Articles

Checks on Corruption & Miscarriage of Justice in

Arbitration
J.C. Seth, FCS, Advocate, Supreme Court, New Delhi.
Arbitration is intended as a mechanism to settle commercial disputes without the
intervention of courts. However on account of improper selection of arbitrators, many
e-mail : a times the very purpose is defeated. This article outlines some problem areas relating
[email protected] to conduct of proceedings by arbitrators.

The founding fathers of Constitution of India in its Preamble Thus the Courts do not interfere in the arbitration process and
set the aim of securing JUSTICE – social, economic and even after the Award is passed, only a limited role is assigned
political to the people of India. But JUSTICE or rule of law is to Courts under Section 34 of the Act. The Supreme Court
far cry in India, even after six decades of the Constitution. has summarized the legal position in N.P. Ltd. v. DIC (2007)
The machinery for administration of ‘JUSTICE’ i.e. Courts 8 SCC 466 (479) as under : -
are over-burdened with litigation. At present 2.64 crores cases “It is correct that Courts shall not ordinarily substitute their
are pending across the country and Delhi High Court alone interpretation for that of the Arbitrator. It is also true that
has 1,38, 411 pending cases. if the parties with their eyes wide-open have consented to
As an ‘Alternative Dispute Resolution’ Arbitration has been refer the matter to arbitration, then normally the finding of
engineered to adjudicate commercial disputes. Arbitration is the Arbitrator should be accepted without demur”.
supposed to decide disputes, expeditiously and economically Thus, the Apex Court refrains from doing JUSTICE according
and is regulated by Arbitration and Conciliation Act, 1996 to its best judgment in regard to arbitral awards, because of
(hereinafter called the Act). It is common experience that the limitations prescribed in Sections 5 & 34 of the Act and because
arbitrators render polluted justice, as there is lot of Corruption the parties have consciously chosen to exclude the Court’s
in arbitration. The purpose of this Article is to resurrect the
jurisdiction by opting for arbitration. Certainly it is a ‘Hobson
system after analysing the sources and causes of corruption
choice’ for people of India to seek arbitration for settlement
and how best to check miscarriage of justice in arbitration.
of commercial disputes through arbitration by private forum
The major cause of corruption is ‘absolute’ and unbridled (which is generally capricious and corrupt) while the ‘litigation’
powers vested in the Arbitrator(s) by the Act. The Act treats in Courts is prohibitive, as it is expensive and also it takes
an arbitration Award as ‘decree’ of Court and Courts do not long years/decade to get justice.
exercise appellate jurisdiction over the arbitration awards. An
Another major source of corruption is the ‘Collusion’ between
arbitration award can be set aside by Court only on limited
Arbitrator and one of the parties (generally contractors in case
grounds, such as incapacity of party, no proper notice, beyond
of Govt. Contracts). The Bombay High Court in UOI v. Ajit
the scope of reference, conflict with law and (undefined) public
Mehta AIR 1990 Bom. 45(84) observed rampant corruption
policy of India, as provided in Section 34 of the Act.
in arbitration cases involving Govt. contracts as under:-
Another reason for miscarriage of justice by Arbitrators is
“…… they reveal a large scale fraud practiced on the public
restriction imposed on Courts under Section 5 of the Act,
exchequer. The fraud involves crores of rupees and is being
which is quoted below:-
practiced regularly in a very sophisticated manner…. ….
“5. Extent of judicial intervention.- Notwithstanding The modus operandi is simple. The contractors submit their
anything contained in any other law for the time being in final bills and no claim-certificates without reservations,
force, in matters governed by this Part, no judicial authority pass receipts in full and final settlement of the bills and get
shall intervene except where so provided in this Part”. their bank-guarantees released. After some months, they
Articles
Checks on Corruption & Miscarriage of Justice in Arbitration
prefer fresh claims and in spite of the provisions to the Officer to the ‘persona designata’ (working under him) that
contrary in the contract, get arbitrators appointed under he should be appointing an Arbitrator only from the Panel of
Section 8 of the Act from the list of arbitrators submitted Arbitrators approved by him. This panel of Arbitrators may
by themselves. A sham fight is put up in the Courts to be reviewed from time to time based on performance of the
resist the proceedings.. . . It is for the Government to Arbitrators. If award of any Arbitrator is set aside by competent
investigate the matter and safeguard the public funds”. Court, because of his collusion/corruption/ bias/mal-practice,
Why cannot India administer JUSTICE through arbitration, as then such an Arbitrator should be blacklisted, after show cause
other advanced countries do? In India the Public Exchequer notice, and his name should be circulated to all other Deptt./
unduly suffers because of corruption in arbitration. It is pertinent PSUs so that such a person is never appointed again as an
to add that because of miscarriage of Justice in arbitration, some Arbitrator by any other Govt. Deptt./PSUs. Section 11 of Act
of the Public Sector Undertakings are understood to have dropped should also provide for ‘disqualification’ of such a person to
the ‘arbitration clause’ from their conditions of contracts. Such act as Arbitrator. Further any person convicted by Court for
avoidance of arbitration may not be in public interest, as it offence involving moral turpitude should also be disqualified
adversely affects healthy competition, since reputed Contractors to act as Arbitrator.
