Union of India & Anr v. Rajasthan Micro & Small Enterprises Facilitation Council & Anr decided by the High Court of Rajasthan at Jaipur could be one of the earliest decisions interpreting and applying the the Arbitration & Conciliation (Amendment) Ordinance, 2015.
The second Respondent in this case had filed an application before the Rajasthan MSMEFC (Micro & Small Enterprises Facilitation Council) claiming certain amounts before the MSEFC. Union of India- Railways filed a Writ Petition in 2013 before a Single Bench of the Rajasthan High Court arguing that the MSEFC had no jurisdiction since there was an arbitration clause in the Agreement between the parties and that the appropriate remedy for the second Respondent was invoking arbitration under the Arbitration & Conciliation Act, 1996. The Single Judge rejected the contention of the Writ Petitioner and dismissed the Writ Petition.
Against the dismissal, the Petitioner appealed to a Division Bench of the High Court. The Division Bench rejected the Writ Appeal on two grounds. The first ground was that the MSEFC had jurisdiction to entertain such an Application by the Second Respondent. The second ground was on the basis of the Arbitration and Conciliation (Amendment), Ordinance, 2015.
The Court took support from the amendment Section 12(5) of the Arbitration and Conciliation Act, 1996 which reads as below:
"Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator."
The Court also quoted Item 1 of the Seventh Schedule (newly inserted by the Ordinance) which reads: "The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party."
Based on the above provisions, the court held that the second Respondent cannot be directed to seek remedy under the amended 1996 Act since the arbitration clause provided for appointment of an employee of the Appellant as the arbitrator and such employee would be ineligible to be appointed as arbitrator.
The aforesaid decision is perhaps one of the earliest decisions on the applicability of the 2015 Ordinance. The following points are noteworthy in this regard:
- The approach of the Court in stating that the MSEFC per se had jurisdiction is correct.
- However, the reliance on the second ground is not correct: In principle, merely because the arbitration clause provides for appointment of the employee of a party as arbitrator would not make the entire clause unenforceable. The decision of the High Court should not be read as holding that the arbitration clause itself was unenforceable.
- A court which is faced with the question of enforceability of such a clause (post the amendments) should take an approach similar to the one taken in Denel Prorpietory Limited v. Ministry of Defence. The court should sever the portion of the clause referring the parties to arbitration from the portion of the clause appointing a party's employee as arbitrator. An alternative, approach would be to apply such a method to arbitration clauses entered into after 23 October 2015. The former approach seems a better one considering that appointment of a neutral arbitrator would only make the process fair, which is the intent of the amendments and is the approach taken by the High Court as well (in applying the Ordinance to an arbitral clause which was agreed upon much prior to the Ordinance.
- It is likely that the phrase "business relationship" is proposed to be given an ejusdem generis construction. In other words, it could be argued that the scope of "business relationship" is restricted by the use of the phrase "employee, consultant, advisor". However, considering the intent and spirit behind the provision (in making the arbitral process fair), "business relationship" should be given the meaning: "occupation, profession, or trade".