"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Friday, August 28, 2009

Indian Oil Corporation Limited v Raja Transport Pvt Ltd

Indian Oil Corporation Limited v Raja Transport Pvt Ltd
Case No: Civil Appeal No. 5760 of 2009 (SLP (C) No. 26906 of 2008)
Court: Supreme Court of India
Decided on: 24.08.2009
Decided by: R.V. Raveendran and D.K. Jain, JJ.
Provision of Law: Arbitration and Conciliation Act, 1996 (Act) - Section 11, 12 etc..
Prayer: appeal against the order of the Uttaranchal High Court appointing a sole arbitrator under S 11(6) of the Act
Arbitration Clause:
"69. Any dispute or a difference of any nature whatsoever or regarding any right, liability, act, omission or account of any of the parties hereto arising out of or in relation to this Agreement shall be referred to the sole arbitration of the Director, Marketing of the Corporation or of some officer of the Corporation who may be nominated by the Director Marketing. The dealer will not be entitled to raise any objection to any such arbitrator on the ground that the arbitrator is an officer of the contract relates or that in the course of his duties or differences. In the event of the arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason the Director Marketing as aforesaid at the time of such transfer, vacation of office or inability to act, shall designate another person to act as arbitrator in accordance with the terms of the agreement. Such person shall be entitled to proceed with the reference from the point at which it was left by his predecessor. It is also a term of this contract that no person other than the Director, Marketing or a person nominated by such Director, Marketing of the Corporation as aforesaid shall act as arbitrator hereunder. The award of the arbitrator so appointed shall be final, conclusive and binding on all parties to the Agreement, subject to the provisions of the Arbitration Act, 1940 or any statutory modification of re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceedings under this clause."
Issue
One of the questions that arose was whether appointing IOC’s Director as arbitrator would make the take away independence and impartiality of the arbitral tribunal. On this point, the Court held as below:

1. It is now well settled by a series of decisions of this Court that arbitration agreements in government contracts providing that an employee of the Department (usually a high official unconnected with the work or the contract) will be the Arbitrator, are neither void nor unenforceable

2. If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a government/statutory corporation/public sector undertaking containing an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrator, he can not subsequently turn around and contend that he is agreeable for settlement of disputes by arbitration, but not by the named arbitrator who is an employee of the other party. No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named Arbitrator contained in the arbitration clause.

3. There can however be a justifiable apprehension about the independence or impartiality of an Employee-Arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute. Where however the named arbitrator though a senior officer of the government/statutory body/government company, had nothing to do with execution of the subject contract, there can be no justification for anyone doubting his independence or impartiality, in the absence of any specific evidence. Therefore, 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

4. The position may be different where the person named as the Arbitrator is an employee of a company or body or individual other than the state and its instrumentalities.

Comment:
The Court also recommended that the public sector undertaking/ state and central authorities to change their practice of nominating its employee as the arbitrator in view of the avowed objectives of independence and impartiality of the arbitral process. But the court does not seem to be clear in treating government departments/ PSUs differently from private entities in the appointment of its own employees as arbitrators.

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