always prefer to compete only for those contracts where there In one case it was found that the Arbitrator was favouring the
is a provision for arbitration, particularly arbitration under ICC contractors during course of arbitration and he even enjoyed
Arbitration Rules in Paris or in London, so that in case of dispute, hospitality of one of the contractors. Despite Applications under
they will get JUSTICE. This is sad and poor reflection on our Section 13(3) of the Act, the biased Arbitrator did not recluse
Arbitration Act and arbitration practice in India. We must himself in either case. On filing Writ Petition for his removal,
introspect and ensure JUSTICE is administered through the High Court did not agree to remove him, on ground that
arbitration. there is no power vested in Court under the Act to remove the
In practical terms, any arbitration is as good or as bad, as the Arbitrator. The party also prayed for declaration that Section
Arbitrator is. The Arbitrator is kingpin of arbitration, the award 13(4) of the Act enabling the Arbitrator to decide finally
of an Arbitrator varies with size of his foot, nay ‘arm’ of the challenge to his partiality, is ultra vires the Constitution of
Arbitrator. He weilds unlimited powers and generally makes India (as no one can be judge in his own cause), but the Division
collusive or perverse awards with immunity. While some Bench of Delhi High Court held as under;
arbitrators are excellent in resolving disputes expeditiously “Having upheld the constitutional validity of the relevant
and judiciously a large majority do not care for JUSTICE. provisions of the Arbitration and Conciliation Act, 1996
Hence the choice or appointment of right Arbitrator is pivotal and having upheld the right of the Petitioner to challenge
in the arbitration system. To expect justice in arbitration, it is the award of the arbitral tribunal on grounds of bias and
essential that the Arbitrator must be honest, knowledgeable, prejudice on the part of the Arbitrator under Section 34 of
justice–minded, upright and self-disciplined (not biased, the Act, we are of the view that we need not go into the
corrupt or unruly). second question raised in this petition about the alleged
bias and prejudice on the part of the Arbitrator as a matter
Most of the awards go against the Govt. and Public Sector
of fact”.
Undertakings (PSUs) even though the ‘persona designata’ is
generally General Manager or Superintending Engineer of the The above Order of the High Court was not interfered with
Deptt. who appoints the Sole Arbitrator. This is so, because by Supreme Court, as reported in 2001(2) Arb. L.R. 545,
right persons are not nominated as Arbitrators. Lot of when the Apex Court also held that the Petitioner may challenge
extraneous pressures/interests influence the appointment of the award after it is passed under Section 34 of the Act and
Arbitrators by such designated authorities. Ultimately it may left the question of law open. After the Arbitrator passed the
result into unjust award of crores of rupees in favour of award on 6.7.2001, it was challenged under Section 34 of the
obliging contractors, as pointed out by Bombay High Court. Act in the High Court. Ultimately after 8 years the party
It is essential that only persons of high proven integrity must succeeded in getting quashed both the unconscionable Awards
be appointed as Arbitrators. This objective could be achieved passed by the same Arbitrator. In Para 36 the High Court
when the Chief Executive of the Deptt./Undertaking prepares concluded as under:-
a ‘Panel of Arbitrators’ after proper scrutiny and verification “The petitioner in this case has sufficiently shown from the
of antecedents of such persons before empanelling them. conduct of the proceedings by the Arbitrator, from his attitude
Internal instructions may be issued by the Chief Executive towards petitioner and its officers about which affidavits have
 Articles
Checks on Corruption & Miscarriage of Justice in Arbitration
been filed by the petitioner and their advocates and from the (3) If a challenge under any procedure agreed upon by the
decision rendered by the Arbitrator that the Arbitrator in this parties or under the procedure of paragraph (2) of this
case was highly prejudiced and biased and acted in a malafide article is not successful, the challenging party may
manner. He deliberately ignored the entire evidence put request, within thirty days after having received notice
forward by the petitioner and gave his award contrary to the of the decision rejecting the challenge, the court or other
terms of the contract. The award is liable to be set aside on authority specified in article 6 to decide on the challenge,
these grounds and is hereby set aside”. which decision shall be subject to no appeal; while such
What a colossal wastage of time and energy of Courts and a request is pending, the arbitral tribunal, including the
expense of parties involved in arduous litigation of 9(nine) challenged arbitrator, may continue the arbitral
years on wasteful proceedings initially before the (biased) proceedings and make an award.
