Appointment of Arbitrators and making the domestic Arbitration affordable and effective?

Looking at the pendency of the cases before various Courts in this country and looking at the technicalities in Courts, many support the Alternative Dispute Resolution Mechanism (ADR) like “Arbitration”. Even the courts have highlighted the object of Arbitration and Conciliation Act, 1996. The history, the old act, the new act, the scheme of Arbitration Law in India is referred by the Hon’ble Supreme Court in many decisions and especially in M/s. S.B.P. & Co. Vs. M/s. Patel Engineering Ltd. and Another (2006 AIR(SC) 450 : 2005 (3) ArbLR 285: 2005 (8) SCC 618: 2005 (9) Scale 1: 2005 (9) JT 219 : 2005 (7) Supreme 610: 2005 (7) SCJ 461: 2005 (5) CTC 302, as follows:

“2. Arbitration in India was earlier governed by the Indian Arbitration Act, 1859 with limited application and the Second Schedule to the Code of Civil Procedure, 1908. Then came the Arbitration Act, 1940. Section 8 of that Act conferred power on the Court to appoint an arbitrator on an application made in that behalf. Section 20 conferred a wider jurisdiction on the Court for directing the filing of the arbitration agreement and the appointment of an arbitrator. Section 21 conferred a power on the Court in a pending suit, on the agreement of parties, to refer the differences between them for arbitration in terms of the Act. The Act provided for the filing of the award in court, for the making of a motion by either of the parties to make the award a rule of court, a right to have the award set aside on the grounds specified in the Act and for an appeal against the decision on such a motion. This Act was replaced by the Arbitration and Conciliation Act, 1996 which, by virtue of Section 85, repealed the earlier enactment.

3. The Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') was intended to comprehensively cover international and commercial arbitrations and conciliations as also domestic arbitrations and conciliations. It envisages the making of an arbitral procedure which is fair, efficient and capable of meeting the needs of the concerned arbitration and for other matters set out in the objects and reasons for the Bill. The Act was intended to be one to consolidate and amend the law relating to domestic arbitrations, international commercial arbitrations and enforcement of foreign arbitral awards, as also to define the law relating to conciliation and for matters connected therewith or incidental thereto. The preamble indicates that since the United Nations Commission on International Trade Law (UNCITRAL) has adopted a Model Law for International Commercial Arbitration and the General Assembly of the United Nations has recommended that all countries give due consideration to the Model Law and whereas the Model Law and the Rules make significant contribution to the establishment of a unified legal framework for a fair and efficient settlement of disputes arising in international commercial relations and since it was expedient to make a law respecting arbitration and conciliation taking into account the Model Law and the Rules, the enactment was being brought forward. The Act replaces the procedure laid down in Sections 8 and 20 of the Arbitration Act, 1940. Part I of the Act deals with arbitration. It contains Sections 2 to 43. Part II deals with enforcement of certain foreign awards, and Part III deals with conciliation and Part IV contains supplementary provisions.”

If it is not possible to reduce the pendency before the traditional courts in this country and if approaching a court for relief is a tedious thing, then, there is nothing wrong in supporting the Alternative Dispute Resolution Mechanism. As the object of Alternative Dispute Resolution Mechanism is providing speedy relief and avoiding the technicalities like strictly adhering to the provisions of Civil Procedure Code, the Alternative Dispute Resolution Mechanism (ADR) should provide an affordable and effective relief to the litigants. But, as I have seen and heard from various people, there are many challenges in achieving the object behind the Alternative Dispute Resolution Mechanism (ADR) like “Arbitration” under “Arbitration and Conciliation Act, 1996”. Few concerns are as follows:

1. It is an assumption only that the Alternative Dispute Resolution Mechanism like “Arbitration” provides a speedy relief.

