of an Arbitrator for adjudication of disputes in respect of work referred herein above, by resorting to clause-25 of the agreement.
3. Taking note of the aforesaid request having been made by the petitioner, Engineer-in-Chief, HPPWD, sent a communication to the Superintending Engineer, Ist Circle, HPPWD, Mandi, vide communication dated 27.9.2017 (Annexure P5) requesting therein to send a detailed report of matter along with copy of the agreement so that further steps are taken in the matter by the office of Engineer-in-Chief. However fact remains that after issuance of aforesaid communication, no steps are taken by the respondent-
department for appointment of an Arbitrator in terms of request having been made by the petitioner-claimant and as such, he is compelled to initiate proceedings in this regard under [SECTION] of the Act, praying therein for appointment of an Arbitrator, before this court.
4. Mr. [ENTITY], learned counsel representing the petitioner-
claimant, while making this Court to travel through clause-24 of the agreement and communication sent by the petitioner-claimant i.e. Annexure P-2, contended that in the event of dispute having arisen inter-se parties, any of the party, at the first instance, was under an obligation to raise dispute through disputes redressal system and as such, petitioner-claimant vide communication (Annexure P-2 ) sought redressal of his dispute through the disputes redressal system invoking clause-24 but since respondent-
department failed to give its decision within the stipulated period of 45 days .
and as such, he had no option, but to approach this Court for appointment of an Arbitrator in terms of clause 25.
5. Mr. [ENTITY], learned Deputy Advocate General, while refuting aforesaid contention put forth on behalf of the petitioner-claimant, contended that present petition is pre-mature and has been filed in hot-haste manner by the petitioner-claimant without waiting for the outcome of decision, if any, by the technical committee, constituted by the department pursuant to the request having been made by the petitioner claimant.
Learned Deputy Advocate General, further contended that technical committee is seized of the matter and shall be rendering its decision immediately after completion of verification of the measurements as claimed by the firm under the disputes redressal system and as such, prayer for appointment of an Arbitrator having been made on behalf of the petitioner-
claimant deserves to be rejected at this stage. Apart from above, learned Deputy Advocate General, contended that since entire payment pursuant to agreement arrived inter-se parties stands paid to the petitioner-claimant, no dispute survives inter-se parties and as such, present petition may be dismissed with exemplary costs.
6. I have heard the learned counsel representing the parties and carefully gone through the record.
7. Execution of agreement inter-se parties (Annexure P-1) is not in dispute, rather respondent has categorically admitted same in their reply filed in the instant petition. Similarly, there is no dispute qua petitioner's having .
invoked clause-24 of the agreement for redressal of his dispute under the disputes redressal system. At this stage, it would be profitable to take note of clause 24 of the agreement, which is reproduced herein below:-
"24. Dispute Redressal System 24.1 If any dispute or difference of any kind what-so-ever shall arise in connection with or arising out of this Contract or the execution of Works or maintenance of the Works there under, whether before its commencement or during the progress of Works, or after termination, abandonment or breach of the Contract, it shall, in the first instance, be referred for settlement to the competent authority, described along with their powers in the Contract Data, above the tank of the Engineer. The competent authority shall, within a period of forty-five days after being requested in writing by the Contractor to do so, convey his decision to the Contractor. Such decision in respect of every matter so referred shall, subject to review as herein after provided, be final and binding upon the Contractor. In case the Works is already in progress, the contractor shall proceed with the execution of the Works, including maintenance thereof, the decision of the competent authority as aforesaid with all due diligence.
24.2. Either party will have the right of appeal, against the decision of the competent authority, to the standing Empowered Committee if the appealed against exceeds rupees one lakh. 24.3. The composition of the Empowered Standing Committee will be I One official member, Chairman of the Standing Empowered Committee, is Engineer-in-Chief, Public Works Department of H.P.;
II One official member not below the rank of chief engineer; and III One non-official member who will be technical expert of Chief, is Engineer's level selected by the Contractor from a panel of there persons given to him by the Employer.
24.4 The Contractor and the Employer will be entitled to present their case in writing duly supported by documents. If so requested, the Standing Empowered committee may allow one opportunity to the Contractor and the Employer for oral arguments for a specified period. The Empowered Committee shall give its decision within a period of ninety days from the date of appeal, failing which the contractor can approach the Arbitrator for the resolution of the dispute.
