Bombay High Court
Itd Cementation India Limited vs Konkan Railway Corporation Limited on 12 December, 2019
Equivalent citations: AIRONLINE 2019 BOM 2877
Author: G.S.Kulkarni
Bench: G.S. Kulkarni
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
Commercial Arbitration Petition No. 1106 OF 2018
ITD Cementation India Ltd. ...Petitioner
Versus
Konkan Railway Corporation Ltd. ...Respondent
AND
Commercial Arbitration Petition No. 1107 OF 2018
ITD Cementation India Limited. ...Petitioner
Versus
Konkan Railway Corporation Limited. ...Respondent
----
Dr.Birendra Saraf with Mr.Raj Panchmatia, Ms.Jyoti Sinha, Mr.Himanshee
Vidhani and Mr.Varun Mansinghka i/b. Khaitan & Co., for the Petitioner.
Ms.Kiran Bagalia with Subhash Gutle, Mushraf Shaikh, for the
Respondent.
-----
CORAM : G.S. KULKARNI, J.
Dated : 12 December 2019
Judgment:
1. These are two applications under Sections 11(6) read with Section
14(2) and 15(2) of the Arbitration and Conciliation Act,1996 (for short
'the Arbitration Act') whereby the petitioner has prayed that it be declared
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that the mandate of the "standing arbitral tribunal" constituted under the
agreement between the parties stands terminated and has further prayed
for appointment of an arbitral tribunal for adjudication of present and
future disputes between the parties arising under the agreement between
the parties, in accordance with the provisions of the Arbitration Act as
amended.
2. The prayers in both these petitions are identical. It would be
appropriate to note the prayers as made in one of the petitions
(Commercial Arbitration Petition no.1106 of 2018) which reads thus:-
(a) that this Hon'ble Court in exercise of its powers under
Section 14(2) of the Arbitration and Conciliation Act,1996 be
pleased to hold that the mandate of the present Standing Arbitral
Tribunal constituted under the Agreement, has been terminated;
(b) that this Hon'ble Court in exercise of its powers under
Section 11(6) read with Section 15(2) of the Arbitration and
Conciliation Act,1996 be pleased to take necessary steps to appoint
an arbitral tribunal to adjudicate upon the all present and future
disputes between the parties under the agreement, in accordance
with the procedure agreed upon between the parties and the
provisions of the Arbitration and Conciliation Act,1996, as
amended;"
3. As the parties have advanced arguments on the above petition, it
would be appropriate to refer to the facts in Commercial Arbitration
Petition no.1106 of 2018.
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4. In nutshell the facts are:
The petitioner is a company incorporated under the Companies Act,
1956 interalia engaged in the business of construction and infrastructure.
Respondent-Konkan Railway Corporation is a Government Company.
Respondent had issued a tender for the work of construction of tunnels
namely "T1 on the Katra-Dharam section of the Udhampur-Srinagar-
Baramulla, New B.G.Rail Link Project" in the State of Jammu and Kashmir.
The petitioner was a successful bidder and was awarded the contract for
the said work. A contract agreement dated 24 September 2014 came to
be executed between the petitioner and the respondent which interalia
contained general and special conditions of contract. A clause for dispute
resolution was provided, being Clause 55 of the Special Conditions of the
Contract, whereunder the parties agreed for reference of the disputes to
arbitration by forming a "standing arbitral tribunal". Clause 55 which
provides for composition of a "standing arbitral tribunal" reads thus:-
55.0 Standing Arbitral Tribunal
55.1 The Arbitral Tribunal shall consist of a panel of three
Gazetteed Rly. Officers not below JA Grade, or two Railway
Gazetted Officers not below JA Grade and a retired Railway
Officer,retired not below the rank of SAG Officer as the Arbitrators.
The Standing Arbitral Tribunal shall be formed within three months
from the date of the execution of the Contract. For this purpose, the
Corporation will send a panel of more than 3 (Three) names of
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Gazetted Rly. Officers of one or more departments of the Railway,
which may also include the name (s) of Retired Railway Officers to
the contractor from the panel approved by Northern Railway.
Within two weeks from the receipt of the list, the Contractor shall
intimate in writing two names from the said list to the Chairman
and Managing Director KRCL. The Chairman and Managing
Director/KRCL shall appoint at least one out of them as the
contractor's nominee and will also simultaneously appoint the
balance number of arbitrators from the panel approved by Northern
Railways duly indicating the presiding Arbitrator from amongst the
3 Arbitrators so appointed. While nominating the Arbitrators, it will
be necessary to ensure that one out of them is from the Accounts
department.
55.5 Reference to Arbitration
55.5.1. In partial modification of Clause 43 of the Standard
General Conditions of Contract of Northern Railway, the
Contractor has to prepare and furnish to the Engineer-in-charge
and to Chief Engineer of Project once in every six months an
account giving full and detailed particulars of all the claims for any
additional expenses, to which the contractor may consider himself
entitled to and all extra or additional works ordered by the
engineer which he has executed during the preceding six months. If
any dispute has arisen as regards execution of the works under the
contract, while submitting the said half yearly claims, the
contractor shall give full particulars of such dispute in the said
submission. After signing Contract Agreement, within six months,
contractor shall submit all the claims from the date of award of
contract in first submission of claims.
55.5.2 The Contractor will submit a copy of the half yearly
claims under 55.5.1 to the Chief Engineer, along with particulars of
any other disputes which may have arisen between the parties in
respect of the execution of the contract to the Arbitral Tribunal.
55.5.3 The parties shall submit all the relevant documents in
support of their claims and the reasons for raising the dispute to
the TRIBUNAL.
55.5.4 If the claims made by the Contractor in the said submission
to Chief Engineer is refuted or the payment is not made within one
month from the date of the submission of the said half yearly
claims, a dispute would be deemed to have arisen between the
parties. The contractor, within one month from the date when the
dispute arises or is deemed to have arisen, will communicate to the
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Arbitral Tribunal on a half-yearly basis of the said
refusal/nonpayment. The said communication will be the reference
of the dispute to the ARBITRAL TRIBUNAL appointed under the
present agreement.
55.5.5 The said claims of the contractor so referred to ARBITRAL
TRIBUNAL so far as it relates to the disputed claims, shall be
treated as Statement of Claims of the Contractor and the ARBITRAL
TRIBUNAL shall call upon KRCL to submit its reply. The ARBITRAL
TRIBUNAL after giving an opportunity of being heard to both
parties, decide the dispute within a period of two months from the
date of communication of the dispute under clause 55.5.3 above.
The Arbitral Tribunal will pass a reasoned award in writing, while
deciding the Dispute. Once the award is declared, the Arbitral
Tribunal cannot review the same except what is permissible in
terms of provisions contained in Arbitration and Conciliation Act,
1996. The parties shall be entitled to the remedies under the
Arbitration and Conciliation Act, 1996 or any amendment thereof.
56. Settlement through court
56.1 It is a term of this contract that the Contractor shall not
approach any Court of Law for settlement of such disputes or
differences unless an attempt has first been made by the parties to
settled such disputes or differences through clauses 55.0 above.
56.2. The contract shall be governed by the law for the time being
in force in the Republic of India. In case of any
disputes/differences resulting in court cases/ between contractor &
KRCL the jurisdiction shall be of courts at Mumbai only."
5. In terms of the above clauses, after execution of the contract
agreement, the respondent by its letter dated 3 February 2015 forwarded
to the petitioner a panel of arbitrators (comprising of four names) and
requested the petitioner to suggest two names out of the said panel one of
whom can be appointed as the petitioner's nominee on the Standing
arbitral tribunal. The petitioner by its letter dated 12 February 2015
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informed the respondent of it s choice of two names from the said panel.
6. Respondent thereafter formed a standing arbitral tribunal,
comprising of Mr.P.K.Aggarwal - Presiding Arbitrator, Mr.Rajkumar Sarkar
- petitioner's nominee and Mrs.Preeti Jha- Respondent's nominee. The
petitioner has contended that two of the appointed arbitrators were
serving employees of the Northern Railways.
7. In executing the contractual work, the petitioner had addressed
various communications to the respondent and more particularly letters
dated 17 April 2015 and 3 June 2016 with regard to the revision in the
applicable toll tax cost being levied pursuant to the notification dated 31
March 2015 and 30 May 2016 issued by the Government of Jammu and
Kashmir. Petitioner had requested the respondent to reimburse the
petitioner, the amount of additional toll tax incurred by the petitioner.
8. The petitioner also by its letter dated 26 August 2016 requested the
respondent to furnish reasons for the respondent deducting excess works
contract tax, based on the Jammu and Kashmir General Sales Tax Act,
1962, in lieu of the work carried out by the petitioner under the contract
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agreement, over and above the petitioner's contractual liability.
Thereafter, correspondence exchanged between the parties. The petitioner
made a grievance to the respondent that the deduction of this amount was
severely hampering the cash flow and general progress of the work under
the agreement and demanded release of the amounts.
9. Thereafter, the petitioner by its letter dated 30 August 2016
informed the respondent about complete stoppage of all tunneling
activities under the contract agreement since 28 August 2016 owing to a
cavity formation at TIP2 tunnel face. It was highlighted that stoppage of
the work was beyond the control of the petitioner. Further by its letter
dated 3 January 2017 the petitioner appraised the respondent of the
various steps which were taken towards resumption of tunneling activity
consequent to formation of cavity at TIP2 tunnel phase. The petitioner
also informed the respondent of additional cost incurred as a result of
tunnel collapse at tunnel face at TIP2 and that only an amount of Rs.2.43
crores was received from the respondent by the petitioner and substantial
amounts being outstanding towards the balance un-recovered cost payable
by the respondent. A half yearly statement of claim for the period ending
31 December 2018 came to be submitted by the petitioner to the
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respondent by petitioner's letter dated 14 February 2017 with a request to
the respondent to release pending dues owed to the petitioner.
10. The petitioner contends that due to repeated tunnel collapse during
the period August 2016 to September 2016 and further tunnel collapse
during February 2017 to October 2017 in all there being six major tunnel
collapses, the petitioner was constrained to take urgent remedial measures
to work on the instances and for prevention of future instances. For this
the petitioner had incurred huge additional cost which according to the
petitioner were in the best interest of the project. The petitioner contends
that repeatedly the respondent was informed of the additional
expenditure incurred and the serious financial crunch being faced by the
petitioner and that despite these difficulties the petitioner had continued
to work as the project was of national importance. The petitioner
contended that the payment however was withheld by the respondent
despite repeated requests to the respondent to release these payments.
