Indian Supreme Court on the appointment of directors and employees as arbitrators

Devan Parikh, Senior Advocate and Arbitrator, India

The Indian Supreme Court has recently clarified the legal position with regard to the appointment of directors and employees of companies and government enterprises as arbitrators.

In Denel (Proprietary) Limited v Bharat Electronics Limited and another (2010) 6 SCC 394, the respondent (Bharat) (a Government of India Enterprise) had placed certain purchase orders with the claimant (Denel) (a company wholly owned by the government of South Africa), for the delivery of electrical equipment which was duly delivered. Bharat accepted the goods but refused to pay on the ground that it is a government company under the control of the Ministry of Defence and that the Ministry had issued a direction to withhold payment. The purchase orders contained an arbitration clause which provided for the appointment of the Bharat's managing director, or his nominee, as arbitrator. Denel filed a petition for the appointment of an independent arbitrator.

The Supreme Court referred to its earlier judgment in the case of Indian Oil Corporation v Raja Transport Pvt.Limited (2009) 8, SCC 520, in which it held that while the appointment of an employee as an arbitrator is not ipso facto a ground to raise a presumption of bias, if such a person was the controlling or dealing authority in regard to the subject contract, or if he was a direct subordinate of such an officer, then there would be a justifiable apprehension about his independence or impartiality. However, a senior officer of a government or statutory body/company, who has nothing to do with the execution of the subject matter, can be appointed in the absence of any specific evidence as to bias. A distinction has to be drawn between a person who is an employee of a company or a body which is a commercial entity and one who is an employee of a state or state entity. Thus, a director of a private company cannot be appointed as an arbitrator, but a senior officer of a government undertaking can be so appointed, as long as he is not directly connected with the relevant contract. This is subject to specific evidence about his lack of independence or impartiality.

The Supreme Court took the view that, although the managing director in this case was the managing director of a government enterprise, that enterprise was under the control of the Ministry of Defence. The non-payment by Bharat which was the subject of the arbitration was due to instructions issued by the Ministry of Defence itself. In those circumstances, it was possible that the managing director might not be in a position to remain independent. Therefore, in the circumstances of this case, the Supreme Court appointed a third person as the sole arbitrator.

 
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