This article has been written by Ria Verma and further updated by Mehak. This article aims to illustrate the concept of arbitration and focus on the different types of arbitration, advantage and disadvantage of arbitration. In addition to this, this article also emphasises the arbitrability and non-arbitrability of the subject matter of the disputes. The Article also describes arbitral award and how it can be enforced by the parties. 

Table of Contents

Introduction 

We often hear a plethora of complaints by the petitioners or plaintiffs in a particular case. The legal fees charged are usually exorbitantly high, the dispute gets resolved after a number of hearings or even it is a usual complaint that the appropriate remedy is not provided through the verdict. But with the advent of alternative dispute resolution, we can observe a significant decrease in such complaints. Arbitration especially is seen as a recent trend in resolving the disputes relating to commercial contracts”

An increase in foreign trade has resulted in a subsequent increase in cross-border disputes giving rise to a need for an effective form of dispute resolution. Arbitration has emerged as a way to preserve the relationships between two companies and resolve a dispute amicably.  The Supreme Court in the case of Amazon v. Future Retail Limited, (2021) drew attention to the parties opting for arbitration to resolve the dispute. But what is arbitration? Is it more time-efficient and cost-saving as compared to the traditional courts? How is arbitration beneficial to parties? What are the different types of arbitration prevalent and what is their significance?  What matters can be referred for arbitration or not? All such questions will be answered in the course of this article. 

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Historical background of arbitration

A number of authors have argued that the first arbitrator, King Solomon, used a procedure similar to the modern-day procedure while resolving a dispute that emerged when two women protested that they were the mother of a baby boy. 

Another influential figure, Philip the Second, had used arbitration to amicably resolve a territorial dispute that took place way back in 337 BC. In Roman law, ‘compromissum’ was used to indicate a process of dispute resolution that would draw out a compromise between the parties. Therefore, we can see that there have been a number of examples of arbitration that actually took place in the ancient era and can be seen as a trailblazer for the laws we have today. 

In India, arbitration came to be known and given recognition when the Arbitration Act 1899 was enacted, but its applicability only extended to Bombay, Madras and Calcutta. The provisions were given an extension to the remaining areas in Section 89 as well as Schedule II of the Code of Civil Procedure, 1908. However, it was observed that arbitration did not reap the expected benefits to the public at large and to meet the economic reforms in the country, the Arbitration Act was enacted in 1940. The previous Act, along with the provisions in the Code of Civil Procedure, were repealed.

The Act can be seen as a consolidation of the existing laws; however, there was no stipulated procedure pertaining to the enforcement of foreign awards. It was confined to the domestic territory and therefore, it did not achieve the purpose behind its enactment. In the case of Guru Nanak Foundation v. Rattan Singh, (1981), Justice D.A. Desai criticised the ineffectiveness and poor implementation of the Act. He explained how the complex, expensive and time-consuming court procedure involved in resolving disputes compelled jurists to switch to a more effective forum; however, the way the forum operates has invited harsh criticism from the courts. 

The Arbitration and Conciliation Act, 1996, was then introduced with the objective of providing speedy dispute resolution. The Act covered international arbitration as well and was based on the UNCITRAL Model Law on International Commercial Arbitration. The Act, however, was met with criticism due to exorbitant costs, the absence of a stipulated time period for making an arbitral award, and interference by the court beyond a reasonable limit, which went against the essence of the Act.   

Subsequently, the Arbitration and Conciliation (Amendment) Act, 2015, was passed with a number of amendments. After taking into account the recommendations made by a committee headed by Justice B.N. Srikrishna, the Arbitration and Conciliation (Amendment) Act, 2019 was enacted. The Arbitration Council of India was instituted with the goal of promoting ADR in India, boosting the established arbitration system in the country, and evaluating the functioning of the arbitral institutions and the arbitrators.

On November 4, 2020, the Arbitration and Conciliation (Amendment) Ordinance, 2020 was implemented with two major amendments. First, the enforcement of an arbitration award could be stayed unconditionally if the court can infer that the contract/agreement or award was given fraudulently or under undue influence. Second, after much scrutiny and discourse, the qualifications and experience required for approving an arbitrator were deleted from the Eighth Schedule of the said Act. 

