arbitration meaning
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This Article is written by Shreya Tripathi of Banasthali Vidyapith, Jaipur. In this article she gives an overview of Arbitration in India, about its proceedings, agreement and enforcement of foreign awards.

Earlier there were no rights and no laws as people were not educated and didn’t have any knowledge regarding arbitration. But later on, when people started getting civilized, the rights of individuals were considered which also gave birth to conflicts. In such cases, one party used to approach a third person whom they trust and resolve the matter with their suggestions. The same principle applies in today’s era as well. As the need for globalization and commercial market is increasing, more disputes are being seen between the parties related to their contracts and agreement held between them which brings us back to a mutually decided person who will dissolve their dispute and in legal term, known as an “Arbitrator” or “Mediator”. They are the people who are assigned the work to dissolve commercial disputes between the parties being an independent person, without approaching the court and saving their time and money.

Arbitration is considered as an alternative dispute resolution procedure under which mediation and conciliation are also included. It is considered as International commercial arbitration where two parties from two different countries approach an international arbitrator either by their mutual consent or through an arbitration institution and dissolve their dispute accordingly. The alternative dispute resolution procedure has gained importance in the last few years due to the increase in commercial market dispute and also it is a speedy, cost-effective and efficient way of settlement. The United Nations have given due recognition to Model Law of International Commercial Arbitration and Conciliation rules given by the United Nations Commission on trade and law ( UNCITRAL). The model law and rules have played a significant role in the settlement of commercial disputes and provided rules to various other countries. These can be adapted and made according to their municipal laws as earlier there was no unified law related to trade and its need was felt with globalization which further gave rise to disputes related to it.

Based on UNCITRAL model law India enacted the Arbitration and Conciliation Act, 1996 further amended in 2015 which deals with domestic and international commercial arbitration in India. The amended Act especially emphasizes minimizing the role of judiciary court in arbitration proceedings and further to consider every arbitration order or award as a decree as it is been considered in civil procedure code. The Act is categorized in two, Part I deals with significant provisions which deal with domestic and International commercial arbitration procedure to be conducted in India irrespective of nationality and Part II talks about enforcement of foreign arbitration award.

In spite of the need for arbitration, there are some disadvantages where arbitration cannot be used as an effective mode of settlement, as:

  1. Arbitration lacks in granting authoritative remedies such as permanent injunction and specific performance order.
  2. In certain cases, the arbitrators do not have jurisdiction and are excluded to try the case.
  3. The cost can be a major factor as, if the arbitration proceeding is delayed, the cost keeps on increasing and especially, in the cases where three arbitrators are appointed by the parties.
  4. No appeal can be made for an arbitration order granted by the arbitrator.
  5. Lack of cross-examination as the process relies on evidence and not on witnesses.

Arbitration agreement

Defined under Section 2(b) read with Section 7 of the Act.

It can be defined as a written statement or exchange of communication between the parties or any statement made through means of telecommunication. It is not compulsory for the parties to sign or unsign it. Even if an arbitration clause is present in the agreement it would be considered as an arbitration agreement.

Rickners Verwaltung Gmbh vs. Indian Oil Corporation, 1998 stated that the intention of the party in arbitration gathers information in the form of expression and the meaning it conveys. An arbitration agreement would be a statement made by one party regarding the claim in dispute and not denied by the other party.

Non Intervention of Court in the Arbitration process

As per Section 5 of the Arbitration and Conciliation Act, 1996 the court cannot interfere in the arbitration proceeding except wherein provided by the act in the following situations:

  • Where an arbitrator needs to be appointed when the parties cannot appoint a mutually independent arbitrator.
  • In cases of taking the shreds of evidence.
  • Where the court is ruling in the cases as the arbitrator is terminated due to incapacity or other sufficient reasons mentioned under the Act.

Section 8 is a companion section which says “where a party has approached the judicial court to dissolve a dispute and it is exclusively to be trialled by the arbitrator, then the court must direct the person to start the arbitration proceeding first without any delay and may come later to the court when arbitration award has been made.”

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Interim measure

A party can seek interim measures for which two avenues are open to them which is:

  • Approach the court under Section 9.
  • They may approach the arbitral tribunal under Section 17 of the Act.

