Arbitration clauses buried in bulky commercial contracts often carry the hidden virus of litigation, as seen in the number of disputes reaching the Supreme Court in recent times. The new arbitration law has not reduced the flow. Questions are frequently raised whether there was a consensual clause on invoking arbitration, whether the arbitrator was impartial or any other nit-picking argument of which the shaky party could think.
When the contract is with a government entity like a public sector company, it often slips in a condition that the arbitrator will be chosen from one of its officials. The hazard in signing such agreements is that these officials will be loyal and obedient to their employers and cannot be presumed to be impartial. Promotions and perks while in harness and sinecures waiting after the harness is taken down are strong temptations to go along with the government stance.
Though companies anxious to deal with government entities must blame themselves for signing such one-sided contracts and coming to their senses too late, courts have understood the practical situation and come to the rescue of private players. Normally, arbitration must follow the agreed procedure in the contract, but courts have made exceptions in several cases to rescue firms that had blundered into signing such agreements. In a judgment delivered by the Supreme Court a few days ago, Denel Ltd vs Ministry of Defence, this problem was discussed and the court extricated a firm by appointing a judge as arbitrator instead of a defence employee.
In this case, the company agreed to supply technical goods to the defence ministry. After some time, disputes arose between them and the director general of ordinance factory appointed a manager of an ordinance factory as arbitrator. This was authorised by the contract that stated that in case of disputes, they will be referred for sole arbitration to the director general or a government servant appointed by him. This was objected to by the company since it apprehended that such an arbitrator would be favourably inclined towards the employer.
The district court and the Supreme Court accepted the firm’s concern about the impartiality of a defence officer wearing the robes of the arbitrator when the claim was against the authorities themselves. Both courts asserted that the arbitrator had not acted fairly. The Supreme Court stated that “the attitude of the ministry of defence towards the proceeding is not indicative of an impartial approach. In fact, the material produced before the court indicated that the arbitrator was biased in favour of the government”.
In the scramble for government contracts, several other companies have also stumbled into legal traps for lack of a level playing field. They have failed to see the snares in the deeds and signed the “general terms and conditions” offered by government corporations. Courts have called upon government bodies to change their arbitration clauses that provide for serving officers to act as arbitrators and encourage “professionalism in arbitration”.
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In its judgment, Union of India vs Singh Builders, the Supreme Court said: “Having regard to the emphasis on independence and impartiality in arbitration in the Arbitration and Conciliation Act, the government, statutory authorities and government companies should think of phasing out arbitration clauses providing for serving officers in arbitration.” In this case, the railways did not nominate its arbitrator for a long time. When the Delhi High Court appointed one, he was soon transferred. There was no successor for a long time. The company moved the high court again. It appointed a new panel. After one sitting, the new official was also transferred. This was repeated three more times. The patience of the high court was exhausted and it appointed a retired judge.
In a later case, Indian Oil Corporation vs Raja Transport, the court reiterated its call: “A general shift may in future be necessary for understanding the word ‘independent’ as referring to someone not connected with either party. That may improve the credibility of the arbitration as an alternative dispute resolution process.”
Making government employees arbitrators goes against the principle of “natural justice”. According to this doctrine, no person shall be judge in his own cause. That is why judges recuse themselves from cases when there is conflict of interest. Giving the babu a double-role is a violation of this rule followed by the all-modern judicial systems. But this has not been recognised by the arms of the government.
The court’s role is limited when a private party signs an unfair contract negligently, or underestimating the capacity of the mandarins to create a legal mess, or being too clever by half hoping to manipulate them later. Arbitration puts great power in the hands of a government official who also wears the arbitrator’s hat. Woe to businessmen who are caught in the power whirl of a Pooh-Bah.