Aman SinghaniaSenior Associate
The Arbitration and Conciliation Act, 1996 (Act), based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, with amendments made to it over the years, seeks to provide a sophisticated and contemporary legal framework for arbitration in India. However, conflicts of interest and long-drawn controversies surrounding arbitral appointments have haunted the Indian arbitral regime. Amendments to the Act in 2015 and 2019 aimed to lay down detailed norms on the appointment of arbitrators, disclosures, eligibility, and challenges to appointment, to address the issues of impartiality, independence and bias.
Sections 12, 13 and 14 of the Act establish the composite scheme for challenging an arbitrator’s mandate and the consequent termination of this mandate. Indian courts view the requirement of compliance and disclosure enshrined in Section 12 strictly. Failure by an arbitrator to disclose the existence of grounds giving rise to justifiable doubts as to his impartiality can ipso facto vitiate both the arbitral proceeding as well as the arbitral award. However, a challenge to an arbitrator under Section 12 is required to be submitted before the arbitrator himself for adjudication, in accordance with Section 13, thus making the arbitrator ‘a judge in his own cause’. The only carve out to this conundrum is prescribed under Section 14 where a ‘de jure’ or ‘de facto’ challenge to an arbitrator’s mandate, basis failure or impossibility to perform his duty, must be adjudicated before a competent court of law. This legal position, the judicial approach surrounding it and the global viewpoint are discussed in detail below.
Arbitrator disclosures: The devil lies in the details
Arbitration proceedings rest on the delicate balance between party autonomy and arbitrator independence. Arbitrator disclosures refer to the process by which nominated arbitrators reveal potential conflicts of interest, relationships, or circumstances that may impact their impartiality and independence in a given case. The purpose of these disclosures is to provide the parties with comprehensive information about the arbitrator's background, connections, and potential biases. This allows parties to make an informed decision on whether an arbitrator should be disqualified or not. It is, therefore, essential for arbitrators to disclose any circumstances that could create a conflict or potential conflict of interest or bias to safeguard the rights of the parties and ensure a level playing field.
Demystifying the legal framework
Duty and standards of disclosure
The 2014 International Bar Association Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) is considered the leading soft law laying down obligations of the arbitrator alongside issues arising out of conflicts of interest. The IBA Guidelines explanation to General Standard 3(a) states that “the arbitrator’s duty to disclose ... rests on the principle that the parties have an interest in being fully informed of any facts or circumstances that may be relevant in their view.” Several arbitral institutions across the globe have adopted and endorsed this rule. In India, taking into consideration the Law Commission’s recommendations in light of the IBA Guidelines, the 2015 amendments to the Act illustrate the principles that should guide arbitrators, arbitral tribunals and parties in considering issues of possible bias and independence.
Section 12 of the Act (grounds of challenge) lays down the legal requirements for arbitrator disclosures. Any individual approached to be appointed as an arbitrator must disclose in writing any circumstances that may give rise to justifiable doubts about his impartiality and independence. The disclosure must be made before accepting the appointment or as soon as the arbitrator becomes aware of any such circumstance during the lifecycle of the arbitration proceedings. The circumstances that must be disclosed under Section 12 include:
- Relationship: Any past or present relationship with any of the parties or their legal representatives that could influence the arbitrator's judgment. Any existing professional or personal relationships with other arbitrators involved in the case must also be disclosed, as this could affect the arbitration's fairness.
- Financial interest: Any direct or indirect financial interest in the outcome of the arbitration, such as holding shares in a party to the dispute.
- Previous involvement: Any prior involvement in the dispute or a similar issue that could impact the arbitrator's ability to remain impartial.
- Other circumstances: Any other factors that could reasonably be seen as compromising the arbitrator's impartiality or independence.
The appointment of an arbitrator, whose disclosure is likely to raise doubts about his independence/impartiality, may be challenged under Section 12 read with Section 13 (challenge procedure). Under Section 14 (failure or impossibility to act), an arbitrator may also be deemed to have become de jure or de facto ineligible to act and unable to perform his functions.
Amendments to Section 12 of the Act make the declarations required from the arbitrator about his independence and impartiality more onerous. The Fifth Schedule added to the legislation acts as a ‘guide’ which lists illustrative grounds and circumstances that would give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Further, the Seventh Schedule clarifies that notwithstanding any prior agreement between the parties, if the arbitrator’s relationship with the parties or the counsel or the subject matter of dispute falls in any of the categories mentioned in the Seventh Schedule (such as professional relationship with a party, financial stake or interest in the dispute, past involvement in the case or dispute), then such an arbitrator would be ineligible for appointment.
Notably, such duty of disclosure under Section 12 must not be considered as a ‘one-time obligation’, but rather an ongoing duty to disclose throughout the arbitration process in the interest of maintaining the sanctity of the arbitral process. If new circumstances arise that could affect the arbitrator's impartiality or independence, they must be disclosed promptly.
