Grounds for challenge: Section 12 of Arbitration and Conciliation Act, 1996 (1996 Act)
“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,
(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.
Explanation 1—The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.
Explanation 2—The disclosure shall be made by such person in the form specified in the Sixth Schedule.
(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.
(3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.
(5) Notwithstanding any prior agreement to the contrary, 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 shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”[i]
Accordingly, there are two grounds on the basis of which the appointment of an Arbitrator may be challenged. These grounds found in Section 12 are exhaustive. The appointment of an Arbitrator may not be challenged on any grounds other than those found in these provisions. The appointment of an Arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his independence and impartiality, or if he does not possess the qualifications agreed to by the parties for his appointment.
The primary ground on which the appointment of an arbitrator may be challenged is where one of the parties has reasonable grounds to believe that the arbitrator may be biased.[ii] Importantly, a party challenging the appointment of an arbitrator need not prove that actual bias exists,[iii] he must only show that there are “justifiable doubts” concerning the arbitrator’s impartiality. Some circumstances that may raise such justifiable doubts are
- Arbitrator is related to one of the parties to the dispute
- Arbitrator has some personal or commercial interests in the subject-matter of the dispute
- Arbitrator has a past history with one pf the parties (eg., he may have been the employer/employee or business partner or even legal representative of one of the parties).
In International Airport Authority of India v KD Bali,[iv] the court held that for the independence and impartiality of an arbitrator can be impugned only where there is a real likelihood of bias. A mere suspicion of bias will not suffice. Where a real likelihood of bias as opposed to a mere suspicion is found, the proceedings before the arbitrator may be quashed and the arbitrator disqualifies on the grounds of his interest in the proceedings. There must also be an element reasonableness and not just any suspicion of a litigating party which will lead to the conclusion of bias. Consequently, the apprehension has to be judges from “reasonable, healthy and average point of view and not on a mere appearance of any whimsical person”. The test to be applied by the court has to be the “reasonableness and the apprehension of an average honest man”.
In a subsequent decision of three learned judges in Jiwan Kumar Lohia v Durga Dutt Lohia,[v] the Supreme Court held:
“with regard to bias in relation to a judicial tribunal the test that is applied is not whether in fact a bias has affected the judgment, but whether a litigant could reasonably apprehend that a bias attributed to a member of the tribunal might have operated against him in the final decision.”
The court cited with approval the test which was laid down in Ranjit Thakur v Union of India[vi]:
“the test of likelihood of bias is whether a reasonable person, in possession of relevant information, would have thought that bias is likely and whether the person concerned was likely to disposed to decide the matter only in a particular way.”
Lack of necessary qualifications
The second ground on which the appointment of an arbitrator may be challenged is where one of the parties finds that the arbitrator does not possess the qualifications that the parties have agreed to. For example, under the terms of the arbitration agreement, the parties to the dispute decided that a sole arbitrator was to be appointed to settle the dispute. The sole arbitrator was to be a retired judge of Bombay High Court who could considered an expert in arbitration law and who had an engineering degree. If any of the above conditions are not fulfilled, then the opposing party can challenge the appointment of the sole arbitrator.
Duty of Disclosure
Section 12 gives a person who has been approached with a request to act as an arbitrator an opportunity to disclose to the parties any prior interest he may have with regard to the parties or the subject-matter of the dispute. In fact, such a person has an obligation to make a disclosure concerning any circumstances that may give rise to justifiable doubts as to his independence or impartiality concerning the dispute. This must be done at the at the earliest possible time and without delay. If such circumstances exist before his appointment is made, he must ensure that the parties are aware of the circumstances as soon as possible. If circumstances that may raise questions regarding his bias appear during the pendency of arbitral proceedings, he is under an equal obligation to disclose such circumstances to the parties without delay. The arbitrator must make such disclosure in writing and ensure that all parties are given notice of such circumstances.
Section 12 is couched in mandatory terms as the provision states that the arbitrator “shall disclose any circumstances which may raise justifiable doubts concerning his impartiality”. It is imperative that the arbitrator disclose such circumstances to the parties. However, non-disclosure of an immaterial fact is not a ground for challenging the appointment of an arbitrator. The arbitrator cannot be expected to reveal every detail of his private life. It is only when a fact that many raise the question of the arbitrator’s bias is hidden from the parties that an arbitrator’s appointment may be challenged.
“an arbitrator must show urberrima fides to the parties whose disputes he is going to arbitrate and whose domestic forum he is constituted. The arbitrator must disclose to the parties all facts which are likely or calculated to bias him in any way in favour of one or the other party.”
