Arbitration

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There is a famous proverb “where there are two minds there will be three opinions”. Everybody has their own opinion and views, hence there may be a conflict of opinions. In today’s society, such conflicts are inevitable and a quick, easy, and strong mechanism for resolution of such conflicts at minimum cost is need of time. Such a mechanism reduces the burden on the judiciary. Arbitration, Mediation, Conciliation, Negotiations, Lok Adalats are some methods which can be used in such situations. These methods are collectively known as the Alternate Dispute Resolution (ADR) System. Let us discuss arbitration as an alternate dispute resolution system.

Defining Arbitration:

There is no internationally recognized definition of arbitration. In Champsey Bhara and Co. v. Jivraj Balloo Spinning and Weaving Co., 1923 MLJ 706 PC, the Privy Council observed: “where a cause of matter in difference is referred to an arbitrator, where a lawyer or a layman, he is constituted the sole and final Judge of all the questions both of law and of fact. The only exceptions to that rule, are, cases where the award is the result of corruption or fraud, and cases where the question of law necessarily arises on the face of the award, or upon some paper accompanying and forming part of the award”.

In K. K. Modi v. K. N. Modi, AIR 1998 SC 297 case, the Supreme Court stated that it is not possible to give the definition of arbitration instead it pointed out attributes of an arbitration agreement. Relying on the passage from the book of Mustill and Boyd on Commercial Arbitration the Apex Court pointed out that in a complex modern State there is an immense variety of tribunals, differing fundamentally as regards their compositions, their functions, and the sources from which their powers are derived.

The Supreme Court held for an agreement to be considered as an arbitration agreement the following attributes must be present.

1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement;
2. That the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration;
3. The agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal;
4. That the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides;
5. That the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly;
6. The agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal.

According to Section 2(1)(a) of the Arbitration and Conciliation Act, 1996, “arbitration” means any arbitration whether or not administered by a permanent arbitral institution. This definition of the Act reproduces the text of Article 2(a) of the Model Law. The only difference between the two definitions is that Article 2(a) of the Model Law is prefixed with the words ‘for the purpose of this law’, while Section 2(1)(a) of the Arbitration and Conciliation Act, 1996, is prefixed with the words ‘in this Part, unless the context otherwise requires’. Thus the term arbitration defined by Article 2(a) of the Model Law, is not controlled by the context, while, the term as defined in Section 2(1)(a) of the Arbitration and Conciliation Act, 1996 is controlled by the context of Part I.

Arbitration is a procedure in which parties submit present or future disputes, to one or more arbitrators (arbitral tribunal) 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. The decision given by the arbitral tribunal is called an award.

Different Kinds of Arbitrations:

Different kinds of arbitrations are as follows:

• Domestic Arbitration: It is that type of arbitration, which happens in India, wherein both parties must be Indians and the conflict has to be decided in accordance with the substantive law of India. 
• International Arbitration: When arbitration happens within India or outside India containing elements which are foreign in origin in relation to the parties or the subject of the dispute, and the dispute is decided in accordance with substantive law in India or any other country, then it is called as International Arbitration. 
• Institutional Arbitration: When an arbitral Institution conducts arbitration in accordance with the prescribed rules of such institution, it is called Institutional Arbitration.
• Ad-hoc Arbitration: If the parties agree among themselves and arrange for arbitration, it is called Ad-hoc Arbitration without having an institutional proceeding. It can either be domestic, international or foreign arbitration.
• Statutory Arbitration: It is mandatory arbitration, which is imposed on parties by the operation of law. There are many central and State Acts which makes arbitration mandatory.
• Fast Track Arbitration: It is a time bound arbitration, with strict rules of procedure, which do not allow for any laxity or scope for extensions of time and delays.

Advantages of Arbitration:

The advantages of arbitration are as follows:

• Liberty to Choose Arbitrator: The parties to the dispute usually agree on the arbitrator, so the arbitrator will be someone that both sides have confidence will be impartial and fair.
• Expert Arbitrator: Unlike in a court trial, where the judge or jury may know very little about the subject matter of the dispute, the parties to the arbitration have the ability to select an arbitrator with expertise in a certain area, which may lead to a more equitable and informed decision. 
• Acquaintