Independence and Impartiality in Adjudication of Arbitral Proceedings
The
Arbitration and Conciliation Act of 1996- Pre Amendment Situation
Section 11 of the Act provided
for the Appointment of the arbitrators by the parties. Further Section 12([1])
of the Act specified the grounds for challenging an arbitrator. It simply laid
down that an arbitrator shall disclose any circumstances to the parties which
shall give rise to doubts as to his independence and impartiality before and
after appointment. Further it specified that any appointment may be challenged
only if doubtful circumstances exist as to his independence or impartiality; or
if he does not possess the qualifications as agreed between the parties after
the appointment has been made.
Shortcomings
Ø Vague and uncertain
language as to indefinite provisions to ensure that an arbitrator appointed to
adjudicate the disputes between parties is indeed unbiased.
Ø Silent as to what constitutes
Justifiable Guidance.
Ø Silent as to what
renders an arbitrator ineligible to act.
Ø Above uncertainties
rendered the Act toothless with reference to the virtues of independence,
impartiality and neutrality of an arbitrator.
Law Commission's 246th
Report
The Law Commission of India examined various
shortcomings in the working of the Act and in its first report, i.e. 176th Report
the said Commission made various suggestions for amending certain provisions of
the Act. This exercise was again done by the Law Commission of India in its 246th
in August, 2004, which led to the enactment of the Arbitration and Conciliation
(Amendment Act), 2015 (“Amendment Act”). The amendment brought a major change
in the Section 12 of the 1996 Act.
The
Arbitration and Conciliation Act - Post 2015 Amendment
The
Amendment Act of 2015 led to the significant changes in the "grounds
for challenge" of an arbitrator :
- amendment
of Section 12(1) of the Act, now mandates an arbitrator to disclose in
writing existence of any direct/indirect, past or present relationship
with any of the parties to such dispute, which may raise justifiable
doubts as to his impartiality. It also introduced Schedule V to the Act[2],
provides guidance on what constitutes such "justifiable doubts";
- Introduction
of Section 12(5) to the Act with the simultaneous introduction of Schedule
VII, which specifies certain categories that render an arbitrator
ineligible to act
Grounds
that may render an arbitrator ineligible for appointment
Ø Arbitrator's
relationship with the parties or counsel (14 grounds);
Ø Relationship of the
arbitrator to the dispute (2 grounds);
Ø Arbitrator's direct or
indirect interest in the dispute (3 grounds).
Section 12(5) is reproduced as under:
"(5) Notwithstanding any
prior agreement to the contrary, any person whose relationship, with the
parties or counsel or the subject-matter of the dispute, falls under any of the
categories specified in the Seventh Schedule shall be ineligible to be appointed
as an arbitrator: Provided that parties may, subsequent to disputes having
arisen between them, waive the applicability of this sub-section by an express
agreement in writing"
- Section
14 of the Act has been amended to include the provision of substitution of
another arbitrator, upon termination of the mandate of an arbitrator[3].
Ensuring
Independence and Impartiality
Section 12 of the Amended Act
provided that the person who has been approached in relation to his possible
appointment as an arbitrator must give disclosure regarding any direct,
indirect of past or present relationship with any of the parties or in relation
to any interest in the subject matter in dispute etc. which may raise
legitimate doubts on his independence and impartiality. Further, such person is
also required disclosure regarding any situation or circumstance which may
impact his ability to devote sufficient time to arbitration. The said
disclosure must be provided in such form as prescribed in the sixth schedule of
the Amendment Act.
Fifth schedule enlisted the guiding
factors in determining whether such circumstances exist which may give rise to
justifiable doubts as to the independence and impartiality of the arbitrator.
Further, if the relationship of
the person, who has been approached to be appointed as the arbitrator, and the
parties or the counsel or the subject matter falls within the forbidden
categories, as enumerated in the seventh schedule of the Amendment Act, then
such person shall be considered ineligible to be appointed as an arbitrator.
Judicial
Precedents which clarified the amended Provisions
Before the Amendment Act, it was
a generally accepted norm that arbitration agreements in government, statutory
and public-sector contracts would contain a named arbitrator, that would
generally be a departmental head.
Issue No. 1: What could be called
'apparent bias'?
Courts did not recognize the
concept of 'apparent bias' in situations like these. Hon'ble Supreme Court of
India, in Indian Oil Corporation v. Raja Transport (P) Ltd[4].,
has held:
"...senior officer/s
(usually heads of department or equivalent) of a government/statutory
corporation/public sector undertaking, not associated with the
contract, are considered to be independent and impartial and are not
barred from functioning as Arbitrators merely because their employer is a party
to the contract."
