This article is written by Monesh Mehndiratta. The article explains Section 21 of the Arbitration and Conciliation Act, 1996 which deals with the commencement of arbitral proceedings and requests to refer a dispute to arbitration. This article explains the significance of issuing notice under Section 21 of the Act, its objectives, and important case laws. 

It has been published by Rachit Garg.

Introduction

Have you heard about outside court settlements? Do you know that parties to a suit can settle their disputes without getting involved in long court proceedings?

Download Now

Yes, it’s correct. There are various methods by which parties can resolve their disputes without going to the courts. These are known as alternative dispute resolutions (ADR)  and help to reduce the burden of courts. Arbitration, conciliation, mediation, negotiation, etc. are some of the ADR processes. Each and every method has its own process and stages of resolving the dispute and differs from each other in some way or the other. These mechanisms run parallel to the court system and do not involve interference from the court. 

The present article deals with the meaning of Arbitration, the kinds of arbitration, and its proceedings. Like every other ADR mechanism, arbitration has its own procedure consisting of the existence of an arbitration agreement, commencement of proceedings upon issuance of a notice, statements of claim, hearing of parties and so on. The article specifically deals with Section 21 of the Arbitration and Conciliation Act, 1996 which deals with the commencement of arbitral proceedings, its significance in the entire process of arbitration, ingredients of the section, issuance of notice prior to commencement of proceedings and important case laws related to it. 

The 1996 Act is enact with the purpose to speed up the justice delivery system by promoting ADR mechanisms. It was enforced on 22 August, 1996 and covers all the aspects of domestic and international arbitration along with foreign arbitral award. Let us understand the significance of Section 21 of the Act. 

Commencement of arbitral proceedings

Section 21 of the Act deals with the commencement of arbitral proceedings. The section provides that the arbitral proceedings commence from the date the request to refer the dispute to arbitration has been received by the respondent unless the parties themselves have agreed upon a particular date. This means that informing the respondent through a legal notice regarding referring the dispute to arbitration is one of its essential ingredients. This also implies that the process of arbitration is based on the consent of both  parties. The provision of Section 21 is taken from Article 21 of the UNCITRAL Model law.  

Essentials of Section 21 of Arbitration and Conciliation Act, 1996

Section 21 of the Act deals with commencement of arbitral proceedings. In order to understand the provision, it is necessary to understand its essentials. In the case of M/S D.P. Construction v. M/S Vishvaraj Environment Pvt. Ltd. (2021), the court referred to various judicial precedents with respect to Section 21 of the Act and requirement of notice before commencing the procedure and held that:

  • The notice which is given under Section 21 of the Act must be clear and reflect the intention of the party to refer a dispute to arbitration by calling and informing the other party and further proceeding with the appointment of arbitrators. 
  • Another important thing to note and unless a request is made by one party to a dispute to refer a dispute to arbitration, mere setting out the claims and issues would not be enough and cannot be used to refer a dispute to arbitration. 
  • The question of failure does not arise if the parties failed to adhere to the agreed procedure mentioned in the arbitration clause for referring a dispute to arbitration. This only means that the pre-condition for invoking the jurisdiction under Section 11 of the Act is not fulfilled and thus, invokes the jurisdiction of the court to look into the matter. 
  • The court also observed that it has been mentioned in various judicial precedents that once a notice is issued according to Section 21 of the Act, there are legal consequences which also include computation of limitation period. 

Particulars to be mentioned in the notice 

arbitration

The following particular must be mentioned in the notice issued under Section 21 of the Act:

  • Names of both the parties. 
  • Address of parties.
  • Relationship and commercial interactions existing between the parties.
  • Facts of the case.
  • Issues pertaining to the dispute.
  • Responsibilities to be performed by the opposite party.
  • Mention the arbitration clause which was used to refer the dispute to arbitration.
  • Provide a time period within which the opposite party has to send the reply. 
  • In case the arbitral tribunal is to be established, ask the opposite party to nominate arbitrator or arbitrators. 

In the case of Smt. Veena W v. Seth Industries Limited (2010), the Bombay High Court observed that even though the notice issued under Section 21 of the Act does not contains the claims of the party referring a dispute to arbitration but it must contain the dispute or facts leading to dispute between the parties along with the subject matter for which the arbitration clause has been invoked and the case is referred to arbitration. 

