Malaysian Airlines Systems BHD v Stic Travels P Ltd.

(2011) 1 Comp LJ 217 (SC)

FACTS: -

The petitioner company has its Principal place of business at Kaulalumpur, Malaysia. It has an
office at New Delhi and it is carrying on business of air-transportation, operation of air flights in
and from India under a bilateral agreement between Malaysia and India. It is stated that its Senior
Vice President, South Asian Region, Mr. Noor Amiruddin holds a general power of attorney to act
for and on behalf of the petitioner and that the said person is the Principal Officer of the petitioner
company in India. Original power of attorney dated 15.12.97 has been produced and by order dated
3.11.2000, it was impounded for collection of stamp duty and penalty and, after overruling
objections by an order dated 21.11.2000, the original power of attorney was treated as evidence
under Section 42(1) of the Indian Stamp Act. It is the case of the petitioner that the respondent has
been appointed as General Sales Agent ( passenger) for various countries and that under
agreements dated 15.9.86 and 11.1.89, the respondent has been so appointed, the former agreement
relating to passengers and the latter relating to cargo. The agreements were to be performed in India
and the cause of action arose in India. The originals of the agreements are with the respondent. It is
stated that the aforesaid agreements could be terminated by either side by giving to the other,
written notice 60 days in advance as per Article 3 of the agreements. It is stated that the petitioner
established its office for North India w.e.f. 1.5.99.

It is further stated that the petitioner terminated the aforesaid agreements by notice dated 1.3.99
( delivered to respondent on the same date). This was done on the ground that the respondent failed
to remit and pay to the petitioner, all the sums and monies received by it in the course of agency on
account of sale of passenger tickets and airway bills. According to the petitioner, the respondent
had, in its letter dated 15.6.99 admitted liability upto Rs.83,54,655.79 and failed to pay the same
and had fraudulently attempted to "arbitrarily and illegally" adjust the same against false claims
with a view to defraud petitioner. All the amounts unilaterally adjusted by respondent were false
claims.

ISSUES-

1. Whether the preliminary issues raised by the respondent can be decided at this stage or be
referred to the arbitrator?
2. (2) Whether, in the case of an international arbitration agreement, where one of the parties is an
Indian national, it is not permissible to appoint an arbitrator of Indian nationality in view of the
observations in Dolphin International Ltd Vs. Ronak Enterprises Inc. 1998(5) SCC 724?

Regarding the first point, the judge explaining the position stated that the Supreme Court in
some cases felt that the preliminary issues could be decided to cut short litigation and waste of
time, where the documents were clear enough. But subsequently the three judges Bench in
Konkan Railway Corporation Ltd vs. Mehul construction Co. JT 2000(9) SC 362 has taken the
view that the Chief Justice or his nominee is performing an administrative duty, and cannot
decide the preliminary issues at this stage, and it is for the arbitrator alone to decide the same.
In view of the said three judge judgment, he declined to decide these preliminary issues, and
directed that the matter be straightaway referred to an arbitrator.

On the second point, the judge considered some decided cases and practice in various countries
with regard to international arbitration. He finally observed that clearly in several countries
where the United Nations convention of International Trade Law (Uncitral) model is adopted, it
had been held that it was not impermissible to appoint an arbitrator of a nationality of one of the
parties to arbitration.

HELD-

The SC held that the word ‘may’ in Section 11(9) is not intended to be read as ‘must’ or ‘shall’.
The court held that in case the party who belongs to a nationality other than that of the proposed
arbitrator and no objection is raised, the SC or the person or institution designated by that court
can appoint an arbitrator belonging to a nationality of one of the parties.

However, in case there is an objection by one party of the appointment of an arbitrator

belonging to the nationality of the opposite party, the Apex Court stated that the SC or his
designate can certainly consider the objection and see if an arbitrator not belonging to the
nationality of either party can be appointed. According to the court, while taking that decision,
the supreme court or his designate can also keep in mind, cases where the parties have agreed
that law applicable to the case is the law of a country to which one of the parties belongs,
whether there will be an overriding advantage to both parties if an arbitrator having knowledge
of the applicable law is appointed.
Indian Oil Corporation v. Raja Transport (2009) 8 SCC 520

Facts:

1. The appellant appointed the respondent as its dealer for retail sale of petroleum products.
2. In the contract they had an agreement that in the case of any dispute, the matter will be
solved by arbitration.
3. In the agreement itself, they also decided that the Director, Marketing of the Corporation or
of some officer of the Corporation who may be nominated by the Director Marketing, will be
the sole arbitrator.
4. After the period of six month, the appellant terminated the dealership of the respondent on
the recommendation of its Vigilance Department.

