Nemo judex in sua causa
Published: Sep 16, 2024
By Shoba Ramamoorthy
NO-one is a judge in his own cause, is one of the fundamental principles of natural justice. So then, could one party to a contract act as an arbitrator to resolve the disputes that had arisen under the contract? Or could a party retain the power to appoint an arbitrator of its choice? Or could it appoint an arbitrator from a panel of arbitrators curated by it?
With the liberalization of Indian economy in the early '90s, the need to provide for a legal framework in conformity with international practice assumed significance, in the context of commercial engagements between MNCs and PSUs. The Arbitration and Conciliation Act, 1996 (the Act, for short) was enacted consolidating and amending the law relating to domestic arbitrations, international commercial arbitrations and the enforcement of foreign arbitral awards.
Section 12(1) of the Act provided as under:
"When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality"
The above quoted provision has been subject to much litigation, especially in the context of State undertakings appointing particular persons / designated officials of the undertakings as potential arbitrators. In the case of Indian Oil Corporation Ltd. vs Raja Transport (P) Ltd,1 the dealership agreement envisaged the resolution of disputes by the sole arbitration of the Director (Marketing) or any other officer of the Corporation nominated by him. Arbitration is essentially an adjudicatory mechanism declaring the rights and liabilities of the parties and therefore ought to be just and fair. The abovesaid clause, patently unfair to the dealer, was challenged and the Supreme Court formulated the following question, in the appeal:
"Whether the learned Chief Justice was right in assuming that when an employee of one of the parties to the dispute is appointed as an arbitrator, he will not act independently or impartially?"
This question was answered in the negative for the reason that there was no bar under the Act for an employee of a government undertaking to act as an arbitrator; there can be justifiable apprehension about the independence /impartiality of an employee-arbitrator only if such person was dealing with the subject contract or if such person is a direct subordinate to the officer whose decision is the subject matter of the dispute. However, the Court recorded the parting note:
"Before parting from this issue we may however refer to a ground reality. Contractors in their anxiety to secure contracts from Government/statutory bodies/public sector undertakings, agree to arbitration clauses providing for employee arbitrators. But when subsequently disputes arise, they baulk at the idea of arbitration by such employee arbitrators and tend to litigate to secure an "independent" arbitrator. The number of litigations seeking appointment of independent arbitrator bears testimony to this vexed problem.
…. A general shift in future may be necessary for understanding the word "independent" as referring to someone not connected with either party. That may improve the credibility of arbitration as an alternative dispute resolution process…"
In 2001, the Law Commission gave its 176th report recommending certain amendments in the Act, having regard to the fact that the UNCITRAL model adopted by the legislature does not adequately address the arena of domestic arbitrations resulting in complex, expensive and time-consuming arbitrations. This report was entirely accepted by the government and an Amendment Bill was introduced in the Rajya Sabha on 22.12.2003. However, the Standing Committee on Personnel, Public Grievance, Law and Justice opined that some of the amendments were contentious. The Committee stressed upon the need for popularizing institutional arbitration in India and called for the establishment of an institute along international standards. Resultantly, the 2003 Bill was withdrawn.
In August 2014, the Law Commission, in its 246th report, proposed substantial amendments to Sec 12 of the Act, purporting to increase the threshold for judicial intervention in arbitration matters and to provide for neutrality of arbitrators. The Commission recommended that appropriate Schedule be appended to the Act, indicating the circumstances giving rise to justifiable doubts about an arbitrator and the persons who are ineligible to act as arbitrators in a given matter.
An entirely new provision was substituted for Sec 12 in the '96 Act. Sec 12(3) and Sec 12(5) read as under:
"12. Grounds for challenge - …..
(3) An arbitrator may be challenged only if-
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
………………..
(5) Notwithstanding any prior agreement to the contrary, any person 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 shall be ineligible to be appointed as an arbitrator:
Provided that the parties may, subsequent to the disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."
The Fifth Schedule was introduced enlisting the 'justifiable doubts' circumstances and Seventh Schedule provided for 'ineligible persons', drawn from the Orange and Red List of the IBA Guidelines on Conflicts of Interest in International Arbitrations.
The amendments came into effect on and from 23.10.2015.
