Contracts between private parties and government agencies, authorities or public sector undertakings
Proactive role of judiciary
This update examines arbitration agreements that provide for the appointment of arbitrators by a designated person alongside the independence and impartiality in the appointment of arbitrators required in the 2015 amendment to the Arbitration and Conciliation Act 1996. With the advent of globalisation and increasing dependence on alternative dispute resolution (ADR) in general – and arbitration in particular – reducing judicial interference in arbitration proceedings and increasing the power and autonomy of arbitral tribunals are pivotal in making ADR more effective.
As US writer, author and memoirist Stan Lee rightly said, "with great power there must also come great responsibility". As substitutes to the courts, arbitral tribunals are expected to follow the basic and fundamental principles of justice, equity and fair play. Therefore, their independence and impartiality is all the more significant in order to encourage faith and trust in litigants and ensure that disputes are independently, impartially and fairly adjudicated.
The 1996 act (as compared to the obsolete Arbitration Act 1940) in itself was a significant attempt to promote ADR as a preferred mode of dispute resolution, instead of slow, cumbersome and delayed court proceedings. Among other significant developments, the 2015 amendment (brought into force by incorporating amendments to Sections 11 and 12 of the 1996 act, read with Schedules 5, 6 and 7 to the 1996 act) emphasises the legislature's intention to reassure litigants that arbitral tribunals will be independent and impartial and that disputes will be fairly adjudicated.
Contracts between private parties and government agencies, authorities or public sector undertakings
The enforceability of contracts between private parties and government agencies, authorities and public sector undertakings must be considered against this backdrop. It is standard practice for such public entities to include general conditions of contract (framed decades ago), containing provisions which emphasise their dominant position.
When a private party succeeds in a tender process with such public entities, entering into the contract is often alluring enough for the private party not to negotiate various terms and conditions which are unilaterally imposed as a condition precedent to the signing of the contract. Irrespective of the existing repute of the private party, a contract with any public entity goes a long way in helping to build on experience and plays a significant role in a company's prospective when submitting future tenders and participating in bids with other agencies. However, in the process, private parties are left with little to no negotiating or bargaining powers as regards the terms and conditions of the contract. The general conditions of contract are usually incorporated as a part of the contract signed between the parties, with minor changes incorporated by way of special conditions of contract. In most cases, these are rudimentary changes pertaining to customisations of specific facts and, in any case, do not improve the private party's scope for negotiations.
Arbitration clauses which provide for a dispute mechanism under the contract are often enforced on private parties in the general conditions of contract. These clauses are adopted with little to no changes in the form of special conditions of contract.
It is a settled principle of law that the parties to a contract are bound by the terms and conditions stipulated in the contract. It is also presumed that through the pre-execution of the contract, the parties have negotiated and amicably agreed to adhere to the terms and conditions stipulated therein of their own freewill and volition, without any fraud, coercion or duress. However, contracts like the one referred to above leave little room for any amicable settlement of terms and conditions with the public entity, which has significantly greater bargaining power compared to the private party. In the process, the arbitration agreement imposed on the private party is usually unfair and at times makes a mockery of the requirement to obtain the parties' consent – a core principle of the appointment of an arbitral tribunal, particularly in view of the 2015 amendment.
The Supreme Court has taken note of the precarious situations and resulting predicaments faced by private parties. In Union of India v Singh Building Syndicate(1) the court explicitly held that:
"a provision for serving officers of one party being appointed as arbitrator brings out considerable resistance from the other party, when disputes arise. Having regard to the emphasis on independence and impartiality in the new act (1996 Act), Government, statutory authorities and Government Companies should think of phasing out arbitration clauses providing for serving officers and encourage 'professionalism' in arbitration."
In this case, the court appointed a retired judge as the sole arbitrator, despite the fact that the arbitration agreement provided for a serving railway officer to be appointed as arbitrator.
In this context, it is pertinent to refer to the provision contained in Section 11 of the 1996 act which emphasises adherence to the terms of the parties' agreement. This provision also promotes the freedom of parties to agree on the procedure for appointing arbitrators. It is only when there is a failure in an appointment procedure that a party may invoke the jurisdiction of the high court (or any person or institution designated by such court under Section 11 of the 1996 act) to appoint arbitrators.
