Litigation v. Arbitration
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This article is written by Archna Nair, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com. Here she discusses “Litigation v. Arbitration”.

Introduction

To begin with a small example, two MNCs have a contract with each other related to a matter of developing and marketing pharmaceutical products. The contract also contains a dispute resolution clause, but not so efficient. The clause lacks in: which laws will be applicable to resolve the dispute, what will be the jurisdiction, who will appoint and what is the number of arbitrators, etc. A dispute arises later regarding the subject matter of the contract and one of the parties want to resolve the dispute through the arbitration agreement embedded in their business contract. However, the other party is reluctant and keeps on hindering the proceedings of arbitration by filing for an application or interim relief in the court. Now a procedure which should have taken only 3 months to resolve, took 3 years in court to be completely resolved and finally receive a judgment. 

This particular example has two phases:

  • One that how arbitration, one of the ways to dispose off any dispute speedily, can become ineffective.
  • Second, how parties do not prefer an actual litigation process, as it can take years to be finally disposed off. 

How is litigation different from arbitration?

In the above example, it can be seen that both arbitration and litigation can take time for a judgment to be delivered. Both have their own pros and cons. So which one is the better option? Is arbitration really speedy and cheap? The answer is, it depends. It really does depend on who the parties are, what the subject matter of the dispute is, whether they have a dispute resolution or an arbitration clause. If the parties are huge MNCs having no time and lots of money, they should probably go for arbitration. But if the parties are not much concerned about time, but want the judgment in their favour by setting a proper precedent, it is always better to go for litigation. Once again, if the parties are really concerned about their reputation, then they should probably go with the arbitration, as it is more of a private nature. But if the parties really want to have a good precedent and need a legal and binding effect, it is always better to go with the litigation procedure.

Hence, both have their own pros and cons. It really depends on the party or the general counsel of any corporate as to which process is to be chosen. But having a strong arbitration clause is always effective and can turn out to be in your favour if carefully drafted. Applying a mediation clause in the first instance of the dispute, it always proves to be most effective. It really helps one party to understand the point of view of the other party. 40% of the disputes are resolved at this stage itself. The next step is negotiation or conciliation. If all these procedures prove to be ineffective, then the second-last resort is arbitration, last resort being litigation. 30-40% of the cases in our country is arbitral and can be efficiently resolved by this process. The huge pile-up of cases in our country might be reduced through arbitration.

Although there is a screening mechanism through 2002 amendment of Legal Services Authority Act, wherein the court has the power to redirect the cases mandatorily to Alternate Dispute Resolution (ADR), it is not quite effective. However, if there is a mandatory requirement to go to arbitration in the first instance, rather than putting it on the discretion of the courts, the burden on courts may be reduced. Therefore, if all disputes that are arbitral in nature can be referred to ADR mechanism first and then if they do not give desired results, the parties may move to the court. This would reduce the burden on courts to a great extent. India is yet new to ADR, although it is making good progress and at a fast pace too. In the coming years, through better and new law enactments, ADR can be strengthened in India.

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Arbitration in India

Arbitration in India is governed by the Arbitration and Conciliation Act, 1996. This Act only codifies arbitration and conciliation. Mediation and negotiation are still not codified mechanisms in India, although the parties can have such proceedings without being legally bound by the final decision. The parties need to be bound by an arbitration agreement for the mechanism to be applicable. Generally, it is the corporate entities that prefer ADR mechanisms, although now even government entities prefer it.

Arbitration being yet an upcoming resolution mechanism in India, not many parties resort to arbitration. It is generally corporate disputes or trade disputes or commercial disputes that are majorly resolved through ADR or rather an arbitration. Other private disputes such as family disputes are not brought under the purview of the Act. The Act avoids certain issues that are not arbitral in nature:

  • Criminal offences
  • Matrimonial disputes
  • Guardianship disputes
  • Insolvency and winding up disputes
  • Testamentary disputes
  • Tenancy disputes

According to the landmark case of Booz-Allen & Hamilton Inc. v. SBI Home Finance Ltd. & Ors.,

“The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under : 

(i) Whether the disputes are capable of adjudication and settlement by arbitration? That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (courts). 

(ii) Whether the disputes are covered by the arbitration agreement? That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the `excepted matters’ excluded from the purview of the arbitration agreement. 

(iii) Whether the parties have referred the disputes to arbitration?”

In a recent judgment by Supreme Court, it was held that if an arbitration agreement is not sufficiently stamped, then it cannot be said to be in existence and the parties cannot appoint an arbitrator or enforce the agreement.

