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
sethjc2008@gmail.com to conduct of proceedings by arbitrators.
The founding fathers of Constitution of India in its Preamble
set the aim of securing JUSTICE – social, economic and
political to the people of India. But JUSTICE or rule of law is
far cry in India, even after six decades of the Constitution.
The machinery for administration of ‘JUSTICE’ i.e. Courts
are over-burdened with litigation. At present 2.64 crores cases
are pending across the country and Delhi High Court alone
has 1,38, 411 pending cases.
As an ‘Alternative Dispute Resolution’ Arbitration has been
engineered to adjudicate commercial disputes. Arbitration is
supposed to decide disputes, expeditiously and economically
and is regulated by Arbitration and Conciliation Act, 1996
(hereinafter called the Act). It is common experience that the
arbitrators render polluted justice, as there is lot of Corruption
in arbitration. The purpose of this Article is to resurrect the
system after analysing the sources and causes of corruption
and how best to check miscarriage of justice in arbitration.
The major cause of corruption is ‘absolute’ and unbridled
powers vested in the Arbitrator(s) by the Act. The Act treats
an arbitration Award as ‘decree’ of Court and Courts do not
exercise appellate jurisdiction over the arbitration awards. An
arbitration award can be set aside by Court only on limited
grounds, such as incapacity of party, no proper notice, beyond
the scope of reference, conflict with law and (undefined) public
policy of India, as provided in Section 34 of the Act.
Another reason for miscarriage of justice by Arbitrators is
restriction imposed on Courts under Section 5 of the Act,
which is quoted below:-
“5. Extent of judicial intervention.- Notwithstanding
anything contained in any other law for the time being in
force, in matters governed by this Part, no judicial authority
shall intervene except where so provided in this Part”.
Thus the Courts do not interfere in the arbitration process and
even after the Award is passed, only a limited role is assigned
to Courts under Section 34 of the Act. The Supreme Court
has summarized the legal position in N.P. Ltd. v. DIC (2007)
8 SCC 466 (479) as under : -
“It is correct that Courts shall not ordinarily substitute their
interpretation for that of the Arbitrator. It is also true that
if the parties with their eyes wide-open have consented to
refer the matter to arbitration, then normally the finding of
the Arbitrator should be accepted without demur”.
Thus, the Apex Court refrains from doing JUSTICE according
to its best judgment in regard to arbitral awards, because of
limitations prescribed in Sections 5 & 34 of the Act and because
the parties have consciously chosen to exclude the Court’s
jurisdiction by opting for arbitration. Certainly it is a ‘Hobson
choice’ for people of India to seek arbitration for settlement
of commercial disputes through arbitration by private forum
(which is generally capricious and corrupt) while the ‘litigation’
in Courts is prohibitive, as it is expensive and also it takes
long years/decade to get justice.
Another major source of corruption is the ‘Collusion’ between
Arbitrator and one of the parties (generally contractors in case
of Govt. Contracts). The Bombay High Court in UOI v. Ajit
Mehta AIR 1990 Bom. 45(84) observed rampant corruption
in arbitration cases involving Govt. contracts as under:-
“…… they reveal a large scale fraud practiced on the public
exchequer. The fraud involves crores of rupees and is being
practiced regularly in a very sophisticated manner…. ….
The modus operandi is simple. The contractors submit their
final bills and no claim-certificates without reservations,
pass receipts in full and final settlement of the bills and get
their bank-guarantees released. After some months, they
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prefer fresh claims and in spite of the provisions to the
contrary in the contract, get arbitrators appointed under
Section 8 of the Act from the list of arbitrators submitted
by themselves. A sham fight is put up in the Courts to
resist the proceedings.. . . It is for the Government to
investigate the matter and safeguard the public funds”.
Why cannot India administer JUSTICE through arbitration, as
other advanced countries do? In India the Public Exchequer
unduly suffers because of corruption in arbitration. It is pertinent
to add that because of miscarriage of Justice in arbitration, some
of the Public Sector Undertakings are understood to have dropped
the ‘arbitration clause’ from their conditions of contracts. Such
avoidance of arbitration may not be in public interest, as it
adversely affects healthy competition, since reputed Contractors
always prefer to compete only for those contracts where there
is a provision for arbitration, particularly arbitration under ICC
Arbitration Rules in Paris or in London, so that in case of dispute,
they will get JUSTICE. This is sad and poor reflection on our
Arbitration Act and arbitration practice in India. We must
introspect and ensure JUSTICE is administered through
arbitration.
