Independence and Impartiality of Arbitrators: A Step Closer Towards Alternate Dispute Resolution, by Sneha Bhawnani & Swatilekha Chakraborty

In the recent times, a significant change has been noticed in the attitude and approach of the society, at large, in relation to resolution of disputes. It has been witnessed in some of the prominent Western countries, especially, the United States of America, that the Courts have adopted an approach which is clearly in favour of pro arbitration mechanisms. However, there is much scholarly debate to subject such alternate dispute mechanisms to a particular specified standard in order to avoid any conflict between the traditional way of delivering justice by means of Courts and the new method of resolving disputes by means of arbitration.

In this context, must be noted that arbitration is a private forum and is most often criticised on the grounds that it imbibes an informal and family like atmosphere and therefore appears to be gentler way to resolve disputes[1]. Further, it has been observed that arbitration is no insignia of state authority and no pomp—just “a group of people sitting around a row of table[2].” Therefore it is imperative to take note of such criticisms so that there is no compromise, delay or denial of justice to the aggrieved parties involved in arbitration proceedings. Undoubtedly, one of the ways in which efficacy and efficiency of such alternate dispute resolution mechanisms can be ascertained is by ensuring the independence and impartiality of the arbitrators.

At this juncture, reference must be made to the international community in order to understand the significance of independence and impartiality of an arbitrator across the globe. The most quintessential element of international arbitration is constitution of an impartial, independent and neutral tribunal. Impartiality and independence of the arbitrators is equated with direct relation to or bias towards one of the parties and neutrality is ascertained in context of nationality of the arbitrator, that is to say, an arbitrator is considered neutral if the nationality of such arbitrator is different from that of the parties.

In India, a landmark judgement was pronounced by the Apex Court of the country in the case of Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Limited[3] in order to highlight the importance of independence of an arbitrator. The aim, object and purpose of this article are to delve upon the key aspects of the said judgement which has brought much clarity with regards to appointment of independent and impartial arbitrators.

Amendments to the Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation Act 1996 (hereinafter referred to as the “Act”) was enacted to consolidate and amend the law relating to domestic arbitration, inter alia, commercial arbitration and enforcement of foreign arbitral awards etc. It must be noted that while enacting the said Act, the legislature took into account the basic structure of United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on International Commercial Arbitration. The provisions of the Act, however, lacked sufficient teeth with respect to neutrality, independence and impartiality of the arbitral tribunal. Therefore, 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 Report No. 246 in August, 2004 suggesting sweeping amendments in the Act which led to the enactment of the Arbitration and Conciliation (Amendment Act), 2015 (“Amendment Act”). The Amendment Act came into effect on October 23, 2015.

Legislative Mandate to ensure independence and impartiality of an arbitrator

One of the most significant amendments to the Act, based upon the recommendations of the aforesaid Law Commission reports, vide the Amendment Act was the amendment to Section 12 of the Act. The amendment has been made to address the issue of partiality of the arbitrators in relation to or bias towards one of the parties. Therefore, according to the amended Section 12 of the Act, 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.

Also, the legislature in its wisdom has also added the fifth schedule, introduced vide the Amendment Act, which elucidates 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.

The amended Section 12 of the Act has been reproduced below:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,—

  • 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 his ability to complete the entire arbitration within a period of twelve months

Explanation 1.—The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

 Explanation 2.—The disclosure shall be made by such person in the form specified in the Sixth Schedule.”;

 

  XX

 “(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.”

Apex Court on independence and impartiality of arbitrators

In the case of Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Limited[4], 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. Before discussing the case in detail, it is important to remember that the Supreme Court has time and again, held that it is important to ensure that no doubts are raised on the neutrality, impartially and independence of the arbitral tribunal by any of the parties involved in the case. The Supreme Court in a set of different judgements have referred to notable commentators[5] and observed that qualification, experience and integrity should be the criteria for appointment of an arbitrator.  In this context, reference must be made to Section 10 of the Act, according to which the Chief Justice of India has been vested with a wide discretion to appoint an arbitrator in an arbitration proceeding, taking into consideration all necessary factors which would preserve the integrity of the mechanism of arbitration.

Thus, the judgement in Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Limited seeks to interpret the aforesaid amendment and thereby reinforces the importance of constituting an arbitral tribunal which is “neutral”, “impartial” and “independent” in order to deliver justice to the parties involved in the arbitration proceedings.

Background of the case

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. Certain disputes arose between the parties with regard to the said contract and the petitioner claimed that the respondent had wrongfully withheld certain sum of money towards invoices raised for supply of lot of 3000 MT of rails and illegally encashed performance bank guarantees. Further, the petitioner claimed that the respondent suspended the business dealings with the petitioner for the period of six months. The petitioner being aggrieved by all the aforesaid actions desired for resolution of the dispute by means of arbitration, as provided in Clause 9.2 of General Conditions of Contract (herein referred to as “GCC”) read with Clause 9.2 of Special Conditions of Contract (herein referred to as “SCC”) executed between the parties.

It is pertinent to note that 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. 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. 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.

