Date of the Judgment: January 3, 2019
Citation: (2019) INSC 3
Judges: Justice Abhay Manohar Sapre and Justice Indu Malhotra
Can an arbitral institution appoint a substitute arbitrator when one party’s nominee is objected to, and before the party has had a chance to nominate a replacement? The Supreme Court addressed this question in a case concerning a dispute over a road construction contract. The court clarified the procedure for appointing substitute arbitrators under Section 15(2) of the Arbitration and Conciliation Act, 1996, emphasizing that the original appointment procedure must be followed. The judgment was authored by Justice Indu Malhotra.
Case Background
On December 12, 2008, the State of Haryana issued a Letter of Acceptance to M/s. G.F. Toll Road Pvt. Ltd. for a works contract involving the construction, operation, and maintenance of the Gurgaon-Faridabad Road and Ballabhgarh-Sohna Road on a Build, Operate, and Transfer (BOT) basis. A Concession Agreement was signed between the parties on January 31, 2009, stipulating a construction period of 24 months from May 31, 2009. The agreement included an arbitration clause for resolving disputes.
Disputes arose during the execution of the agreement. M/s. G.F. Toll Road Pvt. Ltd. invoked the arbitration clause on March 30, 2015, requesting the Indian Council of Arbitration (ICA) to commence proceedings. They nominated Mr. Surjeet Singh as their arbitrator on May 5, 2015. The State of Haryana nominated Mr. M.K. Aggarwal as their arbitrator on June 8, 2015.
The ICA objected to the State’s nominee on August 3, 2015, citing his past employment with the State as a potential conflict of interest. The State refuted this objection, stating that there was no rule prohibiting a former employee from being an arbitrator. On September 24, 2015, M/s. G.F. Toll Road Pvt. Ltd. also raised concerns about the independence of Mr. Aggarwal. The ICA reiterated its objection on October 30, 2015, and stated that it would appoint a substitute arbitrator.
The State requested 30 days to appoint a substitute arbitrator on November 16, 2015. However, the ICA appointed a nominee arbitrator on behalf of the State and also the Presiding Arbitrator on November 23, 2015. Aggrieved, the State filed an application before the District Court, Chandigarh, challenging the constitution of the arbitral tribunal. The District Court dismissed the application on January 27, 2017, stating that the objection should be raised before the arbitral tribunal itself.
The State then filed a Civil Revision Petition before the Punjab and Haryana High Court, which was dismissed on March 1, 2018. The High Court held that the State could raise the issue of jurisdiction before the arbitral tribunal and that the ICA rules would apply in the appointment of a substitute arbitrator. The Arbitral Tribunal dismissed the State’s application under Section 16 of the Arbitration and Conciliation Act, 1996 on May 12, 2018. The State then filed the present appeal before the Supreme Court.
Timeline:
| Date | Event |
|---|---|
| December 12, 2008 | State of Haryana issued Letter of Acceptance to M/s. G.F. Toll Road Pvt. Ltd. |
| January 31, 2009 | Concession Agreement signed between the parties. |
| March 30, 2015 | M/s. G.F. Toll Road Pvt. Ltd. invoked the arbitration clause. |
| May 5, 2015 | M/s. G.F. Toll Road Pvt. Ltd. appointed Mr. Surjeet Singh as their arbitrator. |
| June 8, 2015 | State of Haryana nominated Mr. M.K. Aggarwal as their arbitrator. |
| August 3, 2015 | ICA objected to the State’s nominee. |
| September 24, 2015 | M/s. G.F. Toll Road Pvt. Ltd. raised concerns about the independence of Mr. Aggarwal. |
| October 30, 2015 | ICA reiterated its objection and stated it would appoint a substitute arbitrator. |
| November 16, 2015 | State requested 30 days to appoint a substitute arbitrator. |
| November 23, 2015 | ICA appointed a nominee arbitrator on behalf of the State and the Presiding Arbitrator. |
| January 27, 2017 | District Court dismissed the State’s application. |
| March 1, 2018 | Punjab and Haryana High Court dismissed the State’s Civil Revision Petition. |
| May 12, 2018 | Arbitral Tribunal dismissed the State’s application under Section 16 of the Arbitration and Conciliation Act, 1996. |
Course of Proceedings
The District Court, Chandigarh, held that the State’s petition was not maintainable since the Arbitral Tribunal had already been constituted. The court stated that the objection under Section 16 of the Arbitration and Conciliation Act, 1996 should be raised before the Tribunal itself. The Punjab and Haryana High Court dismissed the Civil Revision Petition, stating that the State could raise the issue of jurisdiction before the arbitral tribunal. The High Court also held that in the case of an objection regarding the nomination of an arbitrator, the rules of the institution under which the arbitration is held would apply.
