The ideology behind incorporating Alternative Dispute Resolution (ADR) into the legal mainstream is twofold. First, it aims to provide speedy redressal for various legal issues that arise between parties. Second, it seeks to prevent courts from becoming overburdened with such cases. However, a fundamental pillar of ADR is the mutual consent of both parties; if this consent is vitiated, the structure of ADR is compromised.
In the context of arbitration, which is a form of ADR, the foundation lies in the mutual agreement of the parties to refer their disputes to arbitration and to mutually select an arbitrator. However, this principle often differs in banking cases, particularly in lender-borrower agreements.
Earlier Approach
Neutrality in the selection of an arbitrator is a critical component of arbitration. However, this aspect is often overlooked in lender-borrower agreements, where banks and Non-Banking Financial Companies (NBFCs) typically hold a dominant position. These contracts are often structured in a way that, in the event of a dispute, the arbitrator is appointed or selected solely by the bank or NBFC, leaving the borrower with no option but to accept this selection.
In such cases, the borrower is subject to the arbitrator’s discretion, which frequently results in arbitral orders unfavorable to the borrower. Previously, this unilateral selection of arbitrators was permitted in India, effectively placing borrowers at the mercy of these arbitrators. However, this scenario changed with the Arbitration and Conciliation (Amendment) Act, 2015, which introduced provisions to address this imbalance.
Development Post Arbitration and Conciliation (Amendment) Act, 2015
Under established law, an arbitrator can be appointed in two ways: first, by approaching an appropriate court under Section 11 of the Arbitration and Conciliation Act; second, by mutual consent of the parties as per the arbitration clause in the agreement. In the case of the second method, post-amendment, the law has become more streamlined to eliminate the exclusivity of unilateral arbitrator selection in lender-borrower agreements. If a bank appoints an arbitrator in a dispute, it must communicate this to the other party, and only with the latter’s approval can the arbitration proceed.
Once an arbitrator has been mutually appointed by both parties, they must disclose any facts necessary to demonstrate their independence and impartiality toward the parties in dispute, as required by Section 12(5), in conjunction with Schedules 5 and 7 of the Arbitration and Conciliation Act. Additionally, this disclosure must follow the format prescribed in Schedule 6 of the Act.
Relevant Judgements
- Proddatur TV Digi Cable Services v. Siti Cable Network Limited (2020 SCC OnLine Del 350)
It was held that where only one party has an exclusive right to appoint a sole arbitrator, the choice made will always have an element of exclusivity in drawing the course for dispute resolution, thereby making the outcome favourable to their own interests. Therefore, such unilateral appointments are to be discouraged. - Sawarmal Gagodia v. Tata Capital Financial Services Limited, 2019 SCC OnLine Bom 849
It was held that the sole arbitrator is obliged to disclose in writing any circumstances which raise doubt about their independence and impartiality, and such disclosure should be in the format mentioned in Schedule 6 of the Arbitration and Conciliation Act, 1996. - Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760
It was held the person who stands ineligible to be appointed as sole Arbitrator in particular dispute in terms of section 12(5) of Arbitration and Conciliation Act also stands ineligible to appoint another arbitrator in the said Dispute.
Conclusion
With the rise in lender-borrower disputes, more cases are likely to be referred to arbitration to provide a quick and effective resolution. Ensuring the appointment of a neutral arbitrator is essential to maintaining impartiality in decisions related to these disputes. However, when arbitrators are appointed primarily by banks or NBFCs, the opposing party may be inclined to reject the appointment, resulting in delays.
To avoid this, parties should consider referring their cases to neutral institutions, particularly Online Dispute Resolution (ODR) platforms such as SAMA, Cadre, and Presolv360. These platforms expedite the appointment of neutral arbitrators and ensure impartial decision-making throughout the process.
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