Against the Arbitrator

Author: Ms. Aradhya Singh (Final Year Law Student [B.A.LL.B.])
Co-Author: Ms. Srishti (Final Year Law Student [B.B.A. LL.B.] )
College: Symbiosis Law School NOIDA

Immunity and liability

In the business world, the unwritten rule in many organizations is that employees must feel safe reporting unethical or illegal activities without fear of retribution. The rationale behind this is intuitive: protecting the employees encourages transparency and accountability. However, despite the principle of protecting those who bring forth important information, the reality can be starkly different, mirroring the temptation that parties have to not just blame but also sue the arbitrator while opting for an alternative dispute resolution (hereinafter referred to as ‘ADR’) mechanism.

A breach of arbitrator’s obligations in the realm of arbitration, is a multifaceted web of relationships. It can lead to significant legal liabilities, including the potential obligation to pay damages. This multifaceted web of relationships underscores the critical importance of arbitral immunity, which serves as a protective shield for arbitrators.

There is minimal accountability of arbitrators regarding their position as there is hardly any scrutiny. In fact, arbitrators have more leeway than judges: judges' decisions can be appealed, their misconduct can be reprimanded, and they can be removed from office, while they are not appointed through a rigorous mechanism either. Conversely, arbitrators operate without such oversight due to the absence of the ‘office.’ Although arbitral awards can be set aside, there is no consideration for instances in the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the Act’) where arbitrators misapply do not disclose their interest of relationship in the parties or the subject matter of the dispute as envisaged under Section 12 of the Act read with the Sixth Schedule. This goes against the purpose of the Act as the benefit of finality is not achieved.  Additionally, disputants must pay the arbitrator and the institution, even if an arbitration award is overturned. The party whose interest is compromised is left disenfranchised.

Steeply divergent approaches

When determining if arbitrators' liability is covered by its exceptional nature, it is important to consider the legal character of the relationship between the arbitrator and the disputing parties. A key aspect to ponder is whether the agreement with the arbitrator is simply a contractual arrangement where the arbitrator commits to settling the dispute ­ an approach adopted and accepted in civil law jurisdictions. If it encompasses a judicial aspect which finds favour in common law jurisdictions, it shall culminate into a certain ‘status’ given to arbitrators wherein they are put on a tantamount pedestal to judicial immunity, thereby being shielded from liability.

Arbitral immunity refers to the legal protection afforded to arbitrators, shielding them from legal action related to their adjudicative functions. It ensures that, provided they act in good faith, arbitrators can perform their duties without the constant fear of legal repercussions, thereby preserving the integrity and efficacy of the arbitration process. However, arbitral immunity is not universally adopted. The legislative gap has allowed for the development of varied national laws concerning arbitral immunity, leading to several issues, such as ensuring party autonomy, liability and maintaining the impartiality and independence of arbitrators.

Precedent Analysis

It is pertinent to mention about the newfangled judgment of the Delhi High Court in Rajesh Batra vs Ranbir Singh Ahlawat wherein it was determined that the challenged award could not be upheld and must be set aside. This case is particularly alarming because the arbitrator assumed jurisdiction without ensuring that the parties had mutually appointed him, as stipulated by the agreement. Thus, the court went on to take suo moto cognizance on grounds of his overenthusiasm and penalised him. It is likely that the applicant did not request such relief. Therefore, the question arises whether the imposition of costs was due to an implied contractual right to claim against an arbitrator for unjustified and illegal conduct or because of the court's inherent power to impose costs on its own initiative. Perhaps, given the significance of the issue, the court could have thoroughly examined the question of arbitrator immunity. It was for the first-time that an arbitrator was not held to the same high standards of conduct as judges. Judicial decisions like Rajesh Batra show that there is little accountability for impropriety if taken by arbitrators. India does not have a statutory provision regarding the liability of arbitrators for actions taken during arbitration aligning itself with the status adopted by common law jurisdictions.

Arbitral Immunity in Indian Laws

Following the B.N. Srikrishna Committee’s recommendations, Section 42-B was added to the Act, which aligned with Article 16 of the UNCITRAL Arbitration Rules, 2010. It lays down protection of action of the arbitrator taken in good faith. However, the provision does not explicitly include exceptions for cases of bad faith, creating yet another ambiguous aspect of the law. It is likely that there is a lack of inclination towards recognising arbitrator’s potential liability or shortcomings.