Procedural History:

 The respondent filed Suit in the Court of Civil Judge, Junior Division, Rishikesh,
Dehradun for a declaration that the order of termination of dealership was illegal and void
and for a permanent injunction restraining the appellant from stopping supply of petroleum
products to its retail outlet.
 The appellant filed an application under Section 8 of the Arbitration and Conciliation Act,
praying that the suit be rejected and the matter be referred to arbitration according to the
agreement, which the civil judge accepted and directed the parties to refer the matter to
arbitration within two months.
 Before going for the arbitration proceedings, the respondent filed an application before the
Chief Justice of High Court praying for appointment of an independent arbitrator to decide
the dispute relating to the validity of the termination of the dealership.
 The learned Chief Justice, after hearing the parties allowed the application, and appointed a
retired High Court Judge as sole arbitrator to decide the dispute.

Issues:
1. 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 respondent herein had taken necessary steps for appointment of 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?

Analysis:

1. Once a party has entered into an agreement with eyes wide open, it cannot wriggle out of
the situation by contending that the person appointed as arbitrator, is an employee of the other
party and thus he will not be impartial or objective. However, if the appellant feels that the
arbitrator has not acted independently or impartially, or he has suffered from any bias, it will
always be open to the party to make an application under Section 34 of the Act to set aside
the award on the ground that arbitrator acted with bias or malice in law or fact. The court held
that a person being an employee of one of the parties cannot per se be a bar to his acting as an
Arbitrator. Accordingly, the answer to the first question is that the learned Chief Justice was
not justified in his assumption of bias.

2. The legislative intent is that the parties should abide by the terms of the arbitration
agreement. If the arbitration agreement provides for arbitration by a named Arbitrator, the
courts should normally give effect to the provisions of the arbitration agreement. In other
words, referring the disputes to the named arbitrator shall be the rule. The Chief Justice or his
designate will have to merely reiterate the arbitration agreement by referring the parties to the
named arbitrator or named Arbitral Tribunal. Ignoring the named Arbitrator/Arbitral Tribunal
and nominating an independent arbitrator shall be the exception to the rule, to be resorted for
valid reasons.

3. When the dispute arose, the respondent did not seek arbitration, but went to civil court. It
was the appellant who sought reference to arbitration in terms of the arbitration agreement.
The respondent ought to have referred the dispute to the Director (Marketing) of the appellant
within two months from the date of the order of the court. It failed to do so. Therefore, it was
the respondent who failed to act in terms of the agreed procedure and not the appellant.

Held:

The appeal is, therefore, allowed. The order of the High Court is set aside. The Director
(Marketing) of the appellant Corporation is appointed as the sole arbitrator to decide the
disputes between the parties.

Voestalpine Gmbh v Delhi Metro Rail Corporation (Arb Pet 50/2016, SC).

FACTS: -

The petitioner, VSG, is a company registered under the laws of Austria and has its branch
office in India. The respondent, DMRC, awarded the contract to VSG for supply of rails.
Certain disputes arose between the parties with regard to the said contract and VSG
commenced arbitration. The arbitration agreement prescribed a particular procedure for
constitution of the arbitral tribunal which, inter alia, stipulated that DMRC shall forward the
names of five persons from the panel of arbitrators maintained by them, and that VSG will
have to choose its nominee arbitrator from the said panel. As per this provision, DMRC had,
in fact, furnished the names of five such persons to VSG with a request to nominate its
arbitrator from the said panel.
However, this was unacceptable to VSG on the grounds that the panel consisted of serving or
retired engineers either of DMRC or of a government department or public sector
undertakings. VSG claimed that the panel did not consist of independent arbitrators. Thus,
according to VSG, in view of the amendment of section 12 of the Act, such a panel had lost
its validity being contrary to the law of the land.

Central Issue

Whether panel of arbitrators, as constituted by the respondent, violates the amended

provisions of Section 12 of the Act?
 According to the Supreme Court, such an arrangement may result in the following adverse
consequences:

(a) Firstly, the choice given to VSG was very limited as it had to choose one out of the
five names that were forwarded by DMRC. In other words, the availability of free
choice to nominate a person out the entire panel list, which was prepared by DMRC,
was completely absent.
(b) Secondly, with the discretion given to DMRC to choose five persons, a room for
suspicion was eventually created in the mind of VSG that DMRC may have picked its
own favourites. This may lead to impartiality of the arbitrator towards DMRC.

