In the ever-complex world of contracts and dispute resolution, the concept of an independent arbitrator is often hailed as sacrosanct. But what happens when the arbitrator is intrinsically linked to one of the parties involved? A recent case before the Delhi High Court, Isar Engineers Private Ltd. v. NTPC-SAIL Power Company Ltd., throws this very question into relief, and the answers aren't simple.

The case revolves around a project awarded to Isar Engineers (“Petitioner”) for civil works on an ash dyke. Disputes arose, delays plagued the project, and eventually, the contract was terminated. The arbitration clause stipulated that the General Manager/Business Unit Head (“GM”/”BUH”) of NTPC-SAIL (“Respondent”) would be the sole arbitrator. The Petitioner, wary of potential bias, requested an independent arbitrator, which was denied.

The crux of the matter lies in the challenge to the arbitral award predicated on the assertion that the designated arbitrator, the GM, had an inherent conflict of interest. The Petitioner contended that, given the GM’s direct involvement in the project’s execution and the subsequent decision to terminate the contract, impartiality was compromised. Furthermore, the Petitioner challenged the procedural validity of successive General Managers automatically assuming the role of arbitrator upon their predecessor’s departure, arguing it contravened Clause 56 of the General Conditions of Contract (“GCC”), which mandates appointment by the Chairman and Managing Director of NTPC.

The Court, in its analysis under Section 34 of the Act, considered the Petitioner's challenge to the ex-parte arbitral award. The Court examined the validity of the arbitrator's appointment, particularly in light of the pre-2015 amendment regime of the Act, which did not per se disqualify an employee of a party from acting as an arbitrator. However, the Court acknowledged the Petitioner's right to demonstrate justifiable apprehension regarding the arbitrator's independence and impartiality.

The Court scrutinized Clause 56 of the GCC, noting that it designated the GM as the named arbitrator and stipulated that no objection would be raised even if the arbitrator was an employee of the Respondent, and had to deal with matters to which the contract relates. A further critical contention was the automatic succession of General Managers as arbitrators. The court, found merit in this argument, adding another layer of complexity to the issue.

The Hon’ble Court, relying and reiterating the recent case of Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) A Joint Venture Co., 2024 SCC OnLine SC 3219 which dealt with unilateral appointments of arbitrators, concluded in the present case that, the award was liable to be set aside. The Court held that both, the apprehensions of impartiality as well as the subsequent procedure of appointments of arbitrators, was contravening the agreement. It was highlighted that the Arbitrator is a creature of the contract and has to function within four corners of contract. If the appointment mechanism is contemplated, the same must be followed in its true letter, spirit and intent, failing which the Arbitrator is without jurisdiction and the appointment is non-est.

The Delhi High Court's decision highlights a critical balance in arbitration: the balance between party autonomy (the freedom to agree on the terms of dispute resolution) and the fundamental principles of fairness. While parties can agree to have an employee serve as an arbitrator, the question remains: at what point does that relationship compromise impartiality?

By - Sayjal Deshpande