However, the Supreme Court has interpreted the provision under Section 11 of the 1996 act rather liberally, and in Northern Railway Administration v Patel Engineering Company Limited(2) held that although Section 11 of the 1996 act emphasises adherence to the terms of the agreement as closely as possible, the court need not uniformly follow the same; instead, the court must pay due regard to the qualifications stipulated in the agreement for persons to be appointed as arbitrators.
In Bharat Sanchar Nigam Limited v Motorola India Pvt Ltd(3) the Supreme Court held that in view of the fact that the authority, who was entitled to appoint an arbitrator as per the contract, was the one who had imposed liquidated damages, allowing the same person to appoint the arbitrator would defeat the principles of natural justice, which recognise that a party cannot be a judge in his or her own case. Moreover, the authority would not satisfy the test of impartiality and independence, as required under Section 12 of the 1996 act.
Similarly, in Bipromasz Bipron Trading SA v Bharat Electronics Limited(4) the Supreme Court held that the chief justice or designated person had the power to appoint a person other than the named arbitrator on examination of the relevant facts, which indicated that the named arbitrator was unlikely to be impartial. Hence, the court clarified that a petition cannot be rejected merely on the grounds that the chief justice or designated person has no power to appoint an arbitrator other than the chair or his or his designate, as agreed between the parties.
Therefore, it is evident that where there is a threat to the independence and impartiality of an arbitral tribunal, the Supreme Court will take a proactive role. This stance was taken by the judiciary even before the 2015 amendment to the 1996 act – the courts have historically criticised the insistence on the part of government agencies, authorities and public sector undertakings to appoint arbitrators through a designated person, authority or principal officer vested with such power.
In this light, Section 11(8) of the 1996 act (as amended) provides that before the appointment of an arbitrator, the court making the appointment must seek a disclosure in writing from the prospective arbitrator in terms of Section 12(1) of the 1996 act, having due regard to:
- any qualifications required by the parties; and
- the content of the disclosure and other considerations which are likely to secure the appointment of an independent and impartial arbitrator.
Moreover, Section 12 of the 1996 act (as amended) has widened the grounds on which to challenge the appointment of an arbitrator. Sections 12(1)(a) and 12(1)(b) of the 1996 act provide that a person who is approached as an arbitrator must make a disclosure in the format set out in Schedule 6 of the 1996 act. The person must categorically state his or her (direct or indirect) existing or past relationship with any of the parties in relation to the subject matter of the disputes. The relationship can be financial, business related, professional or of any nature which may give rise to justifiable doubts about the arbitrator's independence and impartiality. The amendment has identified such categories of person in Schedule 5. Further, Section 12(5) of the 1996 act, which was introduced by way of the amendment, provides for a non-obstante clause, emphasising that even if there is an agreement with regard to the appointment of an arbitrator, the same has no effect if the person named in the agreement falls under any of the categories specified in Schedule 7.
This provision categorically provides that if the person named in the agreement has any relationship with any of the parties or their counsel and such person is covered under any of the categories in Schedule 7, he or she will be considered ineligible to act as an arbitrator. However, a provision has been inserted to allow the parties, by an express agreement in writing, to waive the applicability of this section. This provision was inserted to ensure that no one becomes a judge in his or her own cause and that independence and impartiality remain embedded in the adjudication process.
The Supreme Court's recent judgment in Union of India v Uttar Pradesh State Bridge Corporation Limited(5) held that in contracts with government bodies, the terms of the contract – including the arbitration clause – are usually drawn up by the government, which gives a dominant position to the government with regard to constitution of the arbitral tribunal. According to the court, although it was bound to appoint the arbitral tribunal as per the agreed procedure, the same had undergone significant erosion. Further, the court was of the view that while such clauses are valid, they put an onus on the government to appoint arbitrators who can function independently and impartially and devote time to conducting the arbitration. The court reiterated that both parties' interests should be equally protected in the arbitration clause.
