India's Arbitration Reform: Enhancing neutrality and global standing

India has now emerged as a more arbitration-friendly jurisdiction, offering a stable and robust environment for dispute resolution.

By Rahul Pandey & Rahul Saraswat

Alternative Dispute Resolution (ADR) has emerged as an alternative to court-based judicial processes and has gained significance in various countries, including India. India’s arbitration ecosystem has undergone a remarkable transformation in recent years. Once known for its unpredictable court interference, India has now emerged as a more arbitration-friendly jurisdiction, offering a stable and robust environment for dispute resolution. As business corporations and individuals seek faster, confidential, and cost-effective dispute resolution mechanisms, arbitration is poised to play an increasingly pivotal role in India’s legal landscape.

The Role of Arbitrators

An arbitrator, being a neutral third party appointed by the parties, is expected to resolve disputes impartially and independently. As arbitration gains traction as a preferred method for dispute resolution, particularly in commercial contexts, the integrity and neutrality of arbitrators have become fundamental to fostering trust and maintaining the credibility of the arbitration process. While independence and impartiality are often used interchangeably, they have distinct meanings. Independence refers to an arbitrator’s freedom from any relationships or influences that could potentially affect their ability to act impartially. Impartiality, on the other hand, requires arbitrators to approach each case with an unbiased mindset, avoiding any favoritism towards any party involved.

Internationally, several frameworks guide arbitrators' independence and impartiality, including but not limited to the UNCITRAL Model Law, International Bar Association (IBA) Guidelines, and ICSID Convention. The UNCITRAL Model Law is widely adopted as it sets out the grounds for challenging an arbitrator’s mandate based on justifiable doubts regarding their independence or impartiality. Additionally, the Model Law provides a comprehensive legal framework for arbitration, promoting uniformity and consistency across jurisdictions. On the other hand, IBA Guidelines offer comprehensive advice on conflicts of interest in international arbitration, promoting transparency and consistency in assessing an arbitrator’s impartiality. The guidelines provide practical examples and recommendations to help parties and arbitrators navigate complex conflict-of-interest situations.

India’s Legislative Framework for Arbitration

In India, the Arbitration and Conciliation Act, 1996 (the “Act”) provides a legal framework that underscores the importance of arbitrators' independence and impartiality. The 246th Law Commission Report recommended amending Section 12 of the Act by incorporating the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration. The IBA Guidelines have notably influenced the reform of standards for independence and impartiality under the Indian Arbitration Act.

Amendments to the Arbitration Act

The 2015 amendments significantly altered the landscape regarding the independence and impartiality of arbitrators in India. Section 12 of the amended Act stipulates that any person approached to be an arbitrator in a particular case must disclose any direct or indirect relationship with the parties or in relation to the subject matter in dispute that may affect their independence or impartiality.

Furthermore, Section 12(5) of the Act renders ineligible any person who falls within the categories listed in the Seventh Schedule, which is largely based on the IBA Guidelines' Red List. The Fifth Schedule, introduced in the 2015 Act, provides guidance on circumstances that may give rise to justifiable doubts about an arbitrator's independence or impartiality, drawing from the IBA Guidelines' Orange List.

However, it is also important to note that Section 12(5) allows parties to waive the applicability of the Seventh Schedule with mutual and express agreement when appointing an arbitrator. Thus, the Act has maintained alignment with international standards while focusing on the core principle of arbitration, i.e., party autonomy.