I have personally seen many cases where a dispute before an Arbitrator is pending for a long time like a proceeding in a Civil Court. Impartiality of the Arbitrator or the commitment of the Arbitrator to dispose of a case speedily is also a subject for discussion. Where sitting free is agreed to be paid to an Arbitrator, then, it is likely that the Arbitrator may frequently adjourn the matter on some grounds and it is very difficult to allege something on Arbitrator or to prove that a particular proceeding or an adjournment is not needed. Again, if the litigants are not committed to resolve the dispute speedily, then, they will proceed with the delay tactics by filing various interim applications and preferring an application under section 34 of the Arbitration and Conciliation Act, 1996 very frequently. These issues may appear to be simple, but, it is very difficult to address these issues. Thus, it can very well be said, at times, that it is an assumption that the Alternative Dispute Resolution Mechanism through “Arbitration” provides a speedy relief. On the other hand, in the recent past I have seen some cases, where the traditional civil court has passed a final judgment in a suit very speedily and within a span of one year or one and half year. Looking at the ground reality, I do strongly feel that traditional courts can provide effective and also speedy relief to the litigants and for that we may require few reforms in the system. There can not be any effective alternative to the traditional courts to the common man. It may be right to say that the Arbitration Mechanism is useful for the high-profile litigants, companies or where the stakes are very high. But, for common man, I don’t think that the Alternative Dispute Resolution Mechanism (ADR) is really effective and it is more so when a common man forced to submit himself to the Alternative Dispute Resolution Mechanism.

2. There are ways to protract an Arbitration proceeding like the delay tactics adopted at times in Civil Court.

It is not an exaggeration to say that there are ways to protract even an arbitration proceeding before arbitrator like the delay tactics adopted before the Civil Court at times in some cases. In fact, as the procedure to be followed before the Arbitration is not specific and it depends upon the discretion of the Arbitrator and the litigants at times, one can file any number of interim applications in an arbitration proceeding and challenging an interim-order; an application under section 34 can be filed and is filed in many cases. In fact, comparing a proceeding before Civil Court with an Arbitration proceeding, the procedure before Civil Court appears to be clear and certain.

3. The appointment of Arbitrator has become a one-sided affair with many arbitration clauses in an agreement provides a right to only one party to choose the Arbitrator.

Against the settled assumption and the all-round support to the Alternative Dispute Resolution Mechanism, I was privileged to concentrate on the issue of appointment of arbitrator by the Hon’ble Chief Justice under section 11 of Arbitration and Conciliation Act, 1996. I am not dealing with the law of the land now and I am not going to the issue of precedents on the issue with binding nature. But, I had to see a shift in the concept pursuant to the judgment of Supreme Court in M/s. S.B.P. & Co. Versus M/s. Patel Engineering Ltd. and Another (2006 AIR (SC) 450: 2005 (3) ArbLR 285: 2005 (8) SCC 618: 2005 (9) Scale 1: 2005 (9) JT 219: 2005 (7) Supreme 610: 2005 (7) SCJ 461: 2005 (5) CTC 302). The appointment of Arbitrator by the Chief Justice under section 11 of the Arbitration and Conciliation Act, 1996 is seen as an administrative function and the judgment referred to above made it as a judicial function. It is not easy to come to an opinion as to whether it is better to see the function of the Chief Justice under section 11 of the Arbitration and Conciliation Act, 1996 as administrative or as judicial function. Because, if we consider it as an administrative function, then, at times, innocent public may suffer irreparable hardship as reasoned by the Hon’ble Supreme Court in M/s. S.B.P. & Co. Versus M/s. Patel Engineering Ltd. and Another. On the other-hand, if we treat the function of Chief Justice under section 11 of the Arbitration and Conciliation Act, 1996 as judicial function, then, it will burden the Chief Justice or there will be inordinate delay in getting an Arbitrator appointed by the Court. I would like to just extract the observations of Supreme Court in M/s. S.B.P. & Co. Versus M/s. Patel Engineering Ltd. and Another, dealing with the nature of the function of the Chief Justice under section 11 of Arbitration and Conciliation Act, 1996 and also the consequent observations like the arbitration is costly. The observations are as follows:

