Safeguarding the effectiveness and purpose of arbitration in small-value claims

Needless to reiterate, arbitration has been a go-to solution for various organizations, companies, and even individuals to settle disputes through a (perceived-to-be) quicker and more efficient dispute resolution mechanism as compared to courts.

However, we must ask whether arbitration has been able to live up to its expectation and fulfil its purpose. And if not, what is the solution?

The Supreme Court of India, in the case of Shree Vishnu Constructions v. The Engineer In Chief Military Engineering Service & Ors, recognized that there had been delays in the disposition of applications made under Section 11 of the Arbitration Act. Upon receiving a report on the matter, the Court determined that there were outstanding applications dating back to 2006. The Court further stated that if such applications were not decided within a reasonable period of time, particularly within one year of filing, the objectives of the Act would be defeated. 

For the uninitiated, Section 11 relates to the appointment of an arbitrator by the court. In situations where the parties are unable to appoint an arbitrator through mutual consent or in accordance with established procedures, they are compelled to seek the intervention of the courts, an intervention they originally sought to avoid through the choice of arbitration. Unfortunately, the courts have consistently failed to meet the expectations of those seeking expedited resolution, often taking extended periods of time to appoint an arbitrator. 

It can be concluded that the effectiveness of arbitration as a means of dispute resolution is compromised from the outset, i.e., from the time when the parties have to reach courts for even the appointment of an arbitrator. To illustrate, consider the use of arbitration clauses in “legacy  agreements” between banks and their customers. These agreements typically include provisions stating that any disputes between the parties shall be resolved through arbitration, a decision that was likely motivated by the perceived advantages of speed and efficiency of arbitration. However, as previously discussed, the appointment of an arbitrator by the courts can be a lengthy and protracted process, undermining the intended benefits of arbitration. 

In situations where a significant number of customers default on their loans or fail to make timely payments on their instalments, banks may be forced to resort to arbitration as a means of resolving the resulting disputes. In such cases, the banks usually have only two options available to them: first, to appoint an arbitrator with the consent of the other party, which is often unlikely, given that the defaulting party may never agree to the arbitrator or would want to delay the proceeding as much as they can; and second, to petition the courts for the appointment of an arbitrator, which can also be a time-consuming process.

It is not difficult to envision a scenario in which a large number of default disputes, particularly in the wake of the COVID-19 pandemic, are referred to the courts for the appointment of an arbitrator. With around five crore pending cases already choking the judicial system, this influx of additional cases would only serve to further clog the courts.

Ironically, the use of arbitration, which was intended to be a distinct and efficient alternative to the court system, becomes reliant on the courts for its own functioning and ultimately loses its effectiveness and efficiency as a result. 

One potential solution to this issue is the increased use of institutional arbitration, particularly through online dispute resolution (ODR) institutions. Rather than relying on the courts for appointment of an arbitrator, it is suggested that banks and other parties involved in disputes, particularly those related to defaults, refer their cases in their entirety to these institutions. These institutions often maintain a panel of highly qualified arbitrators who are able to promptly and fairly resolve such disputes. This approach saves the courts’ time and allows the arbitration process to achieve its intended purpose. 

It is noteworthy to mention that the Arbitration and Conciliation Amendment Act of 2019 included provisions for the creation of the Arbitration Council of India. Specifically, Section 3 of the Arbitration and Conciliation (Amendment) Act, 2019 amended Section 11 of the principal Act to grant the Supreme Court and the High Courts the authority to designate arbitral institutions, which are to be graded by the Arbitration Council of India. Additionally, Section 3(ii) and Section 3(iv) of the Amendment Act amended sub-section 4 and sub-section 6 of Section 11 respectively to give arbitral institutions the power to appoint arbitrators, rather than relying on the courts to do so. However, these provisions have yet to be officially notified, and it is necessary for this to occur in order for them to be fully implemented. 

It is legally permissible for the parties to a dispute to utilize an arbitration institution as an alternative to the courts, and it is suggested that banks and other organizations begin to utilize  this option in order to more efficiently and effectively resolve disputes. In order to avoid confusion and ensure the smooth operation of the arbitration process, it would be advisable for the parties to specify the names of the chosen arbitration institutions in their agreements. 

Arif Mohammed Madani is a retired district judge with 25 years of judicial experience and over 10 years of experience as an arbitrator.