Section 9 of the Act enables a person to approach the competent court before or after or during the arbitral proceedings are made but before the enforcement of the arbitration award.

In the case, Sundaram Finance v. NEPC, 1999 (2) SCC 479 the Apex Court of India held that if a party approaches the court before the commencement of arbitration proceedings, he must serve a proper notice to the opposite party as to invoking the arbitration and further, the court must satisfy the party as to first approach the arbitrator and take effective steps to settle the dispute without any delay. For this purpose, the court must be satisfied as there exists a valid arbitration agreement between the parties.

Under Section 17 the parties can also approach the arbitral tribunal and in such cases, the tribunal has the power to grant interim measures related to the subject matter in dispute. The interim measures are the urgent measures required by the party to preserve and protect his property, measure related to payment of claim etc.

Arbitrators

Appointment of the Arbitrator

The appointment of arbitrator is given under Section 11 of the Act. The Act provides full freedom to the parties to appoint an arbitrator as of any nationality unless agreed by the parties. However, in the case of failure to appoint an arbitrator the parties can approach the court to make such an appointment. In case of domestic arbitration, the Chief Justice of the High Court has the authority to appoint an arbitrator to the parties and in case of International Commercial Arbitration, the Chief Justice of India has the authority to make such appointment as in India, the foreign disputes must be dealt by the highest judicial officers.

In the case of Konkan Railway Corporation v. Rani Construction Pvt Ltd, 2002 the Supreme Court held that the function of Chief Justice of India and his designates is to ensure the nomination of an arbitrator who is independent, competent and impartial and  settles the dispute between the parties to the best of his knowledge.

Power and Duties of Arbitrator

Power

Duties

Pass Interim Order

Order of Appointment

Decide the Process of Arbitration Proceedings

Timely adjudicate the matter

He has the power to Terminate the procedure

Act Judicially and Impartial

Appointing an Expert person

Encourage settlement of the matter

Seeks Court permission in taking evidence

Misconduct is not allowed

Correct the error in interpretation of the award

Pass the final award

Challenging an Arbitrator

An arbitrator can be challenged under Section 12 of the Act in the following two circumstances as

  • Grounds related to his independence or impartiality.
  • If he does not possess sufficient qualifications as to agreed by the parties.

Section 13 talks about the challenge procedure and specifies the time limit under Section 13(2) as within 15 days after becoming aware of the constitution of the Arbitral Tribunal and any other circumstance, the party can make a written statement specifying the reasons to the Arbitral Tribunal and it is the Arbitral Tribunal and not the court who will decide on the matter of challenge.

Termination of an Arbitrator

The Act provides for the termination of an arbitrator under Section 14 of the Act and it can be made in two circumstances which are:

  • If he fails to act without undue delay, &
  • If he is unable to perform his function due to De jure or De facto.

In case of any controversy in regard to the situation, the parties can approach the court.

Types of Arbitration proceedings

In India, the arbitration proceeding is broadly categorised into Ad-hoc arbitration and institution arbitration.

Under ad hoc arbitration the parties themselves commence the arbitration proceedings and determine the conduct of arbitration proceedings. In ad hoc arbitration if the parties are not able to appoint a mutual arbitrator then either of the parties can invoke Section 11 of the Act. Under ad hoc arbitration the parties and the arbitrator both have to agree on the fee of the arbitration proceedings which is usually expensive.

Under institutional arbitration, arbitration is administered by the arbitration institution. The parties can approach any arbitration institution and they themselves appoint an arbitrator and the proceedings can be commenced. The Indian Institution includes the Indian Council of Arbitration and International Centre for Alternative Dispute Resolution. The International institution includes the International Court of Arbitration, American Arbitration Association. All these institutions have expressly formed rules to deal with all the possible disputes with arbitration proceedings.

Arbitral proceedings

The arbitrators are the masters of the arbitration proceedings and can conduct the proceedings in the manner they feel appropriate. This power includes relevance, the weight of any evidence, admissibility. The only restriction on them is they need to treat both the parties with equality and both parties must be given equal opportunity to present his case, without any biasedness. The Indian Evidence Act, 1872 and the Civil Procedure Code,1908 both do not apply on the arbitration proceedings. Generally, oral documents are been considered on the request of the parties and a further piece of evidence can be presented if required. The arbitrator has the power to grant ex- parte order in a case where the respondent fails to appear in court or without sufficient cause fails to communicate his statement of defence, the arbitrator can grant ex-parte order. However, the court should not treat this order and act of the respondent as admission and use against him to terminate the proceedings.

