India: Appointment Of Arbitrators By Indian Government Owned Entities: Dos And Don'ts

Indian public sector undertaking (PSUs) account for a large part of India's GDP. Naturally, therefore, PSUs are parties to many Indian disputes (whether in courts or arbitration). When it comes to arbitrations involving PSUs in particular, one of the most contentious issues has been appointment of arbitrators. Historically, PSUs have appointed arbitrators with whom they have an existing relationship (for example, PSUs would typically appoint their current or former employees as arbitrators).

Indian courts and academics have been critical of this practice as it has the effect of undermining the neutrality of the arbitration process. Indeed, it was one of the issues discussed by the Law Commission in its Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 (the Act). Pursuant to Law Commission's recommendations, the conflict of interest provisions of the Act were substantially amended in 2015. Most importantly, two new schedules were added to the Act (Fifth and Seventh Schedules), which lay down 34 and 19 grounds respectively, on the basis of which an arbitrator's appointment may be challenged. In light of these amendments, and the recent High Court and Supreme Court judgments applying the amended Act, it is vital that PSUs re-assess the procedures for appointment of arbitrators in their contracts. This article summaries common arbitrator appointment procedures adopted in Government/PSU contracts and identifies procedures which continue to remain valid post amendments to the Act, and those that do not.

Recent Amendments to the Act

Even before the Act was amended, an arbitrator's appointment could be challenged if there were circumstances "that give rise to justifiable doubts as to his independence or impartiality". However, previously, the Act did not contain any statutory guidance on what are these 'circumstances', leaving it up to the courts to decide the issue on a case-by-case-basis. That has changed post amendments. In particular, two schedules have been added – i.e., the Fifth and the Seventh Schedules – that contain 34 and 19 grounds respectively, derived from the IBA Guidelines on Conflict of Interest in International Arbitration, 2010. The grounds set out in the Fifth Schedule serve as a "guide" in determining whether justifiable doubts as to arbitrators' independence and impartiality actually exist under Section 12(1)(a) of the Act. The Seventh Schedule, on the other hand, contains 'ineligibility' grounds. If the arbitrator is found to fall under any of the 19 categories specified in Seventh Schedule, he would be 'ineligible' for appointment pursuant to Section 12(5) of the Act (or, if already appointed, his appointment would be void). However, the parties may agree to waive the sub-section (and consequently the Seventh Schedule) by an express agreement in writing, after the dispute has arisen.

Modes of Arbitrator Appointment in PSU/Government Contracts

The table below sets out the commonly found procedures for appointment of arbitrators in Government/ PSU contracts. In respect of each entry, we have identified the current validity status, i.e. if the procedure remains valid following the amendments to the Act.

Category 1 - 'Named Person' within the PSU

This is one of the most commonly found arbitrator appointment procedures in Government/PSU contracts. Generally these arbitration clauses identified individuals holding senior positions within the PSU to act as the arbitrator. The legality of such clauses had been upheld by the Supreme Court in the pre-amendment regime, provided certain conditions were met.¹ However, post amendments, these clauses are no longer permissible. Under Section 12(5) read with Entry 1 of the Seventh Schedule, current employees, officers or advisors of a party, are 'ineligible' for appointment, unless the parties waive the application of the Seventh Schedule after the dispute has arisen.²

Category 2 – 'Named Person' outside the PSU

This category deals with the situation where the arbitrator is not directly related to the disputing PSU, but is employed with a Government department or a different PSU. As things stand, such arbitrator appointments are permissible under the Act. Having said that, it is important to ensure that none of the other grounds listed under the Fifth and Seventh Schedules of the Act adversely affect the eligibility of the individual to serve as an arbitrator.

Category 3 - Former Employees

There is lack of clarity in this category due to differing judgments of the High Courts. In Assignia-Vil the Delhi Court held that the appointment of present and retired employees of one of the parties as arbitrators would "definitely give rise to justifiable doubt[s] as to his independence and impartiality". On the other hand, the Punjab and Haryana High Court in Reliance Infrastructure Ltd v. Haryana Power Generation Corporation Ltd. held that former employees are not barred from being arbitrators under the Act, provided: (i) they do not have any other past business relationship with the party; and (ii) no justifiable doubts as to their impartiality exist or have been raised by the party aggrieved.³ The Madras High Court in Offshore Infrastructure Limited v Bharat Heavy Electricals Limited⁴ and the Delhi High Court in the recent Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited⁵ reached the same conclusion, although on different grounds.

