Arbitration in India – Points to know

Suing in the court of Law, a tiresome procedure!

“I’ll See You in Court” is the most common phrase used by people when there is a heated argument or a dispute, beyond their understanding to settle it by mutual and amicable means, between them. However, the Indian courts have been flooded and overburdened with a number of cases pending before them. As the population of our country is increasing every moment, so are the disputes amongst its people. These disputes range from criminal, civil, commercial, environmental, taxation, corporate and also cross border trade disputes.

According to data on National Judicial Data Grid, more than 49 lakhs cases are pending before the High Courts of the country, of these, over 24 lakhs cases were related to civil matters and over 13 lakhs related to criminal matters, as on 27th Dec, 2018. According to a report, around 66000 cases are pending before district courts and other subordinate courts of the country, as on 30th Dec, 2018, for more than 30 years. Thus, if there is a new dispute brought to the court, one cannot expect a timely disposal of it, as there are tiresome processes and long waiting duration by way of delay in granting hearings and introduction of undiscovered evidences and facts.

The concept of ‘Arbitration’

There are 2 ways of settling the disputes. The primary mode of dispute settlement mechanism is resorting to a suit in a court of law. However, due to various constraints, there emerged an Alternative Dispute Resolution or ADR method to settle certain kinds of civil and commercial disputes. The most common method of ADR is arbitration. Disputes are settled outside the courts by the arbitrator appointed by the parties to the disputes. There may be 1 or more than one person, but in odd numbers, appointed to settle the disputes. The order given by these arbitrators is called as arbitral award, and this award is binding on the parties.

Features of Arbitration

  1. It is globally accepted means of disputes settlement and different countries have made their rules to adopt and enforce the method.
  2. An independent third party is appointed to act as arbitrator.
  3. It is speedy mode of disputes settlement vis-à-vis the litigation.
  4. There is confidentiality and matters can be kept in private.
  5. There is no prescribed qualification to act as an arbitrator. Parties are free to choose a person so desired to act as arbitrator who may possess subject specific knowledge regarding the matter in disputes. Thus, he/she may be an engineer if dispute is relating to a subject based on engineering backgrounds.
  6. It is adopted by corporates in commercial and cross border trade disputes.
  7. However, criminal matters cannot be referred to this mode of disputes settlement mechanism.
  8. Arbitration and Conciliation Act, 1996, is the legislation governing the conduct of arbitrations conciliations in India.

Integral components in Arbitration (Arbitration and Conciliation Act, 1996)

As mentioned above, the law governing arbitration in India is the ‘Arbitration and Conciliation Act, 1996’ which came to effect on 22nd August, 1996. The Act provides for, along with domestic arbitrations, international commercial arbitration and enforcement of foreign awards as well. This Act is applicable where the place chosen for arbitration is India. Also the provisions of THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2015 have been discussed hereunder.

1. Arbitration Agreement (Section 7)

The matter can be referred to arbitration only if there is a prior consent and agreement signed between the parties thereto. It is also possible to refer a dispute to arbitration if there is an ‘arbitration clause’ in the main contract.

2. Forms of Arbitration

There are 2 modes to refer an arbitration. The first is ad-hoc arbitration where the parties are not governed by specific rules of any institution regarding the appointment of arbitrators, procedure for arbitration and thus, it is up to the parties to make their own procedures and rules. It is governed by the Arbitration and Conciliation Act, 1996. However, in an institutional arbitration, there is a specified institution having its own set of rules and lays down the procedures to settle the disputes. There is no flexibility given to the parties if they choose to refer their disputes to an institution method as the rules are fixed for all. The institution provides facilities regarding appointment of arbitrators from their panel, secretarial services, administration, rooms and support for this purpose, etc.

3. Interim reliefs (Section 9 & 17)

The Act provides for certain safeguards such as interim measures to protect interest of parties during pendency of disputes. There have been instances where there are unreasonable delays which affects the interest of the parties to the disputes. Thus, interim measures can prove to be a relief till the time of execution of awards. The relief to be granted depends on the facts and circumstances of the cases. Any party to the dispute can apply for such interim measures.

A court does not entertain a petition for interim reliefs unless the party specifically proves that the interim relief granted by the tribunal is not sufficient. Where section 9 provides for interim measures to be granted by the court, section 17 on the other hand provides for interim measures to be granted by the tribunal.

Interim measures by the Court (when?)Interim measures by the tribunal (what?)
Before the tribunal is constituted.When the party wishes to secure an amount in the dispute.
After granting the award and before its enforcement.When the party wishes to protect the property which is the subject matter in the dispute.
When during the proceedings, the tribunal has granted interim relief which is inefficacious. Interim injunctions and appointment of a receiver.

