Daulat Ram Brake Mfg Co v. Union of India

12. It is stated that the petitioner consistently objected to the appointment of employees or ex-employees of the respondent as arbitrators and repeatedly sought the appointment of independent arbitrators, as also noted in the notice invoking arbitration dated 26.03.2022. However, without responding to this request, respondent no.1, vide letter dated 13.04.2022, sought the petitioner‟s consent to waive the applicability of Section 12(5) of the 1996 Act, which was expressly denied the petitioner vide its reply dated 02.05.2022. It is well-settled that a waiver under Section 12(5) must be express and in writing post the appointment of the Arbitral Tribunal, and such rights cannot be deemed waived by mere conduct.

13. It is further stated that in anticipation of the appointment of exemployees of the respondent No. 1 as arbitrator(s), the petitioner filed a petition under Section 11 of the 1996 Act before the High Court of Madhya Pradesh seeking appointment of an independent arbitrator. Despite duly informing both the respondent and the arbitral tribunal that the matter was sub judice before the High Court of Madhya Pradesh, the petitioner was compelled to nominate arbitrators from the respondent‟s panel and participate in the arbitral proceedings as Clause 2905(c)(i) of IRS provided that if the contractor fails to suggest his nominees for the arbitral tribunal within the prescribed time frame, then the General manager has the power to proceed for appointment of arbitral tribunal within 30 days of the expiry of such time provided to contractor.

14. Vide letter dated 31.03.2023, the General Manager provided a restricted panel of only 4 retired railway officers, to the petitioner to nominate its arbitrator. Even from this limited panel, the petitioner was not allowed to appoint an arbitrator of its choice but was to suggest two names. The General Manager unilaterally appointed the arbitrators. As a result, the entire tribunal was constituted solely at the discretion of the General Manager, which is in violation of Section 18 of the 1996 Act and against the principles of party autonomy, natural justice, neutrality, and the independence and impartiality of arbitrators.

15. A party cannot be compelled to select its nominee arbitrator from a panel unilaterally curated by the opposing party, particularly when such panel is not „broad-based‟. This practice undermines the principle of equal treatment of parties and disturbs the balance in the arbitral process, as it deprives the petitioner of equal participation in the constitution of the arbitral tribunal. Reliance is placed on the judgment passed by a coordinate bench of this Court in Taleda Square Private Limited v. Rail Land Development Authority2023 SCC OnLine Del 6321 (paras 5 and 7).

16. Further, out of the proposed 4 names, one was that of Shri Khichchu Mal, which was rejected by the petitioner. However, the General Manager vide appointment letter dated 12.05.2023 appointed Shri Khichchu Mal as the „presiding arbitrator‟ in this matter.

17. It is stated that the General Manager, being himself ineligible to act as an arbitrator, could not have appointed the arbitrator(s), as it is wellsettled in law that a person who is disqualified from acting as an arbitrator is equally disqualified from appointing one.

18. Reliance is placed on the judgment passed by a Coordinate bench of this Court in BW Business World Media Pvt. Ltd. v. IRCTC, 2022 SCC OnLine Del 226. On behalf of the Respondent

19. Per Contra, it is stated that the constitution of the Arbitral Tribunal was carried out strictly in accordance with the agreed contractual terms set out in Clause 2900 of the IRS, which forms an integral part of the binding arbitration agreement between the parties.

20. Clause 2900 of the IRS, provides for the appointment of a Gazetted Railway Officer as the sole arbitrator, to be appointed by the General Manager or other competent authority. The said clause excludes those officers who had “an opportunity to deal with the matters to which the contract relates” or who “have expressed views” on the dispute, thereby ensuring impartiality and neutrality. Reliance is placed on the judgment passed by the Hon‟ble Supreme Court in Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665.

21. It is stated that despite initial objections raised by the petitioner regarding the constitution of the Arbitral Tribunal, the petitioner actively engaged in the arbitral proceedings over an extended period including nominating arbitrators, filing pleadings, and presenting arguments on merits. Consequently, any challenge to the constitution of the tribunal stands waived by the petitioner‟s conduct.

