By Arif Mohammed Madani

A commercial court in Delhi recently rejected an application to enforce an arbitral award. The reason given was the unilateral appointment of the sole arbitrator in the dispute. Arbitration is an out-of-court process where, after hearing the parties, the arbitrator renders the decision as an arbitral award. A unilateral appointment is the appointment of an arbitrator by an interested party to the dispute.

In its decision, the court considered various factors. These included provisions of the Arbitration law (Act), the reports of the Law Commission, and relevant judgments of various courts. The court even considered the UNCITRAL model law on commercial arbitration and other countries’ legal position on unilateral appointments. The court ultimately concluded that the unilateral appointment in the case was illegal and dismissed the execution petition.

This aligns with previous rulings by the Supreme Court of India, which has previously invalidated unilateral appointments of sole arbitrators. This was intended to safeguard a fundamental aspect of arbitration – the independence and impartiality of arbitrators.

It is imperative to understand why such issues repeatedly reach the court.

Many of these cases often involve low-value loan defaults by customers of lending institutions. After a default, the lender initiates an arbitration against the borrower based on the terms of the agreement. The terms of the agreement often state that the lender has the right to appoint the arbitrator. However, the current legal scenario imposes restrictions on this right. Any party to the agreement or any person interested in the dispute’s outcome is ineligible to act as an arbitrator. Further, such a party or person cannot even appoint an arbitrator.

Therefore, if the lender unilaterally appoints an arbitrator, such appointments, and consequently the arbitration proceedings, will be declared illegal. This will apply even if the borrower has attested to such a procedure in the agreement.

Alternatives to unilateral appointment of arbitrators

The question then arises — what can parties do in such cases? The available options are as under:

Option A: Appointment of arbitrator by consent. Here parties are required to agree and consent to a particular arbitrator to adjudicate the dispute. This option is not pragmatic in lending disputes as the borrower would, generally, not want to partake in adversarial proceedings.

Option B: Petition the concerned court for appointing the arbitrator. Here the lender could approach the jurisdictional court and request for the appointment of the arbitrator. Apart from lawyer’s fees, the parties would have to bear the arbitrator’s fee. This would amount to INR 30,000 at the very minimum, payable by each party.

In terms of time, it can take 2-3 years for an appointment, if the current trend of the courts continues. This duration could also increase due to the heavier burden on the courts. The Supreme Court has on two occasions expressed concern about the pendency of such petitions before the courts for a lengthy period of time. It observed that such inordinate delays frustrate the very purpose of the Act, and negate the purpose of choosing arbitration as the mode of dispute resolution.

Ensuring speedy and effective dispute resolution relies on the rapid appointment of arbitrators – often easier said than done.

Considering the low value of such disputes, this alternative, is, therefore, neither economical nor efficient.

Option C: Recourse to institutional arbitration. It would be expedient for lenders to incorporate an appropriate institutional arbitration clause in the loan agreements. However, the challenge arises in legacy agreements containing unilateral appointment clauses.

The importance of impartiality in arbitration

As we know, one of the fundamental aspects of arbitration is the fair adjudication of a dispute by independent and impartial arbitrators. Another fundamental aspect is the speedy and affordable resolution of the dispute.

Interestingly, the commercial court of Delhi also provides a solution:

“… the proposed amendment of the Act talks of constitut[ing] an ‘Arbitration Council of India’
which, in turn, will prepare a list of Arbitration Institutions on the basis of infrastructure, the calibre of arbitrators, performance, compliance of time limits etc. As per proposed amendment, under
Section 11(3A) of the Act, the designation of institutions by the Hon’ble Supreme Court and the High Courts is to be carried out only as per the proposal made by the ‘Arbitration Council of India’. This Court is apprised by Ld. Counsel for the plaintiff that the controlling Ministry of Arbitration and Conciliation Act, 1996 under Allocation of Business Rules, 1961 is the Ministry of Law and Justice, Govt. of India. It is submitted that the Law Ministry, Govt. of India has already prepared and notified a Pan India List of Arbitral Institutions offering quality Arbitration and Mediation services and the same is available in the public domain.

Accordingly, the parties could approach an independent and neutral institution that has no interest in the outcome of the dispute. This institution can even administer the dispute through independent and qualified arbitrators from its broad-based panel of professionals. This option allows for a more efficient and effective means of resolving the dispute, while also maintaining the impartiality and independence of the adjudication process.

Since the arbitrator is not appointed by or connected to any party, the provisions and judicial precedents surrounding unilateral appointment would not be attracted. This approach was found to be correct by a commercial court in Bengaluru.

Moving beyond unilateral appointment

The 246th Law Commission Report and the High-Level Committee Report dated 30th July 2019, under the Chairmanship of Justice B.N. Srikrishna, Former Judge of the Supreme Court of India, have endorsed the concept of institutional arbitration and minimal court intervention.

It is however necessary to oversee these institutes. Therefore, the 2019 amendment to the Act envisaged the establishment of the Arbitration Council of India (ACI) to promote and encourage arbitration, mediation, conciliation, or other alternative dispute resolution mechanisms, and for the purpose, to frame policy and guidelines for the establishment, operation, and maintenance of uniform professional standards in respect of all matters relating to arbitration. Unfortunately, the provisions concerning the ACI have so far not been notified.

Until the ACI is established, parties could evaluate independent institutions that follow best practices, uphold professional standards, and adhere to ethical guidelines to resolve their disputes.

The author is a Retired District Judge with 25 years of judicial experience and over 10 years of experience as an arbitrator. Views expressed are personal.

Adapted from Institutional Arbitration – Breaking The Deadlock In Small-Value Lending Disputes, published in LiveLaw on 2nd January 2023.

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