This article is written by Khushika Setia, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com. Here he discusses “Principle of Natural Justice in Arbitral Proceedings”.
Arbitration is a mechanism for the speedy resolution of disputes between the Parties. Arbitration intends to ensure a fair hearing and speedy trial of the dispute giving finality of the decision as compared to litigation. The arbitration proceedings have evolved the principle of natural justice as a quintessential in order to preserve its legitimacy and fair exercise. Though, parties unsatisfied with the award passed by the arbitrator, challenge an arbitral award under the guise of breach of natural justice. It is the duty of the arbitrator to ensure that all parameters of natural justice are followed in the adjudication process. The arbitral proceeding must be fair, reasonable imbibing the natural justice.
What is Natural Justice?
Natural justice is a universal justice, social justice. To elucidate Natural Justice in layman- “Natural Justice is nothing, but a fair play in action”. It means making fairness as the creed of life and being impartial. The decision of the court/arbitrator/tribunal should be independent, free from bias. It is an essence of fair adjudication, deeply rooted in tradition and conscience.
The Hon’ble Apex Court define Natural Justice as follows:
“Well then, what is “natural justice‟? The phrase is not capable of a static and precise definition. It cannot be imprisoned in a straightjacket of a cast-iron formula. Historically, “natural justice” has been used in a way “which implies the existence of moral principles of self-evident and unarguable truth”. In the course of times, judges nurtured in the tradition of British jurisdiction often invoked it in conjunction with a reference of “equity and good conscience”. Rules of natural justice are not embodied rules. Being a means to an end and not an end in themselves, it is not possible to make an exhaustive catalogue of such rules.”[i]
Essentials of Natural Justice
The principles of natural justice derive from English Common Law and are clearly captures into two Latin maxims:
- Audi Alteram Partem
- Nemo judex in causa sua
Audi Alteram Partem
The Audi Alteram Partem rule means no one should be condemned unheard. It means the person against whom any sought of legal action is to be taken or the person whose rights or interest is being affected, must be given a reasonable opportunity to take their stand.
The Arbitration and Conciliation Act, 1996 states-
“The parties shall be treated with equality and each party shall be given a full opportunity to present his case.”[ii]
The “full opportunity” means the right to express, the parties to the arbitration proceeding must be given proper notice and full opportunity of being heard. It is a sine qua non of fair hearing. Before the Court/Tribunal passes an order/award against any person reasonable opportunity of arguing must be given.
Now, the question arises whether the non-signatories alleged to be a party to an arbitration agreement do not have the opportunity to present their claim. Will this amount to breach of natural justice?
In Sukanya Holdings Pvt Ltd. vs. Jayesh H. Pandya[iii], it was held that a suit which contains matters beyond the scope of arbitration agreement and also the parties who are not the parties to the arbitration agreement, therefore such suits cannot be referred to arbitration.
However, in the Chloro Control P. Ltd. vs. Severn Trent Water Purification Inc. and Ors[iv], the Supreme Court held that in a commercial project several parties are involved, prima facie the existence of an arbitration agreement would be sufficient to refer the parties to the arbitration.
Nemo judex in causa sua
The Nemo judex in causa sua also known as Rule Against Bias, means no man shall be Judge in his own cause or the authorities must be impartial and free from bias. The arbitrator appointed must act impartial, independent and neutral. Even a small amount of interest leads to disqualifying an Arbitrator, creating a reasonable suspicion of bias.
“A distinction is made between the actual bias and apparent bias. Actual Bias is rarely established but clearly provides ground for removal. More often there is a suspicion of bias which has been variously described as apparent or unconscious or imputed bias. In such a majority of cases, it is often emphasized that the challenger does not go so far as to suggest the arbitrator is actually biased, rather that some form of objective apprehension of bias exists.
There is an automatic disqualification for an arbitrator who has a direct pecuniary interest in one of the parties or is otherwise so closely connected with the party that can truly be said to be judge in his own cause.”[v]
As per the new Amendments in the Act, under the Section 12(5) and seventh and fifth schedule of the Act states any relation with the parties or outcome of the disputes leads to the justifiable doubts to the impartiality and independence of an arbitrator. The party autonomy cannot override the independence and impartiality of an arbitrator.
In the Perkins Eastman Architects DPC and Ors. vs. HSCC[vi],the Apex Court held that the person interested in the outcome of the dispute must not have power to appoint an arbitrator. The respondent would appoint an arbitrator however, the Court clarifies the both parties have an exclusive right to appoint an arbitrator. The court relied on three-judge decision in TRF judgment[vii], in which the court held that the person who himself is disqualified to be appointed as an arbitrator, cannot appoint arbitrator. Applying the principle that what cannot be done directly may not be done indirectly.