11. The petitioner has contended that time for completion of the project
was also extended which was however for reasons beyond the petitioner's
control. Despite the same, the petitioner was unable to reduce its staff and
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minimise the loss in view of Clause 48.4 of Special conditions of contract
which entitled the respondent to recover the amounts from the petitioner
on monthly basis in case the petitioner did not deploy the minimum staff
at site.
12. As there was no response from the respondent to the petitioner in
regard to the petitioner's correspondence on release of payments and to
clear the outstanding dues, the petitioner by its letter dated 5 July 2017
informed the respondent that as the dues were not cleared, the dispute
relating to non payment of the dues be referred to arbitration. In this
letter the petitioner also made specific reference to the amendments under
the Arbitration and Conciliation (Amendment) Act, 2015 and the decision
of the Supreme Court on eligibility of the arbitrators as held in Voestalpine
Schienen GmbH Vs. Delhi Metro Rail Corporation Ltd. 1, and requested the
respondent to provide the entire list of arbitrators on the panel maintained
by the respondent alongwith their qualifications and professional
experience. The petitioner states that thus there was no favourable reply
to this letter from the respondent.
1 (2017)4 SCC 665
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13. Thereafter, the petitioner by its letter dated 13 February 2018
submitted its statement of claim to the respondent for the period ending
31 December 2017 with all details and supporting documents. The
petitioner requested the respondent to clear the outstanding dues
approximately Rs.3455.73 lacs on account of these claims. The petitioner
has contended that the entire claims alongwith the interest thereon has
remained unpaid, as despite the petitioner's letter dated 13 February 2018
respondent had failed to take any steps. As no reply was received to the
petitioner's letters dated 5 July 2017 and 13 February 2018 and the
respondent not having taken any steps in accordance with the amended
provisions of the Act, for appointing an arbitral tribunal to adjudicate
upon the disputes between the parties, the petitioner has filed the present
petition.
14. The petitioner has contended that the current members of the
standing arbitral tribunal namely Mr.P.K.Aggarwal-Presiding Arbitrator,
and Mrs.Preeti Jha-Respondent's nominee, are existing employees of
Indian Railways (as part of the Northern Railways, a functional division of
Indian Railways) and as such are working under the Indian Railways. As
regards the third member Mr.Satya Pal, the petitioner has contended that
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he is also a former employee of Indian Railways (as a part of South
Central Railways, functional division of Indian Railways). The petitioner
contends that neutrality, impartiality and independence of the present
members of the standing arbitral tribunal is likely to be compromised, in
the event the present members of the standing arbitral tribunal arbitrate
upon the disputes between the petitioner and respondent.
15. It is contended by the petitioner that the respondent is an
undertaking of the Indian Railways and entirely under its authority,
Supervision, and control. It is contended that an "affiliate" entity is
defined under the Seventh Schedule of the Act as amended, to encompass
"all companies in one group of companies including the parent company".
The petitioner has contended that on account of current shareholding of
51% of the Indian Railways in the share capital of the respondent, the
Indian Railways qualifies as the parent entity of the Respondent and
hence, is an "affiliate" of the respondent. The petitioner referring to sub-
section (5) of Section 12 of the Act contends that the spirit of the non-
obstante clause as incorporated by the 2015 Amendment Act is to ensure
neutrality in the arbitration proceedings. It is contended that
notwithstanding the fact that the source of arbitrator's appointment is
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deduced from the contract and has been explicitly agreed between the
contracting parties, the appointment of an arbitrator must nonetheless
withstand the test of impartiality and independence as the Act would
prescribe. The petitioner also contends that Section 12(5) read with
Seventh Schedule makes it clear that if an arbitrator falls in any one of the
categories specified in the Seventh Schedule, such arbitrator becomes
ineligible to act as arbitrator. Once such ineligibility is established, then he
becomes de jure unable to perform his functions within the meaning of
Section 14(1)(a) of the Act. It is thus contended that the mandate of
ineligible arbitrator's appointment is liable to be terminated pursuant to
Section 14(2) of the Act as amended. The petitioner contends that in the
light of the respondent's continued failure and neglected to undertake
steps to ensure appointment of arbitral tribunal in compliance with the
provisions of the Act as amended, the prayers as made in the petition
ought to be granted.
16. A reply affidavit has been filed on behalf of the respondent. The
respondent at the outset has contended that the petitioner was earlier
awarded construction of T6, T10, T11, T12 and T19 contractual work in
respect of Udhampur Srinagar Baramullah Rail Link project under an
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agreement dated 18 October 2010. It is contended that the said contract
also provided for standing Arbitral Tribunal during the execution of the
contract and for resolution of all the disputes between the parties under
Clause 56. The said arbitration agreement also provided for panel of three
or more gazetted railway officers not below JA grade or two railway
Gazetted Officers not below JA grade and a retired Railway Officer, who
retried not below the rank of SAG officer from the panel approved by the
Northern Railway. There was also a procedure that a list of at least three
names of the Gazetted Railway officers from the panel approved by the
Northern Railway should be sent to the contractor and the contractor was
required to intimate two names from the said list, out of which the
Managing Director of the respondent shall appoint one, as contractor's
nominee and simultaneously appoint the remaining arbitrators indicating
the name of Presiding Arbitrator. It is contended that the present
agreement was signed by the petitioner without demur and following the
procedure as contained in the said agreement, an arbitral tribunal of
Mr.P.K.Agarwal, Mr.Satya Pal and Mr.Ajit Kumar was constituted and
intimated to the petitioner on 25 February 2015. It is stated that one of
the arbitrator Mr.Ajit Kumar retired and in his place the respondent
appointed Ms.Preeti Jha and the petitioner was so informed by
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respondent's letter dated 8 February 2016.
17. The respondent has contended that after the dispute arose between
the parties, the constituted arbitral tribunal is available. It is contended by
the respondent that the present arbitral tribunal, after retirement of
Mr.Ajit Kumar has been reconstituted in the year 2016 and thus after the
amendment of the Arbitration Act and after the dispute had arisen, the
parties have accepted the constitution of the arbitral tribunal in
accordance with the agreed terms.
18. The respondent has contended that the railway is one of the largest
employer in India, next to the Indian Army. The railway engineering is a
special class of engineering and specially the Udhampur Srinagar
Baramulla Rail Link is a project one of its kind in Asia. It is contended
that from the thousands of employees of the Indian Railways, a
proposition that a railway officer merely because he is in the employment
of the Railways would be a biased arbitrator, is only imaginary and
baseless. It is contended that the agreed procedure for constitution of
arbitral tribunal does not offend the provisions of Section 12(5) of the
Amended Act. The respondent has contended that the Northern Railway
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had circulated to the petitioner vide respondent's letter dated 11 August
2017 a panel of names consisting of serving officers of Northern Railway,
Central Railway and other Railway Zones, Retired Officers (Finance-SAG
and above), Retired Officers (Engineering SAG and above). The
respondent has also contended that the list consists of members of
Railway Board, Chief Engineers, Chief Executive Officers, FA & CAOs, the
Director/Executive Director (Finance) etc. and that there are officers also
from other PSUs like IRCON, the Chief Safety Officers who are
independent officers of Aviation department. It is contended that a bare
perusal of these lists would show very high ranking officers having
expertise are being appointed and that none of the officers are even
remotely involved in execution of the contract. Hence, there is no reason
for any apprehension that the members of the panel being biased or not
independent. It is stated that the members of the panel are not covered in
any of the embargo created under Section 12 of the Act who would have
any influence on the contractual work. The respondent has contended
that the Courts have consistently held having named arbitrators from the
same department or Government servants does not prove any bias or
partiality. Thus the contention as urged on behalf of the petitioner that the
arbitral tribunal as constituted, is hit by the provisions of Section 12(5) of
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the Act, according to the respondent, is completely misconceived.
19. A rejoinder affidavit has been placed on record on behalf of the
petitioner denying the contentions as urged in the reply affidavit of the
respondent. Referring to the decision of the Supreme Court in
"Voestalpine Schienen GMBH Vs. Delhi Metro Rail Corporation" (supra) it
is contended that a broad panel of arbitrators to be provided is what is
expected from the respondent to have neutrality and impartiality of the
arbitral process.
20. It is on the above pleadings, I have heard the learned Counsel for
the parties.
Submissions on behalf of the Petitioner.
21. Dr.Saraf, learned Counsel for the petitioner has made the following
submissions:-
(i) The standing arbitral tribunal constituted in accordance with clause
55 of the contract is violative of Section 12(5) of the Act as amended by
the 2015 Amendment Act, as the tribunal is formed from a restricted list
out of a panel comprising only of existing/retired railway employees. In
doing so the respondent is obliged to give to the petitioner a panel of only
three names of Gazetted Railway Officer who may include retired officers
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from which the petitioner is expected to select two nominees and out of
the two nominees so selected, the Chairman and Managing Director of the
respondent to appoint at least one person as nominee on behalf of the
petitioner. It is submitted that this apart the Managing Director is required
to appoint one more person from the restricted list as a nominee on behalf
of the respondent. It is the Managing Director himself who appoints the
third arbitrator from the said restricted list. Thus, the standing arbitral
tribunal formed by following the said procedure under Clause 55 raises
justifiable doubts about independence and impartiality of the arbitral
tribunal.
(ii) It is submitted that the reference of disputes to arbitration is distinct
and different from the formation of the tribunal and it takes place every
six months. Each dispute is a separate reference which is evident from
reading of clause 55.5 and in particular Clause 55.5.4 which in no
uncertain terms provides ".... ... .. The said communication will be the
reference of the dispute to the Arbitral Tribunal appointed under the
present agreement". It is submitted that it is incumbent upon the
respondent to follow the directions and guidelines as laid down by the
Supreme Court in the case Voestalpine Schienen GMBH Vs. Delhi Metro
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Rail Corporation"(supra) and cannot compel the petitioner to first refer
the dispute to an arbitral tribunal which was constituted contrary to the
said guidelines. It is contended that the Supreme Court in paragraphs 26
and 27 of this decision while holding that appointment of former
Government employees was in violation of Section 12 of the Arbitration
Act, in paragraph 21 has clearly held that providing of a restricted list
/panel, leads to suspicion about independence and/or impartiality of the
arbitrators to be appointed and that such a provision should be deleted.
The Supreme Court has also held that a wide choice from the panel should
be offered to the contractor and two arbitrators should be given the
freedom to choose third arbitrator from the entire panel.
