Delhi High Court on ‘close family relationship’ between arbitrators and parties

Introduction

One of the cardinal rules of natural justice is that no one should act as a judge in a case where they have a personal interest. This is because a judge may harbor some bias (or perceived to have some bias) which may ultimately affect an otherwise equitable outcome in cases where the judge has a personal interest. While the law is clear that one cannot be a judge in their own cause, the nature of relationship with the litigant which would disqualify a judge is a subject of constant discussion. In the recent decision of Himanshu Shekhar v. Prabhat Shekhar (Himanshu Shekhar Case), the Delhi High Court has delved into the nature of relationships between a litigant and an arbitrator which would attract disqualification under the arbitration law.

Facts

In the Himanshu Shekhar Case, a dispute arose between two out of the three brothers involved in a family business of manufacturing and dealing in jewellery and ornaments. The parties to the dispute i.e., two siblings, Himanshu and Prabhat (A and B respectively) referred the dispute to arbitration by way of an agreement dated 04 October 2021 (Agreement) and decided to jointly appoint a sole arbitrator (Arbitrator). It is noteworthy that the Agreement clearly stated that the Arbitrator was related to both parties to the arbitration in so much that the Arbitrator was the father-in-law of the daughter of Mr. Vivek Shekhar (C). C was a sibling of A and B and was not a party to the arbitration.

However, soon after the appointment of the Arbitrator, A filed an application before the Arbitrator praying that he recuses himself from the proceedings since he is related to B and therefore, there is a likelihood that he would give a biased decision in favor of B. However, the Arbitrator rejected this application. Aggrieved, A approached the Delhi High Court seeking removal of the Arbitrator on grounds that he is related to B and praying that an independent arbitrator be appointed in his place.

Concept of close family relationship under the Arbitration Act

Under the Arbitration & Conciliation Act, 1996 (Arbitration Act), any person who is approached for his possible appointment as an arbitrator is required to disclose to the parties whether he has a direct or indirect relationship with the parties, their counsels or any interest in the subject matter, and outcome of arbitration. This is so that the parties to the arbitration are aware of the possible circumstances that may cast doubts on the proposed arbitrator’s impartiality or independence and prevent the appointment of an unacceptable candidate. The importance of judicial impartiality on the part of the arbitrator cannot be overstated. It is for this reason that the Seventh Schedule of the Arbitration Act provides a list of relationships that would disqualify a person from acting as an arbitrator. Entry 9 of the Seventh Schedule explicitly states that “the arbitrator has a close family relationship with one of the parties…”. Therefore, as per Entry 9, a person would be automatically disqualified from acting as an arbitrator in the matter where one of the parties is a close family relative. However, the parties may enter into an agreement waiving this ineligibility in Entry 9 and in such cases, the person will be eligible to act as an arbitrator.

While Entry 9 stipulates that a close family relationship with one of the parties will automatically disqualify a person from acting as an arbitrator, the term ‘close family relationship’ is neither defined in the Arbitration Act nor in the International Bar Association Guidelines on Conflict of Interest in International Arbitration (IBA Guidelines) from which the Seventh Schedule is inspired. Accordingly, for determining the scope of ‘close family relationship’, the Delhi High Court referred to the definition of ‘close family member’ under Entry 1 of Seventh Schedule which refers to a spouse, sibling, child, parent or life partner.

The Delhi High Court also placed reliance on certain international authorities including Vermont Securities Regulations (2016), Employment Standards Act, SNB 1982 (New Brunswick, Canada) to note that even in cases, where there is a likelihood of bias because a family member of an arbitrator has a significant financial interest, the ‘family member’ was either a spouse or sibling or child or parent or life partner.

Accordingly, the Delhi High Court held that ‘close family relationship’ with respect to an arbitrator cannot mean a mere relationship with one of the parties. The Court held that the disqualification will be applicable in cases where the relationship is in the nature of a spouse, sibling, child, parent or a life partner i.e., relationship specifically limited by blood, adoption or marriage. The Court ruled that the relationship between the Arbitrator and the parties cannot be described as a close family relationship solely on the basis that the Arbitrator’s son is married to A and B’s niece, and this relationship at best would be a ‘distant’ one. Therefore, the court refused to allow the application for removal of the Arbitrator.

Our thoughts

It should be noted that courts in India have laid down a “reasonable third-party test of arbitrator’s bias” for determining an arbitrator’s qualification under the Seventh Schedule. The test for determining whether a reasonable apprehension of bias exists regarding an arbitrator is whether an informed person, viewing the matter realistically and practically, and having thought the matter thoroughly, would conclude that the arbitrator may have a prejudice or bias. This apprehension of bias must be based on substantial grounds. So, even if the arbitrator does not have ‘close family relationship’ with any of the parties, he can still be removed as an arbitrator for reasonable apprehension of bias, if a fair-minded and informed observer is likely to conclude that the arbitrator is biased. Therefore, a reasoned suspicion of bias is a sufficient disqualifier for appointment of an arbitrator, in addition to the disqualifiers listed in Seventh Schedule of the Arbitration Act.

The Himanshu Shekhar Case will be looked upon in the future for adjudication of disputes on the issue of appointment of arbitrators. The major takeaway from this judgment is that a mere relationship between the proposed arbitrator and a party should not lead to an automatic assumption of bias against that arbitrator. However, it should be noted that in the present case, the Court was dealing with a position where the Arbitrator was equally related to both the parties, and therefore bias could not have been attributed solely on the basis of the relationship with one of the parties.

It would be ideal for courts to scrutinize any allegation of a relationship of the proposed arbitrator with the parties so that it does not affect the independence and impartiality of the arbitrator. This is especially given the fact that an arbitral award can be challenged on limited grounds provided under the Act and thus, if any prejudice is caused to any one of the parties due to an arbitrator’s bias, it will be difficult to remedy such prejudice once the final award is passed.

 Authors: Renjith Nair, Altamash Qureshi and Richa Phulwani

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