Ensuring Independence and Impartiality: Amended Section 12

By Labeeb Faaeq

Description.

The Arbitration and Conciliation (Amendment Act, 2015) was intended to propel arbitration proceedings in the country. However, this process involved not only reducing judicial intervention or advocating absolute party autonomy (even though this was achieved in other sections). The amendment to section 12 reflects an attempt at balancing party autonomy and the integrity of the proceedings as pointed out in the 246thLaw Commission Report. This paper intends to initially understand the workings of the amended section briefly and focus more importantly on the policy considerations and the legislative scheme behind the same on an institutional level. Towards the end, the possible shortcomings will be highlighted with proposed alterations.

Interpretation of the Amended section.

 There had been a lack of guidance as to what the ‘circumstances’ were to raise justifiable concerns about the arbitrator’s impartiality and independence (in the un-amended section). This was redressed by placing qualifiers of relationships and interests based proximity to characterize what these circumstances would entail. A list is created (as the fifth schedule) which illustrates these relationships. Furthermore, another list is created i.e. the seventh schedule. These adopt the IBA Guidelines on Conflict of Interest (fifth schedule = red and orange lists; seventh schedule = red list).

These can be a doubt, as to its exhaustive nature to exclude impartiality. But a bare reading of sub-section 3 suggests that the conditions for challenging appointment are kept open-textured and judicial discretion is sustained to enable the possibility of exclusion of people not mentioned in schedule 5 or schedule 7. This has been even reflected in judicial pronouncements now[1].

The first 19 entries in both the schedules are common. The court interpreted in HRD Corporation v GAIL, that the entries are mentioned in schedule 5 to enable disclosure requirements, but because of their nature, they are mentioned in the seventh schedule. It is to be noted that the red list originally contained non-waivable entries. However, respecting party autonomy, irrespective of arbitrators being in the seventh list, post dispute, allowance of parties waiving off applicability of the prohibition (proviso of sub-section 5) was granted.

While it is clear that entries 19 to 34 of schedule 5 do not require subsequent waiving off, there is one confusion that may arise. S12(4) prohibits challenges by persons who were the appointers if they knew about the circumstances, but S12(5)’s proviso requires both parties to waive the applicability of S12(5), post dispute. It may lead to a predicament. If a person selects a person enlisted in schedule 7 (being aware of the circumstances), there can be a restriction to his/her challenge as per S12(4). Then his/her waiving off may become irrelevant for S12(5)’s proviso. But going by the scheme of the Act, the proviso requires ‘agreement’ between both parties in writing, which implicates both the parties. Because participation of both parties is what an ‘agreement’. Thus, the probable interpretation would seem to apply S12(4) only to matters exclusively in the fifth schedule. This is evident even from the legislative scheme as it was adopted from the Law Commission’s recommendations and thus it can be seen that it wanted this power to exist, notwithstanding, any agreement to the contrary between the two, which implies situations where both parties are aware of the situation.

Policy Implications. 

The reason behind ensuring impartiality and independence of arbitrators is to incorporate principles of natural justice, owing to the quasi-judicial nature of the process as pointed out in the 246thLaw Commission Report. It was seen that the Supreme Court inclined towards ensuring contract autonomy over procedural fairness previously vis-à-vis arbiter appointments only. In the cases before the amendment, even current employees were allowed to be arbitrators (with minor exceptions). This can be seen as an insecure response from the courts to what they saw as an apparent undermining of their powers. So that somehow their intrusion into arbitration proceedings can be seen to be mitigated by their encouraging party autonomy. But this has adverse consequences.

Arbitrators are mostly elected by the parties themselves, therefore there is friction between idea fairness of the process and how the arbitrators are themselves elected[2]. Since, even if the proximity of the relationship is not close enough, any arbitrator chosen by a party will likely be predisposed in some way to favor the said party (as observed by Stephen R. Bond in The Independence and Neutrality of Arbitrators). But ensuring a procedure of fairness (even if apparent) is instrumental. There must be an attempt to meet the expectations of the parties who choose arbitration over other methods. Especially in India, where the legislative attempt is to create a substitute method of dispute resolution to attract investment and provide relief to the over-burdened judiciary, ensuring the integrity of the substitute method is indispensable to foster confidence in parties to adopt arbitration. Stephen concludes, that it also lowers the chances of efforts (specifically by the losing party) to overturn or oppose the award.