(Note: As per the amendment of 2015, if the Court grants an interim measure of protection under section 9 prior to commencement of arbitral proceedings, then the arbitral proceedings shall have to commence within a period of 3 months from the date of such order or within such time as the Court may determine. Also the Court shall not entertain any such application unless it finds that the remedy under Section 17 is not efficacious.)

4. Arbitral Tribunal (Section 10 & 11)

The arbitral tribunal is nothing but the arbitrator or arbitrators’ panel who will decide and give the award. The parties can appoint only odd number of arbitrators. In case parties are unable to appoint such number of arbitrators, there shall be only 1 sole arbitrator. Such an arbitrator can be of any nationality. (As per amendment of 2015, if a party fails to act as required under the appointment procedure, or the 2 arbitrators, if so appointed, fail to agree, or if any person or institution in this regard fails to perform his duties, the Supreme Court or the High Court or any person or an institution designated by them shall resolve the issue of the application for appointment of arbitrators within 60 days from the date of service of notice on the opposite party.)

5. Grounds for challenging appointment of arbitrators (Section 12 & 13)

The arbitrator has to be an independent person and he/she shall not have any kind of interest in the parties or the subject matter of the dispute. If such circumstances arise where there is a doubt regarding his independence or if it is found that he does not possess the required qualifications agreed to by the parties, the appointment of such arbitrator shall be challenged. (Note: as per the amendment of 2015, (section 12) a schedule (schedule 5) has been provided which provides grounds which would make the appointment of an arbitrator suspicious of being partial. If a person is not falling under such grounds, then he/she is likely to be impartial and independent. Also, another schedule (schedule 7) is provided which lays down the relationship of parties with the arbitrator and the relationship of the arbitrator with the subject matter of disputes which if established would render the arbitrator ineligible.)

6. Place (Section 20) and Seat of arbitration

(Note: this is an important concept in international commercial arbitrations)

The parties are given freedom to agree on the place of arbitration as they deem fit. In case the parties fail to do so, the arbitral tribunal shall decide the same considering the convenience of parties. However, there has been a confusion regarding the difference between the venue and the seat of arbitration. The seat of arbitration means the court which shall have jurisdiction to supervise the arbitrations agreements. The seat shall be independent of the venue. Since the Act does not have express provisions regarding the difference between the 2, it is wise to consult an attorney cum arbitrator to decide upon this matter.

7. Commencement of arbitration proceedings (Sec 21)

If not specifically agreed by the parties, the arbitration proceedings shall commence on the date when the notice of  ‘dispute to be referred to arbitration’ is received by the other party.

8. Language (Section 22)

The parties are also given freedom to choose the language to be used in arbitral proceedings and in case the parties are unable to decide, the arbitral tribunal shall do the needful.

9. Commencement of arbitration proceedings (Sections 23 to 27)

S-23: the parties have to submit their respective claims, (counter claims by the respondents or plead for set-off as per amendment of 2015) facts, defences and such other material facts within time specified by the parties or determined by the tribunal.

S-24: Unless the parties expressly decide to not hold oral hearings (the amendment of 2015 requires the tribunal to hold oral  arguments or hearings for presentation of evidences, on day to day basis. Also there shall be no adjournments without sufficient cause.), the tribunal shall decide whether to hold oral hearings or not. Also an advance notice of hearing has to be given. All information provided by one party shall be communicated to the other party.

S-25: if the party, without showing proper reasons, fails to communicate his claim, the tribunal shall decide on the basis of evidences before it. (As per the 2015 amendment, the tribunal may treat the respondent’s failure to provide his statement of defence.) as forfeiture of this right by the respondent.)

S-26: the arbitral tribunal shall appoint one or more experts to report on specific issues which the tribunal has to decide.

S-27: the tribunal or a party with the approval of tribunal shall apply to the court for assistance in taking evidences.

10. Provisions for arbitral award (Section 31)

The tribunal shall make the award in writing, signed by the members of the tribunal, state the reasons on which the award is based, it should be dated and should contain the name of the place. A signed copy of the order shall be sent to each party. The tribunal shall also have powers to make an interim order regarding the dispute. The tribunal shall include in its award, to make payment with interest (interest rate as specified by the Act) to the other party.

11. Termination of arbitration proceedings (Section 32)

The arbitral proceedings are terminated by the tribunal giving the final award or where the tribunal finds that the proceedings cannot be continued due to unnecessary or impossible reasons.

12. Correction of award (Section 33)

The award can be corrected by the tribunal or can give an interpretation of the award to the party who may request for such correction or interpretation, within 30 days of the original award. If the tribunal deems fit, it shall do the needful within 30 days of such request. The tribunal can correct computational, clerical, typographical errors or any other errors of similar natures.

