Combatting Frivolous Claims: Arbitral Immunity in India

[Prerona Banerjee is a 4th year student at National Law University Odisha]

There is very little authority addressing the obligations of various countries to recognize an arbitrator’s immunity from civil liabilities because most contemporary nations contain broad grants as a part of their arbitration regimes. Through the 2019 amendment, India has also incorporated arbitral immunity through section 42B in the Arbitration & Conciliation Act 1996.  The provision reads as follows:

“No suit or other legal proceedings shall lie against the arbitrator for anything which is in good faith done or intended to be done under this Act or the rules or regulations made thereunder.”

Immunity for arbitrators is a welcome surprise and a right step towards making Indian arbitration practice congruent with the best practices around the world. Back in 2015, the Chartered Institute of Arbitrators had drafted the “London Principles” to develop a balanced and independent basis for assessing the safest juridical seats for arbitral proceedings. One of the principles identified that legal exemption from civil liabilities is a marquee feature of a potentially desirable seat for arbitral proceedings. In fact, one of the recommendations of the High-Level Committee chaired by Justice B.N. Srikrishna was that a new provision is inserted to the Indian Arbitration Act that provides for immunity for any act or omission that has not been tainted by bad faith.

It has often been claimed that such immunity had been assumed by courts in India even before the said amendment. However, High Courts in India have rendered judgments that necessitate such an amendment. One instance could be when the Delhi High Court in Rajesh Batra v Ranbir Singh Ahlawat imposed a penalty on the arbitrator for acting beyond his jurisdiction and stated: “The present is a shocking case where the arbitrator assumed jurisdiction without even caring to see that the parties had not appointed him mutually as required by the agreement…” It is interesting to note that the appellant had not asked for such a penalty and the judge used his suo moto discretion to award the same. Thus, this amendment provides for the much desired impregnable immunity so that arbitrators do not have to work in an environment of uncertainty.

Through this post, the author aims to analyse section 42 B and ascertain the practical implications of the section.

Understanding Section 42B

The Indian Arbitration Act is modelled after the watershed UNCITRAL Model Law which is silent on the provision of immunity of arbitrators. The drafters of the Model Law had concluded that given the diversity of national approaches, they cannot narrow down on one satisfactory approach to deal with the issue of arbitral immunity. Even today, there is a lack of international harmonization when it comes to arbitrator’s immunity, rights or liabilities and this issue is left almost entirely to national laws. To deal with this subject adequately, India opted for a negative clause which provides arbitrators with specific immunities as opposed to a positive clause which provides instances of claims against which one can move against arbitrators. Other jurisdictions which provide for similar clauses are the English Arbitration Act, 1996, section 29(1); Singapore International Arbitration Act, 2012, section 25 and the Australian Commercial Arbitration Act, 2011, section 39.

The Srikrishna Committee recommended that India should adopt a clause that provides for immunity unless “…the act or omission is shown to have been in bad faith.” Accordingly, the only caveat attached to the immunity provision is that such an action has to be performed in good faith or intended to be carried out under the Act or the rules and regulations specified under it.  Since there is no precedent for section 42B set by the High Courts or the Supreme Court in India, there is no set way to understand the import and threshold of the good faith qualification. Parties to an arbitration agreement can bring various claims against the arbitrator ranging from contractual disputes to tortious ones. Actions that lack good faith can involve instances of bias, deliberate wrong-doing, fraud, corruption and withdrawal from the arbitration process without substantiating with reasons.  The Indian Arbitration Act does not define what qualifies as an act done in good faith. Furthermore, neither the Srikrishna Committee Report nor the legislature has made any concrete suggestions as to which actions can be proceeded against and which ones are covered under the civil immunity provided by the Indian Arbitration Act. Thus, words like good faith or honesty might seem ambiguous and fail to send a clear message as to the scope of the provisions and what qualifies as a transgression.

However, the General Clauses Act, 1897 defines good faith as something that is done with honesty, irrespective of whether it is done negligently or not. In the same vein, several commentators note that no liability can be imposed on arbitrators for the want of skill or care as long as the act is done with honesty and without fraud. Essentially, this notion of good faith opens the contractual system to ethics and ensures that an arbitrator will be immune as long as he does not trample the rights of the other parties to the contract. Since the definition provided by the General Clauses Act lays stress on honesty, acts involving deceit, lack of care, intentional procedural irregularities, inappropriate withdrawal from arbitration, contacting a party inappropriately and refusing to abide by court orders should essentially be non-exempted actions that can be proceeded against. This also means that there is no professional obligation on the arbitrator to perform competently or abide by the arbitration agreement as long as the actions are in good faith and intended to be done under the Indian Arbitration Act.

