This article is written by Kartikeya Awasthi, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com.
Table of Contents
Introduction
Did you know that in many countries the Courts only decide on about 5% of all disputes? That’s quite a surprising statistic, and while it is undoubtedly the case that some disputes are dismissed because they are not serious enough to warrant Court time, the majority of the disputes are legitimate. Given the interests and sums which are often at stake in these disputes, why should the parties in dispute choose not to take the traditional legal route? Perhaps more importantly, where do they go instead and what do they do as an alternative?
The answer to this is that they choose to use Alternative Dispute Resolution (ADR). Essentially, ADR offers a way to settle disputes without needing to involve the Courts and generally involves bringing in a neutral and impartial third party. In more recent times, the use of ADR has been a notable expansion. In 1990, the US congress enacted the Administrative Dispute Resolution Act,1990 which ‘gave federal agencies additional authority to use ADR in most administrative disputes’ and the Negotiated Rulemaking Act which ‘directed regulatory agencies to use negotiation to develop administrative rules.’
Given its versatility in resolving a wide range of disputes, some have taken to calling ADR as ‘Appropriate Dispute Resolution’, suggesting that ‘in ADR the parties choose to process what they feel is the most appropriate for their needs and interest’. As mentioned earlier, ADR generally involves bringing in a neutral and impartial third party. Overall, there are two principal ways in which the third party participates: the decisional approach and the facilitative approach.
(1) Decisional approach – the third party can impose a solution upon the parties in the dispute e.g.: Arbitration.
(2) Facilitative approach – the third party as a facilitator only, helping the parties to find their own solution e.g.: the mediation.
Various forms of Alternative Dispute Resolution
There are in total 5 different types of ADR followed in India i.e. Ombudsman, Negotiation, Conciliation, Arbitration, Mediation.
- Ombudsman Schemes usually take a proactive inquisitorial approach, appreciating that consumers often cannot present their own complaints fully. Staff carrying out investigations typically knows the most common complaints about respondents and can discern patterns of behaviour that an arbitrator would never be able to identify. There is a basic difference in the way in which the private sector and public sector schemes work. The private Ombudsmen resolve complaints brought by consumers or small businesses up to certain maximum Award limits often with the power to make recommendations as to further compensation.
Their decisions bind the respondents only if the complainant accepts and not the other way round. Public sector schemes lack the power to bind the parties. They can only make recommendations which the respondents can ignore although not usually without giving a reason for doing so. ‘Many “non-binding recommendations have led to system changes, official apologies and compensation payments to aggrieved individuals.
- Negotiation consists of a sequence of proposals (P) and counter-proposals (CP) that continue until agreement is reached or negotiations breakdown. This mechanism involves an interaction between disputing parties whereby, without compulsion by a third-party adjudicator, they endeavour to come to an independent, joint decision concerning the terms of agreement on the issues between them. In recent years, a considerable body of scientific literature has been developed in an attempt to model the negotiation process. One of the most remarkable methods of negotiation is the so-called principled negotiation or negotiation of merits, which was developed at the Harvard Negotiation Project.
It suggested that, for a negotiation to be successful, the parties must:
(1) Separate the people from the problem.
(2) Focus on interests, not positions.
(3) Generate a variety of possibilities before deciding what to do.
(4) Insist that the result be based on some objective standard.
Negotiation will ideally produce an outcome which will be better than the best available alternative that could be reached without negotiating. The parties’ Interests should be well-satisfied and joint gains and mutually advantageous trade-offs should be diligently sought, explored and put to use.
- Conciliation: The third party suggests a solution, which is non binding on the parties. More formal than mediation, conciliation affords flexibility to the parties as they are entitled to craft their own rules, select the conciliator of their choice, and decide when to abandon the process altogether the result above is not surprising. Conciliation is a non-adversarial mechanism, and it allows the parties to preserve the relationship; a characteristic that has allowed it to be used effectively in international, labour and family disputes. Conciliation is the ADR mechanism where a neutral party meets with the parties both individually and together in an attempt to resolve the dispute. The neutral’s role is to help the parties negotiate with each other and culminates in a settlement proposal which is non-binding on them.
