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No power to remove a biased arbitrator under the new Arbitration Act of India
by Sunil Gupta *
Cite as : (2000) 3 SCC (Jour) 1
A serious omission
The absence in the new Indian Arbitration Act, 1996 of either a judicial remedy or an institutional device for the removal of a biased arbitrator at the very threshold of an arbitration or at the earliest after the discovery of likelihood of bias by a party is a matter of no small concern. It does not augur well for the fair and just conduct of arbitrations in India.
The mere availability and threat of use of such a remedy has operated in most arbitration systems in the world as an important check and safeguard against the vices of bias and partiality entering the conduct of arbitrations. It has acted as a strong deterrent and helped in keeping potentially partisan arbitrators at a distance from the arbitral process right from the beginning or else operated as an effective tool for excluding the few knights errant from the process at the earliest after the discovery of their 'connections' with any party.
The existence of a judicial or institutional mechanism at the very threshold rather than at the post-award stage in most international arbitration systems of repute has also helped in avoiding much undue waste of time and money over fresh and/or frustrated rounds of arbitration. After all, economy of time and money is undisputedly one of the primary objectives of arbitration as opposed to litigation.
A commercial misadventure
It is common knowledge that one of the avowed purposes of the new Arbitration Act in India, namely, the Arbitration and Conciliation Act, 1996 (hereafter the new Act) has been to make the arbitration law in India more progressive and more acceptable by international standards. Indeed, the new Act was enacted basically for implementing in India the UNCITRAL Model Law i.e. the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL). The necessity was particularly felt in the changing economic scenario to reassure and attract foreign businessmen and investors towards India. The international businessman's point of view on the importance of effective mechanisms for ensuring a fair and impartial arbitration has been succinctly stated in Russel on Arbitration, (1997), at para 4-035 as follows:
4-35 The parties' expectations.
International arbitration institutions try to meet the expectations of the international business community for independent and neutral tribunals. "The parties would never agree to arbitration in the first place unless they had confidence that the arbitration system concerned would take every reasonable measure to ensure the independence and neutrality of the arbitral tribunal (Stephen Bond in (1988) 4 Arbitration International 300)." (emphasis supplied)
At all times, therefore, what is important is not only the promise of a fair and just award in future but also the assurance of a fair and impartial arbitration (trial) at present. And it is not enough to provide just any arbitration - not even any speedy arbitration; the arbitration must be an impartial one. Impartiality is an essential attribute of fairness. The UNCITRAL Model Law was set up as an international yardstick and standard to satisfy the needs of a speedy and impartial arbitration and the new Act was enforced in India to satisfy the demands of the Model Law. However, insofar as the arrangement made by the Indian Parliament in Section 13 of the new Act for dealing with a biased arbitrator is concerned, it cannot but be said that it grievously departs from the Model Law which it seeks to implement and reveals a real chink in the armor of the new Indian law.
The duty to disclose
Large portions of the new Act are little more than verbatim reproductions of corresponding articles in the UNCITRAL Model Law. One of the areas in which the new Act endeavours to substantially conform to the Model Law is the matter of disclosure by the arbitrator of any interests, relations, circumstances etc. that might create an impression of a possible bias. Section 12 of the new Act which casts a legal duty upon the arbitrator to disclose at the earliest 'any circumstances likely to give rise to justifiable doubts as to his independence or impartiality' and also gives a right to the party aggrieved by the non-performance of such duty to challenge the authority of the defaulting arbitrator is virtually a reproduction of Article 12 of the Model Law.
At this stage it is relevant to ask what exactly is it that a party does while challenging the impartiality of an arbitrator at the initial stage of arbitration or discovery of bias itself. The party tries to correct a mistake committed by it in the choice and appointment of an arbitrator in ignorance of the reality pertaining to the suspicious circumstances surrounding the arbitrator. And the law recognises the right of the party to do so as a matter of civilized system of justice.
For that reason, Russel on Arbitration (supra) demands the earliest disclosure by an arbitrator of any interest in the matter at Para 4-032 in the following words:
"4-032 Early disclosure advised.
