Arbitration or Alternative Dispute Resolution(ADR) means a mechanism in law which encourages parties to settle their differences privately either by mutual consensus or by mediation of a third person. It can be considered as a substitute for the traditional litigation system which is prevalent in this society for more than few centuries now. Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. In the process of arbitration, there is a hearing conducted to determine the cause of conflict between the parties by the person who is appointed as an arbitrator by the parties or by the statutory body. The main purpose of arbitration is adjudication and there is no place to compromise. After determining the cause of conflict and hearing both sides of the parties, the arbitrator enforces their point of view that is neutral and fair. In India, there are four types of ADRs. They are: Arbitration, Negotiation, Conciliation, and the Lok Adalat and they are recognized legally through few enactments such as The Arbitration and Conciliation Act 1996, The Legal Services Authority Act, 1987, and Section 89 of the Civil Procedure Code of 1908.
Origin and Evolution of the concept of Arbitration
The course of arbitration flourished in India since the end of nineteenth century. Arbitration in India was statutorily recognized as form of dispute resolution for the first time when Indian Arbitration Act, 1899 was enacted however, it was confined to the three presidency towns only i.e. Madras, Bombay and Calcutta. It was further codified in Section 89 and Schedule II of the Code of Civil Procedure, 1908, where provisions of arbitration got extended to different regions of British India to which the Act of 1899 was not extended. The Act of 1899 and the provisions of the Code of Civil Procedure, 1908 were found to be inexpedient and more technical and thus, Arbitration Act, 1940 came into existence and repealed the Act of 1899 along with the relevant provisions of the Code of Civil Procedure, 1908. The Act of 1940 was a reflection of the English Arbitration Act, 1934 and was a comprehensive legislation on the subject but it had no provisions to deal with enforcement of foreign awards and hence, dealt only with domestic arbitrations. Though, the 1940 Act attracted severe criticism and adverse remarks from the Courts however, no amendments were brought in to improve the working of the 1940 Act. After the economic liberalization in the year 1991, steps were taken to attract foreign investment which required a comfortable business environment and ease of doing business. For the said reason, Arbitration and Conciliation Act, 1996 came into force and repealed the Act of 1940. Interestingly, the Act of 1996 was based on UNCITRAL Model Law on International Commercial Arbitration, 1985 and covered both domestic and international arbitration.
International Commercial Arbitration System
International commercial arbitration is an alternative method of resolving disputes between private parties arising out of commercial transactions conducted across national boundaries that allows the parties to avoid litigation in national courts. It helps to resolve disputes among the international parties arising out of the internal commercial agreements. Section 2(1)(f) of the Arbitration and Conciliation Act defines international commercial arbitration as disputes arising out of the legal relationship where one of the parties is a citizen, resident, or habitually residing out of India. International commercial arbitration is used by the traders of different countries as a way of settling their business conflicts.
Steps involved in International Commercial Arbitration are:
- Notice of arbitration: To commence the proceedings of arbitration one party has to provide the notice of arbitration under Section 21 of the Act, to the other party requesting to refer the dispute to arbitration. When the respondent receives the notice of arbitration, the proceedings of arbitrations begin. In this notice, there are two essentials: one is the communication of an intention to refer the dispute to arbitration and the other is that the other party to whom the notice has been served should take a step towards it.
- Referral to arbitration: The judicial authority can refer the subject matters of the case to the arbitration if that agreement contains the clause of arbitration to settle the disputes among the party if there are any. According to Section 8 of the Arbitration and Conciliation Act, the judicial authority can refer the parties to arbitration if there is an arbitration agreement.
- Appointment of arbitrators: The parties are at their discretion to appoint the arbitrator to decide their case. If the parties are not able to appoint the arbitrators mutually due to some issues then the court allows the parties to appoint each arbitrator and then these two arbitrators will appoint the third party who will be neutral. If the parties fail to appoint, they can request the Supreme Court and High Court to appoint the arbitrators. The High Court or the Supreme Court can appoint any person or institution to appoint arbitrators. In the cases of International Commercial Arbitration, the Supreme Court can appoint the arbitrators for the parties and in the cases of domestic arbitrations, the High Court appoints the arbitrators.The challenge to the appointment of arbitrators: The appointment of arbitrators can be challenged only on these two criteria:
- When there are circumstances that raise reasonable suspicions about his or her independence or impartiality; or
- The arbitrator does not possess the qualities the parties required.
