Supreme Court of India: Whether the appointment of an arbitrator by ‘post’ & not by ‘person’ is valid?

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In SP Singla Constructions Pvt. Ltd. vs State of Himachal Pradesh (Civil Appeal Nos. 11824-11825 of 2018 decided on 4 December 2018), the Supreme Court addressed the challenge to the appointment of an arbitrator by post (appointed by the Engineer-in-Chief). Read the case analysis below:

Factual Matrix

The parties entered into a construction contract, clause (65) of which contained an arbitration clause. Dispute arose amongst the parties and the Appellant requested for the appointment of an arbitrator. Pursuant to the request, the Chief Engineer, of Respondent’s department appointed the Superintendent Engineer as the arbitrator. The arbitrator entered reference and the Appellant remained absent or sought adjournment in arbitration proceedings. Therefore, the arbitration proceedings were terminated by the arbitrator under Section 25(a) of the Indian Arbitration and Conciliation Act, 1996 (‘Act’) which deals with the situation where the parties commit default without showing sufficient cause and consequent termination of the proceedings. Meanwhile, aggrieved by the appointment of departmental arbitrator, the Appellant filed an appeal before the Himachal Pradesh High Court under Section 11(6) pursuant to which a party may request the High Court to take necessary measures for securing the appointment of an arbitrator. It is pertinent to note that Section 11(6) does not confer any right to appeal to the parties. The High Court rightly dismissed the ‘appeal’ of the appellant stating that the proper remedy for the Appellant was to file a petition under Section 13 of the Act which deals with sets out the challenge procedure related with the appointment of an arbitrator and thereafter, challenging the award under Section 34 of the Act. The Appellant challenged these findings of the High Court in the present proceedings.

Arbitration Clause

Clause 65 of the General Conditions of Contract-…..Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs drawings and instructions therein before mentioned and as to the quality of workmanship of materials used on the work or as to any other question, claim, right matter or thing whatsoever in any way arising out of or relating to the contractor designs drawings, specification and estimates, instructions orders or these conditions otherwise concerning the works of the execution or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by the Engineer-in-Chief/Chief Engineer, Himachal Pradesh Public Works Department. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant that he had to deal with the matters to which the contract relates, and that in the course of his duties as Government servant he had expressed views on all or any of the matters in dispute or different. The arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason that (sic) the Chief Engineer, HPPWD at the time of such transfer vacation of office or inability to act shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with the reference from the stage at which it was left by his predecessor, it is also a terms of this contract that no person other than a person appointed by the Chief Engineer, HPPWD, should act as arbitrator and if for any reason that is not possible the matter is not be claim in dispute is Rs.50,000/- (Rupees Fifty Thousand) and above, the arbitrator shall give reasons for the award.

Subject as aforesaid the provision of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof and the rules made thereunder and for the time being shall apply to the arbitration proceeding under this clause.” [Underlining added in the Original Judgement]

Applicable Legal Principles

Section 11(6) of the Act

“Section 11 – Appointment of arbitrators

(6) Where, under an appointment procedure agreed upon by the parties,-

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

…”

Section 25(a) of the Act

“Section 25 – Default of a party

Unless otherwise agreed by the parties, where, without showing sufficient cause,–

(a) the claimant fails to communicate his statement of claim in accordance with sub-section(1) of section 23, the arbitral tribunal shall terminate the proceedings

…”

Parties Contentions

The Appellant contended that the appointment by department after coming into operation of the Act, was no more permissible and any appointment could only be made in terms of Section 11 of Act. It was further submitted that since the arbitrator appointed by office had entered upon the reference, the Appellant was compelled to file a petition under Section 11(6) of the Act before the High Court which had erroneously rejected its prayer for appointment of an independent arbitrator by name.

It was also argued by the Appellant that the arbitrator appointed by the department, is an employee in service of the department which the provision of Section 12(5) of the Act bars at the threshold.

