Independence and Impartiality of Arbitral Tribunal

The Arbitration and Conciliation Act, 1996 [“the Act”] provides a speedy resolution of disputes to the litigants with minimal judicial interference. These two fundamental features of the Act are reflected in Section 29A of the Act which inter alia enjoins the Arbitral Tribunal to pass the Arbitral Award in a time bound manner i.e. within a period of 12 months from the date of completion of pleadings. Section 5 of the Act, on the other hand, limits the intervention of the court except where so provided under the Act. Another alluring feature of the Act making it a lucrative mechanism for adjudication of disputes is “party autonomy” i.e. the parties under the Act have been granted expansive powers to dictate the course of arbitration proceedings. The most palpable features of “party autonomy” can be found in the following provisions of the Act viz –

Section 10 allows parties the freedom to decide the number of arbitrators.
Section 11(2) allows parties the freedom to agree on a procedure for appointing the arbitrator or arbitrators.
The proviso to Section 12(5) allows parties to waive applicability of Section 12(5) by way of an express agreement in writing.
Section 13 allows parties to determine their own procedure qua challenging the appointment of the arbitrator.
Section 19 allows parties to determine their own procedure to be followed by the arbitral tribunal.
Section 20 allows parties to determine the seat and venue of the arbitration proceedings.
Section 21 allows parties to agree upon the language to be used in arbitration proceedings.
Section 24 allows parties to decide upon the procedure for presentation of evidence.
Section 26 grants autonomy to the parties regarding appointment of experts.
Section 29 allows parties to agree regarding the decision making by the panel of arbitrators.
Section 29A (3) allows parties to extend the period of the for passing the Arbitral Award by a period of 6 months.

The provisions granting absolute autonomy to the parties under the Act, begin with “unless otherwise agreed by the parties” making it clear at the very outset that “party autonomy” is of paramount importance. The Courts in India, on various occasions have described “party autonomy” as the brooding and guiding spirit¹ and backbone of arbitrations².

Independence and Impartiality of the Arbitral Tribunal

The principle of “party autonomy” is however, not absolute and subject to just exceptions envisaged under the Act. The Arbitration proceedings are quasi-judicial in nature which enjoin the Arbitrator to follow the principles of natural justice. This is also reflected in Section 18 of the Act which categorically states that the parties shall be treated with equality and each party shall be given full opportunity to present its case. To impart the function of fairly adjudicating the dispute between the parties, it is essential that the arbitrator appointed by the parties is unbiased and does not have any personal interest in the outcome of the proceedings. In some arbitration clauses, one party is granted the unfettered discretion to appoint the sole arbitrator which immediately raises eyebrows as to the independency and impartiality of such an arbitrator to adjudicate the dispute. To ensure the independency and impartiality of the arbitrator, the legislature incorporated Section 12(1) and Section 12(5) in the Act by way of Arbitration and Conciliation Act (Amendment) Act 2015 [“the 2015 Amendment”].

Section 12(1) of the Act enjoins the arbitrator to make disclosure in writing with respect to circumstances which may give justifiable doubts as to his independence or impartiality. For determining whether the circumstances as disclosed by the arbitrator give rise to justifiable doubts, the fifth schedule to the Act must be referred to which envisage such grounds which can be categorised as follows-

The relationship of the arbitrator with the parties or counsel;
The relationship of the arbitrator to the dispute.
The arbitrator’s direct or indirect interest in the dispute;
Previous services rendered by the arbitrator to one of the parties or other involvement in the case;
Relationship between an arbitrator and another arbitrator or counsel;
Relationship between arbitrator and party and others involved in the arbitration, and
Other circumstances.

Section 12(5) of the Act stipulates that if a person’s relationship with any of the parties, counsel or subject matter of the dispute falls under any of the categories under the seventh schedule, then he shall be ineligible to be appointed as an arbitrator. The seventh schedule to the Arbitration Act divides the specified category based on three factors-

Arbitrator’s relationship with the parties or counsel.
The relationship of the arbitrator to the dispute.
Arbitrator’s direct or indirect interest in the dispute.

The fundamental difference between Section 12(1) and 12(5) is that, for challenging the appointment of an arbitrator on justifiable doubts as per Section 12(1)(a) read with fifth schedule, it is the arbitral tribunal itself which will decide the challenge under Section 13(2). On the other hand, if an arbitrator has become “ineligible” as per Section 12(5) read with seventh schedule, then the parties must approach “Court” under Section 14(2). For a detailed analysis of workability of Section 12,13 and 14, refer here. Another striking feature of “party autonomy” is reflected in proviso to Section 12(5) which empowers the parties to waive the application of sub-section 12(5) by way of an express agreement in writing.

