Arbitration is a form of Alternate Dispute Resolution (“ADR”) through which a dispute is resolved outside the Court by an independent and neutral Arbitral Tribunal, undertaking the role of a Judge, to adjudicate and resolve the dispute between the parties.
In essence, an Arbitral proceeding grants the parties to a dispute a fair deal of autonomy to resolve the dispute as per their own terms laid down in the Arbitration agreement. Compared to litigation, Arbitration is cost-effective and saves time for the parties along with enabling them to choose multiple facets of Arbitration such as the mode of appointing the Tribunal, the Rules applicable, venue and seat of the Tribunal, language of the proceedings, and so on.
The basis of Arbitral proceedings lies in the principles of natural justice, which grants such proceedings sanctity and legitimacy as a fair and just mechanism for dispute resolution. The principles of natural justice come to play at multiple stages of the Arbitral proceeding, from appointment of a neutral Arbitrator, to equal treatment of parties during conduct of proceedings, and to the challenge of an Award being inconsistent with the principles of natural justice.
Arbitration has recently emerged as the preferred mode of dispute resolution across the globe. With the Courts in India emphasizing more on the minimal judicial interference provisions of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”), it has become all the more necessary to have a uniform interpretation of the principles of natural justice in the Arbitral proceedings for the conduct of fair and just dispute resolution. In this article, we discuss the relevance of principles of natural justice in an Arbitration proceeding.
CONCEPT OF NATURAL JUSTICE
‘Natural Justice’ is a term of wide amplitude and serves as the grundnorm of any legal system that follows the Rule of Law for adjudication. It connotes that justice should be fair, equal and impartial and protect individuals’ rights against arbitrariness and capriciousness.
the essence of natural justice was elaborated by J. Mason in the case of Kioa v. West, (1985)159 CLR 550 as follows:
“What is appropriate in terms of natural justice depends on the circumstances of the case, and they will include, in inter alia, the nature of the inquiry, the subject matter and the rules under which the decision-maker is acting. … The critical question in most cases is not whether the principles of natural justice apply but the duty to act fairly in the circumstances of the case.”
The fundamental principle of Natural Justice outlines the idea that “justice must not only be done, but must be seen to be done.” It encompasses two fundamental rules, namely:
I. Nemo Judex In Causa Sua – No One can be a Judge in his Case
Nemo Judex in Causa Sua, also known as the ‘Rule Against Bias’, states that no person can be a judge in his own matter. The authority making the decision must be composed of impartial individuals functioning reasonably, without prejudice or bias, as a basic need of Natural Justice.
It is an apparent fact that bias would be inevitable when the Judge of the case has any interest in the subject matter of the case. In Arbitral proceedings, a bias may be in the form of a personal bias, such as an Arbitrator hearing her own case or a case against relatives; in the form of a money bias, wherein the Arbitrator acts in part under the influence of financial gain; or in the form of formal bias, wherein a biased behaviour of the Arbitrator creeps in due to the influence of a person in an authoritative position.
Application of the principle against biasness entails that the mere possibility of bias is enough to render the right to decide a decision null and void, and no proof of actual bias is required. Needless to say, a person who hears his own case is incapable of dispensing justice and thereby jeopardizes society’s goal of maintaining law and order.
Section 12(5) of the Act along with the Fifth and Seventh Schedule of the Act reinforces the principle against biasness, by providing for the appointment a neutral Arbitrator who is required to disclose any relationship with the parties or outcome of the dispute. If any Arbitrator is found to have any relation with the parties or the outcome, justifiable doubts arise regarding their impartiality and independence and such Arbitrator shall be disqualified under the Act.
Laying down the test to identify whether or not a bias has taken place, the Supreme Court, in the case of Jiwan Kumar Lohia v. Durgadutt Lohia, AIR 1992 SC 188 observed that the test is whether a reasonable person with the relevant facts would have believed prejudice to be likely in the said situation, and if the said person was likely to decide the issue in a particular way.
Additionally, the Supreme Court has held in Perkins Eastman Architects DPC and Ors. v. HSCC Arbitration Application No. 32 of 2019 dated 26.11.2019 that a person having an interest in the outcome of the dispute cannot possess the power of appointment of Sole Arbitrator. Similarly, in TRF Limited v. Energo Engineering Projects Ltd. (2017) 8 SCC 377, the Supreme Court held that a person who is himself disqualified from appointment as an Arbitrator, cannot appoint an Arbitrator.
Section 13(3) of the Act enables the Arbitrator to itself decide upon the challenge to its appointment by any party when the challenged Arbitrator does not withdraw from its office or the other party disagrees to the challenge. In such a situation, a reasonable apprehension of bias arises as the Arbitrator decides upon its own competence.