The arbitrator should disclose the interest at the earliest opportunity. This enables the issue to be debated before much time and money have been spent on the arbitration proceedings. If it is not disclosed by the arbitrator at an early stage, but discovered by one of the parties at a later stage, there is much more likelihood of suspicion arising from the apparent concealment. In those cases it is at least likely that there will be objections to the continued involvement of the arbitrator and much more risk that substantial costs will have been wasted if he has to be replaced." (emphasis supplied)
Indeed, a ground of interest discovered by a party only adds fuel to the fire of suspicion. Needless to say, it may also prove to be the breeding ground of much avoidable unpleasantness and/or non-co-operation that may cut at the very root of an amicable and peaceful remedy like arbitration.
On the disclosure by an arbitrator of any interest that might raise a suspicion as to his impartiality, the two opinions of Justice Black and Justice White of the US Supreme Court rendered as long back as in 1968 in the case of Commonwealth Coatings Corp. v. Continental Casualty Co.1 , remain unparalleled both as regards their wisdom and their eloquence. In the present context, even a lengthy re-production of the same would not be out of place. The relevant portions from the two opinions are extracted below:
Justice Black
"These provisions show a desire of Congress to provide not merely for any arbitration but for an impartial one. It is true that petitioner does not charge before us that the third arbitrator was actually guilty of fraud or bias in deciding this case, and we have no reason, apart from the undisclosed business relationship, to suspect him of any improper motives. But neither this arbitrator nor the prime contractor gave to petitioner even an intimation of the close financial relations that had existed between them for a period of years. We have no doubt that if a litigant could show that a foreman of a jury or a judge had, unknown to the litigant, any such relationship, the judgement would be subject to challenge....
Since in the case of courts this is a constitutional principle, we can see no basis for refusing to find the same concept in the broad statutory language that governs arbitration proceedings and provides that an award can be set aside on the basis of 'evident partiality' or the use of 'undue means' ... It is true that arbitrators cannot sever all their ties with the business world since they are not expected to get all their income from their work deciding cases but we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review. We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias....
This rule of arbitration and this canon of judicial ethics rest on the premise that any tribunal permitted by law to try cases and controversies not only must be unbiased but also must avoid even the appearance of bias. We cannot believe that it was the purpose of Congress to authorise litigants to submit their cases and controversies to arbitration boards that might reasonably be thought biased against one litigant and favorable to another."
Justice White
"The Court does not decide today that arbitrators are to be held to the standards of judicial decorum of Article III judges or indeed of any judges. It is often because they are men of affairs, not apart from but of the marketplace, that they are effective in their adjudicatory function.... This does not mean the judiciary must overlook outright chicanery in giving effect to their awards; that would be an abdication of our responsibility. But it does mean that arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial. I see no reason automatically to disqualify the best informed and most capable potential arbitrators...."
The arbitration process functions best when an amicable and trusting atmosphere is preserved and there is voluntary compliance with the decree, without need for judicial enforcement. This end is best served by establishing an atmosphere of frankness at the outset, through disclosure by the arbitrator of any financial transactions which he has had or is negotiating with either of the parties. In many cases the arbitrator might believe the business relationship to be so insubstantial that to make a point of revealing it would suggest he is indeed easily swayed, and perhaps, a partisan of that party. But if the law requires the disclosure, no such imputation can arise. And it is far better that the relationship be disclosed at the outset, when the parties are free to reject the arbitrator or accept him with knowledge of the relationship and continuing faith in his objectivity, than to have the relationship come to light after the arbitration, when a suspicious or disgruntled party can seize on it as pretext for invalidating the award. The judiciary should minimize its role in arbitration as a judge of the arbitrators' impartiality. That role is best consigned to the parties who are the architects of their arbitration process, and are far better informed of the prevailing ethical standards and reputations within their business.
Of course, an arbitrator's business relationships may be diverse indeed, involving more or less remote commercial connections with great numbers of people. He cannot be expected to provide the parties with his complete and unexpurgated business biography. But it is enough for present purposes to hold, as the Court does, that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed. If arbitrators err on the side of disclosure, as they should, it will not be difficult to identify those undisclosed relationships which are too insubstantial to warrant vacating an award."
