In this blog post, Rituraj Singh Bhati, pursuing M.A. in business law from NUJS, Kolkata, analyses 10 things about arbitration that every Indian businessman should know.

Arbitration has its roots pretty deep in India; from ancient times people of India believed and followed the Panchayat system wholeheartedly where the person aggrieved would voluntarily take the dispute or grievance to the group of learned and wise men of the community referred to as Panchayat for a final and binding decision. Further, in the modern era, Britishers under their rule passed Bengal Regulations, 1772; which provided the references for the courts to arbitrate with the consent of the parties in suites instituted for dispute in accounts, partnership deeds and breach of contract.

Before the enactment of the act of 1996 the arbitration in India constituted of three statutes mainly:

• The Arbitration (Protocol & Convention) act, 1937.

• Indian Arbitration Act, 1940.

• The Foreign Awards (Recognition and Enforcement) Act, 1961.

 

All the previous statutes were repealed by The Arbitration and Conciliation Act, 1996; which was enacted to substitute the out-dated 1940 Act. While the 1940 Act was perceived to be a good piece of legislation in its actual operation and implementation by all concerned parties, arbitrators, lawyers and the courts, it proved to be ineffective and was widely felt to have become out-dated.

The Act of 1940 only dealt with domestic arbitration, whereas the act of 1996 was tailored to meet up the new expectation of the upcoming economic revolutions and therefore covers domestic as well as ambit of International Trade Related disputes which are purely based on Civil contractual Liability.

Arbitration in India is controlled by The Arbitration and Conciliation Act, 1996 which came into force on the 25th day of January 1996; which was amended recently by the Arbitration Ordinance 2015. Arbitration is an alternative to the judicial method and is one of the major methods proposed under ADR (Alternative Dispute Resolution). The Act of 1996 has given Arbitration an authority of adjudication by a quasi-judicial tribunal that too with a policy of non-intervention by courts in Arbitral proceedings; which signifies that the Arbitral Tribunal is a free entity and ex-checker of its own decisions. Though an appeal to the High Court is maintainable but none of the courts can have absolute intervention in Arbitration Tribunal’s proceedings.

Before the Act of 1996, the Arbitration in India was governed by the Arbitration Act of 1940, which was based on the ‘English’ Arbitration Act of 1934 through which the British were governed. The act of 1996 is based on The UNCITRAL (The United Nations Commission on International Trade Law) established in 1966 which is a subsidiary body of General Assembly of United Nations with general sanction towards unification and progressive harmonization of the laws of international trade. The present act has the basis of UN Model Law on International Commercial Arbitration, 1985. Though being based on Model Law of UN the act of 1996 differed and went beyond the predecessor Model Law; firstly, the act of 1996 applies to domestic as well as international commercial arbitrations whereas the Model Law was designed only to apply to international commercial arbitrations. Secondly, the act of 1996 was designed accordingly to minimize the judicial intervention by the courts whereas Model Law was silent on the judicial intervention. The transmutations brought by the act of ‘96 were so far-out that the entire case laws compounded in the last fifty-six years on arbitration were rendered to be supererogatory; therefore the Supreme Court held in the case of Sundaram Finance vs. NEPC Ltd. that the provisions of the act of 1996 have to be interpreted and construed independently and in fact reference to the act of 1940 may lead to misconstruction.

The PREAMBLE thoroughly explains the feature and role of the newly formed Arbitration and Conciliation Act 1996:

“An Act to consolidate and amend the law relating to domestic arbitration, international Commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto.”

The Beneficial features of the Act.

• Fair resolution of a dispute by impartial tribunal without any unnecessary delay or expense;

• Arbitration clause is an agreement within an agreement;

• Arbitral Tribunal works under an ambit of the parties agreement;

• Party autonomy is paramount subject only to such safeguards as necessary in public interest;

• A Unilateral document cannot be deemed and constituted as an arbitration agreement;

• No party can unilaterally terminate the agreement to arbitration.

• Arbitration clause survives the breach of the agreement as well as its termination;

• Arbitration is an alternate remedy, the parties can apply before courts even if they are bound by an Arbitration Clause;

• The Arbitral Tribunal in enjoined with a duty to act fairly and impartially.

