18 August, 2016
Background
In Assignia-Vil JV v Rail Vikas Nigam Ltd2, Assignia-Vil JV (“Assignia”) had entered into a contract (the “Contract”) to carry out construction works for Rail Vikas Nigam Ltd (“RVNL”). The arbitration clause in the Contract provided that RVNL would nominate five arbitrator candidates, from which Assignia would select its arbitrator. RVNL would then pick an arbitrator from the remaining members of the panel, and the co-arbitrators would pick the chairman. The arbitration clause further specified that the arbitrator candidates should meet various criteria, including age and specific qualifications, and also stated that they should be serving or retired officers of RVNL or the Indian Railways Accounts Service, with the presiding officer necessarily a serving railway officer.
Subsequently, three distinct claims were referred to arbitration, and a tribunal was constituted of members who met the above criteria. However, the disputes escalated and RVNL purported to terminate the Contract. Assignia sought to refer the termination dispute to arbitration, but on this occasion, given that the amendments to the Arbitration Act had by now taken effect, Assignia requested that an independent tribunal be appointed. RVNL did not produce a list of arbitrator candidates for the termination dispute, contending that the matter could be referred to the existing tribunal hearing the three pre-existing claims. Assignia then approached the Delhi High Court for assistance in appointing a tribunal to adjudicate over the termination dispute.
Issue for Consideration
Section 12(5) of the amended Act states that “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”. The Seventh Schedule of the Arbitration Act mandates that an arbitrator should not be an employee, consultant, advisor or have any other past or present business relationship with a party. Therefore, Assignia argued, an arbitral tribunal consisting of present or past employees of RVNL would fall foul of this section.
The Delhi High Court held that the amendments to the Arbitration Act would apply to the termination dispute as the request for arbitration of that dispute was made after the amended Act had come into force. The Court ruled that there was no obligation to refer to a pre-existing tribunal such disputes as had arisen after the initial arbitral proceedings had commenced. Accordingly, Assignia was entitled to seek a new tribunal for the termination dispute, and RVNL had lost its opportunity to put forward a list of five candidates, as per the arbitration agreement in the Contract. The Court also held that it was “duty bound to secure the appointment of an independent and impartial” tribunal, and that appointing an RVNL employee in a matter to which RVNL was a party “would definitely give rise to justifiable doubt as to his independence and impartiality”. The Court thus proceeded to appoint three independent arbitrators.
Analysis
This decision is significant as it shows the willingness of the courts to implement the new amendments to the Arbitration Act even to older contracts, where the dispute arises after the amendments came into force. The Court clearly held that under the new regime, clauses requiring arbitrators to be employees of a party would not be upheld, but that the arbitration agreement more generally would still be effective. It also ensured that the new rules would not be circumvented by pre-existing arbitrations, by affirming that newly arising disputes did not have to be brought into the scope of existing arbitral proceedings.
This decision is of special significance to government entities and public sector undertakings who were previously allowed to have, and often had, current and past employees sit as arbitrators in ongoing disputes3, which is likely to no longer be permitted under the amended Act.
2 29 April 2016.
3 Previous case law had held that there was no bar to a party’s employee serving as arbitrator: Executive Engineer, Irrigation Division, Puri vs. Gangaram Chhapolia, 1984 (3) SCC 627 and Indian Oil Corporation Ltd. v Raja Transport (P) Ltd, (2009) 8 SCC 520.
For further information, please contact:
Nicholas Peacock, Partner, Herbert Smith Freehills
nicholas.peacock@hsf.com
