In search of neutral arbitrators

Government instrumentalities must rework their contracts to provide a level playing field to others

While the wrangle over the independence of the judiciary in appointment of judges is going on at the highest level, there is a less visible struggle for dominance in the field of arbitration. The government, public sector undertakings and their affiliates are the largest provider of contracts in the country. This gives them an upper hand while employing private firms to build huge projects. Very often the agreements they offer contain one-sided clauses, the most controversial being the appointment of their own executives or related people as arbitrators.

The Supreme Court has criticised this practice in several judgments in the past and told the government companies to provide a level playing field to the opposite parties. However, these pronouncements have largely been ignored. Following the Law Commission Report 246, the Arbitration and Conciliation Act was amended two years ago to cure this iniquity by introducing two schedules with guidelines on the selection of arbitrators and a list of disqualifications. But some recent judgments of the Supreme Court and the high courts show that government corporations are reluctant to relax their hold on arbitration and want to continue to act as judges in their own cause.

The Delhi High Court dealt with the issue of independence and impartiality of arbitrators in a recent case, Afcons Infrastructure Ltd vs Rail Vikas Nigam Ltd. There was a dispute over the builder’s claim for constructing a viaduct in Kolkata for the rail corporation. The private company chose a retired Calcutta High Court judge as arbitrator but the rail corporation insisted that the arbitrators must be chosen from its panel of five names, all of them former rail employees. It insisted that the infrastructure firm had agreed to the term in the contract. The high court stated that this limited choice would shake the confidence in the arbitration process. It disregarded the arbitration clause and allowed Afcons to choose a Supreme Court judge as its nominee.

The high court was following the Supreme Court judgment delivered earlier this year in the case, Voestalpine Schienen GmbH vs Delhi Metro Rail Corporation Ltd. In that case, when the German firm wanted arbitration, the Delhi Metro provided it a list of names from which it was asked to choose its candidate. They were all serving or retired engineers of government departments or PSUs. The German firm raised the issue of conflict of interest and the question reached the Supreme Court. It rejected the contractor’s objection stating that if it was upheld, few would be available for arbitration. However, the court asked the Metro to widen the choice and make it broad-based. 

Despite the long list of tests provided in the amended Act, there are grey areas in the matter of selection of arbitrators. Rules cannot envisage all possible situations and the definitions can be stretched to the breaking point by lawyers and judges. For instance, there is difference of opinion among the high courts over appointing former employees of a government corporation. 

Even retired judges are not above suspicion. Last month the Delhi High Court rejected the objection raised by HRD Corporation against the appointment of two judges as arbitrators in its dispute with Gas Authority of India Ltd (GAIL). According to the US corporation, the two were ineligible to act as arbitrators as they had relationship with GAIL. One of them allegedly acted as arbitrator in a case involving GAIL, but the court stated that it could not be called a “business relationship” disqualifying him from the present arbitration. The other judge had reportedly given legal advice to GAIL in another matter, but that would not disqualify him as he was not giving advice regularly. A “relationship” of an advisor would signify an association that is continuing and would not include obtaining a solitary opinion from an independent practitioner. Taking a legal opinion does not constitute a relationship of an advisor to the party seeking such opinion, according to the judgment.

What government entities must do to enhance the confidence of the contracting parties is to rework their old contractual models by releasing their big brother grip on agreements. It is not enough that the terms are strictly in line with the new law; they should also be seen as fair and equitable and stand the test of Caesar’s wife. The long delays in arbitration start with squabble over choice of arbitrators. The rest of the perils on the way have given this alternative dispute resolution mechanism a bad name to the country, leaving it behind other arbitration centres abroad.