Introduction

Appointment of serving or ex-employees of a contesting party as arbitrators continues to beleaguer the entire arbitration community. Although this issue has been put to scrutiny before various Courts but it is yet to be resolved determinatively. Such appointments are questionable on account of apparently being in conflict with the sanctimonious principle of impartiality in arbitration, as the appointment of such persons as arbitrators would naturally bring a presumption of bias in favor of the party with whom they are or have been associated with. In order to ensure independence, neutrality and impartiality in the process of appointing the arbitral tribunal, Section 12(5) r/w the Seventh Schedule was introduced by way of the 2015 Amendment to the Arbitration and Conciliation Act, 1996 ("the Act"). Section 12(5) provides that any person whose relationship with either party to the dispute falls within the relationships specified under the Seventh Schedule, shall be ineligible to be appointed as an arbitrator. The first relationship specified under the Seventh Schedule which makes a person ineligible to be appointed as an arbitrator is:

"The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party."

A literal interpretation of the aforesaid excerpt makes it clear that the serving employees belonging to either party to the dispute are ineligible to be appointed as arbitrators. Therefore, the controversy regarding appointment of current employees as arbitrators is no longer res integra. However, in so far as the appointment of ex-employees is concerned, no clear guidance has been provided in the Act. Moreover, Court's interpretation of this issue has been capricious and varied. Therefore, there has been continuing conundrum surrounding the validity of arbitral clauses that require a party to choose an arbitrator from a panel comprising ex-employees of the opposite party. This article briefly discusses and analyses a few judgments passed by the Hon'ble Supreme Court of India regarding this issue.

I. Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665 (Supreme Court) ("Voestalpine judgment")

In the Voestalpine case, the arbitral clause required Delhi Metro Rail Corpn. Ltd ("DMRC") to prepare a panel of 5 arbitrators from which both parties were to choose their respective arbitrators. When the dispute arose, Voestalpine Schienen GmbH ("Voestalpine")  objected to the process of appointing the arbitral tribunal as the said panel consisted of serving and ex-employees of DMRC. In response to the objections, DMRC sent a fresh list of 31 arbitrators, comprising of no serving or ex-employees of DMRC, and asked Voestalpine to nominate its arbitrator therefrom. Nevertheless, Voestalpine challenged the process of appointing the arbitral tribunal proposed by DMRC as being in contravention to Section 12(5) r/w the Seventh Schedule of the Act. While dealing with the challenge made by Voestalpine, the Court held that,

"26. It cannot be said that simply because the person is a retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (the party in dispute), he would be treated as ineligible to act as an arbitrator. Had this been the intention of the legislature, the Seventh Schedule would have covered such persons as well. Bias or even real likelihood of bias cannot be attributed to such highly qualified and experienced persons, simply on the ground that they served the Central Government or PSUs, even when they had no connection with DMRC. The very reason for empanelling these persons is to ensure that technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators. It may also be mentioned herein that the Law Commission had proposed the incorporation of the Schedule which was drawn from the red and orange list of IBA guidelines on conflict of interest in international arbitration with the observation that the same would be treated as the guide "to determine whether circumstances exist which give rise to such justifiable doubts". Such persons do not get covered by red or orange list of IBA guidelines either

27. As already noted above, DMRC has now forwarded the list of all 31 persons on its panel thereby giving a very wide choice to the petitioner to nominate its arbitrator. They are not the employees or ex-employees or in any way related to DMRC. In any case, the persons who are ultimately picked up as arbitrators will have to disclose their interest in terms of amended provisions of Section 12 of the Act. We, therefore, do not find it to be a fit case for exercising our jurisdiction to appoint and constitute the Arbitral Tribunal.

29. Some comments are also needed on Clause 9.2(a) of GCC/SCC, as per which 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 instil 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 the dispute is the Government or public sector 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 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."

While rejecting the petition filed by Voestalpine, it can be seen that the Court specifically took into consideration that the panel proposed by DMRC did not contain any person who was its serving employee or ex-employee. Although, the Court, in definite terms, did not lay down that the appointment of ex-employees as arbitrators is not permissible under the Act, however, as is evident from the aforesaid paragraphs of the judgment, the fact that the panel proposed by DMRC did not contain its serving or ex-employees appears to be the primary basis for the Court to  reject Voestalpine's petition.

In conclusion, the Supreme Court in Voestalpine laid down that:

  1. The panel of arbitrators from which the a party is required to nominate its arbitrator should not include people who are employees/ex-employees of the opposite party. (Para 27)
  2. The panel of arbitrators from which the a party is required to nominate its arbitrator should be a broad based panel. (Para 29 and 30)

II. Central Organisation for Railway Electrification v. EPI-SPIC-SMO-MCML (2020) 14 SCC 712 (Supreme Court) ("Railway Electrification")

In this case, the question for consideration before the Hon'ble Supreme Court was that whether the panel of arbitrators suggested by a party to the dispute could comprise of its ex-employees? While allowing ex-employees of a party to the dispute to be appointed as arbitrators, the Court held that,

"25. Contending that the appointment of retired employees as arbitrators cannot be assailed merely because an arbitrator is a retired employee of one of the parties, the learned ASG has placed reliance upon Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd. [Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC (Civ) 607] After referring to various judgments and also the scope of amended provision of Section 12 of the Amendment Act, 2015 and the entries in the Seventh Schedule, the Supreme Court observed that merely because the panel of arbitrators drawn by the respondent, Delhi Metro Rail Corporation are the government employees or ex-government employees, that by itself may not make such persons ineligible to act as arbitrators of the respondent DMRC. It was observed that the persons who have worked in the Railways under the Central Government or the Central Public Works Department or public sector undertakings cannot be treated as employee or consultant or advisor of the respondent DMRC. In para 26 of Voestalpine Schienen GmbH [Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC (Civ) 607] , the Supreme Court held as under : (SCC p. 689, para 26)

