Understanding Section 12 of the Arbitration and Conciliation Act, 1996: Impartiality and Independence of Arbitrators

By :

TAYENJAM MOMO SINGH

Advocate, High Court of Manipur

Advocate-on-Record, Supreme Court of India

INTRODUCTION:

Arbitration, as an alternative dispute resolution mechanism, relies heavily on the impartiality and independence of arbitrators to ensure fairness and equity in resolving disputes. Section 12 of the Arbitration and Conciliation Act, 1996,(hereinafter , “the Act”) plays a crucial role in upholding these principles by establishing standards for the qualifications of arbitrators and safeguarding against potential conflicts of interest. This article delves into the significance of Section 12 of the Act and its implications for arbitration proceedings in India.

UNDERSTANDING SECTION 12 OF THE ACT:

The Arbitration and Conciliation (Amendment) Act,2015 (3 of 2016) to the Act, in order to ensure independence and impartiality in appointment to arbitrators, following the recommendation of the 246^th Law commission report had amended Section 12, inserted the Fifth and Seventh Schedules to the Act w.e.f. 23-10-2015.

Section 12 of the Arbitration and Conciliation Act, 1996, mandates that an individual approached to be an arbitrator must disclose any circumstances that may give rise to justifiable doubts regarding their impartiality or independence. This provision aims to ensure that arbitrators are free from any bias, conflict of interest, or external influence that could compromise their ability to render fair and unbiased decisions. The duty of disclosure imposed by Section 12 is continuous, extending from the initial acceptance of the appointment to the conclusion of the arbitration proceedings. Arbitrators are required to promptly disclose any new circumstances that may arise during the course of the arbitration, which could affect their impartiality or independence. This transparency is essential for maintaining the integrity and credibility of the arbitration process.

The Section 12(5) of the Act states that 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. The proviso to the Section 12(5) states that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.

The Fifth Schedule of the Act states the various grounds giving rise to justifiable doubts as to the independence or impartiality of arbitrators. The Seventh Schedule of the Act states the various relations of the Arbitrator’s relationship with the parties or counsel, which leads to disqualification of the appointment of the arbitrator.

IMPLICATIONS FOR ARBITRATION PROCEEDINGS : SECTION 12 OF THE ACT SERVES SEVERAL KEY PURPOSES IN ARBITRATION PROCEEDINGS:

1. Safeguarding Impartiality and Independence: By requiring arbitrators to disclose potential conflicts of interest or circumstances that may affect their impartiality, Section 12 of the Act helps maintain the integrity of the arbitration process. Parties can assess the arbitrator's suitability and object to their appointment if justified doubts exist regarding their impartiality or independence.
2. Promoting Transparency and Accountability: The duty of disclosure enhances transparency and accountability in arbitration proceedings. Parties have a right to be informed about any factors that could impact the arbitrator's decision-making process, thereby fostering trust in the fairness and integrity of the arbitration process.
3. Mitigating Risks of Bias and Partiality: By proactively disclosing potential conflicts of interest, arbitrators minimize the risks of bias or partiality in their decision-making. This proactive approach helps address concerns about arbitrators favoring one party over the other and ensures that arbitration awards are based on merit and legal principles rather than extraneous considerations.

JUDICIAL DECISIONS ON SECTION 12 OF THE ACT :

While Section 12 is intended to strengthen the impartiality and independence of arbitrators, its effectiveness may be hindered by certain challenges and controversies. One common challenge is the interpretation of what constitutes circumstances giving rise to justifiable doubts regarding an arbitrator's impartiality or independence. This determination may be subjective and open to varying interpretations, leading to disputes and delays in the arbitration process.

