This article is written by Astitva Kumar, a student at Guru Gobind Singh Indraprastha University. The article is the outcome of detailed research and analysis on the topic of arbitration; how it has emerged and its future growth.
Arbitration is a reference to the decision of one or more persons, either with or without an umpire, of some matter or matters in difference between the parties.
In Halsbury’s Laws of England, the term ‘arbitration’ has been defined as: The term “arbitration” is used in several senses. “It may refer either to a judicial process or to a non-judicial process”. A judicial process is concerned with the ascertainment, declaration and enforcement of rights and liabilities as they exist, under some recognised system of law. Industrial arbitration may well have its functions to ascertain and declare, but not to enforce, what in the arbitrator’s opinion ought to be the respective rights and liabilities of the parties, and such a function is not judicial.
Arbitration has long been used as a way of alternative conflict resolution. The UNCITRAL (United Nations Commission on International Trade Law) framework of laws was used to model the Arbitration and Conciliation Act 1996, to modernise Indian arbitration law and bring it in line with best global practices, as well as making India a global hub for arbitration.
Though changes in the legislation have made arbitration a popular alternative to litigation; it is important to remember that the vast majority of arbitration in India is ad hoc, with institutional arbitration accounting for only a small part of all cases. Various attempts have been made to characterise the increasing popular knowledge of legal arbitration forms. Rene David describes arbitration as the resolution of a disagreement between two or more parties by a third distinct party or parties, and his definition is one of the most well-known. The agreement between the parties, not the state, gives these private parties their power.
Fundamental elements of arbitration
Arbitration is a method of resolving disputes outside of a country’s national courts, in which the parties involved refer the problem to a neutral party or parties for resolution. The sole arbitrator, or the Arbitral Tribunal in the case of several arbitrators, is the third impartial party. The arbitral tribunal is usually made up of professionals in their professions who are familiar with the law and the parties’ current or potential disputes. The parties’ arbitration agreement can be in the form of a separate contract or it can be inserted in the original contract as an arbitration clause.
The main element of this technique is that the parties expressly agree that in the case of a dispute between them, the matter will be brought to the arbitral tribunal specified in the agreement for final determination and resolution. Parties prefer arbitrators and arbitration as a means of conflict resolution in general because they follow processes that allow them more flexibility. Since many conflicts include global laws, these arbitral tribunals are better equipped to handle such cases than national courts. In India, arbitration is defined by Section 2(a) of the Indian Arbitration and Conciliation Act, 1996, which, however, does not define what arbitration is, just stating that it is “Any arbitration whether or not administered by a permanent arbitral institute.”
Arbitration has four main characteristics:
- It functions as a natural alternative to national courts;
- It is a privately funded way of conflict resolution;
- The parties are in charge in this mode of dispute resolution; and
- It is binding on the parties.
Perhaps the most appealing characteristic of arbitration is that the parties have complete control over the process, resulting in higher satisfaction with the final verdict than with the results of litigation. Arbitration might be either institutional or ad hoc. The parties determine components of the arbitration such as the number of arbitrators, their appointment, the laws applicable, and the procedural law relevant to the arbitration in ad-hoc Arbitration. Institutional arbitration, on the other hand, is administered by a prop to the early recognised institution. To govern the arbitration, each institution has its own set of norms and frameworks.
Emergence of arbitration
Before any written legislation, India had a long tradition of arbitration, and the concept of non-judicial dispute resolution was widely accepted in Indian society. Yajnavalka’s writings allude to ancient India’s unique arbitration courts. Even India’s panchayat system is regarded as one of the earliest forms of dispute resolution. “It is undoubtedly a striking characteristic of ordinary Indian life, I would even go so far as to say that it is considerably more prevalent in all walks of life than it is in England. Referring a problem to a sarpanch is a natural means of resolving many conflicts in India. It’s possible that the panch resembles a judicial court in some circumstances since the panch can act based on one party’s complaint rather than both parties‘ agreement, such as in a caste dispute. However, in many circumstances, the conclusion is reached through mutual agreement.”
Arbitration has been a part of Indian culture since the dawn of time. Local forms of self-government, such as jirgas and panchayats, held informal arbitral processes and were held to be legally binding. Local luminaries, frequently village elders or individuals of high social status, were nominated to settle disagreements within communities in these types of dispute resolution. This traditional council of adjudicators eventually evolved into the panchayat raj, an Indian type of self-rule that included arbitral techniques as part of a post-colonial ideal of local governance and grassroots democracy. Even early descriptions of arbitration can be found in Hindu mythology. In various versions of the Ramayana, Lord Rama and his family try to reconcile their differences with the help of the gods. Arbitration was given a limited, but gradually developing, role in the adjudication of Indian economic disputes under the British colonial government.
