This post has been written by Hon’ble Justice A.K. Sikri (Sitting Judge, Supreme Court of India). This is the second post in a series of posts written by Justice Sikri for TBL on arbitration in India. In this post, Justice Sikri deals with the changes brought in by the new era of arbitration.
USHERING IN A NEW ERA
The amendments carried out in the Arbitration Act coupled with the rational approach of the Supreme Court and High Courts have seen paradigm shift in the arbitration culture. It can be said that a proper equilibrium is getting established between Arbitral Tribunal and courts, thereby ushering in a new era at a fast pace. Thereafter I would be discussing this perceptible change keeping in view different provisions of the Act. In this discussion, my endeavor is to show the shift in the mindset of the judiciary bringing about balance which needs to be maintained and heading towards minimal interference principle.
(a) Pre-Arbitral stage – Section 8 and 11
In the pre-arbitral stage, i.e. prior to the constitution of the arbitral tribunal, the Act gives courts a limited power intervention, under sections 8, 11 in the case of Part I arbitrations (domestic arbitration) and section 45 in the case of Part II (foreign seated arbitration) arbitrations, relating to “reference to arbitration” and “appointment of the tribunal”. Section 8 states that a judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall refer the parties to arbitration, unless it finds that prima facie no valid arbitration agreement exists. Therefore, only limited interference is allowed by the Court i.e. when there is no valid arbitration agreement, prima facie.
Section 11 of the Act allows a freehand to the parties to agree on a procedure for appointing the arbitrator(s). This autonomy is however, subject to judicial review in limited circumstances. These limited circumstances include situations in which parties fail to nominate arbitrator according to the procedure agreed upon or within the time limit provided in the Act. In such situations the Court can appoint an arbitrator.
After a series of cases culminating in the decision in National Insurance Co. Ltd. v Boghara Polyfab Pvt. Ltd. the Supreme Court laid down the exact scope of judicial intervention. It held that the issue – (a) whether the party making the application has approached the appropriate High Court, (b) whether there is an arbitration agreement and (c) whether the party who has applied under section 11 of the Act, is a party to such an agreement – are to be decided by courts, in cases of a challenge. On the other hand, the issues which do not fall within the scope of judicial intervention and is the sole preserve of the arbitral tribunal are – (a) Whether a claim falls within the arbitration clause and (b) the merits of any claim involved in the arbitration.
This position of law was incorporated in the Arbitration and Conciliation Act vide the Arbitration and Conciliation (Amendment) Act, 2015. Section 11 limits the scope of judicial intervention in cases of appointment of arbitrators to that of an administrative nature. This prevents a situation where a party (intending to defeat the arbitration agreement) refuses to appoint an arbitrator in terms of the arbitration agreement, or moves a proceeding before a judicial authority in the face of such an arbitration agreement.
(b) Setting aside of arbitral award -Section 34 and Section 48
Once an arbitral award is made, an aggrieved party may apply for the setting aside of such award. Section 34 of the Act deals with setting aside a domestic award and a domestic award resulting from an international commercial arbitration whereas section 48 deals with conditions for enforcement of foreign awards. Section 34 and 48 provide the grounds on which an Indian court can set aside a domestic and foreign award, respectively. One of the contentious grounds for application of Section 34 is if the court finds the arbitral award to be conflicting with public policy of India.
Around early 2000s there were a slew of cases passed by the Supreme Court which took a conservative view of public policy, allowing for judicial interference into the arbitration proceedings, most notably the case of ONGC v. Saw Pipes, which expanded the test of ‘public policy’ to mean an award that violates the statutory provisions of Indian law or terms of the contract. The Court held that in case of an application u/s 34 to set an award aside, the role of the Court was similar to an appellate/revision court, therefore, it had wide powers. Further, the Court also added a new ground – patent illegality to the grounds enumerated under which the arbitral award could be set aside. This opened a floodgate of litigation under S. 34 as every award where there was an alleged error of application statutory provisions could now be challenged.
The Arbitration and Conciliation (Amendment) Act, 2015 made important changes to section 34. These changes were aimed at restricting courts from interfering with arbitral awards on the ground of “public policy.” Accordingly, the amendment added “Explanation 2” to section 34(2) as well as Section 2A which prevented courts from undertaking a merit analysis of arbitral awards. This explanation significantly curtailed the scope of judicial intervention supplied in various Supreme Court cases. Because of this amendment, courts would no longer be able to interfere with the award passed by the arbitrator. The amendment also curtails the scope of interpretation of “patently illegal”. Post amendment, courts can no longer reappraise evidence or set aside awards merely because the Arbitral Tribunal has made errors when dealing with the same.
