APPREHENSION OF BIAS AGAINST PERSON NAMED IN ARBITRATION CLAUSE

[Mr. M. GOVINDARAJAN]

ARBITRATION AGREEMENT

Section 7 of the Arbitration and Conciliation Act, 1996 provides for arbitration agreement. According to this section ‘arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes which have arises or which may arise between them in respect of a defined legal relationship, whether contractual or not.  An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.  The agreement is said to be in writing if it is contained in-

-          A document signed by the parties;

-         An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

-         An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other;

-         The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract

APPOINTMENT OF ARBITRATOR

Section 10 of the Act provides for appointment of arbitrators. The parties are free to determine the number of arbitrators provided that such number shall not be an even number. Failing the determination as indicated above the arbitral tribunal shall consist of a sole arbitrator. 

The appointment of an arbitrator can be challenged only on one or more of the following grounds:

-          That circumstances exist which give rise to justifiable doubts as to his independence or impartiality; or

-          That he does not possess the qualifications agreed to by the parties.

NAMED ARBITRATOR

Where the agreement itself specifies the arbitrator, it is obligatory on the part of the Court to refer it only to the arbitrator named in the agreement. In ‘Punjab Agricultural University V. Association Construction’ – (2003) 3 RAJ 431 (P&H) the named person has to be appointed at the initial stage. The challenge as to his lack of independence or impartiality has to be presented before him under Section 16.   The Chief Justice cannot begin with selecting and appoint any other persons. The named person was an officer of the University.  It was held that it is not open to the Court to ignore such an agreement clause and appoint another person as an arbitrator.

APPREHENSION OF BIAS

It needs no emphasis that once the dispute is referred to an arbitrator, the arbitrator has to act fairly and objectively and the proceedings must meet the requirements of principles of Natural Justice.

In ‘Gullapalli Nageswara Rao V. Andhra Pradesh State Road Transport Corporation’ - the Court stated the principle of natural justice that the authority empowered to decide the dispute must be one without bias towards one side or the other in the dispute.

In ‘Secretary to the Government, Transport Department V. Munuswamy Mudaliar’ 1988 (8) TMI 380 - SUPREME COURT =AIR 1988 SC 2232,  it was held that when the parties entered into the contract, the parties knew the terms of the contract including arbitration clause.   The parties knew the scheme and the fact that the Chief Engineer is superior and the Superintendent Engineer is subordinate to the Chief Engineer of the particular circle.   In spite of that the parties agreed and entered into arbitration and indeed submitted to the jurisdiction of the Superintending Engineer at that time to begin with, who, however, could not complete the arbitration because he was transferred and succeeded by a successor. In those circumstances on the facts stated no bias can reasonably be apprehended and made a ground for removal of a named arbitrator.   In the opinion of the Court this cannot be, at all, a good or valid legal ground.   Unless there is allegation against the named arbitrator either against his honesty or capacity or mala fide or interest in the subject matter or reasonable apprehension of the bias, a named and agreed arbitrator cannot and should not be removed in exercise of discretion vested in the courts under Section 5 of the Act. The Court further held that reasonable apprehension of bias in the mind of a reasonable man can be a ground for removal of the arbitrator.   A predisposition to decide for or against one party, without proper regard to the true merits of the disputes is bias.   There must be reasonable apprehension on cogent materials.

In ‘International Airport Authority of India V. K.D. Bali’ 1988 (3) TMI 409 - SUPREME COURT = AIR 1988 SC 1099,  it was held that there must be reasonable evidence to satisfy that there was a real likelihood of bias.   Vague suspicions of whimsical, capricious and unreasonable people should not be made the standard to regulate normal human conduct.   In this country in numerous contracts with the Government, clauses requiring the Superintending Engineer or some officials of the Government to be the arbitrator are there.   It cannot be said that the Superintending Engineer, as such, cannot be entrusted with the work of arbitration and that an apprehension simpliciter in the mind of the contractor without any tangible ground, would be a justification for removal.   No other ground for the alleged apprehension was indicated in the pleadings before the Court.   There was no ground for removal of the arbitrator.   Mere imagination of a ground cannot be an excuse for apprehending bias in the mind of the chosen arbitrator.

 In ‘S. Rajan V. State of Kerala’–1992 (7) TMI 295 - SUPREME COURT = AIR 1992 SC 1918, the Supreme Court found that the agreement itself specifies and names the arbitrator. It is the Superintending Engineer, Buildings and Roads Circle, Trivandrum.   In such a situation, it was obligatory upon the Court, in case, he was satisfied that the dispute ought to be referred to the arbitrator, to refer the dispute to the arbitrator specified in the agreement.   It was not open to him to ignore the said clause of the agreement and to appoint another person as an arbitrator.   Only if the arbitrator specified and named in the agreement refuses or fails to act the court does get the jurisdiction to appoint another person or persons as the arbitrator.

