Guest Post: Independence and Impartiality of Arbitrators: The Applicability and Scope of amended Section 12

(The following post is contributed by Shubham Jain, who is a student at the National Law School of India University, Bangalore)

Introduction 

The enactment of the Arbitration and
Conciliation (Amendment) Act, 2015
(“the
amendment
”) has brought a slew of changes in the two decade old Arbitration and Conciliation Act,
1996
(“the Act”). Based on the
recommendations of the 246
th Report of the Law Commission, the
Amendment sought to address the difficulties faced in the working of the Act.

One of the major changes brought about by
the amendment was the inclusion of provisions to ensure independence and
impartiality of arbitrators. Based on the Red and orange lists of
IBA
Guidelines on Conflicts of Interest in International Arbitration
, the
amended Section 12(1) read along with the newly inserted Schedule V provides an
illustrative list of situations which can raise doubt over the independence of
an arbitrator. More importantly, Section 12(5) creates a
non obstante whereby any person whose relationship, with the
parties, counsel or the subject-matter, falls under any of the categories
specified in Schedule VII, is deemed ineligible to be appointed as an
arbitrator and is treated as
de jure unable
to perform his function under Section 14. The questions over the scope of
amended Section 12 and its applicability to pre-amendment arbitration
agreements have been addressed by the recent judgment of the Delhi High Court
in
            Assignia-VIL JV v. Rail Vikas
Nigam Limited
, Arbitration Petition No.
677/ 2015 (Decided on April 29, 2016).


Background Facts and Issue:

The dispute relates to the alleged illegal
termination of the works and construction contract by Railways. Assignia sought
to resolve the dispute amicably in terms of Clause 20.2 of the contract. On
receiving no response, it invoked the arbitration clause contained in Clause
20.3. However, the respondent failed to nominate the names of arbitrators as
per the procedure and the petitioner filed a Section 11 petition for
appointment of arbitrator. There were several issues before the court including
whether the dispute could be referred to a new tribunal in light of a pre-existing
tribunal to adjudicate disputes arising from the same contract. However, two
issues that merit consideration are
first,
the applicability of amended Section 12 and
second,
the scope of amended Section 12.

1.                 
Applicability of amended Section 12:
Commencement of Proceedings

Section 26 of the amended Act states that
the provisions of the amendment apply to all arbitral proceedings commencing
after the commencement of the amendment Act unless the parties otherwise agree.
As per Section 21 of the Act, “Commencement of arbitral proceedings” is deemed
to take place on the date on which a request for that dispute to be referred to
arbitration is received by the respondent. In the instant case, the petitioner
asked for reference of the dispute to arbitration on October 26, 2015 while as
per Section 1(2) of the amendment act, it came into force on October 23, 2015.
Hence, there was no difficulty in applying the amendment provisions to this
case.

However, a more expansive position was
taken by the Guwahati High Court in
Panihati Rubber Limited v. The
Principal Chief Engineer, Northeast Frontier Railway
,
Arbitration
Petition No. 12/ 2011 (Decided on March 15, 2016). The contract contained an
arbitration clause similar to
Assignia

The petitioner had requested the respondents to refer the matter to an arbitral
tribunal way back in 2011 and had subsequently filed a Section 11 petition due
to the inaction on part of the respondents. The question before the court was
whether the appointment of the arbitrator during the pendency of the petition
was a valid one. While the court was correct on its reliance on
Datar
Switchgears Ltd.
v. Tata Finance Ltd.

to conclude that the respondents had forfeited their right to appoint the
arbitrator, its additional reliance on the amendment to conclude that in any
case, an interested party is barred from being an arbitrator as per Section
12(5) suggests that the court has failed to take notice of Section 26 unlike
the Delhi High Court in
Assignia (¶¶
36, 40).


In light of the clear definition of
commencement of arbitral proceedings, the proceedings would be deemed to have
commenced in 2011 and therefore, the amendment was inapplicable in the instant
case. Merely because an arbitration petition is decided after the amendment
should not mean that the provisions of the amendment can be applied to the
case. Therefore, it is respectfully submitted that the court was incorrect while
placing reliance on amended Section 12.

2.                 
Scope of Amended Section 12: The Death
knell of In-House Arbitrators


Clause 20.3 of the contract signed by the
petitioners in
Assignia provided that
the tribunal shall consist of 3 arbitrators with one arbitrator being a working
or retired officer of the Indian Railways Accounts Service, one arbitrator
being a working or retired officer of any Engineering service of Indian
Railways and the presiding member being a serving railway/ RVNL officer. A
prima facie look at the clause is
sufficient to make one wonder if a tribunal of such composition can decide the
dispute in a fair and unbiased manner. However, the erstwhile Section 12
created no bar on such clauses. A catena of apex court decisions (
See 246th
Report of Law Commission of India
, ¶¶ 53-56) had held such clauses to be
enforceable. The
locus classicus in
this regard is
Indian Oil Corporation Ltd. v. M/S Raja Transport (P) Ltd.

In Indian
Oil
, it was held the “senior
officer/s (usually heads of department or equivalent) of a government/statutory
corporation/ public sector undertaking, not associated with the contract, are
considered to be independent and impartial and are not barred from functioning
as Arbitrators merely because their employer is a party to the contract.
” While
it might be argued that party autonomy is the cornerstone of arbitration and clauses
providing for in-house arbitrators could be negotiated upon, such negotiations
seldom take place in practice. Lucrative government contracts often see fierce
bidding from parties with relatively weak bargaining power. Therefore, such
clauses are commonplace in all contracts with public sector undertakings.
 


The Law Commission opposed such clauses on
the ground of violation of principles of natural justice. It was of the view
that the distinction between private and public sector entities was superfluous
and the concept of party autonomy needs to be balanced with neutrality of
arbitrators. Therefore, it proposed the aforesaid amendments. The court in
Assignia denied the appointment as per
the terms of the arbitration clause as the same could have been said to be in
violation of Entry 1 of Schedule VII.


Conclusion

In effect, the amendment has brought as end
to the practice of having “in-house arbitrators” by state or its
instrumentalities. It has brought the Indian law at par with international
standards. This has been reinforced by the judgment in
Assignia. However, courts need to exercise caution while applying
the amended provisions. As shown by the judgment given by the Guwahati High Court,
a partial reading of the provisions could lead to unintended consequences. The
amendment makes it clear that it is applicable only to proceedings commencing
after the commencement of the amendment and it would be wrong for courts to
make it applicable to proceedings that have commenced earlier. Such decisions
could lead to increased uncertainty in the arbitration regime, something that
the amendment sought to reduce.

About the author

V. Niranjan

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