The Learned Chief Justice held:
“that a circumstance or a fact may in fact not bias the decision of the arbitrator for he may have too strong a character, too deep a sense of justice to be influenced by consideration extraneous or foreign to the evidence which he has got to consider. However, the question is not what is likely in fact to happen, but what is likely to tend or is calculated to tend to a particular result.”[ix]
This principle now finds statutory recognition in Section 12(1) of the 1996 Act which provides that when a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality. Thereafter, throughout the arbitral proceedings, the arbitrator must disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already disclosed.
Challenge by the appointing party.
A party who has appointed an arbitrator or participated in the appointment of that arbitrator can challenge such appointment. There is no absolute bar on a party’s power to challenge the appointment on an arbitrator who was appointed or nominated by them. However, there is a restriction on that power. If a party was aware of a fact that may have given rise to doubt concerning the arbitrator’s independence and impartiality, or the party was aware that the arbitrator did not possess all the qualifications agreed to by the parties in terms of the arbitration agreement, yet the party proceeded to appoint that person as the arbitrator, then the party cannot challenge at a later date the appointment of the arbitrator on the basis of a fact that was within his knowledge at the time the appointment was made. The party will be deemed to have acquiesced or accepted that the person appointed is fit to arbitrate upon the dispute despite the existence of those circumstances.
In Ladli Construction Co. (P) Ltd. v Punjab Police Housing Corporation Ltd.,[x] there was a contract between the parties for construction of a housing complex which contained an arbitration clause calling for the appointment of the Chief Engineer of the respondent as the arbitrator. When disputes arose, it was the appellant who approached the court praying for the appointment of an arbitrator in terms of the arbitration agreement. No allegation of any bias or hostility on part of the arbitrator was made by the appellant during the appointment of the arbitrator. However, the appellant later wrote to the Arbitrator to recuse himself. Upon the arbitrator’s refusal, the appellant applied to the courts for his removal. The court held that
“Where parties enter into a contract knowing the role, authority or power of the Chief Engineer in the affairs relating to the contract but nevertheless agree for him to be arbitrator and name him in the agreement to adjudicate the dispute/s between the parties, then they stand bound by it unless a good or valid legal ground is made out for his exclusion.
In this country in numerous contracts with the Government, clauses requiring the Superintending Engineer or some official of the Govt. to be the arbitrator are there. It cannot be said that the Superintending Engineer, as such, cannot be entrusted with the work of arbitration and that an apprehension, simpliciter in the mind of the contractor without any tangible ground, would be a justification for removal. No other ground for the alleged apprehension was indicated in the pleadings before the learned Judge or the decision of the learned Judge. There was, in our opinion, no ground for removal of the arbitrator. Mere imagination of a ground cannot be an excuse for apprehending bias in the mind of the chosen arbitrator.”
Frequently Asked Questions:
1. Does an ex-officio arbitrator need to consult the other party before delegating his authority?
In Datar Switchgears Ltd. v Tata Finance Ltd.[xi]the Supreme Court has held that that the ex-officio arbitrator has no obligation to consult the other party on the question of delegation of his authority to act as an arbitrator. The discretion of the ex-officio arbitrator to appoint a designate is entirely unfettered and he may appoint any person of his choosing.
2. Under what section of the 1996 Act can a party challenge an arbitrator?
A party wishing to challenge an arbitrator’s appointment must send a written statement of the reasons and grounds for the challenge to the arbitrator. Under the procedure laid down under Section 13 of the 1996 Act, the Arbitral Tribunal is empowered to decide upon a challenge made to its own appointment.
[i] Arbitration and Conciliation Act 1996, § 12 (India).
[ii] VK Dewan & Co. v. Delhi Jal Board, (2010) 15 SCC 717: (2013) 2 SCC (Civ) 354.
[iii] AP SEB v. A Pratap Singh, (2010) 15 SCC 718.
[iv] (1998) 2 SCC 360: AIR 1988 SC 1099.
[v] (1992) 1 SCC 56: AIR 1992 SC 188.
[vi] (1987) 4 SCC 611: AIR 1987 SC 2386.
[vii] (2003) 3 Arb LR 345: (2003) 2 Mah LJ 810 (Bom).
[viii] AIR 1952 Bom 227.
[x] (2012) 4 SCC 609: AIR 2012 SC 1850.
[xi] (2000) 8 SCC 151: (2000) 6 An LT 26.