India: Appointing An Arbitrator Under The National Highways Act, 1956 In Light Of The Recent Dictums Of The Supreme Court In TRF Ltd. And Perkins Eastman?

India has the second largest road network across the world. Till April 2019, the total length of notified national highway stood at 1,42,126 kms¹. Right since FY 2014-15 till FY 2018-19, the per day construction of national highways has increased from 12.08 kms/ day to 29.74 kms/ day². In her budget speech, the Finance Minister stated that the Government intends to further accelerate the development of highways³.

The length of the national highways is growing at a rapid and commendable pace. However, the essential question, which requires judicial determination, is whether the land owners are being provided with a just and fair platform to raise their grievances regarding the compensation being paid to them?

Scheme under the National Highways Act, 1956

The National Highways Act, 1956 ("NH Act") encapsulates the statutory mechanism under which the Central Government acquires land for construction of these national highways. The NH Act is a complete code in itself for the purpose of acquisition of land, disbursement of compensation and settlement of disputes⁴. Once land is acquired under the NH Act, compensation (and its disbursement) to land owners is decided by the Competent Authority notified by the Central Government⁵. The land owners, dissatisfied with the compensation, can invoke statutory arbitration under Section 3G(5) of the NH Act. However, the right to appoint an arbitrator is solely vested with the Central Government, without giving land owners any say in the process⁶. Pertinently, the provisions of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") are subject to the provisions of the NH Act⁷.

At first blush, the arbitration mechanism under the NH Act raises suspicions about neutrality of the arbitrator appointed by the Central Government, which is prima facie an interested party in the outcome of the arbitral proceedings. This article seeks to discuss the interplay between the provisions of Arbitration Act, which provides for neutrality of an arbitrator, when juxtaposed with the unilateral power of the Central Government to appoint an arbitrator under the NH Act.

The issue of neutrality of the arbitrators, particularly when one party is interested in the outcome of the arbitration, has been the cause of much concern in the recent past. This led the Law Commission to observe in its 246th Report that a sensible statutory scheme cannot permit appointment of an arbitrator –

1. who is himself a party to the dispute; or
2. who is employed by one of the parties to the dispute, thereby being interested in the outcome of the arbitration.

Independence and Impartiality of an arbitrator under the Arbitration Act

The legitimacy of an arbitral proceeding hinges largely on the independence and impartiality of the arbitrator so appointed. It was for this reason that the legislature adopted the recommendations made by the Law Commission in its 246th report by amending the Arbitration Act in 2015. Section 12 of the Arbitration Act lays down the grounds on which appointment of an arbitrator can be challenged. Amendment Act of 2015 has also added Fifth Schedule and Seventh Schedule to the Arbitration Act⁸. These schedules list out the grounds that give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Further, Amendment Act of 2015 also seeks to ensure the neutrality of the arbitrator being appointed. It provides that a person, sought to be appointed as an arbitrator, has to disclose in writing about the existence of any relationship or interest, which is likely to give rise to justifiable doubts as to his neutrality.

Applicability of Section 12 of the Arbitration Act to the NH Act

The Supreme Court in two separate cases⁹, in no uncertain terms, has held that Section 3G of the NH Act is a special provision which will be given effect insofar as the appointment of an arbitrator is concerned. Accordingly, the appointment procedure under the Arbitration Act is not applicable to NH Act. Thus, the power of appointment of an arbitrator, exclusively vests with the Central Government under the NH Act. However, if the Central Government fails to make an appointment, the land owner can approach the court by way of writ or suit seeking direction to the Central Government to appointment an arbitrator.

Pertinently, in Sayedabad Tea, the Supreme Court rightly recognized that the provisions of the Arbitration Act will apply to every arbitration to the extent the NH Act is silent. Under the NH Act, there is no provision which deals with challenge to the appointment of arbitrator. Per contra, Section 12 of the Arbitration Act (read with the Fifth and Seventh Schedule) provides for grounds of such challenge. Therefore, applying Sayedabad Tea, Section 12 of the Arbitration Act will be applicable to the arbitral proceedings under the NH Act.