(iii) Even the Delhi High Court in the case Afcons Infrastructure Ltd. vs
Rail Vikas Nigam Limited2 considering the similar case, appointed an
independent arbitrator while considering the judgment of the Supreme
Court in Voestalpine Schienen GMBH Vs. Delhi Metro Rail
Corporation"(supra). The contention of the respondent that Section 12
does not have retrospective effect and that the standing arbitral tribunal as
already formed, would continue to exist and to be valid, is erroneous. It is
2 2017 SCC Online (Del) 8675
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submitted that formation of standing arbitral tribunal does not in any
manner exclude the application of Section 12 after the amendment to
Section 12. It is submitted that, Section 21 of the Act clearly provides that
arbitration proceedings in respect of a particular dispute would commence
on the date on which a request for that dispute to be referred to
arbitration is received by the respondent. It is submitted that in the
present case, the dispute which is a subject matter of the present
proceedings, has arisen after coming into force 2015 amendment. Even
Clause 55.5.4 of the agreement expressly provides that the communication
of the dispute shall be the reference of the dispute to the arbitral tribunal.
Thus, it is not as if Section 12(5) of the Act is being applied to the pending
arbitral proceedings, but the same is applied to the disputes and
commencement of the arbitration which has arisen after 2015
amendment. It is submitted that Section 26 of the Amendment Act (Act
no.3 of 2016) excludes application of the amendment to arbitral
proceedings which have commenced in accordance with the provisions of
Section 21 of the Principal Act before commencement of the Act and those
which commence after the 2015 Amendment Act was brought into force.
(iv) It is next submitted that considering all pervasive control of Indian
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Railways on the respondent, the standing arbitral tribunal constituted out
of the panel of only existing/retired railway employees, is violative of
Section 12(5) of the Act and in any case raises justifiable doubts as
regards independence and impartiality of the tribunal.
(v) In supporting these submissions, a reference is being made to clause
(2) of the General Conditions of the Contract in the present case wherein
it is specifically mentioned that the present project has been entrusted to
the respondent by the Railway Board, Government of India, through
Northern Railways and in this regard a contract agreement dated 9 August
2005 has been executed between the respondent and Northern Railways.
It is further submitted that it is an admitted position that Indian Railways
(through Government of India) holds 51% of the respondent's
shareholding. The rest of the shareholding in the respondent is held by
Government of Maharashtra, Government of Goa, Government of
Karnataka and Government of Kerala. It is submitted that even the
organizational structure of Ministry of Railways makes the respondent as
one of the Central Public Sector Enterprises. The Articles of Association
also clearly show that the Government of India controls with all force, the
respondent including appointment of contractors of the respondent,
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issuance of contractors, investing monies, borrowings /raising /securing /
payment of monies, dividends, accounts etc. Even the auditors of the
respondent are to be appointed with the specific approval of the
Comptroller and Auditor General of India. It is thus submitted that the
respondent is an undertaking of Indian Railways and entirely under their
direction and control and therefore, affiliated entity as defined under
Seventh Schedule of the Act.
(vi) It is submitted that in the case of this very respondent, the learned
Single Judge of this Court (K.R.Shriram, J.) in Afcons Infrastructure Ltd.
Vs. Konkan Railway Corporation3, following the decision of the Supreme
Court in Voestalpine Schienen GMBH Vs. Delhi Metro Rail
Corporation"(supra) has directed the respondent to prepare a broad based
list of panel of the arbitrators. In support of this submission, learned
Counsel for the petitioner has principally relied on the the decision of the
Supreme Court in Voestalpine Schienen GmBH Vs. Delhi Metro Rail
Corporation (supra), the decision of the learned Single Judge of the Delhi
High Court in Afcons Infrastructure Ltd. Vs. Rail Vikas Nigam Ltd.4,
3 Commercial Appeal No.135 of 2017 decided on 23.10.2018
4 2017 SCC OnLine Del 8675
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Bernard Ingenieure ZT - GMBH Vs. Ircon International Ltd. 5, and the
decision in NCCL-Premco(JV) Vs. Rail Vikas Nigam Ltd.6
Submissions on behalf of the Respondent.
22. On the other hand, Ms.Kiran Bagalia, learned Counsel for the
respondent reiterating the contentions as urged by the respondent in the
reply affidavit would refer to the previous contract between the parties
dated 18 October 2010 to submit that the arbitral tribunal was constituted
under the earlier contract shall remain in force during the entire period of
principal contract as per clause 55.6.5.
23. It is submitted that under the provisions of the Special Conditions of
the contract, the parties having agreed for establishment of standing
arbitral tribunal in the manner provided under clause 55 of the Special
Conditions of the Contract, which was formed after following the
procedure and which now cannot be disturbed. It is submitted that the
amended Section 12 shall not apply in a case where the arbitral tribunal
has already been appointed before 23 October 2015. It is submitted that
the arguments of the petitioner are against the proviso to sub-section (5)
5 2018 SCC OnLine Del 7941
6 2018 SCC OnLine Del 11926
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of Section 12 of the Act.
24. It is submitted that it is not open for the petitioner to take a stand
that each of six monthly claim as provided in the contract, a fresh consent
of the parties, is necessary. It is submitted that the standing arbitral
tribunal constituted in March 2011 (under an earlier contract) has been
continued. The petitioner had also earlier submitted its claim before the
standing arbitral tribunal. It is submitted that the standing arbitral
tribunal has to continue till the end of the contract and till a no claim
certificate is issued. It is submitted that during the execution of the
contract, the tribunal was already appointed and the disputes have been
referred to arbitration and hence, the amended provision does not apply
to constitution of arbitral tribunal. It is submitted that the procedure
provided under the contract is similar to the procedure considered in
Voestalpine Schienen GMBH Vs. Delhi Metro Rail Corporation" (supra) by
the Supreme Court.
25. It is submitted that the arbitral tribunal was established on 3 March
2011 qua the earlier contract and the petitioner had participated in
constitution of the arbitral tribunal by selecting two names from the list of
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the arbitrators forwarded by the respondent, is by communication dated
21 February 2011 and at no point of time the petitioner ever raised a
challenge to the arbitral tribunal on the ground that there were
circumstances giving rise to justifiable doubts as to the arbitrator's
independence and impartiality. It is submitted that none of the amended
provisions of the Act are applicable to the facts of the present case.
26. It is next submitted that the provisions of the Seventh Schedule are
not applicable inasmuch as the Indian Railways' Employee/ Railway
officer is a qualification provided in the arbitration agreement executed
between the parties and it is unthinkable that each of these large number
of railway employees would be ineligible under the Seventh Schedule as
he is a railway officer, though such a person never had dealing even
remotely related to the subject contract. The decision of the Supreme in
Voestalpine Schienen GMBH Vs. Delhi Metro Rail Corporation" (supra) in
fact supports the case of the respondent.
27. In support of her submission, learned Counsel for the respondent
relies on the decision of the Supreme Court in Aravali Power Company
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Pvt. Ltd. vs M/S. Era Infra Engineering Ltd. 7; HRD Corporation (Mercus
Oil & Chemical Division) Vs. GAIL (India) Ltd. 8 (supra), S.P.Singla
Constructions Pvt.Ltd. Vs. State of Himachal Pradesh & Anr. 9 , Union of
India Vs. M.P. Gupta10, BTP Structural (I) Pvt.Ltd. Belgaum Vs. Bharat
Petroleum Corporation Ltd.11
Discussion and Conclusion
28. The short issue which falls for consideration in this petition is
whether the standing arbitral tribunal being constituted by the respondent
as per Clause 55 of the Special Conditions of the Contract would satisfy
the requirement of law as prescribed under Section 12 read with the
Schedules to the Arbitration Act as incorporated by the 2015 Amendment
Act.
29. Section 12 as amended by the 2015 Amendment Act provides for
number of requirements with an object that the arbitral tribunal which
would be constituted is independent and impartial and further that the
members of the arbitral tribunal do not have any direct or indirect, past or
7 (2017) 15 SCC 32
8 Civil Appeal no.11126 of 2017. Date:31/8/2017
9 Civil Appeal no.11824-11825 of 2018. Date 4/12/2018
10 (2004)10 SCC 504
11 2014(4) Mh.LJ 598
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present relationship or interest with any of the parties. Section 12 thus
provides for grounds of challenge to the appointment of an arbitral
tribunal. Proviso to Sub-section 5 of Section 12 stipulates 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 as specified in the Seventh
Schedule (which provides for arbitrator's relation with the parties or
counsel) shall be ineligible to be appointed as an arbitrator. The proviso
to sub-section (5), however, carves out an exception to stipulate that the
parties may subsequent to disputes having arisen between them, waive the
applicability of this sub-section by an express agreement in writing. The
fulcrum of the contentions of the parties being based on Section 12, this
provision is required to be extracted, which reads thus:-
12. Grounds for challenge.--[(1) When a person is approached in
connection with his possible appointment as an arbitrator, he shall
disclose in writing any circumstances,-
(a) such as the existence either direct or indirect, or any past or
present relationship with or interest in any of the parties or in
relation to the subject-matter in dispute, whether financial,
business, professional or other kind, which is likely to give rise to
justifiable doubts as to his independence or impartiality; and
(b) which are likely to affect his ability to devote sufficient time to
the arbitration and in particular his ability to complete the entire
arbitration within a period of twelve months.
Explanation 1.--The grounds stated in the Fifth Schedule shall
guide in determining whether circumstances exist which give rise
to justifiable doubts as to the independence or impartiality of an
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arbitrator.
Explanation 2.--The disclosure shall be made by such person in
the form specified in the Sixth Schedule.]
(2) An arbitrator, from the time of his appointment and throughout
the arbitral proceedings, shall, without delay, disclose to the parties
in writing any circumstances referred to in sub-section (1) unless
they have already been informed of them by him.
(3) An arbitrator may be challenged only if--
(a) circumstances exist that give rise to justifiable doubts as to his
independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
(4) A party may challenge an arbitrator appointed by him, or in
whose appointment he has participated, only for reasons of which
he becomes aware after the appointment has been made.
[(5)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.]"
30. The fifth schedule to the Act deals with the grounds which gives rise
to justifiable doubts as to the independence and impartiality of the
arbitrator. The seventh schedule deals with the arbitrators relationship
with the parties or counsel. The relevant extracts of the fifth and seventh
schedules read thus:
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THE FIFTH SCHEDULE
(See Section 12(1)(b))
The following grounds give rise to justifiable doubts as to the
independence or impartiality of arbitrators:
ARBITRATOR'S RELATIONSHIP WITH THE PARTIES OR COUNSEL
1. The arbitrator is an employee, consultant, advisor or has
any other past or present business relationship with a party.
... ... ... ... ..