HELD -

Thus, the Supreme Court held that the clauses pertaining to this in the agreement warrant
deletion and appropriate choice must be provided 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 panel. Further, it was also held
that it is imperative to have a much broad-based panel, so that there is no misapprehension
between the parties that there is any possibility of principle of impartiality and independence
being compromised at any stage of the arbitration proceedings, especially at the stage of
constitution of the arbitral tribunal.

Afcons Infrastructure Ltd. v. Rail Vikas Nigam Ltd., Judgment dated 29 May 2017 in
ARB.P. 21/2017

BRIEF FACTS

Afcons and RVNL entered into a contract dated 12 December 2011 for construction of an
infrastructure project (“Agreement”). A dispute arose between the parties and Afcons issued a
notice of dissatisfaction and invoked arbitration, relying on the arbitration agreement. In the
notice of dissatisfaction, Afcons nominated their arbitrator. RVNL disputed Afcons
nomination terming it contrary to the arbitration agreement, and proposed a panel of five
arbitrators, and called upon Afcons to select and nominate their nominee arbitrator from that
list. Aggrieved by the same, Afcons preferred a petition under Section 11 of the Act before the
Delhi High Court (“Court”) for appointment of the arbitral tribunal.

The question which the Court had to decide was whether employees and former employees are
disqualified from being appointed as arbitrators under Section 12 (5) of the Act.

The arbitration clause has been reproduced below:

(i) Procedure for Appointment of Arbitrators: The arbitrators shall be appointed as per

following procedure:

1. Employer will forward a panel of 5 names to the contractor and contractor will give
his consent for any one name out of the panel to be appointed as one of the
Arbitrators.
2. Employer will decide the second Arbitrator out of the remaining four names in the
panel as mentioned in Para (a) above.
3. The third Arbitrator shall be chosen by the two Arbitrators so appointed by the parties
and shall act as Presiding Arbitrator. In case of failure of the two Arbitrators
appointed by the parties to reach upon consensus within a period of 30 days from the
appointment of the Arbitrators subsequently appointed, then, upon the request of
either or both parties, the presiding Arbitrator shall be appointed by the Managing
Director, Rail Vikas Nigam Limited, New Delhi.

(ii) Qualification and Experience of Arbitrators: The arbitrators to be appointed shall have

minimum qualification and experience as under:

1. One member of the tribunal shall be necessarily a working (not below the rank of
SAG) or a retired officer (retired not below the rank of SAG, age not exceeding 70
years and in reasonably good mental and physical fitness) of Indian Railway Accounts
Service , having experience in financial matters related to construction contracts.
 2. One member shall be a technical person having degree in Engineering and may be
working (not below the rank of SAG) or retired officer (retired not below the rank of
SAG, age not exceeding 70 years and in reasonably good mental and physical fitness)
of any Engineering service of Indian Railways or equivalent service in RVNL, and
having knowledge and experience of the Railway working.
3. The Presiding Arbitrator shall necessarily be a serving railway/RVNL officer and he
shall have same minimum qualification and experience as specified above for either
of the two arbitrators.
4. Out of 3 Arbitrators not more than one shall be a retired officer.

(iii) No person other than the persons appointed as per above procedure and having above
qualification and experience shall act as arbitrator.

(iv) Neither party shall be limited in the proceedings before such arbitrators to the evidence nor
did arguments previously put before.”

DECISION:

The Court allowed the petition, and directed RVNL to appoint any former judge of the
Supreme Court as an arbitrator within 2 weeks.

The Court opined that:

1. A person who is related to a party as an employee, consultant or an advisor, is

disqualified to act as an arbitrator.
2. An arbitrator which has “other” past or present business relationship with the party is
also dis-qualified.
3. The word “other” indicates a relationship other than that of an employee, consultant
or an advisor. Therefore, the relationship of being a former employee would not come
under the ambit of Section 12 (5) read with Entry 1 of the Seventh Schedule.
4. The Court further clarified that the expression “business relationship” as used in
Entry 1 of Seventh Schedule cannot be understood to include an employer-employee
relationship.
Further, the Court held that the fact that the arbitrator is not disqualified under Section 12 (5)
read with Seventh Schedule does not conclude that his appointment cannot be challenged if
there are grounds which give rise to justifiable doubts as to his independence or impartiality.