Failure of an arbitrator to make proper disclosures can have severe consequences. Once a party becomes aware of an undisclosed circumstance that raises doubts about an arbitrator's impartiality or independence, they can challenge the arbitrator's appointment. If the challenge is successful, the arbitrator may be disqualified, and the arbitration proceedings initiated afresh with a new arbitrator or panel. Failure to disclose such justifiable doubts would ipso facto vitiate the arbitral proceedings and the ensuing award, and would constitute grounds for setting aside the award under Section 34 of the Act.
Distinguishing from the strict position adopted on this issue in India, the recent pronouncement by the UK Supreme Court in Halliburton Company v Chubb Bermuda Insurance Ltd. (Halliburton), reveals a more dynamic and fact-investigative approach to arbitrator conflicts and bias under English law. In principle, the UK Supreme Court recognised that impartiality is a cardinal duty of an arbitrator. It clarified that while the legal duty of disclosure, forming part of the duty of impartiality, does not override the arbitrator's duty towards maintaining privacy and confidentiality of the arbitral proceedings, in the absence of a contract or rules prohibiting/restricting disclosure, the arbitrator need not obtain the parties’ consent before making such disclosures.
Interestingly, the UK Supreme Court, despite finding the arbitrator to be in breach of his legal duty of disclosure, held that there was no apparent bias on the part of the arbitrator in this case, and hence no grounds for his removal were made out.
Indian courts have adopted a much more ‘hands-off approach’ in abiding by the high standards of the IBA Guidelines. The Delhi High Court, in the recent case of Ram Kumar and Anr. v Shriram Transport Finance Co. Ltd., refused to nitpick the facts of the case and took a strict view of the arbitrator’s failure to disclose under Section 12(1), holding that: “since the grounds giving rise to justifiable doubts as to impartiality exist, failure to make such disclosure vitiates the arbitral proceedings and the impugned award.” The decision not only sets a strict precedent for arbitrators in the backdrop of detailed guidelines but also attempts to reinforce the idea of limited judicial interference in arbitral proceedings.
Challenge to arbitral appointments
Timely arbitrator disclosures enhance trust in the arbitration process and minimise the likelihood of challenges to the award on the grounds of arbitrator bias or lack of independence. When parties have access to complete and accurate information about the arbitrator's background and potential conflicts, they can assess the arbitrator's suitability objectively.
The current scheme under the Act encompasses situations where an arbitrator makes a disclosure in writing which is likely to raise justifiable doubts about his independence or impartiality, the appointment of such arbitrator may be challenged under Sections 12(1), 12(3) and 12(4) read with Section 13 of the Act (challenge procedure). Under Section 14 (failure or impossibility to act), an arbitrator may also be deemed to have become “de jure”, i.e., as a matter of law, or “de facto”, i.e., as a matter of fact, ineligible to act and unable to perform his functions. Under Section 12(5), the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule, he becomes ‘de jure’ ineligible to act under Section 14 as an arbitrator and his mandate comes to an end. However, a challenge on the grounds of apparent bias or impartiality cannot be raised under Section 14 of the Act, unless it can be proved summarily.
Challenging the arbitrator’s bias: Judge in his own cause?
Section 13 of the Arbitration Act lays down a detailed procedure for challenging an arbitrator’s appointment. A challenging party must submit a written statement to the arbitral tribunal outlining the grounds for the challenge within 15 days of becoming aware of the circumstances giving rise to the challenge. Section 13(3) offers an arbitrator a dignified exit without entering a contest, however, an arbitrator may also refuse to withdraw and decide the challenge to his mandate himself.
While Section 16 grants wide jurisdictional powers to an arbitrator to decide on his own jurisdiction by applying the principle of kompetenz-kompetenz1, the scheme under Section 13 arguably makes the arbitrator ‘a judge in his own cause’. Here, an arbitrator with a biased perspective may risk adjudicating the challenge unfairly in his own favour and would be allowed to continue in his position till the end of the arbitral proceedings. The aggrieved party would then have no option but to wait until arbitral proceedings conclude before challenging the arbitral award under Section 34 of the Act. This wastes time and money and discourages parties from resorting to a purported ‘party autonomous and independent’ adjudicating mechanism.
This contrasts with the separate and independent adjudication mechanism followed by arbitration institutions across the globe when an arbitrator’s independence or impartiality is challenged. Under the Arbitration Rules of the Singapore International Arbitration Centre (SIAC), such a challenge to an arbitrator is adjudicated exclusively by the SIAC Chairman or the appointing authority, as the case may be. Similarly, the Hong Kong International Arbitration Centre (HKIAC) Rules 2018 and London Court of International Arbitration (LCIA) Arbitration Rules 2020 both provide for such challenges to be adjudicated by the respective institution’s council/court or Secretary General, as the case may be. This lacuna under Section 13 is also antithetical to the UNCITRAL Model Law, which establishes an in-built safeguard under Article 6 allowing a party alleging bias and unfair proceedings to challenge an arbitrator’s jurisdiction before the competent court.
