Conflicts of Interest in Appointment of Arbitrators: Recent Issues and Suggestions

Bar & Bench November 2 2018

Tariq Khan

Behind every great man, there is a great woman; and behind every unilateral appointment, there is a party intent on winning the case. An article of late centenarian Justice VR Krishna Iyer that has recently been reproduced by Mr. Fali S Nariman in his bookGod save the Hon’ble Supreme Court’ reads as under:

“There was once a case between a private citizen and the Maharashtra government. A retired judge of the Supreme Court, who was otherwise a great chief justice, gave an opinion to the private citizen and received a large sum of money as fees for his opinion – an opinion against the Maharashtra government.

In the case between the private citizen and the Maharashtra government, the high court then appointed as arbitrator the same great chief justice who accepted the appointment without disclosing that he had earlier given an opinion to a private party, an opinion that was against the Maharashtra government!

That person, the same judge, who had earlier given an opinion repeated the opinion as his award and claimed another set of fees.”

The verdict of the high court was against the Maharashtra government and the Maharashtra government then appealed to the Supreme Court.

The then chief justice who heard the case in the Supreme Court was also great. But he rebuked the Advocate for the Maharashtra government Madhav Reddy, for criticizing the person who gave the private opinion – the judge who obviously committed misconduct and insult by giving a private opinion and accepting the role of arbitrator in the same matter having taken by now a double set of fees.

The government advocate Madhav Reddy, an eminent lawyer, withdrew from the case and the arbitrator’s verdict became final, although the conduct of the arbitrator in having participated earlier in the same case was clearly a grave misconduct. The judge who heard the case was Chief Justice of the Supreme Court, who wrongly admonished the government lawyer Madhav Reddy, but being a judge his folly escaped being called a delinquency. Such cases, do occur when even an arbitration does not secure justice.” 

The foregoing excerpt leaves us in no doubt that there exists a serious issue regarding the conflict of interest in the appointment of arbitrators. An arbitrator has moral obligations to uphold the integrity and fairness of the arbitration process, as well as moral obligations to the parties to the arbitration. An arbitrator’s obedience to ethical principles is especially pertinent in view of the limited grounds under which courts interfere with the arbitral awards under section 34 of the Arbitration & Conciliation Act, 1996 (the Act).

Unilateral Appointments: The Genesis of Conflicts

Professor Jan Paulsson has pithily put it that ‘Freedom of the parties’ is not the same thing as freedom of a party. Unilateral appointments are inconsistent with the fundamental premise of arbitration i.e. “mutual confidence in arbitrators” to say the least. 

I don’t trust this party, why would I trust the arbitrator that they have appointed?’ The rationale behind this disagreement is simple, if the parties have gone to the extent of initiating arbitral proceedings, how can they have confidence that the arbitrator appointed by their opponent will discharge his duties in a neutral and impartial manner?

In case of unilateral appointment of an arbitrator, there are very little chances of dropping the perverse incentive that an arbitrator might have in ruling in favor of his appointing party. A party to a dispute is only concerned with one thing i.e. a favourable award and therefore, it exercises its right of unilateral appointment, like everything else, with that overriding objective in mind.

In a similar vein, Professor Martin Hunter wrote:

when I am representing a client in arbitration, what I am really looking for in a party-nominated arbitrator is someone with the maximum predisposition towards my client, but with the minimum appearance of bias.

(Martin Hunter, Ethics of the International Arbitrator, 53 Arbitration 219, 1987, pp 222-223).

This is indeed an honest and accurate depiction of the approach which a party takes while looking for a party-appointed arbitrator. Interestingly, it is not surprising to see that an arbitrator appointed by a party, instead of acting as an impartial decision maker, will cross the line and advocate for the appointing party. There is a likelihood that an arbitrator who is unilaterally appointed by a party has the incentive to favour his nominee and rule in its favor, in order to get future nominations by the same party (the company or the law firm representing the company).

The practice of unilateral appointments is jeopardizing the Institution of Arbitration as a whole, as it damages the trust that the process generates. Incidentally, unilateral appointments lead to a high number of challenges to arbitrators which eventually delays the resolution of disputes thereby, defeating the very purpose of arbitration.

The sequitur to the foregoing approach is that there are sufficient safeguards available under the Act against the risk of bias and partiality by a party-appointed arbitrator. References are often made to “Party Autonomy”. However, the legitimacy of arbitration is pyramided on the parties’ confidence in arbitrators. Unfortunately, the existing checks and balances under the Act are inadequate to protect against the “menace” of unilateral appointments.

In Ace Pipeline Contracts Private Ltd. v Bharat Petroleum Corporation while deciding on the question of impartiality and independence of a named arbitrator, the Hon’ble Supreme Court held that

“Once a party has entered into an agreement with eyes wide open it cannot wriggle out of the situation that if any person of the respondent-BPCL is appointed as arbitrator he will not be impartial or objective. However, if the appellant feels that the arbitrator has not acted independently or impartially, or he has suffered from any bias, it will always be open to the party to make an application under Section 34 of the Act to set aside the award on the ground that arbitrator acted with bias or malice in law or fact.”

The Law Commission in its 246th Report was of the view that

..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”.

