Arbitration Process Note

Introduction...
The structure of arbitration rests upon the pillar of consent, once vitiated, the whole structure is
bound to collapse. In addition, a bare perusal of Section 7 of the Arbitration and Conciliation
Act, 1996(hereinafter “the Act”) clearly states that there must be a mutual agreement between the
parties to constitute a valid arbitration agreement.
As arbitration as a dispute resolution mechanism ousts the jurisdiction of the courts, it is
necessary that both parties should have a fair and equal opportunity to choose the arbitrator who
will adjudicate their disputes.
A fair selection of an arbitrator is often a pipe dream for many of the parties who are not in a
strong position to bargain. This usually happens in the case of any arrangements with banks, non-
banking financial companies (NBFCs), and financial sector entities, wherein these lending
entities are placed on a higher pedestal than the borrower.
This ultimately results in the parties entering a one-sided contract, and when such contracts
collapse, the unilateral arbitration clause is set into motion and the arbitrator is appointed
unilaterally by the lending entities. This leaves the borrower at the mercy of a biased arbitrator,
who eventually passes an award in favour of the lending entities.
Disclosure by an arbitrator is a sine qua non for any arbitration. However, some arbitrators
abstain from giving complete disclosure about their prior relations with the appointing party. It is
seen that such arbitrators work in collusion with the appointing party and provide them with the
desired relief. This article aims to bring out the position of law revolving around the appointment
of arbitrators, followed by the issue of unilateral and multiple appointments of arbitrators. Lastly,
it highlights the legal recourse to such invalid appointments if considered, and the concluding
note is supported by suggestions to solve this problem.
Appointment of arbitrator
The law on the appointment of arbitrators under the Indian arbitration regime has evolved
significantly. Earlier, unilateral appointments were allowed in India, however, the position
changed after the Arbitration and Conciliation (Amendment) Act of 2015. The appointment of an
arbitrator became more streamlined and certain restrictions were imposed to determine the
criteria for the ineligibility to act as an arbitrator.
Statutory approach
An arbitrator can only be appointed in two ways, for the resolution of any disputes or differences
between the parties, either by approaching the appropriate court under Section 11 of the Act, or
by mutually agreeing on the name of the arbitrator and appointing the same....
To comment on the latter, the parties must mutually agree on the name of the person who would
act as an arbitrator, followed by which a request is made to the person concerned to accept his
appointment. And eventually, when said person affirms the appointment, he is designated as
arbitrator to adjudicate the disputes.

However, when any person is approached in connection with his possible appointment as an
arbitrator, he is bound to give disclosure to the parties. The purpose of the disclosure is to
establish the independence and impartiality of the arbitrator towards the parties in dispute. Such
disclosure is made in accordance with Section 12 read with Schedules 5 and 7 of the Act. The
format for disclosure is further laid down under Schedule 6 of the Act.
Judicial approach
Post the 2015 Amendment, the scope for unilateral appointment of arbitrators was narrowed,
furthermore, through various judicial pronouncements the courts have hammered down and
confined the law. The Supreme Court of India has repeatedly stated that a person who stands
ineligible by the Bar of Section 12(5) of the Act to act as an arbitrator could not even appoint
another to act as an arbitrator. In cases 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 to be in their own favour. Therefore, such
unilateral appointments are to be discouraged.
The guiding principles while appointing the arbitrator are transparency, fairness, neutrality, and
independence in the selection process. Thus, an appointment can either be through mutual
consent or by an order by the competent court.
Multiple appointments of the same arbitrator
In cases where the arbitration clauses are termed unilaterally, the appointing authority gains an
unfair advantage over the other party. An example of such clauses could be, “Any dispute arising
out of this agreement shall be settled by an arbitrator appointed by Party A….” Such arbitration
clauses entitle only one of the parties to appoint the arbitrator unilaterally, and mutual agreement
between both parties is absent.
Often these clauses are incorporated by NBFCs and other entities to settle their low/mid-value
disputes. These entities maintain a panel of arbitrators to appoint in case of any dispute with the
borrower. Ultimately, they keep appointing the same arbitrator frequently for their disputes.
The appointing authority makes a financial arrangement with the arbitrator wherein, they give
several matters to the same arbitrator for giving a favourable award. Such acts dilute the sanctity
of arbitration and adulterate ethical practices. Such practices benefit the arbitrators as well as the
appointing authority, immensely.
Under Schedule 5 to the Act, certain grounds have been stated that would give rise to justifiable
doubt as to the independence and impartiality of the arbitrator. One of such grounds i.e. Entry 22
has been reproduced below:
The arbitrator has within the past three years been appointed as arbitrator on two or more
occasions by one of the parties or an affiliate of one of the parties.
After having a bare perusal of the aforementioned ground, it is clear beyond doubt that an
arbitrator will raise justifiable doubts if he has acted as an arbitrator on two or more occasions
for one of the parties to dispute. Such circumstances need to be disclosed to the other party as it
would raise questions towards the independence and impartiality of the arbitrator. However, as
indicated earlier, in many cases of unilateral appointment, the arbitrator conceals his relations
with the appointing authority.
Even though the Courts have reiterated through several judgments and settled the proposition,
some of the lending entities still engage in the unilateral appointment of arbitrators. The Courts
have previously dealt with numerous such cases.
Recourse to the appointment of arbitrator
The recourse for appointment of an arbitrator can be made under two circumstances, namely,
 When there is justifiable doubt as to the “independence and impartiality” of the arbitrator;
or
 When the person becomes “ineligible” to be appointed as an arbitrator
In the case of the former, the objections are made before the Arbitral Tribunal itself, pursuant to
Section 12 read with Section 13 of the Act. If the arbitrator does not entertain the objections and
continues with the proceedings, then the aggrieved party may make an application for setting
aside such an award once passed.
As for the latter, the objections lie before the court pursuant to Section 12 read with Section 14 of
the Act. The arbitrator does not have the power to decide any objections concerning his own
ineligibility, as the same would be against the principle of natural justice. The issue of
ineligibility goes to the root of appointment and thus, should be settled by the court. Unilateral
appointments can be challenged under this section as the arbitrator is deemed to be ineligible.
The party aggrieved by the faulty appointment of the arbitrator can take either of the two
approaches, depending on the circumstances and problem at hand.

Conclusion.
The gaining popularity of arbitration clauses in the lender-borrower agreements stipulates a
creative solution. Most of the disputes are small or mid-valued and the parties need a quick and
effective resolution. Appointing an arbitrator with the consent of both parties is a pipe dream as
the defaulting party would oppose the designation of a neutral arbitrator, thereby intentionally
delaying the appointment. Moreover, given the time and expenses incurred by the parties to
approach the courts under Section 11, rendering an application would prove to be burdensome to
settle a small or mid-value dispute.
The most appropriate option for the parties would be to approach the arbitral institutes. By opting
for this, the appointment of an arbitrator can be expedited, and the neutrality of the arbitrator can
be maintained. A dedicated timeline can be followed with the utmost level of transparency.
Subsequently, the parties would save their expenses and avoid going to court. If needed, the
parties can even adopt a customised fee schedule to settle their disputes cost effectively.
Opting for institutional arbitration for financial and other related disputes could be a promising
way to cater to quick resolution for the appointment of the arbitrator, giving arbitration its
effectiveness as a mode of dispute resolution.