Calcutta High Court

M/S. Mangalam Express Cargo Pvt.Ltd vs Union Of India on 10 February, 2025

Author: Shampa Sarkar

Bench: Shampa Sarkar

OCD -3
                                ORDER SHEET

                                AP/505/2021

                      IN THE HIGH COURT AT CALCUTTA
                           COMMERCIAL DIVISION
                               ORIGINAL SIDE

                M/S. MANGALAM EXPRESS CARGO PVT.LTD.
                                     VS
                              UNION OF INDIA
  BEFORE:
  The Hon'ble JUSTICE SHAMPA SARKAR
  Date: 10th February, 2025.


                                                                     Appearance:

                                                  Mr. Sayan Roy Chowdhury,Adv.
                                                               Mr. AvijitDey, Adv.
                                                             .... for the petitioner
                                                      Mr. Amal Kumar Datta, Adv.
                                                              ...for Union of India


         The Court:This is an application for appointment of an arbitrator. The

dispute arises out of a contract dated January 28, 2015. The disputes,inter

alia,relate to withholding of the security deposit by the respondent as also

termination of the agreement. Aggrieved by the action of the respondent, the

petitioner filed a writ petition being WP 25772(W) of 2016. Such writ petition

was dismissed by an order dated August 22, 2019 and the petitioner was

relegated to the alternative forum under the dispute resolution mechanism in

the contract.The clause provided for settlement of disputes by an arbitrator.

Accordingly, the petitioner invoked the arbitration clause by a notice dated

October 5, 2020. Several letters were written by the respondent between March
                                          2


and April, 2024. The respondent called upon the petitioner to agree to a waiver

clause under Section 12(5) and 31A(5) of the Arbitration and Conciliation Act,

1996 (hereinafter referred to as the said Act).

          The names of four retired officials of the Railways had been supplied

to the petitioner and the petitioner was asked to nominate at least two names

out of the panel within 30 days from the date of dispatch of such request by

Railways. The petitioner contends that by letter dated April 30, 2024, the

petitioner, through the learned advocate, objected to such request made by the

Railways and specifically stated that the petitioner was not willing to accept the

waiver clause.

          It is the specific contention of the petitioner that, appointment of

retired officers of the Railways in terms of the General Conditions of Contract,

was no longer good law and the petitioner would proceed with the application

which was pending before the court, for appointment of an arbitrator.

          Learned advocate for the respondent submits that the dispute

resolution clause provides that, a person nominated by the General Manager of

the South Eastern Railways shall be the arbitrator.The said arbitrator would

settle the disputes arising out of the agreement. Thus, the names were

supplied to the petitioner and the petitioner was asked to nominate two

persons from the said list. He further raised the question of limitation.

          This Court is not inclined to decide the merits of the claim.All points,

including the issue of limitation, are to be decided by the learned Arbitrator.
                                         3


The petitioner has invoked arbitration on the basis of the order passed by a

writ court. Petitioner contends that Section 14 of the Limitation Act will be

applicable as the writ petition was filed and proceedings were initiated before a

wrong forum.The other question is whether the dispute resolution clause as it

stands now, can be implemented or applied in this case after decisions were

rendered by the Hon'ble Apex Court in the following cases :

          1. Bharat Broadband Network Limited vs. United Telecoms Limited :

             (2019) 5 Supreme Court Cases 755 ;

          2. Perkins Eastman Architects DPC and Another vs. HSCC (India)

             Ltd. ; 2019 SCC OnLine SC 1517;

          3. Central Organisation for Railway Electrification vs. ECI SPIC SMO

             MCML (JV) A Joint Venture Company : 2024 SCC OnLine SC

             3219.

Clause 30.2 of the agreement which provides for arbitration, is quoted below :-

          "All disputes in regard to implementation of the policy/agreement
          with S.E. Railway under this scheme, will be referred to an Arbitrator
          nominated by General Manager of the S.E. Railway.

Section 12 (5) of the said Act is quoted below:-

          "12(5) 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 shall be ineligible to be appointed as an
          arbitrator: Provided that parties may, subsequent to disputes having
          arisen between them, waive the applicability of this sub-section by an
          express agreement in writing.]"

