By Arif Mohammed Madani

Arbitration has been a go-to solution for various organizations, companies, and even individuals. It can settle disputes through a (perceived-to-be) quicker and more efficient dispute resolution mechanism than the courts. This is particularly useful for small-value claims where the parties wish to avoid excessive legal costs to resolve their disputes.

However, we must ask whether arbitration has been able to live up to its expectation and fulfil its purpose. And if not, what is the solution?

The Supreme Court of India, in the case of¬†Shree Vishnu Constructions v. The Engineer In¬†Chief Military Engineering Service & Ors, recognized delays in the¬†disposition of applications. The dispositions occurred under Section 11 of the Arbitration Act. Upon receiving a¬†report on the matter, the Court determined that there were outstanding applications dating back¬†to 2006. The Court further stated that failure to decide applications within a reasonable period of time would defeat the Act’s objectives.¬†

When does the court appoint an arbitrator?

For the uninitiated, Section 11 relates to the appointment of an arbitrator by the court. Sometimes, the parties are unable to appoint an arbitrator through mutual consent or in accordance with established procedures. If so, they must seek the intervention of the courts, which they originally sought to avoid through arbitration. Unfortunately, the courts have consistently failed to meet the expectations of those seeking expedited resolution. They often take extended periods of time to appoint an arbitrator. 

This compromises the effectiveness of arbitration as a means of dispute resolution from the outset. If the parties have to reach the courts for even an arbitrator’s appointment, it defeats the purpose of the arbitration. To illustrate, consider the use of arbitration clauses in ‚Äúlegacy agreements‚ÄĚ between banks and their customers. These agreements typically include¬†provisions stating the use of arbitration to resolve disputes between the parties. The perceived advantages of speed and efficiency of arbitration likely drive this decision. However, as previously discussed, appointing an arbitrator by the courts¬†can be a lengthy and protracted process. That completely undermines the intended benefits of arbitration.¬†

Ways to appoint an arbitrator

In situations where a significant number of customers default on their loans, or if they fail to make timely payments on their instalments, banks may have to resort to arbitration to resolve the resulting disputes.

In such cases, the banks usually have only two options available to them:

  • Option 1: To appoint an arbitrator with the consent of the other party. This is¬†often unlikely to happen, given that the defaulting party may never agree to the arbitrator, and they would want¬†to delay the proceeding as much as they can.
  • Option 2: To petition the courts for the appointment of an arbitrator, which can also be a time-consuming process.

It is not difficult to envision a scenario in which courts receive a large number of default disputes for the appointment of an arbitrator, particularly in the wake of the COVID-19 pandemic. With around five crore pending cases already choking the judicial system, the influx of additional cases would only serve to further clog the courts.

Ironically, the use of arbitration was to be a distinct and efficient alternative to the court system. Now it is becoming reliant on the courts for its own functioning, and ultimately losing its effectiveness and efficiency as a result. 

The importance of institutional arbitration for small-value claims

One potential solution to this issue is the increased use of institutional arbitration, particularly through online dispute resolution (ODR) institutions. The banks and other parties involved in the disputes, particularly those related to defaults, can refer their cases entirely to these institutions, instead of relying on courts. These institutions often maintain a panel of highly qualified arbitrators who are able to promptly and fairly resolve such disputes. This approach saves the courts’ time and allows the arbitration process to achieve its intended purpose. 

It is noteworthy to mention that the Arbitration and Conciliation Amendment Act of 2019 included provisions for the creation of the Arbitration Council of India. Specifically, Section 3 of the Arbitration and Conciliation (Amendment) Act, 2019 amended Section 11 of the principal Act to grant the Supreme Court and the High Courts the authority to designate arbitral institutions, to be graded by the Arbitration Council of India. Additionally, Section 3(ii) and Section 3(iv) of the Amendment Act amended Sub-section 4 and Sub-section 6 of Section 11 respectively to give arbitral institutions the power to appoint arbitrators, rather than relying on the courts to do so. However, these provisions have yet to be officially notified, and it is necessary for this to occur in order for them to be fully implemented. 

It is legally permissible for the parties to a dispute to utilize an arbitration institution as an alternative to the courts. It is suggested that banks and other organizations begin to utilize this option in order to more efficiently and effectively resolve disputes. In order to avoid confusion and ensure the smooth operation of the arbitration process, it would be advisable for the parties to specify the names of the chosen arbitration institutions in their agreements. 

Arif Mohammed Madani is a retired district judge with 25 years of judicial experience and over 10 years of experience as an arbitrator.

Adapted from Safeguarding the effectiveness and purpose of arbitration in small-value claims, published in Bar & Bench on 28 January 2023.

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