• Framing of issues is not necessary for arbitral proceedings;

• Arbitration Agreement demands to be in writing to lessen the possibility of conflict;

• Arbitrators are not bound by any procedure and are a master of their own procedure;
• Neither Code of Civil Procedure, 1908 nor Indian Evidence Act, 1872 is substantially applicable to the arbitral proceedings.

The main objectives of the Act

• To cover International commercial arbitration and conciliation comprehensively as domestic arbitration and conciliation;

• To construct provisions for fair arbitral procedure which is, in turn, efficient and capable of meeting the needs of specific arbitrations;

• To establish a system where the arbitration tribunal gives reason for its arbitral award;

• To ensure that the limit of jurisdiction is strictly followed by The Tribunal;

• To minimise the supervisory role of courts in arbitral process;

• To permit the Arbitration Tribunal to use other methods of ADR (Alternative Dispute Resolution) during the arbitral proceedings to encourage settlement of disputes;

• To see that every final arbitral award is enforced in the same manner as it were a decree granted by the Judicial Court.

• To provide confidence that every settlement agreement reached by the parties as a result of conciliation proceedings will have the status and effect as an arbitral award rendered by an Arbitration Tribunal.

With such accurate measures and features of the Arbitration and Conciliation Act, 1996 the arbitration tribunal has grown to be an independent and self-righteous entity with near to non-intervention by the judicial courts; which was one of the main motives of the act to lessen the burden of courts in the country which are already flooded with pending and under-trial cases. Nearly 30 million cases pending in courts. “Though the role of courts is minimized but the number of cases arising out of arbitral proceedings have increased which states that the role of courts cannot be excluded.”

The tribunal requires Judicial Supervision; but the interference is kept limited to only three situations where a court can intervene in an arbitral proceeding, which are mentioned below:

• Appointment of Arbitrator (Under Section 11).

• Ruling on whether the mandate of arbitrator stands terminated due to inability to perform its functions or failure to proceed without delay [Under Section 14(2)].

• Assistance in taking evidence (Under Section 27).

 

The essential elements of an Arbitration Agreement that every Indian Businessman should be aware of:

Things that should be present in an ideal Arbitration Agreement’s draft not only for institution of the dispute under the ambit of Arbitration & Conciliation Act, 1996 but also to provide the effective and speedy procedure:

• Who are the parties to be bound by the agreement?

• Clear mentioning of the intention to take the disputes to Arbitration Tribunal whenever the situation arises.

• Number of arbitrators to sit in Arbitral proceedings if in case any dispute arises between the parties to the agreement.

• Mode of appointment of the members of arbitral proceedings.

• Appointing the authority; other than the parties themselves.

• Tribunal Member’s qualification.

• Place of Arbitration (where the arbitral proceedings will take place in case of any dispute).

• Choice of language.

• Procedural Law to be followed during Arbitral Proceedings.

• Rules for procuring evidence.

• Procedure for challenging an Arbitrator.

• Drawing a line regarding the termination of mandate of an Arbitrator.

• Right to amend pleadings to augment claim or defence.

• Appointment of experts as Arbitrators as well as members, if any.

• Time limit regarding interpretation or correction or additional award.

These elements are essential in an arbitration agreement or arbitration clause for better understanding of the proceeding and to save the parties to the agreement from further confusion which is prevalent in people’s minds.

10 things Indian Businessmen should know about Arbitration

• It is mandatory to have Arbitration Agreement / Clause in writing:

The parties interested in having the dispute resolved by Arbitration Tribunal; should have the arbitration agreement/clause in written. The agreement referring to resolution through ADR / Arbitration / Conciliation should autonomously be present at the time of contract or agreement; or there should be an independent clause mentioned in the contract as “Arbitration Clause” to attract the provisions of Arbitration and Conciliation Act, 1996.

An arbitration agreement is said to be in writing if:

• A document is signed by parties;

• An exchange of letters or other means of telecommunication which provide a record of the agreement between the parties.