What is arbitration

Arbitration is one of the forms of Alternative Dispute Resolution (also referred to as appropriate or amicable dispute resolution). Arbitration is one of the prominent forms of ADR and is a type of private court where parties resolve their disputes without taking them to court. This form of ADR is commonly used in disputes that are commercial in nature, especially international commercial transactions, because of its time and cost-effective nature. Contractual parties insert an “arbitration clause” in their contracts, where they specifically mention and appoint a neutral third party referred to as the “arbitrator”, to whom a dispute shall be referred if parties to the contract violate any provisions of the contract. Section 16(1) of the Act entails that an arbitration clause which acts as a surviving clause in the contract, i.e., even if the contract between the parties has come to an end or is null and void, the arbitration clause shall not be terminated. Moreover, the parties unanimously decide the jurisdiction, the language in which the proceedings shall take place, and the laws which would be applicable so as to make certain that no party gets an undue advantage. The decision made by the arbitrator with respect to the dispute is referred to as an “arbitral award,”  which shall be binding upon the parties to the contract. 

Principle characteristics of arbitration

WIPO specifically defines the principle characteristics of arbitration, which are as follows –

Consensual Arbitration

The existing matter can only be taken to arbitration if both parties have agreed upon it. Besides, the parties can insert arbitration clauses in their contract unanimously to refer their subsequent disputes to arbitration. Once a dispute is referred to arbitration, a party cannot unilaterally withdraw from arbitration.

The parties have the right to choose their arbitrator 

As per Section 10 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”), the parties are free to choose the number of arbitrators to be appointed. If parties appoint more than one arbitrator, then the number of arbitrators should not be even. For instance, if there is a three member arbitral tribunal, each party will appoint an arbitrator and those two arbitrators shall decide on the third arbitrator. 

Unbiased arbitration 

Parties are free to decide upon the jurisdiction, language, and applicable laws of the arbitration, which ensures that no party gets undue advantage and that the award given by the arbitrator shall be treated as just and final.

The decision of the arbitrator shall be final 

The decision made by the arbitrator is known as an “arbitral award.” The award given by the arbitrator with respect to the ongoing dispute shall be treated as final and will be binding upon the parties to the contract.

Matters that can be referred to arbitration

Arbitration deals with cases that are right in personam, i.e., rights that can be enforced only against the individual party. Disputes that are right in rem, i.e., rights that are enforced against society, are non-arbitrable in nature and such matters cannot be referred to an arbitral tribunal for resolution. Commercial and almost all civil disputes, such as civil, labour, family disputes, IPR disputes, etc., fall under and within the ambit of arbitration. However, matters that are usually criminal or matrimonial in nature are often non-arbitrable and cannot be resolved by arbitration.

Matters referred by parties to Arbitral Tribunal

If the parties have invoked an arbitration clause or separate arbitration agreement with respect to the contract and such agreement is a valid agreement as per Section 7 and the subject matter of the dispute is arbitrable in nature, then the parties can refer their dispute directly to their arbitrator that has been decided by the parties within their agreement. 

Matter referred by judicial authority to Arbitral Tribunal

The parties can, on their own, refer their dispute to the arbitral tribunal or the judicial authority as per Section 8, which will refer the disputes of the parties that are subject matter of arbitration to the arbitral tribunal only if the parties invoke an arbitration agreement within their contract before filing the first statement. The judicial authority shall thereafter be compelled to refer the matter to arbitration, until and unless there is a prima facie case stating that no valid arbitration agreement exists between the parties. The parties cannot, in any case, add an arbitration clause and refer their contract to arbitration after filing the first statement.

Section 8 of the Arbitration Act 

Following are the essential ingredients covered under Section 8 of the Act –

  1. There must be a valid arbitration agreement between the parties.
  2. The matter must be brought before judicial authority and the matter referred to should be a subject matter of arbitration.
  3. There must be a prior arbitration agreement between the parties. The arbitration clause or agreement should be invoked by the parties before the date of submitting their first statement with respect to the dispute before judicial authority.
  4. The application made by the party to refer the matter to arbitration shall produce original arbitration agreement or its duly certified copy. 
Invoking Arbitration agreement before first statement on dispute and not later than the date of submission

Section 8 of the Act states that judicial authority can refer the matter to arbitration if parties invoke an arbitration clause or agreement in their contract before filing their first statement. But, once the first statement has been made or the date of submission has been exceeded, the parties have waived off their rights to arbitration. Parties can only invoke arbitration clauses within the time frame provided in the provision, i.e., “not later than the date of submitting their first statement on the substance of the dispute”.  

