THE GOVERNMENT OF HARYANA PWD HARYANA (B AND R) BRANCH versus M/S. G. F. TOLL ROAD PVT. LTD. & ORS. on 3 January 2019

SUPREME COURT REPORTS

[2019] 1 S.C.R.

ATHE GOVERNMENT OF HARYANA PWD HARYANA (B ANDR) BRANCH

v.

M/S. G. F. TOLL ROAD PVT. LTD. & ORS.

(Civil Appeal No. 27 of 2019)

B

JANUARY 03, 2019

[ABHAY MANOHAR SAPRE AND INDU MALHOTRA, JJ]

Arbitration and Conciliation Act, 1996 – ss. 15, 15(2) –Termination of mandate and substitution of arbitrator – GovernmentCworks contract – Dispute between the parties – Nomination ofarbitrator in terms with the dispute resolution clause in the agreement– Indian Council of Arbitration-ICA raised objection to arbitratornominated by the State that being a retired employee of the State,his integrity and impartiality doubtful – State sought 30 days timeDto appoint a substitute arbitrator – Meanwhile, ICA appointed anominee arbitrator on behalf of the State, as also Presidingarbitrator – Challenge to, by the State by filing application u/s. 15before the District Judge as also objection before the arbitral tribunalu/s. 16 – District Court held the petition not maintainable since thetribunal had been constituted – Revision Petition before the HighECourt – Dismissal of – On appeal, held: High Court failed to takenote of s. 15(2) which provides that a substitute arbitrator must beappointed according to the rules that are applicable for theappointment of the arbitrator being replaced – ICA could not haveusurped the jurisdiction over appointment of the nominee arbitratorFon behalf of the State prior to the expiry of the 30 days’ periodrequested by the State – Appointment of the nominee arbitrator onbehalf of the State by the ICA unjustified and contrary to the Rulesof the ICA itself – Objection of reasonable apprehension of biasraised as regards the arbitrator nominated by the State whollyunjustified and unsubstantiated – Thus, the order passed by theGHigh Court set aside – On basis of the mutual agreement betweenboth the parties, Justice S.S. Nijjar (Retd.) appointed as the SoleArbitrator to adjudicate the disputes arising out of the Agreement.

GOVT. OF HARYANA PWD HARYANA (B & R) BRANCH v.

M/S. G. F. TOLL ROAD PVT. LTD.

Disposing of the appeal, the Court

HELD: 1.1 The High Court while considering theapplication under Section 15 of the Arbitration and ConciliationAct, 1996 failed to take note of the provisions of Section 15(2) ofthe Act. Section 15(2) provides that a substitute arbitrator mustbe appointed according to the rules that are applicable for theappointment of the arbitrator being replaced. This would implythat the appointment of a substitute arbitrator must be accordingto the same procedure adopted in the original agreement at theinitial stage. The provisions of Section 15(2) require that whenthe mandate of an arbitrator terminates either by his withdrawalfrom office, or pursuant to an agreement by the parties, or forany reason, a substitute arbitrator shall be appointed accordingto the rules applicable to the appointment of the arbitrator beingreplaced. [Paras 3.1, 3.2][276-F-H; 277-C]

1.2 Clause 39.2.2. of the agreement expressly provided thateach party shall nominate one arbitrator and the third arbitratorshall be appointed in accordance with the Rules of the ICA. [Para3.3][277-C-D]

1.3 The appellant-State had requested for 30 days ’time toappoint another nominee arbitrator, after objections were raisedby the ICA to the first nomination. The ICA declined to grant theperiod of 30 days, and instead appointed the arbitrator on behalfof the Appellant-State. The ICA could have filled up the vacancyonly if the Appellant-State had no intention of filling up thevacancy. The ICA could not have usurped the jurisdiction overappointment of the nominee arbitrator on behalf of the State priorto the expiry of the 30 days’ period requested by the Petitioner.The appointment of the nominee arbitrator on behalf of theAppellant-State by the ICA was unjustified and contrary to theRules of the ICA itself. [Paras 3.4, 3.5][277-E-G]

