Further Indian jurisprudence on appointments of former employees as arbitrators

Since our previous report on the Delhi High Court refusing to uphold an arbitration clause that provided for the tribunal to be comprised of one party’s employees or retired employees, there have been several cases which have provided useful guidance in relation to the appointment of arbitrators under the new provisions in the Arbitration and Conciliation (Amendment) Act 2015, which came into force on 23 October 2015 and amended the Arbitration and Conciliation Act 1996 (“Amended Act“).  The Amended Act applies to arbitration agreements which pre-date the amendments.[1]

The recent jurisprudence on appointing former employees as arbitrators has dealt with a number of issues, but four key principles emerge:

  1. The provisions of the Amended Act dealing with independence of arbitrators do not prohibit the appointment of former employees.
  2. Nonetheless, it is still important for there to be no doubts in relation to the neutrality, impartiality and independence of the arbitral tribunal. Therefore, where a party has a contractual right to compose a list or panel from which the other parties are to select an arbitrator, a ‘broad based’ approach must be adopted.
  3. The Courts have adopted a narrow definition of what constitutes an employee, and therefore all government employees are not automatically ineligible to be appointed as an arbitrator where one of the parties is a government body.
  4. If an ineligible person (e.g. an employee) was nominated as an arbitrator in the arbitration agreement but is now ineligible as a consequence of the Act, that person cannot nominate another independent arbitrator, notwithstanding what the agreement might provide.

Eligibility of former employees

Section 12(5) read along with paragraph 1 of Schedule 7 of the Act deals with the appointment of employees as arbitrators. Section 12 (5) states that “[N]otwithstanding 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…”
Paragraph 1 of Schedule 7 states that “The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with the party.”

In the case of Reliance Infrastructure v Haryana Power Generation Corporation Ltd[2], the Punjab and Haryana High Court found that “past relationships” in the Act only referred to “other business relationships”, i.e. the word “past” did not apply in respect of an employee, consultant or advisor. Therefore, in this case a former Chief Secretary of the State of Haryana was eligible to be appointed as an arbitrator.

Since then, the cases of Offshore Infrastructure Limited v Bharat Heavy Electricals Limited[3] and M/S Rahee Infratech Limited vs The Principal Chief Engineer[4], both in the Madras High Court, have confirmed that former employees can be appointed as arbitrators.

Supreme Court emphasis on neutrality, impartiality and independence

In the case of Voestalpine Schienen GmbH v Delhi Metro Rail Corporation Ltd.[5], the Respondent (DMRC, a public sector railways body) initially provided a list of five arbitrator candidates, and invited the Petitioner to nominate its arbitrator from this list (as provided for in the arbitration agreement).  All five candidates were serving or retired engineers of government departments or public sector undertakings.  The Petitioner objected on the basis that the DMRC was a public sector undertaking and that the approach set out in the arbitration agreement would lead to the appointment of “ineligible persons”, and applied to Court for a retired judge to be appointed as arbitrator.  Prior to the hearing, the DMRC put forward an expanded list of 31 names, all of whom were current or former government employees, but not all of whom were from the Railways, and invited the Petitioner to make its choice from this expanded list.

The Supreme Court dismissed the petition on the basis that the expanded list was appropriate, as it did not contain any persons connected with the DMRC.  In so doing, the Court emphasised the importance of neutrality, impartiality and independence, citing authorities from both the UK Supreme Court and the French Cour de cassation.  However, whilst it made clear that the Petitioner had to nominate its arbitrator from the list of 31 names, it also queried the provisions in the DMRC’s arbitration agreement which gave the DMRC the power to put forward a shortlist of five names from which the other party would have to choose.  Whilst the DMRC (ultimately) opted not to invoke that power in this case, the Court noted that this approach may create suspicion in the minds of opposing parties.  It also questioned the need for the panel to be restricted to serving or retired public sector engineers, noting that such panels should be ‘broad based’, and ought to include persons from other backgrounds, such as judges, lawyers and accountants.

