+91 44 28120000

Call Us for an Appointment

 

Issues with Repeat Appointments of Statutory Arbitrators

SURANA & SURANA > SSIA  > Issues with Repeat Appointments of Statutory Arbitrators

Issues with Repeat Appointments of Statutory Arbitrators

Issues with Repeat Appointments of Statutory Arbitrators

Arunima Das

A. Introduction:

Repeat appointments of arbitrators refer to the appointment of an arbitrator for multiple arbitration proceedings. It ordinarily involves the same arbitrator being repeatedly chosen by a single  party or counsel for various cases. In the context of statutory arbitrations, arbitrators are appointed by statutory bodies, rather than by the parties themselves. Consequently, when a sole arbitrator is appointed by a statutory body, for cases with the same subject matter and involving a common party, it can also be considered a form of repeat appointment within statutory arbitrations. Although this definition may be subject to debate, this article assumes its correctness.

B. Insights on Arbitrator Neutrality: The Seventh and Fifth Schedules

Post the 2015 amendment to the Arbitration and Conciliation Act, 1996 (the ‘Act’), repeat arbitrator appointments can be challenged on grounds of bias in two ways: through a) Section 12(5) and the Seventh Schedule or b) Section 12(1) and the Fifth Schedule. The Seventh Schedule, inspired by IBA’s Red List [1], outlines circumstances affecting an arbitrator’s impartiality. If any situations under this schedule occur, it is an absolute bar and the individual is ineligible to act as an arbitrator. On the other hand, the Fifth Schedule, mirroring IBA’s Orange List [1] , details situations that might put to question an arbitrator’s neutrality. If any conditions from this schedule arise, it could cast doubt on the arbitrator’s neutrality. These situations are considered “waivable” and act as a guide rather than an absolute barrier, leaving the courts to decide on an ad-hoc basis. This flexibility allows the courts much room for interpretation.

C. Entry 22 in light of MSCS Act: The Kalpesh Shantikumar Case

Entry 22 of the Fifth Schedule highlights a condition where an arbitrator has been chosen on two or more occasions by one of the parties within the last three years. In a recent verdict in the case of Kalpesh Shantikumar Mehta & Ors. v. NKGSB Co-op. Bank Ltd. and Anr. [2], The Bombay High Court upheld the repeat appointment of an arbitrator under the Multi State Co-operative Societies Act (‘MSCS Act’). The court reasoned that this did not violate the restriction under Section 12 (1)(a) with Entry 22.

The case pivots around a dispute between the petitioners and a Co-operative Bank (the respondent), registered under the MSCS Act. During the arbitration process, the petitioners discovered that the sole arbitrator was arbitrating several cases in which the respondent bank was a party. This raised questions of the arbitrator’s impartiality and independence. The petitioners challenged the arbitrator’s appointment under section 13 (2) of the Act, invoking Section 12 (1)(a). The arbitrator rejected this, upholding their own neutrality. Following this, the petitioners sought to terminate the arbitrator’s mandate before the Court under Section 14 (2) of the Act.

Section 84 of the MSCS Act requires the arbitrator to be appointed by the Central Registrar, yet in this case, the appointment was made by the Commissioner of Co-operation and Registrar. In compliance with Section 12 (1)(b) read with Entry 22 of Schedule V, the arbitrator disclosed that they were involved in ten disputes of the respondent bank within the last three years.

Despite this, the Bombay High Court supported the respondent’s argument that the MSCS Act, as a unique enactment [3] , overrides the Act. The Court stressed on the need for an arbitrator to exhibit impartiality and independence. Still, it ruled that Entry 22 of Schedule V did not apply in this case since the arbitrator was not appointed directly by a party or its affiliate. Since the arbitrator was appointed by the Central Registrar/delegate, and not by one of the parties or an affiliate of one of the parties, the court found the arbitrator’s appointment was legally valid and outside the scope of Entry 22’s restriction.

D. Interpretations of Entry 22 Disqualifications

The ruling in Kalpesh Shantikumar contributes to a growing list of judgments that lean towards a liberal interpretation of the disqualifications listed in the Fifth Schedule. Notably, the Supreme Court in HRD Corporation [4] held that an arbitrator appointed on two or more occasions within the past three years by a party or an affiliate could counteract potential disqualification by demonstrating independence and impartiality during previous appointments.

In Sawarmal Gadodia [5] , the petitioner contested onearbitrator’s decisions under section 34 of the Act. Upon enquiry, the Bombay High Court found the respondent had repeatedly appointed the same arbitrator for 252 arbitrations. However, the arbitrator failed to adequately disclose this in accordance with section 12 of the Act and Entry 22. Consequently, the court set aside the arbitral award but referred it to four separate arbitrations.

Echoing the rulings in HRD Corporation and Sawarmal Gododia, the Delhi High Court in the case of Panipat Jalandhar NH1 Tollway [6] upheld the legitimacy of repeat arbitrator appointments based on two factors: first, the arbitrator disclosed their multiple nominations by a sole party; and second, the disclosure included a comprehensive rationale explaining why these nominations did not cast doubt on the arbitrator’s impartiality.

E. Focus on Disclosures and issues with Statutory Arbitrations

A review of the cited court judgments reveals a subjective approach to determining an arbitrator’s neutrality, primarily focusing on the full disclosure of repeat appointments. The Bombay High Court in the case of Kalpesh Shantikumar emphasised on the importance of adherence to Section 12 (1) and (2) of the Act, which mandates a declaration as envisaged under Schedule VI of the same Act. However, the court in Sawarmal Gadodia displayed concern over an arbitrator’s failure to disclose adequately, leading to setting aside four awards but referring the disputes for separate arbitration.

