#Columns: Towards a more independent, impartial arbitration process

by Dr. Amit George

When the Arbitration and Conciliation Act, 1996 was enacted, it set out to radically redefine the arbitration regime in India when compared to the archaic and outdated provisions of the Act it replaced, i.e. the Arbitration Act, 1940. However, while the 1996 Act was successful in alleviating a variety of the short-comings of the 1940 Act, there were certain areas where this success was elusive.

One of these critical areas was the independence and impartiality provision concerning arbitrators enshrined in Section 12 of the 1996 Act. While Section 12 did establish a normative requirement for the independence and impartiality of arbitrators, its articulation of the exact parameters and objective criteria against which to test this requirement was woefully inadequate.

It resulted in a party that was saddled with an otherwise seemingly biased arbitrator being faced with an almost impossible task of being able to challenge the appointment of such an arbitrator. The net result was that one of the pillars of the 1996 Act viz. fair trial by an impartial tribunal[i], was seriously compromised.

It was precisely to rectify this ineffective independence and impartiality provision in the 1996 Act, that the amended Section 12 introduced by the Arbitration and Conciliation (Amendment) Act, 2015 prescribed stringent and exhaustive tests to objectively determine independence and impartiality. This amended provision has already been the subject matter of interpretation by various High Courts. A pronouncement from the Supreme Court had been elusive thus far, till the recent decision in the case of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.

The Supreme Court in the aforesaid case was concerned with a petition for appointment of an arbitral tribunal under Section 11 of the 1996 Act as amended by the Amendment Act. Clause 9.2(A) of the contract prescribed a procedure for constitution of the arbitral tribunal as per which the Delhi Metro Rail Corporation (DMRC) was required to forward the names of five persons from its panel to Voestalpine Schienen GmbH (‘Voestalpine’), which was in turn required to select its nominee arbitrator from the said list of five names.

However, the names forwarded by the DMRC, and the panel from which they were sourced, comprised primarily of serving or retired government engineers albeit from various different departments. Voestalpine challenged the names forwarded, as also the composition of the panel, on the ground that with the amendment of Section 12 of the 1996 Act by the Amendment Act, all such persons were ineligible to be appointed as arbitrators.

The Supreme Court rejected the argument that a retired government employee would be ineligible to be appointed as an arbitrator in an arbitration concerning a public undertaking, stating,

“It cannot be said that simply because the person is retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (party in dispute), he would be treated as ineligible to act as an arbitrator.

Had this been the intention of the legislature, the Seventh Schedule would have covered such persons as well…The very reason for empanelling these persons is to ensure that technical aspects of the dispute are suitably resolved by utilizing their expertise when they act as arbitrators.”

The Supreme Court thus unequivocally held that the mere fact that a prospective arbitrator had retired as a government official would not ipso-facto lead to a conclusion that he or she would be ineligible to be appointed in an arbitration concerning a government undertaking. However, in its judgment the Supreme Court did take note of the fact that the persons so proposed by the DMRC did not have any connection with the DMRC during their term of employment with the government.

The Supreme Court rejected the petition of Voestalpine on the further ground that the entire expanded panel of 31 names maintained by the DMRC had been made available to Voestalpine, for it to choose a nominee arbitrator, during the course of proceedings.

However, having done so, the Supreme Court proceeded to add a very important and far-reaching postscript to its judgment. The postscript proscribed what could have been the likely abuse of the permissiveness displayed by the Court as regards retired government officials acting as arbitrators.

The Supreme Court made two telling observations in this regard.

Firstly, the Supreme Court expressly faulted the mechanism of limiting the choice of names from which a party could select its nominee arbitrator especially when this curated list was prepared by the other party to the agreement. The Supreme Court observed as under in this regard:

“Even when there are number of persons empaneled, discretion is with the DMRC to pick five persons therefrom and forward their names to the other side which is to select one of these five persons as its nominee (Though in this case, it is now done away with).

Not only this, the DMRC is also to nominate its arbitrator from the said list. Above all, the two arbitrators have also limited choice of picking upon the third arbitrator from the very same list, i.e., from remaining three persons. This procedure has two adverse consequences.

In the first place, the choice given to the opposite party is limited as it has to choose one out of the five names that are forwarded by the other side. There is no free choice to nominate a person out of the entire panel prepared by the DMRC.

Secondly, with the discretion given to the DMRC to choose five persons, a room for suspicion is created in the mind of the other side that the DMRC may have picked up its own favourites. Such a situation has to be countenanced.

We are, therefore, of the opinion that Sub-clauses (b) & (c) of Clause 9.2 of SCC need to be deleted and instead choice should be given to the parties to nominate any person from the entire panel of arbitrators. Likewise, the two arbitrators nominated by the parties should be given full freedom to choose third arbitrator from the whole panel.”

Secondly, the Supreme Court stressed the need for the constitution of a broad-based panel comprising persons from varied backgrounds such as the private sector, the judiciary etc. The Court in fact issued a specific direction to the DMRC to prepare such a panel within a period of two months from the date of the judgment. The relevant observations of the Court in this regard are as under:

“…Keeping in view the spirit of the amended provision and in order to instill confidence in the mind of the other party, it is imperative that panel should be broad based.

Apart from serving or retired engineers of government departments and public sector undertakings, engineers of prominence and high repute from private sector should also be included.

Likewise panel should comprise of persons with legal background like judges and lawyers of repute as it is not necessary that all disputes that arise, would be of technical nature. There can be disputes involving purely or substantially legal issues, that too, complicated in nature…

…It, therefore, becomes imperative to have a much broad based panel, so that there is no misapprehension that principle of impartiality and independence would be discarded at any stage of the proceedings, specially at the stage of constitution of the arbitral tribunal…”

A common refrain that is usually expressed on the occasion of a new legislation being introduced in India, is that practices and strategies would invariably evolve within a short period of time to blunt the enforcement of the stated aims and objectives of the new enactment at the ground level.

While considering such a practice under the un-amended 1996 Act when a government undertaking had appointed its own employee as an arbitrator, the Supreme Court had expressed its strong displeasure in Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd. The Court had however, without striking down the practice, ultimately urged for introspection at the hands of the government undertakings concerned. The hope for voluntary reform that had informed the Supreme Court’s judgment in Raja Transport (Supra) was however belied as the practice continued unabated and in fact gained a modicum of acceptance from the Court’s refusal to expressly strike it down.

The judgment of the Supreme Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., however goes the whole nine yards, and expressly strikes down such a strategy of packing a panel of prospective arbitrators with ‘cherry picked’ nominees and thus rendering the notions of free choice and independence and impartiality as enshrined under the Amendment Act as totally illusory.

The Supreme Court has made it clear, and rightly so, that feigning mere textual conformity with the provisions of independence and impartiality as enshrined in the Amendment Act, 2015 while simultaneously violating the true intent and spirit of the provisions, would not pass judicial muster.

Read the judgment:

Voestalpine_Schienen_GmbH_vs_Delhi_Metro_Rail_Corporation_Ltd_10022017__SC_1

 Dr. Amit George is a an advocate practicing in Delhi.