However, in Union of India v.
Singh Builders Syndicate[5],
the Hon'ble Supreme Court had suggested that the government, statutory
authorities and government companies should consider phasing out arbitration
clauses providing for appointment of serving officers and encourage
professionalism in arbitration.
Post Amendment Situation and One
Landmark Judgement
Post Amendment, a landmark
judgement was pronounced by the Supreme Court in order to highlight the
importance of independence of an arbitrator.
The Apex Court in Voestalpine
Schienen GmBH v. Delhi Metro Rail Corporation Limited[6]
held that independence and impartiality of the arbitrator are the hallmarks in any arbitration proceeding. The moot issue was whether the arbitration clause
providing for appointment of arbitrators from a panel of arbitrators was
contrary to the parameters of impartiality and eligibility as per amended
section 12 of the Act.
Factual
matrix
Ø The petitioner, VSG, is a Company
registered under the laws of Austria and has its branch office in India. The
respondent, DMRC, awarded the contract dated 12th August, 2013 to the
petitioner for supply of rails.
Ø Certain disputes arose between
the parties and the petitioner being aggrieved by actions of Respondent desired
for resolution of the dispute by means of arbitration, as provided in Clause
9.2 of General Conditions of Contract
read with Clause 9.2 of Special Conditions of Contract executed between
the parties.
Ø Clause 9.2(A) of the SCC
prescribed a particular procedure for constitution of the arbitral tribunal
which, inter alia, stipulated that the respondent shall forward names of
five persons from the panel of arbitrators maintained by the respondent and the
petitioner will have to choose his nominee arbitrator from the said panel.
Ø As per this provision, the
respondent had, in fact, furnished the names of five such persons to the
petitioner with a request to nominate its arbitrator from the said panel.
However, this was unacceptable to the petitioner on the grounds that the panel
consisted of serving or retired engineers either of respondent or of Government
department or public sector undertakings.
Ø The petitioner claimed that the
panel did not consist of independent arbitrators. Thus, according to the
petitioner, due to the amendment of Section 12 of the Act, such a panel had
lost its validity being contrary to the law of the land.
Findings of the Court
Supreme Court held
that the arrangement may result to adverse consequences.
Firstly, the choice given to the petitioner was very limited , the availability
of free choice to nominate a person out the entire panel list, which was
prepared by DMRC, was completely absent.
Ø Secondly, with the
discretion given to DMRC to choose five persons, a room for suspicion was
eventually created in the mind of the petitioner that DMRC may have picked up
its own favourites. This may lead to impartiality of the arbitrator towards
DMRC.
Ø Thus, the Supreme Court
held that the sub-clauses (b) & (c) of clause 9.2 of SCC warrants deletion
and appropriate choice must be provided to the parties to nominate any person
from the entire panel of arbitrators. Likewise, the two arbitrators nominated by
the parties should be given full freedom to choose the third arbitrator from
the panel.
Ø Further, it was also held
that it is imperative to have a much broad-based panel, so that there is no
misapprehension between the parties that there is any possibility of principle
of impartiality and independence being compromised at any stage of the
arbitration proceedings, especially at the stage of constitution of the
arbitral tribunal.
Ø According,
the parties were directed to prepare a broad based panel on the aforesaid lines
within a period of two months.
Issue No. 2--Whether a former employee of an
organization is disqualified to act as an arbitrator in a dispute involving the
organization?
Many rulings allowed a former employee outside the purview of the Entry 1
Seventh Schedule. In the aforesaid cases, the Courts applied the literal rule
of construction, thereby holding that former employees are not disqualified to
act as arbitrators in a dispute involving their employers.
Jurisprudence, as developed by
the Courts
Patna High Court
Hindustan Steel Works Construction Limited Vs.
Union of India & Ors.[7]
o Considering
whether a panel of retired Railway Officers who were associated with the
Railway Administration would be impartial arbitrators, ruled that the purpose
behind the amendment of Section 12 of the Act was to ensure that the arbitrator
appointed is independent and discharges his duties without hindrance.
o The Court relied heavily on the decision in M/s. Voestalpine Schienen GMHB V. Delhi Metro Rail Corporation Ltd., and did not approve of the panel. The Court observed the Law laid down by the Hon'ble Supreme Court in the case of Delhi Metro Rail Corporation Ltd. (supra) is correct.
o Court was
of the considered view that as all these officers were in some way or the other connected with the Railway Administration either through the Railway Board or
other zonal Railways the dispute in question pertains to an agreement executed
as per the guidelines of the Railway Board, it is not appropriate to approve
the aforesaid panel.
