India: Arbitrations With The State: Time Is Of The Essence!

Arbitration proceedings arising from contracts with government departments are more often than not, a quagmire of inordinate delays, huge costs and frequent visits to the court seeking intervention. The Supreme Court of India, in a recently reported decision in Union of India and others vs. Uttar Pradesh State Bridge Corporation Limited (2015) 2 SCC 52 has taken the government to task and held that inordinate delays in conducting arbitration proceedings and the inability of the tribunal to perform its functions are grounds for termination of mandate of the arbitral tribunal.

What is more interesting however is that the apex court has gone one step further and held that while appointing a new tribunal under Section 15 of the Arbitration and Conciliation Act, 1996 (the Act) the court need not follow the procedure prescribed under the arbitration agreement between the parties.

Deliberate delays:

The dispute between the Union of India through the Indian Railways and the Respondent arose in relation to the performance of a contract for construction of a rail bridge across the River Ganga near Digha Ghat, Patna. The disputes were referred to an arbitral tribunal as per the arbitration agreement between the parties to a panel of three Indian Railways authorities in the year 2007. However, for a period of about four years, there was no progress in the matter and hearings were being perpetually adjourned for a number of frivolous reasons such as transfer and retirement of the Railways authorities on the Tribunal.

The Respondent's initial petition before the High Court seeking the court's intervention was dismissed with a categorical direction to the Indian Railways to complete the arbitration proceedings within a period of three months and with further directions to hold regular sittings at Patna. The order of the High Court also expressly states that if the Appellant did not comply with the directions of the order, the arbitration proceedings were not completed within the specified time, the Respondent would be at liberty to approach the court again and the court would be constrained to pass appropriate orders in accordance with the Act.

High Court Order:

Three months later, the Respondent was before the High Court again as no progress was made in the arbitration proceedings. The High Court, after taking note of the conduct of Indian Railways held that that delay caused in the arbitration proceedings was intentional. The court observed that despite four years since institution of arbitral proceedings, and in spite of the fact that the court had earlier expressly and specifically directed that the arbitral proceedings be completed within three months, the Indian Railways had shown much disregard for the orders of the court.

Accordingly, the High Court terminated and set aside the mandate of the arbitral tribunal comprising of the Indian Railways authorities and appointed a sole arbitrator to adjudicate the disputes between the parties. It is this order of the High Court that the Union of India challenged before the apex court.

Court's power to appoint an arbitrator:

The top court, after considering the implications of Sections 14 and 15 of the Act in a situation such as this, held that in this case, the High Court was correct in setting aside and terminating the mandate of the arbitral tribunal for failure on its part to perform its functions. However, the primary legal argument of the Indian Railways was based on Section 15 (2) of the Act, which reads:

"(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 Indian Railways argued that the decision of the High Court to appoint a sole arbitrator and not persons in accordance with the arbitration agreement between the parties was incorrect and in violation of Section 15 (2) of the Act. The apex court held that no doubt, the procedure in Section 15 (2) would be the ordinary procedure, it would remain to be seen whether this "classical notion" would apply in every situation. After holding that fair, speedy and inexpensive trial by an arbitral tribunal to be one the pillars of the arbitration system, the court observed that in contracts between government/ state-owned body corporates and private parties it is a valid and accepted position that the government often plays a dominant position in constituting the arbitral tribunal. The apex court cautioned that while it may be valid for the government to choose the tribunal's members, it is imperative that such person(s) act impartially and have adequate time to conduct the proceedings. If the members of the tribunal are frequently being transferred, then the court is not powerless to overlook such lacunae and appoint its own arbitrator. Though the rule in Section 15 (2) of the Act is the norm, the power of the court to appoint an arbitrator of its own choice can be exercised if the facts so warrant.

The decision assumes further importance in light of the emphasis on neutrality of arbitrators by the Law Commission of India in its 246th report released in August, 2014. With amendments to the Act, by way of an ordinance or through an act of Parliament in the pipeline, it remains to be seen whether we have seen the last of government departments appointing their officials as arbitrators, or in the least whether it is last of unreasonable delays.

The decision is also in full synchronicity with the Indian Budget 2015-16 which lays much emphasis on enforcement of public contracts and dispute resolution as part of the "ease of doing business" initiative. The Finance Minister has recognized and admitted the long-drawn and expensive dispute resolution system currently in place with respect to public contracts, and the Government proposes to introduce a Public Contracts (Resolution of Disputes) Bill to streamline the institutional arrangements for resolution of such disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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