• An exchange of statement of claims and defence in which the existence of the agreement is alleged by one party and not denied by the other.

 

An oral agreement to submit a dispute to arbitration will not be binding; if the agreement is in writing it will bind, even if some of the details are filled in by oral understanding of the parties. It is not mandatory that the agreement should be on a formal document, nor it is necessary that the agreement be signed by both or either party. But, on the other hand, it should be necessary for the Clause to apply that there should be a mandatory requirement for settlement of dispute by means of arbitration. An agreement that the parties may present their dispute as a ‘suit’ before the court or present it before an arbitration tribunal; shall not be an arbitration agreement. The presence of a concluded consent of the parties to refer their disputes to arbitration is a necessity.

• Arbitration is an alternate remedy; parties can go to the court if they will.

The movement towards ADR was endorsed by a resolution at a meeting of Chief Ministers and Chief Justices. The meeting noted that the courts were not in a position to take the entire burden of administration of justice and that a number of disputes were capable of being disposed by alternative methods such as arbitration, conciliation, mediation and negotiations.

Alternate Dispute Resolution (ADR) is supposed to provide an alternative not only to civil litigation by adjudicatory procedures but includes also arbitration itself. The institute of arbitration has been a very useful alternative to litigation. Arbitration has been mother source of all the other alternatives not only in substance but also in the procedural working of alternative methods.

Thus, Arbitration Tribunals are an alternative to settle the dispute without the lengthy and slack procedures. But, of course, you can apply to the court of appeals if not satisfied by the award of the Tribunal.

• The relation between the parties need not be contractual a dispute in tort can also be referred.

Arbitration does not bind the parties to have contractual relationship to opt for Arbitration. If a dispute of Tortious nature arises out of a contract it is surely eligible to be brought before an arbitration Tribunal. Speaking at large a lot of disputes of civil in nature can be dealt by arbitration; for example Breach of contract, question of marriage right to hold the premises etc.

Though Arbitration doesn’t deals with certain matters; or example disputes related to appointment of guardian, disputes pertaining to criminal proceedings, winding up of a company, matters of divorce etc. the list is incomprehensive.

Supreme Court in the case of Renusagar Power Co. Ltd vs. General Electric Co. stated that the question is not whether the claim lies in tort but the question is whether even though it has lain in tort it has “arisen out of” or “is related to” a contract, that is to say, whether it arises out of “breach of terms of contract” or is consequential upon any breach thereof.   

• Attorneys need not be appointed; party can represent themselves in the complete proceedings.

Arbitral proceedings’ being quasi-judicial in nature does not require an Attorney contesting the proceedings before the Tribunal. The same duty performed by an appointed attorney can be undertaken by the parties to the agreement themselves.

Parties can contest their own case without investing money into attorneys which in turn makes it time and money saving alternate to resolve a dispute. For the same reason of self-contestability of the proceedings the procedures of the arbitration are kept easy and flexible so that the party does not have to suffer any damage for not being acquainted with the procedures.

• Burden of Proof / Nature of Evidence taking.

The burden of proof in an arbitration proceeding lies upon the party who has first moved an application before the court for appointment of an arbitrator in case of a dispute between the parties to the agreement.

Speaking in general sense the burden of proof in an arbitral proceeding is dealt in the same manner as it is dealt in Civil and Criminal cases. The person first claiming before the Authority has the burden to prove his point first so that the court can decide that the case is even contestable.

There is no specific procedure for procuring evidences unlike Civil and Criminal Courts which procure their evidences according to the Indian Evidence Act and Code of Criminal Procedures accordingly. The Arbitrator is the master of his own procedure; upon the conditions of specific dispute the arbitrator can choose the way of evidence procurement that is most suitable according to the dispute.

• No Court Fee.

Unlike the for the proceedings of Civil / Criminal Courts the parties referring to The Arbitral Tribunals are not forced by the law to submit the court fee by the percentage. If a person takes his dispute before the Court of Civil nature he has to submit a certain percentage of the amount in dispute to be eligible to present his grievance before the court for construing his dispute; whereas if a party to an agreement opts for Arbitration for resolving the dispute, the party saves the certain percentage of the amount in dispute he would have to submit to the court as court fee. If Arbitration is chosen over the Civil Court the parties to the arbitration agreement  saves the Court fee to be submitted plus if the parties are willing to contest their disputes themselves before the tribunal they may well save the cost for hiring an Attorney.

