Institutional Arbitration – Breaking The Deadlock In Small-Value Lending Disputes

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

This decision aligns with previous rulings by the Supreme Court of India, which has invalidated unilateral appointments of sole arbitrators in order to safeguard one of the fundamental aspects of arbitration - 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 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. Owing to the current legal scenario, any party to the agreement or any person interested in the outcome of the dispute shall be ineligible to act as an arbitrator. Further, such party or person cannot even appoint an arbitrator.

Therefore, if the lender was to unilaterally appoint an arbitrator, even if such procedure has been attested to by the borrower in the agreement, such appointments, and consequently the arbitration proceedings, will be declared illegal.

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 appointment of the arbitrator. Apart from lawyer’s fees, the parties would have to bear the arbitrator’s fee which would amount to Rs. 30,000 at the very minimum, payable by each party.

In terms of time, it can take 2-3 years for the appointment and, if the trend of appointment by courts increases, this duration would also increase due to heavier burden on the courts. The Supreme Court has on two occasions expressed concern on the pendency of such petitions before 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.

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.

As we know, one of the fundamental aspects of arbitration is fair adjudication of a dispute by independent and impartial arbitrators. Another fundamental aspect is 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, 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 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 public domain.​”

Accordingly, the parties could approach an independent and neutral institution, that has no interest in the outcome of the dispute, and which can 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.

The 246^th Law Commission Report and the High-Level Committee Report dated 30^th 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, and 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 such time as the ACI is established, parties could evaluate independent institutions which follow best practices, uphold professional standards, and adhere to ethical guidelines to resolve their disputes.