Independence and Impartiality in Arbitration: Is there a need to relook at Section 11 of the A & C Act?

In most of the major commercial contracts today, especially in the ones in which the State is a Contractee, the arbitration clause is worded in a standard format and has a very peculiar characteristic. The State as the contractee, assigns to itself the exclusive right to appoint the arbitrator, and the contract also specifies that it is a retired or working officer/official of the particular state department in question who shall be appointed as the arbitrator. This power is retained by the State in the case of arbitration by a sole arbitrator, and even in the case of arbitration by a panel of arbitrators the arbitrator appointed by the State is a retired or working official of the respective state department. Such an arbitrator is invariably intrinsically connected to the subject matter of the dispute as well as with the parties to the dispute.

Such an arbitration clause seemingly finds its justification and rationale in well established and entrenched principles of contract law- two parties are bound by a mutually agreed contract that they have entered into with their eyes open, after considering the pros and cons of the contract and the arbitration clause. The existing understanding of section 11 of the Arbitration and Conciliation Act also provides no bar to such an arbitration clause. However, on the face of it, an arbitration clause that provides for the appointment of an arbitrator who is intrinsically connected to the subject matter as well as to the parties of the dispute, comes across as an arbitrary and unfair clause. A challenge to the appointment of such an arbitrator under Section 12 and 13 of the Act is not an adequate remedy as such a challenge can only be instituted after the appointment of the arbitrator, and the jurisdiction to decide upon the independence and impartiality of the arbitrator lies with the arbitrator himself.

Is it then possible to read the twin requirements of ‘independence’ and ‘impartiality’ within Section 11 of the Act? Such an interpretation should be possible if we start with the reasonable assumption that no party would submit to the appointment of a partial and biased arbitrator out of retired officers of the department. The sub-clauses to Section 11(6) make it possible to adopt such an interpretation as an application under the Section can be made to the Chief Justice if the parties ‘fail to reach an agreement expected of them under that procedure’ (Sub Clause 11(6)(b)) or ‘fail to perform any function entrusted to him or it under that procedure’ (11(6)(c)). Therefore, the right given for the appointment of arbitrator should be reasonably restricted by the legitimate expectation of appointment of an impartial and independent arbitrator. This is further buttressed from the fact that when the Chief Justice is to appoint an arbitrator under Section 11(8), he is to act on ‘considerations as are likely to secure the appointment of an independent and impartial arbitrator’. The appointment of an arbitrator who can be perceived to have an inherent bias towards the respondent is against any reasonable and legitimate expectation that is expected of the parties under section 11 (6)(b) and (c). Therefore the power to appoint an arbitrator must be read down to include the minimum basic level of independence and impartiality of the person who is to be appointed as arbitration. A ‘reasonable man’ test, for ascertaining whether the relationship of the arbitrator to the parties or the subject matter is close enough to be objectionable should then be adopted while interpreting Section 11 of the Act, as the question is not just whether the arbitrator really is impartial, but whether a reasonable outsider might consider that there is a risk that he is not.

The case law on the subject has largely held that arbitration agreements in government contracts providing that an employee of the Department would be the Arbitrator, are neither void nor unenforceable as no bar under the Act is found for such a clause. However, some support to this aforesaid argument may be found in the decision of the Supreme Court in Northern Railway Administration, Ministry of Railways Vs. Patel Engineering  Company ltd. 2008 3 Arb. L.R. 349 (SC), where the Court stated that Section 11(6) must be read cumulatively with Section 11(8) of the Act to secure the appointment of an independent and impartial arbitrator. The Madhya Pradesh High Court, in Ajay Traders Vs. Birla Jute Industries  Ltd., 2004 (2) RAJ 135 (M.P.), relying on Section 11(8), by relying on the principle of law that a person can not be a judge of his own cause, set aside the appointment of an arbitrator who was directly connected with the contract in question, on reasonable apprehension of bias on his part. A required change in the understanding of section 11 of the Act however is best summarized by Justice Raveendran’s dicta in the recent decision of Indian Oil Corporation Ltd. v. M/s Raja Transport (P) Ltd, 2009 8 SCC 520:

“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 balk 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. It will be appropriate if governments/statutory authorities/public sector undertaking reconsider their policy providing for arbitration by employee- arbitrators in deference to the specific provisions of the new Act reiterating the need for independence and impartiality in Arbitrators. A general shift may in future 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 my practical experience as well, such an arbitration clause that mandates the appointment of a retired/working official as arbitrator, almost always leads to a failure of the purpose and process of arbitration. This is because, firstly a very expansive interpretation is given to a Section 34 application by the civil courts under the Act, and a challenge to an arbitration award when the arbitrator was a retired or working officer of the State is often sustained. Secondly, the A&C Act of 1996 has a very peculiar characteristic, in that under Section 36 of the Act, there is an automatic stay to the enforcement of the arbitral award, the moment a section 34 application is filed. Often, such an application is filed on the 89^th day, resulting in a automatic stay on the enforcement of the award, leading to massive delays and nullifying the benefits of arbitration. The intention behind the A & C Act, is that it should act as an effective, quicker and feasible alternative to civil litigation in courts.  It is also a reality that both arbitration and enforcement of awards today has become an extremely costly and time consuming activity. Both these objectives are defeated invariably when a Section 34 application is filed.

Therefore this question of an existence of an antecedent bias, where the bias may arise either from a relationship between the arbitrator and one of the parties, or from a relationship between the arbitrator and the subject matter of the dispute, requires a fresh perspective and a fairer interpretation.