Bias, like beauty, is in the eyes of the beholder. But whether such a subjective view is sufficient for a court to strike down the appointment of an arbitrator is moot. Courts have leaned in favour of upholding objections to appointments based on objective standards. The Supreme Court of India had the occasion to consider the issue in the case of HRD Corporation v. GAIL (India)Limited
The decision is significant on two counts. To begin with, India recently brought a sea change in its arbitration law through the Arbitration and Conciliation (Amendment) Act, 2015. These amendments were aimed at providing a pro-arbitration legal framework consistent with international standards. This decision interprets the amended provisions on the grounds of challenging arbitrator appointments for conflict of interests and provides significant guidance on how to deal with them. Secondly, the grounds of challenge have been adopted from the International Bar Association Guidelines on Conflicts of Interest in International Arbitration, 2014 (‘IBA Guidelines’) with a few changes. Therefore, the decision adds to the growing body of case law on how different jurisdictions have interpreted the IBA Guidelines or statutory instruments based on the IBA Guidelines. This post discusses the judgement and its implications.
The appellant, HRD Corporation, and GAIL (India) Ltd., the respondent, entered into a long-term agreement for the supply of wax generated at the respondent’s petrochemical plant. Disputes arose between the parties, which led to invocation of four arbitrations by HRD Corporation. In the third arbitration, one of the members of the tribunal expired and Justice TS Doabia was appointed as the substitute arbitrator by an order of the court. The tribunal passed an arbitral award. Justice TS Doabia was once nominated by the respondent as a member of the tribunal in the fourth arbitration. The nominees of the appellant and the respondent appointed Justice RC Lahoti as the presiding arbitrator. At the time of his appointment, Justice RC Lahoti disclosed to the parties that he had given an opinion on a legal issue between the Respondent and another public sector undertaking and that he was an arbitrator in a dispute in which the Respondent was a party.
HRD Corporation challenged the appointments of Justice TS Doabia and Justice RC Lahoti before the arbitral tribunal. Under the Indian Arbitration and Conciliation Act, 1996 (‘1996 Act’), challenges to arbitrator appointment on the ground of conflict of interest is to be brought made before the tribunal. Justice RC Lahoti and Justice TS Doabia passed an order rejecting the challenge. However, the arbitrator-nominee of the appellant passed a separate order holding that the appointment of Justice RC Lahoti was correct but the appointment of Justice TS Doabia was contrary to the provisions of the 1996 Act. Questioning the order passed by Justice RC Lahoti and Justice TS Doabia, HRD Corporation filed a petition in the Delhi High Court, which was dismissed. The appellant thereafter filed an appeal in the Supreme Court of India.
Arguments before the Supreme Court
The appellant argued that the recent amendments introduced in the Arbitration and Conciliation Act, 1996 restricted the grounds on which an arbitral award could be set aside. As a consequence, appellant contended that the grounds of challenging an arbitrator have to be construed widely to ensure a heightened level of independence and impartiality.
Further, HRD Corporation argued that Justice Lahoti had previously given a legal opinion to GAIL, which disentitled him from acting as the arbitrator. HRD Corporation challenged the appointment of Justice Doabia for the reason that Justice Doabia was a member of the arbitral tribunal in a previous arbitration between the parties on related issues. These appointments, according to HRD Corporation fell foul of various grounds of challenge contained in the Fifth and the Seventh Schedule to the 1996 Act. The appellant also alleged that since Justice TS Doabia did not disclose at the time of his appointment those circumstances which affected his ability to devote sufficient time for the arbitration, he was ineligible.
GAIL, on the other hand, argued that none of the items relied on by the Appellant was applicable in the case and that the argument regarding Justice Doabia’s failure to disclose circumstances which affected his ability to devote sufficient time for the arbitration was an afterthought as it raised for the first time before the Supreme Court.