Recent decisions of the Supreme Court on the unilateral appointment of an arbitrator by a party interested in the outcome of an arbitration

In TRF Ltd.¹⁰ a three-judge bench of the Supreme Court decisively ruled against unilateral appointment of an arbitrator. In the said case, the Supreme Court invalidated the arbitration clause that allowed appointment of the Managing Director or his nominee as the sole arbitrator. As per the Supreme Court, a Managing Director or his nominee are interested in the outcome of the case, and thus, ineligible to be act as an arbitrator. The court held that a party who is ineligible to be appointed as an arbitrator by the bar of Section 12(5) could also not appoint, any other person, as an arbitrator.

The said principle was followed by the Supreme Court in its recent judgements in Bharat Broadband Network Ltd¹¹. and Denel Proprietary Ltd¹². Significantly, in Perkins Eastman¹³ the Supreme Court took the paradigm forward. The Supreme Court curtailed the right of executing agency of the State to unilaterally appoint a sole arbitrator on finding it to be interested in outcome of the dispute.

Also, in Pam Developments, the Supreme Court has categorically held that no special treatment can be accorded to the State in the realm of arbitration¹⁴. Thus, the Central Government cannot be relieved from the rigors of the aforesaid judgements.

Central Government, being an party interested in the outcome of the arbitration under NH Act, cannot appoint arbitrators under Section 3G(5) of the NH Act

National Highways Authority of India ("NHAI") is certainly a necessary party to the disputes arising under the NH Act¹⁵. As a nodal agency of the Ministry of Road Transport and Highways, it is entrusted with a function of development, maintenance and management of national highways¹⁶. The courts in past have recognized that NHAI is an implementing agency of the Central Government, created by the Parliament for managing the matters relating to development of national highways¹⁷. It is thus, an instrumentality of the Central Government.¹⁸ Therefore, it can be said that the Central Government would be a party interested in the outcome of the arbitration with the land owners.

In view of the recent judgments of the Apex Court, it is apparent that the Central Government cannot appoint an arbitrator, without keeping in mind Section 12 of the Arbitration Act. Thus, even if the NH Act vests the power with the Central Government to appointment the arbitrator, nonetheless, such an arbitrator would de facto be unable to perform its functions, if the conditions stipulated under Section 12 of the Arbitration Act are not complied with. The dictum in TRF Limited and Perkins Eastman clearly states that if the initial appointing authority is barred from appointing an arbitrator, the appointee is equally barred from acting as an arbitrator. Thus, the essential question remains whether the Central Government can be considered as a party interested in the outcome of the arbitration, hence ineligible to appoint an arbitrator?

The way out: An exception

The three-judge bench of the Supreme Court in Railway Electrification¹⁹ has recently carved out an exception to the principles enunciated in TRF Ltd. and Perkins Eastman. The court in Railway Electrification upheld the validity of the arbitration clause where a party, having the unilateral power to appoint an arbitrator, constituted a panel of arbitrators. The other party has an option to choose an arbitrator from the panel. This, the Supreme Court held, "counter balanced", the unilateral power to appoint an arbitrator by one party.

Conclusion

Following the judgments in TRF Ltd. and Eastman Perkins, a party interested in the outcome of a dispute can no longer unilaterally appoint an arbitrator. As explained above, the Central Government is an interested party in the arbitrations arising out of the NH Act. Accordingly, as of today, the appointment(s) made by the Central Government, appear to be on a sticky wicket and open to challenge.

As a general principle of interpretation, a court should endeavor to harmoniously construe the provisions, rather than striking down the erring provision itself²⁰. The Supreme Court in Railways Electrification, provides a potential way out of the conundrum.

