Neutrality of an Arbitrator

The Government of Haryana PWD Haryana (B and R) Branch Vs M/s. G.F. Toll Road Pvt. Ltd. & Ors.

CIVIL APPEAL NO. 27/2019

(Arising out of S.L.P.(C) No. 20201 of 2018)

Bench in  G.F Toll Road case comprised of Judge Abhay Manohar Sapre (left) and Judge Indu Malhotra (right), Judges Supreme Court of India

Facts of the case

The present dispute dealt within the judgment is regarding the neutrality of an arbitrator issue arising out of the Arbitration clause contained within the concession agreement(“Agreement”)  entered by State for construction, operation and maintenance of Gurgaon-Faridabad Road and Ballabhgarh-Sohna Road on BOT (Build, Operate and Transfer) basis.

Reference 1: As per the World Bank Organisation, in a BOT project, the public sector grantor grants to a private company the right to develop and operate a facility or system for a certain period (“Project Period“), in what would otherwise be a public sector project. Usually, Operator finances, owns and constructs the facility or system and operates it commercially for the project period, after which the facility is transferred to the authority.

On 12.12.2008 the Appellant–State (“State”) issued a Letter of Acceptance to Respondent No. 1 – M/s. G. F. Toll Road Pvt. Ltd. (“G.F. Toll Road Pvt. Ltd.”) for execution of a works contract for aforesaid construction. An Agreement was entered into between the parties on 31.01.2009.

Reference 2: “Ownership of public assets is a sensitive issue for all governments. However, budgetary shortfalls, as well as the repeated failure of governments all over the world to maintain these assets, have forced them to change their attitude towards private ownership of such assets. As a result, policymakers have devised various ways in which the private sector can be brought into maintain and operate public assets. Thus, concession contracts, through which ownership rights continue to reside with public authorities save operation rights and associated returns being transferred to private players, have been gaining popularity around the world. Under concession contract, the private partner gets exclusive rights from the government to operate, maintain and sometimes even carry out investment in a public utility for a given period of time. In return, the private party pays either a fixed sum, a percentage of revenue from the utility or a combination of the two to the government for exclusive rights over a facility. Revenue to the private party comes from the user fee charged to users of the facility. There are different types of concession contracts, including ex-leasing, franchise, build operate- transfer (BOT) etc.

The dispute arose between the State and the G F Toll Pvt. Ltd. viz. the arbitration clause of the Agreement, which is set out herein below:

39.2 Arbitration

39.2.1. Any dispute, which is not resolved amicably as provided in Clause 39.1 shall be finally decided by reference to arbitration by a Board of Arbitrators, appointed pursuant to Clause 39.2.2. sub-clause (b) below. Such arbitration shall be held in accordance with the Rules of Arbitration of the Indian Council of Arbitration and shall be subject to the provisions of the Arbitration Act.

 39.2.2. There shall be a Board of three arbitrators of whom each party shall select one and the third arbitrator shall be appointed in accordance with the Rules of Arbitration of the Indian Council of Arbitration. _

(Emphasis supplied)

During the execution of the Agreement, a dispute arose between the parties. The G. F. Toll Road Pvt. Ltd. vide its Letter to Respondent No. 2, Indian Council of Arbitration (“ICA”) invoked the Arbitration Clause, and requested the ICA to commence arbitration proceedings. The G. F. Toll Road Pvt. Ltd. appointed a retired Engineer-in-Chief–Mr. Surjeet Singh as their nominee Arbitrator. The State appointed one Mr M.K. Agarwal as their arbitrator, who was formerly an employee of the State.

The ICA vide Letter dated 03.08.2015 raised an objection to the arbitrator nominated by the Appellant –State on the ground that he was a retired employee of the State, and there may be justifiable doubts with respect to his integrity and impartiality to act as an arbitrator. The ICA advised the State to reconsider its nomination. The State refuted the objection raised by the ICA on the ground that there was no rule, which prohibited a former employee from being an arbitrator, and there could not be any justifiable doubt with respect to his impartiality since the nominee arbitrator had retired over 10 years ago.

Thereafter on 24.09.2015, G. F. Toll Road Pvt. Ltd. raised an objection regarding the independence and impartiality of the Appellant’s nominee arbitrator –Mr. M.K. Aggarwal.

