2009 (8) TMI 1075 - SC - Companies Law

Arbitrator Bias: Presumption, Adherence to Agreements, Correct Procedure

Indian Oil Corporation Ltd. & Ors. Versus M/s Raja Transport (P) Ltd.

Indian Oil Corporation Ltd. & Ors. Versus M/s Raja Transport (P) Ltd. - 2009 AIR 2145, 2009 (13) SCR 510, 2009 (8) SCC 520 Issues Involved1. Whether the learned Chief Justice was justified in assuming that when an employee of one of the parties to the dispute is appointed as an arbitrator, he will not act independently or impartially.2. In what circumstances, the Chief Justice or his designate can ignore the appointment procedure or the named arbitrator in the arbitration agreement, to appoint an arbitrator of his choice.3. Whether the respondent herein had taken necessary steps for the appointment of an arbitrator in terms of the agreement, and the appellant had failed to act in terms of the agreed procedure, by not referring the dispute to its Director (Marketing) for arbitration.Issue-wise Detailed AnalysisRe: Question No. (i)Assumption of Bias in Employee-Arbitrator:The court examined whether an employee of one of the parties could be presumed to lack independence or impartiality. It was noted that arbitration agreements in government contracts often name senior officers as arbitrators. The court emphasized that a party entering into such agreements with full knowledge cannot later contest the named arbitrator's impartiality unless there is specific evidence of bias or conflict of interest.The court referenced several precedents, including:- Executive Engineer, Irrigation Division, Puri vs. Gangaram Chhapolia: Arbitrators named in contracts are valid unless there is a clear probability of bias.- Secretary to Government, Transport Department, Madras v. Munuswamy Mudaliar: Named arbitrators cannot be removed without tangible grounds of bias or conflict of interest.- Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd.: Parties cannot later contest the named arbitrator's impartiality after agreeing to the arbitration clause.The court concluded that the new Arbitration and Conciliation Act, 1996, while emphasizing independence and impartiality, does not invalidate arbitration agreements naming an employee of one of the parties as the arbitrator. Thus, the learned Chief Justice was not justified in assuming bias merely because the arbitrator was an employee of one of the parties.Re: Question No. (ii)Ignoring Appointment Procedure or Named Arbitrator:The court analyzed the circumstances under which the Chief Justice or his designate could appoint an arbitrator different from the one named in the arbitration agreement. The court referenced:- Ace Pipeline Contract Pvt. Ltd. (supra): The court should adhere to the terms of the arbitration agreement unless exceptional circumstances exist.- Northern Railway Administration v. Patel Engineering Co. Ltd.: The Chief Justice must give due regard to the qualifications and independence of the arbitrator as per the agreement, but can appoint an independent arbitrator if there is a reasonable apprehension of bias.The court held that the legislative intent is for parties to abide by the terms of the arbitration agreement. However, if there is a reasonable apprehension of bias or the named arbitrator is unavailable, the Chief Justice can appoint an independent arbitrator, provided reasons are recorded.The court also noted that specific terms in the arbitration agreement that interfere with the Chief Justice's power to appoint an independent arbitrator in appropriate cases are contrary to the Act and should be ignored.Re: Question No. (iii)Steps for Appointment of Arbitrator and Failure to Act:The court examined whether the respondent had taken necessary steps for the appointment of an arbitrator as per the agreement and whether the appellant had failed to act accordingly. The court found that:- The respondent initially approached the civil court instead of seeking arbitration.- The respondent's notice dated 4.1.2006 demanded an independent arbitrator, contrary to the arbitration agreement.- The respondent failed to refer the dispute to the Director (Marketing) within the stipulated time as per the court's order dated 20.1.2006.The court concluded that the respondent did not act in accordance with the agreed procedure under the arbitration agreement. Therefore, the appellant did not fail to act as required.ConclusionThe appeal was allowed. The order dated 26.9.2008 of the High Court was set aside. The Director (Marketing) of the appellant Corporation was appointed as the sole arbitrator to decide the disputes between the parties.