- Mediation can be defined as the facilitation, by a third party, of a negotiated agreement in which the mediator does not decide the dispute, but facilitates communication and problem-solving by the parties. A mediator has no decision-making power. Mediation may be performed by international organisations, by states or by individuals, and it has been used with great success to resolve a wide variety of disputes. It has proven popular for a variety of reasons, including the ‘speed of the procedure, the expertise of the mediators, the confidentiality of the procedure and avoidance of procedural obstacles of all sorts.’ Although it can take place at any time in a dispute, it is more likely to be successful later on, after the parties in dispute have experienced the costs of conflict.
Commercial mediation begins with the signing of a confidentiality agreement. This is followed by an outline of the format, given by the mediator, and a confirmation that all of the parties have the authority to settle. The mediator then invites both sides to make an opening statement, which typically includes the facts as they see them and discussion of how they have allegedly been damaged by the opposing side. Once each party has had the opportunity to present its case, the mediator will summarise the information before hosting joint or private meetings with the parties. Each party will then discuss its position with the mediator-describing its view of the core issues and what it ultimately seeks as an outcome.
- Arbitration is a process by which parties obtain a resolution to a dispute by getting a decision from a neutral, impartial and independent third party. That decision is final and the parties must abide by it. Unlike mediation, the parties to Arbitration only consent to the process itself, the final decision is imposed upon them rather than being a resolution which they have agreed between themselves. Most commonly, Arbitration is used between two parties that have a pre-existing commercial relationship. The typical situation is where there was a contract for the supply of goods or services, and one party claims that the other failed to meet their obligations under the contract. Arbitration is increasingly being used in non-commercial situations such as some family matters and personal injury matters. In order to go into Arbitration, it is not sufficient to simply have a dispute. Because Arbitration is extra-judicial, both parties must agree to have their own dispute resolved by Arbitration.
In the United Kingdom and India, this means that there must be an Arbitration agreement that is evidenced in writing. If there is an Arbitration clause in the contract, even if one party can invalidate the contract, the Arbitration agreement will be separate and still binding. In cases where two parties had an Informal trading relationship but no contract. They may decide that Arbitration is a more efficient way to resolve their dispute. If they wish to do this, they must still create a binding written Arbitration agreement. This type of agreement is often referred to as a ‘submission agreement’.
As each of these ADR are efficient enough to bring out a resolution. Interestingly these individual types of ADR can be incorporated together for cases which involve more than one issue or for complex commercial relationships.
Arbitration in India
Process
All the Arbitral proceedings commence by a simple notice initiated by one of the parties to the contract and unless agreed otherwise, the date of commencement of Arbitral proceeding for a particular dispute is said to be the date on which the notice was received by the other party to the contract. Now the only essential requirement for an Arbitral proceeding is the mere presence of a valid Arbitration clause/agreement in the contract irrespective of the parent contract being null or void or void ab-initio or frustrated or terminated. Hence, National Agricultural Coop. Mktg. Federation India Ltd v. Gains Trading Ltd confirmed that Arbitration agreement/clause is independent to the parent contract. ‘Autonomie de la clause compromissoire’.
After the notice being acknowledged by the other party, the second step is the appointment of Arbitrator/s. Arbitrator/s are appointed mutually by the parties to the contract but in deadlock situations, Section 11 of the Arbitration& Conciliation Act,1996 comes to the rescue and gives a detailed procedure for the appointment of Arbitrator/s. No sooner did the appointment of Arbitrator/s be confirmed, “the trial phase” begins i.e. submission of written documents, evidence, arguments and oral hearings and the Arbitral Award or interim relief is binding on the parties.
The Arbitral Award is considered to be a decree from a Court but still the Tribunal does not have the same powers as that of traditional Courts. Therefore, the Tribunal can seek Court assistance. No Court will take Suo moto cognizance over any Arbitral proceeding and only when the Tribunal ask for assistances, the Court can make sure that they are just assisting the Tribunal rather than taking up the matter into their own hand for example – referring to Arbitration, interim relief, generation of documents, execution of an Award etc.
