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Status of Arbitration Clauses in Government Contracts

Upon browsing through a contract shared by Government authorities in India, one is most likely to come across an arbitration clause, which is worded in a manner to have Government nominated persons adjudicate the dispute as arbitrators, such has been the common norm. The inclusion of such arbitrators, is likely to give rise to apprehension of bias, which defeats the purpose of opting for speedy remedy by Arbitration vis-à-vis the traditional method of litigation before Courts. The present article focuses on the changes that have been brought to the validity of the Arbitration clauses through the recent judicial decisions on the subject matter.

BACKGROUND

The Arbitration and Conciliation Act, 1996 based on the the UNCITRAL Model Law for International Commercial Arbitration, 1985 casts a duty on the Courts to appoint arbitrators who are impartial and independent in their demeanour if the parties fail in the appointment of arbitrators.

In respect of the biased arbitration clause in government contracts, the earlier view[1] was that if the named arbitrator is a government employee, it is not ipso facto a ground to raise presumption of bias, or partiality, or lack of independence on his part. However, the Supreme Court advised that the government and statutory bodies should try to phase out arbitration clauses which name employees as arbitrators[2]. The Supreme Court while recognizing the well-established principle that appointment is required to be done as per the terms and conditions of the contract, held that if circumstances exist an independent Arbitrator may be appointed as an exception to the general rule, if there is reasonable apprehension of bias and impartiality[3].

Therefore to counter such apprehension of biases, the Law Commission[4] proposed inclusion of the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, in the form of schedules to the Act. Subsequently, the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016), and the following significant changes were made in the grounds for challenge of an arbitrator:

  • Section 12(1), which mandates an arbitrator to disclose in writing existence of any direct/indirect, past or present relationship with any of the parties to such dispute, which may raise justifiable doubts as to his impartiality and the Schedule V to the Act, provides guidance on what constitutes such ‘justifiable doubts’;
  • Section 12(5) and Schedule VII, which specifies certain categories that render an arbitrator ineligible to act.

POST 2015 AMENDMENT

That based on the amendments, three basic principles emerge which need to be defined in reference to arbitration clauses in government contracts/ tenders, firstly whether former employees can act as arbitrators, secondly whether the choice of nominating an arbitrator removes chances of biasness, and thirdly can an ineligible/ disqualified person appoint his nominee as a director.

FORMER EMPLOYEES AS ARBITRATORS

Section 12(5) read along with paragraph 1 of Schedule 7 of the Act deals with the appointment of employees as arbitrators. Section 12 (5) states 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 Seventh Schedule shall be ineligible to be appointed as an arbitrator…” and

Paragraph 1 of Schedule 7 states that “The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with the party.”

The Hon’ble Supreme Court of India had the occasion to consider the issue in the Government of Haryana PWD Haryana (B and R) Branch v. M/s G.F. Toll Road Pvt. Ltd. & Ors.[5] held that as per the first entry in Fifth Schedule of the Act there was a clear bar to a current employee from acting as an arbitrator, there is no automatic bar in the case of an ex-employee, and that this would have to be tested under the standard of reasonable apprehension of bias.

ARBITRATORS – BROAD BASED PANEL

In situation where both parties to an arbitration agreement are provided with the option to nominate their respective arbitrators from a list, the chances of biasness are countered with the choice offered to both the parties in nominating their respective arbitrators. The Supreme Court dealt with the question of choosing an arbitrator from a panel selected by a party, for the first time in Voestalpine Schienen GmbH vs. Delhi Metro Rail Corporation Ltd,[6] the Supreme Court in the said matter struck down the procedure holding that it is imperative that a panel should be ‘broad based’ in nature, while emphasizing the importance of neutrality, impartiality and independence in such cases.

However subsequently a full bench of the Supreme Court in Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCML[7], upheld an agreement wherein the tribunal was to comprise three serving and / or retired Railway Officers, where one arbitrator would be chosen by Contractor from a panel of Railway Officers prepared by Petitioner’s general manager who also had the right to appoint the other two arbitrators, including the presiding arbitrator. The Supreme Court held that appointing the tribunal was counterbalanced by the Respondent’s right to select its nominee from the panel of retired Railway Officers prepared by the Petitioner.

INELIGIBLE ARBITRATOR CANNOT APPOINT A NOMINEE

The disqualification of an arbitrator under Section 12(5) read with the Seventh Schedule of the Act extends to any contractual right he might have to nominate another person as the arbitrator in such arbitration.

The Supreme Court in TRF Limited v Energo Engineering [8] held that a general manager who is disqualified/ ineligible is allowed to nominate an arbitrator then it would be tantamount to the ineligible arbitrator carrying on the proceeding of arbitration by proxy. In order to bar the same, it was held that once an arbitrator has become ineligible by operation of law, he cannot nominate another person as an arbitrator. Subsequently, in Perkins Eastman Architects v HSCC (India)[9], the Supreme Court while relying on the judgement in TRF limited case held that a procedure where an employee of one party has the right to appoint a sole arbitrator also as invalid. 

CONCLUSION

Thus, it can concluded that a former employees are not expressly barred to be appoint as Arbitrators in the matters of the departments in which they have provided services.

Though the order in Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCM, has certainly raised a question in view of the ruling that ineligible party may have a right to choose the Arbitrator, if the other side is given an option to nominate its arbitrator, thereby again giving rise to cleverly drafted arbitration clauses, which are likely to be biased. 

Also, based on the lack of clarity it can be assumed at the stage that the test of a ‘broad based panel’ is not dependent upon the number of arbitrators but, upon the diversity in the expertise of the professionals comprising a panel which renders such a panel to be ‘broad based’ in nature. Further, the possibility that any strait jacket formula is devised for such a broad based panel seems highly likely, as it would have to be seen on case to case basis.

Though, the decisions in Perkins east has provided some clarity regarding the validity of appointment procedures as it invalidates a procedure where one party or an employee of one party has the unilateral right to appoint the sole arbitrator.

For more information on Arbitration clauses in Government Contracts, please write to us at info@ssrana.com or submit a query.

To know more about Arbitration Law in India, read:

Domestic Arbitration in India

International Arbitration


[1] Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd. (2009) 8 SCC 520.

[2] Union of India v. M/S Singh Builders Syndicate(2009) 4 SCC 523

[3] Denel Proprietary Ltd. v. Govt. of India, Ministry of Defence (2012)2SCC759

[4] 246th Law Commission of India Report (2014)

[5] (2019) 3 SCC 505

[6] (2017) 4 SCC 665

[7] 2019 SCC OnLine SC 1635

[8] (2017) 8 SCC 377)

[9] 2019 SCC OnLine SC 1517

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