Supreme Court clarifies appointment of arbitrators in railway contracts: Central Organisation for Railway Electrification vs. M/S ECI-SPIC-SMO-MCML (JV) (17 December 2019)

Introduction

Date of the Judgment: 17 December 2019

Citation: (2019) INSC 1316

Judges: R. Banumathi, J., A.S. Bopanna, J., and Hrishikesh Roy, J.

When disputes arise in contracts, how should arbitrators be appointed? The Supreme Court of India recently tackled this question in a case involving a railway contract. The core issue was whether a High Court could appoint an independent arbitrator when the contract specified a panel of arbitrators. This judgment clarifies the importance of adhering to the agreed-upon arbitration procedures in contracts.

The judgment was delivered by a three-judge bench comprising Justice R. Banumathi, Justice A.S. Bopanna, and Justice Hrishikesh Roy. The opinion was authored by Justice R. Banumathi.

Case Background

The Central Organisation for Railway Electrification (the appellant) awarded a work contract worth ₹165,67,98,570 to M/S ECI-SPIC-SMO-MCML (JV) (the respondent) on 20 September 2010. This contract included an arbitration clause. The contract was governed by the General Conditions of Contract (GCC).

After the Arbitration and Conciliation (Amendment) Act, 2015 came into effect on 23 October 2015, the Ministry of Railways modified Clause 64 of the GCC on 16 November 2016. This modification detailed the procedure for appointing arbitrators.

The respondent failed to complete the work within the stipulated time. Consequently, on 18 October 2017, the appellant issued a seven-day notice to the respondent under Clause 62 of the GCC. Subsequently, on 27 October 2017, a 48-hour notice was issued, and on 1 November 2017, the contract was terminated. The appellant also forfeited the respondent’s security deposit and encashed the performance guarantee.

The respondent challenged the termination in the High Court of Judicature at Allahabad, which was dismissed on 28 November 2017, directing the respondent to invoke the arbitration clause. On 27 July 2018, the respondent requested the appellant to appoint an Arbitral Tribunal to resolve the disputes, claiming ₹73.35 crores. The appellant responded on 24 September 2018, providing a list of four serving Railway Electrification Officers for the respondent to choose from. Another list of four retired Railway officers was sent on 25 October 2018.

The respondent did not reply to these letters but instead filed an arbitration petition before the High Court seeking the appointment of a sole arbitrator, suggesting the name of Shri Ashwani Kumar Kapoor. The respondent argued that the contract did not provide for a neutral arbitrator, necessitating the court’s intervention.

Timeline

Course of Proceedings

The respondent initially filed a petition before the High Court challenging the termination of the contract. This petition was dismissed on 28 November 2017, with the High Court directing the respondent to pursue arbitration. The respondent then requested the appointment of an Arbitral Tribunal. When the appellant sent a list of names for the panel of arbitrators, the respondent did not respond and instead filed a petition before the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator.

The High Court rejected the appellant’s argument that the arbitrator should be appointed from the panel as per the General Conditions of Contract. The High Court stated that its powers to appoint an arbitrator were independent of the contract and appointed Shri Rajesh Dayal Khare, a retired judge of the Allahabad High Court, as the sole arbitrator.

Legal Framework

The case primarily revolves around the interpretation of Clause 64 of the General Conditions of Contract (GCC) and Section 12(5) of the Arbitration and Conciliation Act, 1996, as amended in 2015.

Clause 64 of the GCC outlines the procedure for resolving disputes through arbitration. It specifies how arbitrators should be appointed, including the composition of the Arbitral Tribunal. The clause was modified on 16 November 2016, after the 2015 amendment to the Arbitration and Conciliation Act, 1996.

The modified Clause 64(3)(a)(ii) of the GCC states that if Section 12(5) of the Arbitration and Conciliation Act, 1996 is waived, the Arbitral Tribunal should consist of three gazetted Railway Officers not below JA (Junior Administrative) Grade, or two Railway Gazetted Officers not below JA Grade and a retired Railway Officer not below the rank of Senior Administrative (SA) Grade officer.

Clause 64(3)(b) of the GCC states that if Section 12(5) of the Arbitration and Conciliation Act, 1996 is not waived, the Arbitral Tribunal should consist of three retired railway officers not below the rank of Senior Administrative Officer.

Section 12(5) of the Arbitration and Conciliation Act, 1996, read with Schedule VII, specifies circumstances under which a person is ineligible to be appointed as an arbitrator. This includes situations where the arbitrator has a relationship with the parties or the subject matter of the dispute.

The relevant portion of 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.”

Arguments

Appellant’s Arguments:

• The appellant argued that the High Court should have appointed the arbitrators as per the procedure outlined in Clause 64(3)(a)(ii) or 64(3)(b) of the GCC.
• The appellant contended that since the agreement and the GCC provided for a panel of arbitrators, the High Court erred in appointing a sole arbitrator outside this panel.
• The appellant submitted that the appointment of an independent arbitrator was in contravention of the agreed terms of the contract.
• The appellant relied on the judgments of Union of India v. Parmar Construction Company (2019) SCC Online SC 442 and Union of India v. Pradeep Vinod Construction Company (2019) SCC Online SC 1467, which held that arbitrators should be appointed as per the contractual agreement.