          The schedule VII of the said Act is quoted below:-
                                4


"Arbitrator's relationship with the parties or counsel
1. The arbitrator is an employee, consultant, advisor or has any other
past or present business relationship with a party.
2. The arbitrator currently represents or advises one of the parties or
an affiliate of one of the parties.
3. The arbitrator currently represents the lawyer or law firm acting as
counsel for one of the parties.
4. The arbitrator is a lawyer in the same law firm which is
representing one of the parties.
5. The arbitrator is a manager, director or part of the management, or
has a similar controlling influence, in an affiliate of one of the parties
if the affiliate is directly involved in the matters in dispute in the
arbitration.
6. The arbitrator's law firm had a previous but terminated
involvement in the case without the arbitrator being involved himself
or herself.
7. The arbitrator's law firm currently has a significant commercial
relationship with one of the parties or an affiliate of one of the parties.
8. The arbitrator regularly advises the appointing party or an affiliate
of the appointing party even though neither the arbitrator nor his or
her firm derives a significant financial income therefrom.
9. The arbitrator has a close family relationship with one of the
parties and in the case of companies with the persons in the
management and controlling the company.
10. A close family member of the arbitrator has a significant financial
interest in one of the parties or an affiliate of one of the parties.
11. The arbitrator is a legal representative of an entity that is a party
in the arbitration. 12. The arbitrator is a manager, director or part of
the management, or has a similar controlling influence in one of the
parties.
13. The arbitrator has a significant financial interest in one of the
parties or the outcome of the case.
14. The arbitrator regularly advises the appointing party or an
affiliate of the appointing party, and the arbitrator or his or her firm
derives a significant financial income therefrom.
Relationship of the arbitrator to the dispute.
15. The arbitrator has given legal advice or provided an expert
opinion on the dispute to a party or an affiliate of one of the parties.
16. The arbitrator has previous involvement in the case.
Arbitrator's direct or indirect interest in the dispute .
17. The arbitrator holds shares, either directly or indirectly, in one of
the parties or an affiliate of one of the parties that is privately held.
18. A close family member of the arbitrator has a significant financial
interest in the outcome of the dispute.
                                         5


         19. The arbitrator or a close family member of the arbitrator has a
         close relationship with a third party who may be liable to recourse on
         the part of the unsuccessful party in the dispute."

         In the decision of Bharat Broadband Network Ltd. (supra) it was

held that Section 12(5) of the said Act read with the seventh schedule made it

clear that, if the arbitrator fell in any one of the categories specified in the

seventh schedule he would become ineligible to act as arbitrator and thus de

jure unable to perform his functions. The panel supplied by the Railways

comprised of retired railway officials. Those persons were disqualified under the

law.

         The proviso to Section 12(5) allows the parties to enter into an

express agreementin writing, to the effect that, the claimant would not raise

any objection with regard to the disqualification under the VIIth Schedule.The

Railway Authorities, being aware of the fact that the dispute resolution clause

as it stood was unworkable and contrary to law,asked the petitioner to sign a

waiver clause. The petitioner categorically refused to sign such waiver clause

and filed this application for appointment of an arbitrator through Court.

         In Perkins Eastman Architects (supra), it was categorically held

that there was no quarrel with the proposition that by virtue of Section 12(5) of

the said Act any person, who met the description specified in the seventh

schedule, would be ineligible to be appointed as an arbitrator. A person who

was disqualified to act as an arbitrator was also not eligible to appoint an

arbitrator. According to Hon'ble Apex Court, ineligibility struck at the root of
                                          6


the power of the arbitrator. In the present case, retired railway officials

constituted the panel supplied by the Railways and the appointment was to be

made unilaterally.