“10. The appointment of an arbitrator against the opposition of one of the parties on the ground that the Chief Justice had no jurisdiction or on the ground that there was no arbitration agreement, or on the ground that there was no dispute subsisting which was capable of being arbitrated upon or that the conditions for exercise of power under Section 11(6) of the Act do not exist or that the qualification contemplated for the arbitrator by the parties cannot be ignored and has to be borne in mind, are all adjudications which affect the rights of parties. It cannot be said that when the Chief Justice decides that he has jurisdiction to proceed with the matter, that there is an arbitration agreement and that one of the parties to it has failed to act according to the procedure agreed upon, he is not adjudicating on the rights of the party who is raising these objections. The duty to decide the preliminary facts enabling the exercise of jurisdiction or power, gets all the more emphasized, when sub-Section (7) designates the order under sub-sections (4), (5) or (6) a 'decision' and makes the decision of the Chief Justice final on the matters referred to in that sub-Section. Thus, going by the general principles of law and the scheme of Section 11, it is difficult to call the order of the Chief Justice merely an administrative order and to say that the opposite side need not even be heard before the Chief Justice exercises his power of appointing an arbitrator. Even otherwise, when a statute confers a power or imposes a duty on the highest judicial authority in the State or in the country, that authority, unless shown otherwise, has to act judicially and has necessarily to consider whether his power has been rightly invoked or the conditions for the performance of his duty are shown to exist.

31. Moreover, in a case where the objection to jurisdiction or the existence of an arbitration agreement is overruled by the arbitral tribunal, the party has to participate in the arbitration proceedings extending over a period of time by incurring substantial expenditure and then to come to court with an application under Section 34 of the Arbitration Act seeking the setting aside of the award on the ground that there was no arbitration agreement or that there was nothing to be arbitrated upon when the tribunal was constituted. Though this may avoid intervention by court until the award is pronounced, it does mean considerable expenditure and time spent by the party before the arbitral tribunal. On the other hand, if even at the initial stage, the Chief Justice judicially pronounces that he has jurisdiction to appoint an arbitrator, that there is an arbitration agreement between the parties, that there was a live and subsisting dispute for being referred to arbitration and constitutes the tribunal as envisaged, on being satisfied of the existence of the conditions for the exercise of his power, ensuring that the arbitrator is a qualified arbitrator, that will put an end to a host of disputes between the parties, leaving the party aggrieved with a remedy of approaching this Court under Article 136 of the Constitution. That would give this Court, an opportunity of scrutinizing the decision of the Chief Justice on merits and deciding whether it calls for interference in exercise of its plenary power. Once this Court declines to interfere with the adjudication of the Chief Justice to the extent it is made, it becomes final. This reasoning is also supported by sub-section (7) of Section 11, making final, the decision of the Chief Justice on the matters decided by him while constituting the arbitral tribunal. This will leave the arbitral tribunal to decide the dispute on merits unhampered by preliminary and technical objections. In the long run, especially in the context of the judicial system in our country, this would be more conducive to minimising judicial intervention in matters coming under the Act. This will also avert the situation where even the order of the Chief Justice of India could be challenged before a single judge of the High Court invoking the Article 226 of the Constitution of India or before an arbitral tribunal, consisting not necessarily of legally trained persons and their coming to a conclusion that their constitution by the Chief Justice was not warranted in the absence of an arbitration agreement or in the absence of a dispute in terms of the agreement.

Dragging a party to an arbitration when there existed no arbitration agreement or when there existed no arbitrable dispute, can certainly affect the right of that party and even on monetary terms, impose on him a serious liability for meeting the expenses of the arbitration, even if it be preliminary expenses and his objection is upheld by the arbitral tribunal. Therefore, it is not possible to accept the position that no adjudication is involved in the constitution of an arbitral tribunal.”