In practical terms, any arbitration is as good or as bad, as the
Arbitrator is. The Arbitrator is kingpin of arbitration, the award
of an Arbitrator varies with size of his foot, nay ‘arm’ of the
Arbitrator. He weilds unlimited powers and generally makes
collusive or perverse awards with immunity. While some
arbitrators are excellent in resolving disputes expeditiously
and judiciously a large majority do not care for JUSTICE.
Hence the choice or appointment of right Arbitrator is pivotal
in the arbitration system. To expect justice in arbitration, it is
essential that the Arbitrator must be honest, knowledgeable,
justice–minded, upright and self-disciplined (not biased,
corrupt or unruly).
Most of the awards go against the Govt. and Public Sector
Undertakings (PSUs) even though the ‘persona designata’ is
generally General Manager or Superintending Engineer of the
Deptt. who appoints the Sole Arbitrator. This is so, because
right persons are not nominated as Arbitrators. Lot of
extraneous pressures/interests influence the appointment of
Arbitrators by such designated authorities. Ultimately it may
result into unjust award of crores of rupees in favour of
obliging contractors, as pointed out by Bombay High Court.
It is essential that only persons of high proven integrity must
be appointed as Arbitrators. This objective could be achieved
when the Chief Executive of the Deptt./Undertaking prepares
a ‘Panel of Arbitrators’ after proper scrutiny and verification
of antecedents of such persons before empanelling them.
Internal instructions may be issued by the Chief Executive
Checks on Corruption & Miscarriage of Justice in Arbitration
Officer to the ‘persona designata’ (working under him) that
he should be appointing an Arbitrator only from the Panel of
Arbitrators approved by him. This panel of Arbitrators may
be reviewed from time to time based on performance of the
Arbitrators. If award of any Arbitrator is set aside by competent
Court, because of his collusion/corruption/ bias/mal-practice,
then such an Arbitrator should be blacklisted, after show cause
notice, and his name should be circulated to all other Deptt./
PSUs so that such a person is never appointed again as an
Arbitrator by any other Govt. Deptt./PSUs. Section 11 of Act
should also provide for ‘disqualification’ of such a person to
act as Arbitrator. Further any person convicted by Court for
offence involving moral turpitude should also be disqualified
to act as Arbitrator.
In one case it was found that the Arbitrator was favouring the
contractors during course of arbitration and he even enjoyed
hospitality of one of the contractors. Despite Applications under
Section 13(3) of the Act, the biased Arbitrator did not recluse
himself in either case. On filing Writ Petition for his removal,
the High Court did not agree to remove him, on ground that
there is no power vested in Court under the Act to remove the
Arbitrator. The party also prayed for declaration that Section
13(4) of the Act enabling the Arbitrator to decide finally
challenge to his partiality, is ultra vires the Constitution of
India (as no one can be judge in his own cause), but the Division
Bench of Delhi High Court held as under;
“Having upheld the constitutional validity of the relevant
provisions of the Arbitration and Conciliation Act, 1996
and having upheld the right of the Petitioner to challenge
the award of the arbitral tribunal on grounds of bias and
prejudice on the part of the Arbitrator under Section 34 of
the Act, we are of the view that we need not go into the
second question raised in this petition about the alleged
bias and prejudice on the part of the Arbitrator as a matter
of fact”.
The above Order of the High Court was not interfered with
by Supreme Court, as reported in 2001(2) Arb. L.R. 545,
when the Apex Court also held that the Petitioner may challenge
the award after it is passed under Section 34 of the Act and
left the question of law open. After the Arbitrator passed the
award on 6.7.2001, it was challenged under Section 34 of the
Act in the High Court. Ultimately after 8 years the party
succeeded in getting quashed both the unconscionable Awards
passed by the same Arbitrator. In Para 36 the High Court
concluded as under:-
“The petitioner in this case has sufficiently shown from the
conduct of the proceedings by the Arbitrator, from his attitude
towards petitioner and its officers about which affidavits have

Checks on Corruption & Miscarriage of Justice in Arbitration
been filed by the petitioner and their advocates and from the
decision rendered by the Arbitrator that the Arbitrator in this
case was highly prejudiced and biased and acted in a malafide
manner. He deliberately ignored the entire evidence put
forward by the petitioner and gave his award contrary to the
terms of the contract. The award is liable to be set aside on
these grounds and is hereby set aside”.
What a colossal wastage of time and energy of Courts and
expense of parties involved in arduous litigation of 9(nine)
years on wasteful proceedings initially before the (biased)
arbitrator when his ‘partiality’ was known and then in Court
for getting his awards set aside. It is logical that once bias of
Arbitrator was proved, the Courts should have power to remove
such an Arbitrator, as was permissible under the Arbitration
Act 1940. The above quoted case was indeed exceptional where
Court set aside the Awards.
