(The following post is contributed by Shubham Jain, who is a student at the National Law School of India University, Bangalore)
The enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (“the amendment”) has brought a slew of changes in the two decade old Arbitration and Conciliation Act, 1996 (“the Act”). Based on the recommendations of the 246th Report of the Law Commission, the Amendment sought to address the difficulties faced in the working of the Act.
One of the major changes brought about by the amendment was the inclusion of provisions to ensure independence and impartiality of arbitrators. Based on the Red and orange lists of IBA Guidelines on Conflicts of Interest in International Arbitration, the amended Section 12(1) read along with the newly inserted Schedule V provides an illustrative list of situations which can raise doubt over the independence of an arbitrator. More importantly, Section 12(5) creates a non obstante whereby any person whose relationship, with the parties, counsel or the subject-matter, falls under any of the categories specified in Schedule VII, is deemed ineligible to be appointed as an arbitrator and is treated as de jure unable to perform his function under Section 14. The questions over the scope of amended Section 12 and its applicability to pre-amendment arbitration agreements have been addressed by the recent judgment of the Delhi High Court in Assignia-VIL JV v. Rail Vikas Nigam Limited Arbitration Petition No. 677/ 2015 (Decided on April 29, 2016).
Background Facts and Issue:
The dispute relates to the alleged illegal termination of the works and construction contract by Railways. Assignia sought to resolve the dispute amicably in terms of Clause 20.2 of the contract. On receiving no response, it invoked the arbitration clause contained in Clause 20.3. However, the respondent failed to nominate the names of arbitrators as per the procedure and the petitioner filed a Section 11 petition for appointment of arbitrator. There were several issues before the court including whether the dispute could be referred to a new tribunal in light of a pre-existing tribunal to adjudicate disputes arising from the same contract. However, two issues that merit consideration are first, the applicability of amended Section 12 and second, the scope of amended Section 12.
1. Applicability of amended Section 12: Commencement of Proceedings
Section 26 of the amended Act states that the provisions of the amendment apply to all arbitral proceedings commencing after the commencement of the amendment Act unless the parties otherwise agree. As per Section 21 of the Act, “Commencement of arbitral proceedings” is deemed to take place on the date on which a request for that dispute to be referred to arbitration is received by the respondent. In the instant case, the petitioner asked for reference of the dispute to arbitration on October 26, 2015 while as per Section 1(2) of the amendment act, it came into force on October 23, 2015. Hence, there was no difficulty in applying the amendment provisions to this case.
However, a more expansive position was taken by the Guwahati High Court in Panihati Rubber Limited v. The Principal Chief Engineer, Northeast Frontier Railway, Arbitration Petition No. 12/ 2011 (Decided on March 15, 2016). The contract contained an arbitration clause similar to Assignia.
The petitioner had requested the respondents to refer the matter to an arbitral tribunal way back in 2011 and had subsequently filed a Section 11 petition due to the inaction on part of the respondents. The question before the court was whether the appointment of the arbitrator during the pendency of the petition was a valid one. While the court was correct on its reliance on Datar Switchgears Ltd. v. Tata Finance Ltd. to conclude that the respondents had forfeited their right to appoint the arbitrator, its additional reliance on the amendment to conclude that in any case, an interested party is barred from being an arbitrator as per Section 12(5) suggests that the court has failed to take notice of Section 26 unlike the Delhi High Court in Assignia (¶¶ 36, 40).
In light of the clear definition of commencement of arbitral proceedings, the proceedings would be deemed to have commenced in 2011 and therefore, the amendment was inapplicable in the instant case. Merely because an arbitration petition is decided after the amendment should not mean that the provisions of the amendment can be applied to the case. Therefore, it is respectfully submitted that the court was incorrect while placing reliance on amended Section 12.
2. Scope of Amended Section 12: The Death knell of In-House Arbitrators
Clause 20.3 of the contract signed by the petitioners in Assignia provided that the tribunal shall consist of 3 arbitrators with one arbitrator being a working or retired officer of the Indian Railways Accounts Service, one arbitrator being a working or retired officer of any Engineering service of Indian Railways and the presiding member being a serving railway/ RVNL officer. A prima facie look at the clause is sufficient to make one wonder if a tribunal of such composition can decide the dispute in a fair and unbiased manner. However, the erstwhile Section 12 created no bar on such clauses. A catena of apex court decisions (See 246th Report of Law Commission of India, ¶¶ 53-56) had held such clauses to be enforceable. The locus classicus in this regard is Indian Oil Corporation Ltd. v. M/S Raja Transport (P) Ltd.
In Indian Oil, it was held the “senior officer/s (usually heads of department or equivalent) of a government/statutory corporation/ public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as Arbitrators merely because their employer is a party to the contract.” While it might be argued that party autonomy is the cornerstone of arbitration and clauses providing for in-house arbitrators could be negotiated upon, such negotiations seldom take place in practice. Lucrative government contracts often see fierce bidding from parties with relatively weak bargaining power. Therefore, such clauses are commonplace in all contracts with public sector undertakings.
The Law Commission opposed such clauses on the ground of violation of principles of natural justice. It was of the view that the distinction between private and public sector entities was superfluous and the concept of party autonomy needs to be balanced with neutrality of arbitrators. Therefore, it proposed the aforesaid amendments. The court in Assignia denied the appointment as per the terms of the arbitration clause as the same could have been said to be in violation of Entry 1 of Schedule VII.
In effect, the amendment has brought as end to the practice of having “in-house arbitrators” by state or its instrumentalities. It has brought the Indian law at par with international standards. This has been reinforced by the judgment in Assignia. However, courts need to exercise caution while applying the amended provisions. As shown by the judgment given by the Guwahati High Court, a partial reading of the provisions could lead to unintended consequences. The amendment makes it clear that it is applicable only to proceedings commencing after the commencement of the amendment and it would be wrong for courts to make it applicable to proceedings that have commenced earlier. Such decisions could lead to increased uncertainty in the arbitration regime, something that the amendment sought to reduce.