Gauhati HC Sets Aside Unilateral Railway Arbitrator Panel for Lack of Section 12(5) Waiver

PCM Cement Concrete Pvt. Ltd. Vs Union of India And Anr. (Gauhati High Court)

Material Facts: The petitioner, M/s PCM Cement Concrete Pvt. Ltd., entered into a contract agreement dated 02.07.2018 with the respondents (Union of India and N.F. Railway) to build and operate a 25,000 MT capacity godown with a private siding under the Private Entrepreneurship Godown Scheme of the Food Corporation of India (FCI). Disputes arose between the parties under the contract. Clause 64 / Clause 64(1)(3)(a)(ii) of the contract agreement provided for dispute resolution through an Arbitral Tribunal consisting of three serving/retired Railway Officers appointed by the General Manager, Northeast Frontier Railway.

Procedural History: The respondent Railways issued a letter requesting the petitioner to waive its right under Section 12(5) of the Arbitration and Conciliation Act, 1996, to enable the constitution of a 3-member Arbitral Tribunal of serving/retired Railway Officers. The petitioner refused to waive its rights under Section 12(5) and filed an application before the Gauhati High Court under Section 11(6) of the 1996 Act for the appointment of an independent arbitrator. During the pendency of the writ/arbitration petition, the respondents unilaterally constituted an Arbitral Tribunal comprising three serving/retired Railway Officers vide letters dated 30.10.2023. On 10.04.2024, the High Court issued an order proposing an Arbitral Tribunal of three independent retired judges and sought statutory disclosures. Subsequently, disclosures confirming willingness were received.

Legal Issues

1. Whether the respondent Railways could unilaterally appoint/nominate serving or retired Railway Officers as arbitrators under the contract clause without an express written waiver from the petitioner under Section 12(5) of the Arbitration and Conciliation Act, 1996.
2. Which binding precedent must be followed by the High Court when faced with conflicting decisions of Benches of equal strength of the Supreme Court (specifically, TRF Ltd. / Perkins Eastman versus Central Organization for Railway Electrification).

Statutory Provisions

• Section 11(6) and Section 11(8) of the Arbitration and Conciliation Act, 1996
• Section 12, Section 12(5), and the Seventh Schedule of the Arbitration and Conciliation Act, 1996
• Clause 64 / Clause 64(1)(3)(a)(ii) of the Contract Agreement dated 02.07.2018

Parties’ Submissions

• Petitioner’s Submissions:
  • The General Manager, N.F. Railway, has an interest in the dispute, is not a neutral person, and is statutorily ineligible under Section 12(5) read with the Seventh Schedule to act as an arbitrator or to nominate others.
  • The petitioner explicitly refused to waive its rights under Section 12(5) of the Act.
  • The unilateral appointment of serving/retired Railway Officers vide letters dated 30.10.2023 is invalid, requiring the High Court to appoint an independent arbitrator.
• Respondents’ Submissions (Learned CGC):
  • The arbitration clause explicitly provides for an Arbitral Tribunal of serving/retired Railway Officers, and the petitioner failed to suggest names from the panel sent to it.
  • The appointment made vide letters dated 30.10.2023 was strictly in terms of the agreed contractual clause.
  • The court-proposed panel of independent retired judges was not in consonance with the arbitration clause.
  • Alternatively, if an Arbitral Tribunal is to be constituted by the Court, it should consist of a sole arbitrator.

Court Observations & Findings

• Under Section 12(5) and the Seventh Schedule of the 1996 Act, as interpreted in TRF Ltd. and Perkins Eastman, any person falling within the prohibited categories is statutorily ineligible to be appointed as an arbitrator and cannot nominate another person as an arbitrator.
• Although a coordinate 3-Judge Bench in Central Organization for Railway Electrification (CORE) took a contrary view, that issue has been referred to a larger Bench in Union of India v. Tantia Constructions Ltd.
• Following the 5-Judge Bench ruling in Pranay Sethi and the Supreme Court decision in Union Territory of Ladakh, when High Courts face conflicting judgments from Benches of equal strength, the earlier judgment (TRF Ltd.) must be followed. This approach was also applied by the High Court in M/s Barpeta Agro Infra v. Union of India.
• In the absence of an express waiver under Section 12(5), the respondent Railways had no jurisdiction to nominate or appoint serving/retired Railway Officers as arbitrators.