While the judicial stance remains that the doubt must be one that a reasonable third person would still conclude that the arbitrator may be influenced by factors irrelevant to merits [HRD Corporation v Gail (India) Ltd]. There has arisen a shift in its approach. The courts have even excluded election of those arbitrators who are not mentioned in Schedule 5 or 7 (HSF Arbitration Notes) on the basis that the lists (must not only include ex-employees) should be broad-based. The reasoning being that there should not be an apprehension of suspicion. This shift can be seen in the light of building up the legitimacy of arbitration as an institution. In fact, in another case, the Supreme Court held an ineligible arbitrator to be proscribed from nominating another in his/her place or as an additional arbitrator. For it to be seen as a legal authority, arbitral tribunals have to garner moral legitimacy as well. This requires ensuring fairness in proceedings. This is exactly what the policy assumptions behind the amendment are and they are judicially being incorporated as well.

Apart from the actual presence, it is the appearance of bias that is the focus of the legislative policy of most nations, propositions Stephen. This restriction upon party autonomy is necessitated by ‘ordre public’. It is not just the legislature trying to be the ‘parens patriae’ by saving the parties from impartial judges chosen by themselves (in the assumption that the parties were ignorant or merely inconsiderate during the creation of the arbitration agreement). Furthermore, imbibing it with some ethical standards is required in a situation where there is a lack of codes, for example, the International Bar Association Rules of Ethics for International Arbitrators. The legislature is trying to build up institutional legitimacy of arbitral tribunals so that it can uphold its alternative status to that of other tribunals (for example, courts). The courts are also gradually paying deference to this intent.

The only thing left to be incorporated is the idea of neutrality which deals with the nationality of arbiters. The only inference that can be made is that either this is an oversight, or more possible that the Indian arbitration system has not reached the stage that this is a problem yet. Other states which are internationally vibrant in arbitration have provisions concerning this as well.

Shortcomings in Section 12.

 Keeping all the legislative and policy intent in mind, the section is constructed in a ‘party-focused’ way. If violated, the arbitral awards of the parties would be swept aside. It is the parties which may challenge the election of judges (subject to exceptions). However, there is no incentive for the arbiter for him/her to disclose the information as required by S12. Nor is there any penalty for him/her failure to do so.

While a criminal or civil liability would be too extreme in situations where the arbiter would have genuinely thought the information to be irrelevant to warrant disclosure, the law has still come up with ‘reasonable’ standards (for example, the duty of care) to deal with such situations. But such severe dealing would discourage arbiters at all in fear of missing out on some information [more so because even interests and relationships in schedule 5 and 7 are now not exhaustive, as the judiciary has expanded such boundaries (cases cited before)].

The perfect solution would be to create a provision which precludes the arbiter from acting as one in future arbitral tribunals for a sufficient period as the legislature deems fit after such violations.

Conclusion.

While the amendment and judicial pronouncements have taken a promising turn to build up moral and institutional legitimacy of arbitral tribunals by incorporating principles of natural justice and fairness, it should shift its gaze from mere party-driven provisions to also influence arbiters explicitly and meaningfully. The law should be more regulatory concerning creating a duty of care for arbiters to warrant some action (the kind suggested above) since there is no supranational[3]or national authority to regulate their behavior properly.

[1]S.PSinglaConstructions(P) Ltd. v. Delhi Metro Rail Corporation Limited (2017) SCC OnLine Del 10689; Afcons Infrastructure Ltd. vs Rail Vikas Nigam Limited (2017) ARB.P. 21/2017; Voestalpine Schienen GmbH vs. Delhi Metro Rail Corporation Ltd. AIR (2017) SC 939.

[2]Bastida B Manzanares, The Independence and Impartiality of Arbitrators in International Commercial Arbitration(2007) 6 Revist@ e-mercatoria 1 <https://ssrn.com/abstract=1491528&gt; accessed 12 April 2018.

[3]Catherine A. Rogers, Ethics in International Arbitration (Oxford University Press 2014).

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