Arbitration is a concept under the umbrella of Alternative Dispute Resolution (ADR). To understand Arbitration and appreciating the point which this paper moots, it would be very necessary to go into the roots of why there exists an arbitration agreement in most of the contracts. It is common knowledge that civil cases move at a snail’s pace and are costly in terms of court fees and the charges of the counsel representing parties in the court. Therefore, in such a situation it would be lucrative to have an alternative dispute resolution process that can adjudicate upon the dispute between two or more parties who have submitted themselves to the jurisdiction of the arbitral tribunal in a time-bound and cost-effective manner.
Arbitration in Black’s Law Dictionary is defined as:
‘A method of dispute resolution involving one or more neutral third parties who are usu. agreed to by the disputing parties and whose decision is binding.’
Whereas Arbitrator is defined as:
‘A neutral person who resolves disputes between parties, esp. by means of formal arbitration.’
To my understanding, the most important keyword in both definitions is ‘neutral’.
Arbitrator effectively plays the role of the adjudicator which has traditionally been the responsibility of the Judge in the Court who was appointed in the exercise of the sovereign power. When arbitration seeks to move the adjudicating authority from the Judge to the Arbitrator, it is only proper that some of the attributes of the Judge must also find a place in the Arbitrator.
One of such attributes is being neutral to all parties in a dispute, having no interest in the subject-matter of the dispute or any relation with parties that can have a bearing on the final decision of the dispute.
In my humble opinion, it becomes more important in arbitration than in traditional Courts as there lies no appeal against an award of the arbitral tribunal while judgements and decrees of trial courts can be challenged in the appellate courts.
In India, arbitration proceedings are governed by The Arbitration and Conciliation Act, 1996 (hereinafter also referred to as A&C Act). It recognises an arbitration clause/agreement as a separate legal agreement apart from the main contract from which substantial rights and liabilities of parties arise.
A contract creates a private law between parties, and when there is any dispute arising out of that contract, it would be totally against all sense of fairness, if by the virtue of an unfair arbitration clause, an interested party is allowed to unilaterally appoint a sole arbitrator. It would be the biggest travesty of justice, and would amount to deny a fair hearing to the party who had no or an insignificant say in the appointment of a sole arbitrator.
Unfair arbitration clauses more commonly are found in adhesion contracts often known as ‘standard form contracts’ or ‘boilerplate contracts’.
These types of contracts are usually between parties of unequal bargaining strength, they do not allow for any kind of negotiation and are commonly known as ‘take it or leave it’ form of contracts. It is understood from this feature of these types of contracts that one party has major strength and bargaining power, and therefore, the clauses would be highly skewed in their favour. Few relatable examples can be the terms & conditions of social media platforms which we agree to before creating an account, government contracts, loan agreements etc. Of course, what I have just mentioned is a general non-exhaustive list; there can be some exceptions to them. When a party who already has much advantage in these types of contracts wants to avoid the Courts, they put in an unfair arbitration clause.
In this paper, I will be shedding light on how unfair arbitration clauses in such contracts can potentially result in a violation of natural justice and can potentially lead to biased awards and unfair hearings.
For an easy understanding of my point, we can take an example of criminal law, if an accused is allowed to appoint Judge; or of civil law, if a party interested in the subject matter of the suit, is allowed to appoint Judge, there would be little chance of justice being done. In a similar fashion, it would be a little difficult to say that a sole arbitrator unliterally appointed by a party would act fairly and without any bias.
In the A&C Act, § 8(1) makes it obligatory upon courts to send the dispute to arbitration unless they find prima facie no valid arbitration agreement exists. This obligation imposed upon the courts makes it impossible for them to adjudicate the dispute for which a valid arbitration agreement exists.
§ 11 deals with the appointment of arbitrators; § 11(2) allows the parties to agree on a procedure of appointment of arbitrator(s). § 11(5) says that failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court.
§ 12(3)(a) gives a ground for challenge appointment of an Arbitrator, it should be read with Fifth Schedule. § 12(5) prohibits the appointment of an Arbitrator whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule.
The aforementioned sections are pertinent for an understanding of the Questions of Law which are discussed as follows:
Questions of Law
This paper will be focusing on the following scenarios where doubts on the impartiality and unbiasedness of arbitrators are bound to arise.
