Arbitrator Beware: Comparatively Analysing the Balancing Act of Arbitrator Immunity

*Prateek

1. Introduction:


With the rapid growth of cross-jurisdictional trade catalysed by globalisation, arbitration has been gaining traction as the preferred platform for resolving international commercial disputes and has been touted as an effective mode of cross-jurisdiction dispute resolution, especially since the propensity of state intervention is minimal. Yet, certain areas of ambiguity in the jurisprudential and policy approach towards arbitration on a global scale provides space for varying national policies. Arbitrator’s immunity is one such subject, where the UNCITRAL Model Law itself is silent. Therefore, it is necessary to understand every position on the spectrum of immunity when attempting to find an optimum balance.


2. Relevant Schools of Thought on Nature of Arbitration:


While determining the extent of liability imposed upon an arbitrator, the discourse invariably steers towards the nature of these proceedings. Therefore, to effectively deconstruct all notions and manifestations of immunity, one must undertake the task of analysing the nature of arbitration, as perceived and implemented by various jurisdictions.


a. Contractual Theory:


As per the Contractual Theory, arbitration is the outcome of a contractual relationship between adversarial parties for the resolution of disputes. Different structures of this contractual relationship have been proposed by the proponents of this theory. The lowest common denominator amongst all these perspectives are the underlying propositions that arbitration is undertaken as a private venture for dispute resolution. Therefore, the principle of pacta sunct servanda (‘agreements should be observed’) is propagated under the theory, stipulating that all parties must follow through their end of the arbitration agreement to allow its enforcement, without much interference by state.


Merlin, a major proponent of this theory, proposed that the contractual relationship under an arbitration agreement is one where parties appoint arbitrators as their agent to resolve disputes on their behalf.[i]Thus, all decisions made by the agent, who is the arbitrator in this case, are binding on the principal, i.e., the parties to an arbitration proceeding. But, various Contractualists disagree with this structural interpretation.[ii]While agreeing with the underlying contractual nature of the relationship, the opponents disagree as they believe that an arbitration agreement does not fit any pre-existing structures of a contractual relationship. Additionally, while arbitrators are required to be impartial, agents are partial towards their principal’s interest. This glaring dissimilarity further discredits Merlin’s approach.


Another proposition under the contractual theory proposes the structure of equal parties, whereby all parties to the arbitration agreement, including the arbitrator, have an equal contractual position. This contractual relationship includes two contracts. The first one is the arbitration agreement between two parties. The second agreement is the agreement for appointment of arbitrators between the parties and the arbitrator. This structure gained vague judicial recognition in the English case of K/S Norjarl A/S v. Hyundai Heavy Industries Co. Ltd.,[iii] where the court determined that arbitration is based upon a tripartite agreement. The court further established that an arbitrator consequently has the duty to act with due and reasonable care while making the award.


b. Jurisdictional Theory:


The Jurisdictional Theory proposes that arbitration is a private extension of state’s judicial power through a quasi-judicial forum. According to this theory, lex arbitri provides for the boundaries which bind the functional capabilities of an arbitral tribunal. The theory further postulates that state exercises substantial supervision over all arbitral proceedings. From the initial stage of establishing an arbitration agreement, to the final stage of enforcement/challenge of an arbitral award, the state maintains complete control over all these steps. Such control is premediated in the form of the lex fori which governs all such steps. This also leads to the invariable conclusion that while arbitral awards are made by a private forum, by virtue of legislative legitimacy and state supervision, the award is backed by state machinery.


c. Hybrid Theory:


The Hybrid Theory proposes a combination of the Contractual and Jurisdictional view.[iv] This theory proposes that state makes a concession, whereby parties are allowed to undertake binding adjudication for dispute resolution through private forums, while submitting to the judiciary’s supervisory jurisdiction.[v] This approach allows for concessions in nomination of arbitrators and selection of lex fori, among other issues, to be made by the parties, in exchange of the state retaining supervision, and the ability to determine the curial law. Therefore, on utilitarian grounds, it is imperative for state to allow independent adjudication by a quasi-judicial body that state has made a concession to, under mutual consent of parties to a dispute. While state reservations over arbitrability and public policy are maintained, parties are granted generally high levels of liberty with other aspects of the arbitration process.


