Sarod Arbitration Rules: institutional dysfunction masquerading as party autonomy
Introduction
Institutional arbitration has been frequently touted as a panacea for the systemic issues plaguing the domestic arbitration regime in India and prompted the 246th Law Commission to note that the culture of institutional arbitration in India will go a ‘long way to redress the institutional and systematic malaise’. These issues have been primarily attributed to the proliferation of ad hoc arbitrations, which have proved to be an anathema to the core virtues of arbitration, resulting in excessive litigation clogging the courts’ dockets, lack of predictability and efficiency, increased cost and time, etc. The legislature, executive, and judiciary have made concerted and elaborate efforts to curb the mischief and endeavoured to assimilate the international best practices to harmonise the arbitration ecosystem in the country. This has been primarily done through extensive legislative amendments to the statute, pro-arbitration judicial discourse, and the establishment of arbitral institutes mimicking the premier global institutions like the SIAC, ICC, LCIA, etc. Though laudable, these efforts are found to be lacking in fixing the pervasive problems that continue to haunt India’s arbitration landscape. This may partly be attributable to the prevalent culture among critical stakeholders like the litigating parties, counsels, and arbitrators.
The proliferation of institutional arbitration would remain a piped dream by merely setting up arbitration centres and institutions without addressing the root cultural causes, formulating robust rules, and ensuring adequately skilled administrative support. In this piece, we discuss the harrowing tale of the Society for Affordable Redressal of Disputes (‘SAROD’), a specialised arbitral institution that administers disputes arising from road highway projects. We seek to elaborate on how the arbitration rules of SAROD militate against the hallmark of arbitral proceedings, viz., party autonomy, fairness, and efficiency. It is our thesis that SAROD Arbitration Rules render an unworkable practical framework that is riddled with glaring anomalies. Such instances not only impede India’s dream of becoming an arbitration-friendly jurisdiction but also fail in their cardinal objectives. We also highlight the gnawing concerns that users of SAROD Rules endure from the inception of the arbitration proceedings and how they fall foul of the mandate of the Arbitration and Conciliation Act, 1996 (‘Act’). We further analyse judicial precedents which have read down a few provisions in the SAROD Arbitration Rules and conclude with certain critical recommendations addressing the issues raised.
Red Herrings in SAROD
SAROD as the name suggests came into being to address issues relating to high costs and ensuring effective outcomes in arbitral proceedings, with the collaboration two state instrumentalities viz., (i) National Highways Authority of India (‘NHAI’); and (ii) National Highways Builders Federation (‘NHBF’). Accordingly, the implementing agencies of the Ministry for Road, Transport and Highways (‘MoRTH’) adopted recourse to SAROD as part of its standard form contracts, which are often built in as adhesive dispute resolution clauses. As is often the case with contracts with government undertakings, the contractors hold unequal bargaining power and these clauses are usually thrust upon the contractors with little or no element of choice.
It is an oft-quoted couplet that ‘arbitration is as good as the arbitrator(s)’; however, it is equally true that – ‘arbitration is now as good as the arbitral institution administrating it’. With NHAI and NHBF as the founding members, SAROD is a society registered under the Societies Registration Act, 1860. The constituent founding members also exercise administrative and executive control over the institution, shrouding the working of the arbitral institution in a cloak of a pre-disposed mindset leading to justifiable doubts regarding its impartial nature. One may question the basis for holding justifiable doubts regarding an arbitral institution, however, lest we forget, the rules of the arbitral institution govern not only the conduct of proceedings but also provide for determining the composition of the arbitral tribunal subject to the quantum of the claims; process of appointment of arbitrators; joinder and consolidation; challenge procedures; payment of fees et al. Therefore, the implementation of such rules provide decision-making authority to an arbitral institution instead of mere administrative assistance thereby elevating the role of an arbitral institution as an essential stakeholder in the lifecycle of a dispute.
Insights into SAROD Arbitration Rules
Rule 4.4 of the SAROD Arbitration Rules makes it mandatory to obtain primary membership of SAROD prior to invocation of arbitration. To enrol as a primary member, a party is required to deposit a non-refundable sum of INR 2,00,000 (Indian Rupees Two Lakhs) for consideration of its application. Thus, at the first instance itself, SAROD mandates a deposit, prior to allowing any party to invoke arbitration under its aegis seeking redressal of its disputes. Similarly, Rule 5.2 demands a deposit of INR 25,000 (Indian Rupees Twenty Five Thousand) at the time when the respondent files a reply to the notice invoking arbitration.
