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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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