Promoting Arbitration and Killing it: The Curious creation of ‘Statutory Arbitration’
Ajar Rab & Madri Chandak†
The cornerstone of a voluntary mechanism to adjudicate disputes outside the court system is parties’ consent or party autonomy. Parties choose arbitration due to the advantages it offers in contrast to court litigation. This choice entails the freedom to choose the arbitrator, the procedure, the applicable law and the supervising court (seat) using an arbitration agreement. In the absence of these choices, arbitration becomes an alternative forum without any particular advantage over court litigation.
In stark contrast to the aforementioned party autonomy, there is a curious creation called ‘statutory arbitration,’ i.e., a special enactment that provides mandatory arbitration for adjudication of disputes arising out of the statute. In statutory arbitration, the statute itself is deemed to be an arbitration agreement, albeit without the consent of parties.
It is necessary to understand that statutory arbitrations were creatures under Section 46 of the Arbitration Act, 1940. Even though the Arbitration and Conciliation Act, 1996 (“Act”) was enacted to align with the UNCITRAL Model Law on International Commercial Arbitration (1985) (“Model Law”), these forced arbitrations have been recognized in Section 2(4) of the Act without much thought. Section 2(4) of the Act specifically provides the application of the Act, except a few provisions, to arbitrations being conducted under a special enactment, unless the provisions of the Act are inconsistent with the provisions of the special enactment. There is no other equivalent under the Model Law that resembles statutory arbitrations. Currently, more than twenty-five central legislations in India provide for statutory arbitration, probably with the intent to achieve speedy and final dispute resolution or to build and project India as an arbitration hub.
Given that the legislative intent is unclear, forcing parties to participate in a voluntary mechanism appears to be counter intuitive. If the assumption for statutory arbitrations is speedy dispute resolution, then it is even more important that such arbitrations provide the basic minimum guarantee of fairness and equality. More importantly, a consent-based mechanism being forced on parties ought to at least offer the choice of appointment of arbitrators to allow the parties to fully explore and appoint experts and have an independent and unbiased adjudication of the dispute. Unfortunately, statutory arbitrations in India do the exact opposite.
Firstly, statutory arbitrations violate party autonomy by forcing parties to choose compulsory arbitration with a limited set of arbitrators and without adequate knowledge and understanding of the arbitral process. Secondly, the remedy of arbitration through the statutory body is available to only one party and not to the other resulting in asymmetrical clauses which have been held to be invalid. Thirdly, statutory arbitrations allow the government to be the legislator as well as the adjudicator. Fourthly, these arbitrations result in the formation of a biased tribunal, a gross violation of the fundamental policy of arbitration to ensure fairness and equality during proceedings through independent and impartial arbitrators. Fifthly, in such arbitrations, arbitrators commit grave procedural irregularities primarily due to a lack of formal training in the field of arbitration. And lastly, statutory arbitrations appear to be on an inconsistent footing when it comes to the arbitrability of disputes.
a. Uprooting Party Autonomy
One of the crucial principles of party autonomy is the choice of procedure. However, in a statutory arbitration, since there is no arbitration agreement, the choice of parties is virtually nil, if not completely absent. For instance, Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) requires a mandatory reference to Micro and Small Enterprises Facilitation Council (“MSME Council”). Section 18(3) of the MSMED Act states that the MSME Council may either take up the dispute for arbitration or refer it to some institution or centre if conciliation has failed between the parties. Clearly, the parties have no choice but to submit to arbitration before the MSME Council itself on the flawed premise that the MSME Council will protect the interests of the micro, small and medium enterprises better than an independent arbitrator.
