Application of Natural Justice in Arbitral Proceedings

Application of Natural Justice in Arbitral Proceedings.

[M. Koshy Mammen]

The author is a third-year student of Jindal Global Law School.

Since arbitration is increasingly being favoured over litigation, it is imperative that the principles of natural justice which guide the judiciary should also be followed by arbitration when giving an award. This article examines whether the Arbitration and Conciliation Act, 1996 (“Act”) mandates the arbitral tribunal or the arbitrator to follow the principles of natural justice when adjudicating upon a matter. The first part discusses why it is essential that arbitration proceedings must follow the principles of natural justice. The next part deals with the principle audi alteram partem and whether it is observed in arbitrations. And the final part explores whether the principle nemo judex in sua causa is adhered to in arbitrations in India.

There are three major reasons why the principles natural justice must be followed in arbitration proceedings. Firstly, the award of an arbitral tribunal is final and binding and cannot be challenged like a court decision (save for certain situations). For appealing an order,[1] there are even more limited grounds and it is not ordinarily allowed. Hence, it is essential that the principles of natural justice are followed when adjudicating upon a matter and giving an award for the first time. Secondly, not all the countries have a sophisticated arbitration system like Singapore or London. Modern seats of arbitration may have flaws since they do not have a history of arbitration culture. This lets arbitrators and the parties take advantage of the system and use it to their benefit. One instance is the arbitrator giving an award in favour of the influential and more powerful party so that they may be reappointed again for arbitrations later. There may be an instance where the parties are at unequal bargaining power, or where one of the parties may be lured into the arbitration, or where one party is unknowingly invited to arbitrate or is not aware of its rights. Thirdly, more often than not, the arbitrator appointed is skilled only in a particular area of knowledge and does not know the manner in which judges must conduct themselves. One cannot reasonably expect arbitrators to behave in the same standard as the judiciary. Therefore, it is essential that principles of natural justice are set as the minimum benchmark to adhere to in order to make certain that the adjudication happens in a fair manner.

In an arbitration agreement, after a breach, if one party refuses to appear in front of the arbitral tribunal, the tribunal can go ahead with the proceedings[2] and give an award not in favor of that party and the Courts would not entertain a challenge on the ground that he was not provided with a chance to present his case. However, the case is not the same when a party not mentioned in the arbitration agreement is forced to become a party in an arbitration he did not agree to. If the non-signatory refuses to come before the tribunal, the tribunal may still go ahead and give an award in the absence of one party. One needs to examine if this process complies with the principle of audi alteram partem. One can argue that the non-signatory had the chance to present his case but deliberately rejected it and hence must face the outcome but this argument is flimsy considering the fact that audi alteram partem is the cornerstone of principles of natural justice and it is a clear violation of it.

The law in India regarding forcing non-signatories to be bound by arbitration is unsettled. In Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya[3], the Court stated that arbitration was a viable option only as against some of the parties and the Act did not confer any power on the judiciary to add non-signatories to arbitration agreements. The case Indowind Energy Ltd. v. Wescare (I) Ltd.[4] upheld the Sukanya Holdings judgement. Both the cases did not allow a non-signatory to be added to the arbitration proceedings. Following these judgments, in Sumitomo Corporation v. CDS Financial Services,[5] the Court refused to refer non-signatories to the arbitration stating that arbitration strictly needs to be between parties mentioned in the agreement, as per section 2(1)(h) of the Act. One can observe that until this judgement, the Court was cautious not to violate the rule of audi alteram partemin arbitral proceedings.