Why the competent Court should not have the power to remove
an Arbitrator during the course of arbitration proceedings, if
the Court is satisfied on sufficient evidence that the Arbitrator
is corrupt, biased and there is justifiable doubt as to his
impartiality? As it is, Section 5 of the Act forbids interference
by Court and Section 13(3) of the Act empowers an Arbitrator
to reject challenge to his continuing as Arbitrator,
notwithstanding established partiality he can make the Award.
Obviously a corrupt Arbitrator will always reject any challenge
to his holding the coveted position of Arbitrator, more so
because the law vest power in him to reject the challenge under
Section 13(3) of the Act. The Act does not even provide for
appeal against such a decision of the Arbitrator taken by him
under Section 13(3) and 13(4) of the Act, which read as under:-
“13(3) Unless the arbitrator challenged under sub-section
(2) withdraws from his office or the other party agrees to
the challenge, the arbitral tribunal shall decide on the
challenge”.
“13(4) If a challenge under any procedure agreed upon by
the parties or under the procedure under sub-section (2) is
not successful, the arbitral tribunal shall continue the arbitral
proceedings and make an arbitral award.”
Thus the Act bestows absolute power in the Arbitrator to reject
challenge to his partiality and there is no right of appeal with
the ‘aggrieved party’, which is main source of corruption in
arbitration cases.
While it is proclaimed in the Preamble of our (Indian) Act
that it is based on UNCITRAL Model Law & Rules but Section
13(3) and 13(4) of our Act make a fundamental departure
from Article 13(3) of UNCITRAL Model Law, which reads
as under:-
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(3) If a challenge under any procedure agreed upon by the
parties or under the procedure of paragraph (2) of this
article is not successful, the challenging party may
request, within thirty days after having received notice
of the decision rejecting the challenge, the court or other
authority specified in article 6 to decide on the challenge,
which decision shall be subject to no appeal; while such
a request is pending, the arbitral tribunal, including the
challenged arbitrator, may continue the arbitral
proceedings and make an award.
Thus the UNICITRAL Model law provides in Art.13(3) for an
immediate right of appeal to Court. So also in England, Section
24(a) of the Arbitration Act 1996 vests power in Court to remove
Arbitrator, if circumstances exist that give rise to justifiable
doubts as to his impartiality. Further Section 1037 (3) of the
German Arbitration Act, 1998 also provides for an immediate
right of appeal to the Court and envisages that in the meantime
the arbitrators ‘may’ continue the proceedings and make an
award. Art.13(3) of the Zimbabwe Arbitration Act, 1996 also
provides for a right of appeal and says that in meantime the
arbitrators ‘may’ go on with the proceedings. Similarly Article
13(2) of Schedule 2 to the Australian Act, Article 13 (3) of the
Canadian Act 1985, Article 13(3) of the Schedule to the Ireland
Act 1998, Article 13(3) and the first schedule of the New Zealand
Act 1999 also use the word ‘may’ which gives discretion to the
arbitrator to go ahead with the arbitration pending decision of
the Court on the question of bias or partiality.
There is no reason why Indian legislature should not provide
for immediate appeal to the competent Court against an unjust
decision made by a (biased) arbitrator in his own favour under
Section 13 (3) of the Act, while the universal practice permits
filing of immediate Appeal to Court? To avoid delay, the
arbitration proceedings ‘may’ continue concurrently with the
Appeal before competent Court, whose decision will ultimately
prevail. At present the Act vests absolute powers in the (biased)
Arbitrator, who may pass partisan Award of crores of rupees
with immunity but Indian Courts cannot remove him and cannot
entertain appeal against an order passed by Arbitrator under
Section 13(3) of the Act. This is anomalous.
In the case discussed earlier, the biased Arbitrator dismissed
the challenge to his partiality under Section 13(3) of the Act.
The High Court and ultimately the Supreme Court observed
that the Petitioner can challenge the final Award under Section
34 of the Act. The Award was passed on 6.7.2001. There-
after 8(eight) years of contentious litigation ensued when the
Arbitrator’s awards were set aside by High Court holding that
the Arbitrator was highly biased and prejudiced on the same
facts, as were pleaded earlier before the High Court. If there
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was a right of Appeal available under the Act against order
passed by Arbitrator under Section 13(3) of the Act the valuable
time of Court and expense of parties involved in litigation for
over 8 years after the Award, could be saved. It is advisable
that the provision of Art. 13(3) of UNCITRAL Model Law
quoted above should be adopted mutatis mutandis by Indian
Parliament, in place of extant Section 13(3) and 13 (4) of the
Act, which will enable competent Court to remove a corrupt
or biased Arbitrator, when sufficient evidence is available
against him.