Final Decision

The Gauhati High Court set aside the Arbitral Tribunal constituted by the Railways vide letters dated 30.10.2023. Accepting the respondents’ alternative prayer for a single arbitrator, the Court appointed Mr. Justice C. R. Sarma (Retd.) as the sole Arbitrator to resolve the disputes between the parties, directing them to appear before the learned Arbitrator within one month. The petition under Section 11(6) was accordingly disposed of.

Cases Discussed

• Union Territory of Ladakh & Ors. Vs. Jammu and Kashmir National Conference & Anr. (Supreme Court), 2023 Legal Eagle (SC) 891
• Union of India Vs. Tantia Constructions Ltd. (Supreme Court), (2021) SCC OnLine SC 271
• Perkins Eastman Architects DPC and Anr. Vs. HSCC (India) Limited (Supreme Court), (2020) 20 SCC 760
• Central Organization for Railway Electrification Vs. M/s. ECI-SPIC-SMO-MCML (JV) a Joint Venture Company (Supreme Court), (2020) 14 SCC 712
• TRF Ltd. Vs. Energo Engg. Projects Ltd. (Supreme Court), (2017) 8 SCC 377
• National Insurance Company Ltd. Vs. Pranay Sethi (Supreme Court), (2017) 16 SCC 680
• M/s Barpeta Agro Infra Vs. Union of India and 2 others (Gauhati High Court), Arbitration Petition No. 51/2023

Five Alternative SEO Titles

HC Sets Aside Unilateral Railway Arbitrator Panel for Lack of Section 12(5) Waiver

HC Grants Section 11(6) Relief Appointing Sole Arbitrator Over Ineligible Railway Panel

HC Quashes Railway Arbitral Tribunal Appointment Violating Section 12(5) and Seventh Schedule

HC Appoints Independent Sole Arbitrator Under Section 11(6) Following TRF Precedent

HC Sets Aside Railway Panel Arbitrators and Appoints Retired Judge Under Section 11(6)

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HC Appoints Independent Arbitrator Under Section 11(6) Rejecting Unilateral Railway Panel Appointment

FULL TEXT OF THE JUDGMENT/ORDER OF GAUHATI HIGH COURT

Heard Mr. S. J. Sarma, learned counsel for the petitioner and Ms. A. Gayan, learned CGC.

2. The present petition is for appointment of an Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the ‘1996 Act’).

3. The petitioner’s case is that the petitioner entered into a contract agreement with the respondents to build and operate a 25,000 MT Capacity godown with private Siding under the Private Entrepreneurship Godown Scheme of the FCI. Consequently, contract agreement dated 02.07.2018 was executed between the parties. Disputes having arisen between the parties, the petitioner has filed this application for appointment of an Arbitrator, as Clause 64 of the contract agreement provides for resolution of disputes between the parties by way of arbitration, by constituting an Arbitral Tribunal, made up of members to be appointed by the General Manager, Northeast Frontier Railway.

4. The petitioner’s counsel submits that though Clause (3)(a)(ii) of the contract agreement provides that the dispute between the parties is to be referred to a 3 member Arbitral Tribunal to be constituted by the General Manager, N.F. Railway, the Arbitrator would have to be appointed by this Court and not by the General Manager, N.F. Railway. He submits that this is due to the fact that the General Manager, N.F. Railway cannot be appointed as an Arbitrator as he has an interest in the dispute and is not a neutral person. As such, the General Manager, N.F. Railway cannot in turn appoint any other Arbitrator.

5. The petitioner’s counsel submits that due to the dispute between the parties, the respondent Railways wrote a letter to the petitioner, stating that an Arbitral Tribunal was to be constituted, in terms of Clause (3)(a)(ii), which states as follows:-

“641(3)(a)(ii) In cases not covered by the Clause 64(3)(a)(i), the Arbitral Tribunal shall consist of a Panel of three Gazetted Railway Officer not below JA Grade or 2 Railway Gazetted Officers not below JA Grade and a retired Railway Officer, retired not below the rank of SAG officer, as the arbitrators. For this purpose, the Railway will send a panel of more than 3 names of Gazetted Railway Officers of one or more Departments of the Railway which may also include the name(s) of retired Railway Officer(s) empanelled to work as Railway Arbitrator to the contractor within 60 days from the day when a written and valid demand for arbitration is received by the GM.

