Supreme Court Sets Aside Arbitral Award Due to Arbitrator’s Conflict of Interest: Vinod Bhaiyalal Jain & Ors. vs. Wadhwani Parmeshwari Cold Storage Pvt. Ltd. (24 July 2019)

Date of the Judgment: 24 July 2019
Citation: Civil Appeal No. 6960 of 2011
Judges: R. Banumathi, J. and A.S. Bopanna, J.

Can an arbitrator’s prior professional engagement with one of the parties in a separate case lead to questions of bias and impartiality? The Supreme Court of India addressed this critical question in a recent arbitration dispute. This case revolves around a challenge to an arbitral award where the arbitrator had previously acted as counsel for one of the parties in an unrelated matter. The Supreme Court, in this judgment, examined whether such prior engagement constituted a conflict of interest, thereby affecting the fairness and validity of the arbitration proceedings. The judgment was delivered by a two-judge bench comprising Justice R. Banumathi and Justice A.S. Bopanna, with the opinion authored by Justice A.S. Bopanna.

Case Background

The dispute arose between Vinod Bhaiyalal Jain and others (the appellants), who are commission agents for agricultural products, and Wadhwani Parmeshwari Cold Storage Pvt. Ltd. (the respondent), a cold storage facility in Nagpur. In 2004, the appellants stored 50 bags of ‘Shingada’ at the respondent’s cold storage. The appellants claimed that the goods were not stored properly, leading to damage. Consequently, they issued a notice on May 18, 2006, seeking compensation. The respondent denied the claim and made a counter-claim in their reply dated May 27, 2006. The respondent invoked an arbitration clause present in the storage receipt and appointed Sri S.T. Madnani, Advocate, as the arbitrator.

Timeline

Course of Proceedings

The appellants, aggrieved by the arbitral award dated August 8, 2006, filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 before the District Judge, Nagpur. The District Judge, on November 6, 2006, set aside the award, noting that the arbitrator had acted as counsel for a partner of the respondent, a fact not disclosed as required under Section 12 of the Act. The respondent then appealed to the High Court of Judicature at Bombay under Section 37(1)(b) of the Act. The High Court, on August 30 and 31, 2007, reversed the District Judge’s decision, holding that the objection was not raised by the appellants themselves and that the arbitrator’s prior engagement did not constitute bias. This led to the appellants filing the present appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of Section 12 of the Arbitration and Conciliation Act, 1996, which deals with the grounds for challenging the appointment of an arbitrator. The pre-amended sub-section (1) of Section 12 states:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstance likely to give rise to justifiable doubts as to his independence or impartiality.”

This provision mandates that an arbitrator must disclose any circumstances that could raise doubts about their impartiality or independence. The court also considered Section 13 of the Act, which outlines the procedure for challenging an arbitrator.

Arguments

Appellants’ Arguments:

• The appellants argued that the arbitration clause in the storage receipt was not valid due to a lack of consensus ad idem (meeting of minds). However, the Supreme Court rejected this argument because the appellants had previously filed a petition under Section 11 of the Act seeking the appointment of an independent arbitrator, thereby acknowledging the existence of an arbitration agreement.
• The appellants contended that Sri S.T. Madnani, the arbitrator, should not have acted as an arbitrator because he was also the counsel for the respondent in another case. They highlighted that the arbitrator had filed a vakalatnama on March 29, 2004, in a Mesne Profit Case No. 7/2004, representing Sri Prakash, a partner of the respondent.
• The appellants argued that this prior professional relationship created a conflict of interest and raised justifiable doubts about the arbitrator’s impartiality. They pointed out that they had raised objections through a legal notice and subsequent communications, which the arbitrator ignored.
• They relied on the decision in V.K. Dewan and Co. vs. Delhi Jal Board and Ors. (2010) 15 SCC 717, to support their argument that the arbitrator should not have acted in the matter due to the conflict of interest.

Respondent’s Arguments:

• The respondent argued that the objection to the arbitrator was not raised by the appellants themselves, but by their father, and therefore, it could not be considered a valid objection under Section 13 of the Act.
• The respondent contended that the arbitrator’s prior appearance as a lawyer in a mesne profits case for the respondent did not create a reasonable belief that the arbitrator was biased.
• The respondent argued that a fair-minded person would not perceive bias simply because the arbitrator had previously represented one of the parties in another case.