The Supreme Court of India has consistently emphasized the significance of Section 12 in upholding the fundamental principles of fairness, impartiality, and neutrality in arbitration. In its landmark judgment in the case of TRF Limited v. Energo Engineering Projects Limited,  [(2017) 8 SCC 377 : 2017 Legal Eagle (SC) 850], (hereinafter, “TRF”) the Supreme Court held 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 and that it is inconceivable in law that person who is statutorily ineligible can nominate a person. Further, the Supreme Court in Perkins Eastman Architects DPC vs HSSCC (India) Limited, [(2020) 20 SCC 760 : 2019 Legal Eagle (SC) 1263] (hereinafter, “Perkins Eastman”) held that any person who has an interest in the outcome of the dispute would be ineligible to be an arbitrator and further, a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. And, that has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act,2015 (3 of 2016) and recognised by the decision in TRF. In Bharat Broadband Network Ltd. vs United Telecoms Ltd, [(2019) 5 SCC 755 : 2019 Legal Eagle (SC) 471] (hereinafter, “BNSL”) the Supreme Court held that Section 12(5) read with the Seventh Schedule make it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes “ineligible’ to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as “ineligible”.

In Voestalpine Schienen GmBH vs DMRC, [(2017) 4 SCC 665 : 2017 Legal Eagle (SC) 282] (hereinafter, “Voestalpine”)the Supreme Court after examining the arbitration clause requiring the parties to nominate their arbitrators from a panel maintained by Delhi Metro Rail Corporation Ltd. (DMRC) held that the factum of retired employees and servicemen on panel of DMRC could not ipso facto attract the bar provided under the Seventh Schedule of the Act. It held that the very reason for empanelling these persons is to ensure that technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators. Further, the Supreme Court inter-alia directed that the panel should be broad base by including not just retired government employees but also experts, engineers, retired Judges. Subsequently, in Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCML (JV), [2020 (14) SCC 712 : 2019 Legal Eagle (SC) 1359] (hereinafter,‘Core’) a three-Judge Bench of the Supreme Court observed that the controversy involved in the said matter was that as per the agreement procedure, the contractor was to suggest to General Manager at least two names out of panel sent by department to contractor, for appointment as contractor's nominee and General Manager had to appoint at least one out of them to three-member Arbitral Tribunal as contractor's nominee. The General Manager was to simultaneously appoint balance number of arbitrators from the panel or from outside the panel, duly indicating "Presiding Arbitrator" from amongst the three arbitrators so appointed. After, examining the said issue , the Supreme Court held that since the respondent contractor had been given the power to select two names out of panel of four retired railway officers, at least one of whom had to be appointed as one of the three arbitrators by the General Manager, as per the agreement procedure, the right of the General Manager (himself ineligible to act as arbitrator) in formation of the Arbitral Tribunal was counterbalanced by the respondent's above said power to choose any two from out of the four names. Hence, in the said case it was permissible for General Manager (though he was himself ineligible to act as arbitrator) to nominate arbitrators as per the agreement procedure.

As, it is evident from the conflicting views of the Supreme Court in the case of TRF followed in Perkins Eastman and in the case of Core, in Union of India vs. Tantia Constructions Ltd.[(2021 SCC Online 271)], ((hereinafter ‘Tantia Constructions’) a three-Judge Bench of the Supreme Court observed that it prima facie disagree with the decision in Core for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case. Therefore, the matter was referred to a larger bench to look into the correctness of the said decision. Subsequently, in JSW Steel Limited vs South Western Railway and Another [(2022 SCC Online 1973)],(hereinafter ‘JSW Steel Limited’) another three-Judge Bench of the Supreme Court observed that correctness of the decision in Core was doubted by a subsequent Bench of three Judges in Tantia Constructions, and the matter was directed to be place before a larger Bench.

CONCLUSION:

Section 12 of the Arbitration and Conciliation Act, 1996, serves as a cornerstone for maintaining the impartiality and independence of arbitrators in India. By imposing a duty of disclosure on arbitrators and requiring them to promptly disclose any circumstances that may affect their impartiality or independence, the provision enhances transparency, accountability, and trust in the arbitration process. At present , there is a conflicting views of the Supreme Court in the case of TRF followed in Perkins Eastman and in the case of Core which is yet to be decide by a lager bench of the Supreme, therefore, it would be proper for the parties especially the State and its instrumentality to not appoint arbitrators which are not in violation of the law laid down in the said Judgments. However, effective implementation of Section 12 requires proactive efforts from arbitrators, parties, and arbitral institutions to uphold the highest standards of integrity and fairness in arbitration proceedings.

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