2022 (10) TMI 1283 - HC - Indian Laws

Claims required to be notified - appointment of an Arbitrator from the panel of names submitted by the respondent. Claims required to be notified - HELD THAT - It is true that the respondent despite Clause 9.0.2.0 had not referred the claims of the petitioner to the General Manager because of which the General Manager could not render its decision as to whether the claims forwarded by the petitioner are notified or not but merely because that process has not been gone into it would not mean that all the claims have to be referred to arbitration. That cannot be the effect in view of the clear stipulation of Clause 9.0.2.0 and also of the law expounded by the Supreme Court in Indian Oil Corporation Limited 2022 (7) TMI 974 - SUPREME COURT . In short the Arbitrator gets the jurisdiction only if the claims are notified and not otherwise. If the claims are not notified then they do not form subject matter of arbitration. This Court is of the view that the matter need to be remanded back for the General Manager for him to consider whether the claims of the petitioner are required to be notified or not so that the same can become the subject matter of arbitration. Appointment of an Arbitrator from the panel of names submitted by the respondent - HELD THAT - The procedure of forwarding a panel of five names to the other contracting party to choose its nominee arbitrator from amongst them is no longer a valid procedure. 96. In the present case the stipulation requires forwarding three names (even if they are retired employees from other organizations and not IOCL) to the petitioners for it to choose one name amongst them to act as the Sole Arbitrator. It cannot be overlooked that the list of three names is a restrictive panel limiting the choice of the petitioner to only three options - The integrity and impartiality of these officers could not be normally doubted. However in the absence of a free choice given to the petitioner to choose the arbitrator from a broad and diversified panel and the power conferred upon the respondent to forward any three names as the panel at its discretion there is a possibility of apprehension arising on part of the petitioner about the impartiality of the persons in the panel so forwarded. Whether such an apprehension is justified or not is not for this Court to decide and is in any case immaterial. It is settled law that even an apprehension of bias of an arbitrator in the minds of the parties would defeat the purpose of arbitration and such a situation must be avoided. Conclusion - i) The matter is remanded to the General Manager to decide within eight weeks whether the petitioner s claims qualify as Notified Claims which is a mandatory pre-condition for arbitration. ii) The existing procedure of appointment of a sole arbitrator from a restricted panel of three persons nominated solely by the respondent is declared invalid. Petition disposed off.

Summary

The core legal questions considered in this judgment relate primarily to two issues: (i) the requirement and effect of "Notified Claims" under the arbitration clause of the contract, specifically the role and authority of the General Manager in certifying such claims before arbitration can proceed; and (ii) the validity and legality of the procedure for appointment of a sole arbitrator from a limited panel of three persons nominated by one party, and whether such a procedure complies with the Arbitration and Conciliation Act, 1996 and relevant Supreme Court precedents.

Regarding the first issue, the legal framework centers on the arbitration agreement incorporated in the General Conditions of Contract (GCC), specifically Clauses 9.0.1.0 and 9.0.2.0, which stipulate that only "Notified Claims" included in the contractor's final bill can be referred to arbitration, and that the General Manager has the exclusive jurisdiction to decide whether a claim qualifies as a Notified Claim prior to arbitration. The Supreme Court's recent authoritative judgment in Indian Oil Corporation Limited (supra) was pivotal, holding that disputes concerning whether a claim is a Notified Claim are "excepted matters" excluded from the arbitrator's jurisdiction and must be decided by the General Manager before arbitration can proceed.

The Court analyzed the petitioner's contention that the General Manager lacks authority to decide the Notified Claim issue, that the petitioner had invited the respondent to refer the claims to the General Manager who failed to act within a reasonable time, and that this failure amounted to waiver of the pre-condition, thereby vesting jurisdiction in the arbitrator. The petitioner also argued that the respondent's conduct, including furnishing a panel of arbitrators and not insisting on General Manager's certification, amounted to a subsequent agreement to dispense with the General Manager's role. Reliance was placed on precedents allowing waiver of pre-conditions to arbitration and on Section 16 of the Act enabling the arbitrator to decide jurisdictional issues.

The Court, however, distinguished these submissions in light of the binding Supreme Court authority in Indian Oil Corporation Limited (supra), which unequivocally mandates that the General Manager's decision on whether claims are Notified Claims is a mandatory pre-condition to arbitration and that the arbitrator lacks jurisdiction over this issue. The Court rejected the petitioner's waiver argument, finding no contractual or legal basis to treat the General Manager's non-action as waiver, especially since the contract explicitly excludes arbitrability of this issue. The Court emphasized that the absence of any decision by the General Manager does not confer jurisdiction on the arbitrator or the Court to bypass the contractual mechanism. Thus, the Court held that the claims cannot be referred to arbitration unless and until the General Manager certifies them as Notified Claims, and accordingly remanded the matter to the General Manager to decide the issue within a stipulated timeframe.

The Court also addressed the petitioner's reliance on judgments allowing arbitrators to decide jurisdictional issues and waiver of pre-conditions, but found these inapplicable given the clear contractual exclusion and Supreme Court precedent. The Court underscored that the issue of arbitrability should be decided by courts only when facts are "clear and glaring," which was not the case here.

