124. The doctrine of bias as evolved in English and Indian law
emphasizes independence and impartiality in the process of
adjudication to inspire the confidence of the public in the adjudicatory
processes. Although Section 12 deals with the quality of independence
and impartiality inherent in the arbitrators, the provision's emphasis
is to ensure an independent and impartial arbitral process."
..."20. We thus have two categories of cases. The first, similar to the
one dealt with in TRF Ltd. [TRF Ltd. v. EnergoEngg. Projects Ltd.,
(2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] where the Managing
Director himself is named as an arbitrator with an additional power to
appoint any other person as an arbitrator. In the second category, the
Managing Director is not to act as an arbitrator himself but is
empowered or authorised to appoint any other person of his choice or
discretion as an arbitrator. If, in the first category of cases, the
Managing Director was found incompetent, it was because of the
interest that he would be said to be having in the outcome or result of
the dispute. The element of invalidity would thus be directly relatable
to and arise from the interest that he would be having in such
outcome or decision. If that be the test, similar invalidity would always
arise and spring even in the second category of cases. If the interest
that he has in the outcome of the dispute, is taken to be the basis for
the possibility of bias, it will always be present irrespective of whether
the matter stands under the first or second category of cases. We are
conscious that if such deduction is drawn from the decision of this
Court in TRF Ltd. [TRF Ltd. v. EnergoEngg. Projects Ltd., (2017) 8
SCC 377 : (2017) 4 SCC (Civ) 72] , all cases having clauses similar to
that with which we are presently concerned, a party to the agreement
would be disentitled to make any appointment of an arbitrator on its
own and it would always be available to argue that a party or an
official or an authority having interest in the dispute would be
disentitled to make appointment of an arbitrator.
21. But, in our view that has to be the logical deduction from TRF
Ltd. [TRF Ltd. v. EnergoEngg. Projects Ltd., (2017) 8 SCC 377 : (2017)
4 SCC (Civ) 72] Para 50 of the decision shows that this Court was
concerned with the issue, "whether the Managing Director, after
becoming ineligible by operation of law, is he still eligible to nominate
an arbitrator" The ineligibility referred to therein, was as a result of
operation of law, in that a person having an interest in the dispute or
in the outcome or decision thereof, must not only be ineligible to act
as an arbitrator but must also not be eligible to appoint anyone else as
an arbitrator and that such person cannot and should not have any
role in charting out any course to the dispute resolution by having the
power to appoint an arbitrator. The next sentences in the paragraph,
further show that cases where both the parties could nominate
respective arbitrators of their choice were found to be completely a
different situation. The reason is clear that whatever advantage a
party may derive by nominating an arbitrator of its choice would get
counter-balanced by equal power with the other party.But, in a case
where only one party has a right to appoint a sole arbitrator, its choice
will always have an element of exclusivity in determining or charting
the course for dispute resolution. Naturally, the person who has an
interest in the outcome or decision of the dispute must not have the
power to appoint a sole arbitrator. That has to be taken as the essence
of the amendments brought in by the Arbitration and Conciliation
(Amendment) Act, 2015 (3 of 2016) and recognised by the decision of
this Court in TRF Ltd. [TRF Ltd. v. EnergoEngg. Projects Ltd., (2017) 8
SCC 377 : (2017) 4 SCC (Civ) 72]
...
24. In Voestalpine [VoestalpineSchienen GmbH v. DMRC, (2017) 4
SCC 665 : (2017) 2 SCC (Civ) 607] , this Court dealt with
independence and impartiality of the arbitrator as under : (SCC pp.
