Natural justice plays a vital role in arbitration proceedings by ensuring fairness, impartiality, and transparency, upholding the right to a fair hearing, and preventing bias. Adherence to these principles strengthens the legitimacy and efficacy of arbitration.
Introduction
Arbitration is a popular means of settling disputes outside of the judicial system that provides flexibility, efficiency, and confidentiality. Despite its unique characteristics, arbitration is not free of legal norms that promote fairness and justice throughout the procedure. Natural justice is a fundamental premise that governs all legal proceedings, including arbitration. Natural justice refers to a party's inherent right to a hearing, a fair process, and a conclusion that is free of bias.
The Arbitration and Conciliation Act of 1996 in India lacks a specific section that deals with the Natural Justice principle. However, some provisions of the Act incorporate natural justice principles, with a special emphasis on the right to a fair hearing, the arbitrator's impartiality, and the opportunity of presenting one's position. These rules are intended to ensure that arbitration proceedings meet minimal criteria of fairness and justice, according with natural justice principles.
Concept of Natural Justice
'Natural Justice' is a broad concept that serves as the foundation of any legal system that uses the Rule of Law to adjudicate cases. Justice should be fair, equal, and unbiased, protecting individual rights against arbitrariness and capriciousness. The fundamental principle of Natural Justice states that "justice must not only be done, but seen to be done."
The two core elements of natural justice are:
1. The Rule Against Bias (Audi Alteram Partem)
It states that no one should be a judge in their own cause. In other words, arbitrators must be neutral and free of bias.
The Supreme Court distinguished between actual and apparent bias in the case of Bihar State Mineral Development, Corp. v. Encon Builders (I) Pvt. Ltd.[1]. Actual bias is evident from the facts and information at hand and can be used as justification for dismissing the arbitrator, whereas apparent bias is a suspicion of the arbitrator's impartiality that gives rise to an anxiety of bias. Therefore, the Supreme Court noted that Section 13(2) of the Act is speculative and needs clarification from the Legislature because it violates the natural justice standards.
In India Coal Ltd. v. State of Bihar[2], the issue is raised about the impartiality of an arbitrator who previously worked with the state government in a separate role before being nominated to the arbitration. The Supreme Court ruled that the principle of natural justice compels an arbitrator to fully disclose any potential conflicts of interest. If an arbitrator fails to reveal any such bias, their nomination can be challenged, and the arbitral ruling may be overturned. The Court concluded that the failure to reveal such potential bias in this case violated natural justice.
2. The Right to a Fair Hearing (Nemo Judex in Causa Sua)
All parties must have the opportunity to state their case completely and fairly. This includes receiving notice of the proceedings, being heard, and presenting evidence and arguments. The aforementioned Rule includes the following elements:
A. Notice
Before taking any action, the affected party must be provided appropriate written notice of the proposed action. It is required for a fair hearing, and orders issued without proper issuance and serving of notice are a violation of natural justice and hence invalid ab initio.
B. Hearing
The second aspect is the rule of hearing, which requires the affected party to be given the opportunity to state their case in the manner stipulated. This can be accomplished by giving the parties the option for a written or oral hearing.
In National Thermal Power Corporation Ltd. v. Siemens Atkeing[3], the Supreme Court of India emphasized the importance of the right to a fair hearing in arbitration procedures. The court determined that arbitrators must provide all parties an equal opportunity to present their cases, including the option to respond to the evidence offered by the opposing side. The Court highlighted that denying one party this opportunity would be a violation of the norms of natural justice.
Role of Natural Justice in Arbitration
Arbitration, as a private dispute settlement process, is less formal than court proceedings. Nonetheless, natural justice standards apply to ensure that the arbitration procedure is reasonable and equitable. While arbitrators have extensive authority, they must adhere to minimal procedural fairness criteria in order to maintain the process's integrity.
The right to be heard is a fundamental component of natural justice. This right assures that parties have an equal opportunity to present their position, including the ability to be aware of the problems, make arguments, and question the opposing party's case. In arbitration, this right presents itself in numerous ways:
1. Notice of the proceeding
The parties must be provided proper notice of the time and location of the arbitration hearing. Failure to offer such a warning may be a violation of natural justice.
In Keshav Mills Co. Ltd. v. UOI[4], the Supreme Court ruled that a notice must be clear and understood to be considered proper notice under the Audi Alteram Partem rule.
2. Opportunity to present evidence
Each party must be able to offer evidence supporting their argument and cross-examine witnesses.
The Supreme Court ruled in the case of Sohan Lal Gupta (Dead), the L.Rs. and Ors. v. Asha Devi Gupta and Ors.[5], that a party must be given a reasonable chance to present its case in an arbitration proceeding, which would entail a chance to answer questions from the Arbitral Tribunal and present evidence in support of its position. In accordance with Section 18 of the Act[6], it guarantees equal treatment for all parties, each party must be given a fair and reasonable chance to submit their case during an arbitration procedure.
