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The Madras High Court on Monday had the occasion to reiterate the requirements to be borne in mind in the appointment of arbitrators to ensure the independence of the arbitrator in the case of M/s. JV Engineering Associate Civil Engineering Contractors v. General Manager, CORE, Allahabad.
While allowing pleas filed challenging arbitral awards passed by Deputy Chief Electrical Engineer, a railways employee in a dispute involving the railways, Justice PT Asha also observed,
Section 12 (5) of the Arbitrator and Conciliation Act, 1996 read with Schedule VII of the Act deals with persons who are ineligible to be appointed as arbitrator.
In the case at hand, the sole arbitrator for disputes arising between the railways and certain contractors was a railway employee appointed by the Chief Engineer of the railways itself.
In a plea challenging the dismissal of claims made by the contractors before this arbitrator, a preliminary objection was raised by the petitioner-contractors that the arbitral tribunal in this case was appointed in violation of Section 12 (5) of the Arbitration Act.
This provision bars persons who are connected with the dispute from being appointed as an arbitrator. However, the proviso to sub clause (5) provides an exception, in that the parties to the dispute can waive the applicability of this provision by express agreement in writing.
"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."
Section 12 (5) of the Arbitration Act, 1996
The Court explained:
"… the proviso to this sub section makes an exception, provided the following three circumstances exist namely:
The disputes have arisen between the parties;
Parties have waived the bar under the sub section;
Such waiver should be by an express indication in writing."
The Court emphasised that even if there is an agreement allowing one of the parties to appoint the arbitrator, the provisions of Section 12(5) will have to be mandatorily complied with.
“Sub section 5 [of Section 12] opens with a non obstante clause which stipulates that although parties have entered into an agreement giving right to one party to appoint an Arbitrator, even in such cases, the relationship of the Arbitrator with any of the parties or counsel or subject matter of the dispute comes within the VII Schedule, he becomes ineligible for being appointed as a Arbitrator. Unlike Section 12 Sub section 1 (a), Sub section 5 is a clear bar.”
The Court proceeded to refer to various recent judgments of the Supreme Court, including Voestalpine Schienen GMBH Vs. Delhi Metro Rail Corporation Limited, TRF LTD Vs. Energo Engg. Projects Ltd, Perkins Eastman Architects DPC VS. HSCC (India) Ltdto recount that:
there is a general embargo on a person who is an employee of the party to the dispute to act as an Arbitrator.
if the person nominating the Arbitrator himself is ineligible on account of him being an employee of the party in dispute, then the Arbitrator appointed by him would also be ineligible to be appointed in terms of Schedule VII (1) of the 1996 Act. In other words, if the appointing authority is himself ineligible by operation of the law to a Arbitrator, he cannot nominate an Arbitrator.
In view of these observations, the Court proceeded to set aside the arbitral award challenged, finding that the arbitrator in this case ought note to have been appointed. The Judge said,
“… taking into consideration the legislative intent and the judicial pronouncements narrated supra it is clearly evident that the Arbitrator who had entered the reference in the instant case is ineligible on three grounds:
The general conditions of the contract does not contain the amendments which have been brought about to clauses 64 (3) (a) (ii) and 64 (3) (b) as contemplated in the Judgement in 2019 SCC OnLine SC 1635 - Central Organisation for Railway Electrification Vs. ECI-SPIC-SMO-MCML and therefore the authority appointing the arbitrator was also ineligible.
The arbitrator is an employee of the respondent Railways and therefore falling within the bar contemplated under Section 12 (5) read with schedule VII (1) of the 1996 Act.
There is no express waiver in writing by the petitioner of the bar imposed under Section 12 (5) of the 1996 Act.”