Former employee able to act as arbitrator

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The Supreme Court recently held that the Arbitration and Conciliation Act, 1996, does not disqualify a former employee from acting as an arbitrator provided there are no doubts about his independence and impartiality. The court observed that even after the 2015 amendment, the position remains the same, as entry 1 in the fifth schedule of the Act does not include “past/former employees.”

In Government of Haryana, PWD Haryana v M/s G F Toll Road Pvt Ltd & Ors, the works contract between the Government of Haryana (appellant) and M/s G F Toll Road Pvt. Ltd. (respondent) contained a dispute resolution clause, where disputes were to be referred to an arbitral tribunal of three members with the appellant and respondent each entitled to nominate an arbitrator. The presiding arbitrator would be appointed as per the Indian Council of Arbitration (ICA) rules and the arbitration would also be governed by such rules.

When disputes emerged, the respondent sent a notice to the ICA in May 2015, invoking arbitration and nominated its arbitrator. The appellant then nominated their arbitrator who was a retired engineer in chief. However, the ICA and respondent both objected to the appointment of the appellant’s nominee arbitrator, as he had previously worked for the appellant.

The appellant contested the objection on the grounds there was no rule prohibiting a former employee from acting as an arbitrator, and since its nominee arbitrator had retired more than 10 years ago, his impartiality could not be called into question. The ICA then appointed a nominee arbitrator on behalf of the appellant and picked the presiding arbitrator as well.

Aggrieved by this, the appellant challenged the constitution of the arbitral tribunal before the District Court, Chandigarh as being illegal, arbitrary and against the principles of natural justice. The district court held that the petition was not maintainable, since the arbitral tribunal had already been constituted and the objection should have been raised before the arbitral tribunal to rule on its own jurisdiction.

The said order was also upheld by Punjab and Haryana High Court. The appellant then appealed to the Supreme Court.

Agreeing with the contentions raised by the appellant, the Supreme Court observed that the 1996 Act does not disqualify a former employee from acting as an arbitrator. It also observed that the objection of reasonable apprehension of bias was unjustified and unsubstantiated since the nominee arbitrator was a former employee who last worked for the appellant more than 10 years ago.

Though the case was governed by the pre-2015 amendment, the court took note of the Fifth Schedule to the 1996 Act, which contains grounds to determine whether justifiable doubts exist about the independence or impartiality of an arbitrator. It further held that an arbitrator who has “any other” past or present “business relationship” with the party is disqualified and clarified that the word “other” used in the said entry, would indicate a relationship other than an employee, consultant or an adviser and that the word “other” cannot be used to widen the scope of the entry to include past/former employees.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.