ODR: A method to solve the unilateral arbitrator appointment conundrum?
The choice of arbitration as a means of resolving disputes is intended to facilitate a swift, efficient and effective resolution process. However, prior to the 2015 amendments to the Arbitration and Conciliation Act, 1996, a fundamental issue plagued the arbitration landscape in India – the unilateral appointment of arbitrators by one party.
Many parties approached the courts alleging bias on the part of sole arbitrators appointed by their opponents, necessitating a resolution to this contentious issue. Sections 11, 12, and 18 of the Act gave parties autonomy to agree upon the procedure for appointing arbitrators. However, this autonomy was often misused, with one party attempting to appoint an arbitrator favoring their interests.
While Section 12(1) required arbitrators to disclose potential conflicts of interest and Section 18 mandated impartial conduct, these provisions did not address certain scenarios. The 2015 amendments, along with subsequent judicial pronouncements, sought to address this predicament, restoring fairness to the arbitration process.
The amendment to Section 12 and the accompanying Fifth and Seventh Schedule based on the Red and Orange list of the International Bar Association contains a comprehensive and detailed list of disqualifications for potential arbitrators. These disqualifications were based on the arbitrator’s relationships with the parties, counsel, or the subject matter of the dispute, as well as any direct or indirect interest in the outcome of the arbitration.
The amendment aimed to reinforce the fundamental need for independent and impartial arbitrators, a cornerstone of the Act’s objectives and the very essence of justice in dispute resolution.
Judicial interpretation of the 2015 Amendment
The Supreme Court’s landmark judgments in Haryana Space Application Centre (HARSAC) v. M/s Pan India Consultants Pvt Ltd and AK Builders v. Delhi State Industrial Infrastructure Development Corporation Ltd played a pivotal role in validating the mandatory and non-derogable nature of Section 12(5) and the Seventh Schedule. These judgments further cemented the legal framework, ensuring that the disqualifying provisions were not mere guidelines but rather mandatory requirements, binding upon all parties involved in the arbitration process.
However, even as the amendments and judicial pronouncements addressed the issue of impartiality that may stem from unilateral appointments, a critical question remained unanswered: who could rightfully appoint an arbitrator? Can a person who is disqualified from acting as an arbitrator as per the Seventh Schedule appoint another person as an arbitrator in her/his place?
Such questions were answered to a great extent in the Supreme Court’s rulings of TRF Limited v. Energo Engineering Projects Ltd and Perkins Eastman Architects DPC & Anr v. HSCC, in which it was held that a person or any official with an interest in the dispute could not even unilaterally “appoint” a sole arbitrator, as such appointments itself would inherently violate the principles of natural justice.
These judgements acted as precedents and were upheld by various courts across the country to invalidate unilateral arbitrator appointments. The Delhi High Court, in the matter of Proddatur Cable TV Digi Services v. SITI Cable Network Limited, observed that the Managing Director of a company would always have an interest in the outcome of arbitration proceedings and this interest could lead to bias and partiality. Consequently, even if the Managing Director were to appoint another person as an arbitrator, the potential for bias and partiality would persist. The Bombay High Court, in the matter of Lite Bite Foods Pvt Ltd v. Airports Authority of India, stated that the law regarding independence and impartiality in arbitration also applies to the procedure of the appointment of an arbitral tribunal. The Court stated that if the process for constituting an arbitral tribunal is the cause of justifiable doubt, it is impossible for the arbitrator to be impartial and free from doubt. It further held that there can be only two ways of appointment of an arbitral tribunal - by the consent of the parties or by court order.
However, these options presented their own set of challenges. Mutual appointment of a sole arbitrator was and is mostly hindered by the responding party. The parties either try delaying the appointment of the arbitrator or create hindrances which cause difficulty for the party seeking to get justice. Whereas, if the parties approach the court for the appointment of an arbitrator, prolonged proceedings inherent to the court system effectively undermine the efficiency that arbitration sought to achieve. The procedure to appoint an arbitrator generally takes more time than the entire arbitration proceeding itself.
Rise of Online Dispute Resolution
It was against this backdrop that Online Dispute Resolution (ODR) institutions and service providers emerge as a viable and innovative alternative. These neutral platforms offer solutions that uphold the principles of independence and impartiality by aggregating expert professionals, comprising retired judges, lawyers, engineers, accountants and subject matter experts.
These ODR institutions ensure a robust and transparent process for arbitrator selection. Arbitrators are empaneled based on their competence, knowledge and expertise in relevant fields, ensuring that disputes are adjudicated by trained, qualified and capable individuals. The panel composition is broad-based and cannot be hand-picked by any one party, eliminating the potential for bias or undue influence.
They also employ automated case allocation programs that randomise the assignment process, further enhancing the impartiality and fairness of the proceedings. Arbitrators are required to make disclosures concerning any conflict of interest as per circumstances specified in the Fifth and Seventh Schedule to the Act.
Recent judicial decisions have acknowledged and validated this approach, recognising the crucial role that ODR institutions play in upholding the principles of independence, impartiality and fairness within the arbitration framework.
An arbitral award administered by an ODR institution came to be challenged on the ground of unilateral arbitrator appointment. Dismissing the challenge under Section 34 of the Act, a commercial court in Delhi found that the arbitrator was not unilaterally appointed. On the contrary, the court observed that the arbitration proceeding was administered by an ODR institution, which in turn selected the arbitrator from its panel, and hence the appointment was not unilateral. The court, in its order, stated that,
“I am of the considered opinion that it is not the respondent who chose the arbitrator for conducting the arbitral proceedings. The respondent approached an ODR institution Presolv360 and this institution selected one arbitrator from its panel. The arbitrator duly gave declaration u/s 12 of the Act as required and her appointment by the institution is not hit by Section 12 (5) of the Arbitration and Conciliation Act.”
Similarly, an executing court upheld the appointment of an arbitrator by an ODR institution in a petition under Section 36 of the Act for enforcing an arbitral award. The court noted that the appointment was not unilateral, as notice of appointment of arbitrator had been duly issued to the opposite party, and the ODR institution’s neutrality and independence was not opposed.
In another example, a commercial court in Bangalore while deciding an application under Section 14(2) read with section 14(1)(a) of the Act held that,
“The applicant though has sought for termination of the arbitrator's mandate on the ground of ineligibility, none of the circumstances as specified in the Seventh Schedule are shown to have been existing. Therefore, the sole arbitrator appointed through ODR platform, per se, cannot be held to be ineligible under Section 12(5) of the Act.”
As the arbitration landscape continues to evolve, ODR institutions are poised to become increasingly pivotal, offering parties a reliable and expeditious means of resolving disputes while upholding the fundamental tenets of independence and fairness. By leveraging the institutional structure and infusion of technology, the arbitration process can truly fulfill its intended purpose, and foster swift and equitable resolutions that serve the interests of all disputing parties.
Sidharth Kapoor is an Advocate and works as Manager –Public Policy and Legal Strategy at Presolv360, an Online Dispute Resolution platform.