Matters that cannot be referred to arbitration

There is no specific provision under the Arbitration and Conciliation Act, 1996, that categorises matters as arbitrable or non- arbitrable. But the courts have, from time to time, interpreted through various judgements on what matters may be referred to arbitration and what matters may not be referred to arbitration. The Supreme Court in the leading case Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) has laid down that arbitrability and non-arbitrability shall be determined by the nature of disputes, i.e., whether the subject matter of dispute should be considered arbitrable or not. The court held that if the nature of the disputes operates under right in rem, i.e., rights that are enforced against society, such disputes shall be non-arbitrable in nature, whereas if the nature of the disputes operates under right in personam, i.e., rights that are enforced only against the individual party, they shall be arbitrable in nature. The Supreme Court in the case, also laid down certain examples of disputes that are non-arbitral in nature –

  1. Disputes that are criminal in nature.
  2. Matrimonial Disputes such as divorce, judicial separation, etc.
  3. Guardianship matters.
  4. Insolvency and winding up matters.
  5. Testamentary disputes such as grant of probate, letter of administration and succession certificate. 
  6. Matters related to tenancy and eviction.

The Supreme Court in Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & ors. (2016) added Trust related disputes as a seventh category to the disputes that shall be considered as non-arbitrable, since disputes/matters related to trust can be amicably resolved by the Indian Trusts Act, 1882. 

The Vidya Drolia Case – Four Fold Test

Vidya Drolia v. Durga Trading Corporation (2019) is the latest case that reviews the arbitrability of the subject matter of the disputes. The Supreme Court in this case held down the four-fold test to determine when subject matter is not valid. The factors that shall be considered are as follows –

  1. When the cause of action and subject matter of the dispute operate under right in rem and do not fall under right in personam. 
  2. When the cause of action and subject matter of the dispute affect third party rights, such as in cases in testamentary disputes, matters related to probate, etc.
  3. When the cause of action and subject matter of the dispute are inalienable sovereign and public interest functions of the state.
  4. When the subject matter of the dispute is expressly recognised as non-arbitrable under the statutes.

A mere allegation of fraud does not make the subject matter non-arbitrable

The issue was first decided in the case namely N. Radhakrishnan v. Maestro Engineers (2009), where the Court held that if the subject matter involves “serious allegations of fraud”, then the same shall not be arbitrable. But there’s no test or scope as to what subject matter shall come under serious allegations of fraud. 

Further, the Apex Court in A. Ayyasamy v. A. Paramasivam & ors. (2016), held that mere allegation of fraud does not debar the dispute from being referred to arbitration until and unless there is any serious allegation as to fraud. The Court laid down that the serious allegations should be such that they make a virtual case of fraud and prima facie gives the implication that such a case should be decided via litigation. The Court also stated that where the fraud affects the arbitration clause/agreement or entire contract, including the agreement to arbitrate, then all such cases shall be considered non-arbitrable. 

Arbitration agreement 

Arbitration agreement has been envisaged under Section 7 of the Act. An arbitration agreement refers to an agreement that is made between the parties before any actual dispute arises between them. Through an arbitration agreement, parties can refer all or certain disputes to the arbitral tribunal rather than forwarding their dispute to litigation. An arbitration agreement can be a separate agreement or can be invoked as an arbitration clause in the contract.

Attributes of arbitration agreement 

The Hon’ble Supreme Court, in the landmark case K.K. Modi v. K.N. Modi and Ors. (1988) 3 SCC 573, laid down the following attributes that must be present in the arbitration agreement-

  1. The agreement shall expressly specify that the decision of the arbitral tribunal will be binding upon the parties.
  2. The parties must mutually decide or consent to the jurisdiction of the arbitral proceedings or this can be obtained by the directions of the court’s order that proceeding must be carried on through arbitration.
  3. The tribunal must determine the rights of the parties and ensure a fair and just judgement.
  4. The agreement on the basis of which a dispute is referred to the tribunal, must be legally valid and the terms of such agreement are enforceable by law.
  5. The agreement must state that any dispute being referred to the tribunal must be formulated before the commencement of the arbitration process. 