The erroneous scheme formulated by SAROD seeking deposit of non-refundable sums for enrolment as a member of the arbitral institution is equivalent to seeking a pre-deposit of a specific sum as a condition precedent for invocation of arbitration. Pertinently, such clauses which are carved out by state instrumentalities to bother private parties have been read down by the Hon’ble Supreme Court of India (‘Supreme Court’) as being violative of Article 14 of the Constitution of India, 1950.1Lombardi Engg. Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., (2024) 4 SCC 341 Recently, the Hon’ble Delhi High Court dealt with a dispute where SAROD insisted on payment of membership fee prior to invocation of arbitration and held that an arbitration agreement under which the parties agree on conducting arbitration as per rules of a particular arbitral institution cannot be construed as subsuming within it, an additional obligation to become member of that arbitral institution.2Rani Constructions (P) Ltd. v. Union of India, 2024 SCC OnLine Del 2164. Accordingly, it was held that such an obligation cannot be insisted upon as a prerequisite for taking recourse to arbitration.3Ibid. This position has been affirmed in another recent judgment, and the requirement to pay the membership fee has been read down by the court.4M/s Manarajan Brahma v. National Highways and Infrastructure Development Corporation Limited, O.M.P. (I)(COMM.) No. 356 of 2023, Judgment dated 27.08.2024 Even otherwise, such purely commercial and unfathomable terms obliterate the primary objective of pursuing arbitration and run contrary to the name of the institution itself, which includes the term ‘affordable’.
Next, we move to Rule 11.3 of the SAROD Arbitration Rules, which prescribes the appointment of a sole arbitrator by the governing body of SAROD after the respondent has filed its statement of defence and counterclaims, if any. It is completely unfathomable for an arbitral institution to incorporate such absurd rules that practically provide for the appointment of an arbitrator after the completion of pleadings. In other words, parties would not be aware of the arbitrator until the completion of pleadings in the arbitration. The practical application of such an absurd rule would mean that a party seeking an urgent interim measure of protection during the stage of pleadings would have no arbitrator to seek the said relief. Similarly, a party intending to challenge the jurisdiction of arbitration in terms of Section 16 of the Act will have to wait until the completion of pleadings for the arbitrator to be appointed by SAROD. This will leave a party remediless for raising its preliminary objections to the jurisdiction of the arbitrator or raise pertinent objections pertaining to the deficiently stamped arbitration agreement.
There is a growing trend where courts hearing an application for interim measures of protection before the commencement of arbitration do not interfere with the merits of the dispute and instead convert the petition filed under Section 9 of the Act to an application under Section 17 of the Act for adjudication by the arbitral tribunal. In such cases, the party seeking the interim measure of protection presses for a fast-tracked appointment process by the institution to secure interim measures of protection. However, despite soft directions from the courts to expeditiously appoint an arbitrator, institutions pay little respect to such directions and insist on following their own timelines. Such instances often prejudice the parties, leaving them in a detrimental spot.
Rule 11.6 of the SAROD Arbitration Rules imposes an arbitrary and unreasonable restriction on every arbitrator on the panel maintained by SAROD to have at most three assignments per arbitrator. A plausible objective behind this restriction could be equal time management between all arbitral proceedings; however, if an arbitrator’s assignments are full, the number of available arbitrator(s) for appointment drastically reduces, curtailing party autonomy due to a narrow panel of arbitrators. Therefore, the choice of a party to appoint an arbitrator is constricted and curtailed by the institutional rules itself, being contrary to the concept of party autonomy. It has been observed in several judicial pronouncements that SAROD has the tendency to downsize its panel of arbitrators from time to time without any prior intimation. This significantly impacts the choice of parties and runs contrary to the principles of maintaining a broad panel of arbitrators who belong to diverse fields.
The constitution bench of the Supreme Court has recently reserved its decision on the issues involving a broad-based panel of arbitrators maintained by state instrumentalities. This decision is likely to settle the vexed issues that have created a lot of confusion in the appointment of arbitrators and would apply to SAROD as well. As on 21.10.2024, the panel maintained by SAROD lists a total of 90 arbitrators. A roster analysis reveals that out of 90 arbitrators, there are 21 retired judges, which is merely 23.33% in terms of retired judges who are on the current panel of SAROD. However, the pain point is that due to the onerous condition placed by SAROD of restricting three cases per arbitrator, out of the 21 retired judges, only six are eligible to accept appointments as the assignments of 15 retired judges are full. These glaring statistics put parties in extreme difficulty as they seemingly lose their autonomy in the appointment of an arbitrator.