22. It is stated that the petitioner‟s argument that the General Manager is ineligible to appoint arbitrators cannot be entertained as it is a settled law that ineligibility under Seventh Schedule of 1996 Act applies to a person acting as an arbitrator, not merely appointing one unless such ineligibility is expressly extended through contractual interpretation or statutory bar, which is not the case here.

23. Further, the petitioner‟s argument regarding lack of consent under Section 12(5) is untenable. The record demonstrates that the petitioner was issued a letter dated 13.04.2022 seeking waiver of Section 12(5), to which no objection was raised at that stage. On the contrary, the petitioner proceeded to nominate arbitrators from the panel, indicating acquiescence to the process.

24. The mere pendency of a Section 11 petition does not, in itself, preclude the continuation of arbitral proceedings, particularly where the Arbitral Tribunal has already been constituted in accordance with the terms of the contract. In the absence of any stay or judicial injunction, which the Petitioner has failed to produce, the tribunal was fully competent to proceed. In any event, the Arbitral Tribunal, exercising its powers under Section 16 of the Act, duly considered and rejected the objections to its constitution. This determination, being squarely within the Tribunal‟s jurisdictional mandate, is not amenable to review under Section 34.

ANALYSIS

25. I have heard learned counsel for the parties and perused the material and documents placed on record.

26. The gist of the arguments by the petitioner is that the respondent went on to unilaterally appoint the Arbitral Tribunal, despite the petitioner‟s continuous objection to its constitution vide its letter(s) dated 26.03.2022 and 02.05.2022. Even otherwise, the General Manager provided a restricted panel of only 4 retired railway officers, which cannot be said to be „broad based‟. Per Contra, the objection raised by the respondent in a gist is that the constitution of the Arbitral Tribunal was in accordance with Clause 2900 of the IRS.

27. A perusal of the Clause 2905 of the IRS as reproduced above indicates two distinct scenarios: (i) where the applicability of Section 12(5) of the 1996 Act has been expressly waived by the petitioner in accordance with the proviso thereto, and (ii) where no such waiver has been made. Therefore, the primary issue that arises before me is whether, in the facts of the present case, there has been a valid waiver by the petitioner of the ineligibility criteria of the Arbitral Tribunal under Section 12(5) of the 1996 Act.

28. In this regard, the respondent No. 1 has contended that although the petitioner initially objected to the constitution of the Arbitral Tribunal, it thereafter proceeded to actively participate in the arbitral proceedings, by nominating arbitrators, filing pleadings, and making submissions on merits. Such conduct clearly signifies acquiescence and amounts to a waiver of any objection to the Arbitral Tribunal‟s constitution.

29. Section 12 (5) of the 1996 Act reads as under:

30. To my mind, the argument by the respondent is meritless. The essence of Section 12 of the 1996 Act lies in ensuring the independence and impartiality of the Arbitral Tribunal. The provision mandates that any appointment made in violation of Section 12(5) read with the Fifth and the Seventh Schedule of the 1996 Act renders the arbitrator de jure ineligible. Such ineligibility goes to the very foundation of the arbitral process. The Hon‟ble Supreme Court in Voestalpine (supra), inter alia held as under:

and the source of an arbitrator's appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and nonimpartiality 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)

……

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.” (emphasis supplied)

31. The legal position with respect to Section 12(5) of the 1996 Act, read with the Seventh Schedule, is no longer res integra. It stands conclusively settled by a catena of judgments. It has time and again been held that any person having an ineligible relationship under the Seventh Schedule of the 1996 Act is disqualified from being appointed as an arbitrator, and such ineligibility cannot be cured except through an express written waiver in terms of the proviso to Section 12(5). The Hon‟ble Supreme Court in Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755 has explained the same. (For reference see para nos.15 and 17)

