Appointment of arbitrator solely by one party - does it resolve or give rise to disputes

Arbitration, world over is a tool to resolve a dispute between two parties privately by an independent party. Being an alternate dispute resolution mechanism and possibly a less-time consuming one, most agreements in India contained clauses for resolution of disputes by the method of arbitration. This was probably best summed up by Mr. Barry Feinstein, who said that, “I don't think it's possible without the structure of the arbitration in place to get a deal done”.

Section 10(1) of the Arbitration Act, 1996 (“Act”) leaves it to the parties to decide on the number of arbitrators, provided the same is not an even number. This section has been widely exploited moreso in lending agreements, as therein, the clause pertaining to arbitration solely allows the lender to appoint arbitrator. Usually in any lending agreement, the lender has the majority bargaining power. This leads to the borrower having no other choice but to accede to the lender’s demands and sign on the dotted lines. However, the question that arises is, is it at all tenable to give the right to appoint an arbitrator solely to the lender or should the borrower have any say in this? Does this not make the lender the moving spirit behind resolution of disputes which in turn can affect the award itself? Sadly, there have been no cases in the past whereby this issue has been decided by courts.

This issue has been loosely discussed in the case of Sathi Mukherjee vs Magma Fincorp Limited [1]. The case before Calcutta High Court was a challenge by the petitioner regarding the appointment of an arbitrator by the respondent. The petitioner alleged that this was in derogation of sections 11 and 21 of the Act. The petitioner in this case suggested that u/s 21 of the Act a party to an arbitration agreement without a named arbitrator is required to obtain consent of the other party, before the nomination is made. However, the Hon’ble Calcutta High Court stated that the scope of sections 11 and 21 never served as an impediment to any arbitration agreement in which the arbitrator was not named. It found no merit in the grounds raised by the petitioner in this case and referred the objections raised to be addressed in the course of arbitration proceeding.

The recent case of The Loot (India) Pvt. Ltd & Others vs. Reliance Capital Limited & Others [2] (“Loot India case”), decided by the Bombay High Court pertains to the issues raised by a borrower on the appointment of a sole arbitrator by the lender and the subsequent passing of award without paying heed to the objections raised by the borrower. However, in this case, the petitioners did not question the right of the respondent to appoint a petitioner but questioned the appointment of the arbitrator elected.

Section 18 of the Act relates to “equal treatment of parties”. Thus, any arbitral proceeding shall have to give equal opportunity to parties to represent themselves. However, as has also been pointed out by Bombay High Court in Loot India case, that this does not mean that ex-parte orders cannot be passed under the Act. On making out of a proper case, the court is bound to consider the fact that even after servicing of notices, the parties have not appeared. In the words of the Bombay High Court:

“The important facet in all Arbitration matters is equal and fair opportunity at every stage in the Arbitration proceedings, this in my view, includes even from the date of issuance of first notice of appointment of the Arbitrator by any one of the parties.”

In the present case, even if the loan agreement allowed the lender to appoint an arbitrator, the question remains that if at all the petitioners can raise an objection to the same. Herein, the arbitrator had not intimated and/or expressed and/or informed such independence or impartiality to both the parties in terms of section 12 of the Act. The Bombay High Court stated obiter dicta that in case any objections are raised, the party who appoints such arbitrator including the arbitrator needs to disclose about the independence and/or impartiality. Only because the lender was empowered to appoint arbitrator, the same does not give the right to not seek any consent and/or intimate the suggested name and/or name of possible arbitrator.

The Bombay High Court further stated that the clear disclosure of every detail of the arbitrator including the name suggested, is necessary to avoid further complications. This is for the simple reason that the whole concept of arbitration proceedings and/or Arbitration has a foundation of appointment of arbitral tribunal by consent of the parties.           

Section 10 of the Act allows parties to appoint arbitrator with mutual consent. In the Loot India case, when objections were raised regarding the appointment of arbitrator, evidently there was no consent regarding appointment of arbitrator, a point which should have not been overlooked by the respondent. In the case of International AirPort Authority Vs. K.D. Bali & Anr[3] the Supreme Court held that merely raising such averments and/or doubts about the impartiality and or independence of the arbitrator, itself is not sufficient, as the intention was to frustrate the arbitration proceedings. However, referring to this case in Loot India case, the Bombay High Court stated that facts and circumstances of any case have to be seen as every case is distinct and distinguishable. 

Then how can the issue be addressed?

The problem lies in the fact that not many parties come forward or object to appointment of arbitrator solely by the other party. It is due to this that very cases have come for the consideration of Indian courts in this matter. Probably the closest that Supreme Court had come to providing a cue was in the case of M/S Nandan Biomatrix Limited vs D 1 Oils Limited [4], wherein the differences and disputes were referred to Singapore International arbitration Centre, which in turn was to nominate an arbitrator from its panel. However, in this case, the parties had themselves decided to resolve disputes through institutional arbitration and not through an ad hoc arbitration.

However, companies can take a cue from this ruling and decide on a panel of arbitrators mutually which in turn shall appoint an arbitrator. However, the tenability of this possibility is questionable as lenders prefer being in a superior position. 

Our analysis

Although, the Bombay High Court has not explicitly struck down the appointment of arbitrator solely by the lender, yet it has upheld the necessity of paying heed to the contentions raised by the borrower on grounds of principles of natural justice. The timing of raising objections is not important, however, the contentions are. The case goes a long way in establishing that the usual high-handedness displayed by lenders is oppressive and any aggrieved party can raise a voice against it at the appropriate forum.

An alternative to avoid such disputes is to either name the arbitrator in the agreement itself or decide on a panel of arbitrators. Mere mention of appointment of a sole arbitrator defeats the very purpose of enactment of the Act which was to give an equal opportunity to both parties and to uphold the principle of natural justice. Sadly, this has been grossly overlooked and the Act has been arm twisted to suitable meet the needs of lenders.

[1] To see the full text of the ruling at http://www.indiankanoon.org/doc/1955795/

[2] To see the full text of the ruling, visit: 

http://bombayhighcourt.nic.in/generatenew.php?path=./data/judgements/2013/&fname=OSARBP123212.pdf&smflag=N

[3] See entire text of ruling at http://www.indiankanoon.org/doc/1794709/

[4] See entire text of ruling at http://www.indiankanoon.org/doc/21070/