Supreme Court of India: Justifiable Doubts to the Independence and Impartiality of a Former Employee Acting as an Arbitrator

Supreme-Court-of-India-1_85138_730x419

In [T]he Government of Haryana PWD Haryana (B and R) Branch v. M/s. G.F. Toll Road Pvt. Ltd. & Ors. Civil Appeal No. 27/2019 decided on 3 January 2019, the Supreme Court of India addressed the issue of whether there exists justifiable doubts to the independence and impartiality of a former employee when acting as an arbitrator. Detailed case analysis given below:

Factual Matrix

The dispute culminated from a construction contract between the parties. The dispute resolution clause in the contract stipulated a three-member tribunal arbitration under the auspices of Indian Council of Arbitration (‘ICA’). The Respondent triggered arbitration requesting ICA to commence arbitration proceedings. Both the Appellant and the Respondent nominated ex-employees of the Appellant as their arbitrators. The Respondent objected the nomination of an ex-employee by the Appellant as its arbitrator before ICA.

Thereafter, the Appellant sought 30 days’ time from ICA to appoint another nominee arbitrator. This request was rejected and on the contrary ICA appointed a nominee arbitrator on behalf of Appellant. This appointment was challenged by the Appellant before the District Court on the ground that the constitution of the arbitral tribunal was illegal, arbitrary and against the principles of natural justice. Further, the Appellant also raised an objection before the arbitral tribunal under Section 16 of the Act on its jurisdiction which the tribunal refused to hear awaiting the decision of the District Court.

The District Court held that the question regarding jurisdiction of the tribunal should be first raised before the tribunal itself to rule on its own jurisdiction. This order of the District court was challenged in High Court by the Appellant in a review petition which was rejected by the High Court. Thereafter, the tribunal ruled in its favour on jurisdiction. The Appellant assailed the order of the High Court and the tribunal before the Supreme Court in the instant case.

Arbitration Clause

“39.2 Arbitration

39.2.1. Any dispute, which is not resolved amicably as provided in Clause 39.1 shall be finally decided by reference to arbitration by a Board of Arbitrators, appointed pursuant to Clause 39.2.2. sub-clause (b) below. Such arbitration shall be held in accordance with the Rules of Arbitration of the Indian Council of Arbitration and shall be subject to the provisions of the Arbitration Act.

39.2.2. There shall be a Board of three arbitrators of whom each party shall select one and the third arbitrator shall be appointed in accordance with the Rules of Arbitration of the Indian Council of Arbitration.

Applicable Legal Principles

Section 16 of the Act

“Section 16 – Competence of arbitral tribunal to rule on its jurisdiction

(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,–

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

Section 15(2) of the Act

“Section 15 – Termination of mandate and substitution of arbitrator

(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.”

First entry to the Fifth Schedule of the Act

“Arbitrator’s relationship with the parties or counsel

1 The Arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.”

Parties’ Contentions

The Respondent urged that the arbitrator nominated by the Appellant was a retired employee of the Appellant and as such there may be justifiable doubts to his independence and impartiality to act as an arbitrator.

This objection of the Respondent was contested by the Appellant on the ground that the nominee arbitrator was a Chief Engineer with the Appellant who retired over 10 years ago from the services. The apprehension of the Respondents was hence unjustified since the test to be applied for bias is whether the circumstances are such as would lead to a fair-minded and informed person to conclude that the arbitrator was infact biased.

Judgement

The Supreme Court premised its decision on Section 15(2) of the Act which inter alia provides that in case the mandate of an arbitrator terminates, due to any reason, same rules will apply for the appointment of a substitute arbitrator as adopted in the initial stage prescribed under the original agreement. This will be the case even if the arbitration agreement does not specify any mode of appointment of a substitute arbitrator as held by the Supreme Court in ACC Ltd. v. Global Cements Ltd. (2012) 7 SCC 71. It is noteworthy that the mode of appointment of arbitrator was prescribed under Clause 39.2.2. of the Contract.

The Court observed that ICA was unjust in declining to grant time to the Appellant for appointment of alternate nominee arbitrator which was contrary to its own rules. To portray the importance of time in objecting the partiality of arbitrators, the Court relied on House of Lords decision in Locabail Ltd. v. Bayfield Properties [1999] EWCA Civ 3004 wherein the House of Lords observed that the greater the passage of time between the event relied on as showing a danger of bias and the case in which the objection is raised, the weaker the objection will be.

The Court also cited the ‘real danger’ test for biasness propounded by the English Court of Appeal in Re Medicaments and related Classes of Goods (No.2) [2000] EWCA Civ 350. In this case, the Court of Appeal inter alia held that in order to decide whether in the particular circumstances there was any appearance of bias on the part of arbitrator, the Court must ascertain all the circumstances and then ask itself the question whether a fair minded and informed observer would consider that there was a real possibility or real danger of bias.

Justifiable Doubts as to Arbitrator’s Independence and Impartiality

The Court rejected the Respondent’s allegation of justifiable doubts of biasness of an ex-employee nominated as an arbitrator noticing that the Act does not disqualify a former employee from acting as an arbitrator.

 2015 Amendment Act

Although the present case falls outside the purview of the 2015 Amendment Act, yet the Court observed that the Respondent’s allegations of justifiable grounds of biasness falls out of the parameters set out in the 2015 Amendment Act. The Court also interpreted the Fifth Schedule inserted in the Act vide 2015 Amendment Act. The Schedule Five contains grounds to determine whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

The Entry 1 of the said Schedule indicates that a person, who is related to a party as an employee, consultant, or an advisor, is disqualified to act as an arbitrator. In Court’s view, the words “is an” indicates that the person so nominated is only disqualified if he/she is a present/current employee, consultant, or advisor of one of the parties.