24.5 The decision of the Standing Empowered Committee will be binding on the Employer for payment of claims up to five percent of the Initial Contract price. The Contractor can accept and receive payment after signing as "in full and final settlement of all claims" If he does not accept the decision, he is not barred from seeking Arbitration under clause 25. Similarly, if the Employer does not accept the decision of the Standing Empowered Committee above the limit of five percent of the initial Contract Price, he will be free to approach the Arbitrator applicable under the law."
8. Bare perusal of aforesaid clause contained in the agreement .
clearly suggests that in the event of dispute, if any, having been arisen between the parties, the aggrieved party shall notify its claim by invoking clause-24 of the agreement. It further suggests that competent authority after having received request made in this regard, by the aggrieved party, shall within a period of 45 days, convey its decision to the Contractor. Clause-24.2 further suggests that either party shall have a right to file an appeal against the decision of the competent authority to the standing empowered Committee.
9. In the case at hand, as is clearly evident from communication dated 23.6.2017 (Annexure P-2) the petitioner claimant notified his disputes under disputes Redressal System of the agreement in respect of the work in question on 23.6.2017, which was received by the respondent department on the very same date, as is evident from the stamp put on this communication.
Otherwise also, factum with regard to receipt of this communication dated 23.6.2017, has not been disputed by the respondent-department in their reply, rather receipt of the same, has been acknowledged, meaning thereby, final decision pursuant to the aforesaid request made on behalf of the petitioner claimant was to be taken within a period of 45 days of the receipt of notice under clause 24 i.e. 23.6.2017. In the case at hand, though perusal of communication dated 5.8.2017 (Annexure P-3) suggests that respondent-
department while acceding to aforesaid request having been made by the petitioner-claimant, constituted a technical committee in terms of clause-24 for verification of the measurements as claimed by the firm under disputes redressal system of the agreement but no final decision is/was taken within the .
stipulated period of 45 days. At the cost of repetition, it may be stated that decision pursuant to request made under clause-24 is/was to be taken within a period of 45 days from the receipt of the notice. Here in this case, though technical committee is/was constituted within a period of 45 days, but no final decision is/was ever taken/conveyed to the petitioner-claimant. Since no final decision in terms of clause 24 is/was taken by the respondent-
department, there is/was no occasion for the petitioner-claimant to invoke clause 24.2 and as such, there is no force in the argument of learned Deputy Advocate General that petitioner claimant ought to have filed appeal in terms of clause 24.2, before approaching this Court. Had committee constituted in terms of clause-24 taken some decision within the stipulated period, petitioner was under obligation to file appeal, but in the instant case, no decision was taken and as such, petitioner claimant rightly sent a communication vide letter dated 30.9.2017 to the respondent department, requesting therein to refer the matter to the Arbitrator in terms of clause-25 of the Agreement. Vide communication dated 30.9.2017, the petitioner claimant sent request vide registered letter, which has been otherwise not disputed by the respondent, praying therein for appointment of an Arbitrator but respondent-department instead of taking action in terms of request made by the petitioner-claimant, called for necessary details of agreement from the Superintending Engineer, 1st Circle, HPPWD Mandi, vide communication dated 22.9.2017 (Annexure P-5). Since respondent department without there being any justification failed to accede to the request of the petitioner claimant for appointment of Arbitrator in terms of clause-25 of the agreement, he has .
rightly approached this Court by way of instant petition, praying therein for appointment of an Arbitrator. The question whether petitioner claimant has received full and final payment without any protest, as has been raised/argued by the learned Deputy Advocate General, is not an issue before this Court and same cannot be considered and decided in the present proceedings, rather same needs to be decided/adjudicated by the Arbitrator appointed pursuant to the agreement (Annexure P-2)arrived inter-se parties.
10. [SECTION] of the [ACT], which has come into force w.e.f. 23.10.2015, categorically provides that Supreme Court or High Court while considering any application under sub-section (4) or sub-section (5) or sub section (6), shall notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of arbitration agreement, meaning thereby, if court after having perused agreement executed inter-se parties is convinced and satisfied that there is an arbitration clause in the agreement, it may consider the prayer having been made by the applicant for appointment of an Arbitrator.