The court relying on the Supreme Court of India’s (“Supreme Court”) judgment

in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited (“Voestalpine”), and
Punjab and Haryana High Court’s decision in Reliance Infrastructure Ltd. v. Haryana Power
Generation Corporation Ltd. deviated from the arbitration clause provided in the Agreement
to appoint an independent person to avoid even notional apprehensions of lack of
independence or impartiality.

The Court opined that in the interest of securing the independence and neutrality of the arbitral
tribunal, the process contemplated under clause 17.3 (ii) of the Agreement must be disregarded
primarily because:

1. The decision of the Supreme Court that parties choice to select one out of five persons
suggested by the other party has “adverse consequences”;
2. RVNL suggested the names of former employees of Railways/RVNL for appointment
of an arbitrator. All have part relationship with RVNL/Railways. Although this
relationship may not fall within the prohibition stipulated under Section 12 (5) of the
Act read with Seventh Schedule, it gives rise to apprehensions;

TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377  

FACTS

The Respondent is engaged in the business of procuring equipment for installation in thermal
power plants. The Respondent had issued a purchase order (“PO”) in favor of the Appellant
and received certain bank guarantees from the Appellant to secure performance of the PO.
Certain disputes arose between the parties and the Appellant invoked arbitration on December
28, 2015. The Appellant had objected to the procedure for appointment of an arbitrator
provided under the PO and sought an appointment de hors the specific terms of the PO. The
Respondent rejected this contention of the Appellant and appointed an arbitrator by way of its
letter dated January 27, 2016.

Thereafter, the Appellant filed an application under Section 11(5) read with 11(6) of the Act
for appointment of an arbitrator under Section 11(2) of the Act.

The High Court stated that if a party to a dispute had been validly conferred with the right to
appoint an arbitrator under the old Act then the same was not usurped by application of the
amended Act. The High Court further stated that the amended Act provided for a detailed list
of ineligibility criteria of arbitrators under the Seventh Schedule to the Act, none of which
mentioned that the right to appoint an arbitrator under the old Act would be subsumed by the
application of the amended Act.

ISSUES

1. If a person authorized under a contract to act as an arbitrator becomes ineligible by

operation of law, whether he would be eligible to nominate another person to act as an
arbitrator?
2. Whether a plea seeking statutory disqualification of a nominated arbitrator can be
raised under Section 11(6) of the Act?

JUDGMENT

Clause 33 of the PO provided for the resolution of disputes. It stated that if a dispute could not
be settled by negotiation, it would be determined under the Act, as amended. Therefore, the
amended provisions of the Act would be applicable to the arbitration proceedings. Further, it
stated that a dispute or reference between the parties would be referred to sole arbitration of the
Managing Director of the Respondent or his nominee.

The Court referred to section 12(5) of the Act and stated that if a person whose relationship
with the parties or the counsel or the subject matter of dispute falls under any of the categories
specified in the Seventh Schedule he would be ineligible to be appointed as an arbitrator. With
the exceptions being (i) parties can waive the applicability of the sub-section; (ii) the said
waiver can only be provided after the dispute has arisen between the parties; and (iii) such
waiver must be by an express agreement in writing. Thereafter, the Court applied the same
standard to the aforementioned dispute resolution clause and concluded that the Managing
Director of the Respondent had become ineligible by operation of law to act as an arbitrator in
any dispute arising between the parties under the PO.

The Court thereafter referred to a gamut of Supreme Court judgments to hold that in certain
circumstances the judiciary has exercised its discretionary jurisdiction to nullify the
appointment of an arbitrator made by one of the parties to the dispute as the concerned party
had failed to adhere to the procedure or mechanism provided for appointment of an arbitrator
under the arbitration agreement, resulting in an ex facie contravention of the inherent facet of
the arbitration agreement.

The Court also referred to the Supreme Court judgments of SBP & Co. v. Patel Engineering
Ltd  and Arasmeta Captive Power Company Private Limited and another v. Lafarge India
Private Limited and stated that the designated Judge who is in possession of an application for
appointment of an arbitrator, can at the initial stage, (1) adjudicate upon his own jurisdiction to
entertain the matter, (2) scrutinize the existence of any condition precedent for the exercise of
his power and (3) examine any possible disqualification of a proposed arbitrator. Thereby,
ruling that the Court had the necessary jurisdiction to entertain a plea seeking statutory
disqualification of a nominated arbitrator under Section 11(6) of the Act.

