Justice And Fairness In Arbitration - An Overlooked Principle?

According to Black’s Law Dictionary, the term “Ex Aequo et Bono” or "Amiable Compositeur" means "justice and fairness; according to what is just and good". Arbitrators should apply this legal concept to provide fair and equitable decisions based on good conscience instead of applying rigorous terms of law. This provides the arbitrator an authorization to abate something of the strictness of the law in favour of natural justice and equity.

“Ex Aequo Et Bono” or "Amiable Compositeur" found its place in the UNCITRAL Model Law, 1985, on International Commercial Arbitration because of its significant impact on principles of equity and fairness which an arbitrator has to apply independently of any applicable law. There was a general opinion among many nations that Article 9 of the UNCITRAL Model Law, which contains these legal terms, was acceptable, even though many nations do not permit such types of arbitration. Due to potential differences in their meanings under various national legal systems, the prevailing opinion supported, keeping both terms in the UNCITRAL Model Law.

However, only under specific circumstances, as outlined in the UNCITRAL Model Law, various arbitration rules, and statutory laws, is the use of the "Ex Aequo Et Bono" principle permitted. In accordance with the Pacta Sunt Servanda (agreements must be kept) principle and other guiding principles like party autonomy, and reasonable expectations, parties must expressly authorize the Arbitral Tribunal to use this method. The Arbitral Tribunal must uphold public policy and fundamental principles like Audi Alteram Partem (listen to the other side), as well as the specific contractual terms and mandatory provisions of applicable law (especially for non-arbitrable disputes), even when parties instruct the arbitral tribunal to decide cases using the "Ex Aequo Et Bono" approach.

Section 28(2) of the Indian Arbitration and Conciliation Act, 1996 (A&C Act hereinafter) permits the use of "Ex Aequo Et Bono" or "Amiable Compositeur" in matters related to Arbitration. Section 28(2) of the A&C Act allows the applicability of the principle only with the parties' express consent. When the parties agree to the use of these legal concepts, they provide adaptability and allow the arbitrator to evaluate on impartial and fair norms. The court emphasized the importance of Section 28(2) of the A&C Act in the case of DMRC vs. Kone Elevators India (P) Ltd., 2021 SCC OnLine Del 5048. According to Section 28(2), an Arbitral Tribunal may only render decisions "Ex Aequo Et Bono" or as "Amiable Compositeur" if the parties have specifically authorized it to do so. The court also clarified the meaning of the two legal principles as "Ex aequo Et Bono" referring to the arbitrator's ability to make decisions based on fairness and equity without strictly adhering to legal principles. An impartial third party who is not constrained by rigid legal requirements and who can settle conflicts in accordance with the principles of justice and fairness is referred to as an "Amiable Compositeur".

Further, Section 28(3) A&C Act provides the arbitral tribunal the freedom to pass awards as per its discretion, i.e., in order to resolve a dispute, an arbitral tribunal is therefore not limited to strictly upholding the terms of the contract that bind the parties. Instead, it is free to make its own decisions as long as they are reasonable and ensure justice which is in consonance with equity and fairness. This provides the tribunal with more autonomy and makes them the ultimate adjudicator of disputes and at the same time, limiting the court's intervention in an arbitral proceeding. Therefore, these legal principles become highly beneficial when the agreements are ambiguous or when unforeseen circumstances develop throughout the comprehension of the agreement. It provides arbitrators some leeway in bending the letter of the law, but they cannot go against what the parties agreed to, in their contract.

The importance of the arbitrators striking a balance between fairness and upholding the parties' agreed-upon terms is highlighted by the possibility that any kind of deviation from the contract's terms will be viewed as misconduct or a jurisdictional mistake. However, it is to be borne in mind that under Section 34 of the A&C Act of 1996, parties who choose "Ex Aequo Et Bono" cannot challenge the arbitral award only in specific circumstances. The award may only be potentially set aside under Section 34 of the A&C Act if the arbitral tribunal uses "Ex Aequo Et Bono," without a specific mandate from the parties and the arbitrator's interpretation is so irrational that no reasonable person could agree with it or arbitrator commits a jurisdictional error if they address issues outside the purview of the contract and their jurisdiction, as has been held in Associate Builders v. DDA, (2015) 3 SCC 49.

In S. Dinesh Babu v. C Venugopalan & Ors., (2019) 1 KLJ 416 a conflict arose between the parties which led to Arbitration. It was disputed before the High Court of Kerala as to whether the arbitrator in this case had violated Section 28(2) of the A&C Act, by granting the appellants' request for an expert witness and conducting a private inspection of the building. The court stated that the arbitrator has the power to carry out local inspections and make decisions regarding the admissibility of evidence. Under Section 28(2) of the A&C Act, arbitrators may only consider equity and good conscience with the parties' express consent. Eventually, the court upheld the arbitrator's decision, holding that it was not enough to merely dispute the arbitrator's findings of fact without cogent reasons and that only substantive aspects of the dispute, not procedural ones, were covered by Section 28(2). The same reasoning was also given in an important judgment in Jaiprakash Associates v. NHPC Limited, 2023 SCC OnLine Del 3295, by the Delhi High Court by holding that arbitrators must have the parties' express consent and must abide by the terms of their agreement in order to apply "Ex Aequo Et Bono".

It can be concluded that the fundamental goal of these legal concepts of advancing justice and equitable standards, when permitted by the parties, was reaffirmed by these judgments by striking a balance between legal considerations and equitable values.

However, in practice, only a small percentage of international commercial arbitration agreements actually contain provisions for arbitration based on "Ex Aequo Et Bono" or for an arbitrator to act as an "Amiable Compositeur," despite the fact that many arbitration laws and institutional rules have incorporated these principals. Many studies regarding the effectiveness of "Ex Aequo Et Bono” as a catalyst for arbitration reforms reveal that there is substantial opposition based on concerns about its irrationality and the potential for arbitrators to overstep their authority. There is a misconception that "Ex Aequo Et Bono” hinders the proceedings of Arbitration by giving vide discretion to arbitrators but in reality, it encourages the important elements of party autonomy thereby increasing the efficiency and the potential of Arbitration. These principles also help the Arbitrators decide matters flexibly on the mandate granted by the disputing parties. Therefore, from the conspectus of the above discussion, it can be concluded that "Ex Aequo Et Bono” respects party autonomy by granting powers to the parties to choose the application of this principle by conferring the arbitrators the power to decide a dispute in consonance with equity, fairness and good conscience, and by not applying rigid principles of law.

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