Problems
Lack of awareness
Although India is moving towards modernisation, it is yet a developing country. Which means, most people are ignorant towards Arbitration and still trust Courts more than alternative dispute resolution. The people of India find it very difficult to trust someone other than a judge due to which the Courts are overburdened with cases which are also Arbitral in nature and ADR can provide instant justice.
Arbitrators
Majority of problems associated with Arbitrator/s were addressed and resolved in the 2015 amendment act but still, one of the problems is yet to be addressed. Looking at the DNA strand of Arbitration, one of the traits is to provide a speedy resolution. The documents which are being submitted are less aggressively formal but respectful. Since the majority of Arbitrator/s are either retired judges from Supreme Court of India or High Court of a particular state the Arbitration sometimes tends to follow conventional Court layout for submission of documents, pattern to be followed during proceedings etc which may hinder the efficiency of the Arbitration.
Overlapping effect of different laws
Micro, Small & Medium Enterprise Development Act, 2006 was introduced to protect the supplier from hardship like non-payment of goods or services. The act imposes the obligation on large and government undertakings to pay for the goods within 45 days of the purchase otherwise a compound interest or three times bank rate as specified by the RBI will be levied on the defaulter. Even after that, payment is not made the enterprise can approach Facilitation Council. Section 18 of the MSMED Act gives us a detailed mechanism to be followed. Firstly, there must be due between the supplier and the buyer and one of the parties must refer to the dispute of non-payment due to the Facilitation Council. Secondly, the Council has two levels at which they can resolve the dispute:
(1) Conciliation – if the Conciliation is successful, the settlement agreement will be binding to the parties.
(2) Arbitration – if the Conciliation is not successful, then the matter is referred to Arbitration.
The mandate is to resolve the dispute within 90 days from which the Facilitation Council was notified. Usually, the seat, venue, language are mutually pre-decided by the parties in an Arbitration clause/agreement. Since the council makes them bound to follow Arbitration and the MSMED act is meant to protect the supplier, therefore, the council can act only on those references where the supplier is from its jurisdiction whereas buyer need not be.
Prima facie, any statutory provision will have supremacy over an agreement or a contract but still plethora of High Court judgments related to the Arbitration Agreement and the Council suggests that this question is yet to be answered by the Apex Court. Bombay High Court in case of Bharat Sanchar Nigam Ltd v. Maharashtra Micro and Small Enterprise 2015 SCC OnLine Bom 4145 was of the view that pre-existing Arbitral clause has supremacy over the Statutory provision as the result of the Statutory provision is Arbitration, therefore, allowing the parties to adhere to the contract will not negate the Statutory provision. In case of GE T&D India Ltd v. Reliable Engineering, (2017) 238 DLT 79 the Delhi High Court was of a contrary view than that of Bombay High Court and held that the contractual clause cannot override the Statutory provision. Unless these ambiguities are resolved, the Arbitration cannot work efficiently where one of the parties is micro, small or medium enterprise.
What if one of the parties to the Arbitral Tribunal is insolvent? At the rescue, Section 41 of Arbitration & Conciliation Act, 1996 talks about the course to be taken when one of the parties becomes insolvent. This section goes hand in hand with the provision of Insolvency And Bankruptcy Code (IBC). Corporate Insolvency Resolution Process (CIRP) comes into force when the company turns insolvent. There are certain situations to be considered while one party is insolvent. The Arbitration agreement/clause will lose its binding effect on the receiver once the company is declared insolvent. The irony is that even there the Apex Court in its judgement upheld the principle of ‘Autonomie de la clause Compromissoire’ and Arbitration clause is still void in this situation, yet another reason for the Supreme Court to give correct sanctity to this type of Clause/agreement.
Irrespective of whether the Arbitration agreement is carried out before or after the commencement of the Insolvency process, but before passing Insolvency order; then the resolution to be followed is solely dependent on the receiver handling the Insolvency. If the Arbitration agreement has the jurisdiction to govern the dispute between the parties (the company will be replaced by the receiver handling insolvency) and the receiver agrees to abide by the Arbitration terms of the contract then no permission of the NCLT is required. If the receiver denies abiding by the terms of the contract then the party involved in Arbitration can apply to the NCLT for convincing the receiver to adopt arbitration as a resolution to settle a dispute.
