Tilak Raj, Contractor vs Chief Engineer (MZ) And Another

Sandeep Sharma, J.

By way of instant petition filed under Section 11 of the Arbitration & Conciliation Act, 1996, prayer has been made on behalf of the petitioner for

appointment of arbitrator to adjudicate the dispute inter se parties.

Undisputed facts as emerge from the record are that the petitioner being lowest bidder came to be awarded work namely “Up-gradation of

Tandi, Karding, Lapchang and Peokar Road Km. 0/0 to 14/240 under PMGSY-Phase-VI additional Package No. HP-07-06 amounting to `

1,68,98,029/-. Executive Engineer, Chenab Valley Division, HP PWD, Udaipur, District Lahul & Spiti, entered into an agreement with the petitioner

vide agreement No. 97, dated 17.5.2007 (Annexure P-3). As per averments contained in the petition, work in question was to be completed within a

period of twelve months, however since respondent No.2 failed to complete codal formalities, petitioner could not complete said work within the

stipulated period. Subsequently, petitioner completed the work within a period of forty two months. Allegedly, on account of delay on the part of the

respondents, petitioner suffered loss as stands mentioned in the petition. While invoking provisions of Clause 25 of the agreement No. 97, dated

17.5.2007, petitioner submitted his arbitration claim on 16.10.2015 and vide communication dated 16.4.2016 addressed to respondent No.1, prayed for

appointment of an arbitrator. Acceding to aforesaid request made on behalf of the petitioner, Superintending Engineer, Arbitration Circle, HP PWD,

Solan was appointed as an arbitrator to adjudicate the claim of the petitioner.

However, the fact remains that vide communication dated 2.5.2016, petitioner objected to appointment of Superintending Engineer, Arbitration Circle,

Solan, HPPWD as an arbitrator claiming that in terms of amendment to the provisions of Section 12 of the Act ibid an independent and impartial

arbitrator is required to be appointed to adjudicate the claim of the petitioner. On 4.5.2016, Superintending Engineer, Arbitration Circle, HPPWD Solan

conveyed to respondent No.1 that in view of amendment to Section 12 of the Act ibid, he can not enter into reference and some other suitable person

may be appointed in his place. Since the Department failed to appoint an independent and impartial arbitrator in terms of amended provisions of

Section 12 of the Act ibid, petitioner approached this Court by way of Arbitration Case No. 77 of 2016, wherein this Court vide judgment dated

2.9.2016, appointed on Shri Kartar Singh, Superintending Engineer, 1st Circle, HP PWD, Mandi, District Mandi, Himachal Pradesh as an arbitrator.

Though in view of amended provisions contained in Section 12 of the Act ibid , aforesaid person could not be appointed as an arbitrator, however, he

after having entered into reference sent a communication on 14.3.2018 clarifying that since his time limit for arbitration award has expired by the

mandate of Section 29A of the Act, some other person may be appointed as an arbitrator. In the aforesaid background, petitioner has prayed for

appointment of an independent and impartial arbitrator.

Respondents-State, in their reply have virtually admitted the averments contained in the petition and have prayed that either the time limit of present

arbitrator may be extended or a new arbitrator may be appointed to adjudicate the dispute between the parties.

Having carefully perused the aforesaid provision of law, this Court is persuaded to agree with the contention of learned counsel for the petitioner

that Superintending Engineer, 1st Circle, Mandi, Himachal Pradesh, can not be appointed as an Arbitrator in the instant case and some independent

person, who has no direct or indirect control over the affairs of the respondents ought to have been appointed as an Arbitrator to adjudicate the dispute

inter-se parties.

Hon’ble Apex Court in Volestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, has held as under:-

“14. From the stand taken by the respective parties and noted above, it becomes clear that the moot question is as to whether panel of arbitrators

prepared by the Respondent violates the amended provisions of Section 12 of the Act. Subsection (1) and Sub-section (5) of Section 12 as well as

Seventh Schedule to the Act which are relevant for our purposes, may be reproduced below:

(i) for sub-section (1), the following Sub-section shall be substituted, namely

(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstancesâ€

(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-

matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or

impartiality; and

(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a

period of twelve months.

Explanation 1.--The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as

to the independence or impartiality of an arbitrator.

Explanation 2.--The disclosure shall be made by such person in the form specified in the Sixth Schedule.;

(ii) after Sub-section (4), the following Subsection shall be inserted, namelyâ€

(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. (emphasis

supplied)

THE SEVENTH SCHEDULE

Arbitrator's relationship with the parties or counsel

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

The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.

