Denel (Proprietary Limited) v. Bharat Electronics Ltd. and Anr.

Denel (Proprietary Limited) v. Bharat Electronics Ltd. and Anr.

Decided on: 10th May 2010

Decided by: HL Dattu, J.

Case Details:

A few months back, we had posted a brief comment on a decision of the Supreme Court in IOC v. Raja Transport. The decision was relating to the validity of an arbitration clause which provided for a senior executive of one of the parties to the contract as the sole arbitrator.

In that case, the Supreme Court held valid such a clause but advised PSUs to change their practice of nominating their own senior employees as arbitrators in view of the avowed objectives of independence and impartiality of the arbitral process. The court held:

• 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
• 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.
• 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
• 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.

In Denel (Proprietary Limited) v. Bharat Electronics Ltd. and Anr., the arbitration clause in the contract provided for reference of disputes to Managing Director of BEL or his nominee. Despite recognition of validity of such clauses, the Supreme Court has, in Denel (Proprietary Limited) v. Bharat Electronics Ltd. and Anr., appointed Retired Justice Arijit Pasayat in view of the peculiar circumstances in the case. The peculiar cirumstance was this: Though BEL accepted liability in regard to the dispute, it could not pay Denel because the Ministry of Defence, Government of India had specifically directed BEL not to pay the money under the invoices which formed the subject matter of the dispute. If the Managing Director was appointed as arbitrator, he would be bound by the direction of his superior authorities, that is, the Ministry of Defence. Hence the court held that there was a justifiable doubt as to his independence to decide the matter fairly and appointed an arbitrator on its own