Arbitration Definition and Process
Arbitration is an Alternative Dispute Resolution (ADR) mechanism. The increasing burden of pending cases has necessitated its adoption. It seeks to provide an alternative solution to dispute adjudication outside the courtroom structure.
The Arbitration and Conciliation Act, 1996 (Act) governs the entire gamut of cases submitted to arbitration. Over time, the world has progressed to newer avenues, with virtual reality and the digital sphere gaining precedence. Naturally, the original Act has witnessed many Amendments, which have been brought about to make it more comprehensive and competent.
The latest instance of the Act being amended was the Arbitration and Conciliation (Amendment) Act, 2019 (Amendment Act). The Amendment Act inter alia envisages an “arbitral institution”, makes significant amendments to Part-I, and introduces the “Eight Schedule”. Enough about that, however!
Firstly, let us understand how the law in India defines arbitration. Subsequently, we shall study the elements of an arbitration process. Parallelly, we shall also understand the importance of arbitration.
What is Arbitration?
Section 2(1)(a) of the Act explains the term “arbitration” to comprise:
- Domestic arbitration; and
- International commercial arbitration.
Domestic arbitration refers to arbitration where all the parties are Indians.
Section 2(1)(f) declares that when at least one party to an arbitration, about commercial disputes under the Indian law, is:
- Not an Indian national; or
- Not a body corporate incorporated in India; or
- Not an association or body of individuals exercising their central management and control within India; or
- A foreign government;
such arbitration would be international commercial arbitration.
You may notice that the Act does not define the term “arbitration” and therefore we must excuse ourselves to judicial interpretation.
“Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.”WIPO Arbitration and Mediation Center
A single arbitrator or a panel of arbitrators may adjudicate the arbitrable dispute.
Why Is the Arbitration and Conciliation Act, 1996 Important?
This Act consolidated and repealed the erstwhile laws governing domestic arbitration, international commercial arbitration, and enforcement of foreign arbitral awards. India being a signatory to the UNCITRAL Model Law, decided to honor its international commitments through this enactment.
The existing burden of cases on the Indian courts is well documented. Thus, this Act is meant to ensure speedy disposal of cases pertaining to arbitration, with the slightest court intervention. Although disparate interpretations by the Courts, of various provisions of this Act, have created confusion, the amendments have tried to reduce them.
Furthermore, Part III of the Act enshrines provisions relating to the conciliation of legal disputes under any law in force.
What Is the Process?
The arbitration process covers the entire timeline beginning with the birth of an arbitrable issue to its final award.
Step 1. Arbitration Agreement
Section 7 defines the term ‘arbitration agreement’. It clarifies that the agreement may exist in the form of an arbitration clause, or maybe an individual document. Furthermore, it must exist in writing and must be signed by the (arbitrating) parties. Incidentally, Section 16 protects an arbitration clause from perishing even if the accompanying contract is declared null and void.
A competent judicial authority shall refer the litigating parties to arbitration only when they are signatories to an arbitration agreement. An application for being referred to arbitration must be filed under Section 8 before the competent judicial authority. This application should be filed prior to commencing with the submissions on the substance of the dispute.
Step 2. Appointing the Arbitrator
After the parties have been referred to arbitration, the next agenda would be the appointment of the arbitrator. The parties may choose the procedure for the appointment of the arbitrator/s. Unless the parties have agreed beforehand, an arbitrator could be of any nationality (Section 11).
Number
The Arbitral Tribunal (Tribunal) must compulsorily comprise of any odd number of arbitrators, not less than one. There shall be a solitary arbitrator if the parties fail to decide on the number (Section 10).
Disparity in appointment
The arbitrating parties are expected to amicably appoint an arbitrator within 30 days from the date of the appointment request. This request is sent from one party to the other. Additionally, in an instance of three arbitrators, each party appoints one arbitrator, who appoint the presiding arbitrator within 30 days.
In the event of any disparity, the determination of the arbitrator/s can become a cumbersome process. The Supreme Court, or High Court, or any of its appointees “as the case may be”, would get involved in such an event.