1.4 The 1996 Act does not disqualify a former employeefrom acting as an arbitrator, provided that there are no justifiabledoubts as to his independence and impartiality. The fact that thearbitrator was in the employment of the State of Haryana over 10

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Ayears ago, would make the allegation of bias clearly untenable.[Para 3.9][278-F-G]

1.5 The instant case is governed by the pre-amended 1996Act. Even as per the 2015 Amendment Act which has insertedthe Fifth Schedule to the 1996 Act which contains grounds toBdetermine whether circumstances exist which give rise tojustifiable doubts as to the independence or impartiality of anarbitrator. Entry 1 of the Fifth Schedule and the Seventh Scheduleare identical. The Entry indicates that a person, who is related toa party as an employee, consultant, or an advisor, is disqualifiedCto act as an arbitrator. The words “is an” indicates that the personso nominated is only disqualified if he/she is a present/currentemployee, consultant, or advisor of one of the parties. Anarbitrator who has “any other” past or present “ businessrelationship “ with the party is also disqualified. The word “other”used in Entry 1, would indicate a relationship other than anDemployee, consultant or an advisor. The word “other” cannot beused to widen the scope of the entry to include past/formeremployees. [Para 3.10][278-G-H; 279-B-D]

1.6 The ICA made only a bald assertion that the nomineearbitrator was a retired employee of the Appellant-State, and asEsuch would not be independent and impartial. The objection ofreasonable apprehension of bias raised was wholly unjustified andunsubstantiated, particularly since the nominee arbitrator was aformer employee of the State over 10 years ago. The apprehensionof the respondents was hence unjustified since the test to beFapplied for bias is whether the circumstances are such as wouldlead to a fair-minded and informed person to conclude that thearbitrator was infact biased. This would not disqualify him fromacting as an arbitrator. Mere allegations of bias are not a groundfor removal of an arbitrator. Furthermore, the appointment hadbeen made prior to the 2015 Amendment Act when the FifthGSchedule was not inserted. Hence, the objection raised by theICA was untenable on that ground also. The judgment passed bythe High Court is set aside [Paras 3.11, 3.12][279-E-G]

1.7 During the conclusion of arguments, the Counsel forboth parties mutually agreed to the appointment of Justice S.S.H

GOVT. OF HARYANA PWD HARYANA (B & R) BRANCH v.M/S. G. F. TOLL ROAD PVT. LTD.

Nijjar (Retd.) as the Sole Arbitrator to adjudicate the disputesarising out of the Concession Agreement. The mandate of thethree-member arbitral tribunal constituted under the ICA Rulesis terminated. The Sole Arbitrator shall proceed in continuationof the previously constituted arbitral tribunal. [Para 4][279-H;280-A-C]

ACC Ltd. v. Global Cements Ltd. (2012) 7 SCC 71:[2012]6 SCR 215 – referred to.

Locabail Ltd. v. Bayfield Properties 2000 (1) All ER65; Re Medicaments and related Classes of Goods(No.2) 2002 (1) All ER 465 – referred to.

Case Law Reference

[2012] 6 SCR 215referred to

Para 3.2

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 27 of2019.

From the Judgment and Order dated 01.03.2018 of the High Courtof Punjab & Haryana at Chandigarh in CR No. 3279 of 2017 (O&M).

Hemant Gupta, AAG, Ms. Sunakshi Gupta, Alok Sharma, SanjayKumar Visen, Advs. for the Appellant.

Gopal Jain, Sr. Adv., Salim Inamdar, Hasan Murtaza, Aditya Panda,Ravi Sehgal, Prabal Mehrotra, M/s. Khaitan & Co., Advs. for theRespondents.

The Judgment of the Court was delivered by INDU MALHOTRA, J.

Leave granted.

1. The present Civil Appeal has been filed by the Appellant –State of Haryana to challenge the Order dated 01.03.2018 passed bythe High Court of Punjab and Haryana at Chandigarh in C.R. No. 3279/2017.