Since the amendment, Courts have refrained from giving a wide interpretation to “public policy” or interfering with the merits of the case. In the November 2017 Supreme Court Judgment of Venture Global Engineering LLC v Tech Mahindra Ltd. and Ors., the Court observed:
“The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor it can examine the merits of claim by entering in factual arena like an Appellate Court.”
A similar view was also taken in the judgment of Sutlej Construction Limited v. Union Territory of Chandigarh. These judgments show that the recent trend of interpretation of “public policy” has been one where the Courts have refused to examine the arbitral awards on merits, thereby upholding the legislative mandate of “minimal intervention of the Courts in the arbitral process” as reflected by the changes brought by the Arbitration and Conciliation (Amendment) Act, 2015.
(c) Independence and Impartiality of the Arbitrator
It is universally accepted that any quasi-judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators, viz. their independence and impartiality, is critical to the entire process. Courts carry out a crucial role in ensuring that a neutral arbitrator presides over the arbitration. For this purpose courts are empowered under Section 12 of the Act to intervene when any party challenges the conduct of the arbitrator. An arbitrator may be challenged under specific circumstances including cases where (a) there are justifiable doubts as to his independence or impartiality or (b) he does not possess the qualifications agreed to by the parties.
Earlier, the Supreme Court in various cases had refused to interfere in situations where the impartiality of the arbitrator was contended. It refused to do so on grounds of party autonomy and binding nature of contract. However, the Law Commission Report No. 246 on Amendments to the Arbitration and Conciliation Act 1996, which led to the 2015 amendment observed:
“Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles-even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties’ apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes.”
Section 12 was then amended in 2015 with the objective to induce neutrality of arbitrators, viz., their independence and impartiality. The Commission proposed to have specific disclosures by the arbitrator, drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines), at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Fifth Schedule to the Act was added on the basis of this recommendation.
The 2015 amendment also added the Seventh Schedule drawn from the Red list of the IBA Guidelines. Section 12(5) was amended to make ineligible any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule of the Act. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, under Section 14. However, to maintain real and genuine party autonomy, in certain situations, parties are allowed to waive even the categories of ineligibility as set in the proposed Seventh Schedule.
Post amendment, in the case of Assignia-VIL JV v. Rail Vikas Nigam Limited, Fifth and Seventh Schedule r/w Section 12 of the amended Act was discussed. In that case, the Respondent made a suggestion to appoint its own employee who was either a present employee or retired employee, as the arbitrator. However, it was held by the Hon’ble Delhi High Court that the request could not be accepted as the arbitration had been invoked after the amended Act came into operation and that if the said request was allowed, the very purpose of amending the Act would be defeated. This judgment followed the league of previous case laws such as ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corporation Ltd., Northern Railway Administration, Ministry of Railway v. Patel Engineering Co. Ltd. and North Eastern Railway v. Tripple Engineering Works, wherein the Hon’ble Court held the notion that the High Court was bound to appoint the arbitrator as per the contract between the parties has seen a significant erosion in the past. In all the above mentioned judgments, one of the parties to the dispute was a government entity and each time the Court decided that the government entity cannot be allowed to appoint an arbitrator from one of its own employees be it a current employee or retired.
In the recent case of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., that came up before me, the parties had a one-sided and government-dominated clause on appointment of arbitrators in their contract. While elucidating the importance of neutrality of arbitrators and on drafting and implementation of clauses on appointment of arbitrators, the Court instructed the parties to have a broad based panel, so that there is no misapprehension that principle of impartiality and independence would be discarded at any stage of the proceedings. In that it was observed that:
“Notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator’s appointment is deduced from the agreement entered into between the parties, notwithstanding the same non- independence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration. The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial.”
In the case of Hrd Corporation (Marcus Oil) and Anr. vs Gail (India) Limited, the Supreme Court put to rest the controversy surrounding the course to be adopted in case of circumstances giving rise to justifiable doubts as to the independence or impartiality of an arbitrator.
The Supreme Court examined if the same would render the arbitrator ineligible to act and in what circumstances would the grounds as referred to in Fifth and Seventh Schedule to the Arbitration and Conciliation Act, 1996 render an arbitrator de jure unable to perform his functions and result in termination of the mandate of the arbitrator in terms of Section 14(1) of the Act as amended by the Arbitration and Conciliation, 2015 (2015 Amendment). The court clarified that the 2015 Amendment has not changed the legislative policy of minimizing judicial intervention in arbitral proceedings. However, the termination of the mandate of the arbitrators on account of Section 12(5) read with Seventh Schedule of the Act, could not be rejected at the threshold as falling outside the scope of Section 14 of the Act.