NPAC's Arbitration Review: Waiving the independence and impartiality requirements under the Arbitration Act, and the prospect of abuse

Amit George, Rayadurgam Bharat
Amit George, Rayadurgam Bharat

The independence and impartiality requirements as enshrined under the Arbitration and Conciliation Amendment Act, 2015 (‘Amendment Act’), particularly those contained in the Seventh Schedule thereof, have significantly ring-fenced the autonomy of parties in being able to choose an arbitrator to adjudicate the disputes which have arisen between them.

The Amendment Act, however, does provide a way out of these stringent requirements and pre-requisites, if the parties so expressly agree in writing after the disputes have arisen between them. The relevant provision in this regard is the proviso to the amended Section 12(5) (‘proviso’) of the Arbitration and Conciliation Act, 1996 (‘Act’) which reads as under:

“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: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

The specific stipulation that such an agreement is required to be entered into only ‘after’ the disputes have arisen is to obviate the possibility of abuse inasmuch as one-sided contractual clauses born out of unequal bargaining power are very common in our legal system, and it would be easy for a dominant party to insist upon such a term at the stage of signing of the agreement and thereby defeat the underlying normative intent of the Amendment Act to usher in greater independence and impartiality amongst arbitrators.

The stipulation that the parties, therefore, would need to agree to this waiver consciously at a stage when the disputes have arisen between them has been enshrined to defeat precisely such attempts.

The Supreme Court has also emphasized upon the need for such an agreement to be necessarily subsequent to the disputes having arisen in Bharat Broadband Network Ltd. v. United Telecoms Ltd1. wherein it was observed inter-alia as under:

20.This then brings us to the applicability of the proviso to Section 12(5) on the facts of this case. Unlike Section 4 of the Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5) will only apply if subsequent to disputes having arisen between the parties, the parties waive the applicability of sub-section (5) of Section 12 by an express agreement in writing. For this reason, the argument based on the analogy of Section 7 of the Act must also be rejected. Section 7 deals with arbitration agreements that must be in writing, and then explains that such agreements may be contained in documents which provide a record of such agreements. On the other hand, Section 12(5) refers to an “express agreement in writing”. The expression “express agreement in writing” refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct…

However, in spite of the aforesaid statutory precaution, a grey area can still be said to exist inasmuch as this unequal bargaining power could extend beyond the stage of the entering into of the agreement between the parties, and onto the stage after disputes have arisen.

To cite an example, after disputes have arisen between A and B under an agreement containing an arbitration clause, A offers to make certain payments to B of a significant sum of money, which constitute the sum payable under otherwise uncontroversial claims, and desires to send the remaining claims to arbitration.

However, the payment of this otherwise relatively uncontroversial amount is made contingent upon B agreeing to enter into an agreement in writing with A in terms of the proviso. Now, in such a position, B would undoubtedly be under significant pressure to agree to such a demand failing which it faces the prospect of having to fight for the entirety of the claims in arbitration, and the consequent delay in realization without any immediate payment of the otherwise uncontroversial sum.

It is required to be noted that, after recognizing the facet of economic necessity, the Courts have consistently invalidated no-due certificates or supplementary agreements which have been procured by exerting financial duress and coercion upon the weaker party to a bargain.

In the specific context of a construction contract, the Supreme Court in Chairman and MD, NTPC Ltd. v. Reshmi Constructions, Builders & Contractors2 held as under:

“27. Even when rights and obligations of the parties are worked out, the contract does not come to an end inter alia for the purpose of determination of the disputes arising thereunder, and, thus, the arbitration agreement can be invoked. Although it may not be strictly in place but we cannot shut our eyes to the ground reality that in a case where a contractor has made huge investment, he cannot afford not to take from the employer the amount under the bills, for various reasons which may include discharge of his liability towards the banks, financial institutions and other persons. In such a situation, the public sector undertakings would have an upper hand. They would not ordinarily release the money unless a “No-Demand Certificate” is signed. Each case, therefore, is required to be considered on its own facts. 28. Further, necessitas non habet legem is an age-old maxim which means necessity knows no law. A person may sometimes have to succumb to the pressure of the other party to the bargain who is in a stronger position.”

