India: Delhi High Court Disregards The Procedure For Appointment Limiting A Party's Choice To A Restricted Pool Of Retired/Serving Employees."

The Hon'ble High Court of judicature of Delhi, in the matter of AFCONS Infrastructure LTD . v. Rail Vikas Nigam Ltd.56 has held that the procedure for appointment of an arbitrator, which restricted the AFCON'S (Hereafter "petitioner,") choice of its nominee arbitrator to a select group, who were all former/ serving employees of the Rail Vikas Nigam Ltd. (Hereafter "respondent"), or its controlling body (Hereafter "Railways,") with power vested in the General Manager of the respondent to withdraw future work, on an apprehension of want of fairness on arbitrator's part, failed the test of judicial scrutiny, warranting appointment of an arbitrator, disregarding the procedure agreed between the parties.

The facts in nutshell were: A contract for infrastructure development was entered into between the AFCONS Infrastructure LTD and Rail Vikas Nigam Ltd on 12.12.2011. Clause 17.3 of the contract contained an arbitration clause. Sub-clause (i), whereof provided for three arbitrators, whereas Sub-clause (ii), provided for the procedure for appointment of arbitrators, namely (a) the petitioner was to consent to any one of five names in the panel forwarded by the respondent; (b) the respondent would decide on second arbitrator from the remaining four names in the panel; & (c) the third presiding arbitrator would be chosen by the two arbitrators, within 30 days, failing which the said arbitrator would be appointed by the respondent's Managing Director. Sub-clause (iii), provided for qualification, and experience of arbitrators, and inter alia specified that one member shall be working, or retired officer of Indian Railway Accounts Service, having experience in financial matters related to construction contracts. Another member shall be a technical person (working or retired) having knowledge, and experience of railway working. The presiding arbitrator was to be a serving officer having the qualification, and experience of either of the two arbitrators. Additionally, out of the three arbitrators, not more than one was to be retired.

Disputes having arisen between the parties, the petitioner vide letter dated 17.11.2016, wrote to respondent stating that the procedure for appointment of the arbitral tribunal had been rendered ultra vires the provisions of the amendment act, which required the arbitrators to be appointed in terms of the restrictions imposed by the Fifth, and Seventh Schedules to the Act. The petitioner also nominated a retired judge of the Calcutta High Court, as its nominee arbitrator, and requested the respondent to appoint its nominee arbitrator within a period of 30 days from receipt of the letter.

The respondent vide letter dated 15.12.2016 responded by proposing a panel of five arbitrators, which included names of retired officers of the Railways, and requested the petitioner to select its arbitrator from the said panel.

The parties having reached a stalemate, the petitioner filed a petition under section 11(6) for appointment of an arbitrator, on respondent's behalf, assailing the appointment procedure inter alia on the grounds that; a) the arbitration clause was ultra vires Section 12(5) of the Act; b) in view of the preceding argument, the respondent could not unilaterally insist on appointing retired officers of respondent/railways, since the same would tantamount to rewriting the contract; c) the railways exercised an all pervasive control over the respondent; & d) relationship with former employees, fell within the ambit of past business relationship, and was thus within prohibited category of entry 1 of schedule 7 of the act.

The Hon'ble court noted that there was a consensus ad idem between the parties that in view of section 12(5)57, read with seventh schedule, the serving officers of the respondent/railways were not eligible to be appointed as arbitrators. However, rather than striking out the entire arbitration clause, as specified in Clause 17.3, the Hon'ble court invoked the Blue Pencil Doctrine to severe Sub-clause (iii) of Clause 17.3, which prescribed the qualification of the members of the arbitral tribunal, while leaving out Sub-clause (ii) of Clause 17.3, which dealt with the procedure for appointment of the arbitrators, on the grounds that while the serving officers of the respondent could not be appointed as arbitrators, the same by itself would not render nugatory, the procedure for the constitution of the arbitral tribunal.

Having held the procedure for appointment of arbitrators to be valid, the Hon'ble court proceeded to scrutinize, whether the former employees of the respondent/railways were ineligible to be appointed as arbitrators by virtue of Section 12(5), read with Entry-158 of the Seventh schedule of the act. Answering this question per se in negative, the court, rejected the petitioner's contention that the relationship of former employee is within the ambit of business relationship, and observed that the prohibition under Entry-1 of the Seventh Schedule was restricted to a person who was related to a party as an employee, consultant, advisor, or who had any other past, or present business relationship. The word "any other" was interpreted to indicate a relationship other than as an employee, consultant, or an advisor, and a business relationship could not be understood to include an employeeemployer relationship.

Having rejected the per se argument, the Hon'ble court proceeded to scrutinize the above argument, in the peculiar facts of the case, and noticed that; a) the respondent is an arm of the railways, with the former being a "Special Purpose Vehicle," constituted to undertake project development, mobilize financial resources, and implement railway infrastructure projects. A deeper scrutiny revealed an all pervasive control of the railways over the respondent, leading court to observe that for the purpose of the act, no distinction could be drawn between former employees of the respondent, and the former employees of the Railways; b) the procedure for appointment of arbitrators, which restricted the petitioner to select only one out of the five names suggested by the respondent, consisting of former, or serving employees of the respondent/railway was not sufficiently broadbased, and failed to instil any confidence in the arbitral process. A similar clause which restricted a party to choose one out of the panel of five members to be appointed as an arbitrator had been disapproved by the Hon'ble Apex Court in M/s. Voestalpine Schienen Gmbh v. Delhi-Metro-Rail-Corporation;59 c) the guidelines issued by the railway board for appointment of retired railways officers as arbitrators, which were followed by the respondent, (required the General Manager to keep a watch on the performance of an arbitrator, and to consider deleting the arbitrator's name for subsequent period, if he found the arbitrator "did not appear to be fair,") gave an impression to the other party to arbitration that the impartiality of the arbitrator had been compromised.

In this view of the matter, the Hon'ble High Court disposed of the petition observing that the procedure under clause 17.3(ii) be disregarded, and issued a direction to the respondent to appoint a retired judge of the Supreme Court as an arbitrator on behalf of the petitioner, and nominate an arbitrator on its behalf, with a further direction that the two arbitrators shall nominate the third arbitrator, failing which the petitioner shall be at liberty to approach the court for appointment of the third arbitrator.


56 MANU/DE/1557/2017.

57 Sub-section (5) of Section 12 reads "Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subjectmatter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."

58 Entry 1 of the Seventh Schedule reads "The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party."

59 (2017) 4 SCC 665 at 690, pp. 29-30.

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