The constitution bench in CORE observed that the independence of an arbitrator can be deduced objectively because the dependance arises from the relationship between an arbitrator and one of the parties, or somebody closely connected with one of the parties. In comparison, the existence of impartiality is inferred form facts and circumstances surrounding an arbitrator’s exercise of quais-judicial functions. An arbitrator will not be automatically disqualified in situations where relationship of an arbitrator with the parties does not fall under the categories mentioned under the seventh schedule. Yet, either of the parties may have “justifiable doubts” about the independence or impartiality of the arbitrator. The party challenging the appointment of an arbitrator does not need to demonstrate that the arbitrator lacks “independence or impartiality”. It only needs to show that there are possible “doubts” as to an arbitrator’s independence or impartiality.

The Delhi High Court in Poonam Mittal vs M/s Create Ed Pvt. Ltd.³ observed that the allegation of bias against the arbitrator is invoked far too flippantly in order to seek his substitution. The court then went on to demonstrate how the allegation of “bias” can be demonstrated against an arbitrator, as follows-

“9.Bias, I feel, is a concept which is invoked, more often than not, far too flippantly. It is a concept of legal misconduct which is sui generis, especially when applied to a judicial functionary – which, in the ultimate eventuate, the arbitrator, too, undoubtedly is. It exists in the mind, and in the mind alone, and can only be manifested by outward actions. Psychoanalysis being outside the domain expertise of courts, the action of the authority, to be characterised as bias, must be stark and unconscionable. It must indicate a predilection to decide against one party or the other, and, normally, the motive or propulsion for bias must also be discernible. A judge may pass an erroneous, or a manifestly illegal, or even a markedly perverse, order; he may conduct proceedings in a manner which cannot commend itself to any rightthinking individual; he does not, even then, become biased. The record must transparently disclose an animus against one of the parties to the lis before him for a judge to be regarded as biased.”

Can a party unilaterally appoint an arbitrator?

The aforementioned comprehensive disclosures were not the norm before the 2015 Amendment and therefore, prior to 2015, Courts allowed unilateral appointment of arbitrator i.e. one party having unfettered discretion to appoint an arbitrator of his choice⁴. The arbitration clauses in the nature of unilateral appointment are mostly found in government contracts which inter alia stipulate that in case of dispute, the same shall be adjudicated by a sole arbitrator appointed by the government or in case of dispute, the parties shall appoint an arbitrator from a curated list of arbitrators prepared by the government. The arbitration clauses of such nature came under heavy scrutiny post 2015 Amendment due to application of the amended Section 12.

In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation⁵, the arbitration clause stipulated that in case of dispute the DMRC will make a list of five arbitrators from a curated list of former government employees and both the parties shall choose one arbitrator each from the said list and the two chosen arbitrators will choose the third arbitrator from the list. When a question arose whether the aforesaid procedure violated Section 12(5) of the Act, the Supreme Court held that Section 12(5) read with seventh schedule does not put an embargo on retired government employees from serving as arbitrators. In contrast, a three-judge bench of the Supreme Court in TRF Ltd. vs Energo Engineering Projects Ltd.⁶ invoked the maxim qui facit per alium facit per se (what one does through another is done by oneself) to hold that a person who becomes ineligible to be appointed as an arbitrator cannot nominate another person as an arbitrator. Similarly, in Perkins Eastman Architects DPC vs HSCC (India) Ltd.⁷ the Supreme Court relied upon TRF (supra) to hold that a person having an interest in the dispute “cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator”.

In Central Organization for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company [2019] 16 SCR 1234 [“CORE”] the arbitration clause envisaged that in case of dispute, it will be referred to a panel of three retired railway officers and for this purpose, the railway will send a list of four names of retired railway officers empaneled to work as railway arbitrator and the contractor will have to choose two names out of the panel from which the General manager will choose one of them as the contractor’s nominee and also choose the balance arbitrators. This arbitration clause was upheld by the Supreme court after placing reliance upon Voestalpine (supra). However, a three-judge bench of Supreme Court in Union of India vs Tantia Constructions Limited⁸ disagreed with CORE (supra) which led to formation of a constitution bench in the matter of Central Organization for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company⁹, [“CORE constitution bench decision”] to answer various issues emanating from divergent views of Supreme Court’s decisions.

