Supreme Court Appoints Sole Arbitrator Due to Ineligibility of Government Official: Haryana Space Application Centre vs. Pan India Consultants (20 January 2021)

Date of the Judgment: 20 January 2021
Citation: (2021) INSC 21
Judges: L. Nageswara Rao J., Indu Malhotra J., Ajay Rastogi J.

Can a government official, who is part of the management of a state nodal agency, be appointed as an arbitrator in a dispute involving that agency? The Supreme Court of India addressed this critical question in a recent case, highlighting the importance of impartiality in arbitration proceedings. This case revolves around a dispute between the Haryana Space Application Centre (HARSAC) and Pan India Consultants Pvt. Ltd., where the appointment of a government official as an arbitrator was challenged.

Case Background

The Haryana Space Application Centre (HARSAC), a nodal agency of the Government of Haryana, contracted with Pan India Consultants Pvt. Ltd. for the modernization of land records. The contract, awarded on 28 February 2011, included the digitization of cadastral maps and the management of old revenue documents. The Service Level Agreement, dated 29 March 2011, contained an arbitration clause for resolving disputes.

HARSAC claimed that Pan India Consultants failed to complete the assigned work by the agreed deadline of 31 December 2011, despite extensions granted until 31 December 2013. Consequently, HARSAC invoked the Performance Bank Guarantee on 18 March 2014. Pan India Consultants challenged this action by filing a civil suit before the Delhi High Court, which directed both parties to resolve the dispute through arbitration.

Timeline:

Course of Proceedings

Initially, HARSAC appointed Shri. Anurag Rastogi, IAS, Principal Secretary to the Government of Haryana, as its nominee arbitrator, while Pan India Consultants appointed Justice Rajive Bhalla (Retd.) as their nominee arbitrator on 14 September 2016. The arbitral tribunal was thus constituted.

Pan India Consultants then applied for the appointment of a presiding arbitrator under Section 10(1) of the Arbitration and Conciliation Act, 1996. The tribunal declined this request on 22 May 2017, reserving the right to appoint the third arbitrator if the two arbitrators disagreed.

On 3 August 2018, the arbitral tribunal recorded that arguments were heard and the matter was reserved for the award. However, on 7 January 2019, HARSAC claimed that the tribunal’s mandate had terminated due to the expiry of the statutory period. One of the arbitrators, Justice Rajive Bhalla, stated on 8 February 2019 that the award was ready to be pronounced.

Pan India Consultants then filed an application under Section 29A(4) of the Arbitration Act before the Additional District Judge, Chandigarh, seeking an extension of time for passing the arbitral award. The District Judge granted a 3-month extension on 8 November 2019. HARSAC challenged this order before the Punjab and Haryana High Court, which initially granted an interim order on 31 July 2020 and then a 4-month extension on 24 August 2020.

Legal Framework

The case primarily revolves around Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule. This provision specifies that a person is ineligible to be appointed as an arbitrator if their relationship with the parties or counsel falls within the categories listed in the Seventh Schedule, regardless of any prior agreement.

Section 12(5) of the Arbitration and Conciliation Act, 1996 states:
“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.”

Item 5 of the Seventh Schedule of the Act reads:
“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 Supreme Court emphasized that Section 12(5) read with the Seventh Schedule is a mandatory and non-derogable provision of the Arbitration and Conciliation Act, 1996.

Arguments

HARSAC argued that the arbitral proceedings were not completed within the statutory period of one year or the extended period of six months, thus terminating the mandate of the arbitral tribunal. They contended that the tribunal had failed to pronounce the award even after 28 months from its constitution. HARSAC also argued that the extension granted by the District Judge was not justified.

Pan India Consultants argued that the award was ready to be pronounced and that the delay was caused by HARSAC’s failure to pay its share of the tribunal’s fees. They contended that the mandate of the tribunal had not terminated and sought an extension of time for the tribunal to conclude the proceedings.