Repeat arbitrations are criticised on the grounds of financial dependency of the arbitrator on one party, by being appointed by the same party multiple times. Critics have argued that arbitrators usually favour their appointing party in a self-interest effort to increase the likelihood of subsequent appointments.[7] Beyond financial relationships, bias can also stem from personal associations. For example, a statutorily appointed arbitrator may exhibit bias due to constant adjudication of disputes for one party. Such potential bias necessitates exploration, especially when the bias results from affinity with one party rather than financial dependence. However, Entry 22 does not reflect this nature of bias. The grounds for challenging statutory arbitrations represent not financial dependence, rather affinity with one party.

An appropriate analogy can be drawn with Entry 31 of Schedule V. Entry 31 pertains to a circumstance where an arbitrator has been professionally associated with one of the parties within the past three years with the party. Another analogy can be drawn with the  case of Halliburton v. Chubb Bermuda [8] of the England and Wales Court of Appeal. In this case a challenge was made to the appointment of an arbitrator on the grounds of appointment being in the same or overlapping subject matter involving a common party. The court considered the arbitrator to be ineligible.

Moreover, this issue also deals with the core of challenge to statutory arbitrations. Statutory arbitrators, usually appointed by governmental bodies, often handle multiple disputes involving a sole party, on the same subject-matter. In a system where one arbitrates thirty or even a hundred disputes of solely one party, there is bound to remain questions highlighted on affinity or favouritism. However, it seems that the system of statutory arbitrations prioritises efficiency despite potential bias. Mandatory disclosure may become a procedural formality, not ensuring actual neutrality in statutory arbitrations. There are criticisms that statutory arbitration undermines party autonomy, permits bias, and encourages inefficient decision-making, given these tribunals often exercise both judicial and administrative roles.[9] Critics have also highlighted that the MSME Council, a regulatory body acting as both conciliators and arbitrators, is in breach ofSection 80 of the Act.[10]

F. Conclusion

This article has analysed arbitrator neutrality in relation to repeat appointments and disclosure obligations. The court judgments discussed illustrate the subjective nature of determining an arbitrator’s impartiality and emphasise the significance of comprehensive disclosures to maintain transparency and address potential biases. The case of Kalpesh Shantikumar Mehta sheds light on the interpretation of Entry 22 of the Fifth Schedule, highlighting that repeat appointments alone may not disqualify an arbitrator, especially in statutory appointments. The Bombay High Court held that appointments made through statutory provisions, like the MSCS Act, may deviate from the strict application of Entry 22.

Statutory arbitrators, commonly appointed by government bodies to handle multiple disputes involving a sole party, present their own set of challenges. The pursuit of efficiency in these proceedings frequently overlooks ethical concerns. Mandatory disclosure requirements may become mere formalities, failing to ensure actual neutrality in statutory arbitrations. Furthermore, the dual roles performed by these tribunals, encompassing both judicial and administrative functions, raise questions regarding party autonomy, potential bias, and efficient decision-making.

Courts have stressed on the importance of eliminating bias in decision-making and requiring arbitrators to uphold the most ethical standards. This is crucial to maintain the trust of the parties involved and to enhance the reliability and credibility of the arbitration system for the public. More importantly, it is absolutely essential to appoint a larger number and a diverse pool of arbitrators to improve the overall functioning of the institution of arbitration. The current system of statutory arbitrations is often perceived as a procedural hurdle, where arbitrators act like cogs in a machine rather than judicial actors with independent decision-making authority. Such a system requires deliberation and change since it might undermine the integrity and legitimacy of the arbitration institution.

Footnotes:

[1] IBA Guidelines on Conflicts of Interest, p.no. 17-27, available at: https://www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918 (last visited on Mar. 28, 2023).

[2] MANU/MH/1131/2023 (High Court of Bombay).

[3] Niwas Dattatraya Lad and Ors. v. Punjab Maharashtra Co-operative Bank Ltd. Writ Petition No. 413 of 2012 (High Court of Bombay) and TJSB Sahakari Bank Ltd. vs. Laxmi Industries and Ors. (CARBP 1/2022) (High Court of Bombay).

[4] HRD Corporation (Marcus Oil and Chemical Division) v. GAIL (India) Limited (2018) 12 SCC 471.

[5] Sawarmal Gadodia v. TATA Capital Financial Services Limited & Ors. 2019 SCCOnLine Bom 89.

[6] Panipat Jalandhar NH1 Tollway Private Limited v National Highways Authority of India 2022 SCCOnLine Del 108.

[7] Catherine Rogers, ‘The Politics of International Investment Arbitration (2014) Santa Clara Journal of international Law (12) 223, 226.

[8] [2018] 1 WLR 3361: (2018) EWCA Civ 817 (Pending Appeal).

[9] Chandni Ghatak and Swapnil Tripathi, “Party autonomy v. Statutory Arbitration under the MSME Act: The unsettled woe” Bar and Bench, Jun. 2, 2020, available at: https://www.barandbench.com/columns/party-autonomy-v-statutory-arbitration-under-the-msme-act-the-unsettled-woe (last visited on Mar. 28, 2023). Ajar Rab and Madri Chandak, “Promoting Arbitration and Killing it: The Curious creation of ‘Statutory Arbitration’” National Law School Business Review, Sept. 18, 2021, available at: https://www.nlsblr.com/post/promoting-arbitration-and-killing-it-the-curious-creation-of-statutory-arbitration (last visited on Mar. 28, 2023).

[10] Ibid. Rab and Chandak.

No Comments

Leave a Comment