Through one of the latest pro-arbitration judgments, the Supreme Court iterated in the case of    A. Ayyasamy v. A. Paramasivam & Ors., that a mere allegation of fraud would not render a case non-arbitral in case of existence of a valid arbitration agreement.

Although ADR is new to India, it is making good progress towards implementing the mechanism efficiently.

Arbitration Mechanism in Foreign Countries

In much of the developed countries like the USA, UK, etc., the laws related to ADR is not much different than that of India. The only difference is that now they have strong and established precedents as a result of years of implementation of the arbitration laws. Nevertheless, even these developed countries face challenges in the implementation of arbitration laws. Arbitration in itself is similar around the globe, but it is the countries making it applicable in their countries that make it effective through various legislations. 

As per the reports of the International Chamber of Commerce, the African countries have recorded a 40% increase in the use of ADR mechanism since 2016. Central and West Asia have recorded an increase of over 26%. Meanwhile, the developed countries like the USA and UK has recorded an increase of around 4-8%.

NITI Aayog has also released a report on how efficient ADR mechanism has been in India and how to make it more efficient in the coming future.

Pros and Cons of Arbitration and Litigation

Pros

Cons

Speed

  • Arbitration proceedings generally have to be concluded within 3 months and can be extended up to 1 month on the discretion of the court. This is if there are no bogus filings in the court by any of the parties and both parties actually want to conclude dispute speedily.

  • Whereas lawsuits in courts might take years to conclude, given the burden on the courts due to huge pile-up of cases in our country.

Lack of Discovery

    • Due to speedy disposal of cases in arbitration, various evidence at certain times go unnoticed or even certain cross-examinations take place in a hasty manner, rendering the discovery of various evidence in jeopardy.

    • Whereas in litigation, the proceedings are generally held in an extensive manner, resulting in going deep into the case and discovery of various evidence.

Cost

  • Due to the speedy conclusion of cases, the cost of proceedings can be reduced through arbitration. Also, the procedure would not be prolonged unnecessarily as the procedural aspect like presenting the evidence can only take place at particular stages of the proceedings.
  • Whereas due to the amount of time that litigation generally takes to conclude a lawsuit is high, hence increasing the costs.

Limited Appeal

  • In arbitration, appeals can only be filed for limited reasons, as given in Sec. 34 of the Arbitration and Conciliation Act.
  • Whereas, in litigation, the parties have an option to file for an appeal or file for an injunction as the law provides for, as there is no time limitation in litigation procedures.

Specialized Decision-Makers

  • The arbitrators are chosen by the parties of the arbitration. Such arbitrators have a fair knowledge about a particular area of law, which in turn helps in a situation of complex cases.
  • Whereas in litigation, the judges seldom have the knowledge or have very little knowledge about a particular area of law, which also, in turn, makes it hard for the advocates of the parties.
 

Privacy

  • The main reason any party chosen arbitration is privacy in the dispute. Certain parties would not want to hinder their reputation by going for a public hearing in the courts. 
  • Whereas in case of litigation, the hearings are always public and susceptible to media coverage, which might tarnish the party’s reputation.
 

Forum Selection

  • The parties have an option to choose the number and also the seat and venue of the arbitration procedure. This helps in flexibility to carry out the hearings of the case according to the convenience of the party.
  • Whereas in litigations, the dates and venues are strictly fixed and cannot be changed according to the convenience of the parties.
 

Conclusion on whether the arbitration will overtake litigation in India. What does the future hold?

So will arbitration overtake litigation in India? And is arbitration better than litigation? The answer is, as mentioned before, it depends. It depends on the parties to the dispute and how speedily and efficiently they want the proceedings to be concluded. The question arbitration overtaking litigation seems to be very bleak because if we look into the statistics of even the developed countries, arbitration procedure hasn’t marginally reduced litigation. Although these countries have seen a steep rise in the arbitration proceedings as compared to the past, and also diverting many private entities to go for arbitration rather than litigation. This, in turn, has reduced the burden of the courts in general. Therefore, similarly in India arbitration can help to reduce the burden of courts to a great extent. India can also choose to have business courts like that of the United States. India currently has commercial courts, which is not so efficient and for that matter always overcrowded. Also having a screening system to mandatorily refer arbitral matters to arbitration is a measure to reduce the burden of courts along with the efficient disposal of the cases.

Therefore, both arbitration and litigation have their own pros and cons. It is the parties who have to decide which method could be more beneficial for them, depending on the subject matter and certain other requirements. Hence, both arbitration and litigation can work hand-in-hand to ease the pile-up of cases, making both the mechanisms equally important and efficient.

References

  1.  Civil Appeal No.5440 Of 2002
  2. 2019 SCC Online SC 515
  3. Civil Appeal Nos 8245 & 8246 of 2016

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