5. The arbitrator is a manager, director or part of the
management, or has a similar controlling influence, in an affiliate
of one of the parties if the affiliate is directly involved in the
matters in dispute in the arbitration.
.. .. ...
12. The arbitrator is a manager, director or part of the
management, or has a similar controlling influence in one of the
parties.
13. The arbitrator has a significant financial interest in one of
the parties or the outcome of the case.
.. ... ... ..
PREVIOUS SERVICES FOR ONE OF THE PARTIES OR OTHER
INVOLVEMENT IN THE CASE
... .. .. ..
22. The arbitrator has within the past three years been
appointed as arbitrator on two or more occasions by one of the
parties or an affiliate of one of the parties.
... .. .. ..
RELATIONSHIP BETWEEN ARBITRATOR AND PARTY AND
OTHERS INVOLVED IN THE ARBITRATION
.. .. ..
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.
........
OTHER CIRCUMSTANCES
... .. .. .. .. .....
34. The arbitrator is a manager, director or part of the
management, or has a similar controlling influence, in an affiliate
of one of the parties, where the affiliate is not directly involved in
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the matters in dispute in the arbitration.
Explanation 1- .. .. . .
Explanation 2- The term "affiliate" encompasses all companies in
one group of companies including the parent company."
...
"THE SEVENTH SCHEDULE
(See section 12(5))
ARBITRATORS RELATIONSHIP WITH THE PARTIES OR COUNSEL
1. The arbitrator is an employee, consultant, advisor or has any
other past or present business relationship with a party.
.. .. ...
5. The arbitrator is a manager, director or part of the management,
or has a similar controlling influence, in an affiliate of one of the
parties if the affiliate is directly involved in the matters in dispute
in the arbitration.
... .. .. ..
14. The arbitrator regularly advises the appointing party or an
affiliate of the appointing party, and the arbitrator or his or her firm
derives a significant financial income therefrom.
15.... .. .. .
16... ... . .
17.. .. .. .
18. .. .. ..
19. ... ...
Explanation 1 .. .. .
Explanation 2 - The term "affiliate" encompasses all companies in
one group of companies including the parent company.
Explanation 3 - For the removal of doubts, it is clarified that it may
be the practice in certain specific kinds of arbitration, such as
maritime or commodities arbitration, to draw arbitrators from a
small, specialised pool. If in such fields it is the custom and practice
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for parties frequently, to appoint the same arbitrator in different
cases, this is a relevant fact to be take into account while applying
the rules set out above."
31. It can be thus clearly seen from the aforesaid provisions of the
Arbitration Act that an arbitrator ought not to have either direct or
indirect or any past or present relationship or interest with any of the
parties which is likely to give rise to justifiable doubts as to his
independence or impartiality. The provisions of the Fifth Schedule amplify
this position in interalia providing that an arbitrator cannot be an
employee of a party to the arbitral proceedings. In other words the
arbitrator's employment cannot have any relation or bearing on the
arbitrator discharging his duties as an adjudicator. The arbitrator ought
not to be in the controlling influence of a party by virtue of being an
employee of an organization.
32. On behalf of the petitioner the "Organizational Structure" of
the respondent is also placed on record, pointing out the control of the
Ministry of Railways on the respondent. The organizational structure is as
under:-
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ORGANIZATION STRUCTURE
MINISTER OF RAILWAYS
MINISTER OF STATE OF RAILWAYS(S) MINISTER OF STATE OF RAILWAYS (G)
RAILWAY BOARD
CHAIRMAN
RAILWAY BOARD
MEMBER MEMBER MEMBER MEMBER FINANCIAL
MEMBER
STAFF ENGINEERING TRACTION ROLLING COMMISSIONE
TRAFFIC
STOCK R
DIRECTOR GENERAL/ SECRETARY DIRECTOR GENERAL/S&T
DIRECTOR GENERAL/RHS
RPF ESTT. ADMN. DIRECTOR GENERAL/RS
DIRECTOR GENERAL/
MATTERS MATTERS
ZONAL RAILWAYS (OPEN LINE) PRODUCTION UNITS OTHER UNITS CPSE/CORP
GENERAL MANAGERS GENERAL MANAGERS GENERAL MANAGERS BCL
BSCL
CENTRAL CHITTARANJAN LOCOMOTIVE CENTRAL ORGANIZATION FOR BWEL
EASTERN WORKS RAILWAY ELECTRIFICATION CONCOR
EAST CENTRAL DIESEL LOCOMOTIVE WORKS, NF RAILWAY (CONSTRUCTION) DFCCIL
EAST COAST VARANASI IRCON
METRO** INTEGRAL COACH FACTORY, CAO (R)* IRCTC
NORTHERN CHENNAI CENTRAL ORGANIZATION FOR IRFC
NORTH CENTRAL RAIL COACH FACTORY, MODERNIZATION OF KMRCL
NORTH EASTERN KAPURTHALA WORKSHOP (COFMOW) KRCL
NORTHEAST FRONTIER RAIL WHEEL FACTORY, INDIAN RAILWAY MRVC
NORTH WESTERN YELAHANKA ORGANIZATION FOR ALTERNATE RCIL
SOUTHERN MODERN COACH FACTORY, RAE FUELS (ROAF) RITES
SOUTH CENTRAL BARELI RVNL
SOUTH EASTERN DIRECTOR GENERAL
SOUTH EAST CAO(R)* NATIONAL ACADEMY OF INDIAN Autonomous Bodies/
CENTRAL DIESEL LOCO MODERNIZATION RAILWAYS, VADODARA Authorities
SOUTH WESTERN WORKS/PATIALA
WESTERN DG & EX-OFFICIO GM CRIS
WEST CENTRAL RAIL WHEEL PLANT, BELA RDSO, LUCKNOW RLDA
"METRO RLY, KOLKATA 'CHIEF ADMINISTRATIVE OFFICER (RAILWAYS)
2 INDIAN RAILWAYS ANNUAL REPORT AND ACCOUNTS 2016-17
33. The petitioner has also placed on record the Indian Railways Annual
Reports and Accounts 2016-2017, which would indicate that the
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respondent is directly under the control of the Ministry of Railways and
apart from its Zonal railways, the Central public sector enterprises like
respondent also forms part of the organizational structure under the
Ministry of Railways. Hence, it can certainly be said that various zonal
railways like Central Railways, Eastern Railways, Northern Railways etc.
are having not only business relationship but also controlling influence on
the respondent. From the General Conditions of the contract it is seen
that the project in question has been entrusted to the respondent by the
Railway Board of Government of India through Northern Railways and in
this regard a contract dated 9 August 2005 is executed between the
respondent and Northern railways. Even the Articles of Association would
go to show that the Government of India controls by all force the
respondent, including appointment of the contractors by the respondent.
It also cannot be overlooked that the shareholding of the Indian Railways
in the share capital of the respondent is 51%. The Indian Railways
therefore, qualifies as a parent entity of the respondent. Thus, certainly
the respondent can be said to be "an affiliate" of the Indian
Railways/Northern Railways within the meaning of "an affiliate" as
described in "Explanation 2" to the Seventh Schedule to the Arbitration
Act. It thus cannot be said that the existing employee of the northern
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railways would not have any relationship with the respondent. It is also
likely that the officers can very well be posted by the Ministry of Railways
on deputation with the respondent in which case such employees under
the Ministry of Railways would also be the employees with the
respondent. Hence, it can be said that an employee of the railways can
also be an employee of the northern railways, central railway or any other
railways who can be appointed as an arbitrator in connection with the
dispute to which the respondent is a party. In this situation it cannot be
said that such an employee/arbitrator would be an independent or an
impartial arbitrator having no relationship with the respondent, and more
particularly in the spirit of the amended provisions of Section 12 read
with Fifth and Seventh schedule as noted above.
34. There is another facet which would have relevance, namely that the
dispute between the parties can arise at any stage of the contract. It need
not be that only when the work under the contract is concluded a
reference to arbitration can be made. This is also clear from the facts of
the present case that the dispute has arisen in an ongoing contract, when
certain bills were raised by the petitioner and which are being disputed by
the respondent. Thus once the dispute arises and the arbitration is
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required to be commenced, Section 21 of the Arbitration Act would get
attracted which provides for commencement of arbitral proceedings.
Section 21 provides that unless otherwise agreed between the parties, the
arbiral proceedings in respect of a particular dispute would commence on
the date on which the request of that dispute being referred to the
arbitrator, is received by the respondent. Section 21 reads thus:-
"21. Commencement of arbitral proceedings:- Unless otherwise
agreed by the parties, the arbitral proceedings in respect of a
particular dispute commence on the date on which a request for
that dispute to be referred to arbitration is received by the
respondent."
35. Once a request has been made by a party for reference of the
disputes to an an arbitral tribunal, normally only in that event the
respondent to whom such a request is made, would be required to accept
the request and appoint an arbitral tribunal. In case the request is rejected
then the party is entitled to approach the Court under Section 11 of the
Act praying for appointment of arbitral tribunal. Once the parties are
before the Court for appointment of an arbitral tribunal, then certainly all
the parameters falling under Section 12 read with Fifth and Seventh
Schedule would become applicable.
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36. In the present case considering the arbitration clause, the position
in regard to the commencement of the arbitral proceedings is not different
from what Section 21 provides. Clause 55 of the Contract which provides
for constitution of "a standing arbitral tribunal" cannot be taken to be any
agreement otherwise entered between the parties to be taken as an
exception to deviate from the commencement of the arbitral proceedings,
as stipulated by Section 21, namely from the date on which the reqeust for
a dispute to be referred to arbitration, is made. This more particularly
considering the very next clause in the agreement namely Clause 55.5
providing for a reference to arbitration and the manner in which a
reference would be made. On reading of Clause 55.5 it can be concluded
that constitution of a Standing Arbitral Tribunal and reference of the
disputes are independent from each other. Hence, mere constitution of an
arbitral tribunal cannot be presumed to be any commencement of arbitral
proceedings, even within the meaning of Section 21 of the Arbitration Act.
Thus, necessarily the arbitraiton proceedings in the present case would
commence when the petitioner by its letter dated 5 July 2017 addressed to
the respondent, calling upon the respondent to constitute an arbitral
tribunal as per law. Thus, the requirement of law, on the day such a
request was made for the constitution of the arbitral tribunal, would be
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relevant, namely the applicability of Section 12 as amended by the 2015
Amendment Act alongwith the applicability of the provisions of Schedule
V and Schedule VII.