Arbitral award

An arbitral award, also known as an arbitration award, is a decision granted by the arbitral tribunal with respect to the disputed matter. The awards granted by tribunals procure the same legal binding force over the parties just like the decisions of normal courts do. The arbitral tribunal also passes interim, partial, additional awards with respect to the matter in dispute. Awards granted can be pecuniary and non-pecuniary in nature. Tribunal can impose injunctions, performance of work etc. as a non-pecuniary award. As per, Arbitration and Conciliation Act, 1996, tribunal can pass award with respect to disputes that are domestic in nature as well as international in nature. 

Essential characteristics of arbitral award

As per Section 31 of the Arbitration and Conciliation Act, 1996, an arbitral award –

  1. Shall be in written form and be signed by all the members of the arbitral tribunal; if there is more than one arbitrator, the signature of majority of the arbitrator shall be considered sufficient for a valid arbitral award if the reason for omitted signature is stated.
  2. Shall state the reasons as to on what basis an arbitral award has been passed by the arbitral tribunal, provided that if the parties have consensually agreed that reasons not to be stated while passing arbitral tribunal or the award has been passed as per the provisions of Section 30 of the Act.
  3. Shall state and mention its date and place, i.e., at what date and place an arbitral award has been passed by the arbitral tribunal. 
  4. Signed copy must be delivered to both parties after the arbitral award is passed and made.

Enforcement of arbitral award

Once the award is passed by the tribunal, it does not immediately get enforced on the parties. Before an award is enforced through court, a time period is given to the parties in which they can file an application for setting aside the award, correction/addition of the award, and after the elapse of said time period, parties can file an application for enforcement of the arbitral award. Arbitral awards are mainly categorised into domestic and foreign arbitral awards which are regulated and enforced by the Arbitration and Conciliation Act, 1996, where domestic arbitral awards are governed by Part I and foreign arbitral awards are governed by Part II of the Act, respectively.

Types of arbitration

Unlike civil or criminal cases, a dispute is sent to the arbitration tribunal. The tribunal resolves the dispute and the final decision cannot be appealed, making it binding on both parties. No judicial proceedings are involved to ensure the swift resolution of the disputes. The following are the different types of arbitration as per the jurisdiction of the case: 

Domestic arbitration

In domestic arbitration, both the parties must be Indians and the proceedings must take place in India itself. In the Arbitration and Conciliation Act, 1996 there is no specific definition given to domestic arbitration. A mere reading of Section 2(2) can lead us to infer that domestic arbitration is when the parties had agreed to resolve any disputes that arise in India. The proceedings must be held in the domestic territory and must be in lieu of the procedural and substantive law in India.  

International arbitration

As the name suggests, international arbitration occurs outside the domestic territory because of either a clause inserted in the agreement between the parties or the cause of action that arises from a foreign element relating to the dispute or to the parties. According to the circumstances that led to a case being filed foreign or Indian law would be applicable. 

International commercial arbitration

According to Section 2(1)(f), international commercial arbitration can be understood as arbitration that takes place because of a dispute arising from a commercial contract where either one of the parties resides in a foreign country or is a foreign national; or the core management committee of an association, company or a body of individuals is controlled by foreign individuals. 

Under Indian law, the involvement of a foreign party would attract Part I of the Act, that is, it would come under the purview of international commercial arbitration. But it would be inapplicable in case the international commercial arbitration takes place outside the territory of India.  By virtue of the 2015 Amendment Act, ‘company’ has been removed from the ambit of ICA. The Supreme Court scrutinised the scope of Section 2 (1) (f) (iii) in  TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd.,(2008) (“TDM Infrastructure”), wherein, even if a company is in foreign hands, it would be considered as an Indian company as it was incorporated in India. Therefore, companies that have Indian nationality and have been registered in India would be excluded from the ambit of foreign body corporate, regardless of the fact that the company is in foreign hands.

