Theme: Independence and Impartiality of Arbitrators
Section 3G: My Way or Highway- Evaluating sole arbitrator appointments in the National Highways Act, 1956
By Gurasis Grover & Aryan Gupta (IIM Rohtak)
Abstract
The precedent on independent and impartial arbitrators stretches long as far as speedy resolution is concerned. The arbitrator shall be appointed by a joint agreement, via an arbitration clause, and must exercise the principles of natural justice, which are general rules that apply to almost all arbitration proceedings, all but some. The National Highways Act 1956 comes out as an unsubstantiated exception. This statute allows a sole arbitrator to be appointed by the Central Government, which unequivocally results in unequal bargaining power. This veil of uncertainties caused by a disputed compensation amount when land is acquired by the Central Government will be lifted in this research. The novelty lies in the research intricacies woven by international standards over upholding the natural justice maxims in appointing the arbitrator. Furthermore, we will unravel the quandary of the State interfering in the fundamental rights of the aggrieved party. The research, using analytical methods, will conclude by providing suggestions such as a concurred empanelment of arbitrators, which has international backing to support the same.
Keywords: Arbitration, Natural Justice, Sole appointment, National Highways Act, Impartiality
I. Introduction
Black’s Law Dictionary defines arbitration as determining disputes by private unofficial persons selected by an agreement. An arbitrator, a neutral yet private person is responsible for conducting the arbitration proceedings to resolve disputes.
These initial lines make the stance clear; the impartiality of the arbitrator is unimpeachable and as asserted by the Supreme Court, the hallmark of any arbitration proceeding. The current regime treats all arbitration proceedings bound by natural justice principles, since an arbitral award is set aside if the ‘most basic fundamental principles of justice’ are breached. Specifically, so, if one party is unable to present its case or is forced to abide by unilateraladdition/alteration of a contract.
However, a glitch in this seemingly flawless matrix prompts us to reconsider the process of appointing arbitrators in Indian jurisprudence. This issue is outlined in Section 3G of the National Highways Act 1956 (“NH Act”), which grants the Central Government the statutory power to unilaterally appoint an arbitrator. This award is appealable under Section 34 of the Arbitration and Conciliation Act 1996 (“A&C Act”) only on limited grounds, but not on its merits. This situation poses yet another lacuna that this research yearns to unravel: The appeal process has been transferred from the Land Acquisition Act 1894 to the National Highways Act 1956, which does not even allow for the appointment of a consensual arbitrator. This necessitates an argumentative analysis, preceded by considering the current state of affairs in the next section.
II. Status quo
The conundrum relating to the appointment of an arbitrator stems from Section 3G(5) of the NH Act. It states that if any party is not satisfied with the decision of the competent authority concerning the compensation amount, they have the right to move an application and the dispute shall be decided by a sole arbitrator appointed by the Central Government.
Further, Section 3G(6) states that the A&C Act shall be applied to all the arbitration proceedings conducted under this Act subject to the provisions of the NH Act. One of the distinguishing features of arbitration is the independence and autonomy of the parties. Thus, granting the Government absolute power over appointing arbitrators dismantles the core principles of arbitration law and the A&C Act, per se. It prompted serious examination and was settled through a legal maxim “generalia specialibus non derogant” which means that a special law will, without exceptions, prevail over a general law.
The NH Act serves as a special law, with the A&C Act being applicable where the NH Act is silent, as held in a 2019 Supreme Court case. This case concerned the tardy appointment of an arbitrator by the Government. Notably, even after a decade of deliberation, the Court, in a futile attempt, reiterated its position regarding special versus general law. The judiciary's stance is evident, yet due to seemingly apparent reasons, it fails to adhere to the principles of natural justice and arbitration law. These deficiencies will be thoroughly examined in the following section.
III. Argumentative analysis as to a biased arbitrator appointment
3.1 Incompatibility with natural justice principles
Unilaterally assigning an arbitrator introduces an element of ambiguity to the situation. The Government, with a stronger footing, appoints a sole arbitrator which raises concerns regarding adherence to natural justice principles. These concerns stem not only from its inherent power but also from its classification within the purview of the 'State' as outlined in Article 12 of the Indian Constitution. (“IC”). This sub-chapter outlines the ineluctable.
Audi alterum partem or hearing the other party and Nemo Judex in Causa Sua or rule against bias are the fundamental principles which apply to all quasi-judicial and judicial proceedingsvis-à-vis arbitration proceedings. To abide by this reason, the relationship between the arbitrator and the parties arises from a contract and the appointment is deduced from the agreement. Section 3G (5) of the NH Act allows parties to file for arbitration if dissatisfied with compensation. However, it then grants the Government a free pass to appoint an arbitrator unilaterally. This situation worsens, since the precedent of the arbitrator’s independence from the parties is also seared.
The adjudicatory powers of an arbitrator may potentially be influenced by governmental intervention through indirect means, rendering the situation uncertain. To seek answers, a plea was filed in the Supreme Court for which a notice has already been issued to the parties involved including the Central Government and the National Highway Authority of India (“NHAI”).
The obligation for the aggrieved party to undergo arbitration proceedings, often with a government employee as arbitrator, undermines the purpose of arbitration. This alleged partiality threatens the balanced scales of justice.
3.2 Weakens the foundation of arbitration law
The Government with its outright power of unilaterally appointing an arbitrator posit a significant challenge to the very fundamentals of arbitration law. The A&C Act governing the arbitration proceedings in India reaps its foundation from the UNCITRAL Model Law on International Commercial Arbitration. This is since arbitration law, per se, grants or is supposed to grant, the parties the authority to appoint a consensual arbitrator. The objective behind this is to ensure that the arbitration proceedings remain fair to all parties.