Judicial Interpretation and Precedents

One important ruling of the Hon’ble Supreme Court of India sheds light on the amended Section 12 of the Act as follows:

“Section 12 has been amended with the objective of inducing the neutrality of arbitrators, i.e., their independence and impartiality. The amended provision is enacted to identify the ‘circumstances’ which give rise to ‘justifiable doubts’ about the independence or impartiality of the arbitrator. If any of those circumstances exist, it will give rise to a justifiable apprehension of bias. The Fifth Schedule to the Act enumerates the grounds which may give rise to justifiable doubts of this nature. Likewise, the Seventh Schedule mentions those circumstances which would attract the provisions of subsection (5) of Section 12 and nullify any prior agreement to the contrary. In the context of this case, it is relevant to mention that only if an arbitrator is an employee, a consultant, an advisor, or has any past or present business relationship with a party, is he rendered ineligible to act as an arbitrator. Likewise, a person who is a manager, director, or part of the management or has a single controlling influence in an affiliate of one of the parties, if the affiliate is directly involved in the matters in dispute in the arbitration, is treated as incompetent to perform the role of arbitrator. Similarly, persons who regularly advised the appointing party or an affiliate of the appointing party are incapacitated.”

Judicial Responses So Far

However, issues such as the appointment of employees as arbitrators and unilateral appointments of sole arbitrators have emerged from time to time and have been addressed through notable judgments. The standard of independence and impartiality has been further refined to safeguard the trust and interests of parties opting for arbitration. Recent rulings of the Hon’ble Courts of India can be summarized as follows:

a) Once an arbitrator has become ineligible by operation of law, he cannot nominate another arbitrator.

b) Participating in arbitration proceedings does not constitute a waiver of the right to challenge the appointment of an ineligible arbitrator.

c) An arbitration agreement does not become invalid merely because the procedure for appointing an arbitrator, as stated in the agreement, is barred by Section 12(5) of the Arbitration and Conciliation Act, 1996.

d) Doubts about the impartiality and independence of an arbitrator are justifiable only if a reasonable third person could conclude that the arbitrator is likely to be affected by factors other than the merits of the case.

e) A party, official, or authority with an interest in the dispute is disqualified from appointing an arbitrator.

f) The appointment of an arbitrator who is also an employee of the contracting corporation does not, ipso facto, create a presumption of bias, partiality, or lack of independence.

g) The test of arbitrariness is not whether there is actual bias but whether the circumstances give rise to any justifiable apprehension of bias.

h) Only a current employee of the company is disqualified from becoming an arbitrator, not a past employee.

Nevertheless, while judicial precedents are praised for adopting pro-arbitration stances, disputes questioning the independence and impartiality of arbitrators continue to emerge in courts. Particularly, the practice of maintaining a panel of arbitrators by employers has received differing opinions. On one hand, courts have approved a broad-based mixed panel of arbitrators by a corporation, while on the other, they have rejected the appointment of an arbitrator by a chairperson or manager on the principle that one cannot build without a plinth, i.e., someone ineligible to be an arbitrator cannot appoint one. Mixed decisions also exist regarding the appointment of an employee as an arbitrator. Although an ex-employee is not legally disqualified from acting as an arbitrator, a lacuna arises concerning the relationship between the ex-employee and the employer.

The need for mandatory disclosure rules has been emphasized by the courts repeatedly, yet a broader interpretation by the Supreme Court is required to address the lacuna in its ambit. To uphold the principles of natural justice and prevent circumvention of impartiality requirements, a revamp of the legislation is necessary.

What’s The Path Forward?

India's journey towards becoming a premier arbitration destination is marked by a commitment to excellence and adherence to international standards. The combination of legislative foresight, judicial support, and institutional development provides a solid foundation for arbitration in India. However, there is still a long way to go. The Indian legislature makes it easier for a party to challenge an arbitral award or the competence of an arbitrator compared to international standards. While India looks for “justifiable doubts,” the international community places a heavy burden of proof of reasonable doubts.

Similarly, although the black-letter laws in India and Singapore are similar, the extent of judicial intervention in arbitral awards differs. The unprecedented delays and excessive judicial intervention make India a less favorable seat for arbitration. In conclusion, while India’s arbitration framework has evolved and its proactive measures to promote independence and impartiality underscore its readiness to lead in the global arbitration landscape, significant improvements are still needed. India's efforts to harmonize its practices with international norms and its strategic initiatives to enhance the arbitration environment make it an attractive and credible choice for arbitration worldwide.