Additionally, section 42 B does not provide any immunity from criminal actions, and arbitrators can be made criminally liable for their actions. In the absence of a non-obstante provision or the usage of the words “criminal proceedings or complaint”, it cannot be assumed this provision overrides penal provisions in other codes or encompasses criminal actions in its ambit. Furthermore, a division bench of the Bombay High Court in Indorama Synthetics (India) Limited v. State of Maharashtra, while interpreting section 446  of the Companies Act, 1956, observed that the term “other legal proceedings” should be read ejusdem generis with the expression “suit” and can only mean civil proceedings. This analogy can also be drawn from the Supreme Court judgment in Rabindra Chamrior v. Registrar of Companies where the Court had to consider the scope of “any proceedings” under the section 633 of Companies Act, 1956. The Court opined that the term was limited to civil proceedings and could not be interpreted in a way that would render penal provisions under various Acts ineffective by its application.

Upshots of Providing for Immunity from Civil Liability

With the advent of arbitration as a preferred dispute resolution mechanism, there has also been a stark rise in civil actions against arbitrators. The Srikrishna Report, while advocating for the insertion of section 42B, stated that such immunity from civil actions is important to ensure that the independence of arbitrators is maintained and the integrity of the arbitral process is maintained. The objective behind such a provision would be to protect the arbitrators from unnecessary harassment by the parties to the arbitration. The Report raised concerns that arbitrators in ad-hoc arbitrations and some institutional rules do not provide for any immunity for the arbitrators and the insertion of such a provision will ensure that Indian arbitration practices is at par with other institutions around the world.

To protect the arbitrators from such civil claims, section 42B has been added to the Indian Arbitration Act. Furthermore, both of India’s indigenous arbitration institutions, namely the Mumbai Centre for International Arbitration (“MCIA”) and the Delhi International Arbitration Centre (“DIAC”) have adopted such an exemption in their rules. Rule 34 of the MCIA Rules 2016 provides that an “…arbitrator, shall not be liable to any person for any negligence, act or omission in connection with any arbitration governed by these Rules, save where the act or omission is shown by that party to constitute conscious and deliberate wrongdoing…”. Similarly, rule 35 of the DIAC Rules 2018 states that “…Arbitrator or any Committee or Sub-Committee, shall not be liable to any person for any negligence, act or omission in connection with any arbitration governed by these Rules.

Such civil immunity to arbitrators will go a long way in ensuring that arbitrators are allowed to exercise their functions and work without fear or favour. Furthermore, such immunity will ensure that the brightest minds across the globe are willing to sit as arbitrators in India. In fact, most arbitrators are individuals, and it is almost impossible for them to defend themselves against dissatisfied litigants. Leaving such arbitrators vulnerable to claims from the losing party will make them less inclined to take the role of arbitrators in arbitrations seated in India. Further, the mere threat of incurring personal liability and having to fund such a costly defence against well-funded corporate litigation can hinder the arbitrators from applying their mind freely to the merits of the dispute. Thus, it becomes as important to protect arbitrators and ensure their impartiality and independence as it is to protect judges. Further, given that the grounds for challenging an award has been limited around the globe and merits are seldom re-visited, arbitrators should be given the required freedom during the deliberative processes. Most importantly, constant attacks on the arbitrator would also provide for a ready means for a collateral attack against the award which would undermine the basic objectives of finality and speed of the arbitral process.

Looking Ahead

While the need for civil immunity for arbitrators cannot be questioned, the standard of care and the scope of remedy has to be carefully considered by courts in India. It is important that while interpreting section 42B, the court takes cognizance of the fact that while independence and freedom of the arbitrators ensures competence, a complete freehand is albeit problematic in practice. If complete freedom is given, arbitral immunity can be used as a shield for abuse of functions, impartial decisions and delays which can adversely affect commercial parties. Therefore, the contours of the immunity, bad faith conduct, specific cases such as withdrawal and procedural irregularities have to be weighed against the interests of the parties. To do so, it is necessary that India’s modus operandi involves a balanced approach, instead of giving free reins to either the arbitrator or the parties involved. Such an approach will better serve the Indian arbitration landscape because both arbitrators and commercial parties will benefit from this setting and will not be on tenterhooks while opting for India as the seat for arbitration.

Prerona Banerjee

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