PERSON INTERESTED IN RESULT OF A DISPUTE CANNOT ACT AS ARBITRATOR OR APPOINT SOLE ARBITRATOR

Preface:

Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applies to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator’s appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator (though contractually agreed upon) renders him ineligible to conduct the arbitration.

In the matter of: Voestapline Schienen GmbH V/s Delhi Metro Rail Corporation Ltd, (2017) 4 SCC 665, it was observed that:

“… even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial.”  

Dominant purpose of arbitration:

The United Kingdom Supreme Court in the matter of: Hashwani V/s Jivraj, 2011 UKSC 40, observed that:

“… the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties.” (emphasis supplied)

Similarly, Cour de Cassation, France, in a judgment delivered in 1972 in the matter of: Consorts Ury V/s S.A. des Galeries Lafayette [Cass. 2e civ., 13 Apr., 1972], observed that: 

“… an independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator.”

Independence Versus Impartiality:

Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.

The two categories of cases:

In the matter of: Perkins Eastman Architects DPC & Anr V/s HSCC (India) Ltd, Arbitration Application No. 32/ 2019, Supreme Court of India, Date of Decision: 26.11.2019, after taking note of the precedent, namely, TRF Limited V/s Energo Engineering Projects Limited, (2017) 8 SCC 377, it was held that:

“… 15. … We thus have two categories of cases. The first, similar to the one dealt with in TRF Limited where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorized to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Limited, all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an Arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an Arbitrator.

16. But, in our view that has to be the logical deduction from TRF Limited. Paragraph 50 of the decision shows that this Court was concerned with the issue, “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator”. The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognized by the decision of this Court in TRF Limited.”

Thus, the principle of law that can be culled out from the above referred decision of the Hon’ble Supreme Court of India is that:

(1)  A person having an interest in a dispute or in the outcome or decision thereof, is not only ineligible to act as an arbitrator but is also not eligible to appoint anyone else as an arbitrator.

(2)  A person who has an interest in the outcome or decision of the dispute cannot have the power to appoint a sole arbitrator.

Procedure based arbitration and appointment of arbitrator in terms of Section 11 of the Arbitration & Conciliation Act, 1996:

That in the matter of: Indian Oil Corporation Ltd V/s Raja Transport (P) Ltd, (2009) 8 SCC 520, it was observed that:

“… (vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.”

Although, Indian Oil Corporation Ltd (Supra) dealt with position of law obtaining prior to the coming into force of the Arbitration & Conciliation (Amendment) Act, 2015, but the principle of law contained in the aforesaid judgment was reiterated in Perkins Eastman Architects DPC & Anr (Supra) as follows:

“… if there are justifiable doubts as to the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, such appointment can be made by the Court.”

Further, in the matter of TRF Limited (Supra), the Hon’ble Supreme Court of India approved the observations made by it in the matter of: Walter Bau AG V/s Municipal Corporation of Greater Mumbai & Anr, (2015) 3 SCC 800, that:

“… Unless the appointment of the arbitrators is ex facie valid and such appointment satisfies the Court exercising jurisdiction under Section 11 (6) of the Arbitration Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11 (6) cannot be countenanced in law …”

It is worthwhile to remember that in TRF Limited (Supra), the Managing Director of the respondent had nominated a former Judge of the Hon’ble Supreme Court of India as the sole arbitrator in terms of the agreement [Clause 33 (d)] entered into between the parties, after which the appellant preferred an application under Section 11 (5) read with Section 11 (6) of the Arbitration & Conciliation Act, 1996 before the Hon’ble High Court. The plea put forth by the appellant was rejected by the Hon’ble High Court but the appeal therefrom on the issue whether the Managing Director could nominate an arbitrator was decided in favour of the appellant by the Hon’ble Supreme Court, reiterating the principle of law that if the appointing authority has interest in the decision of a matter then arbitrator appointed by such appointing authority can be perceived to be biased, depending upon the facts and circumstances of a particular case. Further, as regards the issue about fresh appointment, the Hon’ble Supreme Court remanded the matter to the High Court for fresh consideration.

Upshot:

(1)  That in the matter of Perkins Eastman Architects DPC & Anr (Supra), the Hon’ble Supreme Court of India, while dealing with an application under Section 11 (6) read with Section 11 (12) (a) of the Arbitration & Conciliation Act, 1996, held that as per the scheme of Section 11 of the Arbitration & Conciliation Act, 1996, if there are justifiable doubts as to the independence and impartiality of the person nominated as arbitrator by the appointing authority in terms of the contract, and if other circumstances warrant that appointment of arbitrator by the appointing authority is arbitrary then in such a scenario, appointment of arbitrator can be made by the High Court under Section 11 (6) of the Arbitration & Conciliation Act, 1996.

(2)  Appointment of arbitrator is subject to mandatory declaration to be made under Section 12 of the Arbitration & Conciliation Act, 1996 (as amended by the Arbitration & Conciliation (Amendment) Act, 2015) with respect to independence and impartiality of the arbitrator, and ability of the arbitrator to devote sufficient time to complete the arbitration within the time span specified in Section 29-A of the Arbitration & Conciliation Act, 1996 (as amended by the Arbitration & Conciliation (Amendment) Act, 2015).

(3)  Recently, the Arbitration & Conciliation (Amendment) Act, 2019 has caused amendments to Section 11 and Section 29-A of the Arbitration & Conciliation Act, 1996 (as amended by the Arbitration & Conciliation (Amendment) Act, 2015).

*An Imprint of Lex Unified (Shivam Goel, Co-Founder)