IMPORTANCE OF ARBITRATION

IMPORTANCE OF ARBITRATION

 

Civil litigation in this country has hit a roadblock, and resolution of

civil disputes/commercial disputes through mainstream litigation is time-consuming and is no longer the preferred mode of dispute

resolution.

 Arbitration started as an alternate dispute mechanism, and as time progressed, it has now become the only dispute resolution system, more particularly to resolve commercial disputes.

 Business investments – domestic and international, become more effective and viable only if a dispute resolution system is capable of resolving them within a reasonable time. Delay in resolving disputes has plagued the system, and it creates hesitation in major players investing their money in India, fearing the existing system. An effective and efficient arbitration system is critical for the effective conduct of business, both domestic and international.

 To comprehend in simple terms, arbitration is a process where two parties agree to appoint a private judge to resolve their disputes. In view of the same, the main objective behind arbitration is to have minimal Court intervention in the resolution of disputes.

 Apart from efficiency and speed, arbitration is also advantageous in the sense that the process is largely confidential. Many commercial disputes deal with sensitive information such as trade secrets, technical know-how, or confidential business data. Unlike Court proceedings, arbitration is conducted in private, which helps parties protect their confidential information. This is a major reason why arbitration is preferred in commercial matters.

 Arbitration is also particularly useful in disputes involving technical issues, such as engineering contracts, infrastructure projects, or manufacturing-related disputes. In such cases, a specialized understanding of the subject matter is required, which arbitration is better equipped to provide when compared to conventional Court proceedings.

 Arbitration as a process is like a relay race. The baton is first placed in the hands of the Court in terms of providing an interim protection under Section 9 of the Act and/or appointment of a n arbitrator under Section 11 of the Act. The baton thereafter is passed on to the hands of the Arbitral Tribunal. In fact, even insofar as an interim protection is concerned, the Tribunal is vested with power thereafter under Section 17 of the Act. It continues before the Tribunal until an Award is passed. During the interim, it is possible for some Court intervention not to have the effect of shifting the baton back to the Court, but for the purposes of extending the mandate of the Arbitral Tribunal, terminating the mandate of the Arbitral Tribunal, substituting an Arbitral Tribunal, etc. The baton shifts back to the Court after an Award is passed by the Tribunal when the award is either put to challenge under Section 34 of the Act or the Award is put to execution. It also includes the remedy of an appeal available under Section 37 of the Act as against the order passed under Section 34 of the Act. Broadly, the exchange of baton in the arbitration relay race takes place in this fashion.

 There is a realization in India and more particularly amongst the business community, that arbitration is the most preferred dispute resolution process. Hence, we must focus on how to make this process more dynamic and effective. These are my suggestions:

o Let application of mind play a vital role while preparing the

Agreement rather than adopting the easy method of copy and

paste. Unfortunately, the easy availability of model agreements

sometimes creates a proclivity to copy and paste the terms of

those agreements without properly understanding the requirements of the parties who enter into an agreement.

o Include negotiation and/or mediation as a prerequisite prior to the commencement of the arbitration process. Sometimes, a multiple-tier mechanism helps the parties to resolve the dispute before it enters into an aggravated form.

o An arbitration clause in an agreement must contain the essential elements of an arbitration. This is where many of the agreements are found wanting. I have seen agreements that have been w orded as “Parties may resort to arbitration.” I have also seen agreements where there is a mention that the dispute can be resolved through arbitration, but it also talks about the “Court which has the exclusive jurisdiction to resolve the dispute.” Both cannot go together, and one excludes the other. If the parties want to resolve the dispute through t h e arbitration process, it must be specifically put in the Agreement without using any ambiguous words; rather, it must sound mandatory.

o This aspect becomes even more important in places like

Coimbatore, where many companies enter into agreements with

overseas entities. Often, these agreements are signed without

proper attention to the arbitration clause. When disputes arise,

parties then rush to District Courts seeking anti-suit or anti-

arbitration injunctions against foreign-seated arbitrations. Such

practices are now consistently discouraged by the High Courts

and Supreme Court. A properly drafted arbitration clause can

prevent such unnecessary litigation.

o Even though cities like Coimbatore, Madurai, Karur or

Thoothukudi are vibrant industrial centres, the concept of

arbitration still appears unfamiliar. There seems to be a

reluctance to move away from traditional litigation, and the

mindset needs to change if arbitration is to truly take root in

these regions.

