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Beginner’s guide to arbitration: Part 1

Arbitration agreement Arbitration Amendment Act 2015 Arbitrator

Read time: 10 minutes
Inhouse credit: Editor: Amoolya Jain
Last updated: 21/10/2021

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Synopsis: The article, which is the first part of a two article series, gives an insight into arbitration as a mode of settlement of disputes and its procedure.

 

In today’s commercial climate where time is money, and where the vast majority of the populace is disillusioned by the judicial system in place in India (i.e. courts), including in respect of the pendency of disputes, the meteoric rise of arbitration as a mode of settlement of disputes, is unsurprising. Infact, in India, both the legislature and the judiciary, having sensed this trend, have made numerous advances to result in a compelling scenario where the populace would be hard-pressed to consider a mode of dispute resolution other than arbitration. This article seeks to provide some insight and clarity into this ever-burgeoning field.

 

LAW GOVERNING ARBITRATION

  1. Is arbitration in India governed by any particular law/statute?

Arbitration (as also another dispute resolution mechanism, namely, Conciliation) is governed by the Arbitration & Conciliation Act, 1996 (‘the Act’). The Act received the Presidential Assent on August 16, 1996, and was thereafter published in the Official Gazette on August 19, 1996.

The Act repealed (i) the Arbitration (Protocol and Convention) Act, 1937; (ii) the Arbitration Act, 1940; and (iii) the Foreign Awards (Recognition and Enforcement) Act, 1961.

 

  1. Are arbitral proceedings governed by other statutes?

Section 19 of the Act expressly states that the Arbitral Tribunal is not bound by either the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872. However, the courts, in a catena of judgments, have held that the general principles of both the Code of Civil Procedure, 1908 and the Indian Evidence Act, 1872 would govern the arbitral proceedings. This would ensure that the arbitral proceedings are governed by general provisions which have been developed over time without being stringently bound by the same. This again goes to emphasise that the parties have the freedom to determine the procedure to be followed during arbitral proceedings under the Act.

 

SUBJECT MATTER OF ARBITRATION

  1. What types of cases are arbitrable?

As a general rule, all disputes in relation to rights in personam (being interests protected solely against specific individuals) are arbitrable. The corollary thereof is that all rights in rem (against the world at large) are not arbitrable. The judgment of the Supreme Court in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 clearly elucidates this principle. This judgment also held that every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court is capable of being adjudicated and resolved by arbitration unless the jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication.

 

  1. What types of cases are non-arbitrable?

An indicative (but not exhaustive) set of examples of non-arbitrable disputes are (i) criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary proceedings; and (vi) eviction or tenancy matters governed by special statutes.

 

  1. Are civil disputes involving fraud arbitrable?

In today’s clime, most disputes, have at the heart of them, some modicum of fraud averred. The Supreme Court, in N. Radhakrishnan v. Maestro Engineers & Ors., (2010) 1 SCC 72, had earlier held that any dispute involving fraud was non-arbitrable. However, in a subsequent decision in A. Ayyasamy v. A Paramasivam, (2016) 10 SCC 386, the Supreme Court, in view of the fact that fraud is used as a defence to stymie arbitral proceedings, stated that the nature of fraud would determine whether a particular dispute is arbitrable or not. Accordingly, the present position in India is that simple/basic contentions of fraud do not render a dispute non-arbitrable.

 

ARBITRATION AGREEMENT

  1. What is an arbitration agreement?

Section 7 of the Act states that an arbitration agreement is an agreement between parties to submit (either general or particular) dispute/s between them, whether contractual or otherwise, to arbitration. It is the arbitration agreement which forms the genesis of all arbitral proceedings between the parties. Accordingly, the absence of an arbitral agreement would prevent the parties from having recourse to arbitral proceedings.

 

  1. What are the requirements of an arbitration agreement?

The main requirement of an arbitration agreement is that the same needs to be specifically contained in writing in a document between the parties. An oral agreement between the parties will not fall within the ambit of an arbitration agreement and has no validity whatsoever. Accordingly, an oral agreement is no arbitration agreement at all and cannot be acted upon.

