Arbitration in India in the past couple of years has seen some major changes. As the Arbitration Amendment and Conciliation (Amendment) Act, 2015 (hereinafter “the 2015 Amendment”) brought some drastic substantive and procedural changes in arbitral jurisprudence, the Indian judiciary, starting with BALCO v. Kaiser, has also made an attempt to make the environment as conducive as possible for arbitration, putting it on an international pedestal with the aim of making India a preferred seat of arbitration. In the recent judgment of Voestalpine Schienen GmBH (VSG) v. Delhi Metro Rail Corporation Limited (DMRC), the Supreme Court clarified Section 12 of the Arbitration and Concilliation Act, 1996 (hereinafter “the Act”) for the purposes of impartiality and neutrality required for the appointment of an Arbitrator and settled the issue at an Apex stage, though future disputes with respect to Section 12 can be expected as the adjudication was not holistic in that regard.
The Arbitration agreement between the parties prescribed a procedure for the constitution of a panel, which stipulated that DMRC shall forward names of five persons from the panel maintained by the DMRC and Voestalpine would have to choose its nominee arbitrator from the said panel. After DMRC presented the names of the panellists, Voestalpine declined to accept the list as it consisted of serving or retired engineers either of DMRC or of Government Departments or Public Sector Undertakings, who in Voestalpine’s opinion did not qualify as independent arbitrators. Rejecting the DMRC’s list, Voestalpine then filed a petition under Section 11 of the Act for the constitution of a tribunal. Though the original procedure was scrapped, DMRC had also provided for a broad list of 31 respectable arbitrators, but they were all government employees.
The Supreme Court dismissed the petition holding that though DMRC had provided Voestalpine with a list of 31 qualified individuals who were a part of the Government, they were not disqualified either by IBA guidelines or under Schedule V and Schedule VII as per section 12 of the Act. The Supreme Court opined on the need for impartiality and neutrality in the appointment of arbitrators, thereby establishing a ratio which shall be the raison d’être for the appointment of impartial and neutral arbitrators in the times to come in India.
Analysing the raison d’etre
The above decision dovetails with other views by the Indian judiciary on independence and impartiality standards in arbitration. The Court reiterated the phrase of ‘justifiable bias’, as borrowed from UNCITRAL, on the standard of bias which must prevail to question and remove an arbitrator from the tribunal. The Court acknowledged the important distinction between ‘independence’ and ‘impartiality’, stating that while independence can be objectively ascertained and established at the outset, partiality is a subjective concept which can be found out during the course of the dispute.
Two pertinent observations were made by the Supreme Court. Firstly, that the threshold is not one of ‘bias’ or ‘likelihood of bias’ but one of ‘justifiable doubt’. Secondly, freedom of the arbitrator is an utmost important consideration, in the context that to have the dispute adjudicated by an independent and impartial person is one of the cornerstones of arbitral jurisprudence. The Supreme Court cited the 2015 Amendment, the IBA guidelines, literature on impartiality and case law precedents to provide reasons for its stance. It validated the intent of the Law Commission of India in producing the 246th Report in 2004, which was to standardize arbitration in accordance with the universally prevalent arbitral norms. It further reiterated the pre-amendment judgment of U.O.I. v. M/S Singh Builders Syndicate, where the Supreme Court had recommended that the government should phase out arbitration clauses that nominate an employee as the arbitrator.
Ambit of Definition
While there is no clear-cut definition of independence and impartiality, its ambit in India has been legislatively defined to be Schedule V of the 2015 Arbitration Amendment Act read with Section 12(1) and 12(5) of the Act. The Act lists circumstances that would associate the arbitrator with the party which, in turn, would be sufficient to upset the requirement of neutrality. However, if impartiality is ideally pursued, there are two lacunae here. Firstly, such a comprehensive list does not seem to anticipate cases which go beyond the arbitrator’s links with the parties. Secondly, it does not account for impartiality arising out of arbitrator’s intellectual bias. French Courts, in cases of T.A.I. v. S.I.A.P.E. (1989) and Gemanco v. S.A.E.P.A (1991) have adopted intellectual bias as a basis of impartiality if it creates the possibility of a ‘definite risk’ of bias. Prior conduct of the arbitrator in professional and legal situations is important if one of the parties’ claim is to the contrary. In Uni-Inter v. Maillard (1991), a statement made by an arbitrator was analysed by the Paris Court on the parameter if it reveals any excessive vehemence or systematic hostility which might raise a presumption that the arbitrator might be biased towards one of the parties. Clause 31 of the Vth Schedule deals with this, listing the arbitrator’s firm’s adverse behavior against one of the parties as a ground for impartiality.
