The Madras High Court has held that bias on the part of even one arbitrator would vitiate an arbitral award, adding that the presumed neutrality of other arbitrators on the arbitration panel would not render the award 'harmless' or valid [Muthu Construction Vs Union of India].
Justice N Anand Venkatesh made the observation while setting aside an arbitral award arising out of a Southern Railway contract.
The Court ruled that an arbitral tribunal must be independent and impartial in its entirety, and that the participation of a biased member necessarily taints the award, regardless of whether the decision is unanimous.
"A party is entitled for an independent and impartial Tribunal, which means that all the Members of the Tribunal must be impartial and without bias. In the absence of the same, the bias of even a single Member will necessarily vitiate the award rendered by the Arbitral Tribunal," the January 20 ruling said.
The Court passed the judgment on a plea by a company, M/s. Muthu Construction (petitioner), which entered into a contract with the Southern Railway for repairs to existing corroded fittings over points, crossings, and bridges, as well as the boxing and tidying of ballast and painting of boards.
Following a tender process, the petitioner was awarded the contract with a letter of acceptance issued on November 28, 2018, for a value of ₹1,55,15,697 (₹1.55 crores).
During the execution of the work, disputes arose regarding several claims, including the return of the earnest money deposit, security deposit, and the final bill amount. The dispute was referred to arbitration.
The primary issue that became the subject of adjudication before the Arbitral Tribunal was the payment in relation to a unit of measurement designated as "track metre."
The controversy centered on Schedule B of the agreement between the parties, which listed six categories of work using "per track metre" as the unit of measurement. For most items, measurements were taken separately for each track ("up" and "down" tracks).
However, for certain works (item Nos. 1 and 2, which involved boxing, tidying of ballast, and clearing vegetation), the Railways recorded measurements by clubbing "up" and "down" tracks together.
The petitioner challenged this clubbed measurement, arguing that the same yardstick of separate measurement per track should apply across all items since the unit of measurement was identical.
The Arbitral Tribunal rejected the petitioner's claim, leading to the current challenge before the High Court.
The High Court found that the tribunal had ignored the plain terms of the contract and substituted them with conjecture.
“The Arbitral Tribunal, by casting aside the actual wordings in the contract, replaced them with the supposed mutual understanding between the parties,” the Court held, adding that such a construction suffers from patent illegality.
The Court found that the tribunal had applied two different yardsticks for the same unit of measurement, and held that the interpretation adopted by the tribunal was “certainly not a possible view” and amounted to the tribunal “wandering outside the contract."
The Court went on to note certain observations made by the dissenting arbitrator in a connected arbitration involving similar issues, which led the judge to doubt whether the present arbitral award was tainted by bias.
In the connected arbitration, a dissenting arbitrator had accused the presiding arbitrator and a co-arbitrator of acting with preconceived conclusions and not having discussions with an open mind.
These two members of the tribunal (presiding arbitrator and co-arbitrator in the connected matter) were also part of the arbitral panel in the present case.
While noting that courts ordinarily do not examine dissenting opinions, Justice Venkatesh held that an exception arises where bias is alleged, since bias strikes at the root of natural justice.
“Bias is a predisposition to decide for or against one party, without proper regard to the true merits of the dispute,” the Court reiterated, adding that arbitral tribunals are expected to act impartially, objectively and without bias.
Endorsing a doctrine described as “poisoning the well”, the Court reiterated that the bias of one member taints the arbitral tribunal, and that the participation of a biased member vitiates the award regardless of the unanimity of the panel.
The Court concluded that the present arbitral award was tainted by bias or premeditation, violated Section 18 of the Arbitration and Conciliation Act, and went against the fundamental policy of Indian law - even though the award was unanimous in the present case.
“The conspectus of the above discussions leads to the only conclusion that the impugned award is liable to be set aside on the ground of bias/premeditation,” the Court held.
The arbitral award dated January 22, 2022, was accordingly set aside, and the petition was allowed with costs of ₹1.5 lakh, payable by the Union of India to the contractor.
The petitioner company was represented by Advocate Sharath Chandran
Advocate VJ Latha appeared for the Union of India, represented by its Principal Chief Engineer, Southern Railways.
[Read Judgment]