On the 13th of July 1960, India ratified the New York Convention, and the Foreign Awards (Recognition and Enforcement) Act, 1961 was established to give effect to the convention’s Articles. The Act of 1961 was a significant step forward in the development of international commercial arbitration, as it recognised arbitral awards made outside of India’s borders in India. “Foreign Awards will be enforceable in India as if they were awards made in India,” according to Section 4 of the aforementioned Act. The Act also included provisions for “staying proceedings in matters agreed to be referred to arbitration,” “filing of the awards in the court,” “judgement pronounced in terms of the award and a decree passed thereon,” “circumstances under which a Foreign Award could not be enforced,” and “the evidence which the party desiring the enforcement of the award was to produce in support thereof.”
The Indian Arbitration Act, 1899, was the first law on arbitration, and it was limited to Presidency towns (based on the English Arbitration Act, 1899).
The domestic arbitration law was consolidated by the Arbitration Act of 1940.
The 1996 Arbitration and Conciliation Act combined all provisions relating to arbitration, both domestically and for the enforcement of international judgements.
The 176th Law Commission Report was released, proposing changes to the 1996 Act.
The Arbitration and Conciliation (Amendment) Bill, 2003, was introduced in response to the 176th Law Commission Report.
The Justice Saraf Committee on Arbitration was set up to examine the recommendations of the Law Commission’s 176th Report.
For additional review, the 2003 Bill was forwarded to the Department Related Standing Committee on Personnel, Public Grievances, Law, and Justice. The Bill was dropped after the Department determined that it was insufficient.
The 246th Report and supplementary report of the Law Commission proposed that the 1996 Act be amended.
With effect from October 23, 2015, the Arbitration and Conciliation (Amendment) Act, 2015 revised the 1996 Act.
Under the chairmanship of former Supreme Court judge Justice Srikrishna, a committee was constituted to recommend additional amendments to the Act and to encourage institutional arbitration.
Based on the Sririshna J. Report, the Arbitration and Conciliation (Amendment) Bill, 2018, made additional revisions to the Act.
Advantages of arbitration
From the beginning, the arbitration procedure has been marked by a sense of justice. The parties have a say in the appointment of arbitrators, the parties are heard individually in an arbitration procedure, and, perhaps most crucially, the arbitration process is based on the parties’ decision to settle their problems amicably.
- Arbitration has become a cost-effective method of settling disputes, thanks to recent modifications to the Arbitration and Conciliation Act of 2015, which allowed this to happen with minimum judicial interference. Arbitration is thought to be less expensive than litigation since it takes less time to resolve a dispute. Furthermore, the rules of evidence and discovery are limited, resulting in significant cost savings.
- Litigation funding is expensive for a firm since it affects its cash flow, EBITDA, and market value. Rather than investing funds to support expensive litigation, litigation funding allows corporations to put their precious resources to constructive use, such as product development, capacity growth, and so on.
- The company’s operating profit and market value both improve as a result of third-party financing, which has no cost of capital. Future probability-adjusted payoffs from litigation are typically discounted that investors are prepared to underwrite, resulting in a win-win situation for all parties involved.
- Because neither contingent liabilities nor contingent assets are reflected in Indian financial accounts, selling the prospect of a claim for a fixed sum of money, along with the cost savings from potential litigation, is tremendously advantageous to a corporation.
- Singapore’s Civil Law Act was recently amended to allow third-party funding for arbitration and related processes. Similarly, third-party funding for arbitrations and mediations was just legalised in Hong Kong. Third-party funding has also received approval from the Paris Bar Council.
- There is currently no legislation in India that addresses third-party litigation; however, the Supreme Court has clarified the legal permissibility of TPF in litigation, stating that “There appears to be no restriction on third parties (non-lawyers) funding the litigation and receiving remuneration after the litigation’s outcome.”
- Arbitration is thought to be less expensive than litigation since it takes less time to resolve a dispute. Furthermore, the rules of evidence and discovery are limited, resulting in significant cost savings.
When an attorney is representing a client, one of the most common questions is, “When will this lawsuit be over?” This is an obvious issue, given that hiring an attorney is likely to be costly, filing a lawsuit takes time and effort, and living with anxiety over the case’s outcome may be exhausting. Litigation takes time, and parties who anticipate a case to be resolved in a matter of weeks are sometimes disappointed. So, it takes so long for a lawsuit to be filed.