          The relevant paragraphs of Perkins Eastman (supra) are quoted

below:-

          ..."20. We thus have two categories of cases. The first, similar to the
          one dealt with in TRF Ltd. [TRF Ltd. v. EnergoEngg. Projects Ltd.,
          (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] where the Managing
          Director himself is named as an arbitrator with an additional power
          to appoint any other person as an arbitrator. In the second category,
          the Managing Director is not to act as an arbitrator himself but is
          empowered or authorised to appoint any other person of his choice or
          discretion as an arbitrator. If, in the first category of cases, the
          Managing Director was found incompetent, it was because of the
          interest that he would be said to be having in the outcome or result of
          the dispute. The element of invalidity would thus be directly relatable
          to and arise from the interest that he would be having in such
          outcome or decision. If that be the test, similar invalidity would
          always arise and spring even in the second category of cases. If the
          interest that he has in the outcome of the dispute, is taken to be the
          basis for the possibility of bias, it will always be present irrespective
          of whether the matter stands under the first or second category of
          cases. We are conscious that if such deduction is drawn from the
          decision of this Court in TRF Ltd. [TRF Ltd. v. EnergoEngg. Projects
          Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] , all cases having
          clauses similar to that with which we are presently concerned, a
          party to the agreement would be disentitled to make any appointment
          of an arbitrator on its own and it would always be available to argue
          that a party or an official or an authority having interest in the
          dispute would be disentitled to make appointment of an arbitrator.
          21. But, in our view that has to be the logical deduction from TRF
          Ltd. [TRF Ltd. v. EnergoEngg. Projects Ltd., (2017) 8 SCC 377 :
          (2017) 4 SCC (Civ) 72] Para 50 of the decision shows that this Court
          was concerned with the issue, "whether the Managing Director, after
          becoming ineligible by operation of law, is he still eligible to nominate
          an arbitrator" The ineligibility referred to therein, was as a result of
          operation of law, in that a person having an interest in the dispute or
          in the outcome or decision thereof, must not only be ineligible to act
          as an arbitrator but must also not be eligible to appoint anyone else
                                7


as an arbitrator and that such person cannot and should not have
any role in charting out any course to the dispute resolution by
having the power to appoint an arbitrator. The next sentences in the
paragraph, further show that cases where both the parties could
nominate respective arbitrators of their choice were found to be
completely a different situation. The reason is clear that whatever
advantage a party may derive by nominating an arbitrator of its
choice would get counter-balanced by equal power with the other
party. But, in a case where only one party has a right to appoint a
sole arbitrator, its choice will always have an element of exclusivity in
determining or charting the course for dispute resolution. Naturally,
the person who has an interest in the outcome or decision of the
dispute must not have the power to appoint a sole arbitrator. That
has to be taken as the essence of the amendments brought in by the
Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and
recognised by the decision of this Court in TRF Ltd. [TRF
Ltd. v. EnergoEngg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC
(Civ) 72]
...

23. Sub-para (vii) of the aforesaid para 48 lays down that if there are justifiable doubts as to the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, such appointment can be made by the Court. It may also be noted that on the issue of necessity and desirability of impartial and independent arbitrators the matter was considered by the Law Commission in its Report No. 246. Paras 53 to 60 under the heading "Neutrality of Arbitrators" are quoted in the judgment of this Court in VoestalpineSchienen GmbH v. DMRC [VoestalpineSchienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC (Civ) 607] , while paras 59 and 60 of the Report stand extracted in the decision of this Court in Bharat Broadband Network Ltd. v. United Telecoms Ltd. [Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755 : (2019) 3 SCC (Civ) 1] . For the present purposes, we may rely on para 57, which is to the following effect : (Voestalpine case [VoestalpineSchienen GmbH v. DMRC, (2017) 4 SCC 665 :

(2017) 2 SCC (Civ) 607] , SCC p. 681, para 16) "16. ... '57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be

exercised in complete disregard of these principles -- even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr P.K. Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous -- and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes.'

24. In Voestalpine [VoestalpineSchienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC (Civ) 607] , this Court dealt with independence and impartiality of the arbitrator as under : (SCC pp.

687-88 & 690-91, paras 20 to 22 & 30) "20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator's appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration. The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial. The United Kingdom Supreme Court has beautifully highlighted this aspect in Hashwani v. Jivraj [Hashwani v. Jivraj,

(2011) 1 WLR 1872 : 2011 UKSC 40] in the following words : (WLR p. 1889, para 45) '45. ... the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties.'

21. Similarly, Cour de Cassation, France, in a judgment delivered in 1972 in Consorts Ury [Fouchard, Gaillard, Goldman on International Commercial Arbitration, 562 [Emmanuel Gaillard & John Savage (Eds.) 1999] {quoting Cour de cassation [Cass.] [Supreme Court for judicial matters] Consorts Ury v. S.A. des Galeries Lafayette, Cass.2e civ., 13-4-1972, JCP, Pt. II, No. 17189 (1972) (France)}.] , underlined that:

'an independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator'.

22. 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.