If parties have already provided for an arbitration clause in a contract, such a clause is overridden and Section 18 or other similar sections requiring a mandatory reference prevail. Therefore, statutory arbitrations have the unique effect of promoting arbitration and killing it at the same time.
b. Lack of Fairness and Equality
Curiously, the option of a reference under Section 18 of the MSMED Act is available only to the seller and not to the buyer, which results in an asymmetrical clause. An asymmetrical clause has been held to be invalid across jurisdictions, and this view has been upheld by the Indian Supreme Court in TRF Limited v. Energo Engineering Projects Limited and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Limited. This is because asymmetrical clauses like those under the MSMED Act grants the party permitted to refer to a strategic legal advantage violating the requirement of fairness and equality throughout the arbitral process and not just during the proceedings. The grant of this special strategic privilege cannot come at the cost of the other party’s rights. Therefore, statutory arbitrations prima facie offend the existing jurisprudence and fairness requirement.
c. A Muddy Mix of Functions
The other problem is that the arbitrators are appointed by the Government, and they are also government appointees such as District Magistrate or Chief Engineer etc. Such appointments result in a mix of judicial and administrative functions, which obscures the function of adjudication of the dispute.
d. Formation of a Biased Tribunal
Given that the Tribunal, especially in the case of MSME Council, is a regulatory body as well as the body discharging the adjudicatory functions, the members of the MSME Council become the arbitrators. This offends the basic mandate of independence and impartiality, especially because one party to the dispute is often a public sector undertaking or a government entity. Hence, there is a ‘justifiable expectation of bias’ which was the standard proposed under the 246th Law Commission Report. These principles are given statutory recognition under Schedule V and Schedule VII of the Act, which mandate prevention of conflict of interest as under the IBA rules.
This apparent lack of impartiality spells doom for arbitration as it is settled law and practice that persons acting as conciliators or mediators should not be arbitrators in adjudication of the dispute. Therefore, arbitrations by government bodies or government appointees violate Section 80 of the Act, which specifically provides that the conciliator shall not act as arbitrator. This also results in an inconsistency with the view given in Afcons Infrastructure Ltd. v. Cherian Varkey Construction that a mediator or conciliator cannot act as an arbitrator, leading to a big question mark on the procedural fairness as well as the enforceability of the award.
e. Lack of Training
Members to be appointed as arbitrators in statutory arbitrations might be experts with respect to the specific legislations. However, no provisions in these special enactments provide for these experts to be arbitrators. These experts do not have any skill or training in arbitration, and therefore, the appointed members are usually unaware of the procedure and other nuances involved in arbitration. Due to a lack of training, the parties often face procedural irregularities. Resultantly, the award is replete with procedural violations inviting a setting aside application as these untrained arbitrators fail to act reasonably and in compliance with judicial principles. It makes little sense to provide a mechanism that results in flawed awards waiting to be set aside, only to restart a fresh arbitration. Instead of speedy dispute resolution, parties get extended double rounds of litigation.
f. Arbitrability of Disputes under Special Enactments
Recently, in Vidya Drolia v. Durga Trading Corporation, the Supreme Court observed that,
“Implied non-arbitrability requires prohibition against waiver of jurisdiction, which happens when a statute gives special rights or obligations and creates or stipulates an exclusive forum for adjudication and enforcement.”
Special enactments, which provide for statutory arbitration, also provide for special rights. For instance, the MSMED Act, 2006 provides for the protection of interests of small industrialists. The MSME Council has also been formed to formally adjudicate disputes. Therefore, there is a special legislation with special rights and a special forum i.e., MSME Council. Despite the existence of a special forum, a provision is made for mandatory arbitration resulting in an implied conflict with the recent view of the Supreme Court. This implied conflict can be read to make statutory arbitration non-arbitrable, unless the same is somehow read harmoniously by the courts.
Whatever may have been the intent behind Section 46 of the 1940 Act, arbitration as a dispute resolution mechanism has matured over the years and statutory arbitrations offend the current jurisprudence. Forcing parties to arbitration without any party autonomy, only to pass awards with blatant procedural violations results in double rounds of arbitration, in effect destroying any hope of speedy dispute resolution.
Arbitration is a quasi-judicial mechanism with arbitrators carrying equal power to that of a civil court. Government appointees or appointees by virtue of office without any formal training in arbitration are ill-equipped to carry out arbitration proceedings fulfilling the mandate of Section 18 of the Act. It is time to reassess the value of these forced arbitrations and preferably do away with this creation which only resembles arbitration in the name.
† Ajar Rab is Partner at Rab & Rab Associates LLP, Dehradun, Adjunct Professor at NUJS Kolkata and Visiting Professor at NLSIU, Bengaluru. Madri Chandak is a 4th Year student at HNLU, Raipur.