The aforesaid principle has also been extended to a supplementary agreement entered into between parties in cases where the existence of economic duress and coercion has been clearly demonstrated. The High Court of Delhi in National Highways Authority of India v. Madhucon Projects Limited3, while upholding a finding discarding a supplementary agreement held in this regard as under:

6. It is evident from the above discussion that when the parties entered into arbitration, the contractor made a composite claim which basically included the amount withheld. Concededly, at the point of time the parties entered into the original agreement, NHAI could not have withheld the amount on account of the liquidated damages. Nevertheless, it did; that became the subject matter of the claim. At the same time, the contractor’s final bill was pending, which was for an amount of 22 crores. In these circumstances, the supplementary agreement was entered into on 27.05.2015, after which, the NHAI released the amounts (which were undisputed by it) and had been apparently kept back only to justify its claim for the liquidated damages, which, otherwise was impermissible under the original agreement. Its contention that the supplementary agreement was entered into voluntarily and consequent upon it, the contractor could not urge against the withdrawal of its claims, is not sustainable. This Court is of the opinion that the findings of the Arbitral Tribunal with respect to coercion, having regard to the law declared in ‘R.L. Kalathia v. State of Gujarat’ (2011) 2 SCC 400, are justified. Besides that ruling, the Court also notices that in the cases of ‘National Insurance Company Ltd. vs. M/s Boghara Polyfab Pvt. Ltd.’ 2009(1) SCC 267 and ‘Union of India & Ors. vs. M/s Master Construction Company’, 2011 (12) SCC 349, the finding by the Tribunal with respect to the economic coercion was justified in the circumstances.”

If one were to keep the aforesaid underlying principle in mind, it could very well be said that this unequal bargaining power can continue onto the stage ‘after’ disputes emerge between the parties as well and, therefore, by extension, it would always be open to a party to demonstrate upon the facts and circumstances obtaining in the particular case that an express agreement in writing in terms of the proviso was entered into under financial/economic duress and coercion.

One also needs to bear in mind the recommendations contained in the 246th Report of the Law Commission of India, which resulted in the relevant amendment to Section 12(5) of the Act.

It needs no gainsaying that where a particular amendment is the result of the recommendation of a Report of the Law Commission of India, it is permissible to refer to the relevant Report to ascertain the legislative intention behind the amendment. Reference in this regard may be made to the judgment of the Supreme Court in Mithilesh Kumari & Anr. v. Prem Behari Khare4. The relevant recommendations as contained in the 246th Report of the Law Commission are as under:

“60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective “justifiable doubts” regarding his independence and impartiality. To deal with such situations, the Commission has proposed the proviso to section 12 (5), where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed section 12 (5) by an express agreement in writing. In all other cases, the general rule in the proposed section 12 (5) must be followed.”

Thus, even in terms of the originating recommendation qua the relevant proviso, there is a clear underlying intention that it is only ‘real’ and ‘genuine’ party autonomy that must be allowed to prevail over the otherwise clear scheme of the Arbitration Act. Not doing so would mean that the party which insists upon the appointment of an otherwise ineligible arbitrator would be able to achieve indirectly what it could not achieve directly.

The High Court of Delhi recently in Arvind Kumar Jain v. Union of India5 had occasion to consider the repercussions of one party compelling the other to agree to a waiver contemplated under the proviso. Though in the said case the waiver in question had in fact not been agreed to, the Court commented adversely on the obdurate insistence of a party upon the reluctant counter-party to agree to the waiver in question in the following words:

“8. …the respondent cannot compel the petitioner to furnish a waiver from the applicability of Section 12(5) of the Act. In fact, I am of the view that the insistence of the respondent to seek a waiver from the petitioner would be contrary to the ratio of the decision in Perkins Eastman Architects DPC (supra), and will contravene the very scheme of Section 12(5) of the Act.”

Therefore, it is surmised that if a waiver is alleged to have been obtained through duress and coercion then a right ought to be granted to such party to agitate the issue of its consent having been accordingly vitiated.

