Dispute resolution and primarily litigation in India, has been subject of wide criticism. The criticism finds its basis in the substantial amount of time and cost which is involved in getting reliefs. While alternate means of having disputes adjudicated through arbitration existed and were governed by the Arbitration Act, 1940 but with the passage of time, the Arbitration Act, 1940 soon...
Dispute resolution and primarily litigation in India, has been subject of wide criticism. The criticism finds its basis in the substantial amount of time and cost which is involved in getting reliefs. While alternate means of having disputes adjudicated through arbitration existed and were governed by the Arbitration Act, 1940 but with the passage of time, the Arbitration Act, 1940 soon became rudimentary to the more complex and complicated arrangements which were being executed. To be abreast with the pace with which the Indian economy was growing and the nature of commercial and business transactions, as well as, to incorporate the UNCITRAL model laws the Arbitration & Conciliation Act, 1996 (hereinafter referred as “the Act/the Act of 1996”) was enacted, with the anticipation that the inadequacies in the Arbitration Act, 1940 shall be removed.
While one cannot deny but agree that the Act of 1996 while replacing the Arbitration Act, 1940 did to a certain extent remove certain ambiguities, however within no time the provisions of the Act of 1996 itself became subject of several judicial scrutiny and interpretations. From territorial jurisdiction to seat of the arbitrator, from appointment of an arbitrator to challenge procedure, the last 20 years has seen plethora of judgments dissecting each and every section, comma and full-stop of the provisions contained in the Act of 1996.
One of the contentions under the Act of 1996 which has seen several judicial pronouncements relates to the impartiality and independence of the arbitrator. Unlike civil courts, where a matter is listed before a duly appointed Judge whose impartiality cannot be questioned owing to the constitutional position which the Judge holds, the Act of 1996 left it to the parties to agree upon the appointment procedure and qualifications of an arbitrator. As a consequence of the autonomy provided to the parties and more so, owing to ambiguities in the provision relating to procedure of appointment of an arbitrator, the period post the Act of 1996 witnessed several contracts, more specifically government contracts wherein the Arbitrator only could be appointed by the government body or from a panel of arbitrators to be suggested by only one party, who were most often than not existing or former employees of the government entity.
Section 11(2) of the Act of 1996 provides that the parties are free to agree upon a procedure for appointing the arbitrator or arbitrators. Several petitions have been filed and adjudicated by different High Courts and the Apex Court of the country questioning the impartiality and independence of an arbitrator appointed by only one party, as well as, neutrality of an arbitrator when such an arbitrator was to be appointed from a panel of arbitrators who are working in some capacity with the party referring the panel. It is indeed correct that Section 12 of the Act of 1996 provided for the appointed arbitrator to disclose the grounds giving rise to justifiable doubts regarding the impartiality and independence. However, such disclosure eventually turned out to be only customary. The reason for the same being the language in which Section 13 was couched, requiring party claiming bias to first challenge the independence of the arbitrator before the appointed arbitral tribunal and in the event of such challenge being rejected, the party challenging the appointment had to undergo the entire adjudication proceedings and raise its voice under section 34 of the Act of 1996 as a challenge to the award.
In Ace Pipeline Contract Private Limited v. Bharat Petroleum Corporation Limited while deciding on the question of impartiality and independence of a named arbitrator, the Supreme Court of India held that “Once a party has entered into an agreement with eyes wide open it cannot wriggle out of the situation (by contending) that if any person of the respondent BPCL is appointed as arbitrator he will not be impartial or objective. However, if the appellant feels that the arbitrator has not acted independently or impartially, or he has suffered from any bias, it will always be open to the party to make an application under Section 34 of the Act to set aside the award on the ground that arbitrator acted with bias or malice in law or fact.”
The decision in Ace Pipeline (supra) was reiterated by the Apex Court in the case of Indian Oil Corporation Limited and Ors. vs. Raja Transport (P) Limited, wherein it was held that there is no bar under the Act of 1996 for an arbitration agreement providing for an employee of a government/ statutory corporation/public sector undertaking (which is a party to the contract) acting as arbitrator and that a person being an employee of one of the parties (which is the state or its instrumentality) cannot per se be a bar to his acting as an arbitrator. However, observing that in contracts providing for named arbitrators, the dispute regarding the impartiality of the arbitrator had become almost inevitable, the Supreme Court of India suggested for governments/statutory authorities/public sector undertaking to reconsider their policy providing for arbitration by employee-arbitrators in respect to the specific provisions of the Act of 1996 reiterating the need for independence and impartiality of arbitrators.
