An introduction to Arbitration Agreements

Author: Risha Sharma, Research Associate

“I realised that the true function of a lawyer was to unite the parties . . .  a large part of my time during the 20 years of my practice as a lawyer was occupied in bringing about private compromise of hundreds of cases. I lost nothing thereby – not even money, certainly not my soul. ” – Mahatma Gandhi

Arbitration has been recognised as an effective form of alternate dispute resolution system. It primarily consists of dispute resolution processes and techniques, which enable the disagreeing parties to come to an agreement without resorting to litigation. The parties normally resolve their disputes with or without the aid of a third party. It entails the submission of disputes to an independent authority by whose decision the parties generally abide.  Due to the time consuming and cost inducing traditional form of litigation, presently, parties to a dispute are resorting to arbitration as a means to settle their disputes in order to avoid the inevitable technicalities of court proceedings. In fact, the Abid Hussain Committee on Trade Policies appointed by the Government of India has recommended in its Report, which was released in December 1984, for the compulsory inclusion of an arbitration clause in all export contracts.

The inception of arbitration agreements is as old as society itself.  When men begin to live and trade together, adjudication is inevitable. Hence, the consequent submission of disputes to an independent adjudicating authority is an ancient concept. India has a long history of Arbitration. In ancient times, people often voluntarily submitted their disputes to a group of wise men in the community, called the panchayat, for a binding resolution1. The Bengal Regulations created modern arbitration law in India in 1772, during the British rule. The Bengal Regulations provided for reference by a court to arbitration, with the consent of the parties, in lawsuits for accounts, partnership deeds, and breach of contract, amongst others2. Until 1996, the law governing arbitration in India consisted mainly of three statutes:

(i)                The 1937 Arbitration (Protocol and Convention) Act,

(ii)              The 1940 Indian Arbitration Act, and

(iii)            The 1961 Foreign Awards (Recognition and Enforcement) Act.

The 1940 Act was general law governing arbitration in India along the lines of the English Arbitration Act of 1934, and both the 1937 and the 1961 Acts were designed to enforce foreign arbitral awards. The 1961 Act implemented the New York Convention of 1958. The New York Convention of 1958 is one of the most widely used conventions for recognition and enforcement of  foreign awards. The Act of 1996 was passed with a view to modernize the old act of 1940 and is based on the UNCITRAL Model Law.

The Act of 1940 was restricted strictly to domestic arbitration. Accordingly, an intervention was required by the courts at all the three stages of arbitration- prior to the reference of the dispute to the arbitral tribunal, during the duration of the proceedings before the arbitral tribunal, and after the award was passed by the arbitral tribunal3. Before an arbitral tribunal took cognizance of a dispute, court intervention was required to set the arbitration proceedings in motion. The existence of an agreement and of a dispute was required to be proved. During the course of the proceedings, the intervention of the court was necessary for the extension of time for making an award. Finally, before the award could be enforced, it was required to be made the rule of the court4. The act of 1996, on the other hand, was enacted to make arbitration more effective, expeditious and sustainable. The Act has been divided into two parts. Part I provides for the arbitration agreements conducted in India and the subsequent arbitral awards. Part II provides for enforcement of foreign awards. Arbitration agreements in India are governed by Part I of the Act whereas the enforcement of a foreign award is governed by Part II of the Act. The 1996 Legislation differs from the UNCITRAL Model in two major aspects. Firstly, where the UNCITRAL Model is applicable only to international arbitration agreements, the Act of 1996 is applicable to both national and international arbitration agreements. Secondly, the act of 1996 minimizes judicial intervention more than the UNCITRAL Model. The changes brought about by the 1996 Act were so drastic that the entire case law built up over the previous fifty-six years on arbitration was rendered superfluous5. The Government of India enacted the 1996 Act by an ordinance which was followed by another one before the Parliament passed it.