By way of the amended Section 12 of the Act, the grounds which are likely to give rise to justifiable grounds of bias have been identified in Fifth Schedule. Further, by virtue of Section 12(5) of the Act, any person who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as the arbitrator.

Interestingly, categories in Fifth Schedule and Seventh Schedule have attempted to include all possible aspects so as to reduce preliminary disputes arising from independence and impartiality of an arbitrator.

The recent decision in Voestalpine Schienen GmbH v Delhi Metro Rail Corporation Ltd. involved the issue of appointment of retired government employees as arbitrators. The Hon’ble Supreme Court held as under:

“25. ..It cannot be said that simply because the person is retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (party in dispute), he would be treated as ineligible to act as an arbitrator..

29. Time has come to send positive signals to the international business community, in order to create healthy arbitration environment and conducive arbitration culture in this country. Further, as highlighted by the Law Commission also in its report, duty becomes more onerous in Government contracts, where one of the parties to dispute is the Government or public sector undertaking itself and the authority to appoint the arbitrator rests with it. In the instant case also, though choice is given by DMRC to the opposite party but it is limited to choose an arbitrator from the panel prepared by the DMRC. It, therefore, becomes imperative to have a much broad based panel, so that there is no misapprehension that principle of impartiality and independence would be discarded at any stage of the proceedings, especially at the stage of constitution of the arbitral tribunal. We, therefore, direct that DMRC shall prepare a broad-based panel on the aforesaid lines, within a period of two months from today.”

The Act is silent on whether one of the parties to the arbitration agreement could be the appointing authority. A three-judge bench of the Hon’ble Supreme Court has dealt with this issue to some extent in TRF Ltd. v Energo Engineering (“TRF”) wherein the issue involved was whether the person who was required to arbitrate upon the disputes, which had arisen under the terms and conditions of the contract, once ineligible by operation of law, would still be eligible to nominate a person as an arbitrator. The court held as under:

“57….By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so.”

Though the decision in TRF is a progressive one, however, it does not clearly state that one party to an arbitration could no longer be an appointing authority as it only deals with the limited issue that if a person was ineligible to act as an arbitrator, such person could not appoint another in its place.

The Duty of Disclosure: From Myth to Reality

The amended Section 12 of the Act requires that a person who has been approached for a possible appointment as an arbitrator to disclose in writing the circumstances which are likely to raise justifiable doubts as to his or her independence or impartiality to act as an arbitrator.

However, there has been less emphasis by the courts on continuous duty of arbitrators to disclose potential conflicts of interest. It is necessary that a proper disclosure also includes the information that the arbitrators could have known through a reasonable investigation. In fact, Section 12 of the Act does not address the question that what if there was a duty to disclose which has been breached by the arbitrator. Does that breach automatically debar the arbitrator? Unfortunately, there is no provision for any interlocutory challenge before a court to a bias situation and the party has to wait until the award is pronounced. 

Efficiency is dependent on the availability of the arbitrator and hence, it is crucial for the parties to inquire whether the prospective arbitrator can devote sufficient time to resolve the dispute in an efficient manner. Even though the arbitrator in the disclosure may provide that he will be able to finish the entire arbitration in twelve months and will give sufficient time to the arbitration, however, it is not unusual to see that the arbitrator’s diary is full and the dates are given after 3-4 months.

Currently, there is no mechanism or a database that contains all information/past record pertaining to the prospective arbitrator to check whether the prospective arbitrator has been given a correct disclosure in terms of Schedule VI of the Act and has not concealed any information. 

Publication of Awards: The Way Forward

Confidentiality derives from party autonomy and extends to all stages of the arbitration process, including the award. The arbitral award is simply a matter of a private contract between the parties and, thus, should not be disclosed to the public. However, in order to prevent conflict of interests and avoid instances of misconduct and misapplication of law, it is necessary that the practice of publication of arbitral awards be adopted.

The publication of the arbitral awards under arbitrators’ names will, in fact, assist them in building their standing and reputation in the arbitration fraternity. Additionally, the arbitrators will be more vigilant while writing arbitral awards and ensure that quality of arbitral award is maintained.

Conclusion

Indisputably, there are pros and cons surrounding unilateral appointments, however, the negative factors associated with this practice appear to be going on a rise. Therefore, the default rule should be that all arbitrators are appointed jointly by the parties or by a neutral appointing authority especially in an arbitration consisting of a sole arbitrator.

The idea of doing away with the practice of unilateral appointments is in line with the possibility to get rid of conflicts of interest in order to protect the institution of Arbitration, since this issue affects the trust and confidence that Arbitration provides to the parties. Some of the obvious problems that these suggestions could bring are that it is possible that the parties will not be able to agree on the name of the arbitrator, or will not be entirely be satisfied by the appointment made by the Institution.

Also, confidentiality is one of the features which makes arbitration attractive to parties as a means of dispute resolution thereby, making it difficult to implement the idea of publication of awards. There is also a dire need for a mechanism to enable the parties’ to access all relevant information regarding the proposed arbitrator that can help in identifying issues of conflict of interest and to verify if the disclosure provided by the arbitrator is correct. Lastly, it is for the arbitrators to set for themselves a higher moral standing.

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