Thursday, March 9, 2017

Supreme Court on Independence and Impartiality of Arbitrators

[Guest post by Sneha Bhawnani, Assistant Legal Advisor at Vinod Kothari & Company (Kolkata) and Swatilekha Chakraborty, BBA.LL.B final year student at Symbiosis Law School, Pune.]

One of the ways in which efficacy and efficiency of alternate dispute resolution mechanisms can be ascertained is by ensuring the independence and impartiality of the arbitrators. The Supreme Court of India pronounced a landmark judgment in the case of Voestalpine Schienen GmBH (“VSG”) v. Delhi Metro Rail Corporation Limited[1] (“DMRC”) that highlights the importance of independence of an arbitrator. The aim, object and purpose of this post is to delve into the key aspects of the said judgement, which has brought about much clarity with regard to the appointment of independent and impartial arbitrators.

Legislative Mandate to ensure independence and impartiality of an arbitrator

Pursuant to the recommendations of the 176th Report of the Law Commission of India, the Parliament enacted the Arbitration and Conciliation (Amendment Act), 2015 (“Amendment Act”), by which it amended section 12 of the Arbitration and Conciliation Act 1996 (“Act”) on the issue of partiality of the arbitrators in relation to or bias towards one of the parties. The amended section 12 provides that a person who has been approached in relation to his possible appointment as an arbitrator must provide a disclosure regarding any direct or indirect, past or present, relationship with any of the parties or in relation to any interest in the subject matter in dispute, which may raise legitimate doubts about his independence and impartiality. Further, such person is also required to provide a disclosure, in such form and manner as provided in the sixth schedule, regarding any situation or circumstance which may affect his ability to devote sufficient time to arbitration. Further, the fifth schedule elucidates the guiding factors in determining whether such circumstances exist which may give rise to justifiable doubts as to the independence and impartiality of the arbitrator. Also, if the relationship of the person, who has been approached to be appointed as the arbitrator, and the parties or the counsel or the subject-matter falls within the forbidden categories, as enumerated in the seventh schedule of the Amendment Act, then such person shall be considered ineligible to be appointed as an arbitrator

Supreme Court on independence and impartiality of arbitrators

In the case of Voestalpine Schienen GmBHv. Delhi Metro Rail Corporation Limited, the issue was whether the arbitration clause providing for appointment of arbitrators from a panel of arbitrators was contrary to the parameters of impartiality and eligibility in accordance with the amended section 12 of the Act. Before discussing the case in detail, it is important to remember that the Supreme Court has time and again held that it is important to ensure that no doubts are raised on the neutrality, impartially and independence of the arbitral tribunal by any of the parties involved in the case. The Supreme Court in a set of different judgements[2] have referred to notable commentators[3] and observed that qualification, experience and integrity should be the criteria for appointment of an arbitrator.

Background of the case

The petitioner, VSG, is a company registered under the laws of Austria and has its branch office in India. The respondent, DMRC, awarded the contract to VSG for supply of rails. Certain disputes arose between the parties with regard to the said contract and VSG commenced arbitration.

The arbitration agreement prescribed a particular procedure for constitution of the arbitral tribunal which, inter alia, stipulated that DMRC shall forward the names of five persons from the panel of arbitrators maintained by them, and that VSG will have to choose its nominee arbitrator from the said panel. As per this provision, DMRC had, in fact, furnished the names of five such persons to VSG with a request to nominate its arbitrator from the said panel.

However, this was unacceptable to VSG on the grounds that the panel consisted of serving or retired engineers either of DMRC or of a government department or public sector undertakings. VSG claimed that the panel did not consist of independent arbitrators. Thus, according to VSG, in view of the amendment of section 12 of the Act, such a panel had lost its validity being contrary to the law of the land.

Central Issue

Whether panel of arbitrators, as constituted by the respondent, violates the amended provisions of Section 12 of the Act?

According to the Supreme Court, such an arrangement may result in the following adverse consequences:

(a)       Firstly, the choice given to VSG was very limited as it had to choose one out of the five names that were forwarded by DMRC. In other words, the availability of free choice to nominate a person out the entire panel list, which was prepared by DMRC, was completely absent.

 (b)        Secondly, with the discretion given to DMRC to choose five persons, a room for suspicion was eventually created in the mind of VSG that DMRC may have picked its own favourites. This may lead to impartiality of the arbitrator towards DMRC.

Thus, the Supreme Court held that the clauses pertaining to this in the agreement warrant deletion and appropriate choice must be provided to the parties to nominate any person from the entire panel of arbitrators. Likewise, the two arbitrators nominated by the parties should be given full freedom to choose the third arbitrator from the panel. Further, it was also held that it is imperative to have a much broad-based panel, so that there is no misapprehension between the parties that there is any possibility of principle of impartiality and independence being compromised at any stage of the arbitration proceedings, especially at the stage of constitution of the arbitral tribunal.

Conclusion

Independence and impartiality forms an integral part of any adjudicatory system as it inevitably has an impact on the perception of justice and the administration of justice itself.
It should be noted that impartiality should be ascertained upon satisfaction of the tests laid down for ‘bias’, which can be divided under two categories, namely, actual bias and apparent bias. As held in Locabail (UK Limited) Regina v. Bayfield Properties Limited (“Locabail”),[4] instances of actual bias occur when the judge is shown to have an interest in the outcome of the case which he is to decide or has decided; however, on the other hand, apparent bias, as explained in R v. Gough,[5] means the existence of real danger of bias on face of it.

Thus, this judgment comes with a view to consolidate the viewpoint of the Supreme Court on neutrality, impartiality and independence of the arbitral tribunal and therefore, will have far reaching effects not only in domestic arbitration but also on the international commercial arbitration.

- Sneha Bhawnani and Swatilekha Chakraborty



[1]Arbitration Petition No. 50 of 2016, decided on 10th February, 2017.

[2]In the case of Reliance Industries Ltd. &Ors v Union of India (Arbitration Petition No. 27 of 2013) it was held that qualification, experience and integrity should be considered as important parameters for deciding the appointment of an arbitrator.

[3] Redfern and Hunter on International Arbitration, Fifth Edition (2009).

[4] [2000] QB 451.

[5][1993] AC 646.

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