An Arbitrator adjudicating the disputes discharges public
functions of a Judge; some cases involve huge stakes of crores
of rupees. As such the arbitrator, whether appointed by the
parties or by the Court or by any authorized Institution, should
be declared as “Public Servant” in the Act itself. Further to
avail of provision of criminal law, the definition of `Public
Servant’ contained in sixth description of Section 2(21) of
IPC and Section 2(c)(vi) of the Prevention of Corruption Act
1988 should be amplified so as to read as under:-
“Every arbitrator or other person to whom any cause or
matter has been referred for decision or report by any Court
of justice, or by any other competent public authority or by
authorized person under an “arbitration agreement”, as
defined under Act 26 of 1996”.
The addition of italic words in the existing definitions would
achieve the desired purpose. Certainly it is appropriate to
designate an Arbitrator as “Public Servant”. A “Public Servant’
enjoys certain rights, privileges, responsibilities and duties
under the Law e.g. he can administer oath under Section 51
of the Indian Penal Code and he can be held liable for criminal
misconduct under Prevention of Corruption Act 1988. These
definitions alone will have salutary effect and will discipline
the Arbitrators considerably.
The Arbitrators decide disputes of several crores of rupees.
Their Awards are treated as ‘decrees’ of the Court. It is
advisable that the arbitration proceedings may be declared as
‘judicial proceedings’ in the Act, which will insulate the
proceedings from false evidence and perjury etc. which is quite
common at present. This will empower Arbitrator to administer
oath to witnesses, so that the dishonest witnesses are deterred
from giving false evidence and parties do not file fabricated
documents to mislead the Arbitrator(s). Both the parties should
have statutory right to inspect the records of the Arbitrator(s).
Section 34 of the Act relates to setting aside of arbitral award
(as a whole). This Section should also cover cases for
“Modification of award” since award may have many severable
portions/claims and at times only some portion of the Award
Checks on Corruption & Miscarriage of Justice in Arbitration
may need to be set aside or quashed, while the remaining
Award may remain enforceable as a `decree’ of Court. Section
15 of the earlier 1940 Act envisaged ”modification” of Award
while the 1996 Act talks only of `setting aside’, which needs
to be amended to allow `modifications’ and corrections of
awards as well by Court.
Further the following grounds for challenge of award (as was
available earlier under Section 30(a) of old Arbitration Act
1940) should be incorporated by adding sub-section (2)(vi) in
Section 34 of the Act.
“(vi) The Arbitral Tribunal has misconducted itself or the
proceedings”.
This amendment will tone up the Arbitration law and achieve
purity of Justice in arbitration, as Courts will have powers to
see whether there has been legal misconduct, errors on face of
award and whether principles of natural justice have been
followed. This will also enable the Court to appreciate whether
the arbitrator has exceeded his jurisdiction and whether Justice
has been done as per law.
Last but not the least, the Act should prescribe time-limit for
the Arbitrator to make his award, say one year from the date
of commencement of the arbitration. If the Arbitrator does
not make the award within the specified period, he should be
required to record reasons for delay in adjudication, by way
of an addendum to the Award and the Act may also provide
that Arbitrator making Award shall not be entitled to get any
arbitration-fee for the period beyond one year unless and until
the competent Court allows him to draw his arbitration fee,
after scrutinizing the reasons of delay recorded by Arbitrator
in the addendum to the Award.
Recently the Prime Minister gave a call to anti-corruption
agencies declaring a ‘war against corruption’ and he emphasized
that the agencies should have a clear focus on ‘corruption
prone’ areas. Certainly arbitration is one such major ‘corruption
prone’ areas in the administration of JUSTICE. Corruption
has cascading effect on trade commerce and national economy,
as corruption begets corruption. The corruption cannot be
checked alone by the enforcement agencies but it is essential
to make appropriate Law and transparent process subject to
supervision of Courts, for which purpose the Act needs
amendments, as suggested above.
The steps outlined in preceding paras, would largely check
the corruption in arbitration and help to achieve purity in
administration of JUSTICE in arbitration cases, which will
be in interest of Trade, Industry and People at large. The
Parliament, judiciary and legal fraternity must make endeavour
to realize the ideal of JUSTICE in arbitration. ‰