The ICA vide its Letter dated 30.10.2015 reiterated that it has been firmly established that Mr. M.K. Aggarwal had a direct relationship with the State as its former employee, which may raise justifiable doubts as to his independence and impartiality in adjudicating the dispute. The ICA stated that it was in the process of appointing an arbitrator in place of Mr. M.K. Aggarwal and its decision shall be communicated to the Appellant. In response, the State vide Letter requested the ICA for a period of 30 days to appoint a substitute arbitrator.

Aggrieved by the appointment made by ICA of the nominee arbitrator, the State, filed an application under Section 15 of the Arbitration and Conciliation Act, 1996 (“the Act”) before the District Court, Chandigarh on the ground that the constitution of the arbitral tribunal was illegal, arbitrary and against the principles of natural justice.

THE ARBITRATION AND CONCILIATION ACT, 1996

15. Termination of mandate and substitution of an arbitrator.

(1) In addition to the circumstances referred to in section 13 or section 14, the mandate of an arbitrator shall terminate-

(a) where he withdraws from office for any reason; or

(b) by or pursuant to agreement of the parties.

(2)Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.

(3) Unless otherwise agreed by the parties, where an arbitrator is replaced under sub-section (2), any hearings previously held may be repeated at the discretion of the arbitral tribunal.

(4) Unless otherwise agreed by the parties, an order or ruling of the arbitral tribunal made prior to the replacement of an arbitrator under this section shall not be invalid solely because there has been a change in the composition of the arbitral tribunal.

The State also raised an objection before the Arbitral Tribunal under Section 16 on the issue of jurisdiction. The Respondent ICA vide its Letter dated 23.11.2015 informed the State that it had already appointed a nominee arbitrator on behalf of the Appellant, as well as the Presiding Arbitrator. On 08.12.2016, the arbitral tribunal ordered that it shall not hear the objection under Section 16 of the Act, and shall await the decision of the District Court, Chandigarh. The District Court vide its Order dated 27.01.2017 (“Order of the District Court”) held that the Petition was not maintainable, since the Arbitral Tribunal had been constituted, and an objection under Section 16 should be raised before the Tribunal to rule on its own jurisdiction.

THE ARBITRATION AND CONCILIATION ACT, 1996

Section 16: Jurisdiction

(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose-

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

Aggrieved by the Order of the District Court, the State filed a Civil Revision Petition before the Punjab and Haryana High Court, Chandigarh being C. R. No. 3279 of 2017. The learned Single Judge of the Punjab and Haryana High Court vide the impugned Order dated 01.03.2018 dismissed the Civil Revision Petition on the ground that the State could raise the issue of jurisdiction under Section 16 before the arbitral tribunal. Subsequent to the impugned Judgment being passed, the Application under Section 16 filed by the Appellant – State was dismissed by a non-speaking Order of the Arbitral Tribunal dated 12.05.2018.

Aggrieved by the Order dated 01.03.2018 and 12.05.2018, the Appellant – State has filed the present Petition. The High Court while considering the application under Section 15 failed to take note of the provisions of Section 15(2) of the Act.

Aggrieved by the Order dated 27.01.2017, the Appellant – State filed a Civil Revision Petition before the Punjab and Haryana High Court, Chandigarh being C. R. No. 3279 of 2017. The learned Single Judge of the Punjab and Haryana High Court vide the impugned Order dated 01.03.2018 dismissed the Civil Revision Petition on the ground that the Appellant –State could raise the issue of jurisdiction under Section 16 before the arbitral tribunal.

“It was further held that in a situation where an objection is raised regarding the nomination of an arbitrator by one of the parties, and the agreement is silent with regards to the mode of appointment of a substitute arbitrator, the rules applicable would be those of the Institution under which the arbitration is held. Therefore, in the facts of the present case, Rules 25 and 27 of the ICA Rules would apply.”

Section 15(2) provides that a substitute arbitrator must be appointed according to the rules that are applicable for the appointment of the arbitrator being replaced. This would imply that the appointment of a substitute arbitrator must be according to the same procedure adopted in the original agreement at the initial stage.

Section 15(2) of the Act reads as under :

15. Termination of mandate and substitution of arbitrator.— _

(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.”

