Normally, an independent arbitrator is appointed according to the terms of the agreement. But contracts offered by several government entities carry a condition that arbitration will be conducted by its own officers. This is an utterly unconscionable demand, but the lure of government contracts is so high that private firms sign on the dotted line. Only when disputes arise do they realise that officers of the government corporations are judges in their own cause.
One more such case was decided last week by the Supreme Court where the government insisted that the arbitrators should be gazetted officers and any vacancy should be filled by yet another gazetted officer from the same department (North Eastern Railway vs Tripple Engineering Works). In this case, the Railways terminated a works contract, starting prolonged litigation. The contractor failed in the Patna High Court and the Supreme Court, and then resorted to arbitration.
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However, the arbitrators appointed under the government's General Conditions of Contract were officers of the Railways. They get transferred, promoted or retire at crucial junctures of arbitration proceedings. All these can be managed at high levels to defeat the contractors' cause. In any case, these civil servants have to show loyalty to their institution to advance their careers, unless still higher considerations swing their minds.
In this case, arbitrators were appointed in 1996 but they have not decided the dispute till now. The contractor, therefore, approached the Patna High Court. It appointed a former chief justice as an arbitrator. The Railways appealed to the Supreme Court arguing that it was against the terms of the contract. According to the arbitration clause, only a panel consisting of three officers of the Railways can decide the issues. Moreover, the general manager can change the arbitrators midway. The Supreme Court dismissed the Railways' appeal and upheld the nomination of the judge as an arbitrator. In extraordinary circumstances like these, the court can dump the rule, it said.
This is not the first time the court has taken such action. In one leading case, Union of India vs Singh Builders Syndicate, the court tossed the standard rule and appointed a retired judge as an arbitrator. The arbitration by officers had dragged on for over a decade, "making a mockery of the process". The judgment made some stinging remarks: "We find that a provision for serving officers of one party being appointed as arbitrators brings out considerable resistance from the other party. Having regard to the emphasis on independence and impartiality in the Arbitration and Conciliation Act, the government, statutory authorities and government companies should think of phasing out arbitration clauses providing for serving officers and encourage professionalism in arbitration".
Foreign firms might be surprised by such one-sided contracts persisting in this country. In a recent case, Bipromasz Bipron Trading SA vs Bharat Electronics Ltd (BEL), the court appointed an arbitrator disregarding the contractual clauses. According to the agreement, the reference of disputes has to be made to the chairman and managing director (CMD) for arbitration. When disputes arose, the foreign firm wanted to nominate an independent arbitrator. BEL, the government corporation, objected to it pointing out the arbitration clause making its official the arbitrator. Noting the apprehension of the foreign firm the court said that "relevant facts would tend to indicate that the named arbitrator is not likely to be impartial."
In another case, Denel (Proprietary) Ltd vs BEL, the court reiterated that the CMD of BEL, "which is a government company, was bound by the direction/instruction issued by his superior authorities. The private company's case is that it is not in a position to settle the dues only because of the directions issued by the Ministry of Defence. It only shows that the CMD may not be in a position to independently decide the dispute".
A few years ago, BSNL overplayed the card when it asked Motorola to sign a contract that read: "There will be no objection to any such appointment on the ground that the arbitrator is a government servant or that he has to deal with the matter to which the agreement relates or that in the course of his duties as a government servant he has expressed his views on all or any of the matters in dispute." The Supreme Court dismissed BSNL's appeal.
Such unreasonable conditions could act as deterrents in contracting with the government. Officials are possessive about their right, and even flaunt it like Pooh-Bah in the opera who acted as judge, executioner and many other things simultaneously. It is time to delete this unfair clause and offer a level playing field to private companies.