The Independence and impartiality of Arbitrators are the most quintessential characteristic and the bedrock of Arbitration. However, the very question of the independence and impartiality of the Arbitratorsraises several questions and doubts, wherein the method of appointing the Arbitrators can lead to an unfair tilt of the tribunal favouring one party over the otherand thereby adversely effecting the final Arbitral award which would be coloured with biasness; further leading to knocking the courts doors and getting trapped in the vicious circle of litigation.
Basis, the concept of Alternate Dispute Mechanism,parties have been given the option of choosing Arbitrations over Courts to resolve disputes. The main idea for any party to choose Arbitration is to expedite the process and avoid the long tedious procedure of litigation in resolving disputes. Arbitrations provide the parties a more informal and speedier outcome, unlike the Courts. In recent times with the tremendous growth and influx in businesses, billions offunds are at stake basis a single agreement/contract; and with so many contracts and agreements being signed everyday between contracting parties, the parties do not want to impact their growth and burden themselves with litigation, keeping in mind the cost and time involved, resultantly the dispute clause in majority has arbitrations as the more favourable choice of dispute resolution.
The lawmakers have time and again brought about various amendments to the Arbitration and Conciliation Act to strengthen the Act and remove any existing loopholes. The amendments to the Arbitration and Conciliation Act 1996 in 2015, which adopted the international best practices from the International Bar Association Guidelines on Conflict of Interest (“IBA Guidelines”), aimed to reinforce not only the neutrality of Arbitrators, but also the perception of neutrality as envisaged.
The Amendment to the Arbitration and Conciliation Act 1996 (“Act”) in 2015
Prior to the amendment, Section 12(3) of the Arbitration and Conciliation Act 1996 provided that:
“(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.
(3) An arbitrator may be challenged only if-
(a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
(b) He does not possess the qualifications agreed to by the parties.”
The Amendment to the Act:-
The Arbitration and Conciliation (Amendment) Act 2015 (“Amendment Act”) further explained the circumstances under which such arbitral appointments may be challenged. Section 12(1) of the Arbitration and Conciliation Act 1996 was replaced with the following section:
“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —
(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular their ability to complete the entire arbitration within a period of twelve months.”
The Amendment Act also inserted a new Fifth Schedule, which lists the grounds and circumstances that would give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Additionally, Section 12(5) of the Arbitration and Conciliation Act was inserted:
“(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.”
The recent Amendment of the Act in 2015 regarding the Principle of independence and neutrality has been laid down, wherein the 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. The newly introduced Schedule V to the Act, provides guidance on what constitutes such “justifiable doubts”;
And further 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.
The main crux of the amendment to the section 12 of the Act is that the new law asks the Arbitrator for a declaration regarding his independence and impartiality; thereby making the Arbitrator more answerable and responsible before accepting any Arbitration. Further, a Schedule has been inserted (Fifth Schedule) which lists down the grounds that would give rise to justifiable doubt to the independence and impartiality of Arbitrator, it is imperative to note that the conditions given in Fifth Schedule are very exhaustive. Any person not falling under any of the grounds mentioned in the Fifth Schedule is likely to be independent and impartial in all respects.
Furthermore, another schedule (seventh schedule) has also been inserted and a provision has been introduce that notwithstanding any prior agreement of the parties, if the arbitrator’s relationship with the parties or the counsel or the subject matter of dispute falls in any of the categories mentioned in the seventh schedule, it would act as an ineligibility to act as an Arbitrator. The exception to this clause being that, subsequent to disputes having arisen, the parties may waiver this by expressly agreeing to the same by entering into a written agreement. In view of the above, it would curtail the various Government bodies to appoint their employees or consultants as Arbitrators in Arbitrations concerning the said Government bodies; which has been a very prevalent trend and would be a welcome change.
It is imperative to note that, the arbitration clause in an agreement made prior to the amendment would be enforceable as per the terms of the recent amendment, if the arbitration clause is invoked after 23rd October 2015.
This has been made clear In Aravali Power Company Pvt. Ltd. v. M/s. Era Infra Engineering Limited: 12 September 2017,the Supreme Court, while dealing with a challenge to appointment of the arbitrator, appointed pre-2015 Amendment on the strength of the 2015 Amendments, held that the party cannot rely on amended Section 11 of the 1996 Act to challenge the appointment of arbitrator already made as the invocation of arbitration was prior to Amendment Act coming into force. Further, the SC observed that in pre-amendment cases, the law laid down in Northern Railway Administration, must be applied, in that the terms of the agreement ought to be adhered to and/or given effect to as closely as possible. It is thus clear that the SC has categorically held that insofar as Section 11 of the Act is concerned that the amended provisions will have no applicability if the invocation of arbitration is before 23 October 2015.
The abovementioned Amendments have been further validated by enforcement through various judgements of the Apex Court and other High Courts:-
- HRD Corporation v. GAIL (India) Ltd., (2018) 12 SCC 471whereby the court has laid down that “After the 2016 Amendment Act, a dichotomy is made by the Act between persons who become “ineligible” to be appointed as Arbitrators, and persons about whom justifiable doubts exist as to their independence or impartiality. Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes “ineligible” to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1) (a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as “ineligible”. In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground.” Which makes the intention of the drafter of the Statute very clear that people associated in the past with either of the parties or its associate units to the dispute cannot act as an arbitrator.