- Interim relief: Section 9 of the Act provides for interim measures of protection not just before the commencement of arbitral proceedings and during the arbitral proceedings but also after the arbitral award has been delivered. Section 17provides for interim measures ordered by the arbitral tribunal if it is found at the time of proceedings that the disputed matter is dangerous then it can ask the party to provide security.
- Challenge to jurisdiction: According to Section 16 of the Act, an arbitral tribunal has the authority to rule on its jurisdiction if there exists a valid arbitration agreement. If any party has an objection regarding the invention of the tribunal then that party can file a plea before the submission of defence.
The Supreme Court in the case of S.B.P. and Co. v. Patel Engineering Ltd. and Anr held that if without judicial intervention the arbitral tribunal was constituted by the parties the arbitral tribunal can determine all jurisdictional issues by exercising its powers of competence under Section 16 of the Act.
- Settlement during arbitration: The parties are allowed to settle the dispute mutually even if the arbitration proceedings are going on. If the parties arrive at the settlement amicably, the arbitration proceeding will be terminated. Also if both the parties give their consent to record the settlement then this would be known as a consent award that would work as an arbitral award.
- Arbitral awards: The decision rendered by the arbitrators in an arbitration proceeding is known as an arbitral award. The decisions are taken by taking the view of both the parties and by the majority. An arbitral award should be in a written form signed by all the members of tribunals. In the arbitral award, the date and place where it is made should be mentioned. Each party is entitled to acquire a copy of the arbitral award.
- The challenge to an arbitral award: Section 34 of the Arbitration and Conciliation Act provides an application for setting aside an arbitral award. The party can challenge the arbitral award within three months from the date of receipt of an arbitral award and additional 30 days can be given if any good reason is given. A party can challenge the arbitral award on the following grounds by furnishing the proof:
- A party was under some incapacity.
- Under the law, the arbitration agreement is not valid.
- The party was not provided sufficient time to appoint arbitrators and was not given proper notice and was unable to present the case properly.
- The arbitral award does not contain the solution of the dispute but it deals with matters beyond the dispute.
- The composition of arbitral trials and the arbitral proceedings were not according to the agreement of the parties.
- If the court finds out that the arbitral award conflicts with public policy or the subject matter of the disputes are not capable enough to settle by arbitration.
- Foreign Arbitral award: In the Arbitration and Conciliation Act, foreign awards are covered under part of the Act that contains New York Convention Awardsand Geneva Convention Awards. The New York Convention defines foreign arbitral awards as differences between the parties arising out of the legal relationships. The definition of the foreign award is given in Section 44 of the Arbitration and Conciliation Act. The Geneva Convention defines the foreign awards in Section 53 as differences between the parties arising out of commercial matters.
Landmark Judgements on International Commercial Arbitration
- Enercon (India) Ltd. & Ors v. Enercon GmbH & Anr, (2014) 5 SCC 1
It was held that the “venue” of an arbitration is the geographical location chosen based on the convenience of the parties and is different from the “seat” of arbitration, which decides the appropriate jurisdiction.
- Shri Lal Mahal Ltd. vs. Progetto Grano Spa (Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012)
A seminal judgment was passed that established a distinction between the scope of objections of the enforceability of a foreign award under Section 48 of the 1996 Act, and challenges to set aside an award under Section 34 of the 1996 Act. The scope of the expression’ public policy’ was substantially curtailed by the Supreme Court.
- Bharat Aluminium Co. vs Kaiser Aluminium Ltd. (Civil Appeal No. 3678 of 2007)
The Constitution Bench has held that Part I and Part II are mutually exclusive and that the Parliament while enacting the statute had unequivocally adopted the principle of territoriality over subject matter of arbitration. In other words, the Constitution Bench has inter-alia, held that the centre of gravity for international commercial arbitrations having a foreign seat was the juridical seat of arbitration and not where the contract had to be performed.
In a nutshell, we can tell that the ADR is rapidly developing at national and international level, offering simpler methods of resolving disputes. The increasing trend of ADR services can easily be inferred from the growth of “arbitration clause” in majority of contracts. The effective utilization of ADR systems would go a long was in plugging the loophole which is obstructing the path of justice. This concept should be deeply ingrained in the minds of the litigants, lawyers and the judges so as to ensure that ADR methods in dispensation of justice are frequently adopted. The methods of alternative dispute resolutions are less time-consuming and are very cost-effective and thus, awareness needs to be created amongst the people about the utility of ADR and simultaneous steps need to be taken for developing personnel who would be able to use ADR methods effectively with integrity. By using these methods people can resolve their disputes informally without going through formal court trials.
Article written by Anagha K Bharadwaj