Though it needs to be borne in mind that such an exercise may require an element of detailed deliberation by the Court at a preliminary stage while appointing an arbitrator or hearing a challenge to an already appointed arbitrator, and which may be problematic in a procedural and/or evidentiary sense in certain strenuously contested and factually complex scenarios, in the face of a clear demonstration of duress and coercion having been employed to obtain a waiver under the proviso, a party should not be forced to arbitrate before a person who is otherwise squarely disqualified by the Amendment Act.

Courts must be ever vigilant that ‘wily foxes’ do not take advantage of ‘unwary rabbits’ on account of the former’s stronger bargaining power, as so eloquently explained by the decision of the Supreme Court of Appeals of West Virginia in The Board of Education of the County of Berkeley v. W. Harley Miller Inc6. In a long exposition which invokes various members of the animal kingdom, and that somewhat tongue-in-cheek identifies the ‘sharks’ as the likely lawyers, the decision exquisitely sets out the never-ending struggle to ensure absolute fairness in arbitration proceedings in the following words:

“The basic problem in all arbitration cases could probably best be explained not in terms of legal characterizations such as "conditions precedent," "ousting courts of their jurisdiction," or "revocability," but rather by a hypothetical case in the tradition of the ancient fableist Aesop. Let us assume for a minute that for some reason all the rabbits and all the foxes decided to enter into a contract for mutual security, one provision of which were that any disputes arising out of the contract would be arbitrated by a panel of foxes. Somehow that shocks our consciences, and it doesn't help the rabbits very much either.
Now, what happens if we have the same contract with the same arbitration provision, except that disputes will be arbitrated by a panel of wolves? Is there such a community of interest among foxes and wolves that the wolves cannot be impartial? Possibly. Now what happens if disputes will be resolved by a panel composed of one squirrel, one elephant, and one wolf? One might conclude that squirrels look like rabbits, wolves look like foxes, and elephants ought surely to be impartial.
Animal law becomes procedurally very complex if for a moment we assume arguendo that we will absolutely prohibit an arbitration provision which provides for arbitration by a panel of foxes, and that we will also prohibit arbitration by a panel of wolves in recognition of their community of interest with foxes. What happens then if there is a sincere effort to obtain a fair panel of arbitrators, as for example the squirrel, elephant, and wolf, and the decision in a forthcoming dispute is expected legitimately to go against the rabbits?
The rabbits, whom we may logically assume will have retained the services of some sharks to represent them, will go into court and plead "wolfery", that is to say, that the elephant also has a community of interest with the foxes and wolves, so that for all intents and purposes it is the same as if he were a wolf, which is the same as a fox. The rabbits will obviously demand a hearing and a full-blown jury trial on the question of whether an elephant looks more like a squirrel or more like a wolf, and as soon as the law gives the rabbits a hearing, the foxes, relying in good faith on arbitration, might as well kiss themselves goodbye, because not only will they be forced to go to arbitration, but they will also be forced to go through the whole thing again in court either in the first instance when the rabbits seek to enjoin arbitration, or after arbitration when they, the foxes, seek to enforce their award. The purpose of arbitration, namely just, speedy, economical conflict resolution is defeated if the foxes must demonstrate the fairness of the procedure in order to disprove the allegation of "wolfery".
However, if the courts attempt to avoid the problem of the frivolous plea of "wolfery", by writing strong syllabus points making arbitration provisions absolutely binding and enforceable in all cases, then all the fox lawyers come out of the woodwork and begin writing arbitration provisions, with wolves for arbitrators, into all contracts, regardless of the nature of the transaction. If the foxes are blessed with a strong bargaining position they will be able to take advantage of unwary rabbits on all occasions and defeat the prosecution of just claims against themselves.”

1 (2019) 5 SCC 755

2 (2004) 2 SCC 663

3 MANU/DE/1827/2018

4 AIR 1989 SC 1247

5 MANU/DE/0357/2020

6 236 S.E. 2d 439 (1977)

The authors are Advocates practicing before the High Court of Delhi

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