On the basis of the established procedure and rules, there are further three types of arbitration that have been recognized in India: 

Ad-hoc arbitration

Ad-hoc arbitration refers to when parties with mutual consent opt for arbitration to resolve the dispute. It is the most common form of arbitration used in India owing to reasonable costs and adequate infrastructure. Arbitration is conducted without having any institutional proceedings, that is, it does not comply with the rules of an arbitral institution. The parties have the option to choose the rules and procedures to be followed. This form of arbitration can be used for international commercial transactions and domestic disputes. The jurisdiction is of utmost importance since a majority of the issues are resolved in conformity with the applicable law in respect to the seat of arbitration. An example of the same would be if the parties have agreed to keep the seat in India, the dispute would be resolved in lieu of the provisions of the Arbitration and Conciliation Act. Also, As per Section 6 of the Act, the arbitral tribunal or the parties can determine whether to receive administrative assistance from an appropriate institution or individuals. Moreover, as per Section 11 of the Act, the fees of the arbitrator shall be determined by the arbitral institution as specified in Schedule 4 of the Act. In case the parties are unable to reach a consensus on the number of arbitrators, one arbitrator would be part of the tribunal after being appointed by the Chief Justice of a Supreme Court or the Chief Justice of a High Court. 

Fast track arbitration

Fast track arbitration was inserted by an amendment to the Arbitration and Conciliation Act, 2015 with the purpose of resolving disputes between the parties in less time.  The main purpose of fast track arbitration was to make commercial/trade disputes simpler and expeditious for the parties.  This can be seen as an effective solution to solving the problems faced because of delays and time-consuming proceedings in other forms of arbitration. It does not involve any procedure that takes time and upholds the main objective or arbitration, that is, to resolve a dispute in a short period of time. 

As per Section 29B of the Act, a dispute can be resolved through fast-track arbitration, if parties agree before or at the time of the appointment of an arbitrator. Parties referring matters under fast track arbitration can appoint only a sole arbitrator on the consent of the parties. The arbitrator, under fast track procedure, can only make use of the written submissions filed by the parties and there shall be no oral hearings until and unless necessary. The arbitrator has to pass the award within six months from the date of the dispute referred. 

Institutional arbitration

In institutional arbitration, the parties are free to choose a particular arbitral institution in the arbitration agreement itself. The institution’s governing body or the parties can appoint one or more arbitrators from a panel of arbitrators that had previously been agreed upon. Part I of the Act gives parties the freedom to appoint an arbitrator to deal with a specific issue. 

The institution selects one or more arbitrators who possess the skills and experience stipulated applicable in a given case when the parties do not appoint an arbitrator themselves. On the other hand, if the parties choose to appoint one themselves they can choose from the list provided by the institution. 

It is mainly used by business organisations worldwide owing to a specific procedure being deployed as well as an efficient dispute resolution procedure provided by the institutions. A few prominent arbitration centres are the Chartered Institute of Arbitrators UK, the London Court of International Arbitration, the National Arbitration Forum USA, Singapore International Arbitration Centre, and the International Court of Paris.

In M/S Nandan Biomatrix Limited v. D 1 Oils Limited, (2009), the parties had agreed to resolve any dispute arising from the agreement via institutional arbitration. The Supreme Court assessed the validity of the agreement and whether the absence of a specific institution would make the agreement invalid. It was held that the parties had expressly desired to settle the disputes through institutional arbitration, making the agreement between them valid. 

Advantages of arbitration in India 

  1. Mutual consent of both parties – Arbitration can only take place when both parties have given their consent and the contract includes an arbitration clause. 
  2. Unbiased procedure – No party enjoys an undue advantage because the parties are free to decide the relevant venue, language, and applicable law.
  3. Confidential procedure – Any disclosure made by the parties in the proceedings and when the arbitration award is given is to be kept confidential. 
  4. Cost-effective procedure – No exorbitant cost is charged from the parties making it common for parties to prefer arbitration over the traditional form of litigation. 
  5. Simple and informal procedure – The parties do not have to separately hire an attorney to represent them and the outcome of the case can be adapted in compliance with the needs of both parties. Arbitration does not follow strict rules of litigation, which makes the process much easier, less time-consuming. The tribunal follows a flexible way of proceeding to avoid unnecessary delay. 
  6. Freedom to choose arbitrator – The parties can select an arbitrator or agree to get an arbitrator with relevant exercise in the particular domain by the institution. 
  7. Stipulated time period for giving an award – The tribunal will give the award within a short tenure of twelve months from the last day of the pleadings in case of domestic arbitration. On the other hand, in internal commercial disputes, the time period is rather relaxed and no stipulated time period is allotted. Hence, there are no unnecessary delays in giving the award. 
  8. Binding decision – The arbitration awards given are enforceable, making the decision binding on the parties. 
  9. Position of control – The parties have a position to control the outcome as they can directly participate in the decision-making procedure. In this way, the dispute is amicably resolved. 