 In ‘Bristol Corporation V. John Aird & Co.,’ – (1911-13) ALL ER 1076 it was held that if a contractor chooses to enter into a contract binding him to submit any disputes which arise between him and the engineer of the persons with whom he contracts to that engineer to arbitrate on, then he must be held to his contract; whether it be wise or unwise, prudent or the contrary, he stipulated that a person who is the servant of the persons with whom he contracted shall be the judge to decide upon the matters upon which, necessarily, that engineer or arbitrator has himself formed an opinion.   But though the contractor is bound by that contract, still he has a right to demand that, notwithstanding those pre-formed views of the engineer, that gentlemen should listen to argument, and should determine the matters submitted to him as fairly as he can, as an honest man; and if it be shown in fact that there is any reasonable prospect that he will be so biased as not to decide fairly upon those matters, then the contractor is allowed to escape from his bargain, and to have the matters in dispute tried by one of the ordinary tribunals of the land.   But he has more than that right.  If, without any fault of his own, the engineer has put himself in such a position that it is not fitting or decorous, or proper that he should act as arbitrator in any one or more of those disputes, the contractor has the right of appealing to a court of law to exercise the discretion which Section 4 of the Arbitration Act vests in them.

In ‘Ladli Construction Co. P Limited V. Punjab Police Housing Corporation Limited and others’  2002 (11) TMI 744 SUPREME COURT = (2012) 108 CLA 358 (SC), the appellant entered into an agreement with the respondents. The time schedule could not be maintained by the appellant.   He was directed to push up the progress of work but that also it failed to do.   Finally the Respondent Corporation resorted to action under clause 3 of the contract rescinded the contract and adopted further course by giving unexecuted work to another contractor.   Thus the dispute has arisen between the parties, the contractor moved the Court of Sub Judge, I Class, for appointment of arbitration in terms of Clause 25A of the Contract. Clause 25A of the contract stipulates that if any question, difference or objection whatsoever shall arise in any way connected with or arising out of this instrument etc., shall be referred for arbitration to the Chief Engineer of the Punjab Police Housing Corporation, Chandigarh or acting as such at the time of reference within 180 days or in six months from the payment of final bill to the contract or from the date registered notice is sent to the contractor to the effect that his final is ready for payment and his decision shall be final and binding and where the matter involvers a claim for or the payment or recovery or deduction of money, only the amount, if any, awarded in such arbitration shall be recoverable in respect of the matter so referred.

The Sub Judge ordered for appointment of the arbitrator as per Clause 25A of the agreement and ordered the Chief Engineer of the Corporation to act as an arbitrator.   Both the parties were permitted to file claim and counter claim before the Arbitrator. The Arbitrator directed the appellant to appear before him.   Despite appearing before the Arbitrator, the appellant sent a letter intimating him that his appointment as arbitrator was not accepted to them; it did not expect any justice and fair play from him and he must refrain from acting as an arbitrator to the case. The appellant filed a petition before Sub Judge for the removal of the Arbitrator which was dismissed. In the meantime the arbitrator proceeded with the arbitration ex parte and passed the award.   On appeal before the District Judge, the same was dismissed. The appellant filed revision petition before the High Court.   He contended the following before the Court:

• The contractor had reasonable apprehension of bias on the part of the arbitrator as the action of cancellation of contract was taken by the Executive Engineer at the behest of the arbitrator as he was the Chief Engineer of the Corporation;
• The inspection made by the Chief Engineer along with other Engineers of the Corporation and the opinion formed by the Chief Engineer on the basis of the inspection that the work was not being carried out by the contract in accord with the time schedule;
• The conduct of the arbitral proceedings by the arbitrator, particularly concluding the arbitration proceedings in a short span of about 49 days and that too the contractor’s application for his removal was pending before the Court;

• The arbitrator was biased against the contractor on contesting the appeal before the Court and filing counter affidavit in opposition to the appeal.

The Court held that in the application for the appointment of arbitrator, no allegation of any bias or hostility was made against the named arbitrator, i.e., Chief Engineer of the Corporation, rather the Contractor prayed for appointment of arbitrator in terms of the arbitration clause 25A. Before the Court no allegation was made that the contract was terminated at the instance or behest of the Chief Engineer.   These facts clearly show that no case of bias on the part of the Chief Engineer was pleaded or pressed by the contractor before the court in the proceedings for appointment of the arbitrator. There is nothing to indicate that something happened which prompted the Contractor to write to the arbitrator that it had lost faith in him. The Court further observed that in the absence of any stay order from the court and non appearance by the contractor, the arbitrator was left with no choice but to proceed ex parte and conclude the arbitral proceedings.