It would be appropriate to mention that some arbitrators who belong to a non-legal background but are empanelled with SAROD possess little to no prior experience in arbitration matters. In such cases, apart from handling the intricacies of the dispute, which are often dense in construction contracts, counsels also have to take the responsibility and effort of explaining basic legal technicalities and appreciation of evidence to arbitrators during hearings. Despite such efforts, a party is under constant fear that any award rendered by an untrained legal mind may increase the probability of the same being set aside by the jurisdictional court.
Rule 15 of the SAROD Arbitration Rules provides for a code of ethics of arbitrator(s) that elaborately addresses the constituents of ‘bias’ in the absence of the same finding place under the Act. The permissibility of institutional rules defining a threshold or constituents of a sensitive phrase such as ‘bias’ in the absence of any statutory guidance remains questionable and a completely grey area under Indian law. Similarly, as per Rule 16.1, the appointment of an arbitrator may be challenged on the ground of misconduct that is supplemental to the grounds available for challenge under the Act. Therefore, this is another instance of an institutional rule-made law rather than the statutory scheme providing for the same.
Judicial instances noting arbitral institutions dictating procedure and thrusting rules
Given the existence of such arbitrary and onerous institutional rules, the ultimate consequences are borne by disputing parties. At times, and more specifically with SAROD, it may be said that institutional rules curtail the principle of party autonomy and render the hallmark of arbitration proceedings a hogwash. Issues often occur when an arbitral institution dawns the hat of a decision- making body and exercises arbitrary decision-making in stark defiance of the principles of party autonomy.
Defaults by arbitral institutions are not new in the sphere of arbitration. In Société Sisa SA v. Société filature française de Mohair, Cour d’appel de Paris (1re Ch. C)507/19492, 22 January 2009 (‘Société Sisa SA’), the claimant recovered substantial damages from an arbitral institution under French law. The disputes between a French and Spanish entity were being administered by a specialist trade association as per its own rules. The award of the sole arbitrator was in favour of the French company, albeit, the Cour d’appel de Paris annulled the award on the grounds of failure to respect the rights of the defence. As it turned out, the sole arbitrator had passed the award without an oral hearing and based on documents sent to him by the institution. Since the institution was responsible for the onward transmission of all evidentiary materials, one document that was filed by the French company was only forwarded to the sole arbitrator and due to an innocent mistake, the arbitral institution did not forward the same to the Spanish company. Resultantly, the French company was left with a worthless piece of paper in its favour – the annulled arbitral award.6Ana Coimbra Trigo and Mariana França Gouveia, ‘Liability of arbitral institutions: a case law overview’, in João Bosco Lee and Flavia Foz Mange (eds), Revista Brasileira de Arbitragem, (© Comitê Brasileiro de Arbitragem CBAr & IOB; Kluwer Law International 2018, Volume XV, Issue 60), pp. 59 – 79
The decision in Société Sisa SA is perhaps a leading precedent on the consequences of default by an arbitral institution. In terms of the Indian landscape, overreaching exercise of powers was noted by the Hon’ble Supreme Court of India (‘Supreme Court’) in Walter Bau AG v. Municipal Corpn. of Greater Mumbai7(2015) 3 SCC 800 where the Indian Centre for Alternative Dispute Resolution in India (‘ICADR’) was entrusted with the appointment process only after the failure of parties to mutually decide the arbitral tribunal. Pursuant to certain disputes, the Municipal Corporation of Greater Mumbai (‘Municipal Corporation’) failed to appoint its nominee arbitrator within a span of 30 days and consequently, Walter Bau AG (‘Walter Bau’) addressed its concern to ICADR for taking over the appointment process. Whilst the ICADR intimated to the Municipal Corporation about its default and called upon to appoint its nominee from ICADR’s panel, ICADR faulted in giving another option to the Municipal Corporation, i.e. to independently appoint an arbitrator. Since the Municipal Corporation exercised the latter option, Walter Bau approached the Hon’ble Supreme Court, assailing the acts and omissions of ICADR.
The Hon’ble Supreme Court noted the fault of ICADR in extending an unavailable option to the Municipal Corporation on its own whims and interfered with the appointment process to appoint the nominee of Municipal Corporation. Albeit the Hon’ble Supreme Court did not make any observations regarding the acts and omissions of ICADR, its interference with the procedure was sufficient to discern that the appointment process dictated by ICADR was erroneous and required judicial scrutiny and correctness.
