Don’t misread arbitration ruling

In the recent Supreme Court’s judgment in the CORE (Central Organisation for Railway Electrification) vs ECI-SPICSMO-MCML case on the appointment of arbitrators, the intended result and reactions have been contrasting. The court has doubled down on the legal position that was laid down by it in TRF v. Energo Engineering Projects (2017) and Perkins Eastman Architects DPC v. HSCC (India) Ltd (2019) cases: unilateral appointment of an arbitrator – where one party has direct or indirect control over the selection of an arbitrator to resolve disputes – is prohibited.

But India Inc seems to have misunderstood the judgment. What was a judgment in favour of neutral, transparent and process-driven arbitration has resulted in the industry moving away from arbitration. Yes, most loan agreements that India Inc used until 2019 contained arbitrator appointment clauses that were unilateral in nature. But this does not mean that the only recourse available to them is to go to courts and ask them to appoint arbitrators or to abandon arbitration altogether.

An arbitration clause would not be deemed void solely because it provides for a unilateral appointment mechanism. Delhi, Bombay and Calcutta high courts have relied on the doctrine of severability to allow arbitrations in cases where clauses contained a unilateral appointment mechanism. Parties merely need to choose a different mechanism for arbitrator appointment.

Declaring all arbitration agreements containing unilateral appointment clauses invalid will lead to problems for institutions dealing with multiple transactions, like insurance claims and credit card defaults. Such an interpretation of the judgment would be a setback in India’s plans to become an arbitration hub.

Industry could consider the option suggested by solicitor general Tushar Mehta. He argued that there is a use for arbitration institutions like online dispute resolution (ODR) platforms that leverage an institutional structure and infuse tech to make the arbitration process accessible, convenient and affordable. Instead of approaching and overburdening courts, referring such disputes to arbitration institutions shall ensure impartiality, fairness and party autonomy.

Arbitration institutions can eliminate any imbalance of power or conflict of interest in the process of arbitrator appointment. Further, these institutions will also make arbitrations more efficient by providing administrative and technical support.

Unfortunately, it appears the industry has a wrong perception of arbitration institutions. Arbitration institutions are seen as forums situated mostly outside India where high-value matters are arbitrated between two large corporate entities. It is no wonder that Indian companies are the highest users of the Singapore International Arbitration Centre.