Introduction to Arbitration

Arbitration is an alternative dispute resolution mechanism. Parties to an agreement decide beforehand that in case of any dispute arising out of the agreement that they are entering into, they will refer it to arbitration. In such a method both the parties will have a say in selecting the arbitrator who will make a binding decision on the dispute. It is an alternative to approaching courts for dispute resolution which is a time and money-consuming process.

As per Halsbury’s Law of England, 4^th Edn., Vol.2, (para 501), arbitration means resolving the dispute or difference between two or more parties after hearing both sides in a judicial manner by a person or persons other than a Court of competent jurisdiction. Section 2(a) of the UNCITRAL Model Law defines ‘arbitration’ means any arbitration whether or not administered by a permanent arbitral institution.

What are the Features of Arbitration?

1. It is consensual- It can be adopted as a mode of dispute resolution only if both parties have agreed to it. Parties while entering into an agreement insert an arbitration clause or enter into an arbitration agreement pursuant to which any subsequent dispute between the parties will be referred to arbitration. However, for an existing dispute out of an agreement without an arbitration clause, the parties may enter into a submission agreement, i.e. both parties are willing to resolve the dispute by submitting it to arbitration.
2. Parties choose the arbitrator(s)- parties are free to determine the number of arbitrators and the names of arbitrators to preside over the arbitral tribunal. Parties can also decide the qualification and other requirements that the arbitrator shall meet to qualify as an arbitrator for their dispute.
3. Arbitration is neutral- it provides a great deal of flexibility to the parties as they are free to determine the applicable law, language, and venue of the arbitration. This ensures no one party is having an undue advantage.
4. Arbitration is confidential- any disclosures made during the arbitration proceedings are confidential and can’t be used as evidence in court.
5. The decision of the arbitral tribunal is final and binding on the parties- it saves time and money for the parties involved.

What are the legal provisions governing Arbitration in India?

Arbitration proceedings in India are governed by The Arbitration and Conciliation Act, 1996 (hereinafter, the Act). The Act is based on the 1985 UNCITRAL (The United Nations Commission on International Trade Law) Model Law on International Commercial Arbitration and the UNCITRAL Arbitration Rules, 1976. The Act consolidates and amends the law relating to domestic arbitration, international commercial arbitration, and enforcement of foreign arbitral awards. The Act extends to the whole of India. Section 2(a) of the Act defines arbitration as any arbitration whether or not administered by a permanent arbitral institution. The first part of the Act applies to arbitration where the place of arbitration is in India and Part II talks about the enforcement of foreign arbitration awards.

The Act was amended in 2015 pursuant to which the provisions also apply to international commercial arbitrations even if the place of arbitration is outside India. The Courts are obligated to refer the parties to arbitration unless it thinks that a valid arbitration agreement doesn’t exist. This amendment aims to ensure quick enforcement of contracts, easy recovery of monetary claims, reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration, this aims to encourage foreign investment by projecting India as an investor-friendly nation that has a sound legal framework and ease of doing business.

Arbitration Agreement is defined in Section 2(b) read with Section 7 of the Act as an agreement by parties to submit to arbitration all or certain disputes which have already arisen or may arise in the future between the parties. Such an agreement can be in the form of an arbitration clause or as a separate agreement. It shall be in writing.

Can all disputes be resolved through arbitration?

Resorting to arbitration to resolve disputes between parties in civil or commercial nature is the most preferable mode. However, there are certain types of disputes which cannot be taken to arbitration such as- criminal offences, matrimonial disputes, guardianship matters, insolvency petitions, testamentary suits, trust disputes, labor and industrial disputes, tenancy and eviction matters governed by rent control statutes. Disputes which are in rem (against the world, in public) regarding a thing or property cannot be resolved through arbitration. Also, arbitration is restricted in disputes where a specialist forum exists for resolution of disputes such as consumer disputes.

What constitutes an Arbitration Agreement between the parties?

Arbitration Agreement means an agreement referred to in Section 7 of the Arbitration & Conciliation Act, 1996. Such an agreement must possess legal validity according to the general law of contract, Section 10 to 12 of the Indian Contract Act, 1972. Such an agreement postulates present or future dispute to be referred to arbitration and there is consensus ad idem between the parties.[1] It is not necessary that the term ‘agreement’ should be used there. The reciprocal promise of the parties to abide by the award is sufficient consideration for the agreement yet the award can be declared void if the parties to the agreement have doubts about their rights or legal position. An arbitration clause putting an unreasonable restraint of trade is void.

The Court is duty bound to find out whether an arbitration clause exists in the agreement or not. The possibility that a clause in the agreement can be construed and considered as an arbitration clause should be decided with reference to the intention of the parties by reading the language of the clause.

Essentials of an Arbitration Agreement[2]:

1. Presence of a present or future difference in connection with some contemplated affair.
2. There must be the intention of the parties to settle the dispute by a private tribunal.
3. The parties must agree in writing to be bound by the tribunal’s decision.
4. The parties must be ad idem.

Can the arbitration clause be oral?

Before the enactment of the Arbitration Act, 1940, an oral submission and award consequential to it was legal and could form the basis of suit. However, the Arbitration Act which consolidated and amended the law of arbitration lays down in Section 2(9) that the arbitration agreement must be in writing. In Arbitration Act, 1996, Section 7(3) provides that the arbitration agreement shall be in writing.