11. Recently Hon'ble Apex Court in Duro Felguera, S.A. v.
Gangavaram Port limited, (2017) 9 SCC 729, has held that after the amendment, all that the court needs to see is that whether an arbitration agreement exists -nothing more, nothing less, because the legislative policy and purpose is essentially to minimize the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in [SECTION] .
(A) ought to be respected. Relevant paras of aforesaid judgment are reproduced herein below:-
"58.This position was further clarified in [PRECEDENT]. To quote: (SCCp.283, para22) "22. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under [SECTION], the duty of the Chief Justice or his designate is defined in SBP & Co. This Court identified and segregated the preliminary issues that may arise for consideration in an application under [SECTION] of the Act into three categories, that is, (i) issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.
22.1. The issues (first category) which the Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under [SECTION] of the Act, is a party to such an agreement.
22.2. The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long-barred) claim or a live claim.
(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
22.3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:
(i) Whether a claim made falls within 43 the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).
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(ii) Merits or any claim involved in the arbitration."
59.The scope of the power under [SECTION] of the 1996 Act was considerably wide in view of the decisions in SBP and Co. (supra) and Boghara Polyfab (supra). This position continued till .
the amendment brought about in 2015. After the amendment, all that the Courts need to see is whether an arbitration agreement exists - nothing more, nothing less. The legislative policy and purpose is essentially to minimize the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in [SECTION] ought to be respected."
[SECTION]. It is quite apparent from the aforesaid provision of law and law laid down by the Hon'ble apex Court supra, that after the amendment in [SECTION], whereby [SECTION] came to be incorporated, Court is only required to see whether an agreement exists or not. Necessarily, it is not required to take into consideration all other ancillary issues raised on behalf of the opposite party, who is opposing the appointment of an Arbitrator.
13. Undisputedly, in the case at hand, dispute arose inter-se parties, after the amendment in [SECTION] of the Act, because at the first instance, petitioner raised dispute vide communication dated 23.6.2017 (Annexure P-2) under disputes redressal system in terms of clause-24 of the agreement, which has been duly acknowledged by the respondent as has been taken note above and as such, amended provision i.e. [SECTION] is applicable in the present case.
[SECTION]. This Court after having carefully perused material available on record finds substantial force in the argument of learned counsel representing the petitioner-claimant that since in the case at hand, respondent despite having received notice (Annexure P-4) dated 13.9.2017, failed to refer the matter to the Arbitration in terms of clause 25 for more than 2 months,
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petitioner rightly approached this Court in the instant proceedings for appointment of an Arbitrator. Perusal of clause 25 of the agreement (Annexure P1) suggests that an arbitrator is to be appointed by the Engineer-
in-Chief/Chief Engineer (CZ) HPPWD and party can have no objection to the appointment of government servant as an arbitrator, who while discharging his duties may have expressed views on all or any matter in dispute of difference.
15. After having carefully perused aforesaid clause contained in the agreement, this Court finds considerable force in the argument of learned counsel representing the petitioner that independent arbitrator is required to be appointed for the adjudication of the dispute inter-se parties.
16. Learned counsel while inviting attention of this Court to [SECTION] of the Act, contended that aforesaid provision of law stands amended by [ACT], whereby person having either direct or indirect connection or relationship or interest in any of the parties or in relation to the subject matter in dispute, cannot be appointed as an arbitrator and his/her appointment as arbitrator can be laid challenge
17. At this stage, it would be apt to reproduce [SECTION] of the Act, herein below:-
"[SECTION]. Grounds for challenge.
(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances ,-
a) Such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-
matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
- [SECTION] -
b) Which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.
Explanation 1. -The grounds stated in the [SECTION] shall guide in determining whether circumstances exist .
which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Explanation 2. - the disclosure shall be made by such person in the form specified in the Sixth Schedule.] (2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him. (3) An arbitrator may be challenged only if
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made. [(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the [SECTION] shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.]"
18. Bare perusal of aforesaid amended provision of Act clearly suggests that person having direct/indirect control over the day to day affairs of the authority, cannot be appointed as an Arbitrator.