It is however noteworthy, that impartiality or neutrality of an arbitrator was not restricted to having a named arbitrator in the arbitration clause. Disputes were also taken to the Court under Section 11 of the Act of 1996, when only one of the parties had the right to appoint an arbitrator. As mentioned above, the parties were free to agree upon the procedure for appointment of an arbitrator. However, it was not late, when in private contracts one of the parties challenged the arbitration clause before the Court asserting that a clause which provides the right to only of the parties to appoint an arbitrator was invalid and that there shall always be justifiable grounds of bias against an arbitrator appointed pursuant to such clause. However, the judicial interpretation were polarized in dismissing such claims. The Delhi High Court in the case of Usae Equipment Private Limited vs Krishna Shanker Tripathi held that “if at the time of entering into the contract, the parties agree that one of them would have the right to appoint a sole arbitrator, it would not be open for the other party to contest the same at a later stage.”
The above position regarding impartiality and independence of the arbitrator to a certain extent has been now amended by the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter “the Amendment Act”) whereby key provisions of the Act of 1996 were amended. The promulgation of the Amendment Act was considered as a welcome move; a move which was anticipated to eradicate the anomalies and ambiguities which were prevalent in the Act of 1996. However, within the first year itself since the Amendment Act came into existence, disputes at least in relation to impartiality and independence of an arbitrator continue to precipitate.
The Amendment Act with the intent to improve credibility of arbitration as an alternative dispute resolution mechanism, has sought to identify and define as to who shall not be construed as neutral or impartial in order to being appointed as an arbitrator. By way of the amended Section 12, the grounds which are likely to give rise to justifiable grounds of bias have been identified in Fifth Schedule. Moreover, Seventh Schedule provides for categories who are ineligible to being appointed as an arbitrator. The categories in Fifth Schedule and Seventh Schedule have attempted to cover all possible aspects so as to minimize preliminary disputes arising from independence and impartiality of an arbitrator.
One of the interesting entries, which finds mention in both Fifth Schedule and Seventh Schedule is when the “arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party”. Therefore an employee of any of the parties cannot now be appointed as an arbitrator owing to justifiable grounds of doubt regarding his/her independence. The Punjab and Haryana High Court in the case Reliance Infrastructure Limited vs. Haryana Power Generation Corporation Limited while explaining the co-relation between the grounds specified in Fifth Schedule and Seventh Schedule held that “The facts to be disclosed under sub-section (1) of section 12 do not necessarily render a person ineligible to be appointed an arbitrator. These facts are only to be disclosed. Explanation 1 Provides that the grounds stated in the Fifth Schedule are only a guide to determining whether they are to be disclosed or not. The grounds stated in the Fifth Schedule are, therefore, not exhaustive. Sub-section (5), on the other hand, renders a person ineligible to be appointed an arbitrator if his relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule. If the facts required to be disclosed under subsection (1) also fall under any of the categories specified in the Seventh Schedule, he would be ineligible to be appointed as an arbitrator. If, however, the facts disclosed under sub-section (1) do not fall under any of the categories specified in the Seventh Schedule, he would not be rendered ineligible per se. Whether such facts ought to render him ineligible or not would then depend upon the facts of the case. Some of the categories in the Fifth and the Seventh Schedules are the same. In such cases, the person would be ineligible to be appointed an arbitrator in view of sub-section (5). The present case is an illustration where a disclosure was bound to be made under subsection (1) but the circumstances do not render the Ex-Chief Secretary ineligible to be appointed an arbitrator.”
Now the question which until recently became a bone of contention before the High Court was can an ex-employee be appointed by the parties as an arbitrator in light of the amended Section 12 of the Act of 1996. The reason why such a question was raised before the High Court owed to the fact that an employee even if retired, is likely to be in contact of the party where he/she was earlier employed and therefore there is a likelihood of bias. The question relating to appointment of an ex-employee as an arbitrator came up for consideration before different High Courts who have expressed divergent views.
