Arbitration in Government Contracts: Supreme Court Rules on Appointment of Arbitrator

The Supreme Court of India recently delivered an important ruling in the case of Rajasthan Small Industries Corporation Limited vs. M/S Ganesh Containers Movers Syndicate, which addressed the appointment of an arbitrator in a contractual dispute. The case highlights the legal complexities involved in arbitration agreements, the validity of appointed arbitrators, and the impact of delays in arbitration proceedings.

Background of the Case

The dispute arose from a contract between Rajasthan Small Industries Corporation Limited (appellant) and M/S Ganesh Containers Movers Syndicate (respondent) for handling and transportation of ISO containers and cargo. The contract was initially for three years, starting in 2000, and was extended for two more years. Disagreements emerged over transit penalties imposed by the appellant on the respondent and non-payment of handling charges.

The contract contained an arbitration clause (Clause 4.20.1 of Schedule-4) stating that disputes would be resolved by the Managing Director of the appellant or their nominee. The appellant initially appointed I.C. Shrivastava, IAS (Retd.), as the arbitrator. However, due to slow progress, the arbitrator was removed in 2009, and the Chairman-cum-Managing Director of the appellant was appointed as the sole arbitrator.

Over the years, the arbitration proceedings saw multiple delays and adjournments. The respondent raised concerns about the arbitrator’s impartiality and later filed an application before the Rajasthan High Court under Section 11 and Section 15 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an independent arbitrator. The High Court allowed this application and appointed a retired district judge as the sole arbitrator. The appellant challenged this order before the Supreme Court.

Petitioner’s Arguments (Rajasthan Small Industries Corporation Limited)

The arbitration agreement explicitly provided that the dispute would be resolved by the Managing Director or their nominee, and the respondent had initially agreed to this.
The delays in arbitration proceedings were primarily due to the respondent’s frequent absence or adjournment requests.
By participating in arbitration for several years, the respondent had waived its right to challenge the arbitrator’s appointment.
The High Court erred in appointing an independent arbitrator in deviation from the arbitration agreement.

Respondent’s Arguments (M/S Ganesh Containers Movers Syndicate)

Under Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015, an arbitrator who is an employee of one party cannot be appointed as an arbitrator.
Due to persistent delays, the respondent had no choice but to approach the High Court for the appointment of an independent arbitrator.
The arbitration agreement was unconscionable, as it allowed one party (the appellant) to unilaterally appoint an arbitrator, which raised doubts about impartiality.

Supreme Court’s Judgment

The Supreme Court, led by Justices R. Banumathi and Indira Banerjee, ruled in favor of the appellant, overturning the High Court’s decision. The key findings were:

Binding Nature of Arbitration Agreement: The Court reaffirmed that parties are bound by the terms of their arbitration agreement, and courts should not interfere unless there are compelling reasons.
Waiver of Objections: The respondent had participated in arbitration proceedings for years without objecting to the arbitrator’s appointment, thus waiving its right to challenge.
Non-Applicability of 2015 Amendment: The arbitration proceedings had started before the 2015 amendment, making Section 12 inapplicable to this case.
Delays Not Solely Attributable to the Arbitrator: The delays were partly due to procedural issues and the respondent’s conduct.

Observations from the Judgment

The Court referenced previous rulings, including Indian Oil Corporation Ltd. vs. Raja Transport Pvt. Ltd., reiterating that an arbitration clause in a contract must be respected unless proven unfair. It stated:

“The fact that the sole arbitrator is the Managing Director of the appellant is not a ground to presume bias or lack of independence. The respondent willingly participated in arbitration proceedings for years and cannot now seek to appoint an independent arbitrator.”

The Court also observed:

“Mere neglect of an arbitrator to act, as distinct from refusal or incapacity, does not of itself give the court power to appoint another arbitrator.”

Conclusion

This ruling reaffirms the principle that arbitration agreements must be honored, and parties cannot seek to replace an arbitrator merely because of delays unless there is evidence of bias or incapacity. The Supreme Court’s decision ensures that arbitration remains an effective alternative dispute resolution mechanism without unnecessary judicial interference.

Petitioner Name: Rajasthan Small Industries Corporation Limited.
Respondent Name: M/S Ganesh Containers Movers Syndicate.
Judgment By: Justice R. Banumathi, Justice Indira Banerjee.
Place Of Incident: Rajasthan.
Judgment Date: 23-01-2019.

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Download Judgment: Rajasthan Small Indu vs MS Ganesh Container Supreme Court of India Judgment Dated 23-01-2019.pdf

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