In opting for an Arbitral Proceeding the parties saves numerous of expanses and costs for example Court fee, Suit valuation fee, Stamp duties and other procedural fees on account of application fee, notice fee resulting in saving a lot of cost as burden upon the parties.

• Arbitral Tribunal bound to pass the award within 6 months (Fast Track) & 12 months by general procedure.

The arbitration Tribunals are bound by the Arbitration and Conciliation (Amendment) Act of 2015 to pass the award within 12 months from the date it enters upon reference. The said period of 12 months can be extended by the consent of parties up to the extent of 6 months further; after which the mandate of the arbitrator shall deem to terminate. Also when the period is extended above from 12 months the Court may order for reduction in the fee of arbitration by up to 5% for each months delay in proceedings. The application for extension of time shall be decided by The Court within 60 days from the date of notice served upon the opposite party.

The Ordinance also states the procedure for FAST-TRACK settlement of dispute; which any party can opt for at any stage of the on-going arbitral proceeding. In the Fast Track option the Tribunal is bound to pass the award within 6 months form the day the new procedure is opted.

• No more automatic stay on enforcement of award.

By the ordinance of 2015 the facility of automatic stay execution of the award is no more a feature of Arbitration and Conciliation Act, 1996. Adhering to the amendment by the Ordinance of 2015 the party interested in the stay of execution of the award would be bound to get a specific order from the Court for staying the execution of the award thorough an application moved to the Court for the specific purpose. In the earlier proceedings the award was stayed automatically just by filing an application to set aside the award under Section 34 of the Act.

Seeing the flexibility provided to the act this provision has been sided so that the business of the parties should not suffer just because either party doesn’t corresponds to the award passed.

The new law also empowers the court to grant a stay on operation of Arbitral Award where the whole or a part of the awarded amount is still to be deposited.

• Arbitration Clause survives the breach and even the termination of the Principle Agreement.

Arbitration Clause is deemed to be an agreement within an agreement. Therefore, the breach of the principle contract or agreement would not cause any damage to the arbitration; which if invoked would defeat the sole purpose of constituting the arbitration clause in the agreement. Whether the agreement ceases due to breach or termination the arbitration clause survives the effect.

Supreme Court in the matter of Ashapura Mine-chem Ltd. Vs. Gujrat Mineral Development Corporation observed that the arbitration clause is an independent arbitration agreement therefore, even if the parties choose to terminate the agreement; the arbitration clause would continue to be valid and be bounding upon the parties.

• Power to choose Arbitrator for the proceedings.

This right given to the parties to choose their Arbitrator for resolving their dispute is the real influencer for people to opt for Arbitration. The Arbitrator can be chosen even at the time of preparing the arbitration clause with the Name of the preferred Arbitrator mentioned in the Clause. The Arbitrator is not specifically to be bound by qualification to adjudge the subject of proceedings he is holding; speciality is not a mandate. Arbitrators can be chosen from Retired Supreme Court / High Court Judges, District Court Judges, Learned Councils, Solicitors / Partners of Law Firms, External Experts etc. If in any case the Arbitrator’s name is not mentioned beforehand, it can be prayed before The Courts to appoint the Arbitrator to resolve their dispute. Even the Arbitration Clause if not mentioned in the agreement can be added even after the signing of the agreement as the Arbitration Agreement need not be signed. The validity of the agreement can be traced out by the conduct of the parties.

Arbitration is the best and very rapidly growing tool of Alternative Dispute Resolution system. Even though the scope of arbitration is quite narrow, as the Arbitration Tribunal operates under a close ambit of the act and parties agreement. It is bound to resolve only the disputes occurring out of the agreement between the parties and nothing out of it. Arbitration being narrow scoped has also turned to be expensive deviating from its sole purpose.