In the case of Bihar State Mineral Development, Corp. v. Encon Builders (I) Pvt. Ltd., AIR 2003 SC 3688, the Supreme Court noted the difference between actual bias and apparent bias, where actual bias is clear from the facts/information available and a ground for removal of the Arbitrator, and apparent bias is a suspicion on the Arbitrator’s neutrality forming an apprehension of bias. Thus, the Supreme Court observed that Section 13(2) of the Act, being violative of the principles of natural justice, is speculative and requires clarification from the Legislature.
II. Audi Alteram Partem – Hear the Other Party
The rule of Audi Alteram Partem furthers the interest of natural justice and states that no man should be condemned unheard, with both the sides mandatorily heard before any order is passed. Thus, a reasonable opportunity must be given to the parties to represent themselves. The said Rule involves the following elements:
Before any action is taken, the affected party must be given appropriate notice of the proposed action in writing. It is a must for a fair hearing, and orders that are passed without proper issuance and service of notice are violative of natural justice and thus, void ab initio.
In the case of Keshav Mills Co. Ltd. v. UOI, 1973 AIR 389, the Supreme Court held that a notice must be clear and understandable; otherwise, it will not be treated as proper notice in accordance with the rule of Audi Alteram Partem.
The second element is the rule of hearing, which requires the affected party to be availed of an opportunity to represent their case in the manner prescribed. This can be done by according the parties with an opportunity for a written or oral hearing.
The test to determine if a party has been unable to present its case is to enquire whether the factors were beyond the control of the party to have availed a fair hearing. In the case of Sohan Lal Gupta (Dead), the. L.Rs. and Ors. v. Asha Devi Gupta and Ors., (2003) 7 SCC 492, the Supreme Court held that a party must be given a reasonable opportunity of putting their case in an Arbitration proceeding, which would mean an opportunity to explain its arguments before the Arbitral Tribunal and to adduce evidence supporting its case.
Section 18 of the Act provides for equal treatment of the parties and states that during an Arbitral proceeding, the parties shall be treated equally and be presented with full and reasonable opportunity to present their case.
SETTING ASIDE OF AN AWARD FOR VIOLATION OF PRINCIPLES OF NATURAL JUSTICE
Arbitration proceedings are in the nature of quasi-judicial proceedings, which means they have a judicial character similar to court proceedings. The quasi-judicial element of Arbitration proceedings makes it imperative for them to be in adherence to the principles of Natural Justice and fairness.
Section 34 of the Act lays down the grounds on which an Arbitral Award can be set aside, as a safeguard for the rights of the parties to an Arbitration in the event of an Arbitral Award passed in contradiction to the principles of Natural Justice.
Section 34(2)(a)(iii) of the Act prescribes the following conditions for setting aside an Award in violation of the rule of Audi Alteram Partem:
1. If the notice of appointment of an Arbitrator or of the Arbitral proceedings is not served by the party invoking Arbitration to the other party; or
2. If the other party is otherwise unable to present his case, i.e., lack of a fair hearing of the other party.
In the case of Sanjay Roy v. Sandeep Soni & Ors., 2022 SCC OnLine Del 1525, the Delhi High Court held that an Arbitral Award in contravention to the judicial decisions and principles laid down by Indian courts violates the fundamental policy of Indian Law and results in a breach of principles of Natural Justice and basic notions of justice.
However, for the setting aside of an Arbitral Award, the Court must be satisfied that the Arbitral Tribunal committed a breach of a rule of Natural Justice in making the Award and that such breach has caused actual or real prejudice to the party challenging the Award. The breach should be of such nature that it actually alters the outcome of the Arbitral proceedings in a meaningful way in the absence of any curial intervention.
The principles of Natural Justice and fairness are the legitimate expectations of the parties who seek dispute resolution through any mode, be it through the Court of Law or Arbitration. In any mechanism for dispute resolution, the denial of principles of Natural Justice to the parties causes a significant setback in providing justice.
Arbitration has quickly gained traction around the world, and even in India, for the resolution of disputes in a speedy, fair, and just manner. With the emerging trend of increased dispute resolution through Arbitration, it is of crucial importance that the Arbitral Tribunal ensures fairness and adheres with the general principles of Natural Justice along with the provisions of the Act at the time of adjudication of the dispute.
The fundamental object of Arbitration is to minimize court intervention and to provide for an efficacious, cost and time-effective dispute resolution by passing an Award that is essentially equivalent to a decree passed by a Court of Law. Taking into consideration the significance of Arbitral proceedings and the Arbitral Award, the principles of Natural Justice must be abided by the Arbitrators under all circumstances to avoid unnecessary interference of Courts in the Arbitral process, which would disrupt the entire purpose and object of Arbitration.
–Team AMLEGALS, assisted by Mr. Alay Raje (Intern)
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