The Supreme Court noted that the Principal Secretary to the Government of Haryana, being a part of the management of HARSAC, a nodal agency of the State, would have a controlling influence on HARSAC. Therefore, his appointment as an arbitrator would be invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue that emerged was:

1. Whether the appointment of the Principal Secretary to the Government of Haryana as an arbitrator for HARSAC was valid under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule.

Treatment of the Issue by the Court

Authorities

The Supreme Court primarily relied on Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, to determine the ineligibility of the arbitrator.

Judgment

The Supreme Court held that the appointment of the Principal Secretary to the Government of Haryana as the nominee arbitrator of HARSAC was invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule.

The Court observed that the Principal Secretary, being part of the management of HARSAC, would have a controlling influence on the agency, thus making him ineligible to act as an arbitrator.

The Court, with the consent of both parties, appointed Justice Kurian Joseph (Retd.), a former judge of the Supreme Court, as the sole arbitrator to complete the arbitral proceedings.

The Court directed the new arbitrator to conduct the proceedings from the stage they had reached and to pass the award within six months from the date of the order. The arbitrator was directed to adhere to the declarations under Section 12 of the Arbitration and Conciliation Act, 1996, regarding independence and impartiality.

The Court also directed that the fees of the sole arbitrator would be shared equally by both parties and that the proceedings would be conducted either virtually or at the seat of arbitration in Haryana.

The Court stated: “We are of the view that the appointment of the Principal Secretary, Government of Haryana as the nominee arbitrator of HARSAC which is a Nodal Agency of the Government of Haryana, would be invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996 read with the Seventh Schedule.”

The Court also stated: “In exercise of our power under Section 29A(6) of the Arbitration and Conciliation Act, 1996 (as amended), we hereby appoint Justice Kurian Joseph (Retd.), former judge of this Court, as the substitute arbitrator, who will conduct the proceedings in continuation from the stage arrived at, and pass the Award within a period of 6 months from the date of receipt of this Order.”

The Court further stated: “The appointment of the Sole Arbitrator is subject to the declarations being made under Section 12 of the Arbitration and Conciliation Act, 1996 with respect to independence and impartiality, and the ability to devote sufficient time to complete the arbitration within the period of 6 months.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure the impartiality and independence of arbitrators, as mandated by Section 12(5) of the Arbitration and Conciliation Act, 1996. The Court emphasized that the Principal Secretary’s position within the government structure created a conflict of interest, making him ineligible to act as an arbitrator. The Court also considered the fact that the arbitral proceedings had been significantly delayed, and a new arbitrator was needed to expedite the process.

Key Takeaways

• Government officials who have a controlling influence over a government entity are ineligible to be appointed as arbitrators in disputes involving that entity.
• Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, is a mandatory provision that ensures the impartiality of arbitrators.
• The Supreme Court has the power to appoint a substitute arbitrator under Section 29A(6) of the Arbitration and Conciliation Act, 1996, to expedite delayed arbitration proceedings.

Directions

The Supreme Court directed the newly appointed sole arbitrator, Justice Kurian Joseph (Retd.), to conduct the proceedings in continuation from the stage they had reached and to pass the award within six months from the date of the order. The arbitrator was also directed to adhere to the declarations under Section 12 of the Arbitration and Conciliation Act, 1996, regarding independence and impartiality.

Development of Law

This judgment reinforces the principle of impartiality in arbitration proceedings, particularly when government entities are involved. The Supreme Court clarified that Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, is a mandatory provision that cannot be waived by prior agreement. This ruling ensures that arbitrators are free from any conflict of interest and can make fair and unbiased decisions.

Conclusion

The Supreme Court’s decision in the case of Haryana Space Application Centre vs. Pan India Consultants Pvt. Ltd. underscores the importance of maintaining the impartiality of arbitrators, particularly when government entities are involved. By invalidating the appointment of a government official as an arbitrator and appointing a sole arbitrator, the Court ensured that the arbitration process would be fair, independent, and expeditious. This judgment serves as a crucial reminder of the mandatory nature of Section 12(5) of the Arbitration and Conciliation Act, 1996, and its role in upholding the integrity of arbitration proceedings.