Another feature of the A&C Act that is unaccounted for in traditional dispute-solving methods is that it minimizes the interference of courts to the maximum extent possible. To uphold these objectives of arbitration it is sine qua non that the arbitrator appointed is credible and of integrity. Unless parties are at equal footing, the objectives can hardly beachieved. Ensuring the impartiality of an arbitrator is a very rigorous task because it involves the cognitive aspect of an arbitrator. Even if we eliminate this inbuilt bias, the NH Act falls short of preserving the revered principles of arbitration. Following this, we will examine the extent to which the discrepancies found in Indian legislation correspond with international standards.
3.3 Not in consonance with international standards
To appreciate the impartiality in appointing arbitrators, it is imperative to analyse the international standards. Consequently, we went with two jurisdictions which have a developed arbitration mechanism: Australia and the United States of America (“US”).
3.3.1 Australia
This jurisdiction, particularly the Queensland Land Act of 1994, governs the administration and dealings related to land belonging to the citizens of Queensland. Under Section 339O of this Act, in the event of a dispute, the arbitrator is appointed after reaching a consensus. Furthermore, an appreciable part of this section suggests prescribing the appointment via a dispute resolution entity, thus granting the arbitrator complete independence from the parties. The arbitral award is further open to judicial review if affected by jurisdictional error, thus enhancing transparency.
Additionally, in the case of Hui v. Esposito Holdings Pty Ltd which revolved around a disputed share sale agreement, a ‘bias test’ was formulated to consider the possibility of bias in arbitration proceedings. According to this test, the perspective of a reasonable bystander would be considered to identify whether the was a real possibility of bias. A similar test is followed in the United Kingdom and Hong Kong which establishes the Court’s inclination towards international consistency. In Amasya Enterprises case, the Australian jurisprudence went on to include public policy and procedural fairness (‘unable to present the case’) as grounds to set off an arbitral award.
In India, no such concrete mechanism exists on the ground of bias.
3.3.2 US
To conform with international standards and to protect the sanctity of fair arbitration, the US enacted the Federal Arbitration Act of 1925 (“FAA”).
A dispute arose out of 9 U.S. Code § 3 of FAA in the case of Hooters of America, inc. v. Phillips, wherein the plaintiff employer forced compulsory arbitration and formulated calculated rules to produce a biased decision. While staying the arbitration proceedings and asserting them to be unenforceable, the US Court of Appeals ruled that such a process would violate the implied obligation of good faith in conducting arbitration proceedings. The plaintiff employer was then entitled to select the entire panel from which after consensus, a neutral arbitrator would be appointed.
Thus, it resounds that agencies have not been permitted to appoint their own arbitrators and the rule of law prevails over abuse of power. Hence, the thin line between unconscionability and party autonomy must be respected.
3.4 The conundrum of Special Law vis-à-vis General Law
It is an incontrovertible principle that a special law will prevail over a general law. There is a plethora of cases where the judiciary has applied this maxim to decipher the conflict between two or more statutes. However, the implementation of this principle proves to be more intricate than it actually seems. Before ascertaining a law as a special law, factors like the subject matter and particular perspective must be considered. Evolving from case to case, a law may gradually transition from speciality to generality, exhibiting characteristics of both a special and a general statute subject to the facts of the case and the law in question. However, one thing that remains persistent is that no law made should be in violation of fundamental rights.
The IC limits the functioning of the State to the extent that it should not repudiate the right to equality of any person. The Supreme Court has also enunciated that every procedure established by law should confirm the due process of law which includes just, equity and good conscience. Hence, bestowing absolute powers upon the Government to appoint a sole arbitrator flouts the right to equality of the other party, thus necessitating an amelioration of the status quo. We shall now consider suggestions to fill in the cavities of this highway.
IV. Suggestions
The primary solution to address the significant issue of bias is to ensure equitable treatment for both parties involved. As previously discussed, the appointment of an arbitrator under the NH Act does not conform with the principles of natural justice and arbitration law. Rectifying this necessitates establishing a concrete mechanism for fair arbitration proceedings. An approach to achieve this, whilst maintaining the integrity of the legal system and ensuring fairness, involves granting the Government the authority to form an empanelment of arbitrators. From this pool, the opposing party could be given the opportunity to select anarbitrator of their choice.
Another alternative can be to refer the dispute to institutional arbitration. Institutional arbitration is an effective method for ensuring fair arbitration proceedings. Opting for pre-arbitration proceedings such as mediation, negotiation, and conciliation can effectively ensure amicable dispute resolution, without either party being disadvantaged, a principle supportedby Australian jurisprudence. Implementing a procedure for dispute resolution along these lines will enable equitable participation of both parties in the arbitration process, which stands as the most basic tenet of arbitration.
V. Conclusion
At the close of this brief yet revealing take on biased appointment of arbitrators, we would like to address the irony of this situation. On one hand, there are several cases wherein the Courts strive to expand natural justice principles to arbitral proceedings. The other side showcases a shortfall by both the Government and the Courts.
The Courts reached close to address the inexhaustive nature of the NH Act when it found the inability to grant solatium and interest to the aggrieved party to be violative of Article 14 of IC. However, no mention of the violation of right to equality by a biased arbitration proceeding was propounded and regrettably, not much progress followed.
In the Project Director case, the Court iterated that most awards under the NH Act were passed 7-10 years ago. It was asserted that making a de novo start to the arbitration proceedings was unfeasible. However, in this case, we shall introduce a counter to prompt whether asking a question late implies that the question itself is invalid? Implementing suggested changes can eliminate biases in the long run.
Though not always replicated on the ground, it is wise to fill lacunae by embracing win-win solutions. This can be achieved by fully exploring the Alternative Dispute Resolution path and giving a service lane route for mediation or conciliation before finally connecting with the arbitrational highway!
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