The Supreme Court acknowledged that the Fifth and the Seventh Schedules introduced into the statute book through the 2015 Amendments were based on the IBA Guidelines. The court went on to note the differences between the Fifth and the Seventh Schedules: the Fifth Schedule enumerated situations which led to justifiable doubts as to the independence and impartiality of the arbitrators while the Seventh Schedule listed out grounds which made persons ineligible to act as arbitrators. The court also recorded the distinction in the manner in which appointments could be challenged under these Schedules: challenges under the Fifth Schedule were to be brought before the tribunal at the first instance and in case of rejection of such challenge, the rejection could be brought before a court only after the award is passed. However, an arbitrator who falls within the Seventh Schedule becomes de jure unable to act as arbitrator and therefore the challenge could be brought directly to a court of law at the first instance. Given the aforesaid legal position, the Supreme Court rejected challenges based on the items mentioned in the Fifth Schedule and held that such challenges could be made only after the award was passed.
The court disagreed with the Appellant’s contentions that the grounds contained in the Schedules should be widely construed. The court held that as the Schedules were based on the IBA Guidelines, they had to be construed in the light of the general principles contained in the said Rules. The appropriate method of construing the relevant items in the Schedules was to afford them a ‘fair construction, neither tending to enlarge [nor] restrict them unduly’. The court was of the view that the relevant standard to ascertain if doubts as to independence or impartiality were justified was that of a ‘reasonable third person having knowledge of the relevant facts and circumstances’.
The court stated that merely because Justice RC Lahoti gave his legal opinion in one instance to the Respondent did not make him ineligible from appointment under the 1996 Act. According to the court, the term ‘advisor’ in item 1 of the Seventh Schedule (Item 1 of the Seventh Schedule to the 1996 Act reads: ‘The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.’) connoted the existence of a regularity of advisory relationship and that too in relation to the business of a party. The court took note of items 2, 8, 14 and 15 in the Seventh Schedule which contemplated relationships based on legal advice and ruled that since item 1 used the term ‘business relationship’ in contradistinction to a relationship stemming from legal advice, such advice should relate to the business of a party. On this reasoning, the court concluded: ‘Something more is required, which is the element of being connected in an advisory capacity with a party.’
The appellant had argued that item 16 of the Seventh Schedule (Item 16 of the Seventh Schedule reads: ‘The arbitrator has previous involvement in the case’.) debarred an arbitrator who had previously rendered an award between the same parties in an earlier arbitration concerning the same set of disputes. The court disagreed with this and held that item 16 was inapplicable as it concerned a situation where the prospective arbitrator had a prior involvement in the ‘very dispute contained in the present arbitration’. After noting the corresponding provision in the IBA Guidelines, which employed the phrase ‘in the dispute’ instead of ‘in the case’, and the title heading of the said provision (‘Relationship of the arbitrator to the dispute’), the court concluded that Justice Doabia was not involved in the very dispute that formed the subject of the arbitral proceedings although he might have been involved in a related dispute between the parties previously. In reaching the aforesaid conclusion, the court also resorted to items 22 and 24 of the Fifth Schedule. According to the court, if item 16 was to be interpreted in the manner suggested by the appellant, item 24 would be rendered nugatory as the latter item covered the exact situation which the which the appellant was canvassing.
Item 24 of the Fifth Schedule provides: ‘The arbitrator currently serves or has served within the past three years, as arbitrator in another arbitration on a related issue involving one of the parties or an affiliate of one of the parties.’
It is of note that a provision similar to item 24 of the Fifth Schedule is not contained in the Seventh Schedule. The court also rejected the challenge to the appointment of Justice Doabia on the ground that there was nothing to indicate that Justice Doabia held a pronounced anti-claimant view.
On the argument that Justice Doabia did not make a complete disclosure indicating that he would devote sufficient time to complete the arbitration within 12 months as required by the recent amendments. The court dismissed this argument as an afterthought considering that the appellant raised it for the first time before the Supreme Court.