Disadvantages of arbitration in India

Arbitration has advantages that encourage parties to opt Arbitration as their mode of dispute. But with advantages, it brings disadvantages too which has been discussed below – 

  1. Limited Appeal – The awards passed within the arbitration are subjected to limited appeal and the same shall be presumed to be final and binding on the parties. The appeal cannot be made with respect to such an award unless clear misconduct or error by the arbitrator is proven. 
  2. Cost – Sometimes, choosing arbitration as a mode of dispute can be expensive for the parties. Appointing quality arbitrators demands hefty amounts of fees, unlikely in cases of litigation. Moreover, if the arbitration is non-binding upon the parties, then the arbitrator shall not pronounce the final award and parties can refer their case to traditional court, which in turn adds to the cost of litigation. 
  3. Unpredictable – Since arbitration does not follow the strict rules of evidence that are being used in the courts, the decision of the tribunal is unpredictable. In litigation, strict rules are followed to consider the documents as evidence, unlike in arbitration, where the tribunal takes an informal view of documents as reliable evidence. Moreover, if the documents or information have been presented by one party to the court, they are not being cross-examined, which affects the decision and can possibly damage one of the parties.
  4. Unfairness – In cases where there is mandatory arbitration, i.e., if there has been a clause added in the contract, if any dispute arises, the same shall be followed up by the arbitration and this mandatory arbitration leaves no option for the other party to opt for litigation.
  5. Lack of Transparency – Arbitration hearings/proceedings are held in private and have no access to the public, unlike in the case of litigation. These private hearings can lead to biassed decisions for one party.
  6. Lack of Discovery – Arbitration has no defined standards for discovery of evidence, which in turn leads to missing important information, documents and evidence related to the matter in dispute. A lack of vital information can affect the quality and decision of the case. 
  7. No Control – After passing a matter to arbitration, the parties lose their control over the matter and the decision of the tribunal. Once parties hand over their dispute to an arbitral tribunal, the decisions are in the hands of the tribunal, and they cannot withdraw or step back without the consent of the other party. 

Significance of arbitration

Arbitration is significantly growing and is highly influencing the parties to the contract, specifically those engaging in commercial contracts and other trade related contracts. Arbitration is the best alternative parties can choose to resolve their dispute effectively and amicably. 

Mostly, reputed parties choose arbitration as their mode of resolution. There are many reasons why parties prefer arbitration over litigation for the resolution of disputes. Firstly, because under arbitration, proceedings/hearings are conducted out of the gaze of the general public and are kept highly confidential, unlike in cases of litigation. For parties who prefer their disputes to be privately resolved, arbitration serves as a good option. Secondly, the other significant feature that makes arbitration preferable to parties is its flexible nature. In contrast to litigation, arbitration procedures are flexible and consensual, i.e., parties can mutually decide upon the procedure for arbitration. Not only that, arbitration is faster and takes less time than litigation procedures. This benefits parties, especially if the disputes are complex commercial/business disputes and affect their stakes, so arbitration plays a significant role in the faster resolution of disputes. Moreover, one of the most important features of arbitration is the finality of the arbitral awards, i.e., once an award is passed, it shall be treated as final and will be legally binding on the parties. An arbitral award can only be set aside within the limitation period with respect to certain grounds, as mentioned in Section 34 of the Act. After the stipulated time period, an award shall be final and binding on the parties. Also, arbitration has no provisions regarding the appeal of the award, so once the award has been made, it will be considered final. Lastly, an award passed by the tribunals has extensive enforceability, i.e., awards passed can be enforced outside of the national boundaries. Awards can be enforced in foreign countries that are signatories to the Geneva Protocol and the New York Convention. 

