2021 (1) TMI 1353 - SC - Indian Laws

Appointment of the Principal Secretary to the Government of Haryana as the nominee arbitrator of HARSAC a nodal agency of the Government - mandate of the arbitral tribunal stood terminated due to the failure to pronounce the award within the prescribed statutory time period under the Arbitration and Conciliation Act 1996 or not - HELD THAT - The appointment of the Principal Secretary Government of Haryana as the nominee arbitrator of HARSAC which is a Nodal Agency of the Government of Haryana would be invalid under Section 12(5) of the Arbitration and Conciliation Act 1996 read with the Seventh Schedule. Section 12(5) of the Arbitration Act 1996 (as amended by the 2015 Amendment Act) provides that notwithstanding any prior agreement to the contrary any person whose relationship with the parties or counsel falls within any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator. In exercise of power under Section 29A(6) of the Arbitration and Conciliation Act 1996 (as amended) Justice Kurian Joseph (Retd.) former judge of this Court is appointed as the substitute arbitrator who will conduct the proceedings in continuation from the stage arrived at and pass the Award within a period of 6 months from the date of receipt of this Order. The Arbitrator may direct the parties to address final arguments and take him through the entire record of the case. The appointment of the Sole Arbitrator is subject to the declarations being made under Section 12 of the Arbitration and Conciliation Act 1996 with respect to independence and impartiality and the ability to devote sufficient time to complete the arbitration within the period of 6 months. Matter disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

(a) Whether the appointment of the Principal Secretary to the Government of Haryana as the nominee arbitrator of HARSAC, a nodal agency of the Government, is valid under Section 12(5) of the Arbitration and Conciliation Act, 1996 read with the Seventh Schedule;

(b) Whether the mandate of the arbitral tribunal stood terminated due to the failure to pronounce the award within the prescribed statutory time period under the Arbitration and Conciliation Act, 1996;

(c) Whether the extension of time granted by the lower courts for pronouncement of the arbitral award was justified;

(d) The appropriateness of substituting the existing arbitral tribunal with a sole arbitrator to complete the arbitral proceedings;

(e) The procedural aspects concerning the fees of the arbitral tribunal and the parties' obligations towards payment;

(f) The jurisdiction and venue of arbitration as specified in the contract and its implications on the proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity of the Appointment of the Principal Secretary as Arbitrator

The legal framework governing the eligibility of arbitrators is provided under Section 12(5) of the Arbitration and Conciliation Act, 1996, as amended in 2015, read with the Seventh Schedule. Section 12(5) mandates that any person whose relationship with the parties or counsel falls within the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator, notwithstanding any prior agreement to the contrary.

Item 5 of the Seventh Schedule states that an arbitrator is disqualified if he is a manager, director, or part of the management, or has similar controlling influence in an affiliate of one of the parties directly involved in the dispute.

The Court interpreted this provision strictly and held it to be mandatory and non-derogable. Since HARSAC is a nodal agency of the Government of Haryana, and the Principal Secretary to the Government of Haryana exercises controlling influence over HARSAC, the appointment of the Principal Secretary as arbitrator was held to be invalid. This interpretation aligns with the legislative intent to ensure impartiality and independence of arbitrators.

The Court's reasoning emphasized that the Principal Secretary's official position inherently creates a conflict of interest, rendering the appointment impermissible under the statutory framework.

(b) Termination of the Arbitral Tribunal's Mandate due to Delay

The Arbitration and Conciliation Act, 1996 prescribes a one-year period for completion of arbitral proceedings, extendable by a further six months by consent of the parties (Section 29A). In this case, the arbitral tribunal was constituted on 14.09.2016, and the award was not pronounced even after more than four years.

HARSAC contended that since the award was not pronounced within the extended statutory period (up to 15.08.2018), the mandate of the tribunal stood automatically terminated. The tribunal had itself recorded on 03.08.2018 that arguments were concluded and the matter was reserved for award, and again on 08.02.2019 that the award was ready to be pronounced.

The Respondent disputed the termination, contending that the tribunal was ready to pronounce the award and that the delay was caused by the Appellant's failure to pay their share of tribunal fees. The Respondent filed an application under Section 29A(4) seeking extension of time to pronounce the award.

The Court noted the delay but also took into account the pandemic situation and the lower courts' orders granting extensions. The Court recognized that while the delay was considerable, the statutory provisions allow extensions on sufficient cause.

(c) Extension of Time Granted by Lower Courts

The Additional District Judge granted a three-month extension on 08.11.2019, which was further extended by the Punjab and Haryana High Court by four months in light of the COVID-19 pandemic, allowing the parties to conclude arguments and the tribunal to pass the award.

HARSAC challenged these extensions, arguing that the tribunal had already failed to complete the proceedings within the mutually agreed extended period and that further extension was unwarranted.

The Court observed that the extensions were granted based on the circumstances including the pandemic and the readiness of the tribunal to pronounce the award. The Court did not find the extensions per se to be unreasonable, but ultimately directed substitution of the tribunal to ensure expeditious completion.

(d) Substitution of the Arbitral Tribunal

Given the prolonged delay, the invalidity of the Principal Secretary's appointment, and the parties' consent to substitute the tribunal, the Court exercised its powers under Section 29A(6) of the Arbitration and Conciliation Act to appoint a sole arbitrator to complete the proceedings.

The Court appointed a retired Supreme Court judge as sole arbitrator to continue from the stage reached and pass the award within six months. This appointment was subject to the arbitrator's declarations under Section 12 regarding independence, impartiality, and availability.

This step was deemed necessary to uphold the principles of timely justice and to avoid further delay in dispute resolution.

(e) Fees of the Arbitral Tribunal and Parties' Obligations

The dispute over payment of tribunal fees was a significant factor in the delay. The Respondent claimed to have paid their share, while the Appellant had not paid theirs, leading to the tribunal's inability to proceed.

The Court directed that the fees of the sole arbitrator shall be charged as per the Fourth Schedule of the Arbitration Act and that both parties shall equally share the fees. This equitable apportionment was intended to remove financial impediments to the completion of the arbitration.

(f) Jurisdiction and Venue of Arbitration

The Service Level Agreement specified that the arbitration venue and jurisdiction shall be in the State of Haryana. The Court reaffirmed this contractual stipulation, directing that the arbitration proceedings be conducted either virtually or physically at the seat of arbitration in Haryana.

This ensured adherence to the parties' contractual agreement and maintained procedural propriety.

3. SIGNIFICANT HOLDINGS

"Section 12(5) read with the Seventh Schedule is a mandatory and non-derogable provision of the Act. In the facts of the present case, the Principal Secretary to the Government of Haryana would be ineligible to be appointed as an arbitrator, since he would have a controlling influence on the Appellant Company being a nodal agency of the State."

The Court established the core principle that arbitrator appointments must strictly adhere to statutory eligibility criteria to preserve impartiality and independence, overriding any prior agreement to the contrary.

Further, the Court held that prolonged failure to pronounce an arbitral award within statutory timelines, even with extensions, justifies intervention by the Court to substitute the tribunal and ensure expeditious disposal.

The final determination was to substitute the existing arbitral tribunal with a sole arbitrator, who would complete the proceedings within six months, with fees shared equally by the parties, and the venue maintained as per the contract.