Prevalence of Natural Justice in arbitral proceedings: Limitations on arbitrators’ discretionary powers

Arbitration is a form of Alternate Dispute Resolution (“ADR”) through which a dispute is resolved outside of the court by an independent and neutral Arbitral Tribunal, undertaking the role of a Judge, to adjudicate and resolve the dispute between the parties. In essence, an arbitral proceeding grants the parties to a dispute a fair amount of autonomy to resolve the dispute as per their own terms laid down in the arbitration agreement.

The basis of arbitral proceedings lies in the principles of natural justice, which grants such proceedings sanctity and legitimacy as a fair and just mechanism for dispute resolution. The principles of natural justice come into play at multiple stages of the arbitration proceeding, from the appointment of a neutral arbitrator, to equal treatment of parties during the conduct of proceedings, and to the challenge of an award being inconsistent with the principles of natural justice.

Principles of  natural justice in arbitral proceedings

The principles of natural justice that can be seen in two Latin maxims are:

1. Audi Alteram Partem: The Audi Alteram Partem rule means that no one should be condemned unheard. It means the person against whom any sort of legal action is to be taken, or the person whose rights or interests are being affected, must be given a reasonable opportunity to take their stand.

“Full opportunity” means the right to express. The parties to the arbitration proceeding must be given proper notice and a full opportunity to be heard. It is a sine qua non of fair hearing. Before the Court/Tribunal passes an order/award against any person, a reasonable opportunity to argue must be given.

2. Nemo judex in causa sua:The Rule Against Bias, also known as the Nemo judex in causa sua, states that no man shall be judge in his own cause, and that the authorities must be impartial and free of bias. The arbitrator appointed must act impartially, independently, and neutrally. Even a small amount of interest leads to disqualifying an arbitrator, creating a reasonable suspicion of bias.

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 he can truly be said to be a judge in his own cause.

Setting aside of an award for violation of principles of natural justice

Arbitration proceedings are in the nature of quasi-judicial proceedings, which means they have a judicial character similar to court proceedings. The quasi-judicial element of arbitration proceedings makes it imperative for them to be in adherence to the principles of Natural Justice and fairness.

Section 34 of the Act lays down the grounds on which an Arbitral Award can be set aside as a safeguard for the rights of the parties to an arbitration in the event of an Arbitral Award passed in contradiction to the principles of Natural Justice.

In the recent case of Sanjay Roy v. Sandeep Soni & Ors., (FAO(OS) (COMM) 92/2022), the Delhi High Court held that an arbitrary award in contravention of the judicial decisions and principles laid down by Indian courts violates the fundamental policy of Indian Law and results in a breach of principles of Natural Justice and basic notions of justice.

What if there is no violation?

In case, the arbitrator has given the claimants and respondent many opportunities to present their complaints, counterclaims, and evidence, and the claimant or respondent fails to do so despite the arbitrator’s repeated reminders. The arbitrator’s decision appears to be in accordance with natural justice principles. Because the claims were not presented or given an opportunity to be heard, they cannot be challenged under Section 34 of the Arbitration and Conciliation Act of 1996.

Assuming the parties agree to follow the arbitrator’s decision but deny him the ability to reach his findings in whatever way he sees fit, in that circumstance, he must follow the rules of natural justice. Such an agreement is valid, and the award cannot be set aside based on a breach of natural justice principles if the parties have provided the arbitrator with complete power to decide the issue in any preferred manner, including receiving evidence from one party behind the other’s back and undergoing private investigations.

Scope for Future

The concept of natural justice must be established in arbitral proceedings. The parties must not introduce any hollow, procedural, or technical errors after the award has been rendered. The purpose of arbitration is to resolve a dispute swiftly and efficiently. Cases are tough to resolve in the courts. Access to the litigation will be granted to the party, resulting in actual prejudice.

In arbitral procedures, the idea of natural justice should be articulated. Once the award has been made, the parties should avoid introducing hollow, procedural, or technological mistakes. The goal of arbitration is to resolve a disagreement in a timely and effective manner. The courts have a difficult time resolving lawsuit cases. The party should have access to the legal process, which should result in genuine prejudice.

Key takeaways:

In light of the above, we offer the following key takeaways for preserving the integrity of an award in an arbitration from the natural justice perspective:

• Parties should, as far as possible, attempt to resolve procedural issues amongst themselves without recourse to arbitrators’ discretion.
• Parties should be mindful that asking an arbitrator to make a decision that will severely prejudice another party (such as asking the arbitrator to exclude the entirety of the other party’s evidence) may end up being counter-productive in the long run, despite perceived short-term gains.
• Instead, parties should consider framing requests to the arbitrator in terms which achieve a balance between effective advocacy on the one hand and procedural fairness on the other (for example, making submissions on why the arbitrator should apply limited weight to the opposition’s evidence, rather than excluding it entirely).
• Parties should familiarise themselves with the arbitrator’s discretion and powers as set out in the applicable rules governing the arbitration and conduct proceedings accordingly.
• The parties should keep the fundamental principles of natural justice front of mind at all times when making decisions in respect of the arbitration.