Can an arbitration proceeding be said to be fair and just-
When someone interested in the outcome of the arbitration is appointed as an arbitrator or is given the right to appoint a sole arbitrator?
When there is a named arbitrator in the contract?
When arbitrator has to be selected by one party from the panel created by the other party?
In this paper, as you move ahead, all these three scenarios have been dealt with in detail along with the judicial interpretation, leading case laws, and the author’s opinion.
When someone interested in the outcome of the arbitration is appointed as an arbitrator or is given the right to appoint a sole arbitrator
In an ideal situation, assuming a dispute has arisen between two parties, there should be a panel of an odd number of adjudicators at least three in number; one being appointed by both parties and the third one unanimously appointed by those two, it goes without saying that the third one will be the presiding arbitrator. However, this will not be very economical – every arbitrator will charge his fees and it would ultimately put financial pressure on the parties which they wanted to avoid in the first place by opting for ADR.
For this reason, many contracts contain an arbitration clause that provides for an unliteral appointment of a sole arbitrator by a single party. This is especially the case where the contract is between parties of significantly different bargaining strengths. In adhesion contracts, a clause is often found in relation to the unilateral appointment of a sole arbitrator or named arbitrator who is beforehand appointed to hear the disputes should any arise out of the contract. The former type of clause is being discussed in this scenario while the latter type of clause will be discussed in the next scenario.
Nemo Judex in Causa Sua read with qui facit per alium facit per se, clearly implies that if an interested party is allowed to himself act as an arbitrator or unilaterally appoint a sole arbitrator, it would amount to a violation of principles of Natural Justice. Therefore, in the present scenario, the unilateral appointment of a sole arbitrator would result in a violation of the most basic principles of justice.
Coming to judicial interpretation, an important case where the Hon’ble Supreme Court of India held that unilateral appointment of arbitrator impermissible in law as against principles of natural justice is Perkins Eastman Architects DPC and Anr v. HSCC (India) Ltd., 2019 SCC OnLine SC 1517, this case is the corollary to the judgement of the Hon’ble Supreme Court of India in TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377 and Bharat Broadband Network Limited v. United Telecoms Limited, (2019) 5 SCC 755.
In TRF Limited (Supra), Managing Director was himself named arbitrator and was given the additional power to appoint any other person as an arbitrator. The Managing Director was held incompetent to act as the arbitrator and such incompetency stems from the inevitable interest he will have in the outcome of Arbitration.
In Bharat Broadband (Supra), it was held that the person who is de jure ineligible to arbitrate cannot appoint a sole arbitrator and if appointed, his appointment shall be void ab initio as held in TRF Limited (Supra). It was also held that if the arbitrator is struck by Schedule V, the ‘express agreement’ required under the proviso of § 12(5) is compulsory and cannot be overridden by any earlier agreement nor by conduct. It was further held that §12(4) cannot be a defence to § 14(2) as the appointed is barred under § 12(5).
In Perkins (Supra), the Managing Director was not to act as an arbitrator but was given the right to appoint a sole arbitrator. Following the ratio of TRF Limited (Supra), the Hon’ble Supreme Court of India held that when Managing Director was himself incompetent to act as an arbitrator, and such incompetency results from his interest in the outcome of the arbitration. If his interest in the outcome is the basis of his incompetency, it will remain in the present case as well. Thus, the Managing Director was held incompetent not only to act as an arbitrator but also to unilaterally appoint a sole arbitrator.
Perkins’ (Supra) ratio has been followed in multiple decisions, a few of them are BVSR-KVR v. Rail Vikas Nigam Ltd, 2020 SCC OnLine Del 456; Proddatur Cable TV Digi Services v. Siti Cable Network Limited, 2020 SCC OnLine Del 350 : (2020) 267 DLT 51 and Pave Infrastructure Pvt. Ltd. v. WAPCOS Ltd. 2020 SCC OnLine Del 1489.
Accordingly, the present line of judgements and interpretation lays down a good law that unilateral appointment of a sole arbitrator is impermissible in law as violative of principles of natural justice.
