Bombay High Court: In Arbitration applications to resolve disputes that had arisen due to the contracts, a single bench of Bharati Dangre, J. held that the appointment of an arbitrator from a narrow panel of four arbitrators is violative of Section of the (‘Act’) as it restricts free choice and increases suspicion that favorites are chosen from the panel.
Background:
The first application was filed by Telex Advertising Pvt. Ltd. against Central Railway after a Letter of Acceptance was issued in their favor, awarding advertisement rights for five years. Due to the pandemic and imposition of restrictions under Section of the , the Railways issued a notice declaring the non-operational period to be treated as Dies Non. It was also notified that there would be no relief in payment of license fee for non-fare revenue contracts. The Telex addressed a letter to the commercial manager and expressed its intention to terminate the contract and also made it clear that it would not pay the license fee. The applicant received several show-cause and demand notices to pay license fees along with penal interest because of which, the appointment of an independent arbitrator was sought.
The second application was filed by N.P Enterprises after Western Railway issued a Letter of Acceptance in their favor for manual cleaning and housekeeping of 13 railway stations in the Bombay division for four years. Due to the pandemic, the applicant was directed to reduce manpower and was issued a letter of deployment of workers. Railways, through a letter, raised certain issues as regards payment made to the workers and NP Enterprises replied, demanding outstanding payments for the last eight months.
On 20-6-2023, the applicant was blacklisted, and a fine of Rs. 5 Lakh was imposed upon him without any show-cause notice being issued. Ultimately, the Railways terminated the contract, forfeited the performance guarantee, and debarred the applicant for two years from participating in any work with the Mumbai Division of Railway.
Upon approaching this Court under Section of the , the applicant succeeded in obtaining a stay on blacklisting, but the Court left it open for the parties to take appropriate steps for initiation of arbitration proceedings.
N.P. Enterprises invoked arbitration to which the Western Railway intimated that an Arbitrator can be appointed only when the claims are quantified in monetary terms. Through the present application, N.P. Enterprises raised a question as to whether an Arbitrator to be appointed as per clause 8.4 of the General Conditions of Contract shall satisfy the test of the constitution of an independent and impartial arbitrator in the backdrop of Section 12(5) read with Schedule V and VII of the Act.
The NP Enterprises argued that the Railways could not have suggested a restrictive panel of only four retired officers and the panel ought to have been broader to have a choice.
The third petition was an arbitration petition for appointment of a sole arbitrator in the wake of the disputes that had arisen out of the breach of leave and license agreement executed with the Airport Authority of India, Pune.
Analysis and Decision:
The Court stated that an independent and impartial arbitrator is the hallmark of the arbitration proceedings, both on the domestic and international front. The Court stated that the rule against bias is one of the fundamental principles of natural justice, which is applicable with equal force in all quasi-judicial proceedings, and when the parties choose arbitration, they expect the resolution to be independent, impartial, and unconnected with either of the parties. Further, the Court said that to make the provision of Section of the substantive and effective, explanations have been provided by the legislature and to strengthen the essence of the Arbitration process, the legislature introduced Section 12(5).
The Court noted that in the first petition, the Railway admitted the invocation but resisted the appointment of Arbitral Tribunal by stating that the same can only be done ‘when the claims are quantified in monetary terms’. The Court referred to Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation, which specifically dealt with the issue of ‘neutrality of arbitrators’ and reiterated what was emphatically held, that in a situation where the proposed Arbitrator is an employee, a consultant, an advisor, or has any past relationship with the party then, he is rendered ineligible and incompetent to act as an arbitrator.
Further, the Court found it proper to highlight the decision of the Supreme Court in Voestalpine (supra) which was to the effect that to instill confidence in the mind of the other party, the Panel of Arbitrators maintained by any Authority must be broad-based, which could afford enough choice for choosing an Arbitrator and apart from serving or retired engineers of Government departments, Public Undertaking, Engineers of prominence and high repute from the private sector should be included.
The Court reiterated what was said in Bharat Broadband Network Limited v. United Telecoms Limited, that the appointment of someone who is himself de jure ineligible to be an Arbitrator vide Section 12(5) read with Schedule VII, is void ab initio and the award passed by such an arbitrator is a nullity.
The Court further stated that this case is identical to the clause that was before the Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML A Joint Venture Company, wherein, it was held that since the agreement provides for appointment of Arbitral Tribunal consisting of three Arbitrators from out of the panel of serving or retired railway officers, the appointment should be in terms of the agreement, and therefore, the High Court was not justified in appointing an independent sole Arbitrator ignoring clause 64(3)(A)(ii) and 64(3)(b) of the General Conditions of Contract.
On perusal of the clause in the Contract, the Court noted that the cases where the total value of claims does not exceed Rs. 1 crore, the Arbitral Tribunal shall consist of a sole Arbitrator, who shall be a gazette officer of the Railway, not below the JA Grade, nominated by the General Manager. Further, the Court noted that in all other cases, the Railways shall send a panel of at least four names of one or more departments of the Railway, which may also include names of retired officers within 60 days from the receipt of valid demand for arbitration. The other party shall then be asked to suggest to the General Manager at least two names out of the panel as its nominee out of which at least one shall be chosen.
The Court agreed with the submission that such a clause was clearly against Section 12(5) read with Schedule VII and the mode in which the names of the proposed arbitrators shall be forwarded was also contrary to the observation in Voestalpine (supra). Further, the Court held that i it is mandatory for the panel of arbitrators to be sufficiently broad, in conformity with the principle laid down in Voestalpine (supra), failing which it would be incumbent on the Court while exercising jurisdiction under Section of the to constitute an independent and arbitral Tribunal. The Court reiterated that choice should be given to the party to nominate any person from the entire panel of arbitrators since there always exists a scope for restricting free choice and raising suspicion that the chosen arbitrators are their favorites and would act in their favor.
Further, the Court also stated that in the first case, Telex was justified in invoking arbitration because the notice had set out the dispute and since the Railway had failed to act, it had waived its right, which entitled the applicants to seek reference to a sole arbitrator. The Court appointed the Arbitrator for all three cases.
[Telex Advertising v. Central Railway, Arbitration Application (L) No. 6984 of 2023, Decided on 27-03-2024]
Advocates who appeared in this case :
For Applicant — Advocate Mohammed Zain Khan, Advocate Ashraf Kapoor, Advocate Dhananjay Deshmukh, Advocate N. Qureshi, Advocate Dushyant Krishnan, Sr. Advocate G.S. Godbole, Advocate Shon D. Gadgil, Advocate Murtaza Chherawala, Advocate Mihika Awate, Advocate Rukhsar Mulani
For Respondent — Advocate N.R. Bubna, Advocate Pooja Malik, Advocate Mayuresh Lagu, Advocate Shashank Dubey, Advocate Sagar Patil, Advocate H.V. Kode, Advocate J.S. Karnik
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