32. Now coming to the issue at hand, that whether a party waives its right under Section 12(5) of the 1996 Act through conduct, is now well settled. Any waiver of the disqualification contemplated under Section 12(5) of the 1996 Act, must be made expressly in writing. The statute does not permit an implied waiver through conduct or participation in arbitral proceedings. The requirement of a written waiver ensures that the party unequivocally agrees to proceed with the appointment, despite the disqualification, and avoids any ambiguity in this regard. In this regard, the Hon‟ble Supreme Court in Bharat Broadband (supra) inter alia held as under:

agreement. The appointment letter which is relied upon by the High Court as indicating an express agreement on the facts of the case is dated 17-1-2017. On this date, the Managing Director of the appellant was certainly not aware that Shri Khan could not be appointed by him as Section 12(5) read with the Seventh Schedule only went to the invalidity of the appointment of the Managing Director himself as an arbitrator……”

33. Following the law laid down in Bharat Broadband (supra) several other judgment(s) have been passed by this Court, on similar lines. Reliance is placed on Govind Singh vs Satya Group Pvt. Limited and Another2023 SCC OnLine Del 37 and A K Builders vs Delhi State Industrial Infrastructure Development Corporation Ltd O.M.P. (T) (COMM.) 12/2022.

34. In the present case, the facts are not in dispute. The petitioner invoked arbitration vide letter dated 26.03.2022, whereby the petitioner indicated that an independent arbitrator be appointed. Letter dated 26.03.2022 is reproduced below:

35. Pursuant thereto, the respondent no. 1 vide letter dated 13.04.2022 asked for the petitioner‟s consent to waive off the applicability of Section 12(5) of the 1996 Act as Clause 2905 of the IRS provides for the appointment of employees/ex-employees of Railways as arbitrator(s). Letter dated 13.04.2022 is reproduced below:

36. In response, the petitioner denied the waiver vide letter dated 02.05.2022 which is as under:

37. On 31.03.2023, the General Manager provided a panel of 4 names, all ex-employees of the respondent No. 1, out of which the petitioner was to suggest 2 names. Letter dated 31.03.2023 is reproduced below:

38. Out of the 4 names provided by the General Manager on 31.03.2023, the petitioner suggested the names of Mr. Vijendra Kumar Jain and Mr. Ajay Kumar Lal vide its letter dated 10.04.2023 which is as under:

39. Thereafter, the Arbitral Tribunal came to be constituted on 12.05.2023. Letter dated 12.05.2023 is as under:

40. A perusal of the appointment letter dated 12.05.2023 issued by the respondent No.1 reveals that the General Manager has sought to justify the constitution of the Arbitral Tribunal by placing reliance on the petitioner‟s letters dated 26.03.2022 and 02.05.2022.

41. A plain reading of the letter(s) dated 26.03.2022 and 02.05.2022 makes it clear that at no point did the petitioner consent to the appointment of the respondent‟s nominees as members of the Arbitral Tribunal. In fact, the petitioner had categorically communicated its objection to such a constitution and vide letter dated 26.03.2022 had specifically requested that an independent arbitrator be appointed. Further, vide letter dated 02.05.2022, the petitioner while refusing to give consent to waive off the applicability of Section 12(5), had communicated that a Retd. District Judge be appointed as an arbitrator for the adjudication of disputes.

42. The appointment letter dated 12.05.2023 though refers to the letter(s) dated 26.03.2022 and 02.05.2022, but fails to give any reasons as to why the request of the petitioner, was ignored. The letter of 10.04.2023 is a letter giving consent for appointment of Mr. Vijendra Kumar Jain and Mr. Ajay Kumar Lal is a letter prior to the constitution of the Arbitral Tribunal.

43. Admittedly, in terms of clause 2905 of the IRS, all the members so appointed of the Arbitral Tribunal are to be ex-employees of respondent no. 1. Hence, the members of the Arbitral Tribunal are clearly barred under Serial No. 1 of the Seventh Schedule that states that any person is ineligible to act as an arbitrator if the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party. There is no written waiver in terms of the proviso to Section 12(5) by the petitioner after the Arbitral Tribunal was constituted. Merely participating in the arbitral proceedings or raising no immediate objection cannot be treated as a waiver.