In another notable instance, the Hon’ble Delhi High Court in IRB Ahmedabad Vadodara Super Express Tollway Private Limited (‘IRB Ahmedabad’) v. National Highways Authority of India8MANU/DE/1624/2020, appointed the presiding arbitrator from the erstwhile panel of arbitrators maintained by SAROD and categorically noted that there was no justifiable reason for downsizing of the panel of arbitrators by SAROD. The primary issue pertained to the failure of the nominee arbitrators to appoint the presiding arbitrator and whether as per the SAROD Arbitration Rules, the decision can be taken by the governing body of SAROD. In this regard, IRB Ahmedabad argued that the governing body cannot perform a decision-making function since the same was never agreed between the parties. Significantly, IRB Ahmedabad was also aggrieved by the fact that if the decision to appoint the presiding arbitrator is left with the governing body of SAROD that comprises of NHAI and NHBF officials, the presiding arbitrator may not be entirely independent and impartial.
The decision in IRB Ahmedabad is perhaps a leading example of the bitter experience of SAROD Arbitration Rules that stakeholders continue to face in the Indian landscape. Even in IRB Ahmedabad, the arbitral institution had sought to dictate the procedure to parties that strike at the heart of party autonomy. Such actions ought to be amenable to judicial review, scrutiny and fastening of liability if required. After all, with liability, legitimacy is reinforced.9Supra note 5
In M/s AG Construction-Rajendra Singh Bhamboo Infra Private Limited (JV) v. Chief Engineer, Maharashtra State Road Development Corporation Limited10ARB. P. 1420/2022, Order dated 08.05.2023, the Hon’ble Delhi High Court noted the plight of the petitioner in relation to the panel of arbitrators maintained by SAROD being downsized to 98 from 104 arbitrators and minimal availability of judicial members in the panel. It was argued that such practices are against the principle of party autonomy which is a grundnorm in arbitration. Again, This was a case of failure by the state in appointing its nominee arbitrator. Accordingly, the Hon’ble Delhi High Court appointed a sole arbitrator to adjudicate the disputes, demonstrating that the courts will not hold back in referring the dispute to arbitration if the arbitral institution fails to perform its functions.
In another case before the Hon’ble Delhi High Court – TPF Getinsa Euroestudios v. National Highways Authority of India11MANU/DE/5431/2023, certain disputes had arisen out of the termination of the contract whereby TPF Getinsa Euroestudios (‘TPF’) was appointed as the engineer for National Highways Authority of India (‘NHAI’). Even though the contract provided for disputes to be governed by SAROD, with the mutual consent of the parties, a sole arbitrator was appointed by the court itself.
Conclusion
The rule-wise analysis of the SAROD Arbitration Rules brings out a patently erroneous framework that is unworkable and runs contrary to the ethos of arbitration law and practice in India. The judicial precedents are a testament to the interference exercised by the courts at the stage of appointment of arbitrators owing to defaults and delays by an arbitral institution, specifically SAROD. Such instances are perhaps unfortunate, considering arbitral institutions are reasonably expected to ensure procedural transparency, fairness and impartiality. In view thereof, there is a great need to regulate and supervise the conduct of arbitral institutions.
As a plausible measure of reform, arbitral institutions shall be subjected to review by the concerned High Court of the state in terms of reviewing case management statistics and administrative functioning. Arbitral institutions shall submit monthly reports to the Chief Justice of the jurisdictional High Court disclosing the status of ongoing arbitration cases and fresh requests for invoking arbitration, along with details regarding the strength of the administrative staff and revealing any proposed amendments to the procedural rules.
Insofar as the commencement of a new arbitral institution is concerned, the procedural rules for conducting the arbitral hearings shall be approved by the Chief Justice of the jurisdictional High Court to ensure that the same aligns with the provisions of the Act. Rules may be supplemental to the Act but should not be dehors the provisions of the Act.
To ensure the independence and autonomous status of such arbitral institutions, the Chief Justice of the jurisdictional High Court must not intervene in their day-to-day affairs; however, there ought to be a supervisory role to ensure fairness and transparency.
In addition to maintaining a panel of arbitrators, the arbitral institution shall maintain a repository of each arbitrator’s relevant experience to avoid any secrecy in their background. Considering their non-legal background, there are multiple instances when parties are unaware of a technical arbitrator’s prior experience. This layer of transparency will aid the parties in making a more informed decision and align with the principles of party autonomy.
Before parting with the afore-stated recommendations, it is imperative to appreciate that negotiating dispute resolution clauses in standard-form contracts has become equally important as any other obligatory clause. Stakeholders must pay attention to the governance of arbitral proceedings by a specific institution and peek into its rules and background to ensure disputes are efficiently resolved. After all, an arbitral institution is bound to facilitate the dispute and resolve problems instead of creating another dispute. It must be appreciated that more than the mere promotion of institutional arbitration; the operational efficiency of such institutions requires an overhaul. In the present framework, there appears to be a chasm between the cup and the lip.
Recent Post