When compared to litigation, the arbitration procedure is usually quick, but it can potentially take a long time if one of the parties purposely fails to meet deadlines and tries to postpone the proceedings. Commercial disputes are notoriously slow to be resolved in Indian courts. Arbitration can save you a lot of time. All India seated arbitrations must now be concluded within 12 months of the tribunal’s formation, according to recent revisions to the Arbitration and Conciliation Act 1996 (Act). The 12-month deadline can be extended by the parties for another 6 months with their cooperation, after which only the Court can grant the further extension.
Depending on the subject matter, the average time it takes for a case to be decided in a court of law is between 6 and 30 years. According to a recent change, the arbitrator must issue the arbitral ruling within 12 months of the case’s reference date. This is a possible indication of the speed with which cases that have chosen the arbitration option are being resolved.
Keeps us away from the mental and physical stress of litigation
For several years, the direct financial cost of civil litigation–and how it affects individuals and societal systems have dominated the access to justice policy agenda. Legal fees and administrative expenditures connected with filing a lawsuit or being sued are seen as a ‘gateway hurdle’ for those seeking justice. Studies on the costs of civil litigation have thus focused on these actual legal costs and direct financial effects, with little regard for the social and psychological aspects of the process until recently.
Litigation-related anxiety can disrupt a client’s mental, emotional, and physical well-being. Clients’ emotions and disorganised thinking are frequently triggered by lawsuits, according to Cohen. Some clients’ interests are only focused on matters pertaining to their case. Other litigants have the opposite attitude, attempting to avoid all aspects of the lawsuit.
Arbitration has value over procedural litigation because of the benefits it provides due to good communication between the parties and having a wide-open approach relating to the conflicts between them. Litigation without any further say is a lengthy process and it sucks out the time and energy of the parties (physically/mentally). Arbitration provides a neutral ground where parties can decide the venue of where the arbitration can take place.
The location of arbitration in domestic arbitration is not an issue. It can take place anywhere in India, depending on the parties’ agreement. If the arbitration is governed by the rules of an institution, it is usually held at the institution’s headquarters, unless otherwise agreed. Section 20(1) of the Arbitration and Conciliation Act allows the parties to agree on the location of the arbitration. In the absence of such an agreement, the arbitral tribunal shall choose the location of arbitration based on the facts of the case, including the parties’ convenience. Please refer to Section 20(2).
Unless the parties agree otherwise, the Arbitral Tribunal may convene at any location it deems appropriate for consultation among its members, hearing witnesses, experts, or parties, or inspecting papers, goods, or other property [under Section 20(3)]. In this way, a lot of stress from a party’s shoulders is taken away. Visiting a court and taking part in proceedings can take a toll on anyone, but with this, parties have the authority and choice of not visiting courts and keep themselves away from the physical and mental stress of it.
Disadvantages of arbitration
- There are no appeals: The arbitration award only allows for a limited number of appeals. One of the most obvious disadvantages of arbitration is the limited scope of appeal available in awards. There would be no avenue for appeal or rectification if there was a fault with the award.
(Though In India, the Supreme Court has approved two-tiered, or appellate, arbitration. In Centrotrade Minerals & Metal v. Hindustan Copper, a three-judge bench of the Supreme Court of India determined that parties may arrange for an appeal in their arbitration clause and that such a choice would not be contradictory to Indian law.
The case, which was originally heard in 2006, was referred to a higher bench due to a disagreement between the two judges hearing the case. In India, appellate arbitration is not a novel notion. In Heeralal Agarwalla and Co. v. Joakim Nahapiet and Co Ltd., the Calcutta High Court upheld the legitimacy of appellate arbitration under the Indian Arbitration Act, 1899.)
- There are many different arbitration guidelines to pick from, and it can be difficult to decide which ones to use. Similarly, there are a plethora of institutions that provide arbitration services, making it difficult to choose between them.
- Different statutes exist in certain nations for local and international arbitration. This determines the applicability of legislation relating to International problems.
- The cross-cultural language barrier is one of the most significant challenges that arise during the arbitration. The language and culture of the two regions are always in conflict. It becomes increasingly difficult to close the gap and reach a consensus.
- Cost: While arbitration is normally a more cost-effective legal settlement alternative, it may not be appropriate in circumstances where only a little amount of money is at stake.