Significance of issuing notice under Section 21 of the Act

One question that might arise in our minds is whether giving notice under Section 21 is mandatory. It can be said that notice under this section is mandatory due to the following reasons:

  • It is important that the party against whom claims are made in the arbitration agreement know about such claims and that it has been referred to arbitration. It is also possible that as a response to the notice, the respondent accepts some claims and denies others. 
  • Issuing notice under this section gives an opportunity to the respondent to represent his side of the story and verify if the claims asked are time barred or barred by estoppel or whether the dispute in hand can be referred to arbitration or not. 
  • The notices also help in identifying the process that has to be adopted during arbitration like the seat of arbitration, law applicable, the appointment of arbitrators etc. According to Section 11 of the Act, it is necessary that both the parties together appoint the arbitrators and if they are unable to do so, then only they can seek the help of courts and designated institutions. This is only possible when both parties are aware that the dispute has been referred to arbitration. 
  • If one party appoints an arbitrator by itself without the consent of the respondent, he has a right to raise an objection and the person appointed as an arbitrator may be disqualified from the process of arbitration for that particular dispute. Thus, issuing a notice under Section 21 facilitates an important aspect of arbitration i.e., the consent of both parties. 

Objective of Section 21 of Arbitration and Conciliation Act, 1996

The primary objective of arbitration and conciliation is to reduce the burden of courts by reducing the pending cases and delivering quicker justice to the parties. Section 21 of the Act facilitates the purpose of enacting the Act. It deals with commencement of arbitral proceedings. It also makes sure that the principles of natural justice are complied with by issuing a notice to the respondent informing him about the dispute being referred to arbitration. 

In the case of Alupro Buildings System Pvt. Ltd. v. Ozone Overseas Pvt. Ltd. (2017), the Delhi High Court interpreted the Section and provided clarity on its object and significance. The court held that issuing notice under Section 21 is mandatory in nature and is an act precedent to the initiation of arbitral proceedings. It was further held that a person cannot file a claim before an arbitrator without complying with the requirement mentioned in the Section. 

Arbitral process under Arbitration and Conciliation Act, 1996

The process of arbitration under the Act is divided into the following stages:

Arbitration agreement

Arbitration agreement is one of the essential elements of arbitration. The process of arbitration is based on mutual consent of both parties which can be shown through an agreement signed by them. According to Section 7 of the Act, the arbitration agreement must be made in writing. It can be contained in a contract or a separate agreement or as a clause. One question that has been dealt with by courts very often is whether it is mandatory to sign the arbitration agreement. The Supreme Court in its recent judgement in the case of M/S Caravel Shipping Services v. M/S Premier Seafoods Exim Pvt. Ltd (2018) held that it is not mandatory to sign the arbitration agreement however, it must be in writing. 

Notice under Section 21 of the Act

It is important that the party who refers the dispute to arbitration informs the other party against whom the claim is sought regarding the reference of dispute to arbitration so that the consent of both parties is available. This also provides the respondent or other party an opportunity to present his side of the story. This is similar to the issuance of summons to defendants in a civil case after which he is required to appear and file a written statement. Section 21 of the Act facilitates this purpose and advances the further process of arbitration. 

Appointment of arbitrators

Arbitrators are mutually appointed by both  parties. According to Section 10 of the Act, the parties are free to appoint any number of arbitrators but the number of arbitrators appointed must be odd. The appointment of arbitrators is done according to the procedure mentioned in Section 11 of the Act. If the parties fail to appoint the arbitrators by themselves, they can approach the high court in case of domestic arbitration or the Supreme Court in case of international commercial arbitration or designated institutions for the same. 

Statements of claim and defence

After the appointment of arbitrators and the formation of an arbitral tribunal, the claimant is required to file a statement of claim while the respondent is required to file a statement of defence. According to Section 23 of the Act, the claimant must provide relevant facts supporting the claim, issue at hand and relief or remedy sought and the respondent can file his defence with respect to these particulars. He can also file a counter-claim or claim set off which may be decided by an arbitral tribunal if it falls within the ambit of the arbitration agreement. These statements of claim and defence must be filed within 6 months from the date the arbitrators received notice regarding their appointment. 

Hearing of parties

After the statements of claim and defence are filed by both  parties, they are heard and given the opportunity to present their case in front of the arbitral tribunal. Based on these, the arbitral tribunal adjudicates the matter. 

Arbitral award

After the hearing of the parties and presentation of required evidence, the arbitral tribunal issues an arbitral award which is binding on both parties, same as the decree passed by a court. Once an arbitral award is passed in favour of one party, the other party has a time period of 90 days to challenge the award according to Section 34 of the Act. During this time period, the award passed cannot be executed. The arbitral tribunal is also empowered to award an interim relief if necessary during the arbitration proceedings according to Section 17 of the Act. 