37. In the context of Clause 55.1 of the agreement between the parties,
the concept of a "standing arbitral tribunal" and of a nature as agreed, in
my opinion, cannot have any implicit recognition under the provisions of
the Act and more particularly when the arbitral tribunal comprises of in-
service railway Gazetted Officers to be appointed by the Chairman and
Managing Director of the respondent. It is also quite peculiar that the
choice of the railway officers in-service or retired is also supplied by the
respondent to the contractor (petitioner) who would be compulsorily
required to make a selection of its nominees, only from the names as
provided by the respondent. Thus, the choice of persons as offered is also
completely under the control of the respondent, and the contractor is
being foisted upon such names, from which he is required to select two
names out of which one would be appointed by the Managing Director of
the respondent as the contractor's nominee on the arbitral tribunal. In my
opinion, the arbitration clause certainly finds foul of the requirement of
Section 12 read with the noted provisions of the Fifth and Seventh
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Schedule of the Act. Having come to the above conclusion on
consideration of the provisions of the Arbitration Act, this conclusion in
my opinion is also supported by the decisions which I refer below.
38. In Voestalpine Schienen GMBH (supra) the issue which fell for
consideration of the Supreme Court was whether the arbitral tribunal in
the said case as constituted by the respondent-Metro Rail Corporation
Ltd., was in violation of the provisions of Section 12 of the Act, as it was
contended on behalf of the petitioner that the arbitral panel being
constituted of serving and retired engineers of the Government
Department and from the public sector undertakings, defied the neutrality
aspect as they had direct or indirect access or privity to the respondent. In
the said case Clause 9.2(A) of the Special Conditions of the Contract
interalia stipulated that the respondent therein shall forward names of five
persons from the panel maintained by the respondent and the petitioner
will have to chose his nominee arbitrator from the said panel which was
quite similar as in the present case. The respondent therein, in fact had
furnished names of five persons to the petitioner with a request to
nominate its arbitrator from the said panel. However, this was not
acceptable to the petitioner who contended that the panel prepared by the
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respondent consisting of serving or retired engineers either of the
respondent or of the Government Department or public sector
undertakings would not qualify as independent arbitrators. It was the
petitioner's contention that such constitution would lose its validity as it
would be contrary to the provisions of Section 12. However, in the facts of
the case as noted by the Court in paragraph 27 of the report, as the
respondent had thereafter forwarded a list of about 31 persons and had
given a free and wide choice to the petitioner to nominate its arbitrator
and such panel consisted of the persons who were not employees or ex-
employees or in any way related to the respondent, and that as the
persons who were to be ultimately picked up as arbitrators would have to
disclose their interest in terms of the provisions of Section 12 of the Act,
the Supreme Court did not find it to be a fit case to exercise jurisdiction
and appoint an arbitral tribunal. However, what is relevant in the context
of the present case are the observations of the Supreme Court in
paragraphs 28, 29 and 30 whereby the Court criticised such a procedure
as provided for in the contract in Clause 9.2 and the adverse consequence
as entailed by such a clause. The Supreme Court in paragraphs 28,29 and
30 observed thus:
"28. Before we part with, we deem it necessary to make certain
comments on the procedure contained in the arbitration
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agreement for constituting the arbitral tribunal. 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.
29. Some comments are also needed on the Clause 9.2(a) of
the GCC/SCC, as per which the DMRC prepares the panel of
'serving or retired engineers of government departments or public
sector undertakings'. It is not understood as to why the panel has
to be limited to the aforesaid category of persons. 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. Likewise,
some disputes may have the dimension of accountancy etc.
Therefore, it would also be appropriate to include persons from this
field as well.
30. Time has come to send positive signals to the international
business community, in order to create healthy arbitration
environment and conducive arbitration culture in this country.
Further, as highlighted by the Law Commission also in its report,
duty becomes more onerous in Government contracts, where one of
the parties to dispute is the Government or public sector
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undertaking itself and the authority to appoint the arbitrator rests
with it. In the instant case also, though choice is given by DMRC to
the opposite party but it is limited to choose an arbitrator from the
panel prepared by the DMRC. 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. We, therefore,
direct that DMRC shall prepare a broad based panel on the
aforesaid lines, within a period of two months from today."
39. In Afcons Infrastructure Ltd. Vs Ircon International Ltd. 12, the
learned Single Judge of the Delhi High Court has taken a similar view also
referring to the decision of the Supreme Court in Voestalpine Schienen
GMBH (supra). The arbitration clause in the said case was similar as in
the present case. The learned Single Judge held the arbitration clause to
be invalid in view of the provisions of Section 12 of the Act and directed
the respondent to prepare broad based panel. The learned Single Judge
made the following observations in paragraphs 21, 22, and 23:-
21. With reference to a similar clause, the Supreme Court in Voestalpine
Schienen GMBH(supra) has directed that the panel has to be broadbased.
The rationale given by the Supreme Court is that if a restricted panel is
proposed, then the choice given to the opposite party is very limited,
resulting in there being no free choice to nominate a person and it also gives
room for suspicion in the mind of the other side. Such a situation has been
countenanced by the Supreme Court. Accordingly, the Supreme Court
directed that 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. It directed that a
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 could be disputes involving purely or substantially
legal issues, that too, complicated in nature and some disputes may have the
12 2017 SCC OnLine Del 10049
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dimension of accountancy etc. It is, in these circumstances, that the
Supreme Court directed the respondent in the said case to broadbase the
panel and to be restricted not only to retired Engineers or Officers. Another
reason given by the Supreme Court is that in case there is a broadbased
panel, then there would be no misapprehension that impartiality or
independence would be discarded at any stage of the proceedings. In those
circumstances, the Supreme Court directed Delhi Metro Rail Corporation to
prepare a broadbased panel on the principles, as laid down therein.
22. Similarly, in the present case, it would be expedient to direct the
respondent to boradbase their panel on the same lines as directed by the
Supreme Court in Voestalpine Schienen GMBH (supra) as expeditiously as
possible preferably within a period of three weeks from today.
23. The direction to expedite the process of preparing a broadbased
panel has been issued so that the two Arbitrators, who have been
nominated, would have broadbased panel to choose the third Arbitrator
from.
40. Again in Bernard Ingenieure ZT - GMBH Vs. Ircon International Ltd.
(supra) considering a similar arbitration agreement and as the broad base
panel was not prepared by the respondent, the learned Single Judge of the
Delhi High Court made the following observations:-
11. The above judgment was passed by the Supreme Court as far back,
as 10 February, 2017. More than a year has passed, however, even now the
th
so-called broad based panel of the respondent still does not contain names
of Engineers of prominence and high repute from private sector, persons
with legal background like judges and lawyers of repute, people having
knowledge and expertise in accountancy etc. The panel of Arbitrators now
framed by the respondent is, therefore, in my opinion, still not in conformity
with the judgment of the Supreme Court in Voestalpune Schienen GMBH
(supra) and, therefore, in my opinion, the respondent has failed to act in
accordance with the procedure prescribed under the arbitration agreement
between the parties. It is again emphasised that even the Supreme Court in
the above judgment had suggested, if not directed, that a clause in the
arbitration agreement restricting the right of the contracting party to
appoint/nominate his own Arbitrator should be deleted.
41. In NCCL-Premco(JV) Vs. Rail Vikas Nigam Ltd. (supra), a similar
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view was taken by the learned Single Judge of the Delhi High Court
referring to the decision in the Supreme Court in Voestalpine Schienen
GmbH Vs. Delhi Metro Rail Corporation Ltd. (supra). The Court in
paragraphs 10 to 14 has observed thus:-
10. I have considered the submissions made by the counsels for the
parties. As noted above, this Court in Larsen & Arb. P. No.627/2018
Page 5 Toubro Ltd. (supra) in similarly situated facts had held that
mere forwarding of a list of five persons (in that case) would be a
failure of the respondent to discharge its obligations that have been
cast upon it under the Arbitration Agreement read with Section 12
of the Amended Act as also the Judgment of the Supreme Court in
Voestalpine Schienen(supra).
11. As in spite of the judgment of the Supreme Court in Voestalpine
Schienen(supra) and of this Court in Larsen & Toubro Ltd. (supra),
the respondent insisted on giving only a limited number of names
from its panel of Arbitrators to the petitioner for choosing its
nominee Arbitrator, the same clearly amounts to a failure on part of
the respondent to act in accordance with the Arbitration Agreement
read with Section 12 of the Amended Act.
12. Even the panel of Arbitrators that has been framed by the
respondent and has been offered by it to the petitioner alongwith
its reply to the present petition, in my opinion, does not conform to
the Judgment of the Supreme Court in Voestalpine Schienen(supra)
inasmuch as it still does not include Engineers of prominence and
high repute from private sector, persons with legal background like
Judges and lawyers of repute or people having knowledge in
accountancy, i.e. Chartered Accountant, etc. The panel is still
predominantly of former employees with the Railways and Public
Sector Companies connected thereto.
13. Be that as it may, as the respondent had failed to Arb. P.
No.627/2018 Page 6 discharge its obligations in terms of the
Arbitration Agreement read with Section 12 of the Act, the
appointment of the nominee Arbitrator of the petitioner is
confirmed.
14. I appoint Mr.B.K.Makhija, Former Director-Projects, RITES as
the nominee Arbitrator for the respondent."
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42. Apart from the above decisions, of the Delhi High Court, a learned
Single Judge of this Court (K.R.Shriram, J.) in " Afcons Infrastructure Ltd.
Vs. Konkan Railway Corporation " (supra) in the case of the present
respondent in a similar situation, considering an identical agreement, as
entered by the respondent with the applicant-Afcons Infrastructure Ltd.,
has come to a clear conclusion that the respondent KRCL would fall under
the common control of the Indian Railways as per the organizational
structure. It was also held that considering the law laid down by the
Supreme Court in Voestalpine (supra) it was incumbent for the respondent
to prepare a broad based panel. The learned Single Judge has made the
following observations in paragraphs 20,22,24,25, 26 and 27:-
20. Therefore, even if the panel of 31 names recommended by
respondent does not contain anyone who are employees of KRCL
or ex-employees of KRCL (respondent) still all of them would fall
under the common control of the Railway Board-Indian Railways,
as per the organization structure given above.