In the case of Hindustan Construction Company Limited vs. Ircon International Limited, the Delhi High Court observed that “the threshold disqualification for being proposed as an Arbitrator is concerned, the Seventh Schedule to the Act appears to draw a conscious distinction between serving and former officials of an organization. This is evident from a comparison of Entry 1 of the Seventh Schedule on the one hand and Entries 2,5, 9 and 12 on the other brings out this distinction. Then again, it is not as if any and every person having a present association with an organization is disqualified.” On a similar line, the High Court of Madras in the case of Offshore Infrastructure Limited vs. Bharat Heavy Electricals Limited and Ors held that “the Seventh Schedule does not have any clause for an ex-employee. Clause (1) of Seventh Schedule is identically worded to Clause (1) of the Fifth Schedule. Thus, the expression "employee" has to be understood similarly at both the places. The absence of any clause for ex-employee in the Seventh Schedule itself implies that there is no prohibition in the appointment of an ex-employee as an arbitrator per se. However, the use of expression "former employee" in Clause (31) of the Fifth Schedule would show that if the proposed arbitrator has ceased to be an employee within the window of three years, there would be justifiable doubts to the independence or impartiality of the arbitrator, though there is no absolute bar as under the Seventh Schedule.”A similar view was held by the Punjab and Haryana High Court in the Reliance’s case (supra). In another judgment, the Delhi High Court in the case Assignia-Vil JV v. Rail Vikas Nigam Ltd., refused to appoint either former or existing employee of the Respondent as an arbitrator in view of the Amendment Act.
The Supreme Court of India recently in the case of Voestalpine Schienen GmbH vs. Delhi Metro Rail Corporation Ltd. has highlighted on the issue of appointment of retired government employees as arbitrator, however, the moot question as to whether a person who has retired from the employment of one of the parties can or cannot be appointed as an arbitrator was not delved upon. In the present case, the dispute arose in terms of a contract executed between the Voestalpine Schienen GmbH (‘Voestalpine’) and the Delhi Metro Rail Corporation Limited (‘DMRC’). The agreement executed between Voestalpine and DMRC in the event of dispute provided resolution through arbitration. The agreement also provided for a procedure for appointment of an arbitrator, which entailed DMRC to forward names of five persons from its panel to Voestalpine. Voestalpine was required to select its nominee arbitrator from the said list of five names. Since the arbitration was invoked by Voestalpine post commencement of the Amendment Act, Voestalpine challenged the arbitration clause and preferred a petition before the Apex Court under Section 11(6) read with Section 11(8) of the Act of 1996. While arguing that in view of amendment to Section 12 of the Act, the arbitration clause stipulated in the agreement between Voestalpine and DMRC is no longer valid because the names of the five persons of whom Voestalpine is required to nominate its arbitrator were either serving or retired engineers either of DMRC or of Government Department or Public Sector Undertakings. Considering the arguments advanced and the law as it stood post amendment, the Supreme Court of India rejected the submissions made on behalf of Voestalpine and held that simply because a person has retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC he cannot be treated as ineligible to act as an arbitrator. While dismissing the petition, the Apex Court further observed that while constituting a panel of people who could be selected as an arbitrator, DMRC ought to include a larger pool of experienced people not only engineers, lawyers, accountants etc. so much so to provide an expansive choice to the other party while selecting an arbitrator.
While the judgment may be relevant in view of the facts and circumstances which transpired, however, the question as to whether appointing a retired employee from the organization which is one of the party to the dispute remained unattended.
Globalization and changing economic scenario, coupled with the interpretational complexities and fairness expected from the Act of 1996, ensued into bringing forth substantial amendments in the Act of 1996 by the Amendment Act. The Law Commission in its 246th Report while suggesting amendments in the Arbitration & Conciliation Act, 1996 at paragraph 53 observed that arbitration process like any quasi-judicial process must be in accordance with principles of natural justice. Being conscious that in arbitration process, neutrality of arbitrators, viz. their independence and impartiality, is critical the Commission sought to identify and elaborate the grounds which is likely give rise to justifiable grounds regarding the neutrality of the arbitrator. One cannot ignore but question that when a legislation was being amended to make it at par with the global standards and to make it abreast with the changing economic scenario in India, why certain aspects, for instance appointment of ex-employee as an arbitrator, was left for judicial interpretation. Unilateral appointment of an arbitrator by only one of the party to the dispute also gives rise doubt vis-à-vis the arbitrator appointed. The amendment could have incorporated means and ways to keep party autonomy but at the same also include checks and balances, so that multiple litigations to anyway over-burdened court could be averted.
If the amendments are read carefully, it can be noticed that the legislator has largely codified the multiple judicial pronouncements, owing their genesis to the ambiguities in the Act of 1996. The amendments made in the Act of 1996 through the Amendment Act in relation to the neutrality of arbitrators though clears several shortcomings, however, since certain aspects as discussed above have been still left open, the test of time and more judicial intervention and interpretations may pave the way for impartial and independent arbitration regime which was sought to be attempted by the Amendment Act.
[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same].