 

  1. What are the salient features of an arbitration agreement?

It is important to keep in mind the following features in respect to an arbitration agreement:

  1. It may be in the form of a specific clause in a contract between parties - which is the generally adopted practice. However, an arbitration agreement may also be a stand-alone/separate document executed between parties.
  2. The arbitration agreement needs to unequivocally record the understanding between the parties to submit to arbitral proceedings in no uncertain terms. Agreements which state that the parties “may” either file a suit or initiate arbitral proceedings will not qualify as an arbitration agreement. See Wellington Associates Ltd. v. Kirit Mehta, AIR 2000 SC 1379 in this regard.
  3. An arbitration agreement constitutes an agreement by itself and is severable from the other clauses of a contract. See Firm Ashok Traders v. Gurumukh Das Saluja, (2004) 3 SCC 155 in this regard, where the arbitration agreement was held as separable from the other clauses of the partnership deed.
  4. An arbitration agreement will be considered to be in writing if it is contained in (i) a document signed by the parties; (ii) exchange of communication (letters, emails etc.) which records the agreement between the parties; and (iii) Statements of Claim and Defence where one party alleges the existence of the arbitration agreement, which is not denied by the other party.

 

  1. What do arbitration agreements normally contain?

Apart from setting out the unambiguous understanding between the parties to refer disputes to arbitration, the arbitration agreements generally also set out the following details:

  1. Number of arbitrators;
  2. Name of arbitrators/procedure of appointment of arbitrators;
  3. Seat of arbitral proceeding;
  4. Law governing the arbitration agreement/contract/dispute between the parties;
  5. Venue of arbitral proceedings;
  6. Procedure governing the arbitral proceedings;
  7. Details of the institutional arbitration to be utilised by the parties, if so desired (where the institutional arbitral proceedings will be governed by the rules and regulations of the institutional arbitration centre itself).

The aforesaid are merely illustrative in nature. They are contained in arbitration agreements, more often than not, so as to ensure that there is no ambiguity whatsoever which could possibly lead to future disputes which may frustrate the arbitral proceedings. The non-inclusion of any of the aforesaid details will not vitiate the arbitration agreement, provided the rest of the conditions of Section 7 of the Act in respect of arbitration agreements are adhered to. Any lacunae in the aforesaid details will be covered/dealt with by the Act and the interpretation thereof by the courts in India.

 

  1. If there is a valid, binding and enforceable arbitration agreement between parties, is there any possibility for a party to avoid recourse to arbitral proceedings?

Courts in India have consistently upheld arbitration agreements and ensured that parties initiate arbitral proceedings as opposed to proceedings in court. In fact, under Section 8 of the Act, where an action in respect of the subject matter of an arbitration agreement is initiated before a court, the court may direct the party to initiate arbitral proceedings, on an application made by the other party. This particular Section inter alia seeks to ensure that the courts are not hoodwinked into passing orders/granting reliefs in matters which fall within the jurisdiction of arbitrators. However, it is significant to note that Section 8 of the Act would not apply to proceedings which are non-arbitrable viz. matrimonial disputes, criminal proceedings etc., irrespective of whether there is an arbitration agreement between the parties in this regard.

 

APPOINTMENT OF ARBITRATOR

  1. How do parties appoint an arbitrator?

The arbitration agreement generally sets out the mode of appointing arbitrators. Where a mode of appointment of arbitrators is specified, it is imperative that the parties follow such prescribed procedure - as set out in the judgments of the Supreme Court in NHAI & Anr. v. Bumihiway DDB Ltd. & Ors., (2006) 10 SCC 763; India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd., (2007) 5 SCC 510; and Northern Railway Administration v. Patel Engineering Company Ltd., (2008) 10 SCC 240.