When there is a named arbitrator in the contract
In the previous scenario, we discussed about the unilateral appointment of a sole arbitrator, and as discussed before, another type of arbitration clause may be found in adhesion contracts wherein there is a named arbitrator who will hear the disputes, should any, arise out of the contract.
It is pertinent to mention that the Arbitration Law in India expressly allows for naming an arbitrator in the contract. It goes without saying that at the time of dispute arising between parties, if such arbitrator conflicts with Schedule V and/or Schedule VII, he will not be eligible to act as an arbitrator as the same is prohibited by the law. Therefore, by the action of law, such arbitrator will lose his mandate and if any arbitral proceedings are being held under him, they would be equivalent to coram non judice and therefore, non-est in the eyes of law. But in case, such arbitrator is not stuck by the aforesaid schedules, he would be eligible to act as an arbitrator and the arbitral proceedings would be valid in the eyes of law.
Perkins (Supra) does not deal with the problem which comes up in adhesion contracts wherein the party who is in the dominant position can put a named arbitrator of their choice in the contract.
The argument of the dominant party that such arbitrator as not directly hit by Schedule V or Schedule VII would not be biased towards the dominant party seems a little difficult to accept.
As the said arbitrator has received ‘work’ from the dominant party who had the sway over the drafting of the contract; he will in most probability at least be gullible to succumb to the pressure from such party for rendering an award in their favour. If that be the case, it would be a violation of the sanctity of the judicial process.
After the verdict of Perkins (Supra), it is only a matter of time that such clauses in adhesion contracts come up for consideration before Courts. While adjudicating, Courts may not have any assistance of the appointment process as generally there isn’t any for named arbitrator(s), thereby meaning they may have to conduct an analysis into the bargaining power of parties at the time of drafting and signing of contract naming such arbitrator. Apart from this, Courts may also have to see the contract in toto as to ascertain how skewed the clauses are in the favour of the dominant party, it may further help to understand to what extent the dominant party has abused his position to gain an unfair advantage in the contract. Courts may also go into the question of fact whether there was any ‘fair’ discussion in relation to the named arbitrator or strictly adhesion contract was there, it may have a significant impact on the decision. Though, the chances of a ‘fair’ discussion are thin when the difference in the bargaining power of parties is much.
In my humble opinion, it would not be appropriate to allow a named arbitrator in an adhesion contract to hold arbitration proceedings when the party with inferior bargaining power has raised their doubts as to the impartiality and fairness of such arbitrator.
When arbitrator has to be selected by one party from the panel created by the other party
The possibility of bias of arbitrator(s) may also arise when a party has to choose an arbitrator from a panel prepared by the dominant party. This is another type of clause which is used in contracts between parties of unequal bargaining strength.
In this type of clause, the contract designates a party who will constitute a panel and designates the other party to choose arbitrators from that panel. The pivotal part to ensure unbiasedness and fairness in the panel is to make it broad and diverse i.e. having technical members from private sectors and government, judicial members, etc. If the panel is large and having members from diverse backgrounds, it would instil an idea in the other party that the first party is acting fairly. However, if the panel is very small and consists of homogenous members who in one way or the other are interested in the outcome of arbitration, it would be a violation of natural justice and would create an impression in the mind of the other party that first party is acting unfairly and trying to hijack the arbitration.
This issue has come up for consideration before Courts on multiple occasions.
In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, the contract provided that respondent had to create a panel from which they themselves will make a list of five engineers from which they and appellant had to choose one arbitrator each, and then those two will choose the third arbitrator from that list. It was held that the appellant had no real choice to choose the arbitrator from the entire panel, and choosing an arbitrator from the list of five arbitrators prepared by the respondent from the panel that too was prepared by respondent would instil an idea of bias in the mind of appellant. The Court also insisted upon the need of creating a broad-based panel, preferably having some experienced and eminent professionals from the private sector as well as to reduce the possibility of bias.
Hon’ble Supreme Court of India in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), 2020 (1) ALT 70 : 2020 (1) ARBLR 19 (SC), upheld the method of the constitution of arbitral tribunal wherein the appellant has constituted a panel of its four retired officers and respondents were to select two arbitrators from that panel. By the application of this judgement, a party can offer a small panel to the other party for choosing an arbitrator amongst them.
