Supreme Court Upholds Contractual Arbitration Clause: Aravali Power Company vs. Era Infra Engineering (2017)

LEGAL ISSUE: Whether an employee of a party to a contract can act as an arbitrator as per the arbitration clause in the contract, before the 2015 Amendment to the Arbitration and Conciliation Act, 1996. CASE TYPE: Arbitration Law. Case Name: Aravali Power Company Pvt. Ltd. vs. M/S. Era Infra Engineering Ltd. Judgment Date: 12 September 2017

Date of the Judgment: 12 September 2017
Citation: 2017 INSC 768
Judges: Adarsh Kumar Goel, J. and Uday Umesh Lalit, J.
Can a company appoint its own employee as an arbitrator, as per the arbitration clause in the contract, before the 2015 Amendment to the Arbitration and Conciliation Act, 1996? The Supreme Court of India addressed this question in a dispute between Aravali Power Company Pvt. Ltd. and M/S. Era Infra Engineering Ltd. The court examined whether the High Court was correct in setting aside the appointment of the company’s CEO as the arbitrator. The bench comprised of Justice Adarsh Kumar Goel and Justice Uday Umesh Lalit, with the judgment authored by Justice Uday Umesh Lalit.

Case Background

The case revolves around a contract awarded to M/S. Era Infra Engineering Ltd. (the Respondent) on 20 May 2009, for the construction of a permanent township for the Indira Gandhi Super Thermal Power Project in Jhajjar, Haryana. The contract, signed on 17 November 2009, included a General Conditions of Contract (GCC) and Special Conditions of Contract (SCC). Clause 56 of the GCC stipulated that any disputes would be referred to the sole arbitration of the Project In-charge of the project, and if that person was unable or unwilling to act, to another person appointed by the Chairman and Managing Director of NTPC Limited.

Aravali Power Company Pvt. Ltd. (the Appellant) claimed that the work was progressing slowly, leading them to cancel certain remaining works via letters dated 18 July 2014, 24 October 2014, 30 June 2015, and 8 July 2015. The Respondent, in its letter dated 29 July 2015, alleged that the delays were not their fault and invoked the arbitration clause, requesting that a retired High Court Judge be appointed as the arbitrator. The Appellant, however, appointed its Chief Executive Officer (CEO) as the sole arbitrator on 19 August 2015, in accordance with Clause 56 of the GCC.

Timeline

Course of Proceedings

The Respondent challenged the appointment of the arbitrator on 12 January 2016, contending that the constitution of the arbitral tribunal was invalid. The arbitrator rejected this challenge on 22 January 2016, stating that the Respondent had participated in the proceedings without objection. Subsequently, the Respondent filed two petitions in the High Court of Delhi: OMP(T)(Comm.) No.13/2016 under Section 14 of the Arbitration and Conciliation Act, 1996, seeking termination of the arbitrator’s mandate, and Arbitration Petition No.136 of 2016 under Section 11(6) of the same Act, seeking the appointment of an independent arbitrator. The High Court set aside the appointment of the arbitrator and directed the Appellant to suggest a panel of three arbitrators from different departments, from which the Respondent could choose one. The High Court reasoned that the arbitrator, being the CEO of the Appellant, could not be impartial, especially since the decisions of part cancellation were taken at the highest level of the Appellant.

Legal Framework

The Supreme Court examined the relevant sections of the Arbitration and Conciliation Act, 1996, as they stood before the 2015 Amendment. These sections are:

• Section 12: Grounds for challenge

  (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.

  (2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.

  (3) An arbitrator may be challenged only if— (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or (b) he does not possess the qualifications agreed to by the parties.

  (4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

• Section 13: Challenge procedure

  (1) Subject to sub-section (4), the parties are free to agree on a procedure for challenging an arbitrator.

  (2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

  (3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

  (4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.

  (5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.

  (6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees.

• Section 14: Failure or impossibility to act

  (1) The mandate of an arbitrator shall terminate if— (a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and (b) he withdraws from his office or the parties agree to the termination of his mandate.

  (2) If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.

  (3) If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12.

The Court noted that the 2015 Amendment to the Arbitration and Conciliation Act, 1996 came into force on 23 October 2015, and since the arbitration was invoked before this date, the pre-amendment provisions of the Act would apply.

