Haryana government can pick its own arbitrator, even a former employee, says Supreme Court

A retired engineer was disqualified as an arbitrator because he used to work for the government. The government said: wait, that was 10 years ago.

The Haryana government had picked a retired Engineer-in-Chief to sit on a three-member arbitration panel. The Indian Council of Arbitration (ICA) — the body running the arbitration — said no. Too close. Too biased. The government asked for 30 days to find someone else. Before those 30 days were up, the ICA picked an arbitrator for the government. The government went to court. The District Court said it couldn't challenge the appointment. The High Court agreed. The Supreme Court did not.

The question was simple: when a contract gives each side the right to name one arbitrator, can the arbitration institution take that right away and appoint someone on a party's behalf?

2009: The road contract that led to a fight

In 2009, the Haryana government signed a BOT (Build-Operate-Transfer) agreement with a private company to build and operate two roads near Gurgaon and Faridabad. The company would build the roads, collect tolls for a fixed period, then hand the roads back to the government. A standard public-private partnership — the kind that keeps India's highways running.

Disputes arose. The company invoked the arbitration clause. Under Clause 39.2.2, each side was supposed to pick one arbitrator. Those two arbitrators would then pick a third presiding arbitrator. The company picked its nominee. The government picked a retired Engineer-in-Chief — a man who had worked for the Haryana government but had retired over a decade earlier.

The ICA objected. It said the retired engineer might be biased because he used to work for the same government that was now a party to the dispute. The government asked for 30 days to nominate a replacement. Before those 30 days expired, the ICA appointed an arbitrator on the government's behalf and constituted the three-member tribunal.

"We never gave up our right" — the government fights back

The government went to the District Court in Chandigarh under Section 15 of the Arbitration and Conciliation Act, 1996 — the provision that deals with replacing an arbitrator whose mandate has ended. The government argued: the ICA had no right to appoint an arbitrator for the state. The right to nominate belonged to the government alone, under the contract.

The District Court dismissed the petition, saying it wasn't maintainable. The Punjab and Haryana High Court agreed. The government appealed to the Supreme Court.

Meanwhile, the arbitral tribunal — which now included the arbitrator appointed by the ICA on the government's behalf — dismissed the government's challenge to its own jurisdiction under Section 16 of the Act (the tribunal's power to rule on whether it had the authority to hear the case). The government was running out of options.

The Supreme Court: "You cannot take away a party's right"

Justice Indu Malhotra and Justice Abhay Manohar Sapre allowed the appeal on January 3, 2019. The court held the ICA had acted improperly on two counts.

First, under Section 15(2) of the Arbitration Act, when an arbitrator's mandate is terminated, a substitute must be appointed "according to the rules that were applicable for the appointment of the arbitrator being replaced." The contract gave the government the right to nominate its own arbitrator. The ICA could not take that right away and appoint someone unilaterally. The 30-day period the government had asked for had not even expired.

Second, the court held that the retired engineer was not automatically disqualified. The 2015 amendment to the Arbitration Act had introduced a Fifth Schedule listing grounds for challenging an arbitrator's independence. Entry 1 of that Schedule disqualifies someone who "is an employee" of a party. The court noted the present tense — "is" — and held that only current employees are covered. A person who retired over 10 years ago is not a current employee.

The court also rejected the argument that the retired engineer fell under the broader category of "any other past or present business relationship" mentioned in Entry 1. That phrase, the court said, refers to relationships other than employment, consultancy, or advisory. It cannot be stretched to include former employees.

When the clock weakens bias

The court made a practical point: the greater the passage of time between the relationship relied upon and the arbitration proceedings, the weaker the objection of bias becomes. A person who retired over a decade ago has no continuing interest in the government's affairs. The allegation of bias was "clearly untenable."

The court cited three precedents: ACC Ltd. v. Global Cements Ltd., which dealt with arbitrator appointments; and two English cases — Locabail Ltd. v. Bayfield Properties and Re Medicaments and Related Classes of Goods (No. 2) — which laid down the test for apparent bias. The test is whether a fair-minded and informed observer would conclude there was a real possibility of bias. On the facts, the court said, no such observer would.

The end: a single judge, not a panel

For parties dealing with government entities, the judgment is a clear signal: the government's right to nominate its own arbitrator under a contract cannot be overridden by an arbitration institution. The institution must follow the procedure the parties agreed to. If a party is given time to nominate a replacement, that time must be allowed to run.

For former government employees, the judgment removes a cloud. A retired officer who left government service years ago is not disqualified from acting as an arbitrator simply because of the past relationship. The bias objection must be grounded in something real — not just the fact of former employment.

THE PLAY: When an arbitration clause gives a party the right to nominate an arbitrator, the appointing institution cannot appoint one on that party's behalf unless the party has been given a reasonable opportunity to nominate and has failed to do so.

Both sides eventually agreed to have a single retired Supreme Court judge — Justice S.S. Nijjar — decide the entire dispute as sole arbitrator. The three-member tribunal was dissolved. The case would proceed from where the earlier tribunal had left off, using the same evidence already on record.

The government got its right to nominate back. It just chose not to use it.