On 10 February 2017, the Hon’ble Supreme Court of India, in the matter Voestalpine Schienen GmBH (VSG) v. Delhi Metro Rail Corporation Limited (DMRC) (ARBIT. CASE (C) No. 50 of 2016) decided on the issue as to whether the arbitration clause providing for appointment of arbitrators from a panel of arbitrators is contrary to the parameters of impartiality and eligibility codified by the Arbitration and Conciliation Amendment Act, 2015 (the Act).

Background

India has been continuing to face criticism in the international arbitration community for existence of one-sided arbitration clauses with Government entities, more particularly when the control over the appointment of the arbitral tribunal is with the Government entity due to the practice of appointment out of a pool of potential arbitrators of retired or serving employees/ consultants/ advisors to the Government.

In the instant case, the respondent, DMRC, provided VSG, a foreign private entity with a panel of five potential arbitrators having engineering background to choose from, which was objected to by VSG raising concerns as to the eligibility as well as justifiable doubts as to independence and impartiality of the potential arbitrators, in view of the facts that: (i) admittedly, the Managing Director of DMRC had complete control to include and exclude persons from the potential panel of arbitrators; (ii) all of the five candidates had previously worked in the Railways Department with the Government of India (which is a joint venture partner of DMRC); and (iii) the dispute was not technical but contractual in nature and required a person having expertise in contractual matters and not engineering.

VSG placed strong reliance on the provisions of the Act, which provide for exhaustive parameters for ensuring the independence and impartiality of arbitrators and disqualify an arbitrator, who is an employee, consultant, advisor or has any other past or present business relationship with a party. These parameters had been inserted in the Act with the legislative intent to bring back ‘neutrality’, a critical element of the arbitration process and no exception can be carved out for a Government entity, as evident from the Statement of Objects and Reasons of the Act and the Law Commission Reports dated August 2014 and February 2015.

DMRC denied that it had acted in violation of the Act and submitted that the panel of the potential arbitrators was not ineligible for appointment. Furthermore, during the pendency of the matter in the Hon’ble Supreme Court, a fresh panel of thirty-one potential arbitrators was provided for with the submission that VSG can now choose from the fresh panel. VSG submitted that the fresh thirty-one panel also did not comprise of any contractual law experts and had one ex-DMRC advisor on the panel. VSG prayed for appointment of an impartial and independent arbitral tribunal with the requisite qualifications as the test was not ‘actual bias’ but only ‘justifiable doubts/ apprehension of bias’.

Judgment

The Supreme Court dismissed the petition inter alia, observing and directing that:

  • VSG should nominate an arbitrator from the fresh panel of thirty-one arbitrators provided by DMRC during the pendency of the petition as it does not constitute of present or ex-employees of DMRC.
  • Positive signals need to be given to the international business community to highlight independence and impartiality. One can be independent but need not be impartial and vice-versa.
  • Parties dealing with Government entities should have an exhaustive panel of arbitrators to choose from, instead of limiting the non-government party’s choice to a panel of three or five candidates to avoid apprehension of bias that such a limited panel consists of persons who are not independent. The choice of the two nominated arbitrators also gets limited as they have to choose the presiding arbitrator from the remaining small panel.

Khaitan Comment

The judgment delivered by the Supreme Court is the first landmark judgment on interpretation of the legislative intent of the Act in the context of appointment of ‘neutral’, ‘impartial’ and ‘independent’ arbitrators. The judgment provides guidance on drafting and implementation of clauses on appointment of arbitrators, more particularly, the judgment:

  • paves the path for elimination of one-sided and government-dominated clauses on appointment of arbitrators in contracts entered with Government entities; and
  • interprets the legislative intent of the Act to:
  • meet international standards on securing appointment of ‘neutral’, ‘impartial’ and ‘independent’ arbitrators;
  • dissuade creation of any exception for Government entities; and
  • promote India as the place to hold international commercial arbitrations in view of a sound legal framework on arbitration law.

Khaitan & Co represented VSG, an Austrian company as the petitioner in this matter. Although, on facts the petition was dismissed, the judgment lays down important principles on implementing and preserving the impartiality and neutrality of arbitrators in an adjudication process.