22. Voestalpine (supra) was delivered by the Apex Court way
back on 10.2.2017. More than 20 months have passed since then. I
can understand the contract was entered into before this decision
in Voestalpine. But nothing prevented respondent to take the cue
from Voestalpine and talk to applicant to revise clause 55. Not only
respondent has not taken that initiative (they may or they may
not)but even now the so-called broad based panel of respondent
are only having names of those who were either connected with
railways or PSU. It does not contain names of engineers of
prominence and high repute from private sector. They should also
be included. Like wise panel should comprise of persons with legal
background like Judge sand lawyers, people having knowledge
and expertise in accountancy etc. The panel of arbitrators
maintained by respondent is, therefore,in my opinion, not in
conformity with the judgment of the Supreme Court of India in
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Voestalpine (supra). Not only the panel recommended is not in
conformity with Voestalpine (supra), even the procedure of
appointment of arbitrator as prescribed in clause-55 is totally
wrong. I cannot accept that one of the party to the agreement will
recommend four names from the panel, thereby limiting their
choice, which means there is no free choice, and the other party
has to select and forward two names from those four names to
Managing Director of the other party to decide who will be the
first party's arbitrator. Further, with the discretion given to KRCL to
choose more than 3 names, a room of suspicion is created in the
mind of other side that KRCL may have picked up its own
favorites. Such a situation has to be countenanced. This procedure,
therefore, certainly falls foul of the requirement of neutrality of
arbitrators. I also agree with Mr. Engineer that the part in the
arbitration clause which empowers the Chairman and Managing
Director of respondent to even appoint the presiding arbitrator is
violative of section 11(3) of the Act. The two arbitrators appointed
by the parties shall decide who shall be the presiding arbitrator.
24. In the circumstances, I would expect respondent to rework
on clause 55 and discuss with applicant to amend that clause or
prepare a broad based panel of arbitrators consisting of engineers
of prominence and high repute from private sector, persons with
legal background like Judges and lawyers, people having
knowledge and expertise in accountancy etc. Respondent shall,
while deciding the broad based panel, keep in mind the true
spirit and intent of the word "broadbased panel". I would suggest
broadbased would mean at least eight to ten names under each
category.
25. Respondent shall also not decide who will be the arbitrator
to be appointed by applicant. Respondent, once it prepares the
broadbased panel of arbitrators, shall only forward those names to
applicant and it will be open for applicant, i.e., the applicant will
have a free choice, to decide who shall be its nominated arbitrator.
It will be open to respondent to decide who will be its arbitrator
and the two arbitrators shall appoint the presiding arbitrator and
the trio shall form the arbitral panel.
26. Respondent shall furnish a broad based list of panel of
arbitrators to applicant within two months from today. Applicant
will respond with the name of its arbitrator within four weeks of
receiving the list. Respondent thereafter shall nominate its
arbitrator within 14 days and the two arbitrators shall nominate
the third and presiding arbitrator.
27. If, after appointment, applicant still feels that the arbitrator
appointed by respondent or the presiding arbitrator appointed
could be disqualified, it is open to applicant to approach this court
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for appropriate orders. All rights and contentions of the parties
are kept open in this regard."
43. Apart from the above clear position in law as being consistently
accepted, this Court cannot overlook that in the present case the
Managing Director has the ultimate say in appointing the arbitral tribunal
even if the arbitration agreement is now required to be given effect to on a
fresh invocation. In TRF Ltd vs. Energo Engineering Projects Ltd. 13, the
three Judges Bench of the Supreme Court was considering whether the
appointment of an arbitrator made by the Managing Director of the
respondent therein was valid one. The agreement was entered into prior
to the 2015 Amendment Act was brought into force on 23 October 2015.
The contention of the appellant was that by virtue of the provisions of the
Amendment Act by insertion of the Fifth and Seventh Schedule of the Act,
the Managing Director of the respondent had a direct interest in the
dispute and as such could not act as an arbitrator. The submission was also
that a person who himself was disqualified is also not entitled to nominate
any other person to act as an arbitrator. The Supreme Court held that the
Managing Director in such a situation would not have any authority to
nominate any other person to act as an arbitrator.
13 (2017)8 SCC 377
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44. In Bharat Broadband Network Ltd. Vs. United Telecoms Ltd. 14
(supra) an issue arising under Section 12 of the Arbitration Act fell for
consideration of the Supreme Court, in the context of the arbitration
agreement between the parties, which was contained in clause 20 of the
agreement in question, which provided for sole arbitration of the CMD of
the appellant or any other person at the discretion of the CMD. This was a
case wherein, in pursuance of the tender dated 5 August 2013, a purchase
order came to be issued in favour of the respondent on 30 September
2014. The dispute had arisen between the parties on 3 January 2017. On
17 January 2017 the CMD nominated the sole arbitrator. The Court
referring to the decision in TRF Ltd. (supra) held that Section 12(5) has
brought about a situation of de jure inability of the arbitrator in the event
the requirements of Section 12 read with Fifth and Seventh Schedule are
not satisfied. It was held that under the said provisions any prior
agreement to the contrary is wiped out by the non-obstante clause in
Section 12(5) the moment any person whose relationship with the parties
or the counsel or the subject matter of the dispute falls under the Seventh
Schedule. It was held that Section 12(5) then clearly declares that such
person is "ineligible" to be appointed as arbitrator, except when the parties
14 2019 SCC OnLine SC 547
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otherwise agree in a manner provided under the proviso to sub-section (5)
of Section 12. The Supreme Court has clearly held that when the
arbitrator is ineligible to be appointed as an arbitrator, there is no question
of challenge to such arbitrator. It is held that in a case which falls under
Section 12(5), Section 14(1)(a) of the Arbitration Act gets attracted and
the arbitrator becomes as a matter of law - de jure , unable to perform his
functions under Section 12(5), being ineligible to be appointed as an
arbitrator. The observations in this regard as made in paragraphs 14, 15,
17 and 18, 20 are relevant which read thus:-
14. From a conspectus of the above decisions, it is clear that
Section 12(1), as substituted by the Arbitration and Conciliation
(Amendment) Act, 2015 ["Amendment Act, 2015"], makes it clear
that when a person is approached in connection with his possible
appointment as an arbitrator, it is his duty to disclose in writing
any circumstances which are likely to give rise to justifiable doubts
as to his independence or impartiality. The disclosure is to be made
in the form specified in the Sixth Schedule, and the grounds stated
in the Fifth Schedule are to serve as a guide in determining
whether circumstances exist which give rise to justifiable doubts as
to the independence or impartiality of an arbitrator. Once this is
done, the appointment of the arbitrator may be challenged on the
ground that justifiable doubts have arisen under sub-section (3) of
Section 12 subject to the caveat entered by sub- section (4) of
Section 12. The challenge procedure is then set out in Section 13,
together with the time limit laid down in Section 13(2). What is
important to note is that the arbitral tribunal must first decide on
the said challenge, and if it is not successful, the tribunal shall
continue the proceedings and make an award. It is only post award
that the party challenging the appointment of an arbitrator may
make an application for setting aside such an award in accordance
with Section 34 of the Act.
15. Section 12(5), on the other hand, is a new provision which
relates to the de jure inability of an arbitrator to act as such. Under
this provision, any prior agreement to the contrary is wiped out by
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the non- obstante clause in Section 12(5) the moment any person
whose relationship with the parties or the counsel or the subject
matter of the dispute falls under the Seventh Schedule. The sub-
section then declares that such person shall be "ineligible" to be
appointed as arbitrator. The only way in which this ineligibility can
be removed is by the proviso, which again is a special provision
which states that parties may, subsequent to disputes having arisen
between them, waive the applicability of Section 12(5) by an
express agreement in writing. What is clear, therefore, is that
where, under any agreement between the parties, a person falls
within any of the categories set out in the Seventh Schedule, he is,
as a matter of law, ineligible to be appointed as an arbitrator. The
only way in which this ineligibility can be removed, again, in law,
is that parties may after disputes have arisen between them, waive
the applicability of this sub-section by an "express agreement in
writing". Obviously, the "express agreement in writing" has
reference to a person who is interdicted by the Seventh Schedule,
but who is stated by parties (after the disputes have arisen
between them) to be a person in whom they have faith
notwithstanding the fact that such person is interdicted by the
Seventh Schedule.
17. Thus, it will be seen that party autonomy is to be respected
only in certain exceptional situations which could be situations
which arise in family arbitrations or other arbitrations where a
person subjectively commands blind faith and trust of the parties
to the dispute, despite the existence of objective justifiable doubts
regarding his independence and impartiality.
18. The scheme of Sections 12, 13, and 14, therefore, is that
where an arbitrator makes a disclosure in writing which is likely to
give justifiable doubts as to his independence or impartiality, the
appointment of such arbitrator may be challenged under Sections
12(1) to 12(4) read with Section 13. However, where such person
becomes "ineligible" to be appointed as an arbitrator, there is no
question of challenge to such arbitrator, before such arbitrator. In
such a case, i.e., a case which falls under Section 12(5), Section
14(1)(a) of the Act gets attracted inasmuch as the arbitrator
becomes, as a matter of law (i.e., de jure), unable to perform his
functions under Section 12(5), being ineligible to be appointed as
an arbitrator. This being so, his mandate automatically terminates,
and he shall then be substituted by another arbitrator under
Section 14(1) itself. It is only if a controversy occurs concerning
whether he has become de jure unable to perform his functions as
such, that a party has to apply to the Court to decide on the
termination of the mandate, unless otherwise agreed by the
parties. Thus, in all Section 12(5) cases, there is no challenge
procedure to be availed of. If an arbitrator continues as such, being
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de jure unable to perform his functions, as he falls within any of
the categories mentioned in Section 12(5), read with the Seventh
Schedule, a party may apply to the Court, which will then decide
on whether his mandate has terminated. Questions which may
typically arise under Section 14 may be as to whether such person
falls within any of the categories mentioned in the Seventh
Schedule, or whether there is a waiver as provided in the proviso
to Section 12(5) of the Act. As a matter of law, it is important to
note that the proviso to Section 12(5) must be contrasted with
Section 4 of the Act. Section 4 deals with cases of deemed waiver
by conduct; whereas the proviso to Section 12(5) deals with
waiver by express agreement in writing between the parties only if
made subsequent to disputes having arisen between them.
20. Whether such ineligible person could himself appoint
another arbitrator was only made clear by this Court's judgment in
TRF Ltd. (supra) on 03.07.2017, this Court holding that an
appointment made by an ineligible person is itself void ab initio.
Thus, it was only on 03.07.2017, that it became clear beyond
doubt that the appointment of Shri Khan would be void ab initio.
Since such appointment goes to "eligibility", i.e., to the root of the
matter, it is obvious that Shri Khan's appointment would be void.
There is no doubt in this case that disputes arose only after the
introduction of Section 12(5) into the statute book, and Shri Khan
was appointed long after 23.10.2015. The judgment in TRF Ltd.
(supra) nowhere states that it will apply only prospectively, i.e.,
the appointments that have been made of persons such as Shri
Khan would be valid if made before the date of the judgment.