- Shubham Garg v. Ajay Kumar Maheshwari(Civil Misc. Arbitration Application No. 91 of 2018) the Apex court has clearly specified that “If an arbitrator is found de jure to unable to perform his function under Seventh Schedule of the Arbitration and Conciliation (Amendment) Act, 2015 he cannot be continued to be an Arbitrator.”
- VoestalpineSchienen GmbH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665 whereby the Hon’ble Supreme Court has laid down that “Section 12 has been amended with the objective to induce neutrality of Arbitrators viz. their independence and impartiality. The amended provision is enacted to identify the “circumstances” which give rise to “justifiable doubts” about the independence or impartiality of the arbitrator. If any of those circumstances as mentioned therein exists, it will give rise to justifiable apprehension of bias. The Fifth Schedule to the Act enumerates the grounds which may give rise to justifiable doubts of this nature. Likewise, the Seventh Schedule mentions those circumstances which would attract the provisions of subsection (5) of Section 12 and nullify any prior agreement to the contrary. In the context of this case, it is relevant to mention that only if an arbitrator is an employee, a consultant, an advisor or has any past or present business relationship with a party, he is rendered ineligible to act as an arbitrator. Likewise, that person is treated as incompetent to perform the role of arbitrator, who is a manager, director or part of the management or has a single controlling influence in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration. Likewise, persons who regularly advised the appointing party or affiliate of the appointing party are incapacitated.”
- Hindustan Steelworks Construction Limited v. Union of India and Others decided on 02 August 2017 by the Hon’ble Patna High Court on a similar question, it was observed that “The aforesaid panel also seems to be consisting of retired Railway Officers, who were in some way or the other associated with the Railway Administration either through the Railway Board or the Zonal Railway. Therefore, after evaluating the suggestions made by the respondents with regard to this panel, in the backdrop of the law laid down by the Hon’ble Supreme Court in the case of Delhi Metro Rail Corporation Ltd. (supra), I am 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 and as 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, instead from the panel submitted by the petitioner, Hon’ble Justice Smt. Mridula Mishra, a retired Judge of this Court, is directed to be appointed as an arbitrator nominated by the petitioner and along with her, Hon’ble Mr. Justice Jayanandan Singh, a retired Judge of this Court, is appointed as the second member and Sri Tapas K Ghosh B.E. C.E. FIF, Technical Advisor/Consultant is appointed as Technical member of the Arbitral Tribunal.”
- Afcons Infrastructure Ltd. vs Rail Vikas Nigam Limited decided on 29May 2017 by the Hon’ble Delhi High Court on a similar question, it was observed that:-
“31. It is well settled that in given cases, the court may disregard the agreed procedure to secure the appointment of an impartial arbitrator. (See: Union of India v. Uttar Pradesh State Bridge Corporation Limited: (2015) 2 SCC 52).
- This court is of the view that it would be in the interest of securing an independent and impartial arbitral tribunal if the procedure under clause 17.3(ii) is disregarded. This is, essentially, for three reasons. First, the decision of the Supreme Court that the procedure that limits the party’s choice to select only one out of the five persons suggested by the other party has “adverse consequences” and needs to be countenanced.
- Second, that RVNL has only suggested the names of former employees of Railways/RVNL for appointment of an arbitrator. Thus, all persons have a past relationship (however remote) with RVNL/Railways. Such relationship may not fall within the rigour of Section 12(5) of the Act read with the Seventh Schedule to the Act, but undeniably does give rise to apprehensions (whether justifiable or not) in the minds of the other party. It is essential that all parties have full confidence
with the arbitral process.
- And third, the General Manager does wield the power to remove the arbitrator from panel if it appears to him that the arbitrator is unfair; thus depriving him of further work.
- The petitioner has indicated that it would be willing if any former judge of the Supreme Court may be appointed as an arbitrator. Thus RVNL may appoint any former Judge of the Supreme Court as an arbitrator on behalf of the petitioner within a period of two weeks. RVNL will also nominate its arbitrator within a period of two weeks from today. Both the Arbitrators shall concur on appointment of a third arbitrator. If RVNL fails to appoint the Arbitrators or if the Arbitrators fail to concur on appointment of a third arbitrator, the petitioner would be at liberty to approach this court.”
The amendment brought to the Arbitration and Conciliation Act 1996regarding the clause for Appointment of Arbitratorsis undoubtedly a constructive step towards making arbitration infallible and effective. Earlier the Act though carried the provision; the new law encourages transparency and revives faith in the arbitral procedure by making the Arbitrator provide a declaration about his independence and impartiality. This is far more reasonable as compared to the earlier concept which was nothing more than a mere formality and lacked teeth. The above amendments have paved a big way for the independence and neutrality of the Arbitrators and removing the main roadblock towards successful proceedings and unbiased Arbitral Award leaving very little or rather no scope for impartiality and biasness.
Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.