o The arbitration agreement must specifically state as to who will

arbitrate and how the arbitral tribunal will be selected, whether

it will be a sole arbitrator, or a multi-member tribunal. In order

to save time, the parties can agree for appointment of arbitrator

by an Institution. By doing so, parties can avoid unnecessarily

getting into Court by filing a petition under Section 11 of the Act.

o Institutional arbitration can ensure proper procedure for

appointment of arbitrator from amongst the panel of efficient

arbitrators enrolled with the Institution. Thereby, there is quality

in the conduct of proceedings by the Tribunal. Institutional

arbitration also ensures transparency and predictability of cost

involved. Since, quality is ensured in the appointment of the

Tribunal, the natural consequence is that a quality award will be

rendered. Once a quality award is rendered, it becomes next to

impossible to interfere with the same under Section 34 of the Act.

By resorting to institutional arbitration, the arbitrators

a c c u m u l a t e domain expertise over a period of time. Thus,

institutional arbitration stands on a higher footing than ad hoc

arbitrators. Since the performance of the arbitrator will have an

impact on the reputation of the institution, institutional

arbitration also ensures that the institution has quality

arbitrators on its rolls with integrity and stature, which is the

hallmark for choosing arbitration as an alternate dispute

mechanism.

o The Institution must also ensure that its panel consists of

persons with expertise in specific fields. Arbitrators should be

chosen keeping in mind the industries predominant in a

particular region, such as coir industries in Pollachi, spinning

mills in Coimbatore, textiles in Karur and port-related industries

in Thoothukudi. This approach will not only encourage large

companies but also small and medium enterprises to place their

confidence in institutional arbitration. This also means that the

creation of an arbitration hub should not be a mere namesake

exercise; it should be a union of professionals which inspires

confidence in the community. It should aim to be an institution that will be recognized by the new Act once it is notified, pursuant to the recommendations made by the Expert Committee headed by Dr. TK Vishwanathan.

o The dominance of ad hoc arbitration afflicts

arbitration in India. There is no assurance on the integrity of the

arbitrator while resorting to ad hoc arbitration, and an intelligent

corrupt arbitrator who knows how to write an award can

completely ruin the rights of a genuine party since interference

with an award is circumscribed under Section 34 of the Act, and

sometimes it becomes impossible to interfere with the Award.

That danger looms large in the appointment of ad hoc

arbitrators.

o A mechanism must be evolved to award scores for

arbitrators. This will ensure that parties will choose the best

among the arbitrators to resolve the dispute. This will also help

the arbitrators to improve their quality of dispute resolution

which includes honesty and integrity and passing of awards in

an expeditious manner. Fear for the parties in resorting to

arbitration is only because of their apprehension about the

reliability and genuineness of arbitrators to maintain neutrality.

o Seat/place of arbitration in most of the Agreements are used

interchangeably. Both words carry a different connotation. Place

or venue of arbitration, as is popularly understood, is based on

the convenience of the parties and the arbitral tribunal, and it

need not necessarily determine the seat of arbitration, unless a

case so warrants. An agreement has to necessarily specify the

seat of arbitration, which actually determines the jurisdiction of

the Court under Sections 9, 11, 34, etc. This will ensure that the

parties do not waste time on this procedural aspect and they

focus on the merits of the dispute. Improper determination of the

seat of arbitration in many cases leads to construing the venue

as the seat of arbitration, and it leads to several complications.

o Language before the Arbitral Tribunal must be specifically stated in the Agreement and it is more so in international arbitrations.

The exchange of communications between the parties in a

particular language by itself will not determine the language in

which the proceedings are to be conducted by the Arbitral

Tribunal.

o Choice of law, that is the governing law must be specifically stated in the arbitration agreement. It must state the substantive law that will govern the parties and also the law governing the

contract. This becomes essential in international arbitrations.

o While entering into supplementary agreements is where the

parties enter into a fresh agreement that constitutes novation of

the earlier agreements, there must be a specific arbitration clause

or there must at least be a reference to the earlier arbitration

clause that is intended by the parties to be read into the

supplementary agreement/fresh agreement. In the absence of the same, there will be complications while taking steps to resolve the dispute while referring the same for arbitration.

o The Arbitral tribunal must be sensitive to timelines, and the

very objective of resorting to arbitration is to bring to an end the

dispute at the earliest. Arbitration must ideally be completed in

12 months, and that is the reason why Section 29(A) of the Act

was inserted into the Act. Many a time, it is followed in breach.