Now, if we keep the issue of appointment of Arbitrators by the Court under section 11 of the Arbitration and Conciliation Act, 1996 apart, another important aspect comes when the right to appoint Arbitrator is conferred on one party to the agreement itself or when an Arbitrator is named in the agreement who is connected to one party either directly or indirectly. This is a very important thing to deal with. The Hon’ble Supreme Court of India in Indian Oil Corporation Ltd. & Others Versus M/s. Raja Transport (P) Ltd. (2009 (8) SCC 520, 2009 (8) MLJ 885, 2010 (2) LW 610, 2009 (8) SCJ 188), was pleased to observe as follows:

“9. Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It is quite common for governments, statutory corporations and public sector undertakings while entering into contracts, to provide for settlement of disputes by arbitration, and further provide that the Arbitrator will be one of its senior officers. If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a government/statutory corporation/public sector undertaking containing an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrator, he can not subsequently turn around and contend that he is agreeable for settlement of disputes by arbitration, but not by the named arbitrator who is an employee of the other party. No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named Arbitrator contained in the arbitration clause.

13. We find no bar under the new Act, for an arbitration agreement providing for an employee of a government/ statutory corporation/public sector undertaking (which is a party to the contract), acting as Arbitrator. Section 11(8) of the Act requires the Chief Justice or his designate, in appointing an arbitrator, to have due regard to "(a) any qualifications required of the arbitrator by the agreement of the parties; and (b) other considerations as are likely to secure the appointment of an independent or impartial arbitrator". Section 12(1) requires an Arbitrator, when approached in connection with his possible appointment, to disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality. Sub-section 12(3) enables the Arbitrator being challenged if (i) the circumstances give rise to justifiable doubts as to his independence or impartiality, or (ii) he does not possess the qualifications agreed to by the parties. Section 18 requires the Arbitrator to treat the parties with equality (that is to say without bias) and give each party full opportunity to present his case. Nothing in sections 11, 12, 18 or other provisions of the Act suggests that any provision in an arbitration agreement, naming the Arbitrator will be invalid if such named arbitrator is an employee of one of the parties to the arbitration agreement. Sub-section (2) of section 11 provides that parties are free to agree upon a procedure for appointment of arbitrator/s. Sub-section (6) provides that where a party fails to act, as required under the procedure prescribed, the Chief Justice or his designate can take necessary measures. Sub-section (8) gives the discretion to the Chief Justice/his designate to choose an arbitrator suited to meet the requirements of a particular case. The said power is in no way intended to nullify a specific term of arbitration agreement naming a particular person as arbitrator. The power under sub-section (8) is intended to be used keeping in view the terms of the arbitration agreement. The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality of lack of independence on his part.

14. There can however be a justifiable apprehension about the independence or impartiality of an Employee-Arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute. Where however the named arbitrator though a senior officer of the government/statutory body/government company, had nothing to do with execution of the subject contract, there can be no justification for anyone doubting his independence or impartiality, in the absence of any specific evidence. Therefore, senior officer/s (usually heads of department or equivalent) of a government/statutory corporation/ public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as Arbitrators merely because their employer is a party to the contract.

19. While considering the question whether the arbitral procedure prescribed in the agreement for reference to a named arbitrator, can be ignored, it is also necessary to keep in view clause (v) of sub-section (2) of SECTION 34 of the Act which provides that an arbitral award may be set aside by the court if the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties (unless such agreement was in conflict with any provision of Part-I of the Act from which parties cannot derogate, or, failing such agreement, was not in accordance with the provisions of Part-I of the Act). The legislative intent is that the parties should abide by the terms of the arbitration agreement. If the arbitration agreement provides for arbitration by a named Arbitrator, the courts should normally give effect to the provisions of the arbitration agreement. But as clarified by Northern Railway Administration, where there is material to create a reasonable apprehension that the person mentioned in the arbitration agreement as the Arbitrator is not likely to act independently or impartially, or if the named person is not available, then the Chief Justice or his designate may, after recording reasons for not following the agreed procedure of referring the dispute to the named arbitrator, appoint an independent Arbitrator in accordance with section 11(8) of the Act. In other words, referring the disputes to the named arbitrator shall be the rule. The Chief Justice or his designate will have to merely reiterate the arbitration agreement by referring the parties to the named arbitrator or named Arbitral Tribunal. Ignoring the named Arbitrator/Arbitral Tribunal and nominating an independent arbitrator shall be the exception to the rule, to be resorted for valid reasons.”