27. By the letter dated 25-10-2018, the appellant has forwarded a list of four retired railway officers on its panel thereby giving a wide choice to the respondent to suggest any two names to be nominated as arbitrators out of which, one will be nominated as the arbitrator representing the respondent Contractor. As held in Voestalpine Schienen GmbH [Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC (Civ) 607] , the very reason for empanelling the retired railway officers is to ensure that the technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators. Merely because the panel of the arbitrators are the retired employees who have worked in the Railways, it does not make them ineligible to act as the arbitrators."

In the Railway Electrification judgment, the Court placed heavy reliance on the Voestalpine judgment while approving the panel of arbitrators proposed by the Railway Authority. However, it seems that the Hon'ble Supreme Court misinterpreted the ratio laid down in the Voestalpine judgment since:

  1. In the Voestalpine judgment, the Court explicitly noted that the members in the proposed panel were ex-employees of several government departments, but were neither employees/ex-employees of DMRC, nor connected with DMRC in any manner whatsoever (Para 26 and 27 of the Voestalpine judgment). On the other hand, in the Railway Electrification judgment, the Court approved the panel proposed by the Railway Department that exclusively comprised of its ex-employees.
  2. In the Voestalpine judgment, the Court categorically held that a panel unilaterally prepared by a party from which the opposite party is required to nominate its arbitrator should be a broad based panel which shall comprise of people from the public as well as the private sector and should include judges, lawyers, etc. However, in the Railway Electrification judgment, the Court upheld the validity of a panel that comprised of only 4 persons who were ex-employees of the Railway Authority.

The aforementioned reasons make it apparent that the Railway Electrification judgment is in conflict with the law laid down in the Voestalpine judgment.

III. Tantia Construction Limited v. Union of India (MANU/WB/0445/2020) (Calcutta High Court) ("Tantia Construction")

In this case, Tantia Construction Limited ("Tantia") filed a petition for challenging the validity of the panel of arbitrators proposed by the Respondent therein, that consisted of its serving and ex-employees on the ground that the said persons are not eligible to be appointed as arbitrators as per Section 12(5) read with the Seventh Schedule of the Act. While allowing the petition, the Court held that,

"5. In view of the disputes and differences arisen between the parties by a letter dated March 5, 2018, addressed to the General Manager of the respondent, the petitioner invoked the arbitration clause. By a letter dated July 5, 2018, the General Manager of the respondent forwarded the panel of two names of SAG Gazetted Railway Officers and two SAG retired Railway Officers to the petitioner and requested the petitioner to nominate two names out of the said panel. At this juncture, it is to be noted that in view of the amendment in Section 12 of the Act of 1996 with effect from October 23, 2015, and incorporation of the Seventh Schedule to the same Act, any existing officer or employee of the railway cannot act as an Arbitrator...."

In the aforesaid judgment, it is apparent that the High Court categorically affirmed that serving employees of a party to the dispute cannot be appointed as arbitrators. It is noteworthy that the decision of the High Court was challenged by the Respondent, i.e. Union of India, by way of a special leave petition before the Hon'ble Supreme Court in SLP(C) No. 12670/2020. However, vide Order dated 11.01.2021, the Hon'ble Supreme Court concurred with the findings of the High Court and held that, 

"Having heard Mr. K.M. Nataraj, learned ASG for some time, it is clear that on the facts of this case, the judgment of the High Court cannot be faulted with. Accordingly, the Special Leave Petition is dismissed. However, reliance has been placed upon a recent three-Judge Bench decision of this Court delivered on 17.12.2019 in Central Organisation for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company, 2019 SCC OnLine 1635. We have perused the aforesaid judgment and prima facie disagree with it for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this, yet appointments may be valid depending on the facts of the case. We therefore request the Hon'ble Chief Justice to constitute a larger Bench to look into the correctness of this judgment."

It is also noteworthy that in the aforementioned Order dated 11.01.2021 passed in SLP (C) No. 12670/2020, the Railway Electrification judgment has been referred to a larger bench and the judgment of the Hon'ble Supreme Court that will settle the law regarding this issue is awaited. However, at the present moment, the ratio of the Railway Electrification judgment is still the law of the land as no Order of stay against the said judgment has been passed by the Hon'ble Supreme Court.

Conclusion

The neutrality, independence and impartibility of the arbitral tribunal is imperative in the arbitral process not only to ensure fairness but also for the pronouncement of an impartial and unbiased arbitral award. In view of the above, if the arbitral clause provides for the appointment of ex-employee/s of one party to the dispute as arbitrator/s, then on account of such previous relationship, the opposite party would be discouraged from resolving the dispute through arbitration. Thus, in order to ensure fairness in the arbitral process, it is essential that ex-employees belonging to either party to the dispute should not be appointed as arbitrators. On the other hand, in so far as the appointment from panel of arbitrators is concerned, the broad-based panel, not including any serving or ex-employees of either party, proposed in the Voestalpine judgment appears to more plausible to ensure the sacrosanct principles of neutrality, independence and impartibility in the arbitration proceedings.

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