Contractual Clauses Must Provide for Broad Panel of Arbitrators

In Telex Advertising v. Central Railway [2024 BHC-OS 6304] dated March 27, 2024, the High Court of Bombay held that the independence and impartiality of an arbitrator is fundamental to arbitration proceedings and that the absence of a broad panel of arbitrators to choose from is violative of Section 12(5) of the Arbitration and Conciliation Act, 1996.

The present case consists arbitration applications arising from two separate contracts of the applicants. The first application was filed by Telex Advertising Pvt. Ltd. against Central Railway pursuant to a tender being floated for display of advertisement rights. Telex Advertising was issued a letter of acceptance awarding advertisement rights for a period of five years. In the wake of pandemic-related restrictions, commutation through the Railways was restricted. Accordingly Telex sought a renegotiation of terms of the contract for a pro rata reduction in license fee due to the decrease in footfall, in the absence of which the contract would be terminated. The Central Railways however, declared a non-operational period, treating it as Dies Non and announced no relief in payment of license fees. Telex expressed its intention to terminate the contract and refused to pay the fees, leading to show-cause and demand notices. An independent arbitrator was sought.

The second application was brought by N.P Enterprises filed against Western Railway pursuant to entering into a contract for manual cleaning and housekeeping of 13 railway stations for four years. Due to the pandemic, N.P Enterprises was directed to reduce manpower and issued a letter of deployment wherein the Railways raised certain issues regarding the payments to workers. N.P. Enterprises responded to this letter claiming outstanding worker payments, resulting in their blacklisting, termination of the contract and a debarment for two years. While an application to the court brought a stay on blacklisting, the initiation of arbitration proceedings was left open. N.P. Enterprises invoked arbitration proceedings seeking the Railways to appoint a sole arbitrator.

The main issue for consideration before the court revolved around the clause contained in the General Conditions of Contract (GCC) of the Railways, according to which an Arbitrator for a dispute has to be appointed from the panel of four of their employees. This condition was challenged in light of the requirement of the independence of the arbitrator.

In its consideration of the issue the Court pointed out that the fundamental principle of arbitration proceedings was the need for an independent and impartial arbitrator. With regard to the first application in particular, the Court, placing reliance on the case of Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation [(2017) 4 SCC 665], observed that arbitrators must be neutral and free from any past relationships with the parties. It stated that the choice given to the other party is limited, as it had to choose amongst one of the names forwarded, and that there was no free choice to nominate a person outside of such panel. 

The Court emphasized the need for a broad-based panel of arbitrators to instill confidence and provide ample choice for selection. While the Court stressed on the importance of adhering to contractual arbitration clauses, it held that such clauses should not contravene Section 12(5) of the Arbitration and Conciliation Act, 1996 and must allow for a broad panel of arbitrators to ensure fairness and impartiality.