The Governing law

To determine the rules of law applicable to disputes, the law makes a distinction between the Domestic Arbitration and International Commercial Arbitration proceedings. Under International Commercial Arbitration, the court must apply the law of land, where the dispute arises and as agreed by the parties and in case of failure to do so the tribunal must apply rule of law considering appropriate as per the circumstances. Indian Courts have accepted long back that in case of absence of any arbitration agreement the arbitrator can apply the law which is most closely connected and relevant to the subject matter in dispute. However, the Indian tribunals are obliged to apply substantive law where the parties are Indian. Further, the tribunal can grant award as it deems fit and may pass the interest from the day of arising of the cause of action till the arbitration award has been granted as it seems reasonable. In the amendment Act, 2015 the interest rate has been increased by 2%.

In case of foreign dispute the rate of interest will be governed by The Civil Procedure Code, 1908 as it empowers the court to grant pendente lite interest as well as interest from the day of cause of action until the arbitration award is granted. In the case of commercial disputes, the rate of interest should not increase the contractual interest and in its absence, the tribunal can make interest as generally provided by the recognized banks and institutions.

Arbitral Award

The arbitration award granted by the arbitrator can be challenged under Section 34 of the Act by making an application under it only on the basis of grounds specified therein and they are as follows:

  1. The party was under some incapability to make an application;
  2. The arbitration agreement agreed by the parties was not valid as per the law;
  3. The party making the application was not given proper notice for appointment of the arbitrator or arbitral proceedings;
  4. The award made is out of the Scope of arbitration and does not deal with the dispute;
  5. The award made is contrary to public policy;
  6. The subject matter dealt is not capable of settlement by Arbitration.

An application to set aside the award must be made within 3 months from the date of receipt of such award by the applicant which can be further extended to 30 days on giving sufficient cause of delay.

The Saw Pipes Judgement

The Case of ONGC v. Saw Pipes Ltd., AIR 2003 SC 262 was a landmark case in the history of arbitration. The courts do not have the power to deal with the Arbitration proceedings but however, it was put into test. The court was concerned about the arbitration award which disallowed the liquidated damages. Under Indian law, it is covered under Section 74 of Indian Contract Act, 1872. In the proceedings, it was held that the award granted if violates any Act or any provision of law will also be a ground to set aside the award made. Further, the judgement expanded the concept of public policy and held that if the award is contrary to the public policy, it is clearly illegal.

However, this judgement is only confined to domestic arbitration awards.

Phulchand Export Ltd vs. OOO Patriot, 2011 expression “Public policy” is defined under Section 48(2)(b) of the Act, has a deep meaning and award can be set aside, if it is clearly illegal.  

International Commercial Arbitration

International Commercial Arbitration is defined under Section 2(f) of the Act. The Act governs not International Arbitration and the Domestic Arbitration but in these two situations it differs from each other under Part I of the Act and which is as follows:

  1. In case of appointment of an arbitrator;
  2. In relation to determining the governing law.

It can be defined as an arbitration where at least one of the parties which can be an individual, a company or association of individuals who are from outside of India and habitually reside out of the jurisdiction of India in any other country whose Central management is controlled in any other country and not by the Indian government.

Enforcement of Foreign award

The enforcement of the foreign award is given under Part II of the Act which relates to both the New York Convention award and Geneva Convention award.

Definition of Foreign award

Under Section 44 of the Act, it is given that an Arbitration award made by any county to whom the Central government recognises as a territory by making a notification and to whom the New York Convention applies. Even if a country is a signatory to the New York Convention this does not mean that their award can be made in India, there has to be a further notification by the Central government to recognise it as a territory.

So far only 43 countries have  been recognised by the Central government to be a territory and execute their award in India.