High Court of Delhi
Afcons Infrastructure Limited V. Ircon International
Limited[8],
o Court appointed a
broad-based arbitration panel instead of the existing panel of retired Railway
Officers empanelled to work as Railway Arbitrator. Further, the Court clarified that though
appointment of an ex-employee as an arbitrator did not fall within the rigor of
Section 12(5) of the Act read with the Seventh The issue whether a person
disqualified under Section 12(5) of the Act read with the Seventh Schedule to
act as an arbitrator can nominate an arbitrator was resolved and Court held that if the
nomination of an arbitrator by an ineligible arbitrator is allowed, it would be
tantamount to the ineligible arbitrator carrying on the proceeding of
arbitration by proxy.
o In order to bar the same, it was held that once an arbitrator has become ineligible by operation of law, he cannot nominate another person as an arbitrator. The Court observed that; Schedule to the Act undeniably it did give rise to apprehensions (whether justifiable or not) in the minds of the other party, and it was essential that all parties have full confidence in the arbitral process.
Supreme Court of India
TRF
Ltd. v. Energo Engineering Projects Ltd.[9]
o Court
relied upon the maxim "Qui facit per alium facit per se" (What one
does through another is done by oneself). To put it in another form, that which
cannot be done directly may not be done indirectly by engaging another outside
the prohibited area to do the illegal act within the prohibited area.
o
It
is immaterial whether, for the doing of such an illegal act, the agent employed
is given the wider powers or authority of the "pucca adatia", or, as
the High Court had held, he is clothed with the powers of an ordinary
commission agent only."
o Court did not concern itself with the concept of
apprehension of bias or suitability or respectability of the arbitrator while
coming to its decision, but strictly limited itself to the question of
authority and power of the ineligible named arbitrator.
Aditya Jain is an Advocate on Record, Supreme Court of India and Partner at J&G Advocates
Neha Gyamlani is an Advocate at Supreme Court/Rajasthan High Court and Partner at J&G Advocates
1.
When a person is approached in
connection with his possible appointment as an arbitrator, he shall disclose in
writing any circumstances likely to give rise to justifiable doubts as to his
independence or impartiality.
2.
An arbitrator, from the time of his
appointment and throughout the arbitral proceedings, shall, without delay,
disclose to the parties in writing any circumstances referred to in sub section
(1) unless they have already been informed of them by him.
3.
An arbitrator may be challenged
only if-
circumstances
exist that give rise to justifiable doubts as to his independence or
impartiality, or
he does not
possess the qualifications agreed to by the parties. A party may challenge an
arbitrator appointed by him, or in whose appointment he has participated, only
for reason, of which he becomes aware after the appointment has been made.
[2] Grounds
that give rise to justifiable doubts as to the independence or impartiality of
arbitrators:
o Arbitrator's relationship with the
parties or counsel (14 grounds)
o Relationship of the arbitrator to the
dispute (2 grounds);
o Arbitrator's direct or indirect interest
in the dispute (3 grounds);
o Previous services for one of the parties
or other involvement in the case (5 grounds);
o Relationship between an arbitrator and
another arbitrator or counsel (5 grounds);
o Relationship between arbitrator and
party and others involved in the arbitration (2 grounds);
Other circumstances (3 grounds).
[3]
Section 14 as amended states the following -
"(1) The mandate of an arbitrator shall
terminate and he shall be substituted by another arbitrator, if-
(a) he becomes de jure or de facto unable to
perform his functions or for other reasons fails to act without undue delay;
and
(b) he withdraws from his office or the parties
agree to the termination of his mandate.
(2) If a controversy remains concerning any of the grounds referred to
in clause (a) of sub-section (1), a party may, unless otherwise agreed by the
parties, apply to the Court to decide on the termination of the mandate.
(3) If, under
this section or sub-section (3) of section 13, an arbitrator withdraws from his
office or a party agrees to the termination of the mandate of an arbitrator, it
shall not imply acceptance of the validity of any ground referred to in this
section or sub-section (3) of section 12."
[8] Afcons Infrastructure Limited V. Ircon
International Limited [ARB.P. 21/2017, decided on May 29, 2017
(High Court of Delhi)]
[9] TRF Ltd. v. Energo Engineering Projects Ltd. [Civil
Appeal No. 5306 of 2017, decided on July 3, 2017. (Delhi High Court)].
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