BCL Secure Premises (P) Ltd. vs Metro Railway, Kolkata

In this case, we are concerned with the interpretation and application of

Section 12(5) of the Arbitration and Conciliation Act, 1996 read with its

Seventh Schedule. Section 12 (5) is set out below:

"12(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."

The Seventh Schedule to the Act specifies certain relationships. If a

person who is intended to be appointed as an arbitrator falls in that

relationship with a party he is ineligible to be appointed. The exact scope

and implication of this provision has been recently explained in detail by

the Supreme Court in the case of Voestalpine Schienen Gmbh v. Delhi

Metro Rail Corporation Ltd. decided by it on 10th February, 2017.

Delivering the judgement of the Court Mr. Justice A.K.Sikri noted that by

their letter dated 8th July, 2016 the respondent, Delhi Metro Rail

Corporation Limited forwarded to the petitioner a list of five serving and retired officers belonging to the Delhi Development Authority (DDA) and

Central Public Works Department (CPWD), to choose their nominee

arbitrator from it. Thereafter, the respondent forwarded a list of about

thirty one names which included retired officers of the Indian Railways

with technical qualification and experience. The court noted that before

amendment of the Arbitration and Conciliation Act, 1996 the Law

Commission considered the requirement of neutrality of arbitrators.

Arbitrators were required to the independent as well as impartial. The

court observed.

"21. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.

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In the context of this case, it is relevant to mention that only if an arbitrator is an employee, a consultant, an advisor or has any past or present business relationship with a party, he is rendered ineligible to act as an arbitrator. Likewise, that person is treated as incompetent to perform the role of arbitrator, who is a manager, director or part of the management or has a single controlling influence in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration. Likewise, persons who regularly advised the appointing party or affiliate of the appointing party are incapacitated. A comprehensive list is enumerated in Schedule 5 and Schedule 7 and admittedly the persons empanelled by the Respondent are not covered by any of the items in the said list.

it cannot be said that simply because the person is retired officer who retired from the government of other statutory corporation or public sector undertaking and had no connection with DMRC (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 concerned 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 suitable 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."

Very often past officers of the government or government organisations

with a great deal of technical expertise or professional knowledge are

included in the panel so as to effectively arbitrate upon specified

disputes.

Hence, being a past officer of the government or a government

organisation does not per se make a person ineligible to be appointed as

an arbitrator under the Seventh Schedule. In my opinion, if after

appointment of an eligible person it is found that the arbitrator is biased

in favour of his previous employer or is not impartial or that a doubt

occurs in the minds of reasonable persons that the arbitrator is not

independent or is biased or is partial, or circumstances as mentioned in

the fifth schedule exist then the procedure under Section 12 & 13 is open

to a party to challenge him, asking him to withdraw from office or for ask

for his removal by the court under Section 14 of the said Act.

Now, very briefly I come to the facts of this case.

On 3rd June, 2011 the parties executed a formal agreement under which

the petitioner was to supply, install and commission internet protocol

based surveillance system, personal baggage screening system and

explosive detection and disposal system at twenty three metro railway

stations at Kolkata. A letter of acceptance of the petitioners had already

been issued by the metro railway on 25th February, 2011. It was modified on 11th April, 2011 with the concurrence of the petitioner. The petitioner

had furnished with the metro railways a bank guarantee for Rs.

85,36,764 representing 5% of the contract value. The respondent, from

time to time during execution of the contract, paid to the petitioner Rs.

8,34,59,446/-. According to the respondent the petitioner was guilty of

delay and unsatisfactory work and supply of materials. According to the

petitioner the respondent was in breach of the contract by not

performing their obligations under it like providing a proper

infrastructure, approval of the drawings and diagrams submitted by the

petitioner, failing to issue certification etc.

The contract was governed by the general condition of contract of the

railways including the Arbitration Clause-63. The contractor, after one

twenty days but within 180 days of his presenting the final bill on

disputed matters could demand in writing that the disputes be referred

to arbitration. The demand for arbitration should specify the exact

disputes between the parties. In case the claim exceeded Rs. 10 lakhs

the arbitral panel under Clause-64 (3) (a) (ii) was to comprise of a panel

of three gazetted railway officers. The railways were required to send a

panel more than three names of gazetted railway officers of one or more

departments including the names of retired railway officers empanelled

to work as railway arbitrators to the contractor within sixty days from

the day a written and valid demand for the arbitration is received by the

General Manager. The contractor would be asked to suggest at least two

names out of the panel for appointment as contractor''s nominee

arbitrator, out of which the General Manager would have to appoint one.