The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.

The arbitrator is a lawyer in the same law firm which is representing one of the parties.

The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the

affiliate is directly involved in the matters in dispute in the arbitration.

The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.

The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.

The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm

derives a significant financial income therefrom.

The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and

controlling the company.

A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.

The arbitrator is a legal representative of an entity that is a party in the arbitration.

The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.

The arbitrator has a significant financial interest in one of the parties or the outcome of the case.

The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant

financial income therefrom. Relationship of the arbitrator to the dispute

The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.

The arbitrator has previous involvement in the case. Arbitrator's direct or indirect interest in the dispute.

The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.

A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.

The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the

unsuccessful party in the dispute.

Explanation 1.---The term ""close family member"" refers to a spouse, sibling, child, parent or life partner.

Explanation 2.--The term ""affiliate"" encompasses all companies in one group of companies including the parent company.

Explanation 3.--For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or

commodities arbitration, to draw arbitrators from a small, specialized pool. If in such fields it is the custom and practice for parties frequently to

appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the Rules set out above. (emphasis

supplied)

It is a well known fact that the Arbitration and Conciliation Act, 1996 was enacted to consolidate and amend the law relating to domestic

arbitration, inter alia, commercial arbitration and enforcement of foreign arbitral awards etc. It is also an accepted position that while enacting the said

Act, basic structure of UNCITRAL Model Law was kept in mind. This became necessary in the wake of globalization and the adoption of policy of

liberalisation of Indian economy by the Government of India in the early 90s. This model law of UNCITRAL provides the framework in order to

achieve, to the maximum possible extent, uniform approach to the international commercial arbitration. Aim is to achieve convergence in arbitration

law and avoid conflicting or varying provisions in the arbitration Acts enacted by various countries. Due to certain reasons, working of this Act

witnessed some unpleasant developments and need was felt to smoothen out the rough edges encountered thereby. The Law Commission examined

various shortcomings in the working of this Act and in its first Report, i.e., 176th Report made various suggestions for amending certain provisions of

the Act. This exercise was again done by the Law Commission of India in its Report No. 246 in August, 2004 suggesting sweeping amendments

touching upon various facets and acting upon most of these recommendations, Arbitration Amendment Act of 2015 was passed which came into

effect from October 23, 2015.

Apart from other amendments, Section 12 was also amended and the amended provision has already been reproduced above. This amendment is

also based on the recommendation of the Law Commission which specifically dealt with the issue of 'neutrality of arbitrators' and a discussion in this

behalf is contained in paras 53 to 60 and we would like to reproduce the entire discussion hereinbelow:

NEUTRALITY of ARBITRATORS

It is universally accepted that any quasi-judicial process, including the arbitration process, must be in accordance with principles of natural justice.

In the context of arbitration, neutrality of arbitrators, viz. their independence and impartiality, is critical to the entire process. 54. In the Act, the test for

neutrality is set out in Section 12(3) which provides 12(3) An arbitrator may be challenged only ifâ€

(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality...

The Act does not lay down any other conditions to identify the ""circumstances"" which give rise to ""justifiable doubts"", and it is clear that there can

be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too

high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias.

The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular

persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See

Executive Engineer, Irrigation Division, Puri v. Gangaram Chhapolia MANU/SC/0001/1983 : 1984 (3) SCC 627; Secretary to Government Transport

Department, Madras v. Munusamy Mudaliar MANU/SC/0435/1988 : 1988 (Supp) SCC 651; International Authority of India v. K.D. Bali and Anr.

MANU/SC/0197/1988 : 1988 (2) SCC 360; S. Rajan v. State of Kerala MANU/SC/0371/1992 : 1992 (3) SCC 608; Indian Drugs & Pharmaceuticals

v. IndoSwiss Synthetics Germ Manufacturing Co. Ltd. MANU/SC/0139/1996 : 1996 (1) SCC 54; Union of India v. M.P. Gupta (2004) 10 SCC 504;

Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd. MANU/SC/7273/2007 : 2007 (5) SCC 304) that arbitration agreements in

government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in

Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd. MANU/SC/1502/2009 : 2009 8 SCC 520 carved out a minor exception in situations when the

arbitrator ""was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an

inferior rank in some other department) to the officer whose decision is the subject matter of the dispute"", and this exception was used by the Supreme

Court in Denel Proprietary Ltd. v. Govt. of India, Ministry of Defence MANU/SC/0010/2012 : AIR 2012 SC 817 and Bipromasz Bipron Trading SA

v. Bharat Electronics Ltd. MANU/SC/0478/2012 : (2012) 6 SCC 384, to appoint an independent arbitrator Under Section 11, this is not enough.

