Aravali Power Company Pvt. Ltd. v. M/S. Era Infra Engineering Ltd.

Civil Appeal · 2017 INSC 894Decided 12 Sept 2017
Civil Appeal Nos. 12627-12628 of 2017
Justice Adarsh Kumar Goel · Justice Uday Umesh Lalit

Background

Aravali Power Company awarded a construction contract to Era Infra Engineering for a thermal power project township in Haryana. When the project fell behind schedule and Aravali cancelled part of the remaining work, Era invoked the contract's arbitration clause, which named Aravali's own Chief Executive Officer as the sole arbitrator. Era later challenged this appointment as biased, and approached the Delhi High Court, which set aside the CEO's appointment as arbitrator and directed Aravali to offer a panel of alternative arbitrators instead.

Decision Breakdown

The Supreme Court held that, under the law as it stood before the 2015 amendment to the Arbitration Act (which governed this dispute, since arbitration had been invoked before the amendment took effect), merely being an employee of one of the parties does not automatically disqualify an arbitrator: bias can only be presumed if that employee was the "controlling or dealing authority" for the specific contract in dispute, or was a direct subordinate of the official whose decision was being challenged. Examining the reporting hierarchy, the Court found Aravali's CEO was neither directly involved in the day-to-day contract administration nor the immediate superior of the officials who made the disputed cancellation decisions, so no justifiable doubt about his impartiality was shown. The High Court's reliance on the newer (post-2015) "neutrality" standard was therefore misplaced for a pre-amendment dispute. The Court allowed Aravali's appeal (restoring the CEO's appointment) and dismissed Era's cross-appeal (which had sought a panel-based selection process), directing arbitration to proceed under the originally appointed arbitrator.

Lesson Learnt

Whether an employee-arbitrator named in a contract is disqualified for bias depends on their actual role in the specific dispute, being employed by one party is not, by itself, enough to remove them; the challenging party must show a real, specific conflict of interest, and the rules that applied at the time arbitration was invoked (not later amendments) govern the dispute.

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