687-88 & 690-91, paras 20 to 22 & 30)
"20. Independence and impartiality of the arbitrator are the hallmarks
of any arbitration proceedings. Rule against bias is one of the
fundamental principles of natural justice which applied to all judicial
and quasi-judicial proceedings. It is for this reason that
notwithstanding the fact that relationship between the parties to the
arbitration and the arbitrators themselves are contractual in nature
and the source of an arbitrator's appointment is deduced from the
agreement entered into between the parties, notwithstanding the same
non-independence and non-impartiality of such arbitrator (though
contractually agreed upon) would render him ineligible to conduct the
arbitration. The genesis behind this rational is that even when an
arbitrator is appointed in terms of contract and by the parties to the
contract, he is independent of the parties. Functions and duties
require him to rise above the partisan interest of the parties and not to
act in, or so as to further, the particular interest of either parties. After
all, the arbitrator has adjudicatory role to perform and, therefore, he
must be independent of parties as well as impartial. The United
Kingdom Supreme Court has beautifully highlighted this aspect
in Hashwani v. Jivraj [Hashwani v. Jivraj, (2011) 1 WLR 1872 : 2011
UKSC 40] in the following words : (WLR p. 1889, para 45)
'45. ... the dominant purpose of appointing an arbitrator or arbitrators
is the impartial resolution of the dispute between the parties in
accordance with the terms of the agreement and, although the
contract between the parties and the arbitrators would be a contract
for the provision of personal services, they were not personal services
under the direction of the parties.'
21. Similarly, Cour de Cassation, France, in a judgment delivered in
1972 in Consorts Ury [Fouchard, Gaillard, Goldman on International
Commercial Arbitration, 562 [Emmanuel Gaillard & John Savage
(Eds.) 1999] {quoting Cour de cassation [Cass.] [Supreme Court for
judicial matters] Consorts Ury v. S.A. des Galeries Lafayette, Cass.2e
civ., 13-4-1972, JCP, Pt. II, No. 17189 (1972) (France)}.] , underlined
that:
'an independent mind is indispensable in the exercise of judicial
power, whatever the source of that power may be, and it is one of the
essential qualities of an arbitrator'.
22. Independence and impartiality are two different concepts. An
arbitrator may be independent and yet, lack impartiality, or vice versa.
Impartiality, as is well accepted, is a more subjective concept as
compared to independence. Independence, which is more an objective
concept, may, thus, be more straightforwardly ascertained by the
parties at the outset of the arbitration proceedings in light of the
circumstances disclosed by the arbitrator, while partiality will more
likely surface during the arbitration proceedings.
***
30. Time has come to send positive signals to the international
business community, in order to create healthy arbitration
environment and conducive arbitration culture in this country.
Further, as highlighted by the Law Commission also in its report, duty
becomes more onerous in government contracts, where one of the
parties to the dispute is the Government or public sector undertaking
itself and the authority to appoint the arbitrator rests with it. In the
instant case also, though choice is given by DMRC to the opposite
party but it is limited to choose an arbitrator from the panel prepared
by DMRC. It, therefore, becomes imperative to have a much
broadbased panel, so that there is no misapprehension that principle
of impartiality and independence would be discarded at any stage of
the proceedings, specially at the stage of constitution of the Arbitral
Tribunal. We, therefore, direct that DMRC shall prepare a broadbased
panel on the aforesaid lines, within a period of two months from
today..."
In the TRF Ltd (supra), the Hon'ble Apex Court held as follows:-
"53. The aforesaid authorities have been commended to us
to establish the proposition that if the nomination of an arbitrator
by an ineligible arbitrator is allowed, it would tantamount to
carrying on the proceeding of arbitration by himself. According to
the learned counsel for the appellant, ineligibility strikes at the root
of his power to arbitrate or get it arbitrated upon by a nominee.
54. In such a context, the fulcrum of the controversy would be, can
an ineligible arbitrator, like the Managing Director, nominate an
arbitrator, who may be otherwise eligible and a respectable person.
As stated earlier, we are neither concerned with the objectivity nor
the individual respectability. We are only concerned with the
authority or the power of the Managing Director. By our analysis,
we are obligated to arrive at the conclusion that once the arbitrator
has become ineligible by operation of law, he cannot nominate
another as an arbitrator. The arbitrator becomes ineligible as per
prescription contained in Section 12(5) of the Act. It is inconceivable
in law that person who is statutorily ineligible can nominate a
person. Needless to say, once the infrastructure collapses, the
superstructure is bound to collapse. One cannot have a building
without the plinth. Or to put it differently, once the identity of the
Managing Director as the sole arbitrator is lost, the power to
nominate someone else as an arbitrator is obliterated. Therefore,
the view expressed by the High Court is not sustainable and we say
so."