The judgment of the Supreme Court becomes law and binds all the courts in India unless overruled by the larger Bench. I do personally feel that, in the judgment referred to above, the Hon’ble Supreme Court has emphasized the settled principles of impartiality etc. on the part of the Arbitrator and also dealt with the issue of apprehensions of an Arbitrator being one-sided. In my opinion, when it comes to appointment of an Arbitrator, there should be consensus between or among the parties and if there is no consensus, the party seeking reference of dispute to Arbitrator, can be able to approach the Court under section 11 of the Act for appointment of Arbitrator.

In my personal opinion, the position with regard to the appointment of Arbitrator, taking all the ground realities into consideration, should be as follows:

1. There need not be any bar in conferring the right to appoint an Arbitrator on one-party to the Agreement or even naming the Arbitrator in the Agreement.

2. When the Arbitrator named in the Agreement or the right of one party to appoint an Arbitrator is opposed by other, then, the appointment of Arbitrator should be made by the Court under section 11 of the Act or by the competent authority under the Act irrespective of signing the Agreement or agreeing for the Arbitration clause in the Agreement.

This arrangement can even reduce the delay in concluding the Arbitration proceeding. What happens is that, when a party is suspicious of an Arbitrator when the Arbitrator named in the Agreement or appointed by one party is connected to him/her in one way or other, then, the other party will try to drag the matter. As such, when the appointment is made upon the consent or by the Court, then, the delay in Arbitration can definitely be reduced.

4. The cost of Arbitration is more at times.

I do strongly feel that Arbitration is costly and it is more so, when the sitting fee is prescribed for an Arbitrator. The fee of the Counsel too, in Arbitration matters, would be high as he will be spending his substantial time solely on one matter. But, many are not aggrieved at the fee prescribed by the Court while appointing Arbitrators under section 11 of the Arbitration and Conciliation Act, 1996 as the court will consider many issues when it comes appointment and also when it comes to the remuneration to the Arbitrator.

5. Applications under section 34 are preferred very frequently on interim orders passed by the Arbitrator in an Arbitration proceeding and it delays the entire Arbitration proceeding at times.

Every order should be appeallable as otherwise; there will be grave injustice at times. Very frequently, and in a domestic arbitration proceeding, an application under section 34 of the Act is filed challenging the interim-orders of the Arbitrator. While I do not want to deal with as to when an application under section 34 is to be allowed to proceed, I strongly feel that applications under section 34 should be allowed to proceed, unless there is a strong case. Under Civil Procedure Code, 1906, all interim orders are not appeallable though there is an availability of filing Civil Revision Petition when an order is not appellable. But, at times, the pendency of applications under section 34 of the Act, delays the Arbitration proceeding, but, still, there is no other effective way of dealing with it and only thing is that the court entertaining applications under section 34 of the Arbitration and Conciliation Act, 1996 to be careful in allowing the application to be pending or to proceed further.

I am of the strong opinion that the traditional courts can render justice effectively and speedily with few reforms and adjudication of a dispute before the Court is effective than adjudication by the Arbitrator. However, when the stakes involved are high, the Arbitration can be effective and also affordable. But, the issue of appointment of Arbitrator is very important to deal-with taking the ground realities into consideration. We require few reforms in order to make the Arbitration Mechanism affordable and truly effective.

Note: the views expressed are my personal and with public interest and with all the respect to the Hon’ble Supreme Court of India.