2. The factual matrix leading to the filing of the present Appeal,briefly stated is, as under:

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2.1. On 12.12.2008 the Appellant – State issued a Letter ofAcceptance to Respondent No. 1 - M/s. G. F. Toll Road Pvt. Ltd. forexecution of a works contract for construction, operation andmaintenance of Gurgaon- Faridabad Road and Ballabhgarh-Sohna Roadon BOT (Build, Operate and Transfer) basis.

B2.2. A Concession Agreement was entered into between theparties on 31.01.2009. The period of construction was 24 monthsfrom31.05.2009. The said agreement contained a dispute resolution clausewhich is set out hereinbelow:

“39.2 ArbitrationC

39.2.1. Any dispute, which is not resol ved amicably asprovided in Clause 39.1 shall be finally decided by referenceto arbitration by a Board of Arbitrators, appointed pursuantto Clause 39.2.2. sub-clause (b) below. Such arbitration shallbe held in accordance with the Rules of Arbitration of theDIndian Council of Arbitration and shall be subject to theprovisions of the Arbitration Act.

39.2.2. There shall be a Board of three arbitrators of whomeach party shall select one and the third arbitrator shall beappointed in accordance with the Rul es of Arbitration of the”EIndian Council of Arbitration.

2.3. During the execution of the Agreement, disputes arosebetween the parties. The Respondent No. 1 - M/s. G. F. Toll Road Pvt.Ltd. vide Letter dated 30.03.2015 to Respondent No. 2 – Indian CouncilFof Arbitration (“ICA”) invoked the Arbitration Clause, and requestedthe ICA to commence arbitration proceedings. On 05.05.2015,Respondent No. 1 - M/s. G. F. Toll Road Pvt. Ltd. appointed a retiredEngineer-in-Chief – Mr. Surjeet Singh as their nominee Arbitrator.

The Appellant – State herein also nominated a retired Engineer-Gin-Chief, Mr. M.K. Aggarwal as their nominee arbitrator vide Letterdated 08.06.2015.

2.4. The Respondent No. 2 - ICA vide Letter dated 03.08.2015raised an objection to the arbitrator nominated by the Appellant – Stateon the ground that he was a retired employee of the State, and thereHmay be justifiable doubts with respect to his integrity and impartiality to act as an arbitrator. The Respondent No. 2 - ICA advised the State toreconsider its nomination.

The Appellant – State refuted the objection raised by RespondentNo. 2 – ICA on the ground that there was no rule which prohibited aformer employee from being an arbitrator, and there could not be anyjustifiable doubt with respect to his impartiality since the nomineearbitrator had retired over 10 years ago.

On 24.09.2015, Respondent No. 1 - M/s. G. F. Toll Road Pvt. Ltd.raised an objection regarding the independence and impartiality of theAppellant’s nominee arbitrator – Mr. M.K. Aggarwal. Respondent No.2 – ICA forwarded the said objection to the Appellant – State.

2.5. The Respondent No. 2 – ICA vide its Letter dated30.10.2015 reiterated that it has been firmly established that Mr. M.K.Aggarwal had a direct relationship with the Appellant – State as itsformer employee, which may raise justifiable doubts as to hisindependence and impartiality in adjudicating the dispute. The RespondentNo. 2 – ICA stated that it was in the process of appointing an arbitratorin place of Mr. M.K. Aggarwal and its decision shall be communicatedto the Appellant.

2.6. In response, the Appellant – State vide Letter dated16.11.2015 requested the Respondent No. 2 – ICA for a period of 30days to appoint a substitute arbitrator.In the meanwhile, the Respondent No. 2 – ICA vide its Letterdated 23.11.2015 informed the Appellant – State that it had alreadyappointed a nominee arbitrator on behalf of the Appellant, as well as thePresiding Arbitrator.

2.7. Aggrieved by the appointment made by Respondent No. 2– ICA of the nominee arbitrator, the Appellant – State, filed an applicationunder Section 15 of the Arbitration and Conciliation Act, 1996 (“the Act”)before the District Court, Chandigarh on the ground that the constitutionof the arbitral tribunal was illegal, arbitrary and against the principles ofnatural justice.

