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The interplay between Natural Justice and Party Autonomy Principle – An Analysis

Ujjwal Agrawal, Student, Maharashtra National Law University, Nagpur

Introduction

Party Autonomy, i.e. ‘the freedom of the parties to construct their contractual relationship in the way they see fit’[1] is considered as one of the inevitable principles of any arbitration proceeding, which entitles the parties the freedom to choose the arbitrators and their method of appointment[2] . However, it could hamper the natural justice principle of

nemo judex in causa sua

It means that ‘no one could be the judge in his own case’. When the arbitration agreement provides for a sole party to appoint the sole arbitrator and thus compromising with the independence and impartiality requirements of an arbitrator which was inculcated in Sec. 12(5) through 2015 Amendment by the legislature.

The Apex court had held varied position time, and again however the court has recently ruled upon to remove such laxity in the TRF & Perkins Eastman case wherein the court had given the natural justice principle the higher pedestal over the party autonomy principle.

One of the first cases came before the Apex Court was Indian Oil Corp. Ltd. v. M/s Raja Transport wherein the dispute to be referred to arbitration with a sole arbitrator appointed by the Appellant herein and thus the question of bias was raised by the respondents however the Apex Court held that an employee of a government, statutory corporation or any public sector undertaking, cannot be barred under the Act to act as an arbitrator. The Apex court recently again in 2017, while relying on its decision in Raja Transport, in the case of Aravali Power Company Pvt. Ltd. v. M/s. Era Infra Engineering Ltd. upheld the arbitration clause providing for the CEO of the Appellant Company to be the sole arbitrator for arbitrating the dispute between the parties. The crucial point to be noted here is that the parties in Aravali case were appearing appeared before the 2015 amendment in the Act was introduced. Thus, the amendment was not applicable over the parties.

The 20th Law Commission of India in its 246th report[3] have recognised the need of any arbitration process to be conducted following the natural justice principles and the need of independence and impartiality of arbitrator is of utmost importance in any arbitration procedure, irrespective of whether one party is the state or not. The commission further suggested incorporating the IBA guidelines to appoint the arbitrator which was duly incorporated by the legislature in 2015 Amendment.


TRF Limited Case: The Turning Point

The 2015 Amendment of the 1996 Act introduced a non – obstante clause, i.e. Sec. 12 (5), read with Schedule VII of the 1996 Act, and classifies such person who has any relationship with any party, counsel or subject matter of dispute to be ineligible to act as an arbitrator in the dispute. In July 2017, in the case of Trf Ltd. v. Energo Engineering Projects Ltd. before the Supreme Court, wherein the arbitration, as per the agreement was to be referred to the managing director as the sole arbitrator of the respondent company but had become ineligible owing to 2015 Amendment, adding Sec. 12(5) read with Schedule V and VII. However, the moot question which the court was addressing was whether such ineligibility would affect the power of managing director to nominate any other person as sole arbitrator, which was very well provided by the arbitration clause. The Appellant’s arguments were mainly based upon the natural justice principle of

qui facit per alium facit per se

It means that ‘what one does through another is done by oneself’, and the court held that when the arbitrator becomes ineligible, it is not feasible in law that the ineligible person can nominate another person and thus notes that ‘once the infrastructure collapses, the superstructure is bound to collapse’.


The Perkins Eastman Architects' Case:  Carrying it Forward

Again in 2019, the Supreme Court was posed with the similar dispute resolution clause in the case of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. wherein a contract was signed between the parties for the construction of the building of AIIMS at Guntur in Andhra Pradesh, with the dispute resolution clause providing for the disputes to be referred to arbitration with the Chief Managing Director [CMD] of the Respondent Company appointing the sole arbitrator. The Appellant’s arguments were based over the independence and impartiality of the arbitrator that the CMD of the Respondent Company being an interested party should not have the power to appoint the arbitrator as that would defeat the principle of ‘Qui facit per alium facit per se’. The Supreme Court, while heavily relying upon the decision in TRF Limited held that any party which has an interest in the dispute must not have the power to appoint a sole arbitrator to adjudicate the arbitration process.


The proviso to Section 12(5): Saving Party Autonomy Principle

Although the non-obstante clause contained in Sec. 12(5) of the Act prohibits any person related to any party or counsel of the dispute to be appointed as an arbitrator, the proviso to this clause provides for an option to the parties to waive-off such applicability so as to ensure that party autonomy does not get hampered, however, such waiver must be strictly expressed in writing by the parties. The Law Commission of India in its 246th Report[4] in Para 60 observed that in order to respect the genuine or real party autonomy such waiver should be allowed. In a case wherein any party commands the blind faith and trust despite the existence of objective “justifiable doubts” regarding his independence and impartiality, such option of waiver must be given to the parties to respect the party autonomy principle, which directly points towards a pro-arbitration mindset of the legislature.

The Apex Court recently in April 2019 had the opportunity to interpret the proviso to Sec. 12 clause (5) in the case of Bharat Broadband Network Limited v. United Telecoms Limited, wherein both the parties entered into a contract for a turnkey project of GPON, and Solar Power equipment and the Dispute Resolution clause provides for the arbitration with the CMD of the Appellant as the sole arbitrator and also having the power of nomination in case the CMD is unwilling to arbitrate. The CMD later appointed another person when the dispute arose. The Appellants thus move to the Delhi High Court u/s 14 & 15 for the appointment of a substitute arbitrator as the current arbitrator has become de jure incapable of acting as such, the respondents resisted by arguing that they have submitted their statement of claims without any reservation and thus it would amount to valid waiver with respect to the applicability of Sec. 12 (5) of the Act, the Delhi High Court while allowing such counter-argument held that such situation would amount to a valid waiver and it need not be compulsory in the formal agreement. The Apex Court while overruling the High Court’s judgement held that such waiver must be an express agreement in writing as mentioned in the statute and. Similarly in February 2020, the Delhi High Court in the case of Arvind Kumar Jain v. Union of India has held that the respondent cannot compel the other party to issue a waiver under Sec. 12(5) of the Act to appoint the sole arbitrator of its choice.


Conclusion

The Judgment of the Apex Court in TRF and Perkins is a welcome step and shows a pro-arbitration approach of the judiciary to make arbitration a neutral and more effective mode of dispute resolution in India. Through such decision, the Indian Supreme Court has sent out the positive message that India wants to create a healthy and non-arbitrary environment for the arbitration process and to promote the arbitration culture in the country.

Furthermore, the legislature has rightly adopted the Law Commission’s recommendations by adopting the changes in Sec. 12 of the Act such that the natural justice principles are not harmed and even the party autonomy principle, which is one of the fundamental principles of arbitration, is also not affected.

Such a trend set by the Apex Court would be highly beneficial in curbing of misuse of power by adopting such one-sided clause and exploitation of the other party. It would promote the fairness in the arbitration procedure. Also, this would most likely go to hit the government contract which often contains such one-sided arbitration clause, leaving the other party with no other alternative but to lay down before such arbitrary clause.

[1] Abdulhay Sayed., Corruption in International Trade and Commercial Arbitration, 159(1st ed., 2004).

[2] Sec. 11(2), Arbitration and Conciliation Act 1996; Art. 11(2) UNCITRAL Model Law on International Commercial Arbitration 1985.

[3] 246th Law Commission of India Report, Amendments to the Arbitration and Conciliation Act 1996,28-29 (2014), available at http://lawcommissionofindia.nic.in/reports/Report246.pdf, last seen on 25/05/2020.

[4] Supra 3.

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