It is clear that the courts are willing to deviate from the appointment procedure for arbitrators agreed between the parties. In fact, with the 2015 amendment in place and the codification of observations made by the Supreme Court, parties are increasingly invoking the jurisdiction of the courts by challenging unilateral appointments on the grounds of suspicion or apprehension of bias in order to ensure that the constitution of independent and impartial arbitral tribunals. Some of the recent instances where the courts have interfered with the agreed procedure of appointment are summarised below:
- Siddhi Real Estate Developers v Metro Cash(6) – the Bombay High Court held that:
"the courts should as far as possible preserve the sanctity of party autonomy and defer to the appointment procedure agreed to between the parties whilst at the same time retaining a discretion to appoint such arbitrators as may be deemed fit to 'meet the end of justice'… It may also be that an order to follow the appointment procedure is likely to result in a ' stalemate' or otherwise 'the interests of justice may require that the appointment procedure ought not to be followed'. In all such cases, the courts are not powerless to ignore the appointment procedure and appoint 'an independent tribunal outside the appointment procedure.'"
- Tramboy Joinery Mills Pvt Ltd v Commissioner/Secretary to Government(7) – the Srinagar Bench of the High Court of Jammu and Kashmir held that the courts' power to appoint independent arbitrators is not confined to those persons who have been named in the arbitration agreement – particularly when the chosen arbitrators work under the control of the authority that appointed them. Thus, the courts have a right to appoint independent and impartial arbitrators from a list other than the one mentioned in the agreement.
- Panihati Rubber Limited v The Principal Chief Engineer, Northeast Frontier Railway(8) – on March 15 2016 the Gauhati High Court interpreted Section 12(5) of the 1996 act, read with Schedule 7, and held that, in accordance with the 2015 amendment, the railway authorities were not permitted unilaterally to appoint their former employee as an arbitrator, as the employee fell within the restricted categories under Schedule 7. Accordingly, despite the agreed procedure under the contract, the court appointed a neutral arbitrator.
- Assignia-VIL-JV v Rail Vikas Nigam Limited(9) – the Delhi High Court interpreted Section 12(5) of the 1996 act, read with Schedule 7, and held that Rail Vikas Nigam Limited could not appoint its retired or serving employees as arbitrators, as this would defeat the very purpose of the amendment. The court also held that in view of Schedules 5 and 7, it was duty bound to secure the appointment of an independent and impartial arbitrator, to remove any justifiable doubt as to the arbitrator's independence and impartiality. Therefore, the Delhi High Court deviated from the appointment procedure agreed between the parties and appointed three neutral arbitrators.
The above judgments demonstrate that the judiciary has taken a proactive role in order to negate the concerns over bias that private parties experience when constituting arbitral tribunals based on arbitration agreements contained in contracts with government agencies, authorities and public sector undertakings.
As case law has shown, the legislature has been conscious of the tendency of government agencies, authorities and public sector undertakings and designated persons to appoint arbitrators who act with such inflexibility as essentially to render arbitration agreements redundant and the required consent of the parties meaningless. Government agencies, authorities and public sector undertakings – which are considered as 'state' within the meaning of Article 12 of the Constitution 1950 – must act fairly, reasonably and impartially. However, when it comes to commercial contracts, due to the threat of disciplinary or vigilance proceedings, designated persons more often than not refrain from acting contrary to the interests of the government agencies, authorities and public sector undertakings with which they are associated. Arbitrators appointed by designated persons (usually stakeholders, those in a position of authority or direct subordinates to those in power in relation to the dispute) are unlikely to be able to act fairly, independently or impartially.
Therefore, considering the judicial trend and, particularly, the 2015 amendment to the 1996 act, most argue that government bodies should phase out their obsolete and unilateral arbitration agreements. This would also avoid multiplicity of proceedings in the form of challenges to the unilateral constitution of arbitral tribunals based on concerns over bias and the independence and impartiality of tribunals, which is contrary to the spirit of the 1996 act.
For further information on this topic please contact Vanita Bhargava, Jeevan Ballav Panda or Abhisaar Bairagi at Khaitan & Co by telephone (+91 22 6636 5000) or email ([email protected], [email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
(1) Reported in 2009, 4 SCC 523.
(2) Reported in 2008, 10 SCC 240.
(3) Reported in 2009, 2 SCC 337.
(4) Reported in 2012, 6 SCC 384.
(5) Reported in 2015, 2 SCC 52.
(6) Reported in 2014, (4) Mh LJ 283.