No judicial remedy against a biased arbitrator
However, despite the acceptance of the principle underlying the duty of disclosure, the new Act makes, in the matter of providing an effective remedy against an arbitrator who fails to perform his duty of disclosure under Section 12, a rather enigmatic departure from the Model Law. It is true that just as clauses (1) and (2) of Article 13 of the Model Law provide for a challenge to an arbitrator on the ground of 'justifiable doubts as to his impartiality or independence' and for an opportunity to the concerned arbitrator (possibly the sole arbitrator) to withdraw and, failing that, to the arbitral tribunal (which, in a given case, may even mean the self-same sole arbitrator) to decide on the challenge, sub-sections (1), (2) and (3) of Section 13 of the new Act make an identical provision in respect of that challenge. But the similarity ends there.
Whereas clause (3) of Article 13 of the Model Law goes further and provides to the party failing in its challenge before the arbitral tribunal (whether a multi-member tribunal or a sole arbitrator) an additional and effective remedy viz. the remedy before 'the court or the other authority specified in article 6', sub-section (4) of Section 13 of the new Act in India omits the Model Law provision for adopting that course altogether. Instead, in its bid to expedite the arbitration and prevent any diversionary procedures being launched in the courts, sub-section (4) rather straightforwardly directs the sole arbitrator or the multi-member arbitral tribunal, as the case may be, to complete the arbitral process without any let or hindrance. Sub-sections (3) and (4) of Section 13 provide:
"13...
(3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.
(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award." (emphasis supplied)
Thus, in its great zeal to speed up the arbitral process by cutting out curial delays and/or institutional inquests, the Indian law outshines even the UN model on which it is based and which it seeks to implement in India. The question, however, is: Does it not in so doing throw the baby out with the bath water?
The recourse for withdrawal to the challenged arbitrator himself under Section 13(3) is, truly speaking, little more than an empty formality. At best, it is a dignified way of showing the exit to an arbitrator who cares. But an arbitrator who does not care may refuse to withdraw and also, sitting on the challenge as the arbitral tribunal under Section 13(3), decide against the challenge thereby clearing the way for himself under Section 13(4) to continue and complete the arbitral proceeding and make the arbitral award leaving the challenging party high and dry.
The truth of the matter is that Article 13(2) of the Model Law (same as Section 13(3) of the new Act) which enables the challenged arbitrator himself to decide on the challenge (either as the sole arbitrator or as one of the arbitrators constituting the arbitral tribunal) itself is not free from reproach. It is one thing to enable a challenged arbitrator to gracefully withdraw from the arbitration if he likes to do so but quite another to empower him to decide on the challenge to his own conduct and authority. There is little hope that an arbitrator who is not inclined to withdraw would be inclined to decide in favor of the challenge. The provision suffers from redundancy and tautology. It is incongruous if not absurd. More importantly, it suffers from injustice and unfairness. It violates basic tenets of natural justice which require that
(a) no man should be a judge in his own cause, and
(b) justice should not only be done but also appear to be done.
In the case of the Model Law, however, the incongruity and unfairness of the proceeding before the challenged arbitrator is offset and neutralized by the rule which provides for a remedy against the biased arbitrator before 'the court or the other authority specified in Article 6' viz. Article 13(3). But the new Act in India has no such redeeming feature.
Of course, after the award is made in pursuance of sub-section (4), an application may be made under sub-section (5) for setting aside the award 'in accordance with Section 34'. But even Section 34 permits an award to be questioned only on the grounds strictly specified therein and a bare look at the grounds specified in Section 34 shows that they do not take in the ground of possible bias or partiality of the arbitrator as a ground of challenge to the award. The problem of bias, therefore, not only remains unresolved at the arbitration (trial) stage, but it also stands compounded at the post-award stage by the absence of an appropriate remedy under the new Act.
In contrast to the new Act, the old Arbitration Act, 1940 in India contained in its Section 11 a judicial safeguard in the form of court's power to remove an arbitrator suffering from probable bias at the earliest. The doors of justice could be knocked without waiting for the award. That jurisdiction, it is argued by some (perhaps, not wholly without justification), was grossly misused by parties and indiscreetly used by courts over the decades causing undue delays in the conduct of arbitrations.
The question, however, is "Did the court's jurisdiction deserve to be jettisoned altogether? In the alternative, could not the court be substituted by an institutional board or device? Was it not enough to re-define, re-model and re-cast the jurisdiction along internationally accepted lines?"