Arguments

Appellant’s Submissions:

• The appointment of the Arbitrator was in accordance with Clause 56 of the GCC.
• The Arbitration and Conciliation Act, 1996, provides a specific procedure for challenging an arbitrator, and the Respondent failed to follow it.
• The High Court should not have entertained the petitions filed by the Respondent.

Respondent’s Submissions:

• The appointed Arbitrator, being the CEO of the Appellant, could not be impartial.
• The decisions of part cancellation were taken at the highest level of the Appellant, which could influence the Arbitrator.
• The policy of appointing an employee arbitrator is a vexed problem that requires reconsideration.
• The 2015 Amendment to the Arbitration and Conciliation Act, 1996, emphasizes the need for an independent and impartial arbitrator.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame any issues in a separate section. However, the core issue was whether the High Court was correct in setting aside the appointment of the arbitrator, given that the appointment was in accordance with the arbitration clause in the contract and the law as it stood before the 2015 Amendment.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal filed by Aravali Power Company and dismissed the appeal filed by Era Infra Engineering. The Court held that the High Court was incorrect in setting aside the appointment of the arbitrator. The Court emphasized that the appointment was in accordance with the arbitration clause in the contract and the law as it stood before the 2015 Amendment to the Arbitration and Conciliation Act, 1996. The Court stated that the mere fact that the arbitrator was an employee of one of the parties was not sufficient to raise a presumption of bias or partiality, as long as there was no justifiable apprehension about his independence or impartiality. The Court directed that the arbitration should proceed with the arbitrator appointed on 19 August 2015.

How each authority was viewed by the Court?

• Indian Oil Corporation Ltd. and Others v. Raja Transport Private Ltd. [ (2009) 8 SCC 520 ]* – The Court relied on this case to clarify that an employee of a party can act as an arbitrator if there is no justifiable apprehension about their independence or impartiality. The Court also stated that the mere fact that the arbitrator is an employee is not a ground to raise a presumption of bias.
• Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Company Ltd. [ (2008) 10 SCC 240 ]* – The Court discussed this case to emphasize that the terms of the arbitration agreement should be adhered to as closely as possible. The Court also noted that the Chief Justice or his designate must ensure that the remedies provided under the arbitration agreement are exhausted.
• Union of India v. Singh Builders Syndicate [ (2009) 4 SCC 523 ]* – The Court referred to this case to highlight that while the court should first appoint arbitrators as per the arbitration agreement, it can make alternative arrangements if the independence and impartiality of the appointed arbitrators are in doubt.
• Denel (Proprietary) Limited v. Bharat Electronics Limited and Another [ (2010) 6 SCC 394 ]*- The Court discussed this case to show that the court cannot interpose and interdict the appointment of an arbitrator chosen by the parties unless there is a valid reason such as legal misconduct or disqualification.
• Denel (Proprietary) Limited v. Ministry of Defence [ (2012) 2 SCC 759 ]*- The Court cited this case to reiterate that while the court should adhere to the terms of the agreement, it can appoint an independent arbitrator if the circumstances warrant it.
• Union of India and Others v. Uttar Pradesh State Bridge Corporation Limited [ (2015) 2 SCC 52 ]* – The Court referred to this case to show that if the arbitral tribunal fails to act, the court can terminate the mandate of the tribunal and appoint a new arbitrator.
• Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited [ (2017) 4 SCC 665 ]* – The Court distinguished this case, which was governed by the amended Act, to highlight that the amended provisions allow the court to deviate from the arbitration clause if it is inconsistent with the amended Act.

What weighed in the mind of the Court?

The Supreme Court emphasized the importance of adhering to the terms of the arbitration agreement and the procedure laid down in the Arbitration and Conciliation Act, 1996, as it stood before the 2015 Amendment. The Court noted that the mere fact that the arbitrator was an employee of one of the parties was not sufficient to raise a presumption of bias or partiality, as long as there was no justifiable apprehension about his independence or impartiality. The Court also highlighted that the Respondent had not followed the procedure for challenging the arbitrator as per Section 13 of the Act and had participated in the arbitration proceedings without raising any objections.

