Report No. 176
2.16 Independence or Bias or Disqualification of named arbitrator: relationship with one of the parties to the contract and revocation of authority
It is today a very common feature of contract in Government/Public Sector that in the event of differences arising between a contractor and the Department, the Department can appoint one of its officers as an arbitrator.
Such a provision has been held to be valid by the Supreme Court, Secretary Vs. Muniswamy 1988 Suppl SCC 651 and (Nandyal Corp. Spinning Mills Vs. K.V. Mohan) 1993 (2) SCC 654. That was also the earlier English law. But in sec. 24 of the UK Act, 1950 there was a power granted to the Court to grant relief where the arbitrator was not impartial. Sec. 24(1) stated as follows:
"Sec.24(1): Where an agreement between any parties provides that disputes which may arise in the future between them shall be referred to an arbitrator named or designated in the agreement, and after a dispute has arisen any party applies, on the ground that the arbitrator as named or designated is not or may not be impartial, for leave to revoke the authority of the arbitrator or for an injunction to restrain any other party or the arbitrator from proceeding with the arbitration, it shall not be a ground for refusing the application that the said party at the time when he made the agreement knew or ought to have known, that the arbitrator, by reason of his relation towards any other party to the agreement or of his connection with the subject referred, might not be capable of impartiality."
The ICC Rules require prospective arbitrator to disclose:
"whether there exists any past or present relationship, direct or indirect, with any of the parties or any of their counsel, whether financial, professional, social or other kind and whether the nature of such relationship is such that disclosure is called for pursuant to criteria (of such a nature as to call into question the individual's independence in the eyes of the parties."
Some statutes refer only to impartiality such as the 1996 UK Act while the Model Law in Art.12 (2) refers to impartiality and independence. Section 12(1) of the Indian Act also refers to both of them. Fouchard and others (1999) (see para 1028) point out that 'impartiality' is a state of mind while 'independence' is a situation of fact or law. Bias might, in some cases be a factor which affects an independent decision. To some extent they overlap each other. Sec. 8 of the Swedish Arbitration Act refers to three aspects of 'impartiality':
1) when the arbitrator or a person closely associated to him is a party, or otherwise may expect significant benefit or detriment, as a result of the outcome of the dispute.
2) where the arbitrator is a person closely associated to him is the director of a company or any other association which is a party, or otherwise represents a party or any other person who may expect significant benefit or detriment as a result of the outcome of the dispute.
3) where the arbitrator has taken a position in the dispute, as an expert or otherwise, or has associated a party in the preparation or conduct of his case in the dispute.
French courts describe independence as follows: (ibid para 1029)
"The independence of any arbitrator is essential to his judicial role, in that from the time of his appointment he assumes the status of a Judge, which excludes any relationship of dependence, particularly with the parties. Further, the circumstances relied on to challenge that independence must constitute, through the existence of mutual or intellectual links, a situation which is liable to affect the judgment of the arbitration by creating a definite risk of bias in favour of a party to arbitration."
In para 1030, the Fouchard and others say that, in the following situations, the arbitrators have been held not independent in several cases.
(1) where, at the same time as the arbitral proceedings, an arbitrator was personally paid to provide advice or technical assistance to one of the parties to the arbitration.
(2) Where, at the time of signature of a submission agreement in which he was appointed as a replacement arbitrator, an arbitrator was acting as a paid consultant to a company of the same group as that of the parties to arbitration.
(3) where the arbitrator was employed by a party on the day after he had made is award.
The principle is based on a party's 'reasonable doubt' as to the arbitrator's independence or impartiality. The Model law uses the word 'justifiable doubts' (Art. 12(ii).
It is the justifiable doubt of the 'reasonable man'. In the domestic arbitration in US (and as accepted by AAA Commercial Arbitration Rules), if each party is to appoint an arbitrator, they are not treated as neutral and principle of independence is applied only to non-neutral arbitrators.
In other countries, this view as well as an opposite view are prevalent. However, in international arbitration, even if each party appoints an arbitrator, they must remain neutral and independent (ibid. paras 1043, 1044).
The above principles are parts of the ethical rules in various countries "commentators point to the pressure placed on party - appointed arbitrators nominated by governments, and advocate removing the requirement of independence and impartiality, so that the parties should be free to appoint partisan arbitrators if they wish."
We shall confine ourselves to domestic arbitration. A view is expressed that in Government or Public sector undertaking or government company or statutory corporations, one may permit the existing system of departmental officer conducting the arbitration.
So far as other parties (not being Government or public sector corporation), the question is whether, as in the case of the above bodies, same procedure is to be applied or whether private parties should be totally debarred from appointing their officers or those having business connections with them.
In the latter case, such a differentiation where both are private parties may be permissible in law, inasmuch as the employees of private corporations or bodies do not have the same security of tenure and statutory protection as is available to the employees of the Government and the public sector corporations. Suggestion is that the challenge procedure in sec. 13 will apply subject to the above procedure.