Can Employees act as Arbitrators in disputes involving their Employers?

Section 11 Of the Arbitration and Conciliation Act 1996 (“Arbitration Act”) outlines the procedure for appointment of an arbitrator. While the Arbitration Act states that the arbitrator should not be biased, it was silent on the issue of who could not act as an arbitrator. This anomaly was removed by the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) which took effect on October 23, 2015.

The 2015 Amendment introduced 2 (Two) new Schedules, i.e. the Fifth Schedule and the Seventh Schedule. Implicit in these Schedules is the rule against bias. Rule against bias is one of the basic components of the principles of natural justice. The rule stipulates that adjudication be impartial and free from bias. The test of such rule is not whether in fact a bias has affected the adjudication of a matter. The test is whether there can be reasonable apprehension of a bias for or against one of the parties.

Section 12 (1) of the Arbitration Act lists out the disclosures which a person had to make when approached to act as an arbitrator. This includes a disclosure as to whether such person has any relation with any of the parties which is likely to give rise to justifiable doubts as to his independence or impartiality. The Fifth Schedule outlines 34 (Thirty Four) grounds that give rise to justifiable doubts as to the independence or impartiality of arbitrators. A few of the grounds listed are as follows:

“1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.

3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.

4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.

5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.”

(emphasis supplied)

Section 12 (5) of the amended Arbitration Act stipulates that where a person has a relationship with the parties involved or the counsel involved in an arbitration proceeding, which is of a nature specified in the Seventh Schedule, such person shall be ineligible to act as an arbitrator.

The Seventh Schedule also lists relationships similar to those outlined in the Fifth Schedule.

These amendments were welcome additions to the Arbitration Act as they clarified when a person could not act as an arbitrator. On a plain reading of the Fifth and the Seventh Schedule, it is evident that the existence of an employer-employee relationship has been deemed to be a relationship that would render either of the parties’ ineligible from acting as an arbitrator in a dispute where the other party is a litigant.

However, the 2015 Amendment did not specify what the position of law would be if arbitration proceedings had been initiated prior to the 2015 Amendment, i.e. prior to the existence of the Fifth and the Seventh Schedule.

This issue was examined by the Supreme Court in the case of Aravalli Power Company Ltd v. Era Infra Engineering Ltd (“Aravalli”). Aravalli also assumes significance in determining whether an employee could act as an arbitrator for arbitration proceedings initiated prior to the 2015 Amendment.

Facts of the case

Upon a dispute occurring between Aravalli and Era Infra with respect to an agreement, arbitration proceedings were initiated by Aravalli. The arbitration agreement stipulated that the CEO of Aravalli was to be appointed as an arbitrator. The arbitration was initiated a few days before the 2015 Amendment took effect.

Era Infra filed an arbitration petition under Section 11 of the Arbitration Act before the Delhi High Court seeking the removal of the CEO of Aravalli as an arbitrator on the grounds that as per the 2015 Amendment, where the arbitrator was an employee of a party to the proceedings, there would be justifiable doubts as to the independence or impartiality of the arbitrator, thereby rendering him ineligible to act as an arbitrator. In the arbitration petition, Era Infra also sought appointment of the arbitrator by the Chief Justice of the High Court under Section 11(6) of the Arbitration Act. The Delhi High Court admitted the petition. An appeal was filed before the Supreme Court by Aravalli against the admission of the arbitration petition by the Delhi High Court.

The ratio in Aravalli

In Aravalli, Justice Lalit and Justice Goel made two distinct classifications i.e.:

A. In cases governed by the Arbitration Act as it stood before the 2015 Amendment came into force: -Here, they held as follows:

(i) The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part.

(ii) The Chief Justice or his designate ought not to intervene under Section 11(6) of the Arbitration Act unless:

a. A party fails to act as required under the agreement for appointment of an arbitrator; or

b. The parties, or the two appointed arbitrators fail to reach an agreement expected of them under the  agreement for the appointment for an/a third arbitrator; or

c. A person, including an institution fails to perform any function entrusted to him/her/it under the agreement for the appointment of an arbitrator or a panel of arbitrators.

In the present case, the Judges therefore, upheld the appointment of the CEO of Aravalli as an arbitrator.

(iii) While exercising such power under sub section (6) of Section 11, ONLY IF circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded, ignore the designated arbitrator, and appoint someone else.

B. In cases governed by the Arbitration Act after the 2015 Amendment has come into force: -Here, they held as follows:

(i) The fact that the named arbitrator is an employee of one of the parties is a ground to raise a presumption of bias or partiality or lack of independence on his part.

(ii) If the arbitration clause conflicts with the 2015 Amendment, the appointment of the Arbitrator, even if apparently in conformity with the arbitration agreement, would be illegal and thus the Court would be within its powers to appoint another arbitrator altogether, in accordance with the provisions of the Arbitration Act.

Incorporation of the rule against bias and yet, a tale of a missed opportunity!

The 2015 Amendment is a welcome step as regards the assertion of impartiality during appointment of arbitrators. The introduction of the Fifth Schedule and the Seventh Schedule explains and clarifies the situations where there can be a presumption of bias and where a person may be rendered ineligible to be an arbitrator.

As this clarification regarding bias in appointment of arbitrator did not exist prior to the 2015 Amendment, in Aravalli, the Supreme Court had an opportunity to read the rule against bias into Section 12 (1) of the Arbitration Act. By holding that employees could appointed as arbitrators prior to 2015, the Supreme Court failed to utilize this opportunity to correct the long standing, undesirable and controversial practice of appointing employees as arbitrators.

While Aravalli upholds party autonomy, which is a cornerstone of arbitration, there appears to be a disregard of the rule against bias, insofar as arbitrations initiated prior to the 2015 Amendment are concerned.

However, the rule against bias find an explicit recognition in the Fifth Schedule and Seventh Schedule by the 2015 Amendment, where the lawmakers have clearly listed the situations where a presumption of bias may exist and where a person may be rendered ineligible to be an arbitrator due to such a presumption of bias. Going forward, the 2015 Amendment has clearly precluded the possibility of a CEO or another employee of a litigating party acting as an arbitrator in a proceeding involving the Employer and another third party.

Namrata Bhagwatula is an Associate in the New Delhi office of GameChanger Law Advisors. She has a deep professional and academic interest in Commercial Arbitration and Corporate Governance. She can be contacted at namrata@gamechangerlaw.com.

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