In contrast, post the inclusion of Section 42-B, the Madras High Court's ruling in Kothari Industrial Corporation Limited v. M/s. Southern Petrochemicals Industries and Another cautioned against the routine impleading of arbitrators in appeals without specific allegations, aiming to shield arbitrators from unnecessary litigation and preserve their independence and impartiality. The Court further explained that, similar to lower court judges not being included as parties in revision petitions or appeals, arbitrators or members of arbitral tribunals should not be parties unless there are specific personal allegations requiring their response.

Existing literature and jurisprudence on the subject suggest that the school of thought towards arbitrator’s liability in India is largely defensive towards arbitrators and status-based. In fact, the UNCITRAL Model Law is silent on the subject. It cannot be denied that leaving arbitrators exposed to claims from the losing party will discourage them from accepting arbitration roles in India. Additionally, the threat of personal liability and the expense of defending against potential commercial and corporate litigation can prevent arbitrators from impartially considering the merits of a dispute.

Recommendations

Ensuring accountability for arbitrators and establishing a mechanism to impose penalties on parties that wrongfully benefit are essential imperatives in India’s arbitration landscape. The authors suggest a strong cause towards exercising arbitrator due-diligence by the parties to the dispute and agree on the choice of arbitrator. It would counterpoise to conduct a conflict-check on the arbitrator to minimize the risk of allegations of impartiality.

This involves careful scrutiny of arbitrators' past awards and any writings they have published. It is essential to prepare a list of arbitrator’s requirements during the initial stage of due diligence. These requirements, which may be case-specific, can be derived from the arbitration agreement, the seat and venue or the dispute resolution clause of the transactional documents. General considerations include nationality, language, applicable law, expertise in a particular industry, and previous appointments as an arbitrator or a counsel.

Mechanism for due-diligence: The Way Ahead

When appointing arbitrators, it is helpful to gather pertinent details about their expertise and background to assess their fit for the specific case. One way to achieve this feat is by conducting one-on-one conversations with potential arbitrators, allowing the parties to learn from their past experiences relevant to your case's needs. Such discussions can expand upon or clarify the information provided in their disclosures under Schedule VI, offering a more comprehensive understanding of their suitability. The questions might delve into areas such as the nature and complexity of the arbitrations the person has previously adjudicated, the roles they have taken on, and their past performance in those cases, considering their level of preparedness, demeanour, and overall effectiveness.

Such due-diligence can even go beyond the scope of general information to avoid conflicts of interest. When evaluating arbitrators, there is no better approach than directly engaging with a party having first-hand experience with the candidate in question. They can offer valuable insights into how and why the candidate may be well-suited for the specific arbitration at hand by looking into prior arbitrations in which the arbitrator has participated (e.g., subject matter, dispute, complexity, amount at stake, period of appointment) as well as arbitrator’s performance on prior panels (e.g., grasp of issues, management skills, quality of work, disposition, preparedness) based on feedback from the former parties.

Conclusion

We can conclude that arbitrators are in a formidable and murky disposition, encompassing complex interactions with the stakeholders. These connections impose substantial obligations on them, necessitating diligent adherence to their responsibilities to avoid legal liabilities and potential damages. However, ensuring accountability for arbitrators can undergo a colossal overhaul by means of a methodical due-diligence mechanism stirred either by amendments or practices. The effective implementation of arbitral immunity must be balanced with mechanisms that ensure accountability and fairness which will further advance the common law principle that there lies no reason or scope for arbitrators to defend suits brought against them by disgruntled parties. India can further strengthen its position as a preferred destination for both domestic and international arbitration, aligning with global standards and facilitating just outcomes for all stakeholders involved in arbitration processes.

Disclaimer: The content and information in this note should not be construed as legal advice. This is merely a summary of the applicable provisions and not meant for any specific situation. The above explanations are merely to provide an insight of the term in question. Specific situations in a legal scenario are subject to the golden words, i.e. “it depends”.