Important case laws

M/S D.P. Construction v. M/S Vishvaraj Environment Pvt. Ltd. (2021)

Facts of the case

In this case, the Nagpur Municipal Corporation contracted the work of the pipeline to Vishvaraj Environment Pvt. Ltd (respondent) who further engaged D.P. Construction (applicant) for the same through a work order. This work order also had an arbitration clause to resolve the dispute. When a dispute arose between the parties, the applicant issued a notice to the respondent regarding claims and reference of the dispute to arbitration. When the respondent repudiated the claim as a reply to the notice, the applicant made an application to the court seeking help for the appointment of arbitrators. 

Issues involved in the case

  • Whether the arbitrators be appointed by the court in this case.
  • Whether the notice issued to the respondent was in consonance with Section 21 of the Act. 

Judgement of the court 

The respondent in this case argued that the arbitration clause contained a two-tier process for resolving the disputes and the applicant moved to the second procedure without exhausting the first and so the application under Section 11 must not be maintainable. He further argued that the notice issued did not qualify the requirements of Section 21 of the Act as it neither referred to the arbitration agreement nor provided that the dispute was being referred to arbitration. 

The Bombay High Court examined the application under Section 11 and observed that the applicant had exhausted and complied with all the requirements of the first-tier of arbitration clause and then moved to the second-tier. Dealing with the issue of notice under Section 21 of the Act, the court observed that in order to commence the arbitration proceedings, a request to refer a dispute to arbitration must be made by a party. Referring to various judicial decisions, the court held that:

  • The notice which invokes the option of arbitration must be clear and there must be an intention to refer the dispute to arbitration and call the opposite party for the same. 
  • It is necessary that there is a request to refer a dispute to arbitration from one party. Mere setting out the dispute and claim does not help the parties avail the option of arbitration. 
  • In order to invoke the jurisdiction of the court under Section 11 of the Act, it is necessary that the parties have triggered the agreed procedure as set out in the arbitration clause. This also acts as a pre-condition for invoking the jurisdiction of court for appointment of arbitrators. 

The court in the present case held that the notice issued by the applicant to the respondent was not a valid notice as it must be under Section 21. However, the right applicant to initiate arbitration was reserved by the court upon issuance of fresh notice under Section 21 and filing a fresh application under Section 11 of the Act. 

West Bengal Power Development Corporation Limited v. Sical Mining Limited (2023)

Facts of the case

In this case, there was a coal mining agreement between the parties which contained an arbitration clause for the resolution of disputes. A dispute arose between the parties and the Additional Chief Secretary of the Power Department appointed the sole arbitrator which was challenged by the respondent under Section 14 of the Act. An application was filed by the applicant seeking assistance from the court in the appointment of an arbitrator. This application was, however, opposed by the respondent on the ground that no notice was issued under Section 21 of the Act. 

Issues involved in the case

Whether the application for appointment of an arbitrator, in this case, be granted. 

Judgement of the court 

The Calcutta High Court in the case refused to appoint arbitrators and dismissed the application filed under Section 11 of the Act as the requirement of notice under Section 21 of the Act which is considered as a pre-condition for filing application under Section 11, was not complied with. The court further held that a notice under Section 21 must be issued before filing an application for appointment of arbitrator under Section 11 of the Act.

Alupro Buildings System Pvt Ltd v. Ozone Overseas Pvt. Ltd. (2017) 

Facts of the case

In this case, the petitioner is a company which is based in Bangalore and had placed four purchase orders with the respondent for which full payment was done. The petitioner after sometime, received a notice from the sole arbitrator appointed by the respondent for the recovery of money for goods sold by him to the petitioner. The petitioner contended that the appointment was done without issuing any notice under Section 21 of the Act and so the respondent cannot proceed with the arbitration. 

Issues involved in the case

Whether the arbitration proceedings be initiated in this case.

Judgement of the court

The Delhi High Court in this case while observing the importance of issuing notice under Section 21 of the Act observed that the party against whom any claim is made must know what the claim is. Further, it is also possible that such a party may accept some claims while denying others. Another important aspect of issuing notice under Section 21 is that the other party is given an opportunity to raise objections on the claims raised based on whether the claims are time barred, barred by estoppel or file counter-claims if any. Also, where the parties have agreed upon a particular procedure for the appointment of arbitrators, it is not possible to identify whether the said procedure was followed or not in the absence of such notice. 

The court also observed that an arbitration clause does not contemplate the unilateral appointment of arbitrators by either of the parties. Even if the clause allows one party to appoint the arbitrator, it is necessary to inform the other party about the appointment. Issuing notice under Section 21 helps in avoiding wastage of time which may occur if such notice is not issued as it provides an opportunity to the other party to point out any kind of defect in the claim or procedure adopted. 