 

  1. Can parties to a dispute in court, appoint arbitrators?

As a matter of practice, especially in the Bombay High Court, parties are referred to arbitration (in the event of arbitrable disputes), even de hors the existence of an arbitration agreement, on the basis of the consent given through their legally appointed counsel. This practice not only helps reduce the burden on the Court, but is also beneficial to the litigants themselves - on account of the fact that arbitral proceedings are expeditious in nature. However, the Supreme Court, in its judgment dated March 9, 2018, in Kerala State Electricity Board & Anr. v. Kurien E. Kalathil & Anr., Civil Appeal No. 3164 of 2017, has held that the appointment of an arbitrator cannot take place by way of the oral consent of the parties’ legally appointed counsel. This, despite the fact that the legally appointed counsel acts on the instructions of the parties themselves. The rationale for the same appears to be that the arbitration agreement needs to be in writing - which, unfortunately, will result in a practical solution being left by the wayside.

 

  1. What is the downside to not following the prescribed procedure in the appointment of an arbitrator?

In the event that the prescribed procedure for appointment of an arbitrator is given a go-by by a party, the party which fails to adhere to the prescribed procedure will not be entertained by the court while seeking the appointment of an arbitrator. By way of illustration, where an arbitration agreement specifies that the parties require to appoint an arbitrator by consent (with a notice for appointment being addressed by one party to the other), and the party without addressing such notice, directly approaches the court for such appointment, the courts have held that they will not interfere/exercise their jurisdiction prior to the procedure contemplated being followed.

 

  1. Who can be appointed as an arbitrator?

Any individual of any nationality may be appointed as an arbitrator, subject to any agreement to the contrary between the parties, and subject to any terms and conditions stipulated by the parties in respect of the eligibility (technical expertise, rank in the judiciary, etc.) of the arbitrator. On most occasions, parties tend to appoint either a retired judge of the Supreme Court or of a High Court, a designated Senior Advocate or a legal counsel as an arbitrator depending on the magnitude of the matter, quantum of the claim etc. However, it is imperative that the arbitrator sought to be appointed does not fall foul of the conditions set out in the Act, and more particularly Section 12 thereof.

 

  1. Can the appointment of an arbitrator be challenged?

The appointment of an arbitrator can be challenged only if (a) circumstances exist which give rise to justifiable doubts as to the independence/impartiality of the arbitrator; (b) the arbitrator does not possess the necessary qualifications agreed to by the parties. The procedure for the challenge of an arbitrator is contemplated by Section 13 of the Act, which inter alia allows the parties to agree on a procedure for such challenge.

The Arbitration & Conciliation (Amendment) Act, 2015 (‘the Amendment Act’) has set out extensive illustrative instances which would give rise to justifiable doubts to the independence/impartiality of the arbitrator sought to be appointed. The instances inter alia encompass financial, business and professional grounds which pertain to (a) any past/present relationship with the party; or (b) any interest in the subject matter of the dispute. Infact, the Fifth Schedule to the Act (which was introduced by the Amendment Act), sets out 34 illustrative grounds which the legislature believes would give rise to justifiable doubts as to the independence/impartiality of arbitrators.

 

  1. Who cannot be appointed as an arbitrator?

Section 12(5) of the Act provides for such a bar. It states that notwithstanding any prior agreement to the contrary, any person whose relationship with the party/counsel/legal team subject matter of the dispute falls within any of the 19 categories of the Seventh Schedule of the Act (which was also introduced by the Amendment Act) would be ineligible to be appointed as an arbitrator. However, upon disputes arising between the parties, the parties may subsequently waive the applicability of Section 12(5) of the Act, provided there is an express agreement between them to that effect.

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Part 2 of this article series discusses other important concepts such as the intervention of courts, advantages and disadvantages of arbitration. Click here to read more.

 

DISCLAIMER: The information provided in this article is for educational purposes only. The same cannot be construed as legal advice.

 

 





Prateek Pai

Legal counsel
Mumbai

Prateek works as a legal counsel at a law chamber under a Senior Advocate at Mumbai. His areas of practice include civil litigation and arbitration disputes. He has earlier worked at various law firms in Mumbai.

Mr. Pai completed his B.A., LL.B from Bangalore Institute of Legal Studies and has 5 years of experience.
Senior Advocate at Mumbai.

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