Guest Post by Thriyambak J. Kannan
The Arbitration and Conciliation Act, 1996 (“the Act”), pursuant to the recommendations of the 246th Law Commission Report (“Report”) underwent a series of amendments to rectify what the Commission was informed as, “several inadequacies observed in the functioning of the Act”.[1] Pursuant to these recommendations, the Act was amended by the Arbitration and Conciliation (Amendment) Ordinance, 2015 which was promulgated on 23.10.2015 and subsequently, with the passing of Act No. 3 of 2016, the Act was amended which amendment took effect from 23.10.2015.
One of the ‘several inadequacies’ observed in the Report was the action of State entities/ Public Sector Undertakings in appointing their employees and/ or ex – employees as arbitrators in disputes with contractors. The contract documents that the State entities/ Public Sector Undertakings entered into with their contractors contained clauses which forbade the contractor from challenging the independence of the appointment of the employees and/ or ex – employees as arbitrators. Being a standard form contract which the parties had signed with complete disclosure, courts were also reluctant to interfere with the appointment of employees and/ or ex – employees of State entities/ Public Sector Undertakings as arbitrators. The Commission was possibly concerned by the fact that even though arbitration was a means of alternative dispute resolution, in which the judicial interference was to be limited, the high bench mark that is set in public law with regard to the independence and bias was also be required to be reflected in arbitration matters and appointment of arbitrators, if the intention was to have a positive and conducive atmosphere for the conduct of arbitration proceedings.
Part II of the Report contains the introduction to the amendments as suggested by the Commission. Paragraphs 53 to 60 of the Report were the Commission’s view on the issue of neutrality of arbitrators. Paragraph 56 specifically pointed out that the issue of neutrality of arbitrators had been tested by the Supreme Court in the context of contracts with State entities/ Public Sector Undertakings. The said paragraph makes reference to cases where, notwithstanding the contract between the parties requiring the appointment of an employee of the state entity as an arbitrator, the Supreme Court did not approve of the same.[2] The Report however did contemplate that this ad – hoc/ case by case basis of testing the independence of arbitrators would not be adequate and goes on to propose the creation of a Fifth Schedule, which sets out the grounds of justifiable doubts of independence of arbitrators and a Seventh Schedule, being the grounds for disqualification of appointment of arbitrators. The Report observed that these schedules were reflective of the IBA Guidelines on Conflict of Interest in International Commercial Arbitration (“Guidelines”). However, while incorporating the Guidelines, the Commission did not suggest that the Guidelines be verbatim reproduced in the amendment to the Act, but made changes to the same.
For example, while the Guidelines contemplate three separate lists:
- a green list,
- an orange list and
- a waivable and non –waivable red list, being the grounds for disqualification/ testing the independence of arbitrators,
the Seventh Schedule, which one can presume is akin to a non – waivable red list contains 19 circumstances which would automatically render a person, who fell within any of the categories contained therein, as disqualified for appointment.
There are no cases in foreign courts that deal with the interpretation of the Guidelines, since they are truly in the nature of guidelines and are not incorporated into statute itself of any other nation, unlike what has been done with the Act. Most common law or civil law countries still look at the issue of independence on the basis of the classic questions of bias, such as the case of Pinochet[3]or Porter v. McGill.[4] As such, the Act was entering a virgin field when it was incorporating the principles of the Guidelines into the statute book.
One of the grounds of ineligibility contained in the Seventh Schedule is:
“1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party”
This clause was presumably incorporated to check the action of State entities/ Public Sector Undertakings appointing their employees, including ex – employees as arbitrators. However, in amending the Act and incorporating the Guidelines, the most important thing that was lost sight of by the Legislature and the Commission was to include the word “ex-employee” as a ground for disqualification. The only place in the schedules to the Act where mention is made of an ex – employee is in entry 31 of the Fifth Schedule, which is a ground of a justifiable doubt as to the independence of an arbitrator and reads as follows:
“31. 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.”