There is an attitude to get repeated extensions to complete the

arbitral proceedings, and this is due to the old mindset we have

gathered from the traditional civil litigations.

o In international arbitrations, the tribunals give sufficient time for

preparation. However, when the proceedings commence, they

give a maximum time of 2 weeks for evidence. They do not

entertain oral arguments, and they insist upon written

submissions from both parties which must also deal with

appreciation of evidence and they pass the awards within a

reasonable time. If Indians comply with such timelines in

international arbitrations, there is no reason as to why they

should defy it when it comes to domestic arbitrations. Best

international practices must be implemented in India and more

particularly, by institutions which enable institutional

arbitration.

o Broadly, what afflicts Indian arbitration and why parties hesitate

to have India as a seat of arbitration in international commercial

disputes are:

a. Dominance of ad hoc arbitration

b. Delay and absence of a structured timeline

c. Concerns regarding the quality, neutrality and independence of

arbitral tribunals.

d. Excessive judicial intervention and difficulty in execution of

awards.

o Gone are the days of unilateral appointment of arbitrators/

arbitral tribunals due to the intervention of the Apex Court, and

there is more freedom/autonomy for parties to appoint arbitrators

[Section 12(5) of the Act]. Thus, a level-playing field has been

brought about to ensure that an arbitral tribunal that is just and

fair decides the dispute. In such a scenario, institutions can ensure that they provide arbitrators with expertise and stature to resolve the dispute at a reasonable cost.

o Cost effectiveness is yet another objective to resort to resolution of dispute through arbitration. Unruly fixation of cost, which plagued the arbitral process in India, has now been brought under control by bringing in Schedule IV, which prescribes the fees that has to be paid to the Tribunal depending upon the amount involved in the dispute. In spite of such control being brought in by the amendment, even today, lots of complaints are received on the exorbitant fees being charged by arbitrators even without conducting an effective hearing. Institutional arbitration can effectively handle this issue and make the cost predictable for both parties.

o It is high time that Courts get over the traditional mindset while

dealing with challenges arising under the Arbitration Act. Courts

must understand that the parties have the autonomy to choose

the Arbitral Tribunal to resolve the dispute. The Courts must also

bear in mind that they are dealing with a commercial dispute

wherein the parties are bound by an agreement entered into

amongst themselves unless the agreement is vitiated by coercion,

fraud, etc. Therefore, the parties cannot be allowed to go beyond

the scope of the agreement, and they have to necessarily stand

or fall based on the rights and duties assigned by the agreement.

There is no scope for any inherent power or attempting to render

justice beyond the scope of the agreement between the parties.

That is the reason why the scope of interference under Section 34

of the Act has been brought within eight pigeonholes, beyond

which the Court cannot exercise jurisdiction. Many a time, the

traditional mindset of Courts results in excessive interference

into the arbitration process and awards passed by the Arbitral

Tribunal. Judges must consciously deal with the disputes as a

pure and simple commercial dispute without attributing their

unwanted sense of justice to such disputes, unless an extreme

case warrants.

o From the perspective of Chartered Accountants and tax

professionals, arbitration in tax-related disputes is also being

widely discussed. As dispute resolution mechanisms evolve,

professionals must be prepared for a gradual shift from statutory

forums to private dispute resolution mechanisms like arbitration.

It is therefore important for professionals to be equipped for this

transition.

o Once the Privy Council lamented that the actual dispute in a case starts only after a decree is passed in a suit. Unfortunately, this trend continues to date. This trend is also sought to be imposed on awards that are attempted to be executed. In view of the fact that execution of the award is done in the same manner as execution of a decree under Section 36 of the Act. This trend

afflicts even international awards, which require determination

and execution, for which the grounds are provided under

Sections 47-49 of the Act. Even a patent illegality in fact and law cannot be a ground to prevent execution of a foreign award. Despite the same, execution of a foreign award also faces its own challenges, which puts India in a poor light.

o Parties involved in a commercial dispute must change their

mindset and must be prepared to honour the agreements entered

into between the parties and to honour the awards passed by an

Arbitral Tribunal without attempting to drag the same. They must

understand that they will also be placed on a similar footing like an award holder when the award is passed in their favour and the

other side is attempting to drag on the proceedings. This change in mindset is essential to bring about a real change and effectiveness in resorting to resolving disputes through arbitration.

o The path forward to make arbitration as an effective dispute

resolution mechanism are:

a. Institutionalize arbitration

b. Enhance standards/ quality and integrity of arbitrators

c. Accelerated phased procedures

d. Hands-off judicial approach

e. Execution of awards to be made effective and more

predictable.