However, in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc.,[6] the Court reversed this position and expanded the scope of arbitration agreements. This landmark judgement extended arbitration agreements to non-signatories as well. Taking a cue from this judgment, the Amendment Act of 2015 amended section 8 of the Act to include ‘any party claiming through or under such party.’[7] Therefore, with this amendment, arbitration agreements may be extended to non-signatories in both domestic arbitrations and in international arbitrations seated in India. If a non-signatory is asked to present himself before a tribunal and he refuses to do so, the tribunal can make an award in his absence. Therefore, this might trigger the principle of audi alteram partem. No matter how cautious the tribunal may be to anticipate the arguments which may be put forward by the absent party, it will not be sufficient. Section 18 states that the arbitral tribunal shall give each party the opportunity to present its case.[8] This provision may seem to incorporate the principle of audi alteram partem. However, it was held by the Court that section 18 by itself is not a ground for challenging an award.[9] To the casual eye, the provisions seem to be in compliance with the hearing rule; however, a careful examination has shown otherwise.

As regards the question whether the rule of nemo judex in sua causa is adhered to in arbitrations in India, it is pertinent to examine section 13 which lays down the procedure to challenge an arbitrator in order to remove him. Section 13(3) states that the arbitrator who is being challenged can himself determine his own competence as an arbitrator.[10] This is a clear violation of the principle of nemo judex in causa sua (no-one should be a judge in his own cause). Under this section, the arbitrator shall himself decide the challenge regarding his competence when part of the tribunal. This definitely raises concerns regarding his bias.

In the case Jiwan Kumar Lohia v. Durgadutt Lohia,[11] the Court decided the rule regarding the competence of the arbitrator on the ground of bias. The test laid down by the Court is whether a reasonable person, in possession of relevant information, would have thought that bias was likely and whether the person concerned was likely to be disposed to decide the matter only in a particular way. In the context of section 13, the arbitrator taking decisions on his own competence definitely provides a plausible ground for apprehensions of bias. An arbitrator under challenge would more often than not decide the matter in his favour. In the case of Bihar State Mineral Development, Corp. v. Encon Builders (I) Pvt. Ltd.,[12] the Court draws the difference between actual bias and apparent bias – actual bias is established and is a clear ground for removal whereas apparent bias is a suspicion and some form of objective apprehension of bias. When section 13(3) is taken into consideration, where the arbitrator is judging his own case, it clearly creates an apprehension of bias. It is pointed out that the author does not question the character of the arbitrator in an arbitration proceeding, rather there is an apprehension of bias that might arise from an arbitrator judging his own case while scrutinizing it. Section 13(2) is thus ambiguous and appears to be in violation of the rule that no man should be a judge in his own cause and of the rule that justice should not only be done but also appear to be done.

Another problematic provision of the Act is section 16, laying down the competence of an arbitral tribunal to rule on its own jurisdiction. The arbitral tribunal has an interest in the case of the tribunal being valid or not as it gets its fee from the arbitration agreement.  If the challenge is rejected by the tribunal, it can continue with the proceedings and the only option available is to set the award aside under section 34 whose scope is very limited. Thus, section 16 also appears to be in violation of nemo judex in sua causa.

It is of utmost importance that the principles of natural justice are followed in arbitration proceedings. On examining a few provisions, it is seen that there are certain gaps in the legislation where Parliament needs to step in in order to safeguard the rights of the parties.

[1] For these grounds, refer to section 37, The Arbitration and Conciliation Act, 1996.

[2] The Arbitration and Conciliation Act, 1996, section 25.

[3] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, AIR 2003 SC 2252.

[4] Indowind Energy Ltd. v. Wescare (I) Ltd., (2010) 5 SCC 306.

[5] Sumitomo Corporation v. CDS Financial Services, AIR 2008 SC 1594.

[6] Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641.

[7] The Arbitration and Conciliation Act, 1996, section 8.

[8] Ibid, section 18.

[9] Godrej Properties & Investments Ltd. v. Tripura Constructions, 2003(2) Bom CR 1.

[10] The Arbitration and Conciliation Act, 1996, section 13.

[11] Jiwan Kumar Lohia v. Durgadutt LohiaAIR 1992 SC 188.

[12] Bihar State Mineral Development, Corp. v. Encon Builders (I) Pvt. Ltd.AIR 2003 SC 3688

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