3. Diametric Approach to Arbitrator’s Immunity:


The approach on this issue is largely diametric, with one school of thought granting the arbitrator a complete immunity against any personal claims, whereas the other promotes some level of personal liability.


a. Championing the Cause of Arbitrator’s Immunity:


While the UNCITRAL Model Law on Arbitration is silent on this issue, Article 16 of the UNCITRAL Arbitration Rules, 2010 provide that an arbitrator must be granted immunity against all claims by parties for any acts or omissions except wilful wrongdoings. The basis of this approach can be found in the quasi-judicial nature of an arbitrator’s role. While the arbitrator is essentially a private party, the adjudication process gains state recognition by virtue of the submission to legislative policy through the curial law and judicial supervision. Therefore, through virtual designation of powers, the arbitrator is granted quasi-judicial legitimacy and recognition by state through the above-mentioned mechanisms. This delegation of power leads to the creation of a special status for the arbitrator to act within the jurisdiction drawn by state’s curial law. While the level of immunity exists on a spectrum, it can largely be addressed under the following two categories:


i. Absolute Immunity:


Absolute immunity provides for unlimited personal immunity for arbitrators against any civil claims by parties to a dispute. The Unites States of America (“USA”) provides the perfect case study for absolute immunity being granted to arbitrators. The two-pronged justification for absolute immunity is on the grounds of public policy combined with the Jurisdictional Theory of arbitration.


The Federal Arbitration Act, 1925 is silent on the issue of immunity. The concept has instead been developed through judicial precedent. The nation has taken a quasi-judicial approach towards arbitration, with the court in Hoosac Tunnel Dock & Elevator Co. v O’Brien[vi] holding that an arbitrator must be protected just like a judge or juror, from any undue influences, to allow better determination of disputes. This blanket protection of the arbitrator is consistent with the Jurisdictional School on nature of arbitration since the quasi-judicial aspect has been highlighted. The angle of public policy is apparent as well, since the primary driving force behind this approach is to provide better optics with respect to trust-worthiness of the arbitration process. Through S.14 of the Revised Uniform Arbitration Act, 2004, the legislature has granted recognition to this principle by equating an arbitrator’s standards of immunity to those granted to judicial officers of the state.


This approach has been frequently reiterated, and recently in the case of Sacks v Dietrich[vii] it was held that an arbitrator is immune to all civil liability arising out of their discharge of duty. This immunity has been further extended to arbitration institutes through the judgment in Cort v American Arbitration Institute,[viii] and therefore all such institutes are immune from claims of breach and negligence. This deliberate corresponding placement of arbitration with judicial adjudication grants overriding optical legitimacy to the process of arbitration, equating its legal position to that of courts to some extent. Overwhelming promotion of arbitration has been a prominent policy in the USA, and this position on arbitrator’s immunity can be partially attributed to the same.[ix]


ii. Qualified Immunity:


Arguably the most prominent approach across jurisdictions, this concept is manifested under the English position of ‘absolute immunity with the exception of bad faith. Bad faith is a justified exception under this approach since the state concession to private adjudication is limited to the confines of jurisdiction drawn by the lex arbitri, and any wilful act in excess would consequently cause cessation of such immunities.


This approach falls under the Hybrid School on nature of arbitration. While the arbitrators are protected to a large extent as quasi-judicial bodies, such protection is only granted for acts committed under good faith since there is an additional contractual duty over arbitrators to resolve the disputes with utmost care and professionalism. The protection is also limited to within the confines of their duty as an arbitrator. Tying of immunity exclusively to the decision-making function allows parties to hold arbitrators accountable when the latter acts in excess of their jurisdiction. The hybrid approach is therefore evident optically, with the quasi-judicial nature of arbitration being confined by extents defined through the underlying contractual relationship.