In subsequent cases the Delhi High Court[6] has held that, whilst a party may have a contractual right to provide a list from which an arbitrator must be chosen, such a list must not be limited to ex-employees and must be broad based so as not to give rise to apprehensions in the minds of the other party that would adversely affect its confidence in the arbitral process.  In Afcons Infrastructure v Rail Vikas Nigam Limited, the Court declined to require the Petitioner to choose from a list of former Railways employees, even though such individuals are not strictly prohibited by the Amended Act.  It instead allowed a retired Supreme Court judge to be appointed on the Petitioner’s behalf (thus departing from the contractual mechanism).

Narrow definition of who an employee is

The breadth of the definition of “employee” was considered in Voestalpine Schienen. The Petitioner argued that the list of nominees provided by the Respondent, DMRC, contained individuals who worked with the Railways and therefore should be regarded employees of the Respondent. The Court held that whilst such individuals worked for Railways entities or other public sector undertakings, they were not in any way related to the DMRC, and were therefore eligible.  It also noted that the named parties did not fall within the scope of the ‘red’ or ‘orange’ lists of the IBA Guidelines on Conflicts of Interest in International Arbitration.

The Chhattisgarh High Court applied the reasoning in Voestalpine Schienen in the case of Surendra Kumar Chhabda vs State of Chhattisgarh[7], although it noted that the position might be different if it were in relation to former employees of private sector parties.

An ineligible arbitrator cannot appoint a nominee

In the case of TRF Ltd v Energo Engineering Projects Ltd[8], the arbitration clause stated that unless otherwise agreed, the sole arbitrator was to be the Managing Director of the Respondent or his nominee. The Supreme Court held that since the Energo’s Managing Director was not eligible to be an arbitrator (as he was an employee) any nominee picked by him would also be ineligible as this would be “tantamount to carrying on the proceeding of arbitration by himself“.

A similar issue arose in the case of Bharat Broadband Network Limited v United Telecoms Limited[9], where the arbitration agreement provided that the Chairman of the Petitioner or his nominee was to be appointed as sole arbitrator. This provision would ordinarily have been unenforceable on the basis of TRF v Energo.  However, the Court noted that the conditions in Section 12(5) of the Act can be waived by the parties subsequent to disputes having arisen, by an express agreement in writing. In this case the Court noted that after the Petitioner’s Chairman appointed an arbitrator, the Respondent continued to participate in the proceedings, including by filing a statement of claim without any reservation.  Because these steps were taken in writing, the Court considered that the waiver provisions in section 12(5) of the Amended Act had been engaged.

Comments

Historically, public sector undertakings in India have often appointed arbitrators with whom they have an existing relationship such as past or current employees of that public sector body, or other current or former civil servants.

The general thrust of the decisions since the Amended Act came into force, however, point towards at least a partial change in that practice.  It is clear that current employees and any person nominated by them cannot serve, unless the parties agree otherwise in writing after the dispute arises (although as the case law shows, if a party wishes to make an objection, it should do so at the first opportunity).  Also, whilst public sector bodies can stipulate in their contracts that arbitrators be chosen from lists comprising current or former employees of other public sector bodies, those lists should be broad based and should not give rise to apprehensions in the minds of opposing parties.  Otherwise, even if they do not strictly fall foul of the Amended Act, the Courts may still be willing to disapply them and impose other arrangements instead.

Finally, it is worth noting again the continuing practice of the Indian Supreme Court in drawing on international jurisprudence and encouraging the development of Indian arbitration law in line with global norms and standards.

 

[1] Sahib Infrastructure v Secretary to the Government of India, Madhya Pradesh High Court, 14 December 2017.

[2] Punjab and Haryana High Court, 27 October 2016.

[3] Madras High Court, 9 December 2016.

[4] Madras High Court, 10 October 2017.

[5] Supreme Court of India, 10 February 2017 (MANU/SC/0162/2017).

[6] Afcons Infrastructure Ltd v Rail Vikas Nigam Limited (29 May 2017) and S.P. Singla Constructions (P) Ltd. vs Delhi Metro Rail Corporation Limited (25 September 2017).

[7] Chattisgarh High Court, 14 December 2017.

[8] Supreme Court, 3 July 2017.

[9] Delhi High Court, 22 November 2017.

For more information, please contact Donny Surtani, Partner,  John Mathew, Associate, or your usual Herbert Smith Freehills contact.

Donny Surtani
Donny Surtani
Partner
Email | Profile
+44 207 4662 216
John Mathew
John Mathew
Associate
Email
+44 207 4662 913

 

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