Post amendment, in 2017, in Voestalpine Schienen GMBH vs Delhi Metro Rail Corporation Ltd,2the Supreme Court had an occasion to deal with a matter where, in terms of the agreement, DMRC furnished a list of names from its panel of arbitrators consisting of highly qualified and experienced persons who had worked with Railways and PWD, from out of which GMBH had to nominate its arbitrator. The Supreme Court categorically held that no bias or even real likelihood of bias could be attributed to such persons when they had no connection with DMRC and therefore they are not ineligible in terms of Sec 12(5) of the Act. The Court also observed that "the very reason for empanelling these persons was to ensure that technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators."
A month later, a 3-Judge Bench of the Supreme Court, in TRF Limited vs Energo Engineering Projects Limited, 3 declared in no ambiguous terms that "once an arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator." In terms of the arbitration clause in the agreement between parties, the disputes were to be resolved by the sole arbitration of the Managing Director or his nominee. The Court observed that having regard to the language employed in the Seventh Schedule, the Managing Director became ineligible and on that premise, rejected the submission by DMRC that the ineligibility of the MD cannot be extended to his nominee, when he is not an employee of the Corporation and more so when there is apposite and requisite disclosure of nominee's interest in the matter.
This judgment marked a major shift in approach to the issue of neutrality of arbitrators, in the wake of the amendments made to the Act in 2015. Thus, first two of the three questions posited at the very beginning of this article were affirmatively answered in the negative by the Supreme Court.
So then, what about nominating an arbitrator from a panel curated by one of the parties to the dispute?
In 2019, a 3-Judge Bench of the Supreme Court in Central Organisation for Railway Electrification (CORE) vs ECI-SPIC-SMO- MCML (JV) 4validated the procedure for appointment of arbitrators as agreed between the parties which contemplated that CORE proposed a panel of 4 arbitrators (retired railway employees) from out of which the ECI had a choice to agree upon 2 names, whereafter the GM of CORE could appoint one of them as ECI's nominee. The tribunal consisted of 3 arbitrators, two of whom, including the presiding arbitrator were to be nominated by CORE. The Court reasoned that the power of the GM to nominate arbitrators is counterbalanced by the power of ECI to select two names out of four arbitrators in the panel.
The judgment in CORE was doubted for its correctness, for, any appointment by an ineligible person in terms of the Seventh Schedule was declared to be void ab initio, in TRF. The issue was referred 5 to the Chief Justice for constituting a larger Bench to settle the same since the judgments in TRF and CORE were by co-ordinate Benches (3-Judges) of the Supreme Court.
Finally, this issue was taken up by the Constitution Bench of the Supreme Court, in the Reference6. The matter is reserved for judgment. The main thrust of the submissions was that a panel unilaterally 'controlled' by one party would not be independent or impartial and would certainly fall foul of Sec 12 of the Act. An independent panel by an independent institution, i.e., Institutional Arbitration was emphatically suggested to be the only solution to this problem.
While the judgment in Reference will certainly bring a finality to the issue of unilateral appointment of an arbitrator, there is yet another issue launched by the perpetually ingenious legal mind and that is this - Can a party to an agreement which unilaterally appointed an arbitrator; which chose not to get the mandate of the arbitrator terminated even after the judgment in TRF and which invited an award (made against it), raise the plea that the arbitration proceeding was void, in its challenge to the award u/s 34 of the Act? Could the Doctrine of Estoppel and Waiver be invoked against such party?
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1 Indian Oil Corporation Ltd. vs Raja Transport (P) Ltd 2009 8 SCC 520
2 Voestalpine Schienen GMBH vs Delhi Metro Rail Corporation Ltd 2017 4 SCC 665
3 TRF Limited vs Energo Engineering Projects Limited 2017 8 SCC 377
4 Central Organisation for Railway Electrification vs ECI-SPIC-SMO- MCM (JV) 2020 14 SCC 712 = 2019-TIOLCORP-42-SC-MISC-LB
5 Union of India vs Tantia Constructions Ltd - MANU/SCOR/01433/2021 and
JSW Steel vs South Western Railway & Anr - MANU/SCOR/73523/2022
6 Central Organisation for Railway Electrification Vs. M/s. ECI SPIC SMO MCML (JV) JOINT VENTURE COMPANY - C.A. No. 009486/009487/2019.