Category 4 – Appointing Authority

This category deals with a situation where the arbitration clause names a persona designate (or 'appointing authority') who is vested with the power to appoint the arbitrator. Traditionally the practice amongst PSUs was that the 'appointing authority' would appoint a departmental officer or senior official of the PSU/Government entity to act as the arbitrator. That would no longer be permissible in light of the considerations discussed under Category I above. However, if such an appointing authority appoints an arbitrator who is independent and impartial (say, a retired judge), then it would not fall foul of the Act.⁶

Category 5 – Panel of Arbitrators

This category was the subject matter of the Supreme Court's recent ruling in Voestalpine Schienen GmbH.⁷ The dispute in this case (between Delhi Metro Rail Corporation Ltd. (DMRC) and a German entity) related to contract for procurement of rails for the Delhi-Metro project. The arbitration clause provided for the selection of a three member tribunal from a DMRC maintained panel of engineers consisting of "serving or retired engineers [of the] 'Government Departments or of PSUs'". The arbitration clause also provided that the DMRC must send to the Germany entity a short-list of five individuals chosen from the panel, from which that party will choose its arbitrator.

DMRC effectively ignored the latter limitation in the arbitration clause and provided the German entity the flexibility to choose their arbitrator from the entire panel (of 31 arbitrators). Yet, the German entity objected to the appointment process, arguing that the DMRC had "all trappings of the Government" and, therefore, while the panel members were not employed by DMRC, they were still conflicted due to their employment with the Government or other PSUs.

The Supreme Court rejected the German entity's argument. It held that the empaneled individuals were not 'ineligible' for appointment under Section 12(5) read with Entry 1 of the Seventh Schedule. It further noted that if the German entity's arguments were to be accepted, every individual who is remotely connected with the Government would be rendered ineligible for appointment. Nevertheless, the Court laid down two important requirements for appointment of arbitrators from a panel maintained by a PSU/Government entity:

• First, the panel must be 'broad based'. For example, it could contain of names from other government undertakings and PSUs unconnected with the disputing parties, as well as individuals of high repute from the private sectors and the legal community; and
• Second, the other party should be able to choose from the 'broad based' panel, rather than a small short-list as envisaged in the DMRC contract. Indeed, the Court struck down that portion of the arbitration clause which required DMRC to prepare a short list of five arbitrators. This is to dispense any apprehension of the Government picking its favorites.

These guidelines for appointment of arbitrators from a panel were recently applied in the Afcons case. The Delhi High Court noted that the guidelines were necessary "to instill confidence in the arbitral process" and, accordingly, struck down the arbitration clause that required Afcons to choose an arbitrator from a list of five arbitrators forwarded by Rail Vikas Nigam Limited.⁸

In conclusion, while there is still some uncertainty in this field, Government entities and PSUs must at least take a fresh look at the appointment process in their contracts to ensure that they are in compliance with the Act. Equally, parties (both, domestic and foreign) who are entering into contracts with Indian Government entities and PSUs must also be aware of the amended conflict of interest norms, to ensure that the arbitrator appointment process in their contract is enforceable.

Footnotes

*Rishab Gupta is a Counsel and Mayuri Tiwari-Agarwala is an Associate at Shardul Amarchand Mangaldas & Co's Mumbai office.

1. Indian Oil Corp. Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520. The Supreme Court in this case found that appointment of an 'employee' of one of the parties would not, on its own, raise the presumption of bias. However, the Court noted that it had the discretion to refuse appointment of an employee of a party as the arbitrator, if there exists a reasonable apprehension about his impartiality or independence.

2. See, e.g. Assignia-VIL JV v. Rail Vikas Nigam Limited, 2016 SCC Online Del 2567 (current employees of the respondent entity) (Assignia-VIL case); Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited, Arbitration Petition No. 21/2017, decided by the High Court of Delhi on 29 May 2017 (current employees of respondent entity) (Afcons case); West Haryana Highways Projects Pvt. Ltd. v. National Highways Authority of India (NHAI) O.M.P. (T) (COMM.) 28/2017 & IA No.4598/2017, decided by the High Court of Delhi on 15 May 2017 (advisor/consultant of NHAI).

3. Assignia-VIL case, supra note 2, ¶54; Reliance Infrastructure Ltd v. Haryana Power Generation Corporation Ltd., Arbitration Case No. 166 of 2016 (O&M), decided by High Court of Punjab and Haryana on 27 October 2016 (in this case, the Haryana Government had appointed the ex-Chief Secretary of Haryana as the arbitrator).

4. Offshore Infrastructure Limited v Bharat Heavy Electricals Limited, O.P. No. 466 of 2016, decided by the High Court of Madras on 9 December 2016.

5. Afcons case, supra note 2, ¶¶23, 33.

6. See, B.E. Billimoria Co. Ltd. v. RITES Limited, Arbitration Petition No. 716/2016 and IA No. 15567/2016, decided by the High Court of Delhi on 31 January 2017.

7. M/s. Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. (2017) 4 SCC 665.

8. Afcons case, supra note 2, ¶¶26, 33.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.