The General Manager would simultaneously appoint the balance number

of arbitrators either from the panel or from outside the panel.

I need not recount the details of the proceedings taken before this court

by the petitioner for appointment of an arbitrator.

I shall only refer to the last application made by them under Section 11

of the Arbitration and Conciliation Act, 1996, (AP 52 of 2017). By an

order dated 15th February, 2017 this court directed the railways to

furnish the names of three persons for nomination of an arbitrator to be

made by the contractor "keeping in mind the fifth schedule to the Act".

On 24th February, 2017 the metro railway authorities forwarded to the

petitioner three names. According to the arbitration clause the contractor

had to choose two out of which the railways would appoint one as the

arbitrator.

Now, this panel is challenged by the petitioner on the ground that it is

against the permitted relationship of the arbitrator with the parties,

mentioned in the fifth and seventh schedules.

The above decision of the Supreme Court has made it absolutely clear

that an ex-employee of the government or a government organisation is

not ineligible to be appointed as an arbitrator. In fact officers with

defined technical knowledge or expertise or with a large experience in

certain matters are retained after retirement to act as arbitrators, by the

above entities for proper adjudication of the disputes that arise between

themselves and another party.

However, the facts of the Supreme Court case were slightly different from

this case to the extent that, in that case initially a list of five names was

forwarded by the Delhi Metro Rail to the petitioner and thereafter

another list was furnished to the petitioner where the number of

empanelled candidates was increased to about 31. In those

circumstances the Supreme Court felt that when the petitioner was given

a wider choice to choose their nominee from those 31 odd persons, the

standards of independence and impartiality expected of arbitrators was

not sacrificed.

The arbitration clause in the general conditions of contract is not in

compatible with the above decision of the Supreme Court in as much as

under those conditions, a contractor is required to be given a list of more

than three names out of which he is required to choose two and the

railways are to select one out of those two as the contractor''s nominee.

Thereafter the railways are required to nominate their arbitrator.

The general conditions of contract provide that the railways are to

provide a list of more than three persons. But this condition is not

followed as the highest court desires it to be followed. The railways have

forwarded only three names. They ought to prepare and furnish to a

contractor a much longer and wider list. They should be given a wide

choice amongst persons with different backgrounds and professional

attainments.

Therefore, the railways are required to furnish a longer list to the

petitioner containing at least 30 names. Secondly, the arbitration clause

provides that the railways can appoint any person from within or outside

that panel. This stipulation is bad. The railways do not disclose the

personnel from whom they would appoint their arbitrator. The

Contractor does not know whether the appointed arbitrator of the

railways would be disqualified under Schedules V and VII. Therefore, it is

also imperative that the railways appoint an arbitrator from the panel

sent to the petitioner or from a disclosed panel.

The only grievance of the petitioner in this application is that the

nomination is against Schedules V and VII of the Arbitration and

Conciliation Act, 1996. I do not agree, in view of the above Supreme

Court decision. But I do say that the panel forwarded to the petitioner is

very short.

In those circumstances, this application is disposed of by setting aside

the letter dated 24th February, 2017 (Annexure-m page 68 of the petition) by directing the respondent railways to forward a panel of at least 30

names, of persons of different backgrounds and professional avocations

and attainments to the petitioner. It may include serving or retired

officers of other organisations. From this panel the petitioner will be

required to choose two. Thereafter, the railways can select one to be the

contractor''s nominee arbitrator.

I recommend that the arbitration clause in the general condition of

contract of the railways be amended in accordance with the above

Supreme Court decision read with the observations made by this court

following that decision. A copy of this order be sent by the Registrar

Original Side to the Railway Board for doing the needful.

Certified photocopy of this Judgment and order, if applied for, be

supplied to the parties upon compliance with all requisite formalities.