Hon’ble High Court of Delhi in SMS Ltd. v. Rail Vikas Nigam Limited, 2020 SCC OnLine Del 77 followed the ratio of Voestalpine (Supra) and held that as the panel created by the party was not broad-based and many members of that panel were either retired or serving employees of the party, there is a scope of biasedness and it does not satisfy the concept of neutrality.
Hon’ble High Court of Delhi in BVSR-KVR v. Rail Vikas Nigam Ltd. (Supra) followed the ratio of Voestalpine (Supra) and SMS (Supra) and held, “From the above narration it is clear that this Court in SMS Limited (supra) has held that the panel of 37 names (in this case only five names) given by the respondent Company does not satisfy the concept of neutrality of Arbitrators as it is not broad based as contemplated by the Supreme Court in the case of Voestalpine Schienen GMBH (supra). The said conclusion is squarely applicable in this case as the respondent Company has not even shown that they have broad based the panel keeping in view the mandate of the Supreme Court in Voestalpine Schienen GMBH (supra).”
The line of judicial precedents is clear that the panel prepared must be broad and diverse, however, the judgement in Central Organisation for Railway Electrification (Supra) has deviated a little from the line of judgements and may require a review or a reference to the larger Bench.
Lord Hewart, the then Lord Chief Justice of England in Rex v. Sussex Justices,  1 KB 256 said,
“Justice must not only be done, but must also be seen to be done”
Independence and Impartiality are indispensable qualities of an Arbitrator if a fair hearing is to be expected in Arbitration. If they are dispensed with, it would not only be a fraud on Natural Justice but also a mockery of judicial process and laws.
Please read concluding on thedailyguardian.com
This paper discussed in detail the Questions of Law of how much arbitration proceedings can be said to be fair and just in various scenarios, and based on the discussion, the Questions of Law are answered as follows:
Can an arbitration proceeding be said to be fair and just when someone interested in the outcome of the arbitration is appointed as an arbitrator or is given the right to appoint a sole arbitrator?
If this is allowed it would be violative of natural justice, and would lead to erosion of fairness and justice from the arbitration proceedings. After the judgement in Perkins (Supra), it is abundantly clear that any unilateral appointment of a sole arbitrator is untenable in the eyes of law and Courts will have complete power to terminate the mandate of such arbitrator as void ab initio and appoint a new one.
Can an arbitration proceeding be said to be fair and just when there is a named arbitrator in the contract?
There is no authoritative judicial pronouncement on this, however, when there is a named arbitrator in the contract and he is challenged by a party in the Court. The Court may have to go into various factors as discussed above. Following those tests, if there exists a reasonable doubt to his impartiality, fairness or unbiasedness, his mandate should be terminated by Court as coram non judice as if he is allowed to conduct arbitration proceedings it would be a violation of natural justice.
Can an arbitration proceeding be said to be fair and just when the arbitrator has to be selected by one party from the panel created by the other party?
The line of judicial precedents on this question is clear with one exception that the panel must be broad and diverse to minimise the possibility of bias and instil the confidence of fairness of arbitration in the mind of the party who has to choose one from the panel. It is important that the panel must consist of eminent professionals from private sectors and persons having the judicial background to keep the diversity of the panel and the fairness of arbitration proceedings intact.
When a party in the above scenarios petitions the Hon’ble Court with the doubts in relation to fairness and unbiasedness of the arbitrator, it would only be justified for the Hon’ble Courts to intervene for saving natural justice from being ‘legally’ frustrated by the sole arbitrator. It must not be lost sight of that there is no appeal against an arbitration award and grounds for its challenge are very limited.
It would only be fair and just, if the responsibility of naming a sole arbitrator when there is a conflict between parties concerning fairness or unbiasedness of the sole arbitrator unilaterally appointed or named, falls upon the able shoulders of the Court.
The Constitutional Courts have an inherent duty to act as sentinel on the qui vive to protect Natural Justice, as it must not be forgotten that they are de facto custodians of the Constitution and Rule of Law, this makes them duty-bound to interfere in the cases where the most basic principles of justice are blatantly violated.