Ineligibility of arbitrator: Resolving the ‘controversy’
In contrast to Section 13, Section 14 prescribes a strict jurisdictional mechanism for challenges made to an arbitrator’s mandate on the basis of failure or impossibility of the arbitrator to perform his duty. In such ‘de jure’ or ‘de facto’ challenge, (i) the arbitrator may withdraw from his office; or (ii) the parties may agree to terminate the arbitrator’s mandate. However, if neither of these consequences follow the challenge, an aggrieved party may approach the court to decide on the termination of the arbitrator’s mandate.
Despite the wide powers granted to arbitrators to decide on their own jurisdiction under Section 16, since a claim of failure or impossibility to act or ineligibility goes to the root of the arbitrator’s appointment, it can be agitated only before a competent court of law. However, aggrieved parties often approach arbitral tribunals under Section 14 before approaching the court.
Drawing a contra-distinction between Sections 13 and 14 of the Act, the Delhi High Court in National Highways Authority of India v K. K. Sarin & Ors., held that:
Unlike Section 13, in respect of challenge under Section 14 and resolving a ‘controversy’ under Section 14, the arbitrator only has a limited role to: (i) either agree on his ineligibility and withdraw from his office under Section 14 (1)(b), or; (ii) disagree, in which case an aggrieved party can only approach the court for its decision on termination of the mandate of the arbitrator.
“Section 14 provides only for the Court deciding on the termination of the mandate of the arbitrator...
...A party alleging bias is required to first follow the procedure in Sections 12 and 13 and if unsuccessful has the choice of either waiting till the stage of Section 34 or if he feels that bias can be summarily established or shown to the Court, approach the Court immediately under Section 14, after the challenge being unsuccessful, for the Court to render a decision.”
The Madras High Court, in 2014, further distilled this position and clarified that challenge to an arbitrator’s eligibility on the grounds of justifiable doubts as to his independence or impartiality under Section 12(3) can be made only before the arbitral tribunal. However, a controversy concerning the ‘de jure’ or ‘de facto’ inability of the arbitrator to perform his functions or a controversy concerning the failure of the arbitrator to act without undue delay under Section 14(1)(a), can be agitated only before a court under Section 14(2) of the Act.
Thus, once a person becomes ‘de facto’ or ‘de jure’ ineligible to be an arbitrator, under Section 14(1)(a), he cannot perform his functions as an “arbitrator” and would lack the inherent jurisdiction to proceed any further and decide on the challenge to his ability to perform as an arbitrator. Unlike Section 13, in respect of challenge under Section 14 and resolving a ‘controversy’ under Section 14, the arbitrator only has a limited role to: (i) either agree on his ineligibility and withdraw from his office under Section 14 (1)(b), or; (ii) disagree, in which case an aggrieved party can only approach the court for its decision on termination of the mandate of the arbitrator.
International consensus on arbitrator disclosures: Road ahead
The emphasis on standards of independence and impartiality of arbitrators are now encapsulated under several international conventions and rules such as the UNCITRAL Arbitration Rules, International Centre for Settlement of Investment Disputes (ICSID) Convention and its Arbitration Rules, Stockholm Chamber of Commerce Arbitration Rules as well as the International Chamber of Commerce Arbitration Rules. In Eiser Infrastructure Limited and Energía Solar Luxembourg S.à.r.l. v Kingdom of Spain, an ICSID tribunal endorsed the principle that, in case of doubt, an arbitrator should err on the side of disclosure. This was embraced by the UNCITRAL tribunal in Merck Sharpe & Dohme (I.A.) LLC v The Republic of Ecuador. Thus, institutional arbitrations have accepted the imperative role of impartial and independent arbitrators in the adjudication of commercial disputes in arbitration. Notably, while the Halliburton decision of the UK Supreme Court is based on English law, the principles are now recognised internationally and cited by domestic courts and arbitral institutions alike to establish uniformity and standardisation on identifying arbitrator’s bias and independence.
The 2019 amendment to the Act has laid down detailed norms applicable to an arbitrator in respect of his neutrality, impartiality, employment, financial nexus, etc. The ball now seems to be in the court of the arbitral tribunals. They must walk a tightrope between the exercise of their jurisdiction and party autonomy. While following legislative guidelines, arbitral tribunals must also be conversant with the principles of natural justice, equity and good conscience, read into the Indian Constitution as well as give due reverence to the principles of commercial law, and international best practices. This helps to ensure not just the ‘de facto’ legality of arbitral awards, but also their ‘de jure’ enforceability, thus reinforcing the reliability of arbitration proceedings in India.
 The principle of kompetenz-kompetenz enshrines that an arbitral tribunal is empowered and is competent to rule on its own jurisdiction, including determining all jurisdictional issues, and the existence or validity of an arbitration agreement.