Independence and impartiality of an arbitrator is a basic requirement of arbitration. They warrant fairness and ensure that both parties are reasonably and equitably compensated. Based on the UNCITRAL Model Law, while the most potent remedies against bias were section 34 and 11(8) of the 1996 Act, the recent 2015 amendment [A1] introduced sections like 12(1), 12(5), 18, 14[A2], Schedule 5 and 7 to ensure the sanctity of the arbitral process. Despite these legislative safeguards, as a result of judicial pronouncement and misinterpretations, a possibly biased process of arbitration is allowed when government contracts are in question. This article intends to accentuate the redundancy in the court’s approach of creating an exception that deems a government employee as an unbiased arbitrator. Furthermore, it lays down suggestive ideas in order to avoid the application of this exception.
Currently, it is an accepted practice that arbitration agreements in public-sector contracts have a named employee arbitrator, such as the departmental head. Both the private party and the government body consent to such an appointment and proceed with performance of the contract. The government takes advantage of the contractor’s fear of losing the contract and in the private party’s absence of bargaining power and proper, acquires consent to biased terms of the agreement which are later contested by the private party in court. Despite knowing that consent in such contracts is not freely exercised by a party, the courts have held that when parties consent with “open eyes and full knowledge” they cannot later contest the named arbitrator, except in exceptional circumstances. While in some cases courts uphold the consent of the parties and refuse to interfere in arbitrations, in others they have stated the specificity of the fact-circumstances of a case and appointed an arbitrator, acknowledging apparent or justified bias. This dichotomy has not only unfairly allowed government bodies to deviate from the standards of impartiality and independence intended by the statute (as will be argued) but have also allowed the government to act as the ‘bully’ while contracting.
The 246th report of the Law Commission of India while discussing the requirement for amendments in the 1996 Act had discussed the importance of neutrality of arbitrators. Regarding this, it was stated ‘that procedural fairness and presence of impartiality and independence cannot be discarded so as to uphold party autonomy and consent, irrespective of previous agreements between the parties’. The most important observation of the report was its disagreement with the exemption permitted only to the State by the courts against maintaining standards of impartiality and independence by appointing employee arbitrators. It accordingly stated that ‘when it came to fair resolution of disputes a distinction between State and Non-State parties should not be encouraged’. In fact, ‘the State has a higher duty to uphold the principles of natural justice and appointing a possibly biased arbitrator should never be permitted to be waived on the basis of a prior agreement between the parties’. It was with this intent that Schedules 5 and 7 had been suggested by the committee to uphold fairness, nowhere did the suggested amendment mention any exception to the State. Similarly, when these recommendations were subsequently incorporated by the 2015 amendment, no such exceptions were legislated either in section 12 or the Schedules 5 or 7. Had the legislative intent been to include such exceptions they would have done so as was recommended in the 176th report. Unfortunately, this intent was side-lined by the courts who instead finally interpreted the issue stating, that the State could be permitted to appoint its employees as arbitrators (directly in contravention to Entry 1 of the 5th and 7thSchedule) Limiting the court’s interference to exceptional circumstances.
Initially, such exception to the State had been permitted as despite giving an anti-state verdict, a public employee was secure in their job. However, with the advent of capitalism and privatisation of various sectors along with increased competition for employment a gradual shift in practices has occurred. Public employment pattern now resembles private employment patterns, making a distinction between the two negligible. It is therefore futile to hold on to such distinctions and shape the law accordingly. Other gaps in such reasoning opted by the 176th law committee report allowing exemption to the State has also been addressed by courts in various cases. For instance, in Ace pipelines, the courts had acknowledged the ‘departmental lethargy of the government in appointing employee arbitrators’ implying that the government often end up appointing biased arbitrators. The court stated that such appointments then require their interference. The court’s reasoning in this case and many others reflect that a blanket exception to the state against ipso facto assuming bias is faulty and that bias in such appointments may exist. Accordingly, in several cases such as Union of India v. M.P. Gupta, Denel Proprietary Ltd V. Govt. of India, M/s. Voestalpine Schienen GMHB V. Delhi Metrothe courts have detected bias and appointed alternate arbitrators. Therefore, the possibility of bias being present in case of appointment by public bodies does exist just as it exists for private entities and therefore, the statute should apply similarly to public bodies and judicial protection with the blanket exception against presuming bias should be lifted.