44. Having said that it is also apposite to note that the petitioner had denied the waiver vide letter dated 02.05.2022 i.e. before the Arbitral Tribunal was constituted on 12.05.2023.

45. I have already taken a view in M.V. Omni Projects (India) Ltd vs Union of India Through dy Chief Engg Northern Railway and Another 2025 SCC OnLine Del 3379 that even if a party intends to waive the bar under Section 12(5) of the 1996 Act, such waiver must be made only after the constitution of the Arbitral Tribunal is known, that is, when the names and particulars of the proposed arbitrators are disclosed. A waiver without knowledge of who the arbitrators will be, is not a valid waiver. The whole purpose of the proviso is to allow parties to consciously waive the disqualification, knowing fully well the identity and background of the arbitrator being appointed. The operative portion of the judgment reads as under:

Arbitrators and is unequal. To my mind, such clauses strike at the core of the neutrality contemplated under the 1996 Act. Further and most importantly, even if a party agrees to waive off the applicability of section 12(5) of 1996 Act, the same has to be done once the Arbitrator are appointed with the names and details. Any waiver under proviso of section 12(5) of 1996 Act before the details of the Arbitrators/Arbitral Tribunal is known to the party waiving the applicability of section 12(5) of 1996 Act is no waiver in the eyes of law. Hence, for the reasons noted above, the members of the Arbitral Tribunal are clearly ineligible to act as the Arbitrators by virtue of S. No. 1 of seventh schedule of 1996 Act and the waiver was to the constitution of the Arbitral Tribunal not to the members of the Arbitral Tribunal.

46. For the said reasons, the letter dated 02.05.2022 and 10.04.2023 cannot be termed as a waiver much less a valid waiver in the eyes of law. The waiver under proviso to Section 12(5) has not been made, in the present case. The appointment and constitution of the entire Arbitral Tribunal is barred under Serial No. 1 of the Seventh Schedule of the 1996 Act.

47. In addition, I am of the view that Clause 2905 and letter dated 31.03.2023, not only restricts the choice of the petitioner to appoint retired Railway Officers empanelled by the Railways, but also limits the petitioner‟s ability to freely nominate its arbitrator. On 31.03.2023, the petitioner was asked to suggest two names out of a panel of 4 retired Railway Officers forwarded by the General Manager, from which even the petitioner‟s nominee was ultimately appointed by the General Manager of the respondent No.1. The power to appoint the remaining arbitrators, including the presiding arbitrator, also rests entirely with the General Manager. Such a mechanism vests unilateral control over the constitution of the Arbitral Tribunal with one party to the dispute, which is not in consonance with the principles laid down in Voestalpine (supra) wherein the Hon‟ble Supreme Court emphasized the importance of a „broad based‟ panel. The operative portion of the judgment reads as under:

picked up its own favourites. Such a situation has to be countenanced. We are, therefore, of the opinion that subclauses (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 the third arbitrator from the whole panel.

29. Some comments are also needed on Clause 9.2(a) of GCC/SCC, as per which DMRC prepares the panel of “serving or retired engineers of government departments or public sector undertakings”. It is not understood as to why the panel has to be limited to the aforesaid category of persons. Keeping in view the spirit of the amended provision and in order to instil confidence in the mind of the other party, it is imperative that panel should be broad-based. Apart from serving or retired engineers of government departments and public sector undertakings, engineers of prominence and high repute from private sector should also be included. Likewise panel should comprise of persons with legal background like Judges and lawyers of repute as it is not necessary that all disputes that arise, would be of technical nature. There can be disputes involving purely or substantially legal issues, that too, complicated in nature. Likewise, some disputes may have the dimension of accountancy, etc. Therefore, it would also be appropriate to include persons from this field as well.

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 broad-based 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 broad-based panel on the aforesaid lines, within a period of two months from today.”