No institutional remedy either
International norms accept not only courts but also institutional panels and bodies as effective mechanisms for challenging a biased arbitrator. The arbitration rules of quite a few prestigious arbitral institutions in the world provide for complaints against a biased arbitrator to be decided if not by the court then by an institutional board sitting in supervision over the arbitral tribunal. Most rules ensure an uninterrupted arbitral process by providing that if the institutional body does decide against the challenge, the arbitral tribunal shall proceed to complete the arbitration and make the award.
For instance, though the UNCITRAL Model Law adopts under Article 13(3), inter alia, the judicial remedy, the UNCITRAL Arbitration Rules assign the task of deciding the complaint of bias to the appointing authority. Article 12.1 provides as follows:
"Article 12.1. If the other party does not agree to the challenge and the challenged arbitrator does not withdraw, the decision on the challenge will be made:
(a) When the initial appointment was made by an appointing authority, by that authority;
(b) When the initial appointment was not made by an appointing authority, but an appointing authority has been previously designated, by that authority;
(c) In all other cases, by the appointing authority to be designated in accordance with the procedure for designating an appointing authority as provided for in article 6."
An interesting example of constructive variation of the Model Law in Article 25 of the Peru Law is pointed out by Dr Pieter Sanders in his Article "Unity and Diversity in the Adoption of the Model Law":
"If there is one arbitrator, the judge or the arbitral institute organizing the arbitration decides on the challenge. If there is more than one arbitrator, the arbitral tribunal decides on the vote without the vote of the challenged arbitrator. In case there is a tie, the chairman or, if he is challenged, the most senior member of the Tribunal decides. In all cases decision is final". (emphasis supplied)
Under the Rules of Arbitration of the International Chamber of Commerce (ICC), while Articles 7.2 and 7.3 provide for the duty of disclosure by an arbitrator, Articles 7.4 and 11.3 empower the International Court of Arbitration attached to the ICC to decide any challenge to an arbitrator on the ground of suspected bias. In the decision-making process, an opportunity of explanation is given also to the concerned arbitrator. The rules provide as follows:
"7.4 The decisions of the Court as to the appointment, confirmation, challenge or replacement of an arbitrator shall be final and the reasons for such decisions shall not be communicated.
11.3 The Court shall decide on the admissibility, and, at the same time, if necessary, on the merits of a challenge after the Secretariat has afforded an opportunity for the arbitrator concerned, the other party or parties and any other members of the Arbitral Tribunal, to comment in writing within a suitable period of time...."
Likewise, according to Rule 20 of the American Arbitration Association (AAA) a complaint of partiality is submitted to the AAA which determines whether the Arbitrator should be disqualified. In the event of the AAA deciding against the complainant, the arbitrator is required to proceed with the arbitration but the right of the complainant to complain of 'bias' in the court after the award is preserved (vide Sanko v. Cook2 ; San Carlo v. Conley3 , affirmed 163-F. 2d 310 (2nd Cir. 1947) and cited in York Hanover v. AAA4 (Distt Court of New York).
Referring to the ICC, London Court of International Arbitration (LCIA), International Centre for the Settlement of Investment Disputes (ICSID), etc. Russel on Arbitration (supra) sums up the international position at Para 4-036 as follows:
"4-036 Independence.
... The ICC, the LCIA, and ICSID have taken steps to prevent the suspicion that arbitrators they appoint lack independence.... For example, the ICC rules oblige a prospective arbitrator to disclose in writing to the Secretary-General of the ICC Court any facts or circumstances which might be of such a nature as to call into question the arbitrator's independence in the eyes of the parties.... The LCIA and ICSID have similar procedures."
The need to mend and amend
The Indian law under the new Act, however, while eschewing the judicial remedy steers clear of even the institutional safeguards. In the process it exposes the remedy of arbitration in India to a serious flaw and aberration.
Article 13(3) calls for an immediate amendment to provide the wronged parties with judicial or institutional succour against unscrupulous and biased arbitrators. While the victims of legislative zeal for speedy justice suffer helplessly in silence, the Indian Parliament needs to step in urgently for setting right a wrong committed by itself.
- 393 US 145 : 21 L Ed 2d 301
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- 495 F 2d 1260 (2d. Cir. 1973)
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- 72F Supp 825 (D.N.Y. 1946)
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- (1993) YB XX 1995 US 169
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