The Court further held that except raising the vague and general objections that the arbitrator was biased and had predisposition to decide against the contractor, no materials, much less cogent materials, have been placed by the Contractor to show bias of the arbitrator.   No sufficient reason appears on record as to why the arbitrator should not have proceeded with the arbitral proceedings.   The test of reasonable apprehension of bias in the mind of a reasonable man is not satisfied with the factual situation.

In ‘Chief Engineer, Madras Zone, M.E.S.,V. G. Ramachandra Reddy & Co’ 1993 (1) TMI 253 - MADRAS HIGH COURT – AIR 1994 Mad 265 it was held that the court cannot be called upon to appoint an independent arbitrator on the ground of bias only because the person designated in the agreement was an employee of the company against whom the arbitration was sought.  It was not possible for the court to presume any bias and therefore the parties were asked to abide by the arbitration clause.  In ‘Ghaziabad Development Authority V. Elnique Construction’ 1997 (1) TMI 480 - ALLAHABAD HIGH COURT–AIR 1997 All 341 it was held that vague and ambiguous words in the agreement should be ignored and intention of the parties should be made effective through clear statements in the contract.

WHETHER NAMED ARBITRATOR MAY BE CHANGED?

But when bias is likely to be there then it is open to challenge the appointment of named arbitrator.  In ‘Bipromasz Birpon Trading SA V. Bharat Electronics Limited’ – 2012 (7) TMI 383 – Supreme Court of India the respondent has entered into a contract with the petitioner by way of placing a purchase order for the supply of Hydraulic Motor, Actuating Cylinder, EL Motor EDM, Converted and GYRO unit.   The contract contained an arbitration clause under which the Chairman-cum-Managing Director of the respondent company was appointed as the sole arbitrator. A dispute arised on the appointment of the sole arbitrator between the petitioner and the respondent company. The petitioner approached the Supreme Court for the appointment of arbitrator.  The respondent contended before the Supreme Court that as per the contract only the Chairman-cum-Managing Director o their company can be appointed as an arbitrator and prayed the court to reject the petition on the ground that the Court would have no power to make an appointment of an arbitrator other than Chairman-cum-Managing Director or his designates.

The petitioner pleaded before the Supreme Court as follows:

• The named arbitrator is the direct subordinate to the Chairman-cum-Managing Director and employee of the respondent;
• The CMD is the controlling authority of all the employees, who have been dealing with the subject matter in the present dispute and also controlling authority of the named arbitrator;
• Apprehending that the arbitrator would not act independently the petitioner issued a notice on 20.05.2011 in which it has been pointed out that  while the entire process of the performance of the contract was going on, the CMD had issued a letter on 05.06.2009 to the petitioner stating that as per the company’s directives all pending supplies as on that date  were ‘put on hold’;
• After that communications no communication was issued to the petitioner for supply of the goods as per the purchase order dated 03.12.2009;

• Even subsequently, there were difficulties when further lot of 24 units was supplied.

The Court held that the Court would have power to appoint person other than the named arbitrator, upon examination of the relevant facts, which would tend to indicate that the named arbitrator is not likely to be impartial.   In the present case the Court was of the opinion that it would not be unreasonable for the petitioner to entertain the plea that the arbitrator appointed by the respondent would not be impartial.   The CMD itself would not be able to act independently and impartially being amenable to the directions issued by the Ministry of Defence. The court relied its own judgment in ‘Denel (Proprietary) Limited V. Bharat Electronics Limited’ 2010 (5) TMI 660 – Supreme Court of India in which the arbitrator appointed under the arbitration clause is the Managing Director of the Company against whom the dispute is raised. In addition to the said fact, the said Managing Director of Bharat Electronics Limited which is a government company is also bound by the direction/instruction issued by his superior authorities. It is also the case of the respondent in the reply to the notice issued by the respondent, though it is liable to pay the amount due under the purchase orders, it is not in a position to settle the due sonly because of the directions issued by the Ministry of Defence, Government of India. It only shows that the Managing Director may not be in a position to independently decide the dispute between the parties. The Supreme Court is of the opinion that the facts in the present case are similar and therefore a similar course needs to be adopted.

CONCLUSION

 From the foregoing discussions it is clear that once arbitrator is named in the agreement, it is on the part of the party to have faith on the named arbitrator or at that time itself the agreement may be changed. Once it is admitted it cannot be refuted in the later period. If bias is proved on the part of the named arbitrator then it is open to the party aggrieved to approach court for the removal of named arbitrator and pray for another arbitrator to be appointed by the court.   Mere apprehension of bias will not serve for this purpose.   Actual bias is to be proved.