19. Hon'ble Apex Court in [PRECEDENT], has held as under:-
"[SECTION]. From the stand taken by the respective parties and noted above, it becomes clear that the moot question is as to whether panel of arbitrators prepared by the Respondent violates the amended provisions of [SECTION] of the Act. [SECTION] and [SECTION] as well as [SECTION] to the Act which are relevant for our purposes, may be reproduced below:
8. (i) for sub-section (1), the following Sub-section shall be substituted, namely-
(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances
(a) such as the existence either direct or indirect, of any past or present relationship
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with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and .
(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months. Explanation 1. The grounds stated in the [SECTION] shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.
Explanation 2. The disclosure shall be made by such person in the form specified in the Sixth Schedule.;
(ii) after Sub-section (4), the following Subsection shall be inserted, namely
(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the [SECTION] shall be ineligible to be appointed as an arbitrator: Provided that r parties may, subsequent to disputes having arisen between them, waive the applicability of this Sub-section by an express agreement in writing. (emphasis supplied) THE SEVENTH SCHEDULE 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.
2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.
3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.
4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.
5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
6. The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.
7. The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.
8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.
9. The arbitrator has a close family relationship with one of the parties and in the case of companies with
- [SECTION] -
the persons in the management and controlling the company.
10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.
11. The arbitrator is a legal representative of an entity .
that is a party in the arbitration.
[SECTION]. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.
[SECTION]. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom. Relationship of the arbitrator to the dispute
15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.
16. The arbitrator has previous involvement in the case. Arbitrator's direct or indirect interest in the dispute.
17. The arbitrator holds shares, either directly or r indirectly, in one of the parties or an affiliate of one of the parties that is privately held.
18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.
19. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.
Explanation 1. The term "close family member"
refers to a spouse, sibling, child, parent or life partner. Explanation 2. The term "affiliate" encompasses all companies in one group of companies including the parent company.
Explanation 3. For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or commodities arbitration, to draw arbitrators from a small, specialized pool. If in such fields it is the custom and practice for parties frequently to appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the Rules set out above. (emphasis supplied)
15. It is a well known fact that the [ACT] was enacted to consolidate and amend the law relating to domestic arbitration, inter alia, commercial arbitration and enforcement of foreign arbitral awards etc. It is also an accepted position that while enacting the said Act, basic structure of [ACT] Model Law was kept in mind. This became necessary in the wake of globalization and the adoption of policy of liberalisation of Indian economy by the Government of India in the early 90s. This model law of [ACT] provides the framework in order to achieve, to the maximum possible extent, uniform approach to the international commercial arbitration. Aim is to
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achieve convergence in arbitration law and avoid conflicting or varying provisions in the arbitration Acts enacted by various countries. Due to certain reasons, working of this Act witnessed some unpleasant developments and need was felt to smoothen out the rough edges encountered thereby. The Law Commission examined various shortcomings in the working of this Act and in .
its first Report, i.e., 176th Report made various suggestions for amending certain provisions of the Act. This exercise was again done by the Law Commission of India in its Report No. 246 in August, 2004 suggesting sweeping amendments touching upon various facets and acting upon most of these recommendations, [ACT] was passed which came into effect from October 23, 2015.
16. Apart from other amendments, [SECTION] was also amended and the amended provision has already been reproduced above. This amendment is also based on the recommendation of the Law Commission which specifically dealt with the issue of 'neutrality of arbitrators' and a discussion in this behalf is contained in paras 53 to 60 and we would like to reproduce the entire discussion hereinbelow:
NEUTRALITY of ARBITRATORS
53. It is universally accepted that any quasi-judicial process, including the arbitration process, must be in r accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators, viz. their independence and impartiality, is critical to the entire process.
54. In the Act, the test for neutrality is set out in [SECTION] which provides-
[SECTION](3) An arbitrator may be challenged only if
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality "
55. The Act does not lay down any other conditions to identify the "circumstances" which give rise to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias.
56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See [PRECEDENT]; Secretary to Government Transport Department, Madras v.
Munusamy Mudaliar MANU/SC/0435/1988 : 1988 (Supp) SCC 651; [PRECEDENT]; [PRECEDENT]; [PRECEDENT] MANU/SC/0139/1996 :
1996 (1) SCC 54; Union of India v. M.P. Gupta (2004) 10
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SCC 504; [PRECEDENT] [CASE NUMBER] that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in Indian Oil .