(Emphasis supplied)

The provisions of Section 15(2) require that when the mandate of an arbitrator terminates either by his withdrawal from office, or pursuant to an agreement by the parties, or for any reason, a substitute arbitrator shall be appointed according to the rules applicable to the appointment of the arbitrator being replaced.

This Court in ACC Ltd. v. Global Cements Ltd. [1 (2012) 7 SCC 71] held that the procedure agreed upon by the parties for the appointment of the original arbitrator is equally applicable to the appointment of a substitute arbitrator, even if the agreement does not specifically provide so.

In the present case, Clause 39.2.2. of the agreement expressly provided that each party shall nominate one arbitrator, and the third arbitrator shall be appointed in accordance with the Rules of the ICA.

The Appellant –State had vide Letter dated 16.11.2015 requested for 30 days’ time to appoint another nominee arbitrator after objections were raised by the ICA to the first nomination. The ICA declined to grant the period of 30 days, and instead appointed the arbitrator on behalf of the Appellant–State. The ICA could have filled up the vacancy only if the Appellant – State had no intention of filling up the vacancy. The ICA could not have usurped the jurisdiction over the appointment of the nominee arbitrator on behalf of the State prior to the expiry of the 30 days period requested by the Petitioner.

The apprehension of the Respondents was hence unjustified since the test to be applied for bias is whether the circumstances are such as would lead to a fair-minded and informed person to conclude that the arbitrator was infact biased.

In Locabail Ltd. v. Bayfield Properties, the House of Lords held that: 2 2000 (1) All ER 65

“The greater the passage of time between the event relied on as showing a danger of bias and the case in which the objection is raised, the weaker (other things being equal) the objection will be.”

The Court of Appeal in Re Medicaments and related Classes of Goods (No.2) 3 while propounding the ‘real danger’ test for bias held that:

“The question is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the Tribunal was biased.”

Conclusion

The 1996 Act does not disqualify a former employee from acting as an arbitrator, provided that there are no justifiable doubts as to his independence and impartiality. The present case is governed by the pre-amended 1996 Act. Even as per the 2015 Amendment Act which has inserted the Fifth Schedule to the 1996 Act which contains grounds to determine whether circumstances exist which give rise to justifiable doubts as to his independence and impartiality. The fact that the arbitrator was in the employment of the State of Haryana over 10 years ago, would make the allegation of bias clearly untenable.

The present case is governed by the pre-amended 1996 Act. Even as per the 2015 Amendment Act which has inserted the Fifth Schedule to the 1996 Act which contains grounds to determine whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. The first entry to the Fifth Schedule reads as under:

The Arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.”

The Arbitrator’s relationship with the parties or counsel

(Emphasis supplied)

Entry 1 of the Fifth Schedule and the Seventh Schedule are identical. The Entry indicates that a person, who is related to a party as an employee, consultant, or an advisor, is disqualified to act as an arbitrator. The words “is an” indicates that the person so nominated is only disqualified if he/she is a present/current employee, consultant, or advisor of one of the parties.

An arbitrator who has “any other” past or present “business relationship” with the party is also disqualified. The word “other” used in Entry 1, would indicate a relationship other than an employee, consultant or advisor. The word “other” cannot be used to widen the scope of the entry to include past/former employees.

The ICA made only a bald assertion that the nominee arbitrator –Mr. M. K. Aggarwal would not be independent and impartial. In this view of the matter, the impugned judgment dated 01.03.2018 passed by the Punjab & Haryana High Court in C.R. No. 3279.2017 is set aside. The objection of reasonable apprehension of bias raised was wholly unjustified and unsubstantiated, particularly since the nominee arbitrator was a former employee of the State over 10 years ago. This would not disqualify him from an act as an arbitrator. Mere allegations of bias are not a ground for removal of an arbitrator. It is also relevant to state that the appointment had been made prior to the 2015 Amendment Act when the Fifth Schedule was not inserted. Hence, the objection raised by the ICA was untenable on that ground also.


Reference

  1. Concessions, Build-Operate-Transfer (BOT) and Design-Build-Operate (DBO) Projects PPP Public Private Partnership Legal Resource Centre, World Bank;
  2. Ramrao Mundhe, Infrastructure Concession Contracts: An Introduction; CUTS International (02 July 2008)
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