Duration of disassociation of the arbitrator from the parties to establish independence and impartiality is an important aspect in arbitration disputes. While Voestalpine does not delve into this aspect, Schedule V of the Amendment Act neatly concludes the time to be three years for 5 stipulated circumstances as per clauses 20-24. However, the Act only delves into the past behavior of the arbitrators, whereas international jurisprudence has moved a little beyond this and also monitors if the post award behavior of the arbitrator is impartial and neutral, as undisclosed relationships are not uncommon, as observed in Annahold BV v. L’Oréal (1996).
Complete Impartiality of the Panel
The American Arbitration Association (“AAA”) modified its “Code of Ethics for Arbitrators in Commercial Disputes”, which used to allow partial party appointed arbitrators, in 1997 to compulsorily having impartial party arbitrators, even disallowing intra-panel communication for specific reasons. On the other end, IBA’s “Rule of Ethics for International Arbitrators” lays down independence and impartiality should be all pervasive in Arbitration, including party appointed Arbitrators. The Supreme Court, by endorsing IBA in Voestalpine, has tended towards this all pervasive approach. The same approach is followed by the ICC, the CEPANI and the Paris Bar, thus, making the Indian approach truly internationally standardized.
Reasonable man test
The Law Commission of India’s 246th Report adopted the ‘reasonable man test’ to asses “justifiable doubt”, as given in Art. 12(1) of UNCITRAL’s Model Law, which was implemented by way of the 2015 amendment and is now accepted in Voestalpine; the same as other countries such as Germany, Belgium and France (in France it is “reasonable doubt”). Thus, the justifiability of doubt from a reasonable man’s perspective as adopted by the Supreme Court is a global standard for impartiality.
The Trend up to Voestalpine and Beyond
Amendment of Section 12 and addition of Schedules V and VII were breakthrough changes. Earlier, the basis of bias under S. 12 mostly lay in the reasonable apprehension of bias against the arbitrator depending upon the subjective circumstances of the case. In Kumaon Mandal Vikas Nigam Ltd. v. Girja Shankar Pant, the Apex Court held that bias should be determined on the particular facts and circumstances of each case. The standard of proof to establish bias was based on availability of cogent evidence. The standard was a rather subjective element of ‘actual bias’, which stood for any vested interest the arbitrator might have in the case, as held in Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd. By way of the amendment, and now Voestalpine, now there is an objective standard to meet – circumstances under which a person shall automatically be disqualified to be an arbitrator (Schedule VII) and which give justifiable reasons for bias (Schedule V). Once this hurdle is crossed, other subjective elements come into play. By this a huge push has been given to procedural fairness and this shall persist in the future.
Post the 2015 Amendment, in the case of Era Infra Engineering Ltd. Vs. Aravali Power Company Pvt. Ltd., the Delhi High Court, relying on the amendment, held that even if the arbitrator might be impartial in actual conduct, the lack of choice given to the other party in appointing an arbitrator does not convey the message of neutrality and impartiality. In this case the respondent had dictated terms in the agreement that if an arbitrator of its choice is not appointed then it would not go for arbitration at all. Similarly, in the case of Offshore Infrastructure Limited v. B.H.E.L. & Ors., the Madras High Court held that the Amendment’s intention to set the threshold at ‘justifiable doubts’ must be paid heed to, instead of the possibility of an actual bias occurring. Though these were two prominent High Court cases on impartiality, the final stamp of judicial authority on this was put by the Supreme Court in Voestalpine case.
With procedural fairness being given such importance in Indian arbitration, it shall be interesting to see the questions and clarifications which might arise regarding this in the upcoming cases and how they will make India a more internationally standardized and conducive place to arbitrate.