Important case laws

Hindustan Construction Company Limited & Anr. v. Union of India & Ors. (2019)

Facts 

  • Hindustan Construction Company Limited (hereinafter referred to as petitioner) is a construction company that undertakes large scale projects based on public utilities such as roads, buildings, bridges, hydropower, nuclear plants, etc. and is a contractor and agent of government bodies.
  • The Company was aggrieved by the fact that whenever the cost/budget overruns, the same are disputed by the government bodies, which causes delay in recovering legitimate dues by the petition and this makes them suffer losses.  The only way to recover dues is by way of arbitration proceedings or civil proceedings.
  • The arbitral award passed after the arbitration proceedings was in the favour of the petitioner, but the government authority challenged the same under Sections 34 and 37 of the Act, which imposed the automatic stay on the arbitral award because of the amendments made in the act based on the recommendations of Justice B.N. SriKrishna Committee. 
  • Moreover, the government, being the statutory body, is exempted from being prosecuted under the Insolvency & Bankruptcy Code, 2016, but the petitioner, being the private body, is not exempted from the IBC, which creates much financial burdens on the petitioner to reimburse their creditors.

Issues 

Judgment

The petitioners contend that the amendment made in the Act, based on the recommendations of the Justice B.N. Srikrishna Committee, resulted in an automatic stay on the arbitral award passed by the Tribunal if the awardee filed an application under Section 34. Moreover, Section 26 was repealed and Section 87 was inserted with the amendment and as per Section 87, the amended provisions shall only apply to cases commenced before 23.10.2015. The Supreme Court agreed with the contentions made by the petitioner that by inserting Section 87, arbitrariness has been resurrected. Moreover, the Hon’ble Court opined that the insertion of Section 87 resulted in absurd results that critically affected award holders. The Court also concurred with the contention of the petitioners, stating that the insertion of Section 87 is violative of Article 14. The Hon’ble Court also stated that there will be no automatic stay under Section 34 if an application for set aside has been filed by the award debtor. 

National Highways Authority of India v. Sayedabad Tea Estate (2019)

Facts 

National Highways of India (hereinafter referred to as the Appellant) acquired some property as per Section 3D of the National Highways Act, 1956, regarding which Sayedabad Tea Estate (hereinafter referred to as the Respondent) was not satisfied with the amount determined. Therefore, the Respondent filed an application under Section 3G(5) of the NHA, 1956 to the authority for the appointment of an arbitrator as to re-determine the amount. But the government didn’t respond within the thirty days of the time period as prescribed in the provision. Due to no response, the respondent filed an application under Section 11 of the Act, 1996 to Calcutta High Court for the appointment of an arbitrator on 7th March 2007. But in the meantime, the government appointed their arbitrator in the month of April.  

Issues 

  • Whether the appointment of arbitrator under Section 11 is maintainable if there is a special act providing provisions with respect to appointment of arbitrator?

Judgment

The High Court held that the arbitrator appointed by the government shall not be considered a valid appointment since the appointment has been made during the pendency of the case. 

Thereafter, the aggrieved party referred their case to the Supreme Court, where the Court opined that where there is a special act that comes into consideration and has overriding effect on general Act, then general Act shall not be applicable when the one fails to act as per the provisions of Special Act. The Court also held that under Section 3(G), the Central Government has the power to appoint arbitrators that cannot be replaced by Sec 11 of the Act of 1996 in case of failure on the part of the government. The Court further stated that in such cases, parties can file writ jurisdiction under Article 226 of the Constitution. 

Mahanagar Telephone Nigam Limited v. Canara Bank & Ors (2019)

Facts 

In the present case, Canbank Financial Services Ltd. (hereinafter referred to as “CANFINA”), a wholly-owned subsidiary of the Canara Bank, received bonds of Rs 200 crore from Mahanagar Telephone Nigam Limited (hereinafter referred to as “MTNL”) via a Memorandum of Understanding agreement, out of which CANFINA had paid back Rs 50 crore to MTNL, but due to a crisis in the secondary market, CANFINA had decided not to pay interest on the remaining 150 bonds where the disagreement between the parties was initiated. Canara Bank, being the parent company, purchased the Rs 80 crore bonds from CANFINA that were issued by MTNL, but MTNL disagreed to transfer the interest in the name of Canara Bank. Aggrieved by that, the Respondent, i.e., Canara Bank, moved a writ petition in the Delhi High Court, where the court directed them to refer their dispute to arbitration. Thereafter, Canara Bank drafted an arbitration clause with MTNL and referred their case to arbitration. The sole-arbitrator appointed by them, sent notices to all three parties and stated that CANFINA should be a party to the arbitration. Further, the MTNL moved a Special Leave Petition before the Supreme Court. 

Issues 

  • Whether the arbitration agreement between MTNL, CANFINA and Canara Bank is valid or not ?
  • Whether CANFINA be impleaded in the arbitration proceedings?