Section 26 of the Amendment Act, 2015 makes it clear that the
Amendment Act, 2015 shall apply in relation to arbitral
proceedings commenced on or after 23.10.2015. Indeed, the
judgment itself set aside the order appointing the arbitrator, which
was an order dated 27.01.2016, by which the Managing Director
of the respondent nominated a former Judge of this Court as sole
arbitrator in terms of clause 33(d) of the Purchase Order dated
10.05.2014. It will be noticed that the facts in the present case are
somewhat similar. The APO itself is of the year 2014, whereas the
appointment by the Managing Director is after the Amendment
Act, 2015, just as in the case of TRF Ltd. (supra). Considering that
the appointment in the case of TRF Ltd. (supra) of a retired Judge
of this Court was set aside as being non-est in law, the
appointment of Shri Khan in the present case must follow suit."
45. In a recent decision of the Supreme Court in Perkins Eastman
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Architects DPC & Anr. Vs. HSCC (India) Ltd. 15 the issue which fell for
consideration of the Supreme Court was whether as per Clause 24.1(ii) of
the agreement between the parties, which provided that the disputes or
differences shall be referred for adjudication through arbitration by a sole
arbitrator appointed by the CMD-HSCC within thirty days from the receipt
of request from the Design Consultant, can be held to be valid considering
the provisions of Section 12 of the Arbitration Act and the decisions
rendered in that regard. The Supreme Court referring to the decision in
TRF Ltd vs. Energo Engineering Projects Ltd. (supra) observed that in the
category of cases where the Managing Director is not to act as an
arbitrator himself but is empowered or authorised to appoint any other
person of his choice or discretion as an arbitrator, the element of invalidity
which can be attributed in the category of cases where the Managing
Director was found to be incompetent, as he would have interest in the
outcome or result of the dispute, the same element of invalidity, would
always arise and spring, even in the category of the cases where the
Managing Director is called upon to nominate an arbitral tribunal. The
observations in this regard in paragraphs 15 and 16 are required to be
noted which reads thus:-
15 Arbitration Application no.32 of 2019 dated 26/11/2019
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"15. It was thus held that as the Managing Director became
ineligible by operation of law to act as an arbitrator, he could not
nominate another person to act as an arbitrator and that once the
identity of the Managing Director as the sole arbitrator was lost,
the power to nominate someone else as an arbitrator was also
obliterated. The relevant Clause in said case had nominated the
Managing Director himself to be the sole arbitrator and also
empowered said Managing Director to nominate another person to
act as an arbitrator. The Managing Director thus had two capacities
under said Clause, the first as an arbitrator and the second as an
appointing authority. In the present case we are concerned with
only one capacity of the Chairman and Managing Director and that
is as an appointing authority.
We thus have two categories of cases. The first, similar to the one
dealt with in TRF Limited where the Managing Director himself is
named as an arbitrator with an additional power to appoint any
other person as an arbitrator. In the second category, the Managing
Director is not to act as an arbitrator himself but is empowered or
authorised to appoint any other person of his choice or discretion
as an arbitrator. If, in the first category of cases, the Managing
Director was found incompetent, it was because of the interest that
he would be said to be having in the outcome or result of the
dispute. The element of invalidity would thus be directly relatable
to and arise from the interest that he would be having in such
outcome or decision. If that be the test, similar invalidity would
always arise and spring even in the second category of cases. If the
interest that he has in the outcome of the dispute, is taken to be the
basis for the possibility of bias, it will always be present irrespective
of whether the matter stands under the first or second category of
cases. We are conscious that if such deduction is drawn from the
decision of this Court in TRF Limited, all cases having clauses
similar to that with which we are presently concerned, a party to
the agreement would be disentitled to make any appointment of an
Arbitrator on its own and it would always be available to argue that
a party or an official or an authority having interest in the dispute
would be disentitled to make appointment of an Arbitrator.
16. But, in our view that has to be the logical deduction from
TRF Limited. Paragraph 50 of the decision shows that this Court
was concerned with the issue, "whether the Managing Director,
after becoming ineligible by operation of law, is he still eligible to
nominate an Arbitrator" The ineligibility referred to therein, was as
a result of operation of law, in that a person having an interest in
the dispute or in the outcome or decision thereof, must not only be
ineligible to act as an arbitrator but must also not be eligible to
appoint anyone else as an arbitrator and that such person cannot
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and should not have any role in charting out any course to the
dispute resolution by having the power to appoint an arbitrator.
The next sentences in the paragraph, further show that cases where
both the parties could nominate respective arbitrators of their
choice were found to be completely a different situation. The
reason is clear that whatever advantage a party may derive by
nominating an arbitrator of its choice would get counter balanced
by equal power with the other party. But, in a case where only one
party has a right to appoint a sole arbitrator, its choice will always
have an element of exclusivity in determining or charting the
course for dispute resolution. Naturally, the person who has an
interest in the outcome or decision of the dispute must not have the
power to appoint a sole arbitrator. That has to be taken as the
essence of the amendments brought in by the Arbitration and
Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and
recognised by the decision of this Court in TRF Limited."
Thus applying the above principles of law, Clause 55.1 of the
agreement providing for an arbitral tribunal to be constituted by the
Chairman and Managing Director is rendered wholly illegal and of no
consequence.
46. In so far as the contention as urged on behalf of the respondent that
if the case of the petitinoer is accepted, the Court would be accepting the
restrospective application of Section 12 as amended by the 2015
Amendment Act. This contention of the respondent cannot be accepted for
two reasons. Firstly, as noted above it cannot be overlooked that in the
present case commencment of the arbitral proceedings can only be in a
manner as recognized under Section 21 of the Act, that is when the
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dispute would arise, a party to a contract would urge the opposite party to
refer the dispute to arbitral tribunal. In the present case the
commencement of the arbitral proceedings has taken place after the 2015
Amendment Act was brought into force namely by the petitioner's letter
dated 5 July 2017. It is in the context of this letter and in fulfilling the
requirement of law as it stood on the day when the petitioner sought
reference of the disputes to arbitration, the arbitral tribunal would be
required to be constituted. For this purpose the standing arbitral tribunal
constituted prior to coming into force of the Act certainly would not clear
the test of law, when the commencement itself has taken place after the
2015 Amendment Act has come into force. Thus, there is no question of
any retrospective application of the 2015 Amendment Act. The only
conclusion which can be drawn is that the Standing Arbitral Tribunal, in
this situation constituted prior to the dispute in question having been
arisen, by operation of law is rendered invalid and wiped out applying the
principles of law as laid down by the Supreme Court in Bharat Broadband
Network Ltd. Vs. United Telecoms Ltd. (supra) and Perkins Eastman
Architects DPC & Anr. Vs. HSCC (India) Ltd. (supra).
47. Now I refer to some of the decisions as relied on behalf of the
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respondent.
In Aravali Power Company Pvt.Ltd. Vs. Era Infra Engineering Ltd.
(2017)15 SCC 32, the appellant had appointed its Chief Executive Officer
as a sole arbitrator in terms of the arbitration clause, while rejecting the
demand of the respondent to appoint an independent arbitrator. The
invocation of the arbitration was made by the respondent by a letter dated
29 July 2015 (prior to the 2015 Amendment Act coming into force). The
arbitrator was appointed on 19 August 2015 which was also prior to
coming into force of the 2015 Amendment Act. The respondent initially
participated in the arbitral proceedings without raising any objection.
After coming into force of the 2015 Amendment Act, for the first time on
12 January 2016, the respondent raised an objection referring to the
provisions of Section 12 of the Arbitration Act that the arbitrator as
appointed by the respondent would not be an independent and impartial
arbitrator. The objection being rejected by the arbitral tribunal, the
respondent approached the High Court under Section 11(6) praying that
an impartial and neutral arbitrator be appointed. The High Court allowed
the application. In a challenge to the said order, the Supreme Court held
that there was nothing on record which could give rise to justifiable
doubts about impartiality of the named arbitrator. It was held that no
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challenge was raised by the respondent within time and in terms of the
procedure prescribed and in fact the respondent had participated the
arbitral proceedings. It was held that in these circumstances, the High
Court ought not to have interfered in the process and the progress of the
arbitration. I am afraid as to how this decision would in any manner
forward the case of the respondent, when in the present case, the
petitioner had intended reference of the disputes to arbitration after
coming into force the 2015 Amendment Act. In this situation an arbitral
tribunal satisfying the provisions of law and the law as laid down in the
decisions as noted above, can only be held to be a valid arbitral tribunal.
48. In SP Singla Constructions Pvt. Ltd. Vs. State of Himachal Pradesh &
Anr.16 the Supreme Court was concerned with the arbitration proceedings
which had commenced on 18 October 2013 which was much prior to the
commencement of the amended provisions of Section 12 of the Arbitration
Act as amended by the 2015 Arbitration Amendment Act. The
appointment of the arbitrator was made on 30 October 2013 and the
arbitrator entered a reference on 11 November 2013. The appellant
therein had approached the High Court in a petition filed under Section
16 Civil Appeal nos.11824-11825 of 2018, decided on 4/12/2018
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11(6) of the Arbitration Act praying for an appointment of an independent
arbitrator. The High Court rejected the petition on the ground that the
appointment of the arbitrator could not be challenged by way of an
application under Section 11(6) of the Arbitration Act, referring to the
decision of the Supreme Court in Antrix Corporation Ltd. Vs. Devas
Multimedia Pvt.Ltd.17. The appellant being aggrieved by the order passed
by the High Court approached the Supreme Court, contending that it was
not permissible, after coming into force the 2015 Amendment Act, for the
respondent to appoint its officer as an arbitrator. It is in this context the
Supreme Court considering the arbitration agreement between the parties
as contained in Clause 65 of the General Conditions of the Contract, held
that it was not permissible for the appellant therein, to approach the High
Court under Section 11(6) of the Act when the parties were already before
the arbitral tribunal. It was held that considering the provisions of Section
26 of the 2015 Amendment Act, the provisions of the amended Act were
not to apply to the arbitral proceedings commenced in accordance with
Section 21 of the Principal Act before the commencement of the amended
Act, unless the parties otherwise agreed, and as in the said case the
arbitration proceedings had commenced way back in 2014 much prior to
17 (2014)11 SCC 560
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commencement of the Amended Act, hence the provisions of the Amended
Act could not be invoked.
In my opinion the facts of the present case are completely distinct.
This decision would not in any manner help the respondent and more
particularly when the arbitral proceedings in the present case have
commenced after coming into force 2015 Amendment Act.