2.8. The Appellant – State also raised an objection before theArbitral Tribunal under Section 16 on the issue of jurisdiction.

On 08.12.2016, the arbitral tribunal ordered that it shall not hearthe objection under Section 16 of the Act, and shall await the decision ofthe District Court, Chandigarh.

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A2.9. The District Court vide its Order dated 27.01.2017 held thatthe Petition was not maintainable, since the Arbitral Tribunal had beenconstituted, and an objection under Section 16 should be raised beforethe Tribunal to rule on its own jurisdiction.

2.10. Aggrieved by the Order dated 27.01.2017, the Appellant –BState filed a Civil Revision Petition before the Punjab and Haryana HighCourt, Chandigarh being C. R. No. 3279 of 2017.

2.11. The learned Single Judge of the Punjab and Haryana HighCourt vide the impugned Order dated 01.03.2018 dismissed the CivilRevision Petition on the ground that the Appellant – State could raise theCissue of jurisdiction under Section 16 before the arbitral tribunal.

It was further held that in a situation where an objection is raisedregarding the nomination of an arbitrator by one of the parties, and theagreement is silent with regards to the mode of appointment of asubstitute arbitrator, the rules applicable would be those of the InstitutionDunder which the arbitration is held. Therefore, in the facts of the presentcase, Rules 25 and 27 of the ICA Rules would apply.

2.12. Subsequent to the impugned Judgment being passed, theApplication under Section 16 filed by the Appellant – State was dismissedby a non-speaking Order of the Arbitral Tribunal dated 12.05.2018.E

2.13. Aggrieved by the Order dated 01.03.2018 and 12.05.2018,the Appellant – State has filed the present Petition.

3. We have heard the learned Counsel for both the parties, andperused the pleadings.F

3.1. The High Court while considering the application underSection 15 failed to take note of the provisions of Section 15(2) of theAct.

Section 15(2) provides that a substitute arbitrator must be appointedGaccording to the rules that are applicable for the appointment of thearbitrator being replaced. This would imply that the appointment of asubstitute arbitrator must be according to the same procedure adoptedin the original agreement at the initial stage.

Section 15(2) of the Act reads as under :H

“15. Termination of mandate and substitution of arbitrator.—

(1) …

(2) Where the mandate of an arbitrator terminates, a substitutearbitrator shall be appointed according to the rules that wereapplicable to the appointment of the arbitrator being”replaced.

3.2. The provisions of Section 15(2) require that when the mandateof an arbitrator terminates eitherby his withdrawal from office, orpursuant to an agreement by the parties, or for any reason, a substitutearbitrator shall be appointed according to the rules applicable to theappointment of the arbitrator being replaced.

This Court in ACC Ltd. v. Global Cements Ltd.[1] held that theprocedure agreed upon by the parties for the appointment of the originalarbitrator is equally applicable to the appointment of a substitute arbitrator,even if the agreement does not specifically provide so.

3.3. In the present case, Clause 39.2.2. of the agreement expresslyprovided that each party shall nominate one arbitrator, and the thirdarbitrator shall be appointed in accordance with the Rules of the ICA.

3.4. The Appellant – State had vide Letter dated 16.11.2015requested for 30 days’ time to appoint another nominee arbitrator, afterobjections were raised by the ICA to the first nomination. The ICAdeclined to grant the period of 30 days, and instead appointed the arbitratoron behalf of the Appellant – State. The ICA could have filled up thevacancy only if the Appellant – State had no intention of filling up thevacancy. The ICA could not have usurped the jurisdiction overappointment of the nominee arbitrator on behalf of the State prior to theexpiry of the 30 days’ period requested by the Petitioner.

3.5. The appointment of the nominee arbitrator on behalf of theAppellant – State by the ICA was unjustified and contrary to the Rulesof the ICA itself.

3.6. The objection raised by the ICA with respect to theappointment of Mr. M.K. Aggarwal as the nominee of the State waswholly unjustified and contrary to the provisions of the 1996 Act.