arbitrator when his ‘partiality’ was known and then in Court Thus the UNICITRAL Model law provides in Art.13(3) for an
for getting his awards set aside. It is logical that once bias of immediate right of appeal to Court. So also in England, Section
Arbitrator was proved, the Courts should have power to remove 24(a) of the Arbitration Act 1996 vests power in Court to remove
such an Arbitrator, as was permissible under the Arbitration Arbitrator, if circumstances exist that give rise to justifiable
Act 1940. The above quoted case was indeed exceptional where doubts as to his impartiality. Further Section 1037 (3) of the
Court set aside the Awards. German Arbitration Act, 1998 also provides for an immediate
Why the competent Court should not have the power to remove right of appeal to the Court and envisages that in the meantime
an Arbitrator during the course of arbitration proceedings, if the arbitrators ‘may’ continue the proceedings and make an
the Court is satisfied on sufficient evidence that the Arbitrator award. Art.13(3) of the Zimbabwe Arbitration Act, 1996 also
is corrupt, biased and there is justifiable doubt as to his provides for a right of appeal and says that in meantime the
impartiality? As it is, Section 5 of the Act forbids interference arbitrators ‘may’ go on with the proceedings. Similarly Article
by Court and Section 13(3) of the Act empowers an Arbitrator 13(2) of Schedule 2 to the Australian Act, Article 13 (3) of the
to reject challenge to his continuing as Arbitrator, Canadian Act 1985, Article 13(3) of the Schedule to the Ireland
notwithstanding established partiality he can make the Award. Act 1998, Article 13(3) and the first schedule of the New Zealand
Obviously a corrupt Arbitrator will always reject any challenge Act 1999 also use the word ‘may’ which gives discretion to the
to his holding the coveted position of Arbitrator, more so arbitrator to go ahead with the arbitration pending decision of
because the law vest power in him to reject the challenge under the Court on the question of bias or partiality.
Section 13(3) of the Act. The Act does not even provide for There is no reason why Indian legislature should not provide
appeal against such a decision of the Arbitrator taken by him for immediate appeal to the competent Court against an unjust
under Section 13(3) and 13(4) of the Act, which read as under:- decision made by a (biased) arbitrator in his own favour under
“13(3) Unless the arbitrator challenged under sub-section Section 13 (3) of the Act, while the universal practice permits
(2) withdraws from his office or the other party agrees to filing of immediate Appeal to Court? To avoid delay, the
the challenge, the arbitral tribunal shall decide on the arbitration proceedings ‘may’ continue concurrently with the
challenge”. Appeal before competent Court, whose decision will ultimately
prevail. At present the Act vests absolute powers in the (biased)
“13(4) If a challenge under any procedure agreed upon by Arbitrator, who may pass partisan Award of crores of rupees
the parties or under the procedure under sub-section (2) is with immunity but Indian Courts cannot remove him and cannot
not successful, the arbitral tribunal shall continue the arbitral entertain appeal against an order passed by Arbitrator under
proceedings and make an arbitral award.” Section 13(3) of the Act. This is anomalous.
Thus the Act bestows absolute power in the Arbitrator to reject In the case discussed earlier, the biased Arbitrator dismissed
challenge to his partiality and there is no right of appeal with the challenge to his partiality under Section 13(3) of the Act.
the ‘aggrieved party’, which is main source of corruption in The High Court and ultimately the Supreme Court observed
arbitration cases. that the Petitioner can challenge the final Award under Section
While it is proclaimed in the Preamble of our (Indian) Act 34 of the Act. The Award was passed on 6.7.2001. There-
that it is based on UNCITRAL Model Law & Rules but Section after 8(eight) years of contentious litigation ensued when the
13(3) and 13(4) of our Act make a fundamental departure Arbitrator’s awards were set aside by High Court holding that
from Article 13(3) of UNCITRAL Model Law, which reads the Arbitrator was highly biased and prejudiced on the same
as under:- facts, as were pleaded earlier before the High Court. If there
Articles
Checks on Corruption & Miscarriage of Justice in Arbitration
was a right of Appeal available under the Act against order may need to be set aside or quashed, while the remaining
passed by Arbitrator under Section 13(3) of the Act the valuable Award may remain enforceable as a `decree’ of Court. Section
time of Court and expense of parties involved in litigation for 15 of the earlier 1940 Act envisaged ”modification” of Award
over 8 years after the Award, could be saved. It is advisable while the 1996 Act talks only of `setting aside’, which needs
that the provision of Art. 13(3) of UNCITRAL Model Law to be amended to allow `modifications’ and corrections of
quoted above should be adopted mutatis mutandis by Indian awards as well by Court.