Corporation Ltd. v. Raja Transport (P) Ltd.
MANU/SC/1502/2009 : 2009 8 SCC 520 carved out a minor exception in situations when the arbitrator "was the controlling or dealing authority in regard to the subject contract or 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", and this exception was used by the Supreme Court in Denel Proprietary Ltd. v.
Govt. of India, Ministry of Defence MANU/SC/0010/20[SECTION] : AIR 20[SECTION] SC 817 and [PRECEDENT] MANU/SC/0478/20[SECTION] : (20[SECTION]) 6 SCC 384, to appoint an independent arbitrator Under [SECTION], this is not enough.
57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles- even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr. [ENTITY], the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and nonState parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous-and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes.
58. Large scale amendments have been suggested to address this fundamental issue of neutrality of
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arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to [SECTION], [SECTION] and [SECTION] of the Act.
59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the .
stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the [SECTION], which has drawn from the Red and Orange lists of the [ACT] on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed [SECTION] of the Act and the [SECTION] which incorporates the categories from the Red list of the [ACT] (as above), the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed rexplanation to [SECTION]. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the [SECTION], and as based on the Red and Orange lists of the [ACT]), the ineligibility to be appointed as an arbitrator (and the consequent de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the [SECTION], and as based on the Red list of the [ACT]).
60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed [SECTION]. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective "justifiable doubts" regarding his independence and impartiality. To deal with such situations, the Commission has proposed the [SECTION], where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed [SECTION] by an express agreement in writing. In all/all other cases, the general Rule in the proposed [SECTION] must be followed. In the event the High Court is approached in connection with appointment of an arbitrator, the Commission has proposed seeking the disclosure in terms of [SECTION] and in which context the High Court or the designate is to have "due regard" to the contents of such disclosure in appointing the arbitrator.
(emphasis supplied)
17. We may put a note of clarification here. Though, the Law Commission discussed the aforesaid aspect under the heading
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"Neutrality of Arbitrators", the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In international sphere, the 'appearance of neutrality' is considered equally important, which .
means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term 'neutrality' used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term 'neutrality of arbitrators' is commonly used in this context as well.
18. Keeping in mind the afore-quoted recommendation of the Law Commission, with which spirit, [SECTION] has been amended by the [ACT], it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, [SECTION] lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the [SECTION], he shall be ineligible to be appointed as an arbitrator. In such an eventuality, i.e., when the arbitration Clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of non-obstante Clause contained in [SECTION] and the other party cannot insist on appointment of the arbitrator in terms of arbitration agreement."
20. In the aforesaid judgment, it has been categorically held by the Hon'ble Apex Court that main purpose for amending the provision was to provide for neutrality of arbitrators. Hon'ble Apex Court has further held that in order to achieve the neutrality, as referred above, [SECTION] lays down that notwithstanding any prior agreement to the contrary, any person, whose relationship with the parties or counsel or subject matter of dispute falls under any of the categories specified in the schedule, he shall be ineligible to be appointed as an arbitrator.
21. Consequently, in view of aforesaid detailed discussion as well as law laid down by the Hon'ble Apex Court supra, petition is allowed and with the consent of the learned counsel representing the parties, Shri [ENTITY], Senior Advocate, HP High Court, Shimla, is appointed as an arbitrator to
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adjudicate the dispute inter se parties. His consent/declaration under [SECTION] of the [ACT] has been obtained. He has no objection to his appointment as an arbitrator in the present matter. He is .
requested to enter into reference within a period of two weeks from the date of receipt of a copy of this order. It shall be open to the Arbitrator to determine his own procedure with the consent of the parties. It shall also be open to the Arbitrator to fix his fee. Award shall be made strictly as per the provisions of [ACT], within twelve months. Needless to add that the Arbitrator shall pass a speaking order.
22. A copy of this order shall be made available to the Arbitrator, named above, by the Registry of this Court, within a period of two weeks, enabling him to take steps for commencement of the arbitration proceedings.
23. The petition is disposed of.
16th March, 2018 ([ENTITY]), manjit Judge