On the second issue concerning the appointment of an arbitrator, the dispute arose from Clause 9.0.1.1 of the GCC, which provides that the contractor (petitioner) shall select a sole arbitrator from a panel of three persons nominated by the owner (respondent). The petitioner challenged this procedure as invalid in law, arguing that it restricts the right to choose an arbitrator to a limited panel controlled by one party, thereby violating the principles of impartiality and independence under Sections 12(1)(b) and 12(5) and the Seventh Schedule of the Act. The petitioner relied heavily on the Supreme Court's decision in Voestalpine Schienen GmBH (supra), which criticized limited panels prepared unilaterally by one party as giving rise to suspicion of bias and recommended a broader, more diverse panel including judges, lawyers, and experts from various fields to ensure neutrality.

The respondent defended the clause as valid and binding, emphasizing that the panel comprised retired officers from public sector undertakings who do not fall within the categories of persons disqualified under the Act. The respondent relied on judgments upholding the right of a party to nominate arbitrators and the validity of panels, including Central Organisation for Railway Electrification (supra) and various High Court decisions, and argued that the petitioner cannot seek to have the Court rewrite the arbitration agreement. The respondent also distinguished Voestalpine Schienen GmBH (supra) on facts, noting that the panel here was smaller but composed of impartial persons.

The Court examined the competing arguments and the relevant legal principles. It acknowledged the settled law that parties are free to agree on an arbitration procedure, including appointment mechanisms, provided they do not violate the independence and impartiality requirements under the Act. The Court noted the Supreme Court's observations in Voestalpine Schienen GmBH (supra) that limited panels prepared unilaterally by one party create suspicion of bias and that parties should have a free choice from a broad panel. The Court observed that the procedure in the present case, limiting the petitioner's choice to only three arbitrators nominated solely by the respondent, is restrictive and susceptible to apprehension of bias, even if the individuals named are impartial. The Court held that such a procedure is no longer valid and must be modified in accordance with the Supreme Court's guidance to ensure a broad-based panel and free choice.

The Court further noted that the controversy over the validity of the respondent's right to unilaterally nominate a panel of arbitrators is pending before a larger bench of the Supreme Court, and that conflicting decisions exist. However, the Court preferred to follow the binding and recent Supreme Court precedent in Voestalpine Schienen GmBH (supra) over the contested Central Organisation for Railway Electrification (supra) decision, which has been doubted in subsequent rulings.

In conclusion, the Court directed that the General Manager must first decide whether the petitioner's claims are Notified Claims within eight weeks, as a mandatory pre-condition to arbitration. Further, the Court declared that the procedure for appointment of the sole arbitrator must conform to the principles laid down in Voestalpine Schienen GmBH (supra), entailing a broad and diverse panel from which the parties may freely choose, thereby avoiding any suspicion of bias. The petition seeking appointment of an arbitrator on the basis of the existing limited panel procedure was disposed of accordingly, with no order as to costs.

Significant holdings include the following verbatim excerpt from the Court's analysis on the first issue, reflecting the binding legal position:

"Only the Notified Claims of the contractor included in the Final Bill of the contractor in accordance with the provisions of Clause 6.6.3.0 shall have to be referred to arbitration; whether or not a claim sought to be referred to arbitration by the contractor is a Notified Claim or not, the Arbitrator or Arbitral Tribunal shall have no jurisdiction at all; whether or not a claim is a Notified Claim or not shall have to be decided by the General Manager and that too, prior to arbitration proceeding with or proceeding further with the reference. Therefore, once the General Manager, on the basis of the material on record takes a conscious decision that a particular claim sought to be referred to arbitration is not a Notified Claim, such a claim thereafter cannot be referred to arbitration. The language used in Clauses 9.0.1.0 and 9.0.2.0 is very clear and unambiguous."

On the second issue, the Court's critical legal reasoning includes:

"The procedure of forwarding a panel of five names to the other contracting party to choose its nominee arbitrator from amongst them, is no longer a valid procedure... The stipulation requires forwarding three names... for it to choose one name amongst them to act as the Sole Arbitrator... the list of three names is a restrictive panel limiting the choice of the petitioner to only three options... there is a possibility of apprehension arising on part of the petitioner about the impartiality of the persons in the panel so forwarded... even an apprehension of bias of an arbitrator in the minds of the parties would defeat the purpose of arbitration, and such a situation must be avoided."

Core principles established are:

• Arbitrability of claims under the contract is strictly limited to those claims certified as Notified Claims by the General Manager prior to arbitration, and arbitrators lack jurisdiction to decide this threshold issue.
• The failure or delay of the General Manager to decide does not amount to waiver of the pre-condition unless expressly agreed, and courts cannot bypass this contractual mechanism.
• Appointment procedures that restrict a party's choice of arbitrator to a limited panel prepared unilaterally by the other party are invalid as they raise justifiable doubts about impartiality and independence.
• A broad, diverse, and balanced panel must be constituted, allowing parties a free choice of arbitrator to ensure fairness and avoid suspicion of bias.
• Courts must respect the arbitration agreement as executed by the parties but also ensure compliance with the statutory requirements and Supreme Court precedents safeguarding impartiality and independence in arbitration.

Final determinations are:

• The matter is remanded to the General Manager to decide within eight weeks whether the petitioner's claims qualify as Notified Claims, which is a mandatory pre-condition for arbitration.
• The existing procedure of appointment of a sole arbitrator from a restricted panel of three persons nominated solely by the respondent is declared invalid.
• The appointment of arbitrator must be conducted in accordance with the Supreme Court's directions in Voestalpine Schienen GmBH (supra), entailing a broad and diverse panel and free choice by the parties.
• The petition for appointment of an arbitrator on the basis of the existing panel is disposed of with no costs.