Contractor will be asked to suggest to General Manager at least 2 names out of the panel for appointment as contractor’s nominee within 30 days from the date of dispatch of the request by Railway. The General Manager shall appoint at least one out of them as the contractor’s nominee and will, also simultaneously appoint the balance number of arbitrators either from the panel or from outside the panel, duly indicating the ‘presiding arbitrator from amongst the 3 arbitrators so appointed. GM shall complete this exercise of appointing the Arbitral Tribunal within 30 days from the receipt of the names of contractor’s nominees. While nominating the arbitrators, it will be necessary to ensure that one of them is from the Accounts Department. An officer of Selection Grade of the Accounts Department shall be considered of equal status to the officers in SA grade of other departments of the Railway for the purpose of appointment of arbitrator.”

6. The petitioner’s counsel submits that the petitioner had been requested to waive his right under Section 12(5) of the Act, so as to enable the respondents to appoint 3 serving/retired Railway Officers to constitute the Arbitral Tribunal. The petitioner refused to waive his right under Section 12(5) of the Act and instead filed the present writ petition for appointment of an independent Arbitrator.

7. The petitioner’s counsel submits that subsequent to the filing of this writ petition, the respondents constituted an Arbitral Tribunal, consisting of 3 serving/retired Railway Officers to decide the dispute between the parties, vide letters dated 30.10.2023.

8. This Court, on hearing the parties, vide order dated 10.04.2024, had held that as the petitioner had a right not to concede to the waiver of Section 12(5) of the Act, keeping in view the requirements of Section 12(5) and 7^th Schedule of the Act, proposed an Arbitral Tribunal to consist of Hon’ble Mr. Justice C. R. Sarma (Retd.) as the Chairman of Arbitral Tribunal with Mr. Mrinal Kumar Bhattacharjee and Sri Pradip Kumar Das, who were both retired as District and Sessions Judge. Further, the Registry was also directed to communicate with the proposed Members of the Arbitral Tribunal, seeking disclosure, as provided under Sub-Section 8 of Section 11 of the Act. Consequent to the order dated 10.04.2024, reports have been received to the effect that the proposed Arbitrators were willing to take up the disputes between the parties.

9. A. Gayan, learned CGC submits that the arbitration clause provided in the contract agreement between the parties, provides for an Arbitral Tribunal made up of retired/serving Railway Officers and the petitioner was to suggest two names from among the list of four names that had been sent to him. However, the petitioner had not suggested any name for appointment of an Arbitrator. However, as the arbitration clause provided the manner in which the arbitration tribunal was to be constituted, the respondent railways had appointed Arbitrators, in terms of the arbitration clause provided in the contract agreement, vide letters dated 30.10.2023.

10. A. Gayan, learned CGC submits that the proposed Members of the Arbitral Tribunal made by this Court cannot be accepted, inasmuch as, the same is not in consonance with the Arbitration Clause. In the alternative, she submits that even if an Arbitral Tribunal is to be constituted, the same should consist of only one Arbitrator.

11. I have heard the learned counsels for the parties.

12. The question to be decided is as to whether the respondent Railways could have appointed serving/retired Railway Officers as Arbitrators, in the absence of any waiver given by the petitioner under Section 12(5) of the Act.

13. In the case of Perkins Eastmen Architects DPC and Anr Vs. HSCC (India) Limited, reported in (2020) 20 SCC 760, the Supreme Court has held that any person, who falls under any of the categories specified in the 7th Schedule, shall be ineligible to be appointed as an Arbitrator. Further, a person, ineligible to become an Arbitrator, cannot nominate another as an Arbitrator.

14. Thus, as per Section 12 of the 1996 Act and the law laid down by the Supreme Court in Perkins Eastman (supra), any person who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an Arbitrator. Further, a person who is statutorily ineligible to be an Arbitrator, cannot nominate another person as an Arbitrator.

15. In the case of TRF Ltd. Vs. Energo Engg. Projects Ltd., reported in (2017) 8 SCC 377, the Supreme Court held that by virtue of Section 12(5) of the Act, if any person, who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an Arbitrator, by operation of law. Secondly a person, ineligible to become an Arbitrator, cannot nominate another as an Arbitrator.

16. In view of the two judgments of the Supreme Court stated above and the fact that the application for appointment of an Arbitrator had been made subsequent to the amendment of Section 12 of the Act, this Court is of the view that the respondent Railways could not appoint/nominate Arbitrators from amongst its own serving/retired officers, to decide the disputes between the parties.

