Retired Employees As Arbitrators? Supreme Court To Decide

Recently on 30th August 2024, a 5-judge Constitution Bench of the Hon’ble Supreme Court (SC) in Central Organisation for Railway Electrification v. M/s. ECI SPIC SMO MCML (JV) (CORE 2)^[1] reserved its judgment on the issue whether a person who is ineligible to be an arbitrator under the Arbitration and Conciliation Act, 1996 (Act), can otherwise appoint an arbitrator.  

The reference

On 17 December 2019, the SC in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) (CORE 1)^[2] was hearing a challenge to the Allahabad High Court’s order appointing a sole arbitrator who was not part of the panel agreed between the parties in the underlying arbitration agreement. The terms of the contract between the parties stipulated that any dispute would be decided by a panel of 3 arbitrators, who must be 3 retired railway officers not below the rank of a senior railway officer. The HC held that the Court’s power to appoint arbitrators under Section 11 of the Act is independent of the contract between the parties and appointed a sole arbitrator (outside of the agreed panel) to adjudicate the disputes between the parties.

In CORE 1, the respondent argued that an arbitrator cannot be appointed by a former employee of the appellant who is ineligible to be an arbitrator under Schedule VII of the Act. It relied on the SC’s decisions in (i) TRF Ltd. v. Energo Engg. Projects Ltd. (TRF Ltd.)^[3] and (ii) Perkins Eastman Architects DPC v. HSCC (India) Ltd. (Perkins Eastman)^[4] to argue that a person ineligible to be an arbitrator under Schedule VII of the Act cannot appoint an arbitrator. In CORE 1, the SC held that the terms of the contract between the parties gave the respondent the power to select 2 out of the 4 names in the panel, and the power of the appellant nominating its arbitrator, gets counterbalanced by the choice granted to the respondent under the contract.^[5]

The SC distinguished the facts in CORE 1 and held that merely being a retired employee of a party to the dispute does not ipso facto render such employee to be ineligible to be an arbitrator under the Act.^[6] Thus, the SC set aside the Allahabad HC’s order appointing the sole arbitrator.

Subsequently, in January 2021, 3-judge bench of the SC in Union of India v. Tantia Constructions Ltd.^[7] prima facie disagreed with the SC’s ruling in CORE 1 on the ground that once the appointing authority itself is incapacitated from referring the matter to arbitration, its appointments cannot be made valid depending on the facts of the case. Hence, CORE 1 was referred to a larger bench for reconsideration on this issue. Similarly on 16 August 2022, in JSW Steel Ltd. v. South Western Railway and Anr (JSW Steel)^[8] the SC noted that CORE 1 has been referred to a larger bench. Since the impugned order in JSW Steel relied on CORE 1, the SC directed that the matter be placed before a larger bench. In this background, the reference came before the SC in CORE 2.

The controversy

In TRF Ltd. the SC considered the maxim “qui facit per alium facit per se” (i.e., what one does through another is done by oneself) and held that a managing director of 1 of the parties is ineligible “by operation of law”^[9], and cannot therefore nominate an arbitrator. In doing so, the SC accepted the argument that under Section 12(5) of the Act, a managing director of 1 of the parties was statutorily ineligible to be an arbitrator. Between the rulings in TRF Ltd. and CORE 1, there is a fundamental disagreement: the SC in CORE 1 examined several precedents^[10] and ultimately held that being a retired employee of 1 of the parties to the arbitration does not ipso facto make such employee ineligible to be an arbitrator.

Thus, while the larger issue in reference before the SC in CORE 2 is whether a person who is ineligible to be an arbitrator can still nominate an arbitrator, the SC will also have to put to rest the question of a retired employee’s eligibility to be an arbitrator under Section 12(5) read with Schedule VII of the Act.

Treatment of employees under Schedule VII of the Act

In Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd.^[11] (Voestalpine) the SC examined the treatment of employees under Schedule VII of the Act. Voestalpine was also relied on by the appellant in CORE 1 to successfully argue that merely being a retired employee of 1 of the parties is no ineligibility under Schedule VII of the Act.

In Voestalpine, the SC examined the legislative history of introducing Section 12(5) and Schedule VII in the 2015 amendments of the Act. Prior to the amendment, the SC had consistently upheld arbitration clauses in government contracts providing for arbitration by a serving employee of the department.^[12] While the SC had carved out a minor exception to not uphold such clauses where the proposed arbitrator was “the controlling or dealing authority … or if he is a direct subordinate …”, such exception was not enough to further the principles of independence and impartiality of arbitrators.^[13] The 246^th Law Commission Report, which led to the 2015 amendments^[14] emphasised that independence and impartiality of arbitrators are cornerstones of arbitration and as such, Schedule VII was introduced to exclude employees of any party to the dispute, from being appointed as arbitrators.^[15]

In this backdrop, the SC in Voestalpine held that if an arbitrator is an employee, a consultant, an advisor, etc., or has had any business relationship with a party, they shall be ineligible under Schedule VII of the Act.

In Voestalpine, on facts, the SC observed that the panel of arbitrators proposed by the respondent-DMRC did not contain any employees (or ex-employees^[16]) or consultants etc. of DMRC but were employees of other PSUs. Thus, their appointment would not fall under Schedule VII. Still, the SC directed DMRC to furnish a broad-based panel to afford a meaningful choice to the petitioner, as opposed to a panel with only 5 options.