Sample arbitration clauses

1. In the event of any dispute between the parties in any matter covered by this contract or arising directly or indirectly therefrom or connected or concerned with the said contract is any manner of the implementation of any terms and conditions of the said contract, the matter shall be referred to the Chairman & Managing Director of the company who may himself act as sole arbitrator or may name as sole arbitrator an officer of the company notwithstanding the fact that such officer has been directly or indirectly associated with this contract and the provisions of the Indian Arbitration Conciliation Act, 1996 shall apply to such arbitration. The supplier expressly agrees that the arbitration proceedings shall be held at New Delhi.

1. Such a clause which gives exclusive authority to one party to appoint the sole arbitrator is not allowed per law.
   1. Hon’ble Supreme Court of India in TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377, held that the Chairman has become ineligible to be appointed as Ld. Sole Arbitrator and or to appoint a Ld. Sole Arbitrator.

• A legally apt arbitration clause can be worded as follows:

1. In General Partnership

Arbitration

Every dispute or difference arising between the partners as to the interpretation, operation, or effect of any clause in the partnership which cannot be mutually resolved, shall be referred to the arbitration. The decision of such an arbitrator shall be binding on the partners. Subject to the aforesaid, the Arbitration and Conciliation Act, 1996 and the rules made thereunder shall apply to the arbitration proceeding under its clause.

Governing Law

Except as aforesaid, the partnership shall further abide by the provisions of the Indian Partnership Act, 1932.

• Limited Liability Partnership Agreement

Dispute Resolution

All disputes between the partners arising out of this agreement in first instance will be resolved amicably by the partners, failing which it shall be referred to the court in accordance with clause [___] of the Agreement.

Governing Law & Jurisdiction

This agreement in all respects inter-se between the partners be governed by and be interpreted in accordance with the laws of India. The Courts located in [___] shall have exclusive jurisdiction over any matter arising hereunder.

• Procurement of Goods and Services Contract

Dispute resolution through arbitration

• If the dispute arises out of or in connection with any claims not covered in the agreement such Dispute shall be resolved by arbitration under the Indian Arbitration and Conciliation Act, 1996 and the [Relevant Rules], in accordance with the process specified in this Article. In the event of such dispute remaining unresolved as referred to herein, any party to tsuch dispute may refer the matter to Registrar under the Ruled of the [relevant rules].
  • The Arbitration Tribunal shall consist of [number of arbitrators] arbitrators to be appointed in accordance with the [Relevant Rules].
  • The place of arbitration shall be [venue]. The language of the arbitration shall be [language].
  • The arbitration tribunal’s award shall be substantiated in writing. The arbitral tribunal shall also decide on the costs of the arbitration proceedings and the allocation thereof.

• Share Subscription Agreement

Governing Law & Arbitration

• This agreement shall be governed by the laws of the [Place].
• If any difference or dispute shall arise between the parties hereto as to the construction or true intent and meaning of any of the terms and conditions herein contained or as to any payment to be made in pursuance hereof or as to any other matter arising out or as to any other matter arising out of or connected with or incidental to these presents or as to the rights, duties, and obligations of either Party, such difference or dispute as and when the same arise, shall be mutually settled negotiation or conciliation as per the Agreement between the Parties. If the said dispute or difference could not be settled by conciliation within [number of days] days of having been raised by one of the parties to this Agreement, it shall be referred to a sole arbitrator to be appointed by the Parties with mutual consent. If there is a difference and lack of consensus on the nomination of a sole arbitrator, then each of the Parties would nominate their respective arbitrators to form a three-member arbitral tribunal. The arbitration shall be conducted in accordance with the Arbitration and Conciliation Act, 1996. The venue of such arbitration will be [Place], and the language of the arbitration shall be [language]. All disputes pertaining to this Agreement shall be subject to the courts in [Place] alone.

What is the Procedure to invoke Arbitration?

1. Party aggrieved from another must raise dispute arising out of the agreement to the other party and wait for them to resolve the issue.
2. If the other party ignored or delays the resolution of the dispute raised, then the aggrieved party can send a legal notice pointing out that due to the failure of the party to resolve the issues amicably the aggrieved party is invoking the arbitration clause as already laid out in the agreement between the parties.
3. Following will be the contents of the legal notice:
   1. Brief facts of the legal relationship arising out of the agreement between the parties.
   1. Brief facts about the dispute that has arisen between the parties.
   1. Mention the efforts initiated by the aggrieved party to resolve the issue.
   1. Mention the loss suffered by the aggrieved party due to the non-cooperation of the other party.
   1. Mention the arbitration clause as it is from the agreement between the parties.
   1. If the parties have decided on a sole arbitrator from a common consensus then the party may propose a name with all details of the person and seek approval of the other party.
   1. If the parties have decided on a three-panel arbitral tribunal then the aggrieved party may send in a name of their choice and ask the other party to determine a name of their choice.
   1. Such a legal notice shall mention a time frame of 1 month within which the other party must communicate their stance on arbitration and choice of arbitrator.
   1. In case of failure on part of the other party to comply with the arbitration clause then the aggrieved party can approach the Supreme Court or the High Court or any person or institution as designated by such Court under Section 11(6) of the Act.

Can Arbitration agreements be done during Legal Proceedings?

Parties can arrive at an arbitration agreement at any stage including during the pendency of any legal proceedings.   

Conclusion

Arbitration is the most suitable way to resolve civil and commercial disputes between parties in a cost and time-efficient manner while providing subject expertise arbitrators. However, ill-worded arbitration clauses, wrong methods of invocation, invocation notice without cause of action, and ill-timed invocation of the arbitration clause for dispute settlement may frustrate the entire purpose of having an arbitration clause. Hence, it is important to invoke the arbitration clause with well thought legal strategy.

[1] Bihar State Mineral Development Corpn/ v. Encon Building, (2003) 7 SCC 418.

[2] BSMDC v. Encon Building, (2003) 7 SCC 418.