In 2012, the face of International Commercial Arbitration changed when the Supreme Court of India made a judgement in the case of Bharat Aluminium Co. V. Kaiser Aluminium technical services Ltd, (2012) 9 SCC 552. Mostly commonly known as BALCO case and gave the following guidelines as:

  1. In the case of International Commercial Arbitration where the seat is outside India, no application can be made in Indian courts for interim relief and they don’t have any authority in this regard.
  2. The award granted in International Commercial Arbitration will be subject to Indian jurisdiction only when they are to be enforceable in India.

Requirements for enforcement of Foreign award

The following essential must be made to enforce any foreign award and they are:  

  1. Original award or authorized copy where the award was made;
  2. Evidence to prove that it is a foreign award;
  3. The award must be given in a Convention country;
  4. The agreement must be in writing;
  5. The agreement must be valid and should arise from a Commercial agreement.
  6. The award made must be unambiguous.

Khardah company v. Raymond and Co, AIR 1962 SC 1810

In this case, the Court held that a foreign award cannot be made to be enforceable in India if it’s integral part is declared to be illegal.

Koch Navigation v. Hindustan Petroleum Corporation, AIR 1989 SC 2198

In this case, the Court held that to give effect to the award it must be clear, unambiguous and capable of enforcement through Indian law.

Unenforceable award

An Indian court can refuse to enforce a foreign award if it falls under any of the following categories:

  1. The agreement is void in nature;
  2. The parties to the agreement are under some sort of incapacity;
  3. The party making the application was not given proper notice for appointment of the arbitrator or arbitral proceedings;
  4. The award made is out of the scope of the arbitrator and does not deal with the dispute;
  5. The award made is contrary to public policy;
  6. The subject matter dealt is not capable of settlement by Arbitration.

Conditions for enforcement of Foreign award

Where the Court is satisfied that the award made is capable of enforcement it should be deemed to be a decree and executed in the same way as given under CPC, 1908. Basically, there are a few noteworthy differences between Section 34 and 48 of the Act as under Section 34 under domestic award the court can set aside an award whereas in section 48 the court can only refuse to execute the foreign award and cannot set aside it. The only way to set aside a foreign award in India is by way of filling a Civil Suit under the Specific Relief Act.

The second difference between the two Sections is under foreign award, there exists an additional ground where the court can deny to execute the decree as to whether it is binding on the parties or not. If the decree passed does not bind the parties it can be refused to be enforced in India.

An appeal lies from an order of the court where it refused to enforce a foreign award but surprisingly no appeal can be made where the Court has rejected the objections to enforcing a foreign award. However, the Constitutional remedy can be approached by the parties under Article 136 as a special leave petition to the Supreme court.

Limitation Period for enforcement of awards

  1. Domestic award

As the Arbitration award passed under Arbitration proceedings is considered as a decree in the Case of M/s Umesh Girl v. Himachal Pradesh cooperative group housing Society, 2016 (11) SCC 313 the Supreme Court of India held that according to Limitation Act, 1963 the limited time period for enforcement of a decree is twelve years.

  1. Foreign award

Various Courts have given their interpretation in this regard and it varies from each other. The Bombay High Court has held that as the foreign award is not a decree a Competent Court is required to make it enforceable and make it binding on the parties which involve a two-step procedure for which the limitation period would be 3 years for recognizing a foreign award as binding on the parties and thereafter, further 12 years are present to enforce the decree. On the Other hand, the Madras High Court has ruled an opposite judgement and held that the foreign award is similar to the domestic award and it is already stamped therefore, no procedure is required and parties can straight away apply for its execution and 12 years are present to enforce the foreign award as a decree in India.

Conclusion

In the early period, the Concept of Arbitration was introduced but by the efforts of due recognition to Model Law of International Commercial Arbitration and Conciliation rules given by the United Nations Commission on trade and law ( UNCITRAL). The model law and rules have played a significant role in the settlement of commercial disputes and provided rules to various other countries which they can adapt and make according to their municipal laws as earlier there was no unified law related to trade and its need felt when globalization started which further gave rise to disputes related to it. Further the Act was amended in 2015 with better updates.

Reference  

  1. https://www.vakilno1.com/legal-news/law-of-arbitration-in-india-in-a-nutshell.html
  2. https://www.lexology.com/library/detail.aspx?g=72bcbbe3-c139-46f2-b9ce-086394161f41
  3. https://www.myadvo.in/blog/steps-of-arbitration-in-india/

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