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A3.7. The objection raised by Respondent No. 2 – ICA to thearbitrator nominated by the Appellant – State, was that the nomineearbitrator was a retired employee of the Appellant – State, and as suchthere may be justifiable doubts to his independence and impartiality toact as an arbitrator.B3.8. The said objection was refuted by the Appellant – State onthe ground that the nominee arbitrator was a Chief Engineer who retiredover 10 years ago from the services of the State. The apprehension ofthe Respondents was hence unjustified since the test to be applied forbias is whether the circumstances are such as would lead to a fair-minded and informed person to conclude that the arbitrator was infactCbiased.

In Locabail Ltd. v. Bayfield Properties[2], the House of Lordsheld that :

“The greater the passage of time between the event relied onDas showing a danger of bias and the case in which theobjection is raised, the weaker (other things being equal) theobjection will be.”

The Court of Appeal in Re Medicaments and related Classesof Goods (No.2)[3]while propounding the ‘real danger’ test for bias heldEthat :

“The question is whether the fairminded and informedobserver, having considered the facts, would conclude thatthere was a real possibility that the Tribunal was biased.”

3.9. The 1996 Act does not disqualify a former employee fromFacting as an arbitrator, provided that there are no justifiable doubtsas to his independence and impartiality.

The fact that the arbitrator was in the employment of the State ofHaryana over 10 years ago, would make the allegation of bias clearlyuntenable.G

3.10. The present case is governed by the pre-amended 1996Act. Even as per the 2015 Amendment Act which has inserted theFifth Schedule to the 1996 Act which contains grounds to determinewhether circumstances exist which give rise to justifiable doubts as 2 2000 (1) All ER 65H3 2002 (1) All ER 465

to the independence or impartiality of an arbitrator. The first entry to theFifth Schedule reads as under :

“Arbitrator’s relationship with the parties or counsel

1. The Arbitrator is an employee, consultant, advisor or has any other pastor present business relationship with a”party.

Entry 1 of the Fifth Schedule and the Seventh Schedule areidentical. The Entry indicates that a person, who is related to a party asan employee, consultant, or an advisor, is disqualified to act as anarbitrator. The words “is an” indicates that the person so nominated isonly disqualified if he/she is a present/current employee, consultant, oradvisor of one of the parties.

An arbitrator who has “any other” past or present “businessrelationship” with the party is also disqualified. The word “other” usedin Entry 1, would indicate a relationship other than an employee, consultantor an advisor. The word “other” cannot be used to widen the scope ofthe entry to include past/former employees.

3.11. The ICA made only a bald assertion that the nomineearbitrator – Mr. M. K. Aggarwal would not be independent and impartial.

The objection of reasonable apprehension of bias raised was whollyunjustified and unsubstantiated, particularly since the nominee arbitratorwas a former employee of the State over 10 years ago. This would notdisqualify him from act as an arbitrator. Mere allegations of bias are nota ground for removal of an arbitrator.

It is also relevant to state that the appointment had been madeprior to the 2015 Amendment Act when the Fifth Schedule was notinserted. Hence, the objection raised by the ICA was untenable on thatground also.

3.12. In this view of the matter, the impugned judgment dated01.03.2018 passed by the Punjab & Haryana High Court in C.R. No.3279.2017 is set aside.

4. During the conclusion of arguments, the counsel for both partiesmutually agreed to the arbitration being conducted by a Sole Arbitrator A

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Ain supersession of the arbitration clause in the agreement which providedfor a three-member arbitration panel.

The Counsel for both parties mutually agreed to the appointmentof Justice S.S. Nijjar (Retd.) as the Sole Arbitrator to adjudicate thedisputes arising out of the Concession Agreement dated 31.01.2009.

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Accordingly, the mandate of the three-member arbitral tribunalconstituted under the ICA Rules on 05.12.2015 stands terminated. TheSole Arbitrator shall proceed in continuation of the previously constitutedarbitral tribunal. The material already on record shall be deemed to havebeen received by the Sole Arbitrator.

CThe Appeal is disposed of accordingly.

Nidhi Jain

Appeal disposed of.

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