Bombay High Court: Employer's General Manager's Role In Arbitrator Nomination Contrary To Principles Of Impartiality And Independence

Bombay High Court: Employer's General Manager's Role in Arbitrator Nomination Contrary to Principles of Impartiality and Independence

The Bombay High Court has ruled that the General Manager of the employer confirming the nomination of an arbitrator by the Contractor undermines principles of impartiality and independence. It concluded that the nomination of an arbitrator by one party cannot be contingent upon approval by the other party.

Justice Bharati Dangre has ruled that when a party unilaterally selects an arbitrator from a panel, the panel must be comprehensive and varied to ensure the other party's freedom of choice. Any deviation from this requirement would violate Section 12(5) of the Act.

The parties signed an agreement on March 14, 2019, in which the Central Railway granted the petitioner advertisement rights for displaying content through internal media in 35 rakes maintained at Kurla car shed for a duration of five years.

As a result of the COVID-19 pandemic and the imposition of restrictions under Section 144 of the Cr.P.C, railway travel was limited, prompting the petitioner to seek renegotiation of the contract terms. The Railways categorized the lockdown period as ‘Force Majeure’ and deemed the non-operational period as ‘Dies Non’. Relief in the form of payment flexibility for license fees was only extended to contracts that had completed their full term and submitted a declaration.

On October 13, 2020, the petitioner signed an unfair, unilateral, and one-sided agreement, while the respondent proposed a formula for the payment of the license fee. The applicant remitted Rs. Four lakhs as the license fee and sought the waiver of penal interest from June 23, 2020, to March 31, 2021.

Following the invocation of force majeure in a letter to the commercial manager, the petitioner expressed the intention to terminate the contract and declined to pay the license fee. Subsequently, show cause notices and demand notices were issued for the payment of license fees along with penal interest. When the petitioner filed a petition under Section 9 seeking interim relief, they were informed that the security provided had already been encashed.

Subsequently, the petitioner invoked the arbitration clause after the parties failed to mutually appoint an arbitrator. The petitioner then approached the High Court, seeking relief under Section 11(6) of the Arbitration and Conciliation Act.

The petitioner argued that the appointment procedure outlined in the agreement is flawed as it restricts the selection to a limited pool of arbitrators.

Furthermore, they contended that the involvement of the general manager of the respondent as an appointing authority renders the procedure invalid.

Additionally, the petitioner asserted that the appointment process is flawed because it allows the respondent to appoint 2/3rd of the arbitral tribunal, and the petitioner's nomination is contingent upon confirmation by the respondent.

The judgment in Central Organisation Railway Electrification v. M/s.ECI-SPIC-SMO-MCML (JV) A Joint Venture Company (CORE), has been referred to a larger bench pursuant to disagreement by two coordinate benches of the Apex Court.

The respondent countered by arguing that the appointment procedure has been endorsed by the Supreme Court in the CORE judgment, where an identical procedure was approved.

Moreover, the respondent cited the Apex Court's decision in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation, affirming that there is no legal prohibition on appointing retired government employees as arbitrators, as they bring valuable technical expertise to the process.

The Court noted that the clause stipulated the formation of a 3 member arbitral tribunal from a panel of four names maintained by the respondent. It was observed that from these 4 names, the petitioner selects 3, and from those, the respondent appoints one as the petitioner's nominee. Additionally, the respondent is responsible for appointing the remaining two arbitrators, including the presiding arbitrator.

The Court determined that selecting an arbitrator from a limited panel of four arbitrators violates Section 12(5) of the Arbitration and Conciliation Act. It asserted that such a practice of creating narrow panels limits freedom of choice and raises suspicions of favoritism in the selection process.

The Court referenced the decision of the Apex Court in Voestalpine to assert that a panel unilaterally compiled by a party must be comprehensive and varied to steer clear of any potential conflict with Section 12(5).

The Court emphasized that the independence and impartiality of arbitrators are fundamental to arbitration, and the principle against bias is a cornerstone of natural justice, applicable universally across all quasi-judicial proceedings with equal significance.

Furthermore, the Court concluded that the authority vested in the General Manager of the Employer to confirm the nomination of an arbitrator by the Contractor undermines principles of impartiality and independence.

Consequently, the Court granted the petition and appointed a single independent arbitrator.