The decision shall be solely in hands of the NCLT, having regards to the circumstances. If the NCLT passes an Order to ignore the Arbitration clause/agreement already in place because of the circumstances of the Insolvent Company, then the other party is left only with one remedy i.e. to file a civil suit to seek relief against the receiver. Regarding the power vested in the hands of the receiver to push the other party which is involved in Arbitration against the wall, the receiver is not bound to consider the status of another party. The question here to be answered is not the powers of the receiver but the worth of an Arbitration clause/agreement.
Lack of legislation
The only parent act which is governing Arbitration in India is The Arbitration and Conciliation Act,1996. The quantum of an arbitral award is the same as that of a decree from a Court but due to the lack of legislative infrastructure, most of the people are still not willing to take risks or a leap of faith regarding matters of large quantum that they may face in business. Rather than just having guidelines from various forums like Indian Arbitration Forum, Indian Council of Arbitration etc. There must be a law to enforce these guidelines.
The most effective amendment of the parent act was witnessed in the year 2015 where many thresholds related to the time were introduced to Arbitral proceedings. The applicability of the Act was solely dependent on one date i.e. 23rd October 2015. The literature of Section 26 of the 2015 Act which deals with the applicability of this act was the most difficult section to interpret because both Arbitral and Court proceedings are different from each other yet connected. The question was whether this section applies to Court proceedings as well.
In case of BCCI V. Kochi cricket, the Apex Court was of the view that it is an undisputed principle i.e. Arbitral and Court proceedings are different from each other. Every Arbitral dispute dragged into Court proceedings are in relation to the Arbitral proceedings. Since the literature of Section 26 of the act is clear that the act shall apply “…….in relation to Arbitral proceedings commenced on and after the date of commencement of this act”. Therefore, the act applies to Court proceedings in relation to Arbitral proceedings if it passes the criteria for the applicability of that act which is 23rd October 2015.
The legislative wing was of a different view that court proceedings are related to arbitral proceedings (primary proceeding) since primary proceedings are barred from taking advantage of the new act, likewise must be followed by Courts (secondary proceedings). If Section 26 is applied to the Court proceedings, it has the potential to apply 2015 act retrospectively over Arbitral proceedings. (for instance: one of the parties involved in Arbitration filed a suit in the High Court having jurisdiction over that dispute for the appointment of the Arbitrator/s. The Court facilitates the request and appoints Arbitrator/s. Now, without novating the agreement mutually by the parties, it is impliedly expressed that the arbitral Award must be given within 12 months (this time limit is a part of 2015 Act).
To overcome this confusion Section 87 was introduced in the 2019 Amendment Act which reversed the judgement of BCCI v. Kochi cricket (2018) 6 SCC 287 but later the Supreme Court struck down Section 87 of 2019 Amendment Act. Because of this havoc, people fear to take up Arbitration to resolve the disputes. There are too many guidelines and rules that one can follow which sometimes may complicate simple Arbitration proceedings.
Court interference in Arbitral proceedings
In White Industries v. The Republic of India, two issues arise: firstly, the intervention of judiciary, secondly delay in arbitration. So it was well-argued and agreed that the intervention of the judiciary should be minimised to an extent.
To Overcome the Aforesaid Problems
Awareness
Awareness related to Arbitration can be achieved only if we split the awareness program at 3 levels:
- SEMINARS: To encourage the people to opt for Arbitration as an “Appropriate dispute resolution” over traditional Courts is by organizing seminars related to Arbitration and it’s efficiency to resolve a dispute. These seminars can be attended by the Students, Businessmen, Advocate and any other person, so interested. The main motive for the seminar must be lowering the burden of Courts by delivering “just” or an overview of mechanism followed in Arbitration. e.g. SAMA.
- LAW SCHOOLS: The law schools in India must have a wing or a committee devoted to ADR which will be completely engaged in organizing competitions related to Alternative Dispute Resolution; same like moot courts, publishing any new guidelines or rules or convention that India was a part of, conducting seminars and briefing all the law students in their respective institutes about ADR and its mechanism. The competitions organized by the committee will inculcate a culture amongst all the law aspirants to opt for Arbitration to resolve any commercial dispute over Courts. The students will get first-hand experience on the procedural part of any ADR mechanism including Arbitration. In this way the ambiguity related to procedure will be mitigated eventually.
