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Neutrality of Arbitrators in India

September 9, 2018

[Nandini Garg is a fifth-year student at National Law Institute University, Bhopal.]

 

The Law Commission of India in its 246th report reviewed the provisions of the Arbitration and Conciliation Act, 1996 (1996 Act) and recommended a host of changes to it. Subsequently, the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment Act) was enacted. To specifically address the issue of neutrality of arbitrators, section 12 was amended. Questions regarding neutrality of arbitrators usually arise in cases of contracts with government authorities who are usually given wide discretion to appoint an arbitrator of their own choice.

 

Ex-employees as Arbitrators

 

Under the 2015 Amendment Act, Schedules V and VII were incorporated in section 12. Schedule V contains a list of disclosures to be made by the arbitrator at the time of appointment. On the other hand, the Schedule VII covers situations which automatically render the arbitrator ineligible for appointment. Entry 1 of both the schedules makes the appointment of arbitrator open to challenge when s/he “is an employee, consultant, advisor or has any other past or present business relationship with a party”. The appointment of ex-employees as arbitrators by the parties creates bias in the mind of the other and is often challenged before courts under section 12.

The Supreme Court of India has provided some guidance on interpretation of these schedules in the case of HRD Corporation v. GAIL (India) Limited, wherein it noted that the words used in the schedules should be fairly construed and their meaning should be neither enlarged nor unduly restricted. They should be construed considering general principles of the IBA Guidelines, which are that (i) every arbitrator shall be impartial/independent at the time of his/her appointment, and (ii) doubts with respect to the appointment are justifiable only if a third party would reach a conclusion that an arbitrator is likely to be influenced by factors other than the merits of the case. While some High Courts[1] have invalidated the appointment of ex-employees by strictly reading the words “arbitrator is an employee” used under entry 1, others[2] have broadly interpreted the said entry to uphold the appointment of ex-employees.

 

A question regarding appointment of ex-government employees as arbitrators came up before the Supreme Court in Voestalpine GmbH v. Delhi Metro Rail Corporation (DMRC). The Court did not address the issue of appointment of ex-employees directly. It simply insisted that the principle of party autonomy as well as independence and impartiality of arbitrators should be observed. DMRC was ordered to broad-base the panel of arbitrators to also include experts from private sector, judges and lawyers. However, the appointment of ex-employees as arbitrators was permitted as they were not in any way 'related' to DMRC.

 

Statutory Arbitrators

 

Section 2(4) provides that, in cases of statutory arbitration, when there is any inconsistency between the 1996 Act and other relevant statute, the provisions of the latter shall apply. However, the amended section 12 begins with a non-obstante clause, which has an overriding effect on any other prior agreement. Several statutes such as the National Highways Act, 1956 and the Electricity Act, 2003 provide for appointment of an arbitrator by government authorities. The principle of party autonomy with regard to arbitrator's appointment cannot be observed in such cases. The appointments are solely made by the government authorities. Further, such appointment of government’s/ party’s favourites is open to challenge under section 12.

 

In a recent instance, the Madhya Pradesh High Court invalidated the appointment of a departmental arbitrator. In M/s Control Systems v. M.P. Micro and Small Enterprise Facilitation Council & Ors., it held that –

 

“… it is clear that the aspect of neutrality and impartiality is a necessary facet, which needs to be seen in cases of statutory Arbitration. Even if arbitration clause provides otherwise, in order to ensure fairness in action and in order to translate the legislative mandate into reality, it is necessary to appoint an independent arbitrator. …”

 

Conclusion

 

Even prior to the amendment to section 12, there are several instances[3] when the courts have given a go-by to the agreed arbitration agreement to secure the appointment of an independent and impartial arbitrator. The significance of an impartial and independent arbitrator has been statutorily recognized by amending section 12. In the changed scenario, the validity of such statutory provisions becomes questionable. Further, in light of the conflicting judgements, the validity of appointment of ex-employees as arbitrators also remains unclear. With the 2015 Amendment Act, the Indian arbitration law has been brought in line with international arbitration standards. However, it remains to be seen that how these standards are interpreted and implemented to foster pro-arbitration environment in India.

 

[1] Hindustan Construction Co. Ltd v. Ircon International Ltd., ARB.P. 596/2016 (Delhi HC); Offshore Infrastructure Limited v. Bharat Heavy Electricals Limited, (2017) 6 CTC 301.

 

[2] See Assignia-Vil JV v. Rail Vikas Nigam Ltd., (2016) 230 DLT 235; Panihati Rubber Limited v. The Principal Chief Engineer, Northeast Frontier Railway and Ors., Arb. P. No. 12/2011 (Gau. HC).

 

[3] See Datar Switchgears Ltd. v. Tata Finance Ltd. and Anr.,(2008) 8 SCC 151;Deep Trading Co. v. Indian Oil Corporation,(2013) 4 SCC 35;Union of India v. Singh Builders Syndicate,(2009) 4 SCC 523.

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