Parliament, in place of extant Section 13(3) and 13 (4) of the Further the following grounds for challenge of award (as was
Act, which will enable competent Court to remove a corrupt available earlier under Section 30(a) of old Arbitration Act
or biased Arbitrator, when sufficient evidence is available 1940) should be incorporated by adding sub-section (2)(vi) in
against him. Section 34 of the Act.
An Arbitrator adjudicating the disputes discharges public “(vi) The Arbitral Tribunal has misconducted itself or the
functions of a Judge; some cases involve huge stakes of crores proceedings”.
of rupees. As such the arbitrator, whether appointed by the
parties or by the Court or by any authorized Institution, should This amendment will tone up the Arbitration law and achieve
be declared as “Public Servant” in the Act itself. Further to purity of Justice in arbitration, as Courts will have powers to
avail of provision of criminal law, the definition of `Public see whether there has been legal misconduct, errors on face of
Servant’ contained in sixth description of Section 2(21) of award and whether principles of natural justice have been
IPC and Section 2(c)(vi) of the Prevention of Corruption Act followed. This will also enable the Court to appreciate whether
1988 should be amplified so as to read as under:- the arbitrator has exceeded his jurisdiction and whether Justice
has been done as per law.
“Every arbitrator or other person to whom any cause or
matter has been referred for decision or report by any Court Last but not the least, the Act should prescribe time-limit for
of justice, or by any other competent public authority or by the Arbitrator to make his award, say one year from the date
authorized person under an “arbitration agreement”, as of commencement of the arbitration. If the Arbitrator does
defined under Act 26 of 1996”. not make the award within the specified period, he should be
required to record reasons for delay in adjudication, by way
The addition of italic words in the existing definitions would of an addendum to the Award and the Act may also provide
achieve the desired purpose. Certainly it is appropriate to that Arbitrator making Award shall not be entitled to get any
designate an Arbitrator as “Public Servant”. A “Public Servant’ arbitration-fee for the period beyond one year unless and until
enjoys certain rights, privileges, responsibilities and duties the competent Court allows him to draw his arbitration fee,
under the Law e.g. he can administer oath under Section 51 after scrutinizing the reasons of delay recorded by Arbitrator
of the Indian Penal Code and he can be held liable for criminal in the addendum to the Award.
misconduct under Prevention of Corruption Act 1988. These
Recently the Prime Minister gave a call to anti-corruption
definitions alone will have salutary effect and will discipline
agencies declaring a ‘war against corruption’ and he emphasized
the Arbitrators considerably.
that the agencies should have a clear focus on ‘corruption
The Arbitrators decide disputes of several crores of rupees. prone’ areas. Certainly arbitration is one such major ‘corruption
Their Awards are treated as ‘decrees’ of the Court. It is prone’ areas in the administration of JUSTICE. Corruption
advisable that the arbitration proceedings may be declared as has cascading effect on trade commerce and national economy,
‘judicial proceedings’ in the Act, which will insulate the as corruption begets corruption. The corruption cannot be
proceedings from false evidence and perjury etc. which is quite checked alone by the enforcement agencies but it is essential
common at present. This will empower Arbitrator to administer to make appropriate Law and transparent process subject to
oath to witnesses, so that the dishonest witnesses are deterred supervision of Courts, for which purpose the Act needs
from giving false evidence and parties do not file fabricated amendments, as suggested above.
documents to mislead the Arbitrator(s). Both the parties should The steps outlined in preceding paras, would largely check
have statutory right to inspect the records of the Arbitrator(s). the corruption in arbitration and help to achieve purity in
Section 34 of the Act relates to setting aside of arbitral award administration of JUSTICE in arbitration cases, which will
(as a whole). This Section should also cover cases for be in interest of Trade, Industry and People at large. The
“Modification of award” since award may have many severable Parliament, judiciary and legal fraternity must make endeavour
portions/claims and at times only some portion of the Award to realize the ideal of JUSTICE in arbitration. ‰