- Rules of evidence: When it comes to accepting evidence, a judge in a traditional court setting has precise rules to follow. Arbitrators, on the other hand, are free to use whatever information that is presented to them.
- Lack of cross-examination: The arbitration procedure usually consists of documents rather than witnesses, making cross-examination impossible.
- Restricted discovery: Both parties lose the cost-saving advantage of limited discovery if arbitration is not filed until litigation has already begun.
- Lack of uniformity: Because there are no clear rules for arbitration, finding consistency might be challenging. It’s possible that an arbitrator is prejudiced, which can happen in forced arbitration agreements.
- Due to the lack of proof in arbitration, you must rely on the arbitrator’s experience to make the best legal conclusion.
- Lack of transparency: The level of confidentiality involved in arbitration disputes may be to one party’s disadvantage. In addition, there is a lack of transparency, which does not exist in public courtrooms.
Why do people choose arbitration over litigation?
While it is true that people who fall outside the economic eligibility threshold will always be able to afford to participate in the litigation process because our country has advocates who charge anywhere from Rs. 10,000 to Rs. 1,00,000 or more per hearing, the question then becomes whether the current system, as a whole, provides sufficient economic accessibility to the disadvantaged. While the fees paid to an advocate are one component to examine when evaluating economic accessibility, there are two other charges to consider: the costs of attending a court hearing and the costs of lost pay/business as a result of attending a court hearing. The average cost suffered by a litigant (other than legal expenses) is Rs. 1,039 per case per day, and the average cost incurred due to loss of pay/business is Rs. 1,746 per case per day. While the number of hearings in a case can vary and therefore alter costs, it still adds to the overall cost of litigation. What solutions are available to people who earn more than Rs. 1,25,000 per year but can’t afford the triple cost of advocate fees, daily charges, lost pay, and a possible further reimbursement if they lose their case. Losing or creating so much expense and not even getting any worth of it is a gamble which litigation makes us play. In arbitration, the method is precise and is always effective.
The ease with which arbitration may be enforced is frequently a deciding factor in favour of arbitration. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards is ratified by India (the New York Convention). If a party gets a binding award from a signatory to the New York Convention, and the award is made in a region that India has designated as a “convention nation,” the award is enforceable in India. The Central Government has only notified 48 countries as reciprocating countries, with Mauritius being the most recent addition.
Part II of the Act (Arbitration and Conciliation Act, 1996) requires that an arbitration award granted by a foreign seated tribunal be executed in India if the award debtor’s assets are located in India. While the speed and certainty of such enforcement actions have grown significantly in recent years, there is no set time limit for enforcing a foreign award in India. Any challenges to awards issued in India-seated arbitrations, on the other hand, must be completed within 12 months of the opposite side receiving notice.
Parties have various options for appealing a verdict under Indian procedural law. An arbitration award, on the other hand, cannot be appealed. The losing party may seek to have the award set aside in Indian courts; but, unlike an appeal, such set-aside proceedings are not a full-fledged review on the merits.
Arbitration allows parties to customise procedures to the specific circumstances of a dispute. In practice, parties frequently choose for institutional arbitration and follow the institution’s usual norms and processes. Foreign parties entering into India-related contracts frequently choose foreign institutions such as the Singapore International Arbitration Centre (SIAC), the International Chamber of Commerce (ICC), or the London Court of International Arbitration due to the lack of credible arbitration institutions in India. With the opening of the Mumbai Centre of International Arbitration (MCIA) and the anticipated introduction of similar institutes in other Indian cities, this practice is projected to become more common.
Neutrality and expertise
Parties can bring their conflicts to a neutral venue through arbitration, which ensures neutrality and skill. This is especially appealing in the context of international transactions. Singapore has surpassed London as the most popular foreign seat for arbitrations involving India.
Arbitration sessions are typically held in private, and the knowledge that a party is engaging in arbitration procedures is kept private. The only time certain aspects of arbitration may be made public is if there are concurrent court proceedings (e.g., where a party applies to courts for interim relief in support of an arbitration or challenges an arbitration award in courts).
A party’s capacity to secure interim relief is critical to the effectiveness of arbitration (e.g. a party might require a freezing injunction to prevent the other party from dissipating its assets during the pendency of the arbitration). Interim relief can be granted by Indian courts in support of arbitration, even for arbitrations held outside of India. Parties can seek interim relief from Indian courts at any time before the arbitral tribunal is formed. Parties are often expected to seek interim relief from the panel soon after the tribunal has been established.