13. Set aside of arbitral award (Section 34)

Set aside means dismissing the original award passed or making it null and void. The parties shall approach the court (Section 2(e)) for setting aside an award. It can be challenged on the following grounds:

  1. Incapacity of a party;
  2. Invalid arbitration agreement;
  3. The party making such an application was not given proper notice of appointment of arbitrators or of the arbitral proceedings or was unable to present his case;
  4. The award is not falling within the terms of submission to arbitration;
  5. The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
  6. Subject matter of the dispute not capable of settlement by arbitration under the law for the time being in force;
  7. Award being in conflict with ‘the public policy of India.

(Note: as per the amendment of 2015, an award passed in an international arbitration can be set aside only if (i) the award is vitiated by fraud or corruption; (ii) it is in contravention with the fundamental policy of Indian law; (iii) it is in conflict with basic notions of morality and justice. Also an application for setting aside of an award can be filed only after prior notice in this regard has been issued to other party. The party filing the application has to file an affidavit along with the application stating compliance with the requirement of service of such prior notice on the other party. Such applications shall be disposed within 1 year from the date of service of the advance notice on the other parties.)

It is further to be noted that as per section 34(3) the time limit for making an application to set aside the award is 3 months from the date of receipt of the award.

14. Enforceability of awards (Section 36)

Prior to the amendment of 2015, the section provided an automatic stay on the arbitration proceedings if an application to set aside an award was made under section 34. However, post amendment, the applicant has to make a separate application to the court for grant of stay of arbitration award, even if the application for setting aside under section 34 is already made.

15. Appeals (Section 37)

There lies an appeal to the authorized courts to hear appeals from original decrees of the court passing orders granting or refusing any interim measures under section 9 and where the court grants or refuses to set aside an order under section 34.

(As per the amendment of 2015, an appeal shall be filed if the judicial authority refuses to refer the dispute to arbitration under section 8 which states that it is mandatory for judicial authorities (for example if parties file a suit in  a civil court and there is an arbitration clause regarding that dispute) to refer the parties to arbitration if they have an agreement in this regard.)

16. New sections 29A & 29B

The amendment of 2015 provides a specific time period for the completion of arbitration. It is mandated that the arbitration award is to be given within a period of 12 months from the date of reference to arbitration which can be extended by 6 months and incase it is not completed within extended period, arbitrators’ fee can be reduced by not more than 5%, for every month of delay under Section 29A.

Also, a new provision is inserted regarding fast track arbitration under Section 29B of the act which provides for settlement of dispute by arbitration within 6 months and such arbitrations are based upon written submissions and not oral submissions.

Arbitration in news

Mumbai Centre for International Arbitration

This is the first institution arbitration center in the country. It was established in March 2016. According to “The Indian Express”, most of the global business disputes involving Indians land in the Singapore or the London arbitration centers. The total outflow of funds to resolve such cases works out to around $ 5 billion. Thus the establishment of MCIA will be a faster and effective way to solve global business disputes. Infosys, the IT giant, also included the arbitration clause in its employment agreement and as per the rules of Mumbai Centre for International Arbitration.

New Delhi International Arbitration Centre

On 2 March 2019, The New Delhi International Arbitration Centre Ordinance 2019 was promulgated by the President of India, Shri Ram Nath Kovind, to set up the New Delhi International Arbitration Centre (NDIAC). The main objective is to create an autonomous body for institutional arbitration in India and make this a hub for domestic as well as international institutional arbitrations. The Ordinance directs the transfer of all undertakings of the International Centre of Alternate Dispute Resolution (“ICADR”), established in 1995, to the NDIAC. The Ordinance also states to establish the Chamber of Arbitration and an Arbitration Academy. The Chamber shall be constituted of reputed arbitrators and filter the applications for admission in the panel. The Arbitration Academy shall train arbitrators and undertake research in the field of alternative dispute resolution.

Arbitration and Conciliation (Amendment) Bill, 2018

Following are the features of the amendments proposed:

  1. Creation of an independent body named “Arbitration Council of India”, to accredit arbitral institutions and arbitrators which will provide recommendations and guidelines for growth of institutional arbitration in India and shall be completely independent of the government.
  2. The amendment bill proposes appointment of arbitrators by designated arbitral institutions instead of the courts.
  3. The Amendment Bill proposes to exclude the International Commercial Arbitrations from the purview of Section 29A   as it has been subjected to a lot of  complications from the international community on the grounds that it is not practically possible.
  4. The Amendment proposes for an incorporation of a new S. 42A by which confidentiality will be provided in arbitration proceedings except the awards.
  5. The Amendment Bill proposes to provide more freedom to the arbitrators by granting immunity to them from any legal proceedings for acts and omissions done during the course of the arbitration proceedings so that they can exercise their function to the best of their ability without any compulsion or fear.

Thus, we see that Alternative mode of dispute resolutions are becoming popular in commercial fields as they are an effective and less time consuming than litigation. We also see that the Government is constantly reviewing the shortcomings of the past enactments and accordingly making way for effective provisions for faster settlement of disputes.