48. Further, I find force in the submission of the petitioner that the General Manager being himself ineligible to act as an arbitrator under the Seventh Schedule, cannot appoint the Arbitral tribunal. In this regard, the respondent No. 1 has contended that the ineligibility under Seventh Schedule of 1996 Act applies to a person acting as an arbitrator not merely appointing one.

49. The fact of the matter is that the Arbitral Tribunal was appointed by the General Manager of the respondent vide appointment letter dated 12.05.2023. The General Manager is an officer of the respondent NO. 1 itself, which is a party to the dispute and thus an interested party in the outcome of the arbitration. It has time and again been held that an interested party cannot be permitted to unilaterally appoint an arbitrator, as it undermines the fundamental requirement of neutrality in arbitral proceedings. The independence and impartiality of the arbitral tribunal is the cornerstone of the arbitration process, and any appointment made by a person who has a vested interest in the dispute is impermissible. The Hon‟ble Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd.(2020) 20 SCC 760, following its earlier decision in TRF Ltd. v. Energo Engg. Projects Ltd.,(2017) 8 SCC 377 has clarified the law in para 21 of the judgment.

50. The issue in question has further been settled by the Hon‟ble Supreme Court in Central Organisation for Railway Electrification vs ECI SPIC SMO MCML (JV) A Joint Venture Company 2024 SCC OnLine SC 3219 wherein it was inter alia held as under: “……

72. The defining characteristic of arbitration law (particularly ad hoc arbitration) is that it allows freedom to the parties to select their arbitrators. This is unlike domestic courts or tribunals where the parties have to litigate their claims before a pre-selected and randomly allocated Bench of judges. Section 11(2) of the Arbitration Act allows parties to agree on a procedure for appointing the arbitrators. The “procedure” contemplated under Section 11(2) is a set of actions which parties undertake in their endeavour to appoint arbitrators to adjudicate their dispute independently and impartially. Without formal equality at the stage of appointment of arbitrators, a party may not have an equal say in facilitating the appointment of an unbiased arbitral tribunal. In a quasi-judicial process such as arbitration, the appointment of an independent and impartial arbitrator ensures procedural equality between parties during the arbitral proceedings. This is also recognised under Section 11(8) which requires the appointing authority to appoint independent and impartial arbitrators. …..

130. In comparison, a three-member arbitral tribunal usually allows each party to nominate one arbitrator of their choice, with the third arbitrator being appointed either by the two party-appointed arbitrators or by agreement of parties. The fact that both parties nominate their respective arbitrators gives them “a sense of investment in the arbitral tribunal.” A three-member arbitral tribunal also enhances the quality of the adjudicative deliberations and ensures compliance with due process. According to Gary Born, the major advantage of a three-member tribunal is that the parties can participate in the selection of the tribunal to the maximum extent possible.

131. In a three-member tribunal, each of the parties seeks to appoint a co-arbitrator. However, the third arbitrator is usually appointed by a process which allows equal participation of both parties in the appointment process. The equal participation of parties enables the appointment of an independent and impartial third arbitrator. Hence, any perceived tilt of an arbitrator in favour of the party which nominated that arbitrator is offset by the appointment of the third arbitrator in the course of a deliberative process involving both the arbitrators or as envisaged in the agreement between parties. Perkins (supra) rightly observed 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. This counter-balancing will ideally apply only in situations where the arbitrators are appointed by the parties in the exercise of their genuine party autonomy. TRF (supra) and Perkins (supra) have been relied upon by this Court on numerous occasions, including in Glock Asia-Pacific Limited v. Union of India245 and Lombardi Engg Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd. ……

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; ……. 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.”

51. Even though it has been mandated that the judgment of Central Organisation (supra) is to have prospective effect, the said judgment has further crystallized the law of neutrality as laid down in Perkins (supra) and Voestalpine (supra). The fact of the matter remains that in the present case, there was no waiver, no consent and the respondent unilaterally appointed the Arbitral Tribunal.

52. For the reasons noted above, the present petition is allowed and the Impugned Award is hereby set aside.

53. The petition along with pending applications, if any are disposed of.

54. The Counter Affidavit along with documents handed over in Court are taken on record.