The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme

Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be

discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party

autonomy can be exercised in complete disregard of these principles-even if the same has been agreed prior to the disputes having arisen between the

parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties'

apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed

by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr. PK Malhotra, the ex officio

member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The

Commission is of the opinion that, on this issue, there cannot be any distinction between State and non State parties. The concept of party autonomy

cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when

the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous-and the right to

natural justice cannot be said to have been waived only on the basis of a ""prior"" agreement between the parties at the time of the contract and before

arising of the disputes.

Large scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is

critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to Sections 11, 12 and 14 of the Act.

The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding

existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of

the Fourth Schedule, which has drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and

which would be treated as a ""guide"" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms

of the proposed Section 12(5) of the Act and the Fifth Schedule which incorporates the categories from the Red list of the IBA Guidelines (as above),

the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the

event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms

of the proposed explanation to Section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the

Fourth Schedule, and as based on the Red and Orange lists of the IBA Guidelines), the ineligibility to be appointed as an arbitrator (and the consequent

de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the Red list

of the IBA Guidelines).

The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to

waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations

where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective ""justifiable doubts"" regarding his

independence and impartiality. To deal with such situations, the Commission has proposed the proviso to Section 12(5), where parties may, subsequent

to disputes having arisen between them, waive the applicability of the proposed Section 12(5) by an express agreement in writing. In all/all other cases,

the general Rule in the proposed Section 12(5) must be followed. In the event the High Court is approached in connection with appointment of an

arbitrator, the Commission has proposed seeking the disclosure in terms of Section 12(1) and in which context the High Court or the designate is to

have ""due regard"" to the contents of such disclosure in appointing the arbitrator.

We may put a note of clarification here. Though, the Law Commission discussed the aforesaid aspect under the heading ""Neutrality of

Arbitrators"", the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In

the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In international sphere, the 'appearance of

neutrality' is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that

is not the aspect which is being considered and the term 'neutrality' used is relatable to impartiality and independence of the arbitrators, without any

bias towards any of the parties. In fact, the term 'neutrality of arbitrators' is commonly used in this context as well.

Keeping in mind the afore-quoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment

Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, Sub-

section (5) of Section 12 lays down that 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, he shall be ineligible to be appointed as an

arbitrator. In such an eventuality, i.e., when the arbitration Clause finds foul with the amended provisions extracted above, the appointment of an

arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be

the effect of non-obstante Clause contained in Sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms

of arbitration agreement.â€​

In the aforesaid judgment, it has been categorically held by the Hon’ble Apex Court that main purpose for amending the provision was to

provide for neutrality of arbitrators. Hon’ble Apex Court has further held that in order to achieve the neutrality, as referred above, Sub-section (5)

of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person, whose relationship with the parties or counsel or subject

matter of dispute falls under any of the categories specified in the schedule, he shall be ineligible to be appointed as an arbitrator.

Consequently, in view of the discussion made herein above and fair stand adopted by Mr. Dinesh Thakur, learned Additional Advocate General, this

Court without going into merits of the case, deems it proper to refer the matter to arbitration in terms of Clause 25 of the agreement.

Accordingly, with the consent of parties, present petition is allowed. Mr. Justice D.D. Sud, J. (Retd.), is appointed as an arbitrator to adjudicate

upon the dispute inter se parties. His consent/declaration under Section 11 (8) of the Act ibid be obtained and placed on record. Aforesaid arbitrator is

requested to enter into reference within a period of two weeks from the date of receipt of a copy of this order. It shall be open for the learned

arbitrator to determine his own procedure with the consent of the parties. Otherwise also, entire procedure with regard to fixing of time limit for filing

pleadings or passing of award stands prescribed under Sections 23 and 29A of the Act.

Needless to say, award shall be made strictly as per provisions contained in Arbitration & Conciliation Act. A copy of this order shall be made

available to the learned arbitrator named above, by the Registry of this court within one week enabling him to take steps for commencement of the

arbitration proceedings within stipulated period.

The petition is disposed of.