This is one of the most widely followed approaches to arbitrator immunity across the world. Under English Law, arbitrators are immune to claims arising out of the discharge of their duties and functions, but they are liable for any act or omission which is evidenced to have been tainted by bad faith. Similarly, under German Law, an arbitrator is liable for claims arising out of wilful misconduct and negligent acts.[x]Under purely theoretical grounds, the German example may be deemed an outlier since the form of immunity extended to arbitrators is directly proportional to that granted to judges in the country, whereby erroneous application of law amounting to a deliberate criminal offence would not be protected by immunity. This would principally fall under the jurisdictional theory since the arbitrator’s position has been squarely equated to that of a judge, without the caveat being derived out of any underlying contractual element.


b. Against the Arbitrator’s Immunity:


Conversely, on this spectrum’s other end is the approach where no form of immunity against claims of personal civil liability is granted to arbitrators. Evidently following the Contractual perspective, under this approach arbitrators can be held accountable by parties for any breach of duty, even if the same was committed while exercising their decision-making power, as long as some element of negligence or mala fides is evident. Since arbitrators are deemed professionals acting under a private contract, the state must allow parties to hold them accountable for civil damages similar to any other professional providing a service. This approach creates significant scope for the establishment of higher professional standards for arbitrators since the added accountability provides a layer of deterrence against negligence or wilful misconduct, as well as any other form of unprofessional conduct. But on the flipside, this also deters professionals from donning the arbitrator’s role due to a fear of being unnecessarily dragged to court by losing parties pursuing litigation out of spite.


While there are no perfect examples of this approach, its manifestations can be observed in a few different forms to various extents. Nations following Islamic Law seem to enforce contractual liabilities on arbitrators to some extent. This includes the possibility of parties pursuing civil action against arbitrators for negligence and breach of duty causing damages, including unjustified withdrawal, or general failures as a professional who is otherwise required to act with due and reasonable care. France provides another interesting manifestation whereby an arbitrator is fully and personally liable to the extent of the contract, but these claims are only enforceable if no alternative remedy can be pursued. Further, Finland takes an expressly Contractualist approach, whereby any form of negligence or mistake in discharge of duty, or other form of obstruction to the proceedings, would create personal civil liability.


China undertakes a unique position on the issue, whereby arbitrators are criminally liable under certain circumstances. While criminal liability for fraud and corruption can be observed in various jurisdictions, Chinese law takes criminal liability a step forward and provides that arbitrators are criminally liable for making awards that are deemed to be in excess of the law. Under the Chinese rule against perversion of law, encapsulated under S.311(I) of the Criminal Law of People’s Republic of China, arbitrators are criminally liable for any award that is deemed to be in perversion of state laws. While this possesses characteristics of absolute liability, this example is an outlier as it seemingly follows the Jurisdictional Approach. This is because criminal liability under perversion of law, through S.399 of the Criminal Law of People’s Republic of China, is also imposed upon judges under Chinese Law. Hence while this shows a lack of immunity, it is similar to the levels of impunity granted to judicial bodies in China. Laws providing for an arbitrator’s personal liability arising out of the award provide breeding grounds for parties wishing to delay the award’s enforcement. A recent shift in India’s position, as discussed below, poses a manifestation of this threat, and therefore the consequences of the Chinese position become particularly relevant.


4. Conclusion – Striking the Perfect Balance:


Evidently, the coin of arbitrator immunity has two clear sides. The position of absolute immunity, like the American position discussed above, ensures that professionals have more incentive to work as arbitrators, and the arbitrators are optically independent in the discharge of their duties by virtue of not having the axe of vindictive litigation hanging above their necks. But on the flipside, this also creates a lack of trust for parties considering the avenue of arbitration, since there is little to no recourse against unprofessional and negligent discharge of duties by the arbitrator. On the other extreme end, the complete lack of immunity would deter professionals from taking up the role of an arbitrator. This would further create space for litigation claiming personal liability against the arbitrator arising out of the award, solely pursued with the intent of delaying the award’s enforcement. With these elements in mind, before analysing the need for change in the Indian position, the status quo must be understood.


While the Arbitration and Conciliation Act, 1996 was originally silent on the issue of arbitrator immunity, this changed with the introduction of S.42B through the 2019 Amendment. The provision provides arbitrators with an immunity against personal claims for all acts done in good faith within the confines of the State’s rules and regulations on arbitration.