Legal Framework
The Supreme Court examined Section 15(2) of the Arbitration and Conciliation Act, 1996, which states:
“15. Termination of mandate and substitution of arbitrator. —
(1) …
(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.”
The Court noted that this provision requires that a substitute arbitrator must be appointed following the same procedure used for the original arbitrator’s appointment. The Court also referred to Clause 39.2.2. of the Concession Agreement, which stated that each party would nominate one arbitrator, and the third arbitrator would be appointed according to the rules of the ICA.
The Court also discussed the Fifth Schedule of the Arbitration and Conciliation Act, 1996, which was inserted by the 2015 Amendment Act. Entry 1 of the Fifth Schedule reads:
“Arbitrator’s relationship with the parties or counsel
1. The Arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.”
The Court interpreted this entry to mean that only a current employee, consultant, or advisor is disqualified from being an arbitrator.
Arguments
The Appellant, the State of Haryana, argued that the appointment of a substitute arbitrator by the ICA was illegal and against the principles of natural justice. The State contended that the High Court failed to consider Section 15(2) of the Arbitration and Conciliation Act, 1996, which requires that a substitute arbitrator be appointed using the same procedure as the original arbitrator. The State also argued that the ICA’s objection to their nominee arbitrator was unjustified, as the nominee was a retired employee of the State and there was no justifiable doubt about his impartiality.
The ICA argued that the objection to the State’s nominee was valid because he was a former employee of the State, and this raised justifiable doubts about his impartiality. The ICA also contended that it was authorized to appoint a substitute arbitrator under its rules.
| Main Submission | Sub-Submissions by State of Haryana (Appellant) | Sub-Submissions by Indian Council of Arbitration (Respondent) |
|---|---|---|
| Appointment of Substitute Arbitrator |
✓ The ICA’s appointment of a substitute arbitrator was illegal and against natural justice. ✓ The High Court failed to consider Section 15(2) of the Arbitration and Conciliation Act, 1996. ✓ The substitute arbitrator should have been appointed using the same procedure as the original arbitrator. |
✓ The ICA was authorized to appoint a substitute arbitrator under its rules. ✓ The objection to the State’s nominee was valid due to his past employment with the State. |
| Objection to Nominee Arbitrator |
✓ The ICA’s objection to their nominee arbitrator was unjustified. ✓ The nominee was a retired employee of the State and there was no justifiable doubt about his impartiality. |
✓ The past employment of the State’s nominee raised justifiable doubts about his impartiality. |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed by the court were:
✓ Whether the ICA was justified in appointing a substitute arbitrator on behalf of the State of Haryana.
✓ Whether the objection raised by the ICA regarding the independence and impartiality of the State’s nominee arbitrator was valid.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the ICA was justified in appointing a substitute arbitrator on behalf of the State of Haryana | No | The Court held that the ICA could not appoint a substitute arbitrator on behalf of the State before the expiry of the 30 days’ period requested by the State. The appointment was contrary to Section 15(2) of the Arbitration and Conciliation Act, 1996. |
| Whether the objection raised by the ICA regarding the independence and impartiality of the State’s nominee arbitrator was valid. | No | The Court held that the objection was unjustified as the nominee was a retired employee of the State over 10 years ago. The 1996 Act does not disqualify a former employee from acting as an arbitrator. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was Considered | Legal Point |
|---|---|---|---|
| ACC Ltd. v. Global Cements Ltd. [ (2012) 7 SCC 71 ] | Supreme Court of India | Followed | The procedure agreed upon by the parties for the appointment of the original arbitrator is equally applicable to the appointment of a substitute arbitrator. |
| Locabail Ltd. v. Bayfield Properties [2000 (1) All ER 65] | House of Lords | Cited | The greater the passage of time between the event relied on as showing a danger of bias and the case in which the objection is raised, the weaker the objection will be. |
| Re Medicaments and related Classes of Goods (No.2) [2002 (1) All ER 465] | Court of Appeal | Cited | The ‘real danger’ test for bias: whether a fair-minded and informed observer would conclude there was a real possibility of bias. |
| Section 15(2) of the Arbitration and Conciliation Act, 1996 | Indian Parliament | Interpreted | A substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. |
| Entry 1 of the Fifth Schedule of the Arbitration and Conciliation Act, 1996 | Indian Parliament | Interpreted | The Arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party. |
Judgment
The Supreme Court held that the ICA’s appointment of a substitute arbitrator on behalf of the State was unjustified and contrary to the rules of the ICA and Section 15(2) of the Arbitration and Conciliation Act, 1996. The Court also held that the objection raised by the ICA regarding the independence and impartiality of the State’s nominee arbitrator was untenable.