The court’s reasoning was primarily based on the following:

• The arbitration clause in the contract allowed for the appointment of the Project In-charge or a person appointed by the Chairman and Managing Director.
• The CEO was appointed as per the contractual clause.
• The Respondent did not challenge the appointment within the prescribed time.
• The Respondent participated in the arbitration and sought an extension of time.
• The 2015 Amendment was not applicable to the present case.

Logical Reasoning:

The Court rejected the High Court’s view that the arbitrator’s position as CEO of the Appellant inherently created a conflict of interest. The Court emphasized that the arbitrator was not the Engineer In-charge or the day-to-day In-charge of the work, and the decisions of part cancellation were taken by his subordinates.

The Supreme Court quoted the following from the judgment:

“The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part.”

“The High Court was clearly in error in exercising jurisdiction in the present case and it ought not to have interfered with the process and progress of arbitration.”

“The arbitration, in pursuance of the appointment of the Arbitrator on 19.08.2015, shall proceed in accordance with law.”

Key Takeaways

• Parties must adhere to the arbitration clause in their contracts.
• The mere fact that an arbitrator is an employee of one of the parties does not automatically disqualify them.
• Parties must follow the procedure for challenging an arbitrator as laid down in the Arbitration and Conciliation Act, 1996.
• The 2015 Amendment to the Arbitration and Conciliation Act, 1996, is not applicable to cases where arbitration was invoked before the amendment came into force.

Directions

The Supreme Court directed that the arbitration should proceed with the arbitrator appointed on 19 August 2015.

Development of Law

The ratio decidendi of this case is that in cases governed by the Arbitration and Conciliation Act, 1996, before the 2015 Amendment, the mere fact that the arbitrator is an employee of one of the parties is not a ground to raise a presumption of bias or partiality. The court emphasized the importance of adhering to the terms of the arbitration agreement and the procedure laid down in the Act. This case reinforces the principle that contractual agreements should be respected, and that the courts should not interfere with the arbitration process unless there is a clear violation of the law or a justifiable apprehension of bias or partiality.

Conclusion

The Supreme Court’s decision in Aravali Power Company vs. Era Infra Engineering reaffirms the importance of adhering to contractual arbitration clauses and the procedures laid down in the Arbitration and Conciliation Act, 1996. The Court clarified that an employee of a party can act as an arbitrator if there is no justifiable apprehension about their independence or impartiality and that the 2015 Amendment to the Act is not applicable to cases where arbitration was invoked before the amendment came into force. The judgment underscores the principle that courts should not interfere with the arbitration process unless there is a clear violation of the law.

Category:

Parent category: Arbitration Law

Child categories:

• Arbitration and Conciliation Act, 1996
• Section 12, Arbitration and Conciliation Act, 1996
• Section 13, Arbitration and Conciliation Act, 1996
• Section 14, Arbitration and Conciliation Act, 1996
• Appointment of Arbitrator
• Independence of Arbitrator
• Impartiality of Arbitrator
• Challenge to Arbitrator

FAQ

Q: Can a company appoint its own employee as an arbitrator?
A: Yes, according to this judgment, a company can appoint its own employee as an arbitrator, as long as there is no justifiable apprehension about their independence or impartiality. This is particularly true for cases governed by the Arbitration and Conciliation Act, 1996, before the 2015 Amendment.

Q: What are the grounds for challenging an arbitrator?
A: An arbitrator can be challenged if circumstances exist that give rise to justifiable doubts about their independence or impartiality, or if they do not possess the qualifications agreed to by the parties. The challenge must be made within 15 days of becoming aware of the circumstances.

Q: What happens if an arbitrator is unable to act?
A: The mandate of an arbitrator terminates if they become unable to perform their functions or fail to act without undue delay. In such cases, a party can apply to the court to decide on the termination of the mandate.

Q: Does the 2015 Amendment to the Arbitration and Conciliation Act, 1996, apply to all cases?
A: No, the 2015 Amendment does not apply to cases where arbitration was invoked before the amendment came into force. In such cases, the pre-amendment provisions of the Act apply.

Q: What should parties do if they have a dispute?
A: Parties should first refer to the arbitration clause in their contract. If the clause provides for a specific procedure, they should follow that procedure. If there is a dispute about the appointment of the arbitrator, they should follow the procedure laid down in the Arbitration and Conciliation Act, 1996.