In furtherance of these arguments, the courts themselves have noted that the government should refrain from appointing its employees as arbitrators. In Raja Transport, the courts acknowledged the lack of real consent being exercised by private parties in government contracts due to “their anxiety to secure contracts” and requested the government to deter from appointing employees as arbitrators to maintain fairness in the process of arbitration. Similarly, in Union of India v. Singh Builders Syndicate the courts held that to protect independence and impartiality, government bodies should “phase out arbitration clauses provided for serving officers and encourage professionalism in arbitration”. This seems ironic as it was initially the judiciary who itself provided the State with an opportunity to appoint employee-arbitrators despite the statute saying otherwise. Now instead of simply applying the statue as is under schedule 7 and 5 and prohibiting the same, requests the government to make changes.
As the bindingness of judicial precedents is often too strong to go against, currently the courts may hesitate to go against various pronouncements of the Apex court and hold the State to the same standard as private entities, thereby prohibiting the appointment of employees as arbitrators. Only an amendment can bring about this change. Recently, the Srikrishna Committee recommended the establishment for Arbitral Institution in India. While the establishment of the institute strikes at the heart of party autonomy, it can be used to regulate the appointment of independent arbitrators in case of government contracts.
According to the report, ‘the body was to constitute and recognise institutes for the accreditation of arbitration and setting conditions required to act as an arbitrator in contracts where the government is a party’. Utilising this, conditions can be set so that an independent arbitrator is appointed for in government contracts instead of employee arbitrators. Based on these recommendations the 2019 Amendments were introduced. While no solution against the government appointing its own employees as arbitrators was given, the amended additions of section 43D(2)(g) (which permits the council to make recommendations to the central government for resolution of commercial disputes) can be utilised by the council read with 43 H (which permits the council to appoint committees or appoint experts to discharge functions to improve the arbitral process). Accordingly, the committee or expert appointed can in turn recommend an independent arbitrator to the central government to avoid the biased employee appointments that are currently permitted.
It can sufficiently be argued that the judiciary has overlooked the larger intent and misapplied the statue. By going against the legislative intent, they have not only permitted the government to breach the sanctity of consent and party autonomy but also deviated from following the principles of natural justice. This has in turn burdened the courts with multiple disputes regarding the appointment of employee arbitrators, which can be nipped at the bud simply by brining about legislative changes or employing recommendations as has been put forth by this paper. These solutions if employed keeping in mind the legislative intent as suggested by the 246th Report can ensure that standards of independence and impartiality are maintained for public and private parties alike.
(2009) 8 SCC 520, pg. 533, para 38.
Ibid at pg. 527, para 13.
246th Law Commission India Report, Amendment to Arbitration and Conciliation Act, 1996, para 57(2014) http://lawcommissionofindia.nic.in/reports/Report246-II.pdf.
Supra Note 2.
176th Law Commission India Report, The Arbitration and Conciliation (Amendment) Bill of the 1996 Act, para 2.7.2, pg. 64. (2001) http://lawcommissionofindia.nic.in/arb.pdf
(2004) 10 SCC 504, pg. 505, para 4
 (2010) 6 SCC 394, para 22.
 (2017) 4 SCC 665, para 15-26.
 (2009) 8 SCC 520, page 527,para 13.
Ibid at page 533-534, para 38 and 39
(2009) 4 SCC 523, pg. 528, para 25 and 25.
Justice.B.N.Srikrishna, High Level Committee to Review The Institutionalisation of Arbitration Mechanism in India. (2017). http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf
Ibid. Pg.4,recommendation 2.
The Arbitration and Conciliation (Amendment) Act, 2019. http://egazette.nic.in/WriteReadData/2019/210414.pdf
Ibid, Section 43 D(2)(g)
Supra note 23, Section 43H.
Preferred Citation: Murugkar, A. “REVISITING THE APPOINTMENT OF EMPLOYEE ARBITRATOR IN GOVERNMENT CONTRACTS”, The Law Culture (2020)