In the decision of Ellora Paper Mills (supra), the Hon'ble Apex Court held
as follows:-
"16. As observed hereinabove, the Arbitral Tribunal--Stationery
Purchase Committee consisted of officers of the respondent State.
Therefore, as per Amendment Act, 2015 -- sub-section (5) of Section
12 read with Seventh Schedule, all of them have become ineligible to
become arbitrators and to continue as arbitrators. Section 12 has
been amended by the Amendment Act, 2015 based on the
recommendations of the Law Commission, which specifically dealt
with the issue of "neutrality of arbitrators". To achieve the main
purpose for amending the provision, namely, to provide for
"neutrality of arbitrators", sub-section (5) of Section 12 lays down
that notwithstanding any prior agreement to the contrary, any
person whose relationship with the parties or counsel or the subject-
matter of the dispute falls under any of the categories specified in the
Seventh Schedule, he shall be ineligible to be appointed as an
arbitrator. In such an eventuality i.e. when the arbitration clause is
found to be foul with the amended provision, the appointment of the
arbitrator would be beyond the pale of the arbitration agreement,
empowering the Court to appoint such an arbitrator as may be
permissible. That would be the effect of the non obstante clause
contained in sub-section (5) of Section 12 and the other party
cannot insist upon the appointment of the arbitrator in terms of the
arbitration agreement.
17. It cannot be disputed that in the present case, the Stationery
Purchase Committee--Arbitral Tribunal comprising of officers of the
respondent State are all ineligible to become and/or to continue as
arbitrators in view of the mandate of sub-section (5) of Section 12
read with Seventh Schedule. Therefore, by operation of law and by
amending Section 12 and bringing on statute sub-section (5) of
Section 12 read with Seventh Schedule, the earlier Arbitral
Tribunal--Stationery Purchase Committee comprising of the
Additional Secretary, Department of Revenue as President,
and: (i) Deputy Secretary, Department of Revenue, (ii) Deputy
Secretary, General Administration Department, (iii) Deputy Secretary,
Department of Finance, (iv) Deputy Secretary/Under-Secretary,
General Administration Department, and (v) Senior Deputy
Controller of Head Office, Printing as Members, has lost its mandate
and such an Arbitral Tribunal cannot be permitted to continue and
therefore a fresh arbitrator has to be appointed as per the Arbitration
Act, 1996."
Section 11(6) of the said Act provides that where agreed procedure fails, the
appointment of an Arbitrator shall be made either by the Chief Justice or his
designate.
Under such circumstances, as the agreed procedure for appointment of an
Arbitrator by the lender was contrary to law, the unilateral appointment was not
permissible and the award is liable to be set aside, being violative of Section 18 of
the said Act as also Article 14 of the Constitution of India. Equal participation of
the parties in appointing the Arbitrator was denied in this case. Unilateral
appointment violates principles of impartiality. It is also in conflict with the
public policy of India. The award is vulnerable as the composition of the tribunal
was not in accordance with Part 1 of the said Act.
Under such circumstances, the arbitral award is set aside. AP-COM 576 of
2025 is accordingly disposed of.
The parties are at liberty to take steps in accordance with law.
RE: AP-COM 577 of 2025:
AP-COM 576 of 2025, was filed challenging the arbitral award under
Section 34 of the Arbitration and Conciliation Act, 1996. This Court proceeded to
take up the said matter. Upon hearing Ms. Das on the last occasion that, the
award was passed by an unilaterally appointed Arbitrator, the Court directed
listing of the said application. This application has been filed by the borrower for
unconditional stay of the award on the ground that the award was passed by an
unilaterally appointed Arbitrator.
As AP-COM 576 of 2025 has been allowed, this application (AP-COM 577 of
2025) is accordingly disposed of, as the same has now become infructuous.
(SHAMPA SARKAR, J.)
SP/
