M/s. Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Ltd

“Duty becomes more onerous in Government contracts, where one of the parties to dispute is the Government or public sector undertaking itself and the authority to appoint the arbitrator rests with it”

Case name:M/s. Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Ltd
Case number/Citation:Arbitration Petition No. 50 Of 2016
Court:Supreme Court of India
Decided on:February 10, 2017
Relevant Act/Sections:
  • The petitioner, which is a Company incorporated under the laws of Austria, with its registered office in that country, has its branch office in DLF City, Gurgaon, Phase-II, India as well. It was engaged, inter alia, in the business of steel production with the use of advance technology, like Rolling Technology and Heat Treatment Technology, as well as manufacturing, producing and supplying rails and related products. It claimed to be a European market leader and innovation pioneer with a worldwide reputation which has played a decisive role in the development of modern railway rails.
  • The respondent, Delhi Metro Rail Corporation Ltd. (DMRC) awarded the contract dated 12th August, 2013 to the petitioner for supply of rails. Certain disputes have arisen between the parties with regard to the said contract inasmuch as the petitioner feels that respondent has wrongfully withheld a sum of euro 5,31,276/- (Euro Five Lakhs Thirty One Thousand Two Hundred and Seventy Six only) towards invoices raised for supply of last lot of 3000 MT of rails and has also illegally encashed performance bank guarantees amounting to EURO 7,83,200/- (Euro Seven Lakhs Eighty Three Thousand Two Hundred only).
  • Respondent also imposed liquidated damages amounting to EURO 4,00,129.397/- (Euro Four Hundred Thousand One Hundred Twenty Nine and Cent Three Hundred Ninety Seven Only) and invoked price variation clause to claim a deposit of EURO 4,87,830/- (Euro Four Lakhs Eighty Seven Thousand Eight Hundred Thirty).
  • Not satisfied with the performance of the petitioner, the respondent suspended the business dealings with the petitioner for the period of six months. The petitioner felt aggrieved by all the aforesaid actions and wanted its claims to be adjudicated upon by an Arbitral Tribunal, having regard to the arbitration agreement between the parties as contained in Clause 9.2 of General Conditions of Contract (GCC) read with Clause 9.2 of Special Conditions of Contract (SCC).
  • Whether a panel of arbitrators maintained solely by one of the parties, as per the arbitration clause, is valid under Section 12(5) of the Arbitration and Conciliation Act, 1996 (the Act)?
  • According to the petitioner, with the amendment of Section 12 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the ‘Act’) such a panel, by Amendment Act, 2015, as prepared by the respondent, had lost its validity, as it was contrary to the amended provisions of Section 12 of the Act
  • The respondent maintained that arbitration agreement as per which arbitral tribunal was to be constituted from the panel prepared by the respondent does not offend provisions of Section 12 of the Act as maintained in the year 2015. It was submitted that the agreement valid, operative and capable of being performed and the arbitrators proposed by the respondent are not falling in the category of ‘prohibited clause’ as stipulated in under Section 12(5) of the Act read with clause 1 of the 7th Schedule thereto.
  • The court observed that apart from other amendments, Section 12 was also amended and the amended provision has already been reproduced above. This amendment is also based on the recommendation of the Law Commission which specifically dealt with the issue of ‘neutrality of arbitrators. Though, the Law Commission discussed the aforesaid aspect under the heading Neutrality of Arbitrators, the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator.
  • In international sphere, the ‘appearance of neutrality’ is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term ‘neutrality’ used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties.
  • The court held that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, sub-section (5) of Section 12 lays down that 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, he shall be ineligible to be appointed as an arbitrator.
  • In such an eventuality, i.e., when the arbitration clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of non-obstante clause contained in sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of arbitration agreement.
  • This Court in Union of India and others v. Uttar Pradesh State Bridge Corporation Limited, 2015(3) R.C.R.(Civil) 131 : 2015(3) Recent Apex Judgments (R.A.J.) 303 : (2015) 2 SCC 52 held that if the Government nominates such officers as arbitrators who are not able to devote time to the arbitration proceedings or become incapable of acting as arbitrators because of frequent transfers, etc., then the principle of default procedure at least in the cases where Government has assumed the role of appointment of arbitrators to itself, has to be applied in the case of substitute arbitrators as well and the Court will step in to appoint the arbitrator by keeping aside the procedure which is agreed to between the parties.
  • The court further held that independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.
  • It also cannot be denied that the Seventh Schedule is based on IBA guidelines which are clearly regarded as a representation of international based practices and are based on statutes, case law and juristic opinion from a cross-section on jurisdiction. It is so mentioned in the guidelines itself.
  • What was argued by the learned senior counsel for the petitioner was that the panel of arbitrators drawn by the respondent consists of those persons who are government employees or ex-government employees. However, this court held that by itself may not make such persons ineligible as the panel indicates that these are the persons who have worked in the railways under the Central Government or Central Public Works Department or public sector undertakings. They cannot be treated as employee or consultant or advisor of the respondent – DMRC.
  • It cannot be said that simply because the person is retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (party in dispute), he would be treated as ineligible to act as an arbitrator. Had this been the intention of the legislature, the Seventh Schedule would have covered such persons as well.
  • Bias or even real likelihood of bias cannot be attributed to such highly qualified and experienced persons, simply on the ground that they served the Central Government or PSUs, even when they had no connection with DMRC. The very reason for empaneling these persons is to ensure that technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators.
  • The court held that sub-clauses (b) & (c) of clause 9.2 of SCC need to be deleted and instead choice should be given to the parties to nominate any person from the entire panel of arbitrators. Likewise, the two arbitrators nominated by the parties should be given full freedom to choose third arbitrator from the whole panel.

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