In the case of ONGC Ltd. v. Saw Pipes Ltd.[7], ONGC contested an arbitral ruling on the grounds that it was denied a fair opportunity to submit evidence, notably on the magnitude of damages. The Court concluded that the arbitrator's failure to enable ONGC to introduce pertinent evidence violated the principle of natural justice. It determined that a party should be given a reasonable opportunity to submit all material facts and evidence relevant to their argument. Arbitrators must ensure that both parties have a thorough opportunity to present their case, including submitting evidence and calling witnesses. Arbitrators must make decisions based solely on material that has been properly submitted and disclosed to both parties.
3. Adequate time for preparing
Parties should have enough time to prepare their arguments and submit any papers or evidence they intend to present.
4. Reasoned Awards and Transparency
A reasoned award is critical for ensuring that the parties understand the basis for an arbitral ruling. Natural justice requires that an arbitrator provide clear explanation for their decision, so that the parties can understand why the award was issued and whether any procedural errors occurred.
In the matter of DDA v. M/s. Sunder Lal[8], the Delhi Development Authority (DDA) appealed an arbitral judgment that was issued without any apparent justification for the decision. The Court decided that the arbitrator's refusal to provide a reasoned ruling was a violation of natural justice since it denied the parties the opportunity to understand the decision and seek legal recourse if required. Arbitrators must deliver a reasoned award to ensure that the arbitration process is transparent and fair. Failure to offer such rationale can result in an arbitral award being thrown aside due to procedural unfairness.
5. Impartiality of the arbitrator
The idea of impartiality compels arbitrators to have no bias or personal interest in the outcome of the arbitration. Arbitrators must operate impartially and fairly towards both parties, basing their decisions exclusively on the evidence given during the hearing. In practice, impartiality is frequently assessed based on the arbitrator's disclosure duties. An arbitrator must disclose any potential conflicts of interest or affiliations with the parties involved that may raise concerns about their impartiality.
Challenges to Natural Justice in Arbitration
Despite its importance, natural justice can be difficult to apply in arbitration. Several circumstances can undermine the impartiality of arbitration processes, including:
- Imbalance in power dynamics: In some circumstances, especially in commercial arbitration between unequal parties, the smaller party may feel pressed or disadvantaged.
- Lack of access to legal representation: Some parties may be unable to obtain adequate legal representation, perhaps leading to an unfair hearing.
- Varying standards across jurisdictions: Different legal systems may have different views of what constitutes a fair hearing or bias, resulting in inconsistent implementation of natural justice principles.
Setting aside an Award for violation of the Principles of Natural Justice
Arbitration proceedings are quasi-judicial in nature, which means they share a judicial character with court proceedings. Arbitration proceedings must comply with the principles of natural justice and fairness due to their quasi-judicial nature. Section 34 of the Act[9] specifies the grounds on which an Arbitral Award may be set aside, as a safeguard for the rights of the parties to an arbitration in the event that an Arbitral Award is issued in violation of Natural Justice principles.
Section 34(2)(a)(iii)[10] of the Act specifies the following conditions for putting aside an award that violates the rule of Audi Alteram Partem:
- If the party claiming Arbitration does not give the other party with notice of the appointment of an Arbitrator or of the Arbitral proceedings; or
- If the other party is otherwise unable to submit his argument, i.e., the other party does not receive a fair hearing.
The Delhi High Court ruled in the case of Sanjay Roy v. Sandeep Soni & Ors.[11] that an arbitral award that deviates from the rulings and guidelines established by Indian courts is against the fundamental policy of Indian law and violates natural justice principles and fundamental ideas of justice. To set aside an arbitral award, however, the court must be convinced that the arbitral tribunal violated a natural justice rule in rendering the award and that this violation has actually or truly harmed the party contesting the award. The violation must be severe enough to significantly change the arbitral proceedings' outcome in the absence of any intervention.
Conclusion
Natural justice in arbitration is critical to ensure that conflicts are decided fairly, impartially, and transparently. It protects against potential abuses of power by ensuring that each party has an equal opportunity to state their case and that the decision-making process is unbiased. Arbitration, by definition, provides flexibility and efficiency but it must not sacrifice fairness for speed. Adherence to natural justice principles safeguards the rights of the parties concerned while also reinforcing the arbitral process's validity. In today's globalized world, where arbitration has grown in importance as a means of settling cross-border conflicts, maintaining the integrity of natural justice is critical to the arbitration system's legitimacy and efficacy.
[1] AIR 2003 SC 3688.
[2] (2006) 5 SCC 478.
[3] (2007) 4 SCC 451.
[4] 1973 AIR 389.
[5] (2003) 7 SCC 492.
[6] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.18.
[7] (2003) 5 SCC 705
[8] (2008) 3 Arb. LR 469
[9] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.34.
[10] Setting aside the arbitral award.
[11] 2022 SCC OnLine Del 1525.
