Report No. 176
2.7.1 Proposed Section 10A, Section 11 (5A) and Section 13:
Disqualification of an employee of one party or of a person having business connection to be an arbitrator: During the debate under sec.13, this was one aspect upon which strong and divergent views were expressed by several participants. It was pointed out that in the case of contracts with Government and public sector undertakings or statutory corporations, it has been customary all along to incorporate a clause in the contract that the arbitrator will always be an employee of the Government or of the Public Sector undertaking or statutory corporation, as the case may be.
In fact, in some contracts it is said that if it is not a departments' employee, there will be no arbitration! It is pointed out that this method of appointing an employee as an arbitrator has to be done away with in view of sec.18 of the Act which speaks of "equal treatment" of parties. Section 18 reads as follows:
"Section 18: Equal treatment of parties: The party shall be treated with equality and each party shall be given a full opportunity to present his case".
The first part of the section speaks generally about equality and is independent of the second part which refers to equal opportunity during the course of arbitration. It is true that under the law declared by the Supreme Court under the 1940 Act, if parties had with open eyes agreed that the employees of one them is to be an arbitrator then it was not permissible for the parties to challenge the arbitrator on the ground of lack of independence. (see Secretary vs. Muniswamy: 1988 Suppl SCC 651 and Nandyal Corporation Spinning Mills vs. K.V. Mohan: (1993(2)SCC 654).
That was also the earlier English law. But it is pointed out that in sec. 24 of the UK Act, 1950 there was a power granted to the Court to grant relief where it was felt that the arbitration is not or may not be impartial. Sec. 24(1) is 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 so 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 arbitrator'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 (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':
(a) or otherwise may expect significant benefit or detriment, as a result of the outcome of the dispute.
(b) 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.
(c) 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: (see Fouchard and others, para 1029):
"The independence of the 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 relation of dependence, particularly with the parties. Further, the circumstances relied on to challenge that independence must constitute, through the existence of material or intellectual links, a situation which is liable to affect the judgment of the arbitrator by creating a definite risk of bias in favour of a party to the arbitration."
In para 1030, the authors refer to case of an employee or paid consultant or a person who is paid for advice or technical assistance, cannot be treated as an independent arbitrator. They say that, in the following situations, the arbitrators have not been held 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' (clauses (ii) of Art. 12). It is the justifiable doubt of the 'reasonable man'. In the Consultation Paper (Annexure II), it was suggested that so far as Government or Public Sector Undertakings or statutory Corporations are concerned, such provisions be not disturbed and that so far private parties are concerned, they should not be allowed to have their employees or consultants or persons having business connections with them as arbitrators.
This distinction was based upon the fact that in private employment, the threat of some action by the employer looms larger than in the case of public servants. Some of those who intervened in the debate on behalf of Government or Public Sector stated that such clauses must be allowed to continue. It was pointed out that in some organizations, the contractors stood to gain, as disclosed from statistics. It has also been alternatively suggested that officers from some other department of Government or the Public Sector organization can be allowed to be appointed as arbitrators.
One objection to this latter alternative was that the reason for appointing those in the same department was to take advantage of their experience in that department. In the debate, there was, of course, consensus that in regard to private parties such clauses should not be allowed to operate. The Commission felt that so far as private parties are concerned they have greater control over their employees or consultants. In the public sector there are ample safeguards under the service rules and actions are also subject to judicial review by the High Court.
A distinction between private parties and public sector is permissible. The Commission also felt that the provision making such clauses void should not apply to international arbitration where seat of arbitration is in India. After giving our earnest consideration to this question, we are of the view that so far as private parties are concerned, such clauses enabling employees or consultants or those having business connections to be arbitrators must be prohibited and any such clause in contracts between such parties must be treated as not enforceable except in the case of international arbitration in India.
It was no doubt suggested that Dutch law is more explicit and it permits a party to seek a court order, departing from an arbitration agreement which "gives one of the parties a privileged position with regard to the appointment of the arbitrators (see Art. 1028 of the Netherlands Code of Civil Procedure). Similarly, it was said that the German Arbitration Statute, which differs on this issue from the UNCITRAL Model Law, has adopted an equitable rule. Art.1034, para 2 of the ZPO states as follows:
"If the arbitration agreement grant preponderant rights to one party with regard to the composition of the arbitral tribunal which places the other party at a disadvantage, the other party may request the court to appoint the arbitrator or arbitrators in deviation from the nomination made, or from the agreed nomination procedure. The request must be submitted at the latest within two weeks of the party becoming aware of the constitution of the arbitral tribunal. Section 1032 sub section 3 applies mutatis mutandis." (See 1998 Rev Arb. 291 and also 15. J of Int'nl Arb., 85(1998), 1. Int'nl Arb L.Rev 121 (1998) in this part, (see also Fauchard, 1999, no.464, 465).
Reference was made to Fouchard (see para 787) that even in the absence of specific provisions in the statute, such a clause giving special rights to one party could be treated as opposed to due process or 'public policy' of the country where enforcement of such awards is sought. Number of cases have been cited in support. A principle of procedural public policy of a fair trial is applied, drawing the spirit from international conventions like Art.6 of the European Convention which refers to the fundamental right to a fair trial.
Though the Convention applies only to courts, the spirit of it is kept in view by the courts while dealing with attacks against awards. No doubt, the ICCPR to which India is a party, also contains a similar principle of fairness to be adopted by courts. At one stage, it was felt that the provision as in the German Law could be adopted. But, if a person is permitted to object to an employee etc. of the Government or public sector, etc., to be an arbitrator, then it was felt that in every case, objections are likely to be raised by filing application in Courts and there is every likelihood of most arbitrations involving such clauses in respect of these public bodies, being stayed by the Courts.
So the Commission considered the question whether such clauses are to be treated as unenforceable even where the Government, or Public Sector Undertakings or statutory corporations, have included a clause in the agreements so as to have their own employees or consultants etc. as sole arbitrators. It was felt that the above bodies require some special treatment as already stated above, and that they cannot be placed in the same position as private parties. Private parties have greater control over their employees or consultants etc.
In the case of Government and other bodies referred to above which come within the scope of Art. 12 of the Constitution, there are statutory rules under Art. 309 or other statutory regulations, which give protection to the employees. The right to take action against such employees etc. is also subject to judicial review. Hence it was felt that in the case of these bodies, such clauses need not be treated as unenforceable. Therefore, it has been decided that such clauses in the case of Government, Public Sector Undertakings or statutory corporations should not be made unenforceable.
In any event, the existing provision of challenge under sec. 13 is always there and the aggrieved party can always avail of the same. But the order of the arbitral tribunal rejecting a plea of bias can be challenged only after the award is passed in cases of employees, etc. of Government and other bodies. In the result, section 13 is not amended but a new section 10A is proposed to be added as stated below.
2.7.2 After section 10 of the principal Act, the following section shall be inserted, namely:-
"10A. (1) Subject to the provisions of sub-section (2), where any arbitration agreement contains a clause enabling one of such parties to appoint his or its own employee or consultant or advisor or other person having business relationship with him or it, as an arbitrator, such a clause shall be void to that extent.
(2) The provisions of sub-section (1) shall not-
(a) apply to an agreement in international arbitration (whether commercial or not).
(b) render any clause, in an arbitration agreement which enables the Central or a State Government or a Public Sector Undertaking or a statutory body or statutory corporation or other public authority, as the case may be, to appoint its own employee or consultant or advisor or any other person having business relationship, as an arbitrator, void;"
2.7.3 In the context of proposed section 10A, consequent changes have been made in section 11 by the proposed sub-section (5A) in section 11.