Judgment

The Supreme Court in SLP considered the “Doctrine of Group of Companies” for deciding the issues. The Doctrine of Group of Companies theory states that non-signatory parties/companies may also be bound by the arbitration agreement, if such company is the part/signatory/subsidiary of the same company and the signatory company has direct relation to the subject matter. The Supreme Court therefore, relying on the Doctrine of Group of Companies, held that CANFINA shall be part of the arbitration agreement and any decision passed by the arbitrator shall be legally binding upon CANFINA as well.

Conclusion

Arbitration has emerged as an appropriate forum for effectively resolving misunderstandings between the parties and amicably giving an outcome in a way that benefits both parties. The Act has been subject to a number of reforms and amendments. It has developed multifold and is still continuing to adapt to the changing needs of the public at large. 

There is a serious need for citizens to be aware of alternate ways of resolving disputes and their benefits. Many people are financially exploited and do not receive adequate relief via litigation. It can be seen as a respite from the pendency of cases and is free from any sort of bias or advantage given to one party. 

Frequently Asked Questions (FAQs)

What is the difference between arbitration and conciliation?

Though arbitration and conciliation are the modes of Alternative Dispute Resolution, they are somehow different from each other. 

In arbitration, a neutral third party, known as the arbitrator, is appointed by the parties, whereas in conciliation, a neutral third party is appointed, known as the conciliator. Under arbitration, the arbitrator, after hearing both parties, pronounces the final decision as an arbitral award which shall be final and binding on both parties, whereas the conciliator mutually settles the disputes of the parties outside the courtroom. The decision made by an arbitrator has legal binding upon the parties, whereas a decision made by a Conciliator has no binding force. Arbitration is mainly used for commercial contracts and other trade related matters, whereas conciliation is done mainly in family matters, labour related matters and other inter-personal matters.

Who is an arbitrator?

An arbitrator is an unbiased third party appointed by the parties to the contract under the arbitration clause of their contract, can be appointed by an arbitration agreement or in some cases can be appointed through court to refer their disputes in case one party breaches their contractual obligations. As per Section 11 of the Arbitration and Conciliation Act, 1996, any person, irrespective of their nationality, may be appointed as arbitrator but the same must be agreed upon by both the parties and the decision made by them shall be called an arbitration award and will be binding upon the parties.

What is the difference between arbitration and negotiation?

Arbitration: In arbitration, the unbiased third party is involved as arbitrator, who pronounces a final decision as an arbitral award, which has legal binding force over the parties.

Negotiation: In negotiation, the parties to the contract itself or through their representatives, negotiate with each other to reach a consensual settlement. During negotiation, parties communicate with each other with the aim of resolving a dispute and thereafter they draft an agreement concluding the decided solution into a written agreement that is signed by both parties, respectively.  

What is the difference between arbitration and mediation?

Mediation has its own unique features that make it different from arbitration. 

Under arbitration, a third neutral party acts as a judge, who amicably resolves the dispute between the parties by announcing its final decision, which is considered an arbitral award and legally bounds the parties. Whereas, under mediation, a third person is appointed as mediator, who only facilitates communication between the parties and assists the parties in order to reach a solution. The mediator does not act as a judge or arbitrator, also doesn’t provide any legal advice or counselling to the parties. The very main purpose of the arbitrator is to ensure better communication between the parties.

Why is arbitration important in recent times?

Since there are a number of cases that have been pending in the courts, it almost took a number of hearings to announce the verdict. But, with the concept of Alternative Dispute Resolution one can resolve their disputes outside of court without getting into the hassle of litigation. Arbitration is considered one of the most reliable forms of ADR, where parties resolve their disputes amicably through an arbitrator. Just like in litigation, the decision made by the tribunal has a legal binding force over the parties. Moreover, arbitration is more efficient in terms of cost and time. So, parties usually related to trade or commercial contracts preferably opt for arbitration as their mode of resolution.

How is institutional arbitration different from ad hoc arbitration? 

Under institutional arbitration, parties appoint their arbitrator through an established permanent institution with its own set of rules for conducting arbitration proceedings. Whereas, ad hoc arbitration is an arbitration in which the parties mutually appoint their arbitrator and are free to set their own rules of conduct for arbitration proceedings.     

References

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