***

30. Time has come to send positive signals to the international business community, in order to create healthy arbitration environment and conducive arbitration culture in this country. Further, as highlighted by the Law Commission also in its report, duty becomes more onerous in government contracts, where one of the parties to the dispute is the Government or public sector undertaking itself and the authority to appoint the arbitrator rests with it. In the instant case also, though choice is given by DMRC to the opposite party but it is limited to choose an arbitrator from the panel prepared by DMRC. It, therefore, becomes imperative to have a much broadbased panel, so that there is no misapprehension that principle of impartiality and independence would be discarded at any stage of the proceedings, specially at the stage of constitution of the Arbitral Tribunal. We, therefore, direct that DMRC shall prepare a broadbased panel on the aforesaid lines, within a period of two months from today..."

In the decision of Central Organization for Railway

Electrification (supra), the Hon'ble Apex Court considered the issues with

regard to ineligibility of an arbitrator by operation of law under the amended

Act of 1996. It was held that unilateral appointment of an arbitrator was

violative of Section 18 of the said Act. The law mandated that the parties

should be treated equally. The relevant paragraphs are quoted below:-

"133. Many PSUs are regularly involved in arbitration disputes and constantly need the services of arbitrators. Such institutions often maintain a pool of potential arbitrators with the sole object of having a ready pool of qualified professionals who have committed their time and consented to act as arbitrators for fixed fees. The Arbitration Act does not prohibit parties to an arbitration agreement from maintaining a curated panel of potential arbitrators. However, the problem arises when the PSUs make it mandatory for other parties to select their nominees from the curated panel of arbitrators. When a PSU exercises its discretion to curate a panel, the very factor that the PSU is choosing only a certain number of persons as potential arbitrators and not others will raise a reasonable doubt in the mind of a fair-minded person. The PSUs may conceivably have nominated a person on the panel of potential arbitrators because they have a certain predisposition in favour of the former. This doubt is reinforced when the other party is given no choice but to select its arbitrator from the curated panel.

134. In CORE (supra), the three-member tribunal was sought to be constituted in the following manner : (i) the Railways would suggest at least four names of retired railway officers; (ii) the contractor would select two names out of the panel for appointment as their arbitrator; (iii) The General Manager (of the Railways) would thereafter choose at least one person out of the two to be appointed as the contractor's arbitrator; and

(iv) The General Manager would proceed to appoint the balance

arbitrators from the panel or outside the panel and also indicate the presiding arbitrator.

135. Such an arbitrator-appointment clause is likely to give rise to justifiable doubts as to the independence and impartiality of arbitrators for two reasons : (i) the contractor is restricted to choosing its arbitrator from the panel of four arbitrators nominated by the party who is a disputant; and (ii) the contractor's choice is further constrained because it is made subject to the decision of the General Manager who will choose one among the two persons suggested by the party. Since the contractor has to select its arbitrator from a curated panel, the arbitration clause does not allow the contractor equal participation in the appointment of their arbitrator. Moreover, the clause allows the General Manager to appoint the balance arbitrators from either the panel or outside the panel. Thus, the process of appointing the arbitrators is unequal because the General Manager can go beyond the panel of four potential arbitrators, while the contractor is bound by the names enlisted in the panel.

136. In a three-member tribunal, the independence and impartiality of a third or presiding arbitrator are prerequisites to the integrity of the arbitral proceedings. In CORE (supra), the arbitration clause allowed the General Manager to unilaterally nominate the presiding officer out of the panel of three arbitrators. The clause does not countenance any participation from the contractor in the process of appointing or nominating the presiding officer. Thus, the process of appointing and nominating the presiding officer is unequal and prejudiced in favour of the Railways. The fact that the General Manager is nominating the presiding officer gives rise to a reasonable doubt about the independence and impartiality of the entire arbitration proceedings.

137. Given the above discussion, it needs reiteration that the Arbitration Act does not prohibit PSUs from empanelling potential arbitrators. However, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs. The PSUs can give a choice to the other party to select its arbitrators from the

curated list provided the other party expressly waives the applicability of the nemo judex rule."

In paragraph 169 of the majority view, the Hon'ble Apex Court concluded

thus:-

"169. In view of the above discussion, we conclude that:

a. The principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators ;

b. The Arbitration Act does not prohibit PSUs from empanelling potential arbitrators. However, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs;

c. A clause that allows one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to the independence and impartiality of the arbitrator. Further, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators; d. In the appointment of a three-member panel, mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties. In this situation, there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators. The process of appointing arbitrators in CORE (supra) is unequal and prejudiced in favour of the Railways;

e. Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution ;

f. The principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed

unilaterally by one of the parties. After the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule; and g. The law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment. This direction applies to three-member tribunals.