17. Having stated the above, another 3 Judges Bench of the Supreme Court held a different view in Central Organization for Railway Electrification Vs. Ms. ECI-SPIC-SMO-MCML (JV) a Joint Venture Company, reported in (2020) 14 SCC 712

18. In the case of Central Organization for Railway Electrification (supra), the 3 Judges Bench of the Hon’ble Supreme Court held that when a contract agreement specifically provides for appointment of an Arbitral Tribunal consisting of 3 Arbitrators, from out of the panel of serving or retired railway officers, the appointment of the Arbitrator should be done in terms of the agreement as agreed by the parties. This judgment is in complete variance with the judgments passed in TRF Limited (supra) and Perkins Eastman (supra).

19. Due to the conflicting decisions of the Hon’ble Supreme Court and the subsequent decisions of the other Benches of the Supreme Court, like in the case of Union of India Vs. Tantia Constructions Ltd., reported in (2021) SCC OnLine SC 271, the conflicting decisions have been referred to a larger Bench for final resolution of the issue, with regard to whether the express terms provided in a contract agreement would hold sway while constituting an Arbitral Tribunal, in view of Section 12(5) and the 7^th Schedule of the Act.

20. The issue that now arises is as to which judgment should be followed by this Court. In this regard, the learned CGC has taken this Court through the judgment of the Hon’ble Supreme Court in the case of Union Territory of Ladakh & Ors Vs. Jammu and Kashmir National Conference & Anr, reported in 2023 Legal Eagle (SC) 891, wherein it has been held that when faced with conflicting judgments by Benches of equal strength of the Supreme Court, the earlier judgment has to be followed by the High Court, which would be in consonance with the decision of the Five Judges Bench of the Supreme Court in the case of National Insurance Company Ltd. Vs. Pranay Sethi, reported in (2017) 16 SCC 680.

21. Para 35 of the judgment of the Hon’ble Supreme Court in the case of Union Territory of Ladakh (supra) states as follows-

“35.We are seeing before us judgments and orders by High Courts not deciding cases on the ground that the leading judgment of this Court on this subject is either referred to a larger Bench or a review petition relating thereto is pending. We have also come across examples of High Courts refusing deference to judgments of this Court on the score that a later Coordinate Bench has doubted its correctness. In this regard, we lay down the position in law. We make it absolutely clear that the High Courts will proceed to decide matters on the basis of the law as it stands. It is not open, unless specifically directed by this Court, to await an outcome of a reference or a review petition, as the case may be. It is also not open to a High Court to refuse to follow a judgment by stating that it has been doubted by a later Coordinate Bench. In any case, when faced with conflicting judgments by Benches of equal strength of this Court, it is the earlier one which is to be followed by the High Courts, as held by a 5-Judge Bench in National Insurance Company Limited v. Pranay Sethi, (2017) 16 SCC 680. The High Courts, of course, will do so with careful regard to the facts and circumstances of the case before it.”

22. In the case of M/s Barpeta Agro Infra vs. Union of India and 2 others (Arbitration Petition No. 51/2023), this Court was to decide the question as to whether the General Manager, N.F. Railway could appoint 3 Railway Officers (retired/serving), as members of the Arbitral Tribunal in terms of Clause 34 of the contract agreement dated 02.07.2018.

23. By applying the judgment of the supreme Court in the case of Union Territory of Ladakh (supra), this Court held that it was bound to follow the earlier judgment of the Supreme Court, i.e., TRF Limited (Supra) wherein the Managing Director of N.F. Railway could not have constituted the members of the Arbitral Tribunal, in terms of Section 12(5) and the 7^th Schedule of the Act.

24. Thus, it is clear that the respondent Railways could not have constituted an Arbitral Tribunal consisting of serving/retired Railway Officers, as it was not in consonance with Section 12(5) and 7^th Schedule of the Act, in the absence of any waiver given by the petitioner to Section 12(5) of the Act.

25. In view of the reasons stated above, the Arbitral Tribunal constituted by the Railways, in terms of the letters dated 30.10.2023 are hereby set aside. As the respondents’ alternative prayer is for appointment of a Single Arbitrator, this Court appoints Mr. Justice C. R. Sarma, retired Judge of this Court as an Arbitrator, to decide the dispute between the parties. The parties shall appear before the learned Arbitrator, within a period of one month from today. The disclosures required from the Arbitrator, in terms of Section 11(8) of the Act, have already been taken.

26. The arbitration petition is accordingly disposed of.