Arbitration-Court To Apply Reasonable Third Person Test While Considering Arbitrators’ Requirement For Disclosure, If The Case Doesn’t Fall Under The Lists Under IBA Guidelines: Bombay High Court

The bench of Justice Manish Pitale was considering the guidelines issued by the International Bar Association (IBA) on ‘Conflicts of Interest in International Arbitration’ (IBA Guidelines), while considering the objection raised by the award debtor alleging bias attributable to the Chairman of the Arbitral Tribunal. The award debtor alleged that the arbitrator had failed to disclose relevant information indicating his identity of interest/ relationship with the award holder.

The bench observed that the IBA Guidelines have been adopted in the Vth and VIIth Schedules to the A&C Act. While perusing the ‘red’, ‘orange’, and ‘green’ list appended to the IBA guidelines, which set out specific situations warranting (or in the case of the green list, not warranting) disclosure, the court remarked that if the situation is not covered under any of the lists, the court would have to apply the test of a reasonable third person, and not the subjective test, as claimed by the award debtor.

Applying the reasonable third person test, the court concluded that the situation did not give rise to any requirement on the part of the arbitrator for disclosure; thus, the question of bias or likelihood of bias, did not arise at all.

A Share Subscription Agreement was executed between the petitioner, HSBC PI Holdings (Mauritius) Ltd, a Mauritius company, and respondent No.1, Avitel Post Studioz Ltd, an Indian company.

After certain disputes arose between the parties under the Agreement, HSBC invoked the arbitration clause. The arbitration was conducted in accordance with the Singapore International Arbitration Centre (SIAC) Rules, and a three-member Arbitral Tribunal passed an award directing Avitel to pay US$ 60 million as damages to HSBC.

HSBC filed a petition before the Bombay High Court seeking enforcement of the said foreign arbitral award.

Resisting enforcement of the foreign award, Avitel argued that the failure on the part of the chairman of the Arbitral Tribunal, in disclosing vital connections and identity of interests with the award holder, completely vitiated the enforcement of the foreign award. It argued that the enforcement was contrary to the public policy of India under Section 48(2)(b) of the A&C Act.

Avitel submitted that there was a thick business relationship between the chairman of the Arbitral Tribunal, Christopher Lau, and the petitioner/ award holder, HSBC. Avitel thus sought to invoke the relevant clauses of the non-waivable red list, waivable red list and the orange list appended to the IBA Guidelines, which set out specific situations warranting disclosure by the arbitrator.

Avitel pleaded that the IBA Guidelines themselves specify that such guidelines, by their very nature, could not be exhaustive. It further contended that, while considering the issue whether the arbitrator was under a duty to make a particular disclosure, a subjective approach must be adopted.

Perusing the IBA Guidelines, the High Court reckoned that the explanation to clause 3, pertaining to disclosure by the arbitrator, clarifies that disclosure is not an admission of conflict of interest. The same further provides that excessive disclosure unnecessarily undermines the confidence of parties in the process of arbitration itself. “Yet, it is clear from clause 3(c) of the IBA guidelines, quoted hereinabove, that if there is any doubt as to whether an arbitrator should disclose, it is to be resolved in favour of disclosure,” the court added.

The bench further observed, “Clause 7 enjoins the arbitrator and the parties to disclose about the relationships that may concern conflict of interest and in that regard, the arbitrator is under a duty to make reasonable enquiry to investigate potential conflict of interest, the emphasis being upon independence and impartiality of the arbitrator.”

The court held that the IBA guidelines are to be construed in consonance with the said objective, however, the duties imposed upon the arbitrator in the context of potential conflict of interest ought not to be stretched to unreasonable lengths.

It added that when a party claims that the arbitral award ought to be held unenforceable on the ground of likelihood of bias for the reason that there was a conflict of interest, the principle of subjective approach for disclosure needs to be applied with caution, since the party obviously has an interest in resisting the enforcement of such an award.

Perusing the red, orange, and green list appended to the IBA guidelines, the court said, “When a party alleges that the arbitrator was under a duty to disclose, on the basis of facts and circumstances put forth by such a party, it is necessary to first examine as to whether such facts and circumstances are covered under the red, orange or green list appended to the IBA guidelines. The clauses of the IBA guidelines need to be applied with the object of ascertaining the independence and impartiality of the arbitrator.”

The court added that if the situation is covered under any of the lists, the answer would be readily available. But, if the situation does not fit into the said lists, it would be appropriate to apply the test of a reasonable third person, as contemplated under Article 12(2) of the UNCITRAL Model Law.

Thus, rejecting the contentions made by Avitel regarding the subjective approach of disclosure, the court said: “The party insisting upon such duty of disclosure in an individual case, cannot be permitted to submit that the fact situation may not be covered under any of the three lists and yet, the Court must adopt the subjective approach of disclosure. In such a situation, the Court will have to apply the reasonable third person test, to examine as to whether such duty of disclosure on the part of the arbitrator could be insisted upon, in the facts and circumstances of the case and in this regard, clause 2(b) of the IBA guidelines assumes significance.”

The bench reckoned that clause 2(b) of the IBA Guidelines also provides that the Court must examine from the point of view of a reasonable third person, having knowledge of the relevant facts, as to whether justifiable doubts arise about impartiality or independence of the arbitrator.

The court concluded that the circumstances alleged by the award debtor were not covered under the relevant clauses of the said lists. Applying the reasonable third person test, the court held that no reasonable third person, having knowledge of the facts/ circumstances, would conclude that justifiable doubts arose about the impartiality or independence of the chairman of the Arbitral Tribunal, Lau.

“The allegations levelled by the respondents fail to pass the reasonable third person test contemplated in clause 2(b) of the IBA guidelines, pertaining to conflicts of interest and the explanation appended thereto,” the court said. The court concluded that Avitel had failed to raise any doubts as contemplated under clause 3(c) of the IBA guidelines.

The court thus allowed the petition, holding that the 2014 foreign arbitral award was enforceable against the respondents.

Case Title: HSBC PI Holdings (Mauritius) Limited vs Avitel Post Studioz Limited and Ors.

Citation: 2023 LiveLaw (Bom) 222

Dated: 25.04.2023

Counsel for the Petitioner: Mr. Darius Khambata, Senior Advocate, a/w. Mr. Nikhil Sakhardande, Senior counsel, a/w. Mr. Aditya Mehta, Mr. Rohan Rajadhyaksha, i/by. Rajendra Barot, Ms. Priyanka Shetty, Sherna Doongaji, Mr. Dhaval Vora, Shanay Shroff of AZB & Partners

Counsel for the Respondents: Mr. Haresh Jagtiani, Senior Advocate, a/w. Mr. Suprabh Jain, Mr. Pushpvijay Kanoji, Mr. Sumeet Nankani, Mr. Faran Khan, Mr. Sanjay Agrawal, Mr. H. K. Sudhakara, Ms. Aishwarya Kantawala and Ms. Diya Jayan, i/by. Prompt Legal for respondent No.1. Mr. Sharan Jagtiani, Senior Advocate, a/w. Mr. Sumeet Nankani, Mr. Faran Khan, Mr. Sanjay Agrawal, Mr. H. K. Sudhakara, Ms. Aishwarya Kantawala and Ms. Diya Jayan i/by. Prompt Legal for respondent Nos.2 to 4.

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