- LAW FIRMS: They can organize workshop cum competitions where the competitors will get a training session over the procedural rules and roles available for every competitor which can range from being an attorney for some client in Arbitration or meditator or Expert determination or private Judging or Summary Trails etc. In this manner the law aspirants as well as the firm can build their own network amongst the future Arbitration lawyers or ADR lawyers. In this matter the competitors will understand other mechanisms of ADR followed outside of India.
Proper Legislative Infrastructure
In order to mitigate the avoidance of taking up Arbitration as an alternative, the legislature must be powerful enough to impose mandatory obligation over the parties on certain types of issues. United Nation Commission On International Trade Law (UNCITRAL) was the pioneer for most of the countries to adopt Arbitration as an alternative to resolve a dispute and many of them made it as a point of reference to make laws over ADR for example in 1990, the US congress enacted the Administrative Dispute Resolution Act, 1990 which ‘gave federal agencies additional authority to use ADR in most administrative disputes’ and the Negotiated Rulemaking Act which ‘directed regulatory agencies to use negotiation to develop administrative rules.’
Likewise, in the United Kingdom Prior to Parliament’s passage of The Housing Grants, Construction and Regeneration Act 1996, ‘a number of standard form construction contracts already incorporated a form of adjudication procedure for the temporary resolution of disputes.’ After Sir Michael Latham’s review of the construction industry in 1994, his report Constructing the Team ‘strongly advocated adjudication as a means of dispute resolution. Today, the Act ‘applies not only to contracts for the execution of construction works, but also to contracts for the repair, refurbishment and demolition of buildings. Most companies and individuals operating in the construction industry will be subject to its terms’. This kind of ADR is called Construction Adjudication.
It is not correct to say that India does not have any mandatory provision for ADR. Mediation is a mandate to be followed by the companies to resolve a dispute amongst them under Companies Act. Formation of Facilitation Council for MSME which can be an hindrance for a pre-existing Arbitral clause/agreement but still they resolve the dispute using only ADR as a mechanism. Therefore, the jurisdiction of overriding effect must be looked upon. There must be a pecuniary provision that works as a threshold for all the commercial disputes. For instance, “In absence of Arbitration clause/agreement in the contract and any commercial dispute between the contracting parties occurs, involving pecuniary amount less than Rs.10,00,000 must follow Arbitration to resolve the dispute”. In this way a lot of burden from the courts will be taken away on the shoulders of ADR.
The doctrine of ‘Functus Officio’ must be implemented with more advance framework because immediate ceasing of any Arbitral Tribunal once the Award pronounced or after expiring of the timeline given in Section 33 of Arbitration & Conciliation Act, 1996and later some essential evidence/s is found by the party which has a potential to add an Award to the existing Award cannot appeal for an additional Award in the Tribunal after the Award is pronounced or in the Court because Courts cannot interfere into the proceedings or claims sought by the parties in the Tribunal. This leaves the party with only one remedy i.e. to appeal in the High Court to set aside the Award (which is not a solution) or to invoke Arbitration Clause/agreement all over again and start afresh proceeding which is defeating the purpose of Arbitration i.e. speedy resolution. Therefore, the Tribunal must be allowed to review or revise their own Award by different Arbitrator/s only in this situation so that ends of justice are served.
Conclusion
India is estimated to have 3.53 crore pending cases in total, where 58,669 cases are pending in supreme court, 43,63,260 pending cases across all high courts and a whopping 3.11 crore pending cases only across all District and Subordinate courts in India. Despite these statistics, more and more people are tilted towards the judiciary to resolve their disputes. Alternate dispute resolution methods are very helpful and very crucial for any business firm. It helps them to resolve any disputes internally and with a greater pace than any judicial system can ever do. India ranked 131 out of 189 countries in the 2016 World Bank ranking for ease of doing business. According to 2019 rankings, India has gained 63th rank out of 190 countries. On the other hand, India has a very lower ranking in Enforcement of contracts, that is, 163, while it may have improved in comparison to before. Nonetheless efforts are being made by the legislative and judicial wing to enhance Arbitration in India.
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