But the amendment has been criticized for being ambiguous, as the golden standard of “good faith” is seemingly vague and lacks clear definition as a metric under the provision. Further, with the 2021 Amendment to the Act, S.36 now provides for an automatic injunction on execution of an award if the award is prima facie shown to have been affected or induced by fraud and corruption. While S.42B is intended to take away any incentive for parties to make allegations of personal claims against the arbitrator, the singular route to achieving an automatic injunction on execution of an award under S.36 now being the claim of fraud and corruption incentivises parties to undertake such litigation.


Therefore, for a nation like India, which has a budding sphere of arbitration, the best position would be somewhere in the middle of this spectrum. Qualified immunity would allow for arbitrators to be held liable in cases of express negligence and misconduct, creating better trust for parties in the system. But a general cover of immunity for acts undertaken within the confines of the arbitrator’s jurisdiction creates a conducive environment for professionals to take up an arbitrator’s role without fearing retaliatory and vindictive litigation by parties that they might rule against.


As stated above, promoting professional standards for arbitrators is crucial for maintaining a pool of high-quality professional arbitrations, as this would consequently increase public trust in the process. Legislative intent towards this is already evident in India. Through the 2021 Amendment, the Legislature aims to reshape S.43J and allow the prescription of qualification standards for arbitrators by the government in India. This negates the central problem of complacency and low standards of decision-making that may follow immunity in some cases.


But qualification standards still require practical enforcement. While these would provide a high bar for entrance, the quality needs to maintained in practice so that public trust in arbitration is increased. Therefore, the standard of qualified immunity must be enforced at the highest levels. For this, a better definition of ‘good faith’ under S.42B of the Arbitration and Conciliation Act, 1996 is essential. This definition must be exhaustive so that the scope of recourse is limited. Limiting the scope of this term to “wilful or gross negligence” would allow for parties to seek recourse in cases of unprofessional conduct, while also limiting the scope of civil liability to a reasonable extent, allowing free and independent decision making by arbitrators. This is also the scope of liability endorsed by the Japan Commercial Arbitrator Association through Rule 13 of their Commercial Arbitration Rules. This is consistent with the Hybrid approach towards the nature of arbitration that Indian jurisprudence seems to follow.

 

*The Author, Prateek, is a Fifth Year Student of Law (BA. LLB) at the Army Institute of Law, Mohali. [i] Merlin, 9 'Recueil Alphabitique de Questions de Droit' (4th edn 1829), at 144; translation see A Samuel, Jurisdictional Problems in International Commercial Arbitration: A Study of Belgian, Dutch, English, French, Swedish, Swiss, US and West German Law (Ziirich and Schulthess: Polygraphischer Verlag Zurich, 1989), at 34. [ii]Adam Samuel: Jurisdictional Problems in International Commercial Arbitration: A Study of Belgian, Dutch, English, French, Swedish, Swiss, US and West German Law 63 (1989). [iii]K/S Norjarl A/S v. Hyundai Heavy Industries Co. Ltd., [1991] 3 All ER 211 (CA) (U.K.) [iv]Savadkouhi, S. H. and Savadkouhid, S. H. and Bashiri, A. (2014) The four legal theories of international commercial arbitration. Asian Journal of Research in Social Sciences and Humanities, 4 (5). ISSN 2249-7315 [v] Alan Redfern et al., Law and Practice of International Commercial Arbitration, 8 (2d Ed., 1991) [vi]Hoosac Tunnel Dock & Elevator Co. v O’Brien, 137 Mass 424, 426 (1884) [vii]Sacks v Dietrich, 633 F.3d 1065, 1069-70 (9th Circuit, 2011) [viii]Cort v American Arbitration Institute, 795 F.Supp. 970 (N.D. Cal. 1992) [ix]Martin Hunter, Arbitration International, vol. 9, no.3, 1993 [x]Section 839(2) of the BGB; P Reinert in Bamberger/Roth, BeckOK BGB (43rd Edition, 2017) s 839, recital 101.

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