When India decided to take steps to establish a pro-arbitration regime, the Law Commission of India considered that it was appropriate to adopt the objective standards laid down in the form of the IBA Guidelines considering its acceptability in international arbitration. At the same time, the IBA Guidelines were not to be adopted as they were. Considering the criticism that the presence of non-waivable red list was against the party autonomy doctrine (see, Para 60 of the 246th Report of the Law Commission and W Ltd v M SDN BHD  EWHC 422 (Comm), para. 35-41) the Law Commission recommended that grounds under the non-waivable red list should be treated as waivable but after the dispute has arisen. These recommendations were accepted and the 1996 Act was amended to incorporate these changes. The amendments present an appropriate model for those countries which are intending to adopt objective standards in addressing bias of the arbitrators.
The judgement is significant because it provides clarity on the manner of construing various grounds or items in the Fifth and the Seventh Schedules to the 1996 Act. The Supreme Court rightly resisted the temptation to read the grounds broadly and don an activist mantle. The court held that the fundamental principle in interpreting these items would be to look at it from the perspective of a reasonable man having full knowledge of the circumstances surrounding the appointment. The Supreme Court affirmed the view that these grounds should to be construed in a “common-sensical” fashion.
Since the items in the Seventh Schedule were also reflected in items 1 to 19 of the Fifth Schedule, the court noted their interconnectedness and clarified that the manner in which the Fifth Schedule was structured had a bearing on the interpretation of various items under the Seventh Schedule. Further, the court also held, rightly, that the same treatment should be afforded to the corresponding items in the Seventh Schedule. Therefore, it appears that the first step in construing the grounds under the Seventh Schedule would be look at the wordings of the corresponding item in the Fifth Schedule. The second step would be to find out related items and the last step would be to construe the related items harmoniously to ensure that there is no conflict.
The court adopted a prudent stance in holding that only if a professional, such as a legal professional, offered advice with an element of ‘regularity’ would that professional be barred from arbitrating a dispute involving a party which received the legal advice. It is possible that a successful legal professional would have advised prominent companies and clients at some point of time in her career. It is unreasonable and unrealistic to impute possible bias on the basis of such distant professional advice. Also, barring such a person from acting as an arbitrator would make arbitration appointment a cumbersome task.
The court also recognised that unless the challenging party was able to show that the arbitrator was holding a prejudiced view, appointment of such arbitrator between the parties in a related dispute and the award rendered thereunder did not affect the present appointment. Although the decision fails to explain the reason behind employing the phrase ‘in the case’ in item 16 instead of ‘in the dispute’ which was used in the IBA Guidelines, the court’s conclusion that the Appellant failed to show that Justice Doabia would not have brought an open mind to the arguments of the Appellant, which might or might not be different from those made in the previous arbitration is a practical one.
It is common in arbitration, domestic and international, to have the same tribunal adjudicate different arbitrations arising out of the same or similar transactions. If the arguments of the Appellants in this case were to be accepted, it would be difficult to constitute a different tribunal for each such arbitration. Also, what would happen in a case where the arbitral tribunal is appointed simultaneously to deal with different disputes arising out of multiple agreements? It would not be a good argument to suggest that the moment the tribunal makes a determination in one of the disputes, the tribunal would be debarred from acting in the other arbitrations merely because the latter arbitrations involved similar issues.
The manner in which India resolved the absence of relatively predictable standards in addressing conflict of interest of arbitrators by adopting the IBA Guidelines with suitable modifications is commendable and is in line with international practice. The Supreme Court’s decision in this case preserves the delicate balance between fairness on the one hand and reasonableness and predictability on the other. Although the Supreme Court did not examine the reasons for differences in the usage between certain items of the Schedules (such as item 16 of the Fifth Schedule) and the IBA Guidelines, the overall approach of the Supreme Court in clarifying the legal position augurs well for the future of international arbitration in India.