2020 (2) TMI 1716 - HC - Indian Laws

Arbitral proceedings - Validity of an Arbitral award - Neutrality of the Arbitrator - Ineligibility of the Arbitrator u/s 12(5) of the 1996 Act - Mandatory declaration u/s 12(3) of the 1996 Act - Merits of the Arbitrator's decision regarding the proof of submission for escalation - Indian Railway Arbitration Rules - construction contract - HELD THAT - A reading of Section 12 would indicate that as soon as a person is approached with a request to act as an Arbitrator, he is bound to disclose any circumstances which in his opinion would affect his neutrality and which he has to disclose to the parties. With the amendment of the 1996 Act by Act 3 of 2016, the Arbitrator is also bound to make a mandatory disclosure as per the form specified in the VI schedule of the Act. The V schedule to the Act would narrate the circumstances which could give rise to a justifiable doubt about the Arbitrator's neutrality. The further amendment which has been introduced by the Amending Act 3 of 2016 to Section 12 is the introduction of sub section 5. Sub section 5 opens with a non obstante clause which stipulates that although parties have entered into an agreement giving right to one party to appoint an Arbitrator, even in such cases, the relationship of the Arbitrator with any of the parties or counsel or subject matter of the dispute comes within the VII Schedule, he becomes ineligible for being appointed as a Arbitrator. Unlike Section 12 Sub section 1 (a), Sub section 5 is a clear bar. However the proviso to this sub section makes an exception. In the case on hand the clauses of the General Conditions of the Contract continue to remain the same and has not been modified as per the amended Section 12 (5) of the 1996 Act. Therefore, the Judgement in TRF LTD v. Energo Engg. Projects Ltd. 2017 (7) TMI 1288 - SUPREME COURT and Perkins Eastman Architects DPC v. HSCC (India) Ltd. 2019 (11) TMI 1154 - SUPREME COURT would apply to the instant case. Therefore, the Chief Engineer who had appointed the arbitrator was clearly ineligible to nominate the arbitrator. Thus, it is amply clear that neutrality of the Arbitrator is the touchstone of the arbitral proceedings. It is this concept that had led to the amendment of Section 12 in the 1996 Act particularly with the insertion of Section 12 (5) read with the VII Schedule. It is clearly evident that the Arbitrator who had entered the reference in the instant case is ineligible on three grounds a) The general conditions of the contract does not contain the amendments which have been brought about to clauses 64 (3) (a) (ii) and 64(3)(b) as contemplated in the Judgement in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML 2019 (12) TMI 841 - SUPREME COURT and therefore the authority appointing the arbitrator was also ineligible. b) The arbitrator is an employee of the respondent Railways and therefore falling within the bar contemplated u/s 12 (5) read with schedule VII (1) of the 1996 Act. c) There is no express waiver in writing by the petitioner of the bar imposed u/s 12 (5) of the 1996 Act. The arbitral awards were set aside due to the ineligibility of the Arbitrator, and the court did not traverse into the merits of the case. The O.P. Nos. 446 to 449 of 2019 were allowed, and the arbitral awards were set aside with no costs.

Summary

Issues Involved:
1. Validity of the Arbitral Award.
2. Ineligibility of the Arbitrator as per Section 12 (5) read with Schedule VII (1) of the Arbitration and Conciliation Act, 1996.
3. Procedural fairness in the appointment of the Arbitrator.
4. Merits of the Arbitral Tribunal's decision.

Summary:

The issue involved in all the petitions is the validity of an Arbitral award passed by an Arbitrator who is ineligible to be appointed as per the provisions of Section 12 (5) read with Schedule VII (1) of the Arbitration and Conciliation Act, 1996 (the 1996 Act). The arbitral proceedings are also questioned in light of the Chief Engineer of the respondent Railways nominating the Arbitrator, which attracts the mischief of Schedule VII (1) of the 1996 Act. A common order is given since the issue involved in all the OPs is the same.

The claimant invoked the Arbitration clause under the agreement for recovery of amounts due to them towards price escalation. The petitioner contended that delays were due to procedural delays on the respondent's part, and for some extensions, the respondent had granted the extension with PVC by entering into Rider Agreements. However, for the disputed claim, the respondent did not allow the escalation, leading the claimant to invoke Arbitral proceedings. The petitioner represented the case before the Arbitral Tribunal.

The respondent defended the claims, contending that the claimant rushed into filing the claim without permitting the respondent to negotiate for the price escalation with their finance department. The disputes were to be settled as per the Indian Railway Arbitration Rules, and the Principal Chief Engineer CORE/Allahabad nominated V.K. Manoharam as the Sole Arbitrator. The Arbitrator dismissed the claims filed by the petitioner, reasoning that the claimant had not submitted the PVC amount despite sufficient time and had not shown any proof of earlier price escalation.

The petitioner raised several grounds of challenge, including:

a) The Arbitral Tribunal's constitution violated Section 12 (5) of the 1996 Act.

b) The Arbitrator, being an employee of the respondent railways, fell within the ambit of Clause VII Schedule of the 1996 Act.

c) The Arbitrator had not made a mandatory declaration as per Section 12 (3) of the 1996 Act.

d) On merits, the Arbitrator erred in concluding that the petitioner had not given proof of submission of a similar grant of escalation.

The respondent argued that the petitioner accepted the constitution of the Arbitral Tribunal and participated in the proceedings without filing an application u/s 13 (2) of the 1996 Act. On merits, the respondent contended that the petitioner had been paid more than the accepted value in each contract and that the demand was wrong.

The Court discussed the neutrality of the Arbitrator, emphasizing the amendments introduced to Section 12 by Act 3 of 2016, which reiterate the importance of impartiality and independence of the Arbitrator. The Court referred to several judgments, including Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, TRF LTD v. Energo Engg. Projects Ltd., and Perkins Eastman Architects DPC v. HSCC (India) Ltd., which highlighted the ineligibility of an Arbitrator who is an employee of the party to the dispute.

The Court concluded that the Arbitrator in the instant case is ineligible on three grounds:

a) The general conditions of the contract do not contain the amendments brought about to clauses 64 (3) (a) (ii) and 64(3)(b) as contemplated in the Judgment in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML.

b) The Arbitrator is an employee of the respondent Railways, falling within the bar contemplated under Section 12 (5) read with Schedule VII (1) of the 1996 Act.

c) There is no express waiver in writing by the petitioner of the bar imposed under Section 12 (5) of the 1996 Act.

In conclusion, the Court set aside the Arbitral Awards in O.P. Nos. 446 to 449 of 2019 on the ground of the Arbitrator's ineligibility and did not traverse into the merits of the case. No costs were awarded.