Issues Framed by the Supreme Court

The Supreme Court identified the following key issues for consideration:

1. Whether the arbitration clause was valid and binding on the parties.
2. Whether the conduct of the arbitrator, Sri S.T. Madnani, was proper, considering his prior professional relationship with one of the parties.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

Legal Provisions:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court relied on V.K. Dewan and Co. vs. Delhi Jal Board and Ors. (2010) 15 SCC 717* to emphasize that an arbitrator must be independent and impartial. The Court observed that the arbitrator’s prior engagement as counsel for one of the parties in another case raised justifiable doubts about his impartiality, and in the interest of fairness, the arbitrator should have recused himself from the proceedings.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the principles of fairness and impartiality in arbitration proceedings. The Court emphasized that justice must not only be done but must also be seen to be done. The key points that weighed in the mind of the Court were:

• Conflict of Interest: The arbitrator’s prior professional relationship with one of the parties created a conflict of interest, raising justifiable doubts about his impartiality.
• Duty of Disclosure: Despite the absence of a formal requirement for disclosure at the time of the arbitration agreement, the arbitrator should have disclosed his prior engagement as counsel for the respondent when the claim was lodged before him.
• Fairness and Propriety: The Court emphasized that in arbitration, parties choose their judge, and the arbitrator should not have any prior professional relationship with any of the parties.
• Apprehension of Bias: Even if the arbitrator was not actually biased, the circumstances were such that there was a reasonable apprehension of bias in the minds of the appellants, which was sufficient to set aside the award.

Fact:Law Ratio

The court’s reasoning was a blend of factual considerations (the arbitrator’s prior engagement) and legal principles (the need for impartiality and disclosure), with a slightly higher emphasis on legal considerations.

The Supreme Court held that the arbitrator’s prior engagement as counsel for one of the parties in another case raised justifiable doubts about his impartiality. The court emphasized that the arbitrator should have disclosed the conflict of interest and recused himself from the proceedings. The court observed that even if the arbitrator was not actually biased, the circumstances were such that there was a reasonable apprehension of bias in the minds of the appellants, which was sufficient to set aside the award.

The court quoted, “When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstance likely to give rise to justifiable doubts as to his independence or impartiality.”, emphasizing the importance of disclosure.

The court further stated, “That apart when one is required to judge the case of another, justice should not only be done, but it should also seem to be done is the bottom line.”, highlighting the principle that justice must be seen to be done.

The court also noted, “In that view, such an award passed by the learned Arbitrator was not sustainable and the learned District Judge was justified in entertaining the petition under Section 34 of the Act, 1996 to set aside the award.”, justifying the decision to set aside the arbitral award.

There were no dissenting opinions in this case.

Key Takeaways

• An arbitrator must disclose any prior professional relationships with the parties involved in the arbitration.
• Prior professional engagement of an arbitrator with one of the parties may raise justifiable doubts about impartiality, even if no actual bias is proven.
• Justice must not only be done but must also be seen to be done, especially in arbitration where parties choose their judge.
• Failure to disclose a conflict of interest or recuse oneself can lead to the setting aside of the arbitral award.

Directions

The Supreme Court set aside the judgment of the High Court and restored the order of the Principal District Judge, Nagpur, which had set aside the arbitral award. The parties were given the liberty to pursue arbitration again in accordance with law. All contentions on merits relating to the claim/counter-claim were left open.

Development of Law

Ratio Decidendi: The Supreme Court held that an arbitrator’s prior professional relationship with one of the parties constitutes a conflict of interest, raising justifiable doubts about the arbitrator’s impartiality, and therefore, the arbitral award was set aside. This judgment reinforces the principle that an arbitrator must be independent and impartial and must disclose any circumstances that may raise doubts about their impartiality. This decision clarifies that even the apprehension of bias is sufficient to set aside an arbitral award. There is no change in the previous position of law, but this judgment reinforces the existing principles of fairness and impartiality in arbitration.

Conclusion

The Supreme Court’s decision in Vinod Bhaiyalal Jain & Ors. vs. Wadhwani Parmeshwari Cold Storage Pvt. Ltd. underscores the importance of impartiality and transparency in arbitration proceedings. The Court’s ruling emphasizes that an arbitrator’s prior professional relationship with one of the parties can create a conflict of interest, even if no actual bias is proven. The judgment reinforces the principle that justice must not only be done but must also be seen to be done. This case serves as a reminder to arbitrators to disclose any potential conflicts of interest and to recuse themselves from proceedings where their impartiality may be questioned. The decision also highlights the importance of maintaining the integrity of the arbitration process, where parties choose their judge, and the need to ensure that this choice is not compromised by conflicts of interest.