49. In Rajasthan Small Industries Corporation Ltd. Vs. Ganesh
Containers Movers Syndicate 2019 SCC OnLine SC 65, the principal
agreement between the parties was dated 28 January 2000. A dispute had
arisen between the parties regarding imposition of transit penalty by the
appellant upon the respondent interalia for delay in transportation of
containers. The terms of the contract, Clause 4.20.1 of Schedule-4
(General Conditions) provided for arbitration by the Managing Director
himself or his or her nominee for the sole arbitration. The respondent
requested for appointment of an arbitrator in terms of the said clause. The
appellant therein appointed I.C.Shrivastava, IAS (Retd) as sole arbitrator
on 21 February 2005 (prior to coming into force the 2015 Amendment
Act). Since the progress of the sole arbitrator was not satisfactory, the sole
arbitrator was removed on 26 March 2009, and in his place Chairman-
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cum-Managing Director of the appellant-Corporation was appointed to act
as sole arbitrator by consent of both the parties. For one reason or other
the arbitral proceedings could not be concluded. On 16 March 2010 the
respondent raised its doubt regarding impartiality of newly appointed sole
arbitrator. The sole arbitrator passed an order on this application of the
respondent on 6 April 2010 that the arbitration agreement provided for
arbitration by the Chairman cum Managing Director of the Corporation or
his nominee and only at the request of both the parties the Chairman cum
Managing Director has taken up the arbitration to resolve the disputes
between the parties. The disputes proceeded and on 7 February 2013 the
respondent sent legal notice to the petitioner stating that despite number
of requests, the sole arbitrator has not passed an award and hence called
upon the appellant to pay an amount of Rs.3,90,81,602/-. This was
responded by the appellant stating that since the Chairman-cum-Managing
Director has been transferred, award could not be passed and there is no
question of payment to the respondent. In these circumstances, two years
thereafter on 13 May 2015 the respondent filed an application under
Section 11(6) and Section 15 of the Arbitration Act before the High Court
seeking appointment of an independent arbitrator for adjudication of the
disputes between the parties. On 18 December 2015 it was brought to the
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notice of the arbitrator that an arbitration application has been filed
before the High Court. On 5 January 2016 the Arbitral Tribunal adjourned
the proceedings to 13 January 2016 as a last opportunity for hearing the
parties. On 13 January 2016 the arbitrator rejected the application of the
respondent contractor and the request to adjourn the proceedings till the
decision of the High Court, and held that arbitral proceedings would be
finalized on the basis of available facts and adjourned the arbitral
proceedings to 21 January 2016. On 21 January 2016 the arbitrator
passed an ex-parte award. The High Court by its judgment and order
dated 22 April 2016 allowed the application filed by the respondent and
appointed Mr.J.P.Bansal, Retired District Judge as sole arbitrator to resolve
the disputes between the parties. This order of the High Court was the
subject matter of challenge before the Supreme Court in the said case. It is
in this context the following questions fell for consideration as noted in
paragraph 10 of the decision:-
(i) In the light of the proceedings before the sole arbitrator on
various dates and when the proceedings before the arbitrator was
pending, whether the respondent was right in filing arbitration
petition approaching the High Court under Section 11 and Section
15 of the Arbitration Act, 1996 for appointment of a substitute
arbitrator?
(ii) When by virtue of arbitration agreement Clause 4.20.1 of
Schedule-4 (General Conditions), parties have agreed that the
dispute, differences between the parties to be resolved by the
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Managing Director or his nominee, whether the High Court was
right in deviating from the terms of the agreement between the
parties and appointing an independent Arbitrator?
(iii) Whether by virtue of Section 12 of the Arbitration and
Conciliation (Amendment) Act, 2015, the Chairman- cum-Managing
Director has become ineligible to act as the arbitrator?
(iv) Whether the High Court was right in terminating the
mandate of the arbitrator whom the parties have agreed and
appointing substitute arbitrator on the ground that there was delay
in passing the award?
In the facts of the case, the Court held that the respondent had no
material to show that the arbitrator had not acted independently or
impartially. It was also held that the respondent had participated in the
proceedings before the arbitral tribunal for quite some time and had
expressed its faith in the sole arbitrator and the respondent was not
justified in challenging the appointment of the Managing Director of the
appellant. The Supreme Court also held that Section 12 of the Amended
Act was not applicable in the facts of the case as the arbitral proceedings
has commenced prior to the commencement of the 2015 Amendment Act.
Having noted the context in which the above decision was rendered, I do
not see how the same would assist the respondent in the facts of the
present case.
50. There are other decisions as cited on behalf of the respondent which
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are much prior to coming into force of the Amended Act which I do not
find to have any relevance after the 2015 Amendment Act was brought
into force.
51. Now coming to the case at hand, applying the provisions of Section
12 of the Arbitration Act read with the relevant items in the Fifth and the
Seventh Schedules as noted above and principles of law as laid down in
the decisions of the Supreme Court in Voestalpine Schienen GmbH Vs.
Delhi Metro Rail Corporation Ltd. (supra), TRF Ltd vs. Energo Engineering
Projects Ltd. (supra); Bharat Broadband Network Ltd. Vs. United Telecoms
Ltd. (supra) and Perkins Eastman Architects DPC & Anr. Vs. HSCC (India)
Ltd. (supra), to the facts of the present case, it is quite clear that the
contract between the parties in the present case was executed on 24
September 2014. Clause 55 of the Special Conditions of the Contract is the
arbitration agreement between the parties providing for a standing
arbitral tribunal which provides that an arbitral tribunal should consist of
panel of three Gazetted Railway Officers not below JA Grade and a retired
Railway Officer, retied not below the rank of SAG officer, as the
arbitrators. The clause provides that the arbitral tribunal shall be formed
within three months from the date of the execution of the contract and for
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which purpose the respondent will send a panel of more than three names
of Gazetted Railway Officers of one or more departments of the railways
which may also include the name/s of retired railway officers, to the
contractor from the panel approved by Northern Railway and within two
weeks from the receipt of the list, the Contractor shall intimate in writing
two names from the said list to the Chairman and Managing Director of
the respondent. On such receipt of the nomination, the Chairman and
Managing Director has to appoint at least one out of them as the
petitioner's (contractor) nominee and will simultaneously appoint the
balance number of arbitrators from the panel approved by Northern
Railways duly indicating the presiding Arbitrator from amongst the three
arbitrators so appointed and one out of them would be from the accounts
department.
52. It is thus clear that not only the nominee arbitrator for the
petitioner would be from the panel of serving railway officer but also the
nominee arbitrator for the respondent and the presiding arbitrator is to be
appointed by the Chairman and Managing Director of the respondent.
The invocation of the arbitration in the present case as noted above was
when the petitioner by its letter dated 5 July 2017 raised disputes on non
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payment of the amounts by the respondent and invoked arbitration,
however, in accordance with the law laid down by the Supreme Court in
Voestalpine Schienen GmbH Vs. Delhi Metro Rail Corporation Ltd. (supra)
which was by the petitioner's letter dated 5 July 2017 and as no steps
were taken, the petitioner has approached this Court invoking Section
11(6) and making grievance on appointment of standing arbitral tribunal
also has invoked Sections 14(2) and 15(2) of the Arbitration Act. It can
therefore be clearly seen that commencement of the arbitral proceedings
in the present case is well after commencement of 2015 Amendment Act.
Considering the clear provision of Section 21 of the Arbitration Act, it
would be required to be held that the arbitration proceedings have
commenced when the request of the petitioner made on 5 July 2017 refer
the disputes for arbitration by constituting an arbitral tribunal as per the
law prevailing on the date of the invocaton. Thus, there can be no manner
of doubt that the provisions of Section 12 as amended by the 2015
Amendment Act read with the Fifth and Seventh Schedule squarely have
become applicable in the facts of the present case and a neutral, impartial
and an independent arbitral tribunal was required to be constituted. The
request of the petitioner to constitute such arbitral tribunal was not
accepted by the respondent on the ground that the standing tribunal
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already existed. The respondent was not correct in foisting upon the
standing arbitral tribunal on the petitioner, in view of the clear
requirement of the provisions of Section 12 read with Fifth and Seventh
Schedule as noted above.
53. The standing arbitral tribunal as constituted by the respondent in
the present case had lost its validity and would stand wiped out,
considering the clear position in law as laid down by the Supreme Court
in the decisions in Voestalpine Schienen GmbH Vs. Delhi Metro Rail
Corporation Ltd. (supra), TRF Ltd vs. Energo Engineering Projects Ltd.
(supra); Bharat Broadband Network Ltd. Vs. United Telecoms Ltd. (supra)
and Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Ltd. (supra).
54. In my opinion, the respondent had no authority to reject the request
of the petitioner to have an appointment of an independent and neutral
arbitral tribunal and more particularly when the standing arbitral tribunal
as constituted by the respondent, by operation of law had become invalid
as clearly held by the Supreme Court in Bharat Broadband Network Ltd.
Vs. United Telecoms Ltd. (supra) and Perkins Eastman Architects DPC &
Anr. Vs. HSCC (India) Ltd. (supra). The inevitable consequence would be
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that an independent arbitral tribunal is required to be constituted and the
respondent having failed to do so, this Court necessarily would have to
exercise jurisdiction under Section 11(6) read with Sections 14 and 15 of
the Arbitration Act.
55. In the above circumstances, the petitions need to succeed. They are
accordingly allowed by the following order:-
ORDER
(i) Mr.Justice M.S.Sanklecha, Former Judge of this Court, is appointed as a nominee arbitrator on behalf of the petitioner.
(ii) The respondent is directed to appoint its independent nominee arbitrator within two weeks from today.
(iii) The nominee arbitrators of both the parties shall appoint a Presiding Arbitrator before entering a reference, in accordance with the provisions of the Arbitration Act.
(iv) The learned prospective arbitrators, before entering a reference, shall make a statement of disclosure as per the requirement of Section 11(8) read with Section 12(1) of the Arbitration and Conciliation Act,1996, and forward the same to the Prothonotary and Senior Master of this Court to be placed on record of the applications, with a copy to be ::: Uploaded on - 12/12/2019 ::: Downloaded on - 14/12/2019 13:59:16 ::: pvr 66/66 carap1106-1107-18.doc forwarded to both the parties.
(v) The fees payable to the arbitral tribunal shall be governed by the provisions prescribed under the Bombay High Court (Fees Payable to Arbitrators) Rules,2018.
(vi) All contentions of the parties are expressly kept open.
(vii) The petitions are disposed of in the above terms.
(viii) A copy of this order be forwarded to the learned Arbitrator on the following e-mail address:-
"[email protected]"
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