Bulk Arbitration - Does it need to be defined under law?

Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Act”)

?

Section 12 of the Act specifically addresses the grounds for the challenge of an arbitrator’s appointment, with Section 12(5) introducing a significant provision regarding the automatic disqualification of an arbitrator in certain circumstances.

?

Section 12(5) states:

?

????????????????? “Notwithstanding any prior agreement to the contrary, a person shall be ineligible to be appointed as an arbitrator if he is an employee, consultant, advisor, or has any other past or present business relationship with a party, or the counsel of a party, or has any other conflict of interest. Provided that the parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

?

·????? One of the primary issues with Section 12(5) is the ambiguity surrounding terms like “business relationship” and “conflict of interest.” The lack of clear definitions can lead to varying interpretations by different courts and arbitrators, creating uncertainty in determining an arbitrator’s eligibility, potentially undermining the objectivity and independence that arbitration seeks to uphold;

?

·????? Section 12(5) imposes a duty on arbitrators to disclose any potential conflicts of interest.

?

·????? The stipulations in Section 12(5) may significantly limit the pool of potential arbitrators, particularly in bulk arbitrations, where agreements in dispute are in 1000s.

?

·????? Section 12(5) allows parties to waive its applicability through mutual agreement. However, the requirement for an “express agreement in writing” that too subsequent to arisen of disputes can lead to complications. Parties may not fully understand the implications of waiving this provision, leading to potential disputes later. Waiver must be clear and unequivocal, emphasizing the need for parties to be fully aware of the consequences of such waivers.

?

·????? The retrospective application of Section 12(5) complicates and disrupts the arbitration process already set in-motion.

?

·????? The potential for challenges to arbitrator appointments under Section 12(5) can lead to increased litigation and delays in arbitration proceedings. Parties may exploit these provisions to gain tactical advantages.

?

·????? Many arbitration institutions have their own rules regarding the appointment and challenge of arbitrators, which may conflict with Section 12(5). This can create confusion for parties who have opted for institutional arbitration. The court ruled that while institutional rules may provide additional guidelines, they must align with the overarching principles of the Arbitration and Conciliation Act.

?

·????? The stringent application of Section 12(5) could lead to a lack of confidence in the arbitration process. The court emphasized the importance of maintaining trust in the integrity of arbitrators to ensure the effectiveness of arbitration.

?

·????? While Section 12(5) of the Arbitration and Conciliation Act, 1996, aims to uphold the integrity of the arbitration process by ensuring the independence and impartiality of arbitrators, its practical implementation presents several challenges. Ambiguities in the text, challenges in disclosure, limitations on arbitrator selection, and inconsistencies in judicial interpretation contribute to the complexities surrounding this provision. Recent judgments illustrate the ongoing struggle to balance the need for impartiality vis-à-vis practical realities of arbitration.

?

Author’s thoughts:

?

1.??????? Undoubtedly, interpretation of statutes is of paramount importance, however, it is equally pivotal to look at any practical exposure and landslides that each precedent may trigger.

?

2.??????? For example, credit card defaults, which run into lakhs in numbers per month. How is one expected to get so many arbitrators considering the hanging sword of 12(5) read with Schedule V & VII? oh, almost forgot the solution – institutional arbitration. Question is why to undergo the process of creation, invention, circumvention and finally another precedent.

?

3.??????? Now consider the administrative aspect, are the High Courts equipped to accept 1000s and 1000s of section 11 applications per day and turn into 138 courts.

?

4.??????? It is impractical to approach High Courts in bulk arbitration matters. Some thoughts surrounding this aspect, may be, a pecuniary limit can be set and powers to appoint arbitrators can be delegated to district courts. Process of recovery in a speedy and cost effective manner and the practical aspects is the need of the hour, which should not be overlooked while settling law points.

?

5.??????? Bulk arbitration is required to be defined under law - Where more than 10 disputes are sought to be referred to arbitration by an entity per month can be considered as bulk arbitration and the courts/legislature should consider providing exemption from the applicability of Section 12(5) & Schedule IV, V & VII to such bulk arbitration process.

?

6.??????? The existing settled position on unilateral appointment may be a blessing in disguise for some but largely affects one of the major stakeholders i.e. Banking sector which not only resorts to arbitration for resolution of disputes but promotes ADR vs costly, time consuming resolution.

?

?