Contracts with the government and its corporations seem to hold a special attraction. Though it might be one-sided, private contractors apparently sign on the dotted line with open eyes. Though the agreements are whetted by veterans of legalese, arbitration clauses carry seeds of prolonged litigation. The choice of arbitrator is one such point that has surfaced repeatedly in the court.
The most recent judgment is Bipromasz Bipron Trading SA vs Bharat Electronics Limited (BEL), in which the private company realised a bit late that the choice of the arbitrator could be against its interests. The legal position is that in normal circumstances, the arbitrator has to be appointed in terms of the agreement of the parties contained in the arbitration clause. But contracts offered by several government corporations carry a condition that the arbitration will be conducted by one of its officers. Private parties still enter into such contracts and feel later that they have no level playing field.
In this case, the reference of disputes has to be made to the chairman and managing director (CMD) of BEL or his nominee for arbitration. When disputes did arise, the private firm wanted to nominate an independent arbitrator. BEL, the government corporation, objected and pointed out the arbitration clause making its official the arbitrator. It argued that the appointment of an outside arbitrator to adjudicate disputes is contrary to the express clause in the contract.
The foreign firm contended that the CMD or his nominee would not be able to act impartially and, in any case, there will always be an apprehension in its mind that he would decide in favour of his firm, BEL. In this case, the CMD was supervising and in control of the project and, therefore, he could not adjudicate on the dispute.
The court conceded that in normal circumstance, the terms of the arbitration clause should be adhered to. But in cases like this, the court will have the power to appoint a person other than the named arbitrator, “upon examination of the relevant facts, which would tend to indicate that the named arbitrator is not likely to be impartial,” the judgment said. The facts of the case apprehension was justified, the court said, and added that even otherwise, the CMD would be amenable to the directions of the defence ministry. The court, therefore, named a former judge as the arbitrator.
This is not the first time such an issue has come up in the case of BEL. Some months ago, the court heard a similar charge from a private company in the case, Denel (Proprietary) Ltd vs Bharat Electronics. In this case, the focus was on the position of the CMD. The court stated that the CMD of BEL, “which is a government company, was bound by the direction/instruction issued by his superior authorities. The private company’s case is that it is not in a position to settle the dues only because of the directions issued by the Ministry of Defence. It only shows that the Managing Director may not be in a position to independently decide the dispute”.
This issue provides an endless stream of appeals in disputes between private contractors and public authorities and undertakings regarding the choice of the arbitrator. Noting this, the Supreme Court in the leading case, Union of India vs Singh Builders Syndicate, had stated a few years ago that “we find that a provision for serving officers of one party being appointed as arbitrators brings out considerable resistance from the other party, when disputes arise. Having regard to the emphasis on independence and impartiality in the Arbitration and Conciliation Act, the government, statutory authorities and government companies should think of phasing out arbitration clauses providing for serving officers and encourage professionalism in arbitration”.
In this case, officers appointed as arbitrators by the Railways were transferred within months, delaying the arbitration for two decades. Ultimately, the court appointed an independent arbitrator.
In an earlier case, Godavari Marathwada Irrigation Development Corporation vs Pawar & Co, the public authority insisted on naming a retired superintendent engineer as the sole arbitrator whereas the contract spoke only of serving superintending engineer. The Supreme Court asked the corporation to name a serving officer.
One of the most oppressive arbitration clauses brought to light was in the case, BSNL vs Motorola India. It read in part: “There will be no objection to any such appointment on the ground that the arbitrator is a government servant or that he has to deal with the matter to which the agreement relates or that in the course of his duties as a government servant he has expressed his views on all or any of the matters in dispute.” The Supreme Court dismissed BSNL’s appeal invoking this right. Despite a series of such judgments, there are enough firms that are willing to stick their necks out, for reasons that can only be wildly guessed.