The principle of equality applies at the stage of appointment of arbitrators

The constitution bench observed that arbitration proceedings are quasi-judicial proceedings and therefore the law requires the arbitral tribunal to act objectively and exercise their discretion in a judicial manner, without caprice, and according to the general principles of law and rules of natural justice. The incorporation of Section 12(5) is a recognition of the well-established principle that quai-judicial proceedings should be conducted consistent with the principles of natural justice. Furthermore, Section 18 of the Act serves as guide for arbitral tribunals to follow the principles of equality and fairness during the conduct of arbitral proceedings. The Supreme Court observed that the arbitral proceedings, being adversarial in nature must have procedural equality which contains the following indicia-

Equal capability of parties to produce facts and legal arguments.
Equal opportunities to parties to present their case.
Neutrality of the adjudicator.

“In a quasi-judicial process such as arbitration, the appointment of an independent and impartial arbitrator ensures procedural equality between parties during the arbitral process…Equal participation of parties in the process of appointment of arbitrators ensures that both sides have an equal say in the establishment of a genuinely independent and impartial arbitral process..Therefore, the principle of equal treatment of parties applies at all stages of arbitral proceedings, including the stage of the appointment of arbitrators.”

The constitution bench emphatically emphasized upon the maxim nemo judex in causa sua i.e. no one shall be a judge in their own case. Ironically, a very glaring feature inconsistent with the aforesaid maxim is reflected in Section 13(2) of the Act. As per Section 13(2), a party who has justifiable doubts as to the independence and impartiality of the arbitrator may file a written statement of reasons for the challenge before the Arbitral Tribunal. Therefore, it is the Arbitrator himself deciding whether justifiable doubts exist as pointed out by the challenging party as to his independence and impartiality. Most often than not, the arbitrator dismisses the challenge. Now one may argue that the challenging party is not rendered remediless as Section 13(5) of the act provides a recourse to the party to file an application for setting aside the arbitral award under Section 34 of the Act. However, this procedure is quite unfair for the challenging party as the grounds for challenging an arbitral award are extremely limited.

Unilateral appointment of arbitrators is violative of the equality clause under Section 18

Section 18 of the Act, at the very outset, states that the parties shall be treated with equality. Arbitration proceedings being quasi-judicial and adversarial in nature further reinforces the fact the proceedings must be in consonance with the rules of natural justice and devoid of arbitrariness or procedural impartiality. In view thereof, the constitution bench, after a detailed analysis, observed that if a person having a financial interest in the outcome of the arbitral proceedings unilaterally nominates a sole arbitrator, it is bound to give rise to justifiable doubts on the independence and impartiality of the arbitrator. A clause that allows one party to unilaterally appoint a sole arbitrator is exclusive and hinders equal participation of the other party in the appointment process of arbitrators. The court observed that although the Act does not prohibit parties to an arbitration agreement from maintaining a curated panel of potential arbitrators. However, the problem arises when the Government entity or one party to the contract make it mandatory for the other parties to select their nominees from the curated panel of arbitrators. In Voestalpine (supra) and CORE (supra), one of the parties curated a panel of arbitrators and mandated the other party to select their arbitrator from the panel. The court observed that since the curation of the list is exclusively undertaken by one party, the other party is effectively excluded from the process of curating the panel from which exclusively, the appointment of an arbitrator is to be made. This process renders the other party to select its arbitrator from a curated panel, restricting their freedom to appoint an arbitrator of their choice. This is against the principle of equal treatment envisaged in Section 18 of the Act.

Observing in above terms, the Supreme Court overruled the decisions in Voestalpine (supra) and CORE (supra) and upheld the decisions in TRF (supra) and Perkins (supra) wherein the Supreme Court had inter alia observed that a person having an interest in the dispute “cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator.”

Conclusion

The arbitrators appointed under the Act, unlike a judge, are not sensitized to the judicial process, in the sense that they may have prior commercial or professional contacts and relationships with either of the parties to the dispute which makes it imperative to ascertain that the arbitrators appointed under the Act are impartial and devoid of any bias. For this purpose, the legislature has incorporated Section 12(1) and 12(5) in the Act to determine the independence and impartiality of the arbitrator. Despite a comprehensive mechanism laid down in Section 12, to determine the independence and impartiality of the arbitrator, some PSUs still managed to bypass the test of impartiality and independence embodied in Section 12, by unilaterally appointing their own arbitrators in the garb of providing an opportunity to the other party to select an arbitrator from a curated list prepared by the PSU. This has been categorically frowned upon and held to be antithetical to Section 18 of the Arbitration Act by the Supreme Court. The constitution bench decision in CORE fortifies the faith in arbitral proceedings and upholds the principle of equality embodied in Section 18 of the Act.

By Daksh Pandit