Critique

Unlike the facts of Voestalpine, the arbitration clause involved in CORE 1 contemplated an arbitral tribunal of retired railway officers. The SC found^[17] that merely the fact that the proposed arbitrators are retired employees of the Railways does not make them ineligible under Schedule VII.

Voestalpine and CORE 1 are distinguishable on facts

The obvious distinction between Voestalpine and CORE 1 is the degree of relationship between the proposed arbitrators and the parties involved. In Voestalpine, even the petitioner’s case rested on correlating general employment in statutory corporations/PSUs, with DMRC. Thus, the SC returned a specific finding that there was no connection between generally having served as a government employee and the DMRC. On the contrary, no such analysis is forthcoming in CORE 1. The facts recorded in CORE 1 are not sufficient to suggest 1 way or another, what was the degree of relationship between the proposed arbitrators and the appellant therein. In our view, the SC should have explored this aspect as it is integral to determining the eligibility of an arbitrator under Schedule VII. To that extent, the reliance on Voestalpine may be misplaced.

Interpretation of Schedule VII

The SC in CORE 1 also relied on State of Haryana v. G.F. Toll Road (P) Ltd.^[18] wherein the SC has interpreted the words “… is an employee, consultant, advisor, or has any other past or present business relationship with a party” (as occurring in Entry 1 to Schedule VII) to mean that the words “any other” must refer to a relationship “other” than an employee. Arguably, this interpretation borders on being (i) hyper technical, (ii) contrary to the larger objective of ensuring impartiality and independence of arbitrators and (iii) against settled rules of statutory interpretation. Entry 1 can instead be read ejusdem generis making it a category of items including non-exhaustively, “employees, consultants, advisors”. “Any other past or present business relationship” may then include under Entry 1, professional relationships, whether past or present, which are of a similar nature as employees, consultants, advisors.

Objective behind amendment of Section 12(5)

This would further be in line with the Law Commission’s reasoning that a sensible law cannot permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by, or similarly dependent on one party.^[19] Further, the SC’s reliance on the G.F. Toll Road case does not consider Entry 31, Schedule V of the Act. Thereunder, an arbitrator who has been associated within the past 3 years, with a party in a professional capacity, such as a former employee or partner, is considered to be a circumstance which gives rise to justifiable doubts about the independence of such arbitrator.^[20] However, it is also true that the omission to include former employees in Schedule VII while retaining the same in Schedule V would indicate that the Law Commission and the legislature considered ex-employees as a category that is not suitable for de jure ineligibility. Therefore, while deciding CORE 2, the SC must analyse whether the Law Commission and, or the legislature actually contemplated attaching de jure ineligibility to ex-employees.

Conclusion

In our view, it is objectively unreasonable to suggest that a serving employee can be biased, but from the day of retirement, such bias may slowly fade away. For the lack of a definitive threshold, and rightly so – the SC while deciding CORE 2 may in the very least consider suggesting a “cooling off” period. While this may risk venturing into re-writing the law, it is the only reconciliation possible with the view taken by the SC in CORE 1.

The ruling in CORE 1 does not align with the objective of ensuring independence. Furthermore, in law, there is a fundamental difference between “actual” bias and “justifiable apprehensions” of bias. The latter is easier to establish and also the intended test for impartiality of arbitrators.^[21] True, that retired employees are not bound to be biased in every fact and circumstance. Their technical expertise as arbitrators can assist in effective resolution. However, it cannot possibly be suggested that such technical expertise is available only with retired employees having served in the same/similar government organisations.

The principles of natural justice must be met at an earlier threshold than the practical consideration of suitable expertise. Where there is room for doubt (and for good reason, given that actual bias is rarely proved^[22]), any interpretation of Schedule VII must give way to natural justice over practical considerations such as expertise. It remains to be seen whether the SC adopts a similar approach in CORE 2.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication.

[1] Order dt. 30 August 2024, Civil Appeal Nos. 9486-9487 of 2019, Supreme Court of India.

[2] Central Organisation for Railway Electrification v. M/s. ECI SPIC SMO MCML (JV), (2020) 14 SCC 712.

[3] TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

[4] Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

[5] Supra note 2, at 37.

[6] Supra note 2, at 27.

[7] Union of India v. Tantia Constructions Ltd., 2021 SCC OnLine SC 271.

[8] JSW Steel Ltd. v. South Western Railway and Anr, 2022 SCC OnLine SC 1973.

[9] Supra note 3, at 54.

[10] Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665; State of Haryana v. G.F. Toll Road (P) Ltd., (2019) 3 SCC 505.

[11] Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665.

[12] Para 56, Law Commission’s 246^th Report

[13] Ibid.

[14]  Section 8, Arbitration and Conciliation (Amendment) Act, 2015, Act No. 3 of 2016, Acts of Parliament of India

[15] Law Commission of India, 246^th Report, Law Commission of India, Paras 56 to 59, available at: https://lawcommissionofindia.nic.in/report246/ (4 October 2024, 12:00 pm).

[16] Supra note 11, at Para 27.

[17] Ibid.

[18] State of Haryana v. G.F. Toll Road (P) Ltd., (2019) 3 SCC 505.

[19] Supra note 10, at 57.

[20] Rajvanshi Singh and Tanay Mishra, Can an ex-employee of a Party be appointed as an Arbitrator? India Corp Law (4 October 2024, 12:06 pm), https://indiacorplaw.in/2019/01/can-ex-employee-party-appointed-arbitrator.html

[21] Supra note 10, at 55.

[22] Locabail (U.K.) Ltd. v. and Another, [2000] 2 WLR 870.