Can an Ex-employee of a Party be appointed as an Arbitrator?

[Rajvansh Singh and Tanay Mishra are students at National Law University Odisha]

Independence and impartiality are considered to be the cornerstone of arbitration. The duty of an arbitrator to remain independent and impartial is codified under section 12 of the Arbitration and Conciliation Act 1996 (the “Act”). Neither section 12 of the Act nor Article 12 of the UNCITRAL Model Law provides any specific guidance as regards to the “circumstances” that can be said to give rise to “justifiable doubts” as to the “independence and impartiality” of arbitrators.

This resulted in considerable uncertainty and gave rise to tremendous litigation. In such cases, the Indian courts were required to create a balance between the requirement of “neutrality” of arbitrators stipulated under section 12 and the principle of “party autonomy”. Over the years the Supreme Court of India has inclined in favor of party autonomy, especially in cases involving government contracts wherein former and serving employees of one of the parties (being a government entity) were appointed as arbitrators. To address the issue, the Arbitration and Conciliation (Amendment) Act 2015 (the “Amendment Act”) added Schedule 5 and Schedule 7 to the Act. The said schedules provide for instances wherein the impartiality and independence of the arbitrator can be examined.

Following the amendment, the question relating to the appointment of an ex-employee as an arbitrator came up for consideration before different High Courts that have expressed divergent views. On the one hand, in Hindustan Construction v. Ircon International (2016) and Offshore Infrastructures v. Bharat Heavy Electricals (2016), the High Court was of the view that an ex-employee can be appointed as an arbitrator. On the other hand, the Delhi High Court in Assignia-Vil v. Rail Vikas Nigam (2016) expressed a contrary view. Further, the Supreme Court in Voestalpine Schienen v. Delhi Metro (2017) highlighted the issue but left it far from being settled conclusively.

Recently, a two- judge bench of Supreme Court in The Government of Haryana v. M/s G.F. Toll Road (3 January 2019) held that the position of law with respect to the appointment of an ex-employee as an arbitrator remains unchanged. In this post, the authors seek to critically analyse the said judgement. This is because it poses a threat to the principle of independence and impartiality, which are of paramount significance in the arbitration law regime. Also, it has revived the law prevalent during pre-amendment regime.

Factual Matrix

The Government of Haryana (the “appellant”) executed a letter of acceptance to G.F. Toll Road (the “respondent no. 1”) for execution of a contract. The dispute resolution clause stated that a board of three arbitrators shall hear the dispute. Each party will nominate one arbitrator each and the third arbitrator shall be appointed in accordance with the rules of arbitration of the Indian Council of Arbitration (“ICA”).

A dispute arose between the parties; the appellant nominated a retired engineer-in-chief as their nominee arbitrator. This step of appellant was objected to by the respondent no. 2 (ICA) on the ground that the nominated arbitrator was a retired employee, and there may be justifiable doubts with respect to his integrity and impartiality to act as an arbitrator. Subsequently, respondent no. 1 also objected the mandate of the arbitrator on similar grounds.

The appellant requested for a period of 30 days to appoint a substitute arbitrator. In the meantime, the respondent no. 2 appointed a nominee arbitrator on behalf of the appellant, as well as the presiding arbitrator. Aggrieved by the said appointment, the appellant filed an application before the District Court under section 15 of the Act on the ground that constitution of the arbitral tribunal was illegal and against the principles of natural justice.

Issues before the Court

(1) Whether the appointment on behalf of the appellant is valid under section 15 of the Act?

(2) Whether the appointment of an ex-employee as an arbitrator is permissible under the current arbitration law regime?

In this post, the authors will focus on the second issue.

The Decision

The Supreme Court held that an ex-employee can be appointed as an arbitrator. The ratio decidendi of the case was broadly based on two factors-

  • There is no reasonable apprehension of bias as the nominee arbitrator was a former employee of the state over 10 years ago.
  • The interpretation of clause 1 of the Fifth schedule, which is analogous to the clause 1 of the 7th schedule. The said clause reads: “The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party” [emphasis added]. The words “is an” indicates that the person nominated as an arbitrator will only be disqualified if he or she is an employee, consultant, or advisor currently working for a party. The word “any other” used in clause 1 would indicate a relationship other than employee, consultant or an advisor.

Critique

The authors believe that holding ex-employees as being eligible for appointment as arbitrators would not be an ideal solution, especially if it endorses appointment of retired employees of government departments. In case of government departments, employees and ex-employees alike are routinely called upon to work the standard terms of contract and, as such, have a close understanding as to their interpretation and effect.

Ex-employees are likely to retain close links with their former employer and the officers who may be presently working there and this, in turn, often plays a role in their appointment in the first place. This provides a sufficient ground for a prima facie apprehension as to the arbitrator’s independence and impartiality.

The Supreme Court fails to mention clause 31 of Fifth Schedule. The said clause raises justifiable doubts when an “ex-employee” is appointed as an arbitrator within the window of three years. Thus, the ratio decidendi of the case discussed seems to contradict the legislative intent behind clause 31. The authors believe that the said clause is enough to provide a direction for the court to rule against the appointment of ex-employee as an arbitrator. Now, a pertinent question arises that since ten years have elapsed since the ex-employee retired and the same should not be covered under clause 31. On a plain reading of the case, the ratio decidendi of the case seems to be a general opinion and has no bearing on the time after retirement.

An argument is often been posed that if the intent of the legislature was to bar the appointment of an ex-employee as an arbitrator then why a clause analogous to clause 31 is absent from Schedule seven. On this, the authors are of the view that Schedule 7 is not exhaustive and do not cover every situation. The guidelines mentioned in Schedule 5 and 7 should be used as a base and further the law should be developed on it.

Conclusion

The Amendment Act settles the debate regarding the appointment of an employee as an arbitrator. However, the act fails to deliberate upon the issue discussed. The authors are of the view that the Supreme Court should not adopt a liberal approach and should overturn this regressive judgement. This will be in tune with the latest amendment that came into existence to curb the practice of appointment of employee and ex-employee as an arbitrator. Otherwise, the purpose behind the Amendment Act will fail.

The 246th Law Commission Report mentions that neutrality of arbitrators is an important aspect of arbitration. There should not be any law that creates any misapprehension regarding the principle of Impartiality and independence. If not, it will discourage the business community from choosing arbitration as a preferred dispute resolution mechanism.

Rajvansh Singh & Tanay Mishra

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