Principle of Natural Justice as a ground to challenge arbitral award
The award passed by the arbitrator in violation of the principle of natural justice can be challenged under section 34 of The Arbitration and Conciliation Act, 1996 and can be set aside by the Court. Where the one party challenges the arbitral award on the ground of breach of natural justice, the party has to establish:
- which rule of natural justice was breached;
- how it was breached;
- in what way the breach was connected to the making of the award; and
- how the breach prejudiced its rights.[viii]
The court should consider the principles applicable to rules of natural justice. These principle are as follows:
- Parties have a right to be heard effectively on every issue that may be relevant to the resolution of the dispute. The arbitrator must treat the parties equally and allow them the opportunity to present their cases and to respond. The arbitrator should not base his decision on matters not submitted or argued before him.
- The court is not a place where the losing party has a second bite at the cherry. So no arid or technical challenges should be entertained by the court.
- Given the nature of arbitration, the courts should follow the international practice of minimal curial intervention. The two principal considerations that support this practice are: (i) a need to recognize the autonomy of the arbitral process by encouraging finality so that its advantage as an efficient alternative dispute resolution process is not undermined; and (ii) acknowledge that when the parties choose arbitration, they accepted the very limited right of recourse to the courts. A court should not intervene because it might have resolved the various controversies in play differently.
- That the arbitrator did not refer every point for decision to the parties for submissions is not invariably a ground for challenge. It is only where the impugned decision reveals a dramatic departure from the submissions or involves the arbitrator receiving extraneous evidence, or adopts a view wholly at odds with the established evidence or adopts a view wholly at odds with the established evidence adduced by the parties or arrives at a conclusion unequivocally rejected by the parties as being trivial or irrelevant, might it be appropriate for a court to intervene. The party challenging the award must show that a reasonable litigant in his shoes could not have foreseen the possibility of reasoning of the type revealed in the award.
- The parties will urge diametrically opposite solutions to resolve a dispute. The arbitrator is not required to adopt an either/or approach. He may embrace a middle path so long as it is based on the evidence before him and he is not required to consult the parties on his thinking processes before finalizing his award unless it involves a dramatic departure from what has been presented to him.
- Each case must be decided within its own factual matrix. An award should be read generously such that only meaningful breaches of the rules of natural justice that have actually caused prejudice are ultimately remedied.[ix]
Matters not amounting to violation of principles of natural justice
If the arbitrator has given various opportunities to both, the claimants and the respondent, to adduce their claims, counterclaims and evidence. Even on the various reminders from the arbitrator if the claimant/respondent failed to produce their claims or evidence. The award passed by the arbitrator cannot be said to have violated the principles of natural justice. The same cannot be challenged under section 34 of The Arbitration and Conciliation Act, 1996, merely on the ground of struck down that the claims or opportunity of being heard was not given.
If the parties agree to abide by whatever decision honestly given by the arbitrator, but they do not authorize him to form his own conclusions in any manner he likes, he has to follow the ordinary rules of natural justice. But the position will be different where the parties had given full powers to the arbitrator to decide the matter in any way they liked, including taking evidence of one party at the back of the other and to make private enquiries, such an agreement is effective and the award cannot be set aside on the ground of violation of the principles of natural justice.[x]
The principle of natural justice should be evolved in the arbitral proceedings. The parties should avoid bringing hollow, procedural or technical errors, once the award has been passed. The purpose of arbitration is to resolve the dispute efficiently and expeditiously. It is not easy for the courts to recourse the litigation proceedings. The recourse to the litigation should be provided to the party, culminating in actual prejudice.
[i] Swadeshi Cotton Mills versus Union of India, (1981)1 SCC 664: AIR 1981 SC 818
[ii] Section 18 of The Arbitration and Conciliation Act, 1996
[iv] Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. and Ors. (28.09.2012 – SC): MANU/SC/0803/2012
[v] Arbitration-Step by Step by PC Markanda- Second Edition
[vi] Perkins Eastman Architects DPC and Ors. vs. HSCC (India) Ltd. (26.11.2019 – SC): MANU/SC/1628/2019
[viii] VIOLATION OF PRINCIPLES OF NATURAL JUSTICE – WHEN MAY NOT RESULT IN SETTING ASIDE AWARD by PC MARKANDA
[ix] Soh Beng Tee & Co Pte Ltd v Fairmont Development Pte Ltd 2007 (3)SLR(R) 86
[x] Saxena & co. Vs. Damodar Parshad Gupta, AIR 1956 Punjab 243
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