It is thus suggested that Section 3G(5) of the NH Act can be construed to mean that the Central Government can provide for a panel of arbitrators, rather than unilaterally appointing an arbitrator itself. This, as the Supreme Court has stated, would have a counter balance effect i.e. the power of the Central Government nominating its arbitrator gets counter-balanced by the power of choice given to the land owners to choose from a panel. In this situation, the neutrality of the arbitrator appointed under the NH Act can be secured.

Footnotes

1 Available at: https://morth.nic.in/showfile.asp?lid=2923

2 Available at: https://economictimes.indiatimes.com/industry/transportation/roadways/highway construction-down-to-26-km-a-day/articleshow/74680728.cms?from=mdr

3 Available at: https://www.indiabudget.gov.in/doc/Budget_Speech.pdf

4 National Highway Authority of India v. Sayedabad Tea Company Ltd and Ors., Civil Appeal Nos. 6956-6959 of 2009

5 In terms of Section 3(a) of the NH Act, the Central Government has the power to authorize any person or authority to perform the functions of the competent authority.

6 A similar provision under the Electricity Act, 2003 (Section 86(1)(b) read with Section 158) allows the State Commission to appoint an arbitrator in order to adjudicate the disputes. However, the State Commission is an independent authority, which is not interested in the outcome of the arbitration.

7 In terms of Section3G(6) of the NH Act, the provisions of the Arbitration Act will apply to the arbitration under the NH Act, subject to the provisions of the NH Act

8 The Fifth Schedule and Seventh Schedule of the Arbitration Act are in consonance with the Red and Orange List of the International Bar Association Guidelines on Conflicts of Interest in International Arbitration

9 C.A. No. 5250 of 2015 titled as General Manager (Project), National Highways and Infrastructure Development Corporation Ltd v. Prakash Chand Pradhan; C.A. No. 6965-6966 of 2009 titled as National Highway Authority of India v Sayedabad Tea Company Ltd ("Sayedabad Tea")

10 TRF Limited v. Energo Engineering Projects Ltd. (2017) 8 SCC 377 ("TRF Ltd.")

11 Bharat Broadband Network Ltd. v. United Telecoms Ltd., Civil Appeal No. 3972 of 2019 ("Bharat Broadband Network Ltd.")

12 Denel Proprietary Ltd. v. Bharat Electronics Ltd. and Anr., (2010) 6 SCC 394 and Denel Proprietary Ltd. v. Govt. of India, Ministry of Defence (2012) 2 SCC 759 ("Denel Proprietary Ltd.")

13 Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd., Arbitration Application No. 32 of 2019 ("Perkins Eastman")

14 Pam Developments Pvt. Ltd. v. State of West Bengal, Civil Appeal No. 5432 of 2019 and Perkins Eastman ("Pam Developments")

15 In terms of Section 11 of the National Highways Authority of India Act, 1988, the Central Government can entrust the property acquired by it to NHAI under the NH Act. Further, in terms of Rule 2(d)(ia) of the National Highways Rules, 1957, read with Rule 3(i) of National Highways (manner of depositing the amount by the Central Government; making requisite funds available to the competent authority for acquisition of land) Rules, 2019, NHAI acts as the executing agency of the Central Government, for the purpose of disbursement of compensation etc.

16 NHAI has been constituted by the Parliament by virtue of powers given to it under entry 23 of Union List under the Constitution of India

17 GMR infrastructure Ltd. & Anr. v. National Highways Authority of India & Ors., 2008 SCC Online Del 1344

18 The Court on its Own Motion v. Union of India & others, 2017 SCC OnLine Jhar 3297, GMR Infrastructure Ltd. & Anr v. National Highways Authority of India & Ors, 2008 SCC Online Del 1344 and State of W.B. v. Mr. Mondal and Another, (2001) 8 SCC 443

19 Railways Electrification v. M/s ECI-SPIC-SMo-MCML (JV), 2019 SCC Online 1635 ("Railways Electrification")

20 Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors., Civil Appeal Nos. 5399-5400 of 2014

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