The Indian Council of Arbitration advises any parties interested in using the Indian Council of Arbitration for arbitration to include the following arbitration clause in their contracts: “Any dispute or difference between the parties arising out of or relating to the construction, meaning, scope, operation, or effect of this contract, or the validity or breach thereof, shall be settled by arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration, and the award rendered thereunder shall be binding on the parties.”
An arbitration clause, as previously stated, is a contract provision that specifies when arbitration is required for dispute settlement. In the case of a legal dispute over the contract, it is a provision of the contract that discusses the parties’ rights and alternatives. The parties agree not to sue each other in most arbitration provisions. Instead of going to court, they’ll settle their differences through arbitration.
Instead of suing each other, the parties will have to settle their issues at these arbitration hearings. They must also come to an understanding of how to fix the situation. This could result in remedies similar to those available through the courts, such as a settlement payout. When opposed to litigation, arbitration is believed to be considerably more flexible and informal.
Furthermore, the arbitration process allows the disputing parties to talk about the remedies on their own terms.
Binding and non-binding clauses
A binding or nonbinding arbitration clause can be included in a contract. A binding arbitration clause specifies that the arbitrator’s ruling on a particular dispute is final. That judgement will be enforced by the courts, and neither side will be able to appeal or fail to act in accordance with it.
A non-binding arbitration clause, on the other hand, allows the contesting parties to reject the arbitrator’s ruling. They may then decide to take the case to court for a final decision. Binding arbitration provisions are commonly used by parties since they are more definitive and take less time.
Essentials of the arbitration clause
Contract arbitration clauses typically read something like this: “The parties to this contract hereby agree to handle legal issues through arbitration techniques rather than civil lawsuits.” An arbitration clause can be adapted to the specific interests of the contesting parties.
Clauses requiring arbitration should be as precise as feasible. As a starting point, they should include the following information:
1. Information on the parties who are impacted by the clause;
2. When the provision will take effect and, if applicable when it will expire;
3. Is it possible to change the clause in the future; and
4. The ramifications of breaking the provision.
Future of dispute resolution in India
The latest 2019 amendment, which provides the basis for institutionalised arbitration in India, aims to address the aforementioned problem. It calls for the establishment of the Indian Arbitration Council, which will be responsible for, “Taking all such measures as may be necessary to promote and encourage arbitration, mediation, conciliation, or other alternative dispute resolution mechanisms, and for that purpose to frame policy and guidelines for the establishment, operation, and maintenance of uniform professional standards in all matters.”
A tiered method of referring disputes to arbitral institutions was also implemented by the 2019 Amendment. The Arbitration Council of India will now rate arbitral institutions, according to the 2019 modification. Based on considerations such as infrastructure, arbitrator quality and skill, performance, and adherence to time constraints for resolving domestic or international commercial arbitrations, as established by the legislation, arbitral institutions will be graded.
The creating system would provide a gauge of a particular arbitral institution’s competence and integrity, as well as offer validity to the awards it makes. The Supreme Court of India (in this instance of international commercial arbitration) and the high courts (cases other than international commercial attraction) empowered the selected arbitral institutes for the appointment of arbitrators under the 2019 amendment.
This modification aims to decrease the role of courts in arbitration proceedings to improve the procedure’s efficiency in terms of time. This new, swift and progressive legal regime will go a long way toward encouraging more parties to use arbitration as their preferred method of dispute resolution, and it is a significant step toward streamlining the commercial dispute resolution process and making India a preferred location for international arbitration.
India is a rapidly developing economy that requires stable arbitration legislation to establish itself as a worldwide arbitration centre. To achieve this goal, a balance must be struck between keeping arbitration law current and building arbitration centres capable of quickly resolving and processing commercial disputes. With the Amendment Act in place, courts and politicians assuming a pro-arbitration stance, the adoption of best practices is critical in the near future.
More steps must be taken for India to become a global arbitration centre. Signing and ratifying international conventions, such as the ICSID Convention, and extending the scope of recognition of arbitral awards to non-reciprocating countries, would be an important first step. This will allow a larger number of parties to engage in commercial transactions in India, as the ease of resolving disputes is a key consideration when forming business connections.
India now has an excellent opportunity to improve its reputation as a global arbitration centre. Accepting global best practices, adhering to sign agreements such as the ICSID Convention, and addressing the flaws that now plague the Indian arbitration system are the only ways to achieve this. The establishment of the Arbitration Council of India is a significant step in that direction, as it will endeavour to promote both institutional and ad hoc arbitration while also ensuring that the quality of arbitrators and arbitral institutions does not deteriorate.
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