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M/S. Gharpure Engineering & Constructions, Private Limited, rep. by its Authorised signatory, A. Sathyamurti, Pune v/s Chief Executive Officer, Office of Wellington Cantonment Board, Ministry of Defence, Govt. of India, Nilgiris

    Arb.O.P.(Com.Div)No. 265 of 2022
    Decided On, 15 September 2022
    At, High Court of Judicature at Madras
    For the Petitioner: V. Prakash, Senior Advocate for Lilly Francis, Advocate. For the Respondent: M. Vijayan for M/S.King & Partridge, Advocates.

Judgment Text
(Prayer: Petition filed under Section 11(6)(a) of the Arbitration and Conciliation Act, 1996, pleased to: a. Appoint an arbitrator to adjudicate the disputes between the petitioner and the respondent in terms of the Arbitration agreement dated 27.02.2019; b. direct the respondent to pay costs;)

1. The petitioner was awarded a contract for the construction, erection and commissioning of a sewage system by the respondent, namely, the Wellington Cantonment Board (the Board). The agreed position is that the relevant contract was terminated and a dispute ensued in relation thereto. The petitioner issued a notice dated 01.04.2022 by which the petitioner outlined the outstanding claims, invoked clause 52 of the contract between the parties, and requested the respondent to constitute an arbitral tribunal to adjudicate the dispute. The said notice was not responded to by the respondent. Eventually, the petitioner presented this petition under Section 11 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) on 07.06.2022.

2. Learned senior counsel for the petitioner submits that there is more than one arbitration clause in the contract between the parties. Although the petitioner had cited clause 52 in the notice dated 01.04.2022, he states that the more appropriate clause is clause 16 of the agreement dated 27.02.2019. However, according to learned senior counsel, the stipulation in clause 16 that the Director Defence Estate (DE) in the Command or any other Officer nominated by the Principal Director DE shall be the arbitrator contravenes Section 12(5) of the Arbitration Act read with Schedule VII thereof. By way of substantiation, he submits that the Director DE and other Officers nominated by the Principal Director DE are part of the defence establishment and the Board is also a part of such defence establishment. Therefore, he submits that the person named in clause 16 or any other Officer nominated by the Principal Director, DE in terms thereof is disqualified to act as an arbitrator. In such circumstances, he submits that the Court should make the appointment.

3. This petition is strongly opposed by the respondent. Learned counsel for the respondent refers to the notice dated 01.04.2022 and points out that the petitioner invoked clause 52 of the tender documents. Clause 52 is inapplicable to the present dispute, according to learned counsel, and the relevant clause is clause 16 of the agreement dated 27.02.2019. Because the petitioner invoked the wrong clause, learned counsel submits that the present petition is liable to be rejected by leaving it open to the petitioner to issue a fresh notice citing the relevant clause. Assuming the first contention were to be rejected, the second contention of learned counsel is that the arbitral tribunal should be constituted only in accordance with clause 16. He counters the contention of learned senior counsel by submitting that the Director, DE is not a member of the Board but an employee of the Central Government. He further submits that the Board is a Municipality as per Article 243-P of the Constitution and is, therefore, not under the control or influence of the Central Government.

4. Learned senior counsel for the petitioner placed reliance on the judgment of the Supreme Court in Perkins Eastman Architects DPC and another v. HSCC (India) Limited (Perkins) (2020) SCC 760, particularly paragraphs 20 and 21 thereof, and submitted that the Supreme Court concluded that unilateral appointments without counter balancing the interest of the counter party concerned contravene Section 12 (5) read with Schedule VII. On the other hand, learned counsel for the respondent relied on the subsequent judgment in Central Organization for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) (Railway Electrification)(2020) 14 SCC 712, wherein previous judgments of the Supreme Court in cases such as TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, and Perkins were discussed while upholding clause 64(3)(b) of the GCC in Railway contracts. Therefore, he contended that all unilateral appointments are not treated similarly. Indeed, he reiterated that neither the Principal Director DE nor the named arbitrator are members of the Board and that, therefore, if the appointment were to be made as per clause 16, neither the appointing authority nor appointee would be one of the parties to the dispute. He also contended that the named arbitrator would not fall within any of the 19 entries in Schedule VII.

5. Two issues arise for consideration. The first issue relates to whether the present petition is maintainable. The petitioner instituted this petition after the notice dated 01.04.2022 did not elicit a response from the respondent. Undoubtedly, the petitioner invoked clause 52 of the tender documents in the said notice and not clause 16 of the agreement. It should be noticed, however, that the respondent did not reply to this notice and point out that the petitioner had relied upon an inappropriate clause. The petition was filed under Section 11 after more than two months. The admitted position is that there are at least 2 clauses dealing with dispute resolution through arbitration. In the communication dated 01.04.2022, the petitioner set out its claims, referred to the dispute resolution clause, albeit by citing the wrong clause, and called upon the respondent to constitute the arbitral tribunal. In the facts and circumstances, the communication dated 01.04.2022 satisfies the requirement of Section 21 of the Arbitration Act, and the failure by the respondent to reply justifies the filing of a petition under Section 11 thereof.