Further, the Court held that an arbitrator who has “any other” past or present “business relationship” with the party is also disqualified where the word “other” used in Entry 1, would indicate a relationship other than an employee, consultant or an advisor. The word “other” cannot be used to widen the scope of the entry to include past/former employees. Therefore, the Court set aside the decision of the High Court and held that mere allegations of bias are not a ground for removal of an arbitrator.

My Comments

Post 2015 Act, Fifth Schedule has been added in the Act which exclusively lists out grounds give rise to justifiable doubts as to the independence or impartiality of arbitrators. The Seventh Schedule of the Act enlists the relationship with parties or counsel, which would ipso facto make a person ineligible for appointment as an arbitrator. Thus, while Fifth Schedule provides relationships where justifiable doubts can be raised regarding biasness of the arbitrator in certain relationships, Seventh Schedule prescribes an absolute bar on certain relationships and it is not permissible for a person to act as an arbitrator if he falls in any of such relationships.

It is germane to draw the attention on Clause 31 of the Fifth Schedule of the Act which explicitly states that if an arbitrator had been a ‘former employee’ of a party within the past three years then it will raise justifiable doubts as to the independence or impartiality of arbitrators. Although the Fifth and Seventh Schedule are identically worded yet while being a ‘former employee’ raises to justifiable doubts as to the independence or impartiality of arbitrators under Fifth Schedule, no such wordings are used in Seventh Schedule.

Therefore, in nutshell, on comparing the terminologies used in these mirroring Schedules, it can be inferred that while being a former employee, it is sufficient to give rise to justifiable doubts as to his independence if he is within the window of three years (as under Fifth Schedule), there is no prohibition in the appointment of an former employee as an arbitrator per se. This comparison was carved out by Punjab and Haryana High Court in Reliance Infrastructure Ltd. v. Haryana Power Generation Corporation Ltd. 2016 (6) ArbLR 480 (P&H) and later on followed by the Madras High Court in Offshore Infrastructure Limited vs . Bharat Heavy Electricals Limited and Ors. 2017 (6) CTC 301. Further, in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665, the Supreme Court construed the scope of Clause 1 of the Seventh Schedule in relation to the former employees of the Government and inter alia held that it cannot be said that simply because the person is retired officer of one of the parties, he would be treated as ineligible to act as an arbitrator. Had this been the intention of the legislature, the Seventh Schedule of the Act would have covered such persons as well.

Position in Singapore

The Singapore High Court in PT Central Investindo v Franciscus Wongso and others and another matter [2014] SGHC 190 dealt with a challenge to an arbitrator for apparent bias. In this case, the issue before the Court was whether there were justifiable doubts as to independence and impartiality of the Arbitrator as prescribed under Article 12 of the Model Law.

The Court also described the three forms of bias – actual bias, imputed bias or apparent bias. As per the Court, Actual bias will obviously disqualify a person from sitting in judgment. The imputed bias arises where a judge or arbitrator may be said to be acting in his own cause (nemo judex in sua causa) and this happens if he has, for instance, a pecuniary or proprietary interest in the case. In such a case, disqualification is certain without the need to investigate whether there is likelihood or even suspicion of bias. The third form of bias is apparent bias. The allegation against the Arbitrator was that he had been affected by apparent bias.

To decide the issue in hand, the Court propounded ‘reasonable suspicion’ test. The test entails two stages inquiry. First, the applicant party has to establish the factual circumstances that would have a bearing on the suggestion that the tribunal was or might be seen to be partial. The second inquiry is to then ask whether a hypothetical fair-minded and informed observer would view those circumstances as bearing on the tribunal’s impartiality in the resolution of the dispute before it.

Position in England & Wales

In Locobail (UK) Ltd v Bayfield Properties Ltd [2000] QB 451, the English Court of Appeal held that the common law test for apparent bias is reflected in section 24 of the English Arbitration Act. The common law test is that articulated by Lord Hope of Craighead in Porter v Magill [2002] AC 357, namely whether “the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.” Lord Hope gave a further explanation of what was meant by “fair-minded” and “informed” in Helow v Secretary of State for the Home Department [2008] 1 WLR 2416 in following words:

“1 The fair-minded and informed observer is a relative newcomer among the select group of personalities who inhabit our legal village and are available to be called upon when a problem arises that needs to be solved objectively. Like the reasonable man whose attributes have been explored so often in the context of the law of negligence, the fair-minded observer is a creature of fiction

2 The observer who is fair-minded is the sort of person who always reserves judgment on every point until she has seen and fully understood both sides of the argument. She is not unduly sensitive or suspicious, as Kirby J observed in Johnson v Johnson (2000) 201 CLR 488, 509, para 53. Her approach must not be confused with that of the person who has brought the complaint. The “real possibility” test ensures that there is this measure of detachment. The assumptions that the complainer makes are not to be attributed to the observer unless they can be justified objectively. But she is not complacent either. She knows that fairness requires that a judge must be, and must be seen to be, unbiased. She knows that judges, like anybody else, have their weaknesses. She will not shrink from the conclusion, if it can be justified objectively, that things that they have said or done or associations that they have formed may make it difficult for them to judge the case before them impartially.

3 Then there is the attribute that the observer is “informed”. It makes the point that, before she takes a balanced approach to any information she is given, she will take the trouble to inform herself on all matters that are relevant. She is the sort of person who takes the trouble to read the text of an article as well as the headlines. She is able to put whatever she has read or seen into its overall social, political or geographical context. She is fair-minded, so she will appreciate that the context forms an important part of the material which she must consider before passing judgment.”

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