Thereafter, the Court deliberated on whether the Managing Director of the Respondent, after
becoming ineligible by operation of law, could still be eligible to nominate an arbitrator. The
Court made a distinction between a situation where the person nominating the arbitrator is
different from the person acting as the arbitrator and where the person nominating also acts as
the arbitrator. In the first scenario the parties authority to nominate their respective arbitrators
cannot be questioned, the only valid objection can be in respect of procedural compliance and
eligibility of the arbitrator under the provisions of the Act. But, in the second scenario which is
the present case the nomination of an arbitrator by an ineligible arbitrator would tantamount to
the arbitration proceeding being carried out the ineligible arbitrator himself. Ineligibility strikes
at the root of the power to arbitrate or to nominate a person to preside over the arbitration
proceeding.

HRD Corp. v. GAIL (India) Ltd., 2017 SCC OnLine SC 1024

FACTS

HRD and GAIL entered into a long term contract for exclusive supply of wax generated at
GAIL's plant at Uttar Pradesh. Certain disputes arose between the parties and previously
three arbitrations took place. The current dispute before the Court was with respect to fourth
such arbitration.

For the first arbitration, an Arbitral Tribunal comprising of Justice A.B. Rohatgi, Justice J.K.
Mehra and Justice N.N. Gowamy was constituted. The second arbitration had the same panel.
Even in the third arbitration the same panel was constituted, however, Justice N.N. Goswamy
expired and Justice T.S. Doabia was appointed in his place. Subsequently, Justice A.B.
Rohatgi resigned and in his place justice S.S. Chadha was appointed. The third arbitration
proceedings culminated in the year 2015.

In respect of the fourth arbitration, HRD nominated Justice K. Ramamoorthy whereas GAIL
nominated Justice Doabia. The said two Judges then appointed Justice K.K. Lahoti to be the
presiding arbitrator. Subsequently, Justice K. Ramamoorthy withdrew and in his place HRD
appointed Justice Mukul Mudgal.

HRD challenged the appointment of Justice K.K. Lahoti and Justice Doabia before the
Arbitral Tribunal. The challenge was dismissed. Thereafter, HRD challenged the appointment
of the said two arbitrators before the Hon'ble Delhi High Court which was also dismissed the
challenge petitions. The dispute was then appealed before the Hon'ble Supreme Court.

Grounds for Challenge

HRD argued that the appointment of Justice K.K. Lahoti is bad because he has previously
given a legal opinion to GAIL in an unrelated manner and thus attracts Item 20 of the Fifth
schedule and Items 1, 8 and 15 of the Seventh Schedule. Further, the appointment of Justice
Doabia was assailed for the reasons that Justice Doabia was an arbitrator in the previous
rounds of arbitration in the same dispute and thus attracts Items 1, 15 and 16 of the Seventh
Schedule.

Outcome of the Case

At the outset, the Court held that a challenge against attraction of any items under Fifth
Schedule is not permissible before the Court until and unless an award is issued by the
Arbitral Tribunal. This is so because Section 13 of the Act only allows the parties to raise the
issues of "independence" and "impartiality" before the Arbitral Tribunal. However, parties
are free to raise issues attracting Seventh Schedule before the Court directly. This is so
because the items in Seventh Schedule, when attracted, can make the arbitrator de jure
ineligible to act as an arbitrator. Hence, the Court proceeded in the dispute only upon the
allegations raised against the two arbitrators against the items mentioned in the Seventh
Schedule.

With regard to the appointment of Justice K.K. Lahoti, the Court ruled that merely providing
a legal opinion in an unrelated matter will not attract Items 1, 8 and 15 of the Seventh
Schedule. The Court held that to attract these items the advice should be "regular" and the
opinion should be "qua the dispute at hand". Further the advice should also be related to
business relationships and a legal opinion on a matter only constitutes a professional relation
and not a business relation. Hence, the challenge against Justice K.K. Lahoti was dismissed.

As to the appointment of Justice Doabia the Court ruled that his involvement in a previous
arbitration between the same parties would not, by itself, render him ineligible to be an
arbitrator in a subsequent arbitration. What is required is that the involvement should be in
the very dispute contained in the present arbitration. Consequently, the challenge against
Justice Doabia was also dismissed.

Key Takeaways

The decision in HDR Corporation v. GAIL (India) Limited SLP (C) No. 20679 of
2017 will be considered as a reference point for adjudication of any future disputes on the
appointment of arbitrators. The major takeaways of this judgment are:

 Challenge against items in Fifth Schedule can only be made before the Arbitral
Tribunal. It can be subsequently raised before the Court only after issuance of the
Award.
 Challenge against items in Seventh Schedule need not before the Arbitral Tribunal
and can be directly addressed before the Court.