In light of this inadequacy, various State entities/ Public Sector Undertakings continued to appoint ex – employees as arbitrators in disputes that they had with their contractors. This issue of appointing ex – employees as arbitrators was seized in two proceedings in the Madras High Court[5] and the Punjab and Haryana High Court.[6] In both the cases, it was argued that the prohibition in the seventh schedule with respect to an employee being appointed as an arbitrator, would also have to include an ex – employee as well, for not including an ex – employee would render the amendment redundant, in light of the perceived lack of independence. It was argued that the appointment of ex – employees would go against the very intention behind the legislative amendment of the Act and the introduction of the Guidelines into the Act, which was to bring about more neutrality to the process of appointment of arbitrators. Extensive reliance was placed on the contents of the Report and the observations of the Commission. However, in both cases, the courts have come to the conclusion that there is no error on the part of a State entity/ Public Sector Undertaking appointing an “ex-employee” as arbitrator since the statute does not bar such an appointment.
The Punjab and Haryana High Court has said that there is no restriction in the appointment of an ex – employee as an arbitrator since the Seventh Schedule only bars the appointment of an employee. The Madras High Court has circumscribed the right of appointment to be in line with entry 31 of the Fifth Schedule, being an ex – employee who had not been associated with the said State entity/ Public Sector Undertaking in the past three years. While the Punjab and Haryana Judgment is presently in appeal before the Supreme Court,[7] it does not appear that the Madras High Court’s judgment is in appeal before the Supreme Court.
Both these cases bring light to a crucial fact that the amendment to the Act has failed to capture, which is the power of State entities/ Public Sector Undertakings to appoint ex – employees as arbitrators. These appointments of ex – employees as arbitrators by State entities/ Public Sector Undertakings creates a grave impediment to the image of arbitration being a fair and independent process in India. This is more so since State entities/ Public Sector Undertakings are the largest infrastructure operator in the country and any infrastructure client that wishes to enter into that space has to deal with these State entities/ Public Sector Undertakings. In such a scenario, the continued presence of ex – employees of State entities/ Public Sector Undertakings, who, even on the date of the arbitration proceedings, in addition to the arbitration fees, draw pension and other post-retirement benefits from such State entities/ Public Sector Undertakings creates a perception of the proceedings not being held in the fairest of manners.
The Supreme Court of India in a recent judgment[8] has visited the issue of the appointment of persons named in a panel of Delhi Metro Rail Corporation as an arbitrator and has again held that the mere fact that the persons are part of a panel and/ or were ex – government employees, who were not employed with the department in dispute, would not bar them from being appointed as an arbitrator. Crucially in this case, the nominees were not ex – employees of Delhi Metro Rail Corporation. In the judgment the Supreme Court,[9] has spoken of the need to send out positive signals to the international business community of creating a more conducive atmosphere for the conduct of arbitration proceedings. The Supreme Court goes on to caution that such an atmosphere is difficult to create with the power of State entities/ Public Sector Undertakings to appoint arbitrators of their choice.
The important issue though is not the power to appoint, but the issue of who is appointed. There is an urgent need for either the Legislature to fill this lacuna to prevent State entities/ Public Sector Undertakings from appointing their own ex – employees as arbitrators, by passing a suitable amendment to the Act and the seventh schedule or in the alternative, that courts read into the language of entry 1 of the seventh schedule the word “ex – employee” to be included in the word “employee”, so as to improve the image of arbitration in India as being a fair and transparent process.
(The author was the counsel on record in the case of M/s Offshore Infrastructure Limited v. Bharat Heavy Electricals Limited and another, Original Petition No. 466 of 2016 dated 09.12.2016, which was argued before the Madras High Court.)
[1] Letter from the Chairman of the Law Commission, Mr. Justice A. P. Shah to the Minister for Law and Justice dated 05.08.2014 bearing reference D. O. No. 6(3) 238/ 2012-LC(LS).
[2] Denel (Proprietory) Ltd. v. Govt of India, Ministry of Defense, (2012) 2 SCC 759 and Bipromaz Bipron v. Bharat Electronics Limited, (2012) 6 SCC 384).
[3] [1998] UKHL 41.
[4] (2002) 2 AC 357.
[5] M/s Offshore Infrastructure Limited v. Bharat Heavy Electricals Limited and another, Original Petition No. 466 of 2016 dated 09.12.2016
[6] Reliance Infrastructure Ltd. v. Haryana Power Generation Corporation Ltd., Arbitration Case No. 166 of 2016 dated 27.10.2016.
[7] SLP (C) No. 33777 of 2016, in which orders have been reserved on 06.12.2016.
[8] Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation, 2017 SCC OnLine SC 172.
[9] Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation, 2017 SCC OnLine SC 172, Paragraph 30.