Central Issue

  1. Whether panel of arbitrators, as constituted by the respondent, violates the amended provisions of Section 12 of the Act?

Ratio decidendi

The Supreme Court held that in spite of having number of empanelled members, discretion was with Delhi Metro Rail Corporation Limited (“DMRC”) to select five persons there from and forward their names to the petitioner. Thereafter, the petitioner had to select one of these five persons as its nominee arbitrator. Above all, the two arbitrators were given the limited choice of choosing the third arbitrator from the very same list, i.e., from remaining three persons from the panel of arbitrators. As per the Apex Court, such an arrangement may result in the following adverse consequences:

  1. Firstly, the choice given to the petitioner was very limited as the petitioner had to choose one out of the five names that were forwarded by the respondent. In other words, the availability of free choice to nominate a person out the entire panel list, which was prepared by DMRC, was completely absent.
  2. 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.

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. 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. According, the parties were directed to prepare a broad based panel on the aforesaid lines within a period of two months.

Criteria for appointment of an arbitrator

In the case of Reliance Industries Ltd. & Ors v Union of India[6] the Supreme Court had held that it was important to ensure that no doubts were cast on the neutrality, impartially and independence of the arbitral tribunal therefore the Supreme Court held that qualification, experience and integrity should be considered as important parameters for deciding the appointment of an arbitrator.

Conclusion

Independence and impartiality forms an integral part of any adjudicatory system as it inevitably has an impact on the perception of justice and the administration of justice itself. While independence means that the arbitrator has no stake or apparent conflict with the parties or the sum involved in the proceedings, impartiality means that the arbitrator allows equal chance of hearing to both the parties in order to present their case. It should be noted that impartiality should be ascertained upon satisfaction of the tests laid down for ‘bias’, which again, can be divided under two categories, namely, actual bias and apparent bias. As held in Locabail (UK Limited) Regina v. Bayfield Properties Limited (“Locabail”)[7], instances of actual bias occur when the judge is shown to have an interest in the outcome of the case which he is to decide or has decided, however, on the other hand, apparent bias, as explained in R v. Gough[8], means the existence of real danger of bias on face of it.

In the case Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Limited the Supreme Court placed reliance on the book of O.P. Malhotra on the Law and Practice of Arbitration and Conciliation, where it has been rightly observed that one of the most important foundational pillars of the Arbitration and Conciliation Act, 1996 is the “party autonomy in the choice of procedure”, that is to say, the parties have the freedom to follow the procedure as per the arbitration agreement executed between the parties. Further, as per the general rule, this would apply even when a substitute arbitrator is being appointed and, therefore, appointment of such a substitute arbitrator should also be done in accordance with the provisions of the original agreement, as applicable to the appointment of the arbitrator at the initial stage.[9] However, this autonomy of the parties to choose their own arbitrator and/or procedure will not be realised to its full effect unless the person who is being appointed as an arbitrator is neutral, impartial and independent.  Thus, this judgment comes with a view to consolidate the viewpoint of the Supreme Court on neutrality, impartiality and independence of the arbitral tribunal and therefore, will have far reaching effects not only in domestic arbitration but also on the international commercial arbitration.

Lastly, although it is conceded that arbitration is a private forum, however, arbitration is by no means inferior to the old traditional justice delivering mechanism; rather both methods of solving disputes are complementary to each other due to which one cannot be evaluated against another. It needs to be understood that arbitration and the judiciary serve completely different ways of reaching the ends of justice and therefore there must be not be fruitless attempts to create a hierarchy between the two. From this analysis it is undisputable that arbitration is nothing but a forum to achieve the ends of justice and therefore it is imperative that under no circumstances the arbitration proceedings are abused or tainted by the partiality of the arbitrator or the arbitral panel, as the case may be.

[1] Dragor Hiber and Vladimir Pavic, Arbitration and Crime, p 461 available at- http://www.americanbar.org/content/dam/aba/events/international_law/2013/09/2013_aba_moscow_disputeresolutionconference/criminalaspects2.authcheckdam.pdf

[2] A. Redfern & M. Hunter, Law and Practice of International Commercial Arbitration 1 (4th ed. 2004) as mentioned in Dragor Hiber and Vladimir Pavic, Arbitration and Crime, p 461 available at- http://www.americanbar.org/content/dam/aba/events/international_law/2013/09/2013_aba_moscow_disputeresolutionconference/criminalaspects2.authcheckdam.pdf

[3] Arbitration Petition No. 50 of 2016, decided on 10th February, 2017

[4] Arbitration Petition No. 50 of 2016, decided on 10th February, 2017

[5] Redfern and Hunter on International Arbitration, Fifth Edition (2009)

[6] Arbitration Petition No. 27 of 2013

[7]  [2000] QB 451

[8] [1993] AC 646

[9] See Yashwith Constructions (P) Ltd. v Simplex Concrete Piles India Ltd. [(2006) 6 SCC 204]


by- Sneha Bhawnani (sneha@vinodkothari.com) & Swatilekha Chakraborty (swatilekha.chakraborty@symlaw.ac.in)

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