6. The second issue to be dealt with is whether the tribunal should be constituted strictly in accordance with clause 16 or by this Court appointing the arbitrator. In this connection, it is relevant to set out clause 16 which reads as under:

"16. The Director, DE in the command or any other Officer nominated by the Principal Director, DE, the Command shall be the arbitrator for the purpose of arbitration. The provision of the Arbitration and Conciliation Act, 1996 shall apply to the arbitration proceedings. The award passed by the arbitrator shall be binding on both the parties."

7. The above clause provides for a named arbitrator. Such named arbitrator is the Director, DE, in the command. The clause also enables the Principal Director DE to nominate any other Officer as the arbitrator. This leads to the question whether the named arbitrator or nominated arbitrator would fall within the categories specified in Schedule V or VII of the Arbitration Act.

8. By Act 3 of 2016, the Arbitration Act, including Section 12, was amended and Schedules V and VII were introduced therein. Section 12, as amended, is set out below:

''12.Grounds for challenge.—[(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,— (a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and (b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.

Explanation 1.—The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

Explanation 2.—The disclosure shall be made by such person in the form specified in the Sixth Schedule.

(3)An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) he does not possess the qualifications agreed to by the parties.

(4)A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made. 1

(5)Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.''

As is evident from the use of the words “such as” in clause (a) of sub-section (1), the legislative intent is that the arbitrator should disclose all circumstances which are likely to give rise to justifiable doubts as to independence or impartiality, and the expressly enumerated categories are illustrative and not exhaustive. Explanation 1 to sub-section(1) of Section 12 puts the matter beyond doubt by prescribing that the grounds set out in Schedule V are to be used as a guide. In Clarke Energy India Private Ltd. v. SAS EPC Solution Private Ltd. 2021-5- L.W.929, I examined Sections 12-15 of the Arbitration Act in considerable detail and concluded that a challenge under Section 12 and 13 before the arbitral tribunal may only be made by providing evidence of the existence of one or more of the circumstances in Schedule V or VII or circumstances substantially similar or analogous thereto or at least within the framework of the Schedules.

9. Schedules V and VII overlap to the extent that the first 19 entries in Schedule V are repeated in Schedule VII. In terms of implications, if an arbitrator falls within any of the categories listed in Schedule VII, such person is ineligible for appointment notwithstanding any prior agreement to the contrary. On the other hand, as regards the other 15 categories in Schedule V, the existence of one or more of such circumstances would lead to the conclusion that any grievance canvassed as to independence or impartiality is justified although the person concerned may not be ineligible.

10. The above discussion undoubtedly indicates that the entries in Schedule V and VII are broad categories. The legislative intent, as gleaned from text and context, was to illustratively and broadly set out objective criteria to identify conflict of interest so as to avoid, if possible, the formation of an arbitral tribunal comprising any person whose appointment is likely to lead to justifiable doubts as to independence or impartiality, and enable a challenge by an aggrieved party on such grounds before the arbitral tribunal. Consequently, the categories in Schedule V and VII should be construed liberally and not narrowly. Some of the entries in Schedule VII, which are relevant for the present purpose, are set out below:

''1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.

5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.

12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.

13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.''

The above entries disclose that the relationship may be business-related, professional, financial or control/influence-based. It could also be indirect; for instance, through an affiliate.

11. The petitioner asserted that he has justifiable doubts as to the impartiality or independence of persons appointed by the Principal Director, DE, on the ground that the DE and the Board are a part of the defence establishment. Learned senior counsel for the petitioner pointed out that the Officer commanding the station could be appointed by the Central Government in terms of Section 12(3) (a) of the Cantonments Act, 2006, and that the President of the Cantonment Board is the Officer commanding the station as per Section 19 thereof. Therefore, he submitted that the person who executed the agreement was the President of the Cantonment Board and such President may be appointed by the Central Government. Learned counsel for the respondent contended, however, that the respondent is a municipality and not the Central Government. He further contended that the Principal Director DE (the appointing authority) and Director, DE (named arbitrator) are not member

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s of the Board. The contentions of learned counsel for the respondent are technically correct. But, as discussed above, Schedule V and VII are required to be construed broadly and also apply if the arbitrator belongs to an affiliate of one of the parties or is otherwise likely to be under the controlling influence of one of the parties. A perusal of the Cantonments Act, 2006 indicates that the Central Government plays a not insignificant role in the functioning of Cantonments and such role cannot be disregarded because the Board is a municipality. It is also pertinent to bear in mind that no appointment has been made currently and, therefore, an appointment by Court does not displace any person. The limited exercise undertaken herein is to assess whether the apprehension of bias by the petitioner is justified or baseless and I conclude that it is not baseless. Therefore, the facts and circumstances justify departing from the appointment procedure in clause 16 of the agreement. 12. For reasons set out above, this petition is allowed by appointing Mr. Justice V.Parthiban, retired Judge of this Court, No.5069, Z Block, 12th Street, Anna Nagar, Chennai-40 (mobile no.9444094401) as the sole Arbitrator. The Arbitrator is called upon to enter upon reference and adjudicate the dispute. It is open to the Arbitrator to fix the fees and expenses in relation to the arbitral proceedings in consultation with the parties.