It is worth mentioning that Section 12(5) was inserted by the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Act’) which has prohibited the appointment of departmental arbitrators since the amendment came into force i.e. from 23.10.2015 whereas the arbitration proceedings in the present cases initiated in 2013.

In response, the Respondent contended that the appointment of Superintendent Engineer, was as per clause (65) of the contract and as per the provisions of law. It was further argued that the Amendment Act, 2015 shall apply in relation to arbitral proceedings commenced on or after the date of commencement of the 2015 Act and shall not apply to the arbitral proceedings commenced prior to the 2015 Act unless the parties otherwise agree.

Judgement

The Court observed that the main thrust of challenge for appointment of sole arbitrator was on the ground that the arbitrator had not been appointed by name but, had been appointed by designation.

After perusing clause (65), the Court remarked that it was permissible to appoint a person by designation and the same is evident from clause (65), in particular the sentence “the arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason the Chief Engineer is to appoint another person….”. If appointments were only to be made by name and not by designation there could be no question of further appointment on the Arbitrator vacating his office. It is only when an Arbitrator is appointed by designation that the question of a vacancy upon the incumbent vacating office could arise thereby enabling the Chief Engineer to appoint another person to act as arbitrator. The Court also took note that any challenge to the arbitrator appointed ought to have been raised before the arbitrator himself in the first instance. The Appellant challenged the said appointment by way of petition under Section 11(6) of the Act before the High Court. Therefore, in view of the above observation, the Court upheld the appointment of Superintendent Engineer as the Arbitrator.

The Court further took note of Section 26 of 2015 Act which inter alia states that the provisions of the Amendment Act, 2015 shall apply in relation to arbitral proceedings commenced on or after the date of commencement of 2015 Act (w.e.f. 23.10.2015). Since in the instant case, the arbitration proceedings commenced way back in 2013, much prior to coming into force of the 2015 Act, the provisions of the 2015 Act cannot be invoked. Further, the Court also relied on Board of Control for Cricket in India v. Kochi Cricket Private Limited and others, (2018) 6 SCC 287 wherein the Court inter alia held that the provisions of 2015 Act (with effect from 23.10.2015) cannot have retrospective operation in the arbitral proceedings already commenced unless the parties otherwise agree.

The Court also took note of the its earlier judgement of Antrix Corporation Limited v. Devas Multimedia Private Limited (2014) 11 SCC 560 relied by the High Court in the impugned order. In that case, an issue arose whether the ICC Rules or the UNCITRAL would govern the arbitration proceedings. It was the stand of the respondent in the said case that it would be ICC Rules. The Supreme Court was of the view, the invocation of the ICC Rules would be of course the subject to challenge in appropriate proceedings but not by way of an application under Section 11(6) of the Act. It was also held that that where the arbitration clause has already been invoked by one of the parties, the provisions of Section 11(6) cannot be invoked again and in case the other party is dissatisfied or aggrieved by the appointment of an arbitrator in terms of the agreement, his/its remedy would be by way of a petition under Section 13 and thereafter under Section 34 of the Act. Placing reliance on Antrix Corporation (Supra), the Court upheld the view taken by the High Court and held that once, the appointment of an arbitrator is made at the instance of the government, the arbitration agreement could not have been invoked for the second time.

Further, in the interest of justice and taking a pro-arbitration approach, the Court set aside the order of termination of arbitration proceedings given by the arbitrator. The order was set aside since, the Appellant was not given any warning not to take any further adjournments.

My Comments

The position regarding appointment of an employee of a Party as an arbitrator post 2015 Act is well settled now.  Section 12(5) of 2015 Act read with the Seventh Schedule prescribes an absolute bar on certain specific categories to be appointed as an arbitrator. Section 12(5) is reproduced below:

“Section 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.”

In a sense, it is presumed that on the existence of the relationships falling under the categories specified in the Seventh Schedule of the 2015 Act, it would be not permissible for a person to act as an arbitrator.

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