Insufficiency
Incidentally, Section 11 does not provide any solution for a failure to appoint more than 3 arbitrators.
Challenge
An arbitrator will be open to a challenge if;
- He does not possess the requisite qualifications expected of him, or
- Certain circumstances cause justifiable doubts about his impartiality or independence.
Section 12 provides the grounds for challenge, while Section 13 lays down the procedure. Furthermore, incapability or failure to act (Section 14), would terminate the arbitrator’s mandate and cause his substitution (Section 15).
Step 3. Determining the Procedural Rules and Place of Arbitration
Incidentally, Section 19 clarifies that neither the Code of Civil Procedure nor the Indian Evidence Act binds the arbitral Tribunal. Rather, the arbitrating parties (parties) can decide the procedure for conducting proceedings; whereas, the Tribunal will determine an evidence’s admissibility, relevance, materiality, and weight.
Additionally, the parties derive the power to select the place of arbitration from Section 20. In case of a failure to decide, the decision of the arbitral Tribunal will prevail.
Step 4. Commencement of proceedings
Arbitral proceedings are assumed to commence the day the respondent receives a request to refer a particular dispute to arbitration. This is, however subject to an alternate agreement to the contrary between the parties (Section 21).
Step 5. Submitting Statements of Claim and Defence
The claimant must inform the Tribunal about the facts supporting his claims, the points at issue, and the relief sought. Consequently, the respondent must enlighten the Tribunal about his defense to such claims, unless parties have already agreed to otherwise.
It is incumbent on the respondent to submit a counter-claim or plead a set-off, which the Tribunal will adjudicate upon. Moreover, Section 23 states that the statement of claim and defense should be completed within a period of six months from the date the arbitrator/s is appointed.
Step 6. Hearing and Written Proceedings
Finally, this brings us to the penultimate stage of the arbitration process. It shall be the decision of the Tribunal how the hearings and proceedings will be held. They may be conducted orally, or via the assistance of documents and other materials.
Section 24 envisages the grant of minimal adjournments and encourages the imposition of exemplary costs on the party seeking unjustified adjournments.
Additionally, Section 25 frowns upon any default caused by an arbitrating party. A failure of the claimant to communicate the statement of claim will lead to the termination of proceedings. The respondent’s failure to submit the statement of defense may imply forfeiture of such right.
Furthermore, the Arbitral Tribunal may appoint experts (Section 26) or request court assistance (Section 27).
Step 7. Arbitral Award
The substantive law in force, for the time being, in India will govern the adjudication of any domestic arbitration. Conversely, the rules of law as agreed upon by the parties govern international commercial arbitrations. The trade usages and the terms of the contract would also influence the adjudication (Section 28).
A majority opinion generally impacts the decision of the Tribunal (Section 29). Section 29A imposes that the Arbitral Tribunal makes the award within 12 months from the date it enters upon the reference. However, the arbitrating parties may consensually extend the time by a maximum of 6 months. Nonetheless, unless the Court extends the period for making the award, the arbitrator’s mandate will terminate after the extended period.
Incidentally, the arbitrating parties could decide that their dispute be resolved by a fast-track procedure (Section 29B). Failure to arrive at an award, under this procedure, within 6 months will attract the relevant provisions under Section 29A.
The arbitral award must be in writing and may state reasons (Section 31). The adjudicators must sign the award. Furthermore, the Tribunal must correct and/or interpret the arbitral award within 30 days from the receipt of such request. An additional award is also acceptable, within 60 days from the request for such award (Section 33).
Finally, Section 36 professes enforcement of the arbitral award. An arbitral award becomes final after the time to avail setting aside of the award under Section 34 lapses.
Importance of Arbitration
India has been vocal about wanting to become a preferred hub for international commercial arbitration. Success would lead to increased foreign investment, and help improve the economy. The Act seeks to achieve just that, by making the dispute resolution process more user-friendly, cost-effective, and expeditious.