Need For Impartiality Standards To Arbitral Institutions

Impartiality Under The Act

Even in quasi-judicial processes like Arbitration, the principles of natural justice are paramount. In the specific context of Arbitration, having a neutral Arbitrator is thus an essential prerequisite without which an effective Arbitration cannot exist. Further, such impartiality and independence cannot be dispensed with at any stage of the proceedings, especially not at the stage of constitution of Arbitral Tribunal. Although Arbitration emphasizes heavily on party autonomy, the same does not include the autonomy to waive the principles of natural justice in the name of arriving at a speedy resolution.[i]

To this end, the 2015 amendment to the Act inserted Schedules V and VII, listing instances rendering an Arbitrator ineligible or raising justifiable doubts about their eligibility to Arbitrate a particular dispute. The mandate of an Arbitrator falling within the ambit of these Schedules can be challenged under Sections 12 or 14, when justifiable doubts exist over his impartiality or when he becomes de jure and de facto unable to act as an Arbitrator.

This layer of protection offered by the Act has been further expanded upon by the Hon'ble Supreme Court. The Apex Court in TRF Limited[ii] had held that if a person had become ineligible to act as an Arbitrator owing to its lack of impartiality or interest in the dispute's outcome, the same person also becomes ineligible to unilaterally appoint an Arbitrator in that dispute. Consequently, this proposition of law was expanded further in Perkins Eastman[iii] wherein it was held that even if the parties nominate a third party to appoint an Arbitrator, such nomination would be invalid if the third party so nominated lacks impartiality and independence within the meaning of the Act. The Court reasoned that if potential bias exists when a party itself acts as the Arbitrator, then the same concern applies when they handpick a third party to do the same.

Challenges Of Institutional Bias In Arbitration

While a welcome step in the right direction, the Supreme Court's ruling does not directly include Arbitral Institutions within its ambit. This prima facie means that if an Arbitral Institution has been selected in the arbitration agreement, that Institution can unilaterally appoint the Arbitrator. But then, the question arises that what if there are justifiable doubts about the Institutions' or its employees' neutrality and impartiality towards the dispute?

It is not beyond reason that an Arbitral Institution is liable to be compromised as such. While there is nothing inherently wrong with it, it still has to be emphasized that these Institutions work for profit and to that end have to maintain relationships with its clients, creating scope for lobbying. There can be instances where a party is a long standing "client" of the Institution who has numerous matters pending before it, or brings the promise of more business in the future. In that case it is not unreasonable to aver that the Institution might prefer a decision or procedure which is more pleasing to and more conducive of its relationship with its "client".

Further, an Institution itself consists ultimately of individuals. Such individual employees may, in their personal capacity, be interested in the dispute's outcome. Recognizing this, some Arbitral Institutions include mandatory disclosure rules for employees involved in appointing the Arbitral Tribunal.[iv] For example, reference may be made to General Standard 5(b) of the IBA Guidelines on Conflicts of Interest in International Arbitration, which provides that the need for impartiality and independence is not restricted to the Arbitrators themselves, but also extends to employees of the Arbitral Institution. Further reference may be made to Article 7.4 of the Internal Rules of theRussian Arbitration Centre which states that:

“4. In case of an actual or potential conflict of interest with any Party or arbitrator, the employee of the Administrative Office shall immediately cease to perform their functions with regard to the specific arbitration and notify the Parties, the Arbitral Tribunal and the Executive Administrator thereof. In this case, the Executive Administrator shall appoint another employee to perform the functions in this arbitration.”

It must however be noted, that in the Indian framework, inclusion of such rules seeking disclosures are not mandated by the Act or any other law.

The Gap: Recourse Against Institutional Bias

Therefore currently, in such instances where the appointment may be made by a compromised Institution or by an interested employee of such Institution, no recourse lies to the parties since the Act itself does not provide for a challenge against Arbitral Institutions. In the existing framework, while the mandate of an Arbitrator so appointed can be challenged, the process behind such appointment cannot. Thus, in a case where the Arbitrator itself is not barred by the Schedules to the Act but is appointed by an Institution or its employee interested in the dispute within the meaning of the Schedules, no recourse lies to the parties against such a patent violation of not only the Act but of the basic principles of natural justice.

Attention also needs to be directed to the scope of misuse in such a situation, where a party might nominate an interested Institution to appoint the Arbitrator, rather than nominating an interested party. In doing so, the party would be acting in square violation of the ratio in Perkins, but would still succeed since such Institutions are expressly addressed neither in Perkins nor in the Act. Allowing parties to bypass and circumvent a Supreme Court ruling in such a manner undermines the basic foundational principles of the law.

Therefore, a remedy to fill this gaping lacuna in the Indian Arbitration landscape is urgently required. The Rules framed by Arbitral Institutions ought to make it mandatory for its employees to file a disclosure in line with what is required of the Arbitrator under S. 12(1) of the Act of 1996. Simultaneously, the Courts ought to interpret Perkins more liberally to include Arbitral Institutions and its employees within its ambit. This would leverage an existing, well-tested Supreme Court ruling by including entities and individuals that fall within its reasoning but were previously excluded due to lack of explicit mention. This approach would create an adequate remedy for affected parties under the existing provisions of the Act without causing any major implementation hurdles.