The Act of 1996 generally refers to disputes which ‘may not be submitted to arbitration’ and to the possibility of the subject matter in dispute not being ‘capable of settlement by arbitration under the law for the time being’. Indian arbitration proceedings are mostly ad hoc despite the advantages of institutional arbitration over ad hoc arbitration. Some of the arbitral institutions in India are the Chambers of Commerce (organized by either region or trade), the Indian Council of Arbitration (ICA), the Federation of Indian Chamber of Commerce and Industry (FICCI), and the International Centre for Alternate Dispute Resolution (ICADR). Part I comprises of 43 sections spread over ten chapters, making detailed provisions relating to domestic arbitration and international commercial arbitration held in India under this Act. It restates the law and practice of arbitration in India, running chronologically through each stage of arbitration, from the agreement, the appointment of the tribunal, conduct of arbitration proceedings, the award to the recognition and enforcement of the awards. The Act also provides for setting aside of the arbitral award, meaning that these awards are not binding in nature and can be set aside on certain grounds. Further, the act also comprises of sections which set forth appealable orders made by the arbitral tribunal and the court authorised by law to hear appeals from original decrees of the courts passing the order6.

Arbitration is a consensual process and is not a matter of coercion. No arbitration statute can require the parties to arbitrate when they have not agreed to do so7. The parties are generally free to structure their arbitration agreement in any manner they choose. One of the key objectives of this Act was to reduce the role of supervisory judicial authority in the arbitral process. The advantage of arbitration over court litigation is mainly speedier resolution; however, there can be exceptions to this due to multiple parties, arbitrators, lawyers and litigation strategy. It is also less costly. The rules of evidence do not apply to arbitration agreements. Arbitration does not require a public hearing; there is no requirement for a public record of the proceedings. In arbitration agreements, confidentiality is required of the arbitrator and by agreement the whole dispute and the resolution of it can be subject to confidentiality imposed on the parties as well as their experts and attorneys. The very process of arbitration is informal as compared to litigation.

On the other hand, arbitration has its disadvantages too. There is no right of appeal even if the arbitrator makes a mistake of fact or law. However, there are some limitations on that rule, the exact limitations are difficult to define, except in general terms, and are fact driven8. There is no right of discovery unless the arbitration agreement so provides or the parties stipulate to allow discovery or the arbitrator permits discovery9. The arbitration process may not be fast and it may not be inexpensive, especially when a panel is involved. There is no jury and from the claimant’s point of view that may be a serious drawback. An arbitrator may make an award based upon broad principles of “justice” and “equity” and not necessarily on rules of law or evidence10. An arbitration award cannot be the basis of a claim for malicious prosecution as well.

CONCLUSION

Arbitration has been increasingly recognised  as  an appropriate means for the determination of disputes that were hitherto regarded as an exclusive reserve of the national courts. It is a system which endeavours to inspire confidence in the Indian dispute resolution system, attract foreign investment as well as reassure international investors in the reliability of the Indian legal system to provide a cost effective resolution system. However, there are some major lacunae in the Act of 1996 which needs to be dealt with. Further, the arbitration proceedings are not as cost effective as they claim to be, especially ad hoc arbitration proceedings. The arbitration tribunal clearly has no coercive authority in the justice system. With the appropriate amendments and a clear framework, arbitration can transform into an efficient alternate dispute resolution method which is only prompt, effectual and economical.

  1. K Ravi Kumar, ‘Alternative Dispute Resolution in Construction Industry’, International Council of Consultants (ICC)  Papers, at p 2 []
  2. Ibid []
  3. Sarma Krishna, Oinam Momota, Kaushik Angshuman, Development and Practice of Arbitration in India –Has it Evolved as an Effective Legal Institution, Center on Democracy, Development, and The Rule of Law Freeman Spogli Institute for International Studies,(CDDRL) Stanford Papers at p. 3 []
  4. Ibid []
  5. Ibid []
  6. Malhotra, O.P. , The Law and Practice of Arbitration and Conciliation Act, 2nd Ed. 2006 LexisNexis Butterworths at p. 60 []
  7. Id p. 51 []
  8. Mazigrow Arthur, The Advantages and Disadvantages of Arbitration As Compared to Litigation, at p. 2 April 2008 []
  9. Ibid []
  10. Ibid []