The court in this present case held that the arbitration proceedings cannot be commenced on mere filing an application under Section 34 of the Act. Issuance of notice under Section 21 is an important aspect for referring the dispute to arbitration and commencement of arbitral proceedings and hence, the award passed by the arbitrator in this case was set aside. 

Malvika Rajnikant Mehta v. Jess Construction Pvt. Ltd. (2022) 

Facts of the case

In this case, a deed of conveyance was executed by the three applicants in the favour of the respondent. According to the deed, the respondent was under obligation to construct a new building on the property and hand over the same within a period of 42 months. If in case he fails to do so, he would be liable to pay the interest and liquidated damages every month from the date of expiry of the above-mentioned period. The time period was, however, modified to 34 months. The deed also provided that in case of dispute, the case will be referred to arbitration presided by a sole arbitrator, Mr. Kirti K. Shah. 

The respondent failed to fulfil his obligations and so the case was referred to arbitration. The respondent, on the other hand, argued that the sole arbitrator was ineligible and had personal relationship with the petitioners as a result of which the sole arbitrator rescued himself from the arbitration. Multiple efforts were made by the parties to decide the arbitrator but failed to do so. Finally, an application under Section 11 was filed in the court to appoint the arbitrator to which the respondent argued that the applicants failed to follow the prescribed procedure as they did not issue any notice under Section 21 of the Act. 

Issues involved in the case

  • Whether the applicants adopted the correct procedure to refer the case to arbitration. 

Judgement of the Court 

The Bombay High Court in this case observed how arbitration must be invoked and what is the intention behind issuing a notice under Section 21 of the Act. Issuing such notice to the opposite party provides a nature of claims asked by the party requesting to refer a dispute to arbitration. It provides an opportunity to the other party to accept or reject the claims and to raise any objections with respect to appointment or impartiality of the arbitrator. The date of receipt of notice is necessary to determine the date of commencement of arbitral proceedings. It cannot be inferred that parties waived notice merely because they had named the arbitrator. The court held that the respondent also invoked arbitration when he himself suggested the name of arbitrator thus providing the existence of arbitration agreement, dispute between the parties and arbitrability of the dispute and so the issue at hand was only the appointment of arbitrator and nothing else. 

Conclusion 

ADR mechanisms are other alternative ways of resolving the disputes between the parties wherein they settle the dispute with the help of a third party or without any third party by themselves. Arbitration is one such mechanism and is used commonly by people to resolve their matters. The award passed by the arbitral tribunal is binding on both parties and has the same effect as a decree passed by a court. However, in order to initiate the proceedings of arbitration, it is necessary that a request is made by one of the parties and the other is informed about the same through a proper notice under Section 21 of the Act. 

Through various judicial decisions and precedents, it is clear that the issuance of notice under Section 21 is also an important aspect of the appointment of arbitrators under Section 11 of the Act. Where the parties fail to appoint the arbitrators by mutual consent, they can file an application in the High Court seeking assistance for the appointment in case of domestic arbitration and to the Supreme Court in case of international commercial arbitration. 

Frequently Asked Questions (FAQs)

How many arbitrators can be appointed by the parties?

According to Section 10 of the Act, parties are free to agree upon the number of arbitrators however, it must not be an even number. If the parties fail to agree upon a particular number of arbitrators then a sole arbitrator will be appointed. 

Can the parties decide a particular language to be used in the arbitration proceedings?

According to Section 22 of the Act, the parties are free to determine a particular language that must be used in the arbitration proceedings. However, if the parties fail to decide on the language to be used, the arbitral tribunal will do so. 

Is the issuance of notice under Section 21 mandatory?

Yes, it is mandatory to issue a notice under Section 21 in order to commence the arbitration proceedings and refer a dispute to arbitration. 

Is Section 21 of the Act prospective in nature?

Yes, Section 21 of the Act is prospective in nature and cannot be applied retrospectively. The same was held in the case of Bhai Sardar Singh & Sons v. Delhi Development Authority, 2002. 

Is an application filed under Section 8 of the Act amounts to notice under Section 21 of the Act?

No, an application filed under Section 8 of the Act does not amount to a notice under Section 21 which is required for the commencement of arbitral proceedings. It was argued in the case of Cash and Gain Finance v. Manjula Uday Shankar (2008) that the application filed under Section 8 of the Act is a notice required under Section 21. But the court rejected the argument stating that the two provisions operate in different circumstances. Section 8 deals with the power of courts to refer parties to arbitration in case there exists an arbitration agreement. While section 21 with commencement of arbitral proceedings after a request has been made by either of the parties to refer a dispute to arbitration. 

References 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

RELATED ARTICLESMORE FROM AUTHOR

LEAVE A REPLY

Please enter your comment!
Please enter your name here