Delhi High Court cautions Rail Vikas Nigam on appointment of former employees as arbitrators
Recently, the Delhi High Court (“Court”) in Afcons Infrastructure Ltd. (“Afcons”) v. Rail Vikas Nigam Limited (“RVNL”), interpreted Section 12 (5)11 read with Entry 12 Schedule VII of the Arbitration and Conciliation Act (“Act”) to hold that former employees of parties are not precluded from being appointed as arbitrators. However, this decision is subject to certain qualifications as discussed below.
Afcons and RVNL entered into a contract dated 12 December 2011 for construction of an infrastructure project (“Agreement”). A dispute arose between the parties and Afcons issued a notice of dissatisfaction and invoked arbitration, relying on the arbitration agreement. In the notice of dissatisfaction, Afcons nominated their arbitrator. RVNL disputed Afcons nomination terming it contrary to the arbitration agreement, and proposed a panel of five arbitrators, and called upon Afcons to select and nominate their nominee arbitrator from that list. Aggrieved by the same, Afcons preferred a petition under Section 11 of the Act before the Delhi High Court (“Court”) for appointment of the arbitral tribunal.
The question which the Court had to decide was whether employees and former employees are disqualified from being appointed as arbitrators under Section 12 (5) of the Act.
The arbitration clause has been reproduced below:
(i) Procedure for Appointment of Arbitrators: The arbitrators shall be appointed as per following procedure:
(ii) Qualification and Experience of Arbitrators: The arbitrators to be appointed shall have minimum qualification and experience as under:
(iii) No person other than the persons appointed as per above procedure and having above qualification and experience shall act as arbitrator.
(iv) Neither party shall be limited in the proceedings before such arbitrators to the evidence nor did arguments previously put before.”
The Court allowed the petition, and directed RVNL to appoint any former judge of the Supreme Court as an arbitrator within 2 weeks.
The Court opined that:
Further, the Court held that the fact that the arbitrator is not disqualified under Section 12 (5) read with Seventh Schedule does not conclude that his appointment cannot be challenged if there are grounds which give rise to justifiable doubts as to his independence or impartiality.
The court relying on the Supreme Court of India’s (“Supreme Court”) judgment in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited3 (“Voestalpine”), and Punjab and Haryana High Court’s decision in Reliance Infrastructure Ltd. v. Haryana Power Generation Corporation Ltd.4 deviated from the arbitration clause provided in the Agreement to appoint an independent person to avoid even notional apprehensions of lack of independence or impartiality.
The Court opined that in the interest of securing the independence and neutrality of the arbitral tribunal, the process contemplated under clause 17.3 (ii) of the Agreement must be disregarded primarily because:
The decision affirms the intention of the judiciary to ensure impartial and independent arbitration proceedings. Specifically considering the ‘adverse consequences’ of allowing an arbitration clause that severely restricts the autonomy of Afcons in appointing arbitrators, the Court goes a step further, in line with the recent Supreme Court judgment to direct the parties to broad base their appointment of arbitrators.
The Court also expressed caution in upholding the validity of the appointment of former employees as arbitrators, and adds a caveat that mere validity of the appointment and the exclusion of former employees from Entry 1 of Schedule VII does not render the appointment immune of potential challenges. It has unequivocally frowned upon the restrictive appointment procedure laid down by the arbitration clause and recognized that such clause would do little to instill confidence among the arbitration regime laid down in the country, especially in light of the changes brought about by the recent Amendment Act. Such arbitration clauses are a common phenomenon in Government contracts, construction contracts, etc. This would prompt the Government and Public Sector Undertakings to be more mindful of the procedure for appointment and qualification of arbitrators in future.
One may however, question the precedential value of this ruling, in view of the Supreme Court’s decision in West Bengal vs Associated Contractors6, wherein it was held that the decision of the Chief Justice or his designate in a Section 11 application, not being the decision of the Supreme Court or the High Court, as the case may be, has no precedential value, being a decision of a judicial authority which is not a court of record.
– Mohammad Kamran, Alipak Banerjee & Moazzam Khan
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1 Section 12(5) of the Act– “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 Seventh Schedule 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.”
2 Entry 1, Schedule VII of the Act– “The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party”
3 AIR 2017 SC 939
4 2016 (6) ArbLR 480 (P&H)
5 See Voestalpine
6(2015) 1 SCC 32