Respondent’s Arguments:

• The respondent argued that the 2015 amendment to the Arbitration and Conciliation Act, 1996, applied to this case since the demand for arbitration was made on 27 July 2018.
• The respondent contended that under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with Schedule VII, the arbitrators proposed by the appellant were ineligible as they were either serving or retired employees of the appellant.
• The respondent argued that if the General Manager of the Railways was ineligible to be an arbitrator, he could not nominate others to be arbitrators.
• The respondent relied on Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 and TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377, to support their argument that employees or ex-employees of the appellant could not be appointed as arbitrators.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

• Whether the High Court was right in appointing an independent arbitrator in contravention of Clauses 64(3)(a)(ii) and 64(3)(b) of the General Conditions of Contract.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following cases and legal provisions:

Judgment

How each authority was viewed by the Court?

• Union of India v. Parmar Construction Company (2019) SCC Online SC 442*: The Supreme Court followed this case, reiterating that the High Court should not appoint an independent arbitrator when a contract specifies a procedure for appointment.
• Union of India v. Pradeep Vinod Construction Company (2019) SCC Online SC 1467*: The Supreme Court followed this case, stating that the appointment of an arbitrator should be in terms of the agreement.
• Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665*: The Supreme Court distinguished this case, clarifying that retired government officers are not automatically ineligible to act as arbitrators.
• Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755*: The Supreme Court cited this case to highlight the ineligibility criteria under Section 12(5) of the Arbitration and Conciliation Act, 1996.
• Government of Haryana PWD Haryana (B and R) Branch v. G.F. Toll Road Private Limited and Others (2019) 3 SCC 505*: The Supreme Court cited this case to reiterate that a retired employee of a party to the agreement can be appointed as an arbitrator.
• Punj Lloyd Ltd. v. Petronet MHB Ltd. (2006) 2 SCC 638*: The Supreme Court cited this case to explain that the right to appoint an arbitrator continues even after 30 days of demand.
• Union of India v. Bharat Battery Manufacturing Co. (P) Ltd. (2007) 7 SCC 684*: The Supreme Court cited this case to state that the right to appoint an arbitrator ceases after an application under Section 11(6) of the Act has been filed.
• TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377*: The Supreme Court distinguished this case, stating that the General Manager’s power to nominate is balanced by the respondent’s power to select from the panel.
• Perkins Eastman Architects DPC and another v. HSCC (India) Limited (2019) SCC Online SC 1517*: The Supreme Court cited this case to state that when both parties have the advantage of nominating an arbitrator of their choice, the advantage of one party in appointing an arbitrator would get counter-balanced by equal power with the other party.

What weighed in the mind of the Court?

The Supreme Court emphasized the importance of adhering to the terms of the contract, particularly the arbitration clause. The Court held that the High Court was not justified in appointing an independent arbitrator when the contract specified a procedure for appointing arbitrators from a panel. The Court also clarified that retired railway officers are not ineligible to be appointed as arbitrators merely because they are former employees of the Railways.

The court’s reasoning was primarily based on the principle that parties are bound by the terms of their contract. The court also reasoned that the appointment procedure in the contract provided a balanced approach, as the respondent had the power to choose from the panel of arbitrators. The court also clarified that retired railway officers are not ineligible to be appointed as arbitrators, as their expertise can be beneficial in resolving technical disputes.

The Court rejected the argument that the General Manager was ineligible to nominate arbitrators, noting that the respondent’s power to select from the panel counter-balanced this. The court reasoned that the very purpose of empanelling retired railway officers is to leverage their expertise in resolving technical disputes.

The Supreme Court quoted:

“To conclude, in our considered view, the High Court was not justified in appointing an independent arbitrator without resorting to the procedure for appointment of an arbitrator which has been prescribed under clause 64(3) of the contract under the inbuilt mechanism as agreed by the parties.”

The Supreme Court also quoted:

“It cannot be said that simply because the person is a retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (the party in dispute), he would be treated as ineligible to act as an arbitrator.”

The Supreme Court further quoted:

“The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party.”

There were no dissenting opinions in this case.

Key Takeaways

✓ Parties must adhere to the arbitration procedures specified in their contracts.

✓ High Courts should not appoint independent arbitrators when the contract provides for a panel of arbitrators.

✓ Retired employees of a party are not automatically ineligible to act as arbitrators.

✓ The power of one party to nominate arbitrators can be balanced by the other party’s power to select from a panel.

This judgment reinforces the principle of party autonomy in arbitration and clarifies the circumstances under which a High Court can intervene in the appointment of arbitrators. It emphasizes that courts should respect the agreed-upon procedures in the contract.

Directions

The Supreme Court set aside the High Court’s orders and directed the appellant to send a fresh panel of four retired officers to the respondent within thirty days. The respondent was directed to select two names from the panel and communicate them to the appellant within thirty days. The appellant was then directed to constitute the Arbitral Tribunal within thirty days of receiving the respondent’s communication.

Specific Amendments Analysis

Not Applicable in this case.

Development of Law

The ratio decidendi of this case is that when a contract specifies a procedure for appointing arbitrators, the parties must adhere to that procedure, and the High Court should not appoint an independent arbitrator in contravention of the contract. This judgment reinforces the principle of party autonomy in arbitration agreements. There is no change in the previous position of the law, but this judgment clarifies the application of the law in the specific context of railway contracts.

Conclusion

In conclusion, the Supreme Court allowed the appeals, setting aside the High Court’s appointment of an independent arbitrator. The Court emphasized the importance of adhering to the agreed-upon arbitration procedures in contracts and clarified that retired railway officers are not ineligible to act as arbitrators. The Court directed the appellant to constitute an Arbitral Tribunal as per the contract terms, ensuring that the arbitration process is conducted in accordance with the parties’ agreement.