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

The Supreme Court of India in Government of Haryana vs. M/s G.F. Toll Road Pvt. Ltd. addressed a crucial dispute over the appointment of arbitrators in a contract dispute involving a Build-Operate-Transfer (BOT) project. The case highlights key issues related to arbitration clauses, impartiality of arbitrators, and compliance with arbitration laws.

Background of the Case

On 12.12.2008, the Government of Haryana (PWD) issued a Letter of Acceptance to M/s G.F. Toll Road Pvt. Ltd. for constructing, operating, and maintaining the Gurgaon-Faridabad Road and Ballabhgarh-Sohna Road under a BOT contract. A concession agreement was signed on 31.01.2009, with the construction period being 24 months from 31.05.2009.

The agreement included an arbitration clause under Clause 39.2, which provided for the appointment of a three-member arbitration panel under the Rules of the Indian Council of Arbitration (ICA). Disputes arose between the parties, leading M/s G.F. Toll Road Pvt. Ltd. to invoke the arbitration clause and request the ICA to commence proceedings.

The appellant (State of Haryana) nominated a retired Engineer-in-Chief, Mr. M.K. Aggarwal, as its arbitrator. However, the ICA objected to his appointment on the grounds that he was a former government employee, raising concerns over his impartiality. The ICA asked the State to reconsider its nomination.

When the State refused to change its arbitrator, the ICA proceeded to appoint a different arbitrator on behalf of the State, along with the presiding arbitrator. The State of Haryana objected to this move, arguing that it was entitled to nominate its own arbitrator and that the ICA’s decision was unjustified.

Petitioner’s Arguments (Government of Haryana)

The ICA acted beyond its authority by rejecting the State’s nominee arbitrator and appointing another person in his place.
There is no law preventing a retired government employee from serving as an arbitrator, particularly when he had retired over 10 years ago.
The appointment of an arbitrator should follow the same procedure as initially agreed upon in the arbitration clause.
The ICA should have given the State a reasonable time to appoint a substitute arbitrator before unilaterally selecting one.

Respondent’s Arguments (M/s G.F. Toll Road Pvt. Ltd.)

The ICA was justified in rejecting the State’s nominee since his prior employment with the government created a reasonable apprehension of bias.
The ICA had the authority to ensure an impartial arbitration process and prevent conflicts of interest.
The arbitration clause did not explicitly allow a former government employee to be appointed as an arbitrator, making the ICA’s concerns legitimate.
The nomination of the State’s arbitrator was in violation of the principles of natural justice, necessitating an independent appointment.

Supreme Court’s Judgment

The Supreme Court, led by Justices Abhay Manohar Sapre and Indu Malhotra, ruled in favor of the Government of Haryana. The key findings were:

Improper Appointment by ICA: The Court held that the ICA overstepped its jurisdiction by appointing an arbitrator on behalf of the State before allowing a reasonable time for the State to nominate a substitute.
Validity of Government Employees as Arbitrators: The Court clarified that a former government employee is not automatically disqualified from serving as an arbitrator unless there is concrete evidence of bias.
Violation of Contractual Terms: The arbitration clause in the contract stipulated that each party had the right to appoint one arbitrator. The ICA’s unilateral decision to replace the State’s nominee violated this agreement.
Importance of Due Process: The Court emphasized that arbitration proceedings must follow the principles of fairness and contractual obligations, and any deviation must be justified with strong reasons.

Observations from the Judgment

The Court noted:

“The ICA acted without jurisdiction by appointing a substitute arbitrator before allowing the State a reasonable opportunity to make a fresh nomination.”

It further held:

“A mere past association of an arbitrator with a party does not automatically render him biased unless there is tangible proof of a real possibility of partiality.”

Impact of the Judgment

This ruling has significant implications for arbitration law:

It upholds the contractual right of parties to appoint their own arbitrators.
It clarifies that a former government employee can serve as an arbitrator unless there is clear evidence of bias.
It prevents arbitral institutions from overstepping their jurisdiction in appointing arbitrators.
It reinforces the importance of following agreed procedures in arbitration clauses.

Conclusion

The Supreme Court’s verdict in Government of Haryana vs. M/s G.F. Toll Road Pvt. Ltd. ensures that arbitration agreements are enforced as written and that institutional arbitral bodies cannot unilaterally override contractual terms. The ruling strengthens the principles of fairness, due process, and party autonomy in arbitration proceedings.

Petitioner Name: Government of Haryana.
Respondent Name: M/s G.F. Toll Road Pvt. Ltd. & Others.
Judgment By: Justice Abhay Manohar Sapre, Justice Indu Malhotra.
Place Of Incident: Haryana.
Judgment Date: 03-01-2019.

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