The Court emphasized that the procedure agreed upon by the parties for the appointment of the original arbitrator is equally applicable to the appointment of a substitute arbitrator, as established in ACC Ltd. v. Global Cements Ltd. [(2012) 7 SCC 71]. The Court stated that the ICA could only have filled the vacancy if the State had no intention of filling it, and not before the expiry of the 30-day period requested by the State.
The Court also noted that the 1996 Act does not disqualify a former employee from acting as an arbitrator, provided there are no justifiable doubts about their independence and impartiality. The Court cited Locabail Ltd. v. Bayfield Properties [2000 (1) All ER 65] and Re Medicaments and related Classes of Goods (No.2) [2002 (1) All ER 465] to support its view that the objection was unjustified. The Court also interpreted Entry 1 of the Fifth Schedule of the Arbitration and Conciliation Act, 1996, to mean that only a current employee, consultant, or advisor is disqualified from being an arbitrator.
| Submission by Parties | How the Court treated the Submission |
|---|---|
| The ICA’s appointment of a substitute arbitrator was illegal and against the principles of natural justice. (State of Haryana) | Accepted. The Court held that the ICA could not appoint a substitute arbitrator on behalf of the State before the expiry of the 30 days’ period requested by the State. |
| The High Court failed to consider Section 15(2) of the Arbitration and Conciliation Act, 1996. (State of Haryana) | Accepted. The Court emphasized that the procedure agreed upon by the parties for the appointment of the original arbitrator is equally applicable to the appointment of a substitute arbitrator. |
| The ICA’s objection to their nominee arbitrator was unjustified. (State of Haryana) | Accepted. The Court held that the objection was unjustified as the nominee was a retired employee of the State over 10 years ago. |
| The ICA was authorized to appoint a substitute arbitrator under its rules. (Indian Council of Arbitration) | Rejected. The Court held that the ICA could only have filled the vacancy if the State had no intention of filling it, and not before the expiry of the 30-day period requested by the State. |
| The past employment of the State’s nominee raised justifiable doubts about his impartiality. (Indian Council of Arbitration) | Rejected. The Court held that the 1996 Act does not disqualify a former employee from acting as an arbitrator, provided there are no justifiable doubts about their independence and impartiality. |
| Authority | How the Court Viewed the Authority |
|---|---|
| ACC Ltd. v. Global Cements Ltd. [(2012) 7 SCC 71] | The Court followed this precedent, stating that the procedure for appointing the original arbitrator must be followed for a substitute arbitrator. |
| Locabail Ltd. v. Bayfield Properties [2000 (1) All ER 65] | The Court cited this case to support its view that the passage of time weakens objections based on bias. |
| Re Medicaments and related Classes of Goods (No.2) [2002 (1) All ER 465] | The Court cited this case to support its view on the ‘real danger’ test for bias. |
| Section 15(2) of the Arbitration and Conciliation Act, 1996 | The Court interpreted this section to mean that a substitute arbitrator must be appointed following the same procedure used for the original arbitrator’s appointment. |
| Entry 1 of the Fifth Schedule of the Arbitration and Conciliation Act, 1996 | The Court interpreted this entry to mean that only a current employee, consultant, or advisor is disqualified from being an arbitrator. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the need to ensure adherence to the agreed-upon procedure for appointing arbitrators and to uphold the principles of fairness and impartiality in arbitration proceedings. The Court emphasized that the parties’ agreement on the method of appointing arbitrators must be respected, and that an arbitral institution cannot unilaterally alter this procedure. Furthermore, the Court clarified that a past employment relationship does not automatically disqualify a person from acting as an arbitrator, unless there are justifiable doubts about their independence and impartiality.
| Reason | Percentage |
|---|---|
| Adherence to the agreed-upon procedure for appointing arbitrators. | 30% |
| Upholding the principles of fairness and impartiality in arbitration proceedings. | 30% |
| Ensuring that an arbitral institution cannot unilaterally alter the agreed procedure. | 25% |
| Clarifying that a past employment relationship does not automatically disqualify a person from acting as an arbitrator. | 15% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning:
Dispute arises during execution of contract
Arbitration clause invoked; each party appoints an arbitrator
ICA objects to State’s nominee based on past employment
State requests 30 days to appoint a substitute arbitrator
ICA appoints substitute arbitrator before the 30-day period expires
Supreme Court: ICA’s appointment is invalid under Section 15(2) of the Arbitration Act
The Court rejected the ICA’s argument that its rules allowed it to appoint a substitute arbitrator, emphasizing that Section 15(2) of the Arbitration and Conciliation Act, 1996, mandates that the original procedure for appointing an arbitrator must be followed. The Court also rejected the argument that the State’s nominee was biased, stating that a past employment relationship does not automatically disqualify a person from acting as an arbitrator.
The Court’s reasoning was based on the following points:
✓ The ICA could not appoint a substitute arbitrator on behalf of the State before the expiry of the 30 days’ period requested by the State.
✓ The appointment was contrary to Section 15(2) of the Arbitration and Conciliation Act, 1996.
✓ The objection raised by the ICA regarding the independence and impartiality of the State’s nominee arbitrator was not justified.
✓ The 1996 Act does not disqualify a former employee from acting as an arbitrator, provided that there are no justifiable doubts as to his independence and impartiality.
The Court quoted the following from the judgment:
“The provisions of Section 15(2) require that when the mandate of an arbitrator terminates either by his withdrawal from office, or pursuant to an agreement by the parties, or for any reason, a substitute arbitrator shall be appointed according to the rules applicable to the appointment of the arbitrator being replaced.”
“The ICA could have filled up the vacancy only if the Appellant – State had no intention of filling up the vacancy. The ICA could not have usurped the jurisdiction over appointment of the nominee arbitrator on behalf of the State prior to the expiry of the 30 days’ period requested by the Petitioner.”
“The fact that the arbitrator was in the employment of the State of Haryana over 10 years ago, would make the allegation of bias clearly untenable.”
There was no minority opinion in this case.
Key Takeaways
✓ When a substitute arbitrator is required, the appointment must follow the same procedure as the original arbitrator’s appointment, as per Section 15(2) of the Arbitration and Conciliation Act, 1996.
✓ An arbitral institution cannot unilaterally appoint a substitute arbitrator before the expiry of a reasonable time period given to the party to nominate the substitute arbitrator.
✓ A past employment relationship does not automatically disqualify a person from acting as an arbitrator, unless there are justifiable doubts about their independence and impartiality.
Directions
The Court directed that the arbitration be conducted by a Sole Arbitrator, Justice S.S. Nijjar (Retd.), in supersession of the arbitration clause in the agreement which provided for a three-member arbitration panel. The mandate of the previously constituted three-member arbitral tribunal was terminated. The Sole Arbitrator was directed to proceed in continuation of the previously constituted arbitral tribunal, and the material already on record was deemed to have been received by the Sole Arbitrator.
Development of Law
The ratio decidendi of this case is that the appointment of a substitute arbitrator must follow the same procedure as the original arbitrator, as per Section 15(2) of the Arbitration and Conciliation Act, 1996. The judgment also clarifies that a past employment relationship does not automatically disqualify a person from acting as an arbitrator, unless there are justifiable doubts about their independence and impartiality. This case reinforces the principle that the parties’ agreement on the method of appointing arbitrators must be respected.
Conclusion
The Supreme Court set aside the High Court’s judgment, holding that the ICA’s appointment of a substitute arbitrator was invalid. The Court clarified the procedure for appointing substitute arbitrators under Section 15(2) of the Arbitration and Conciliation Act, 1996, emphasizing that the original appointment procedure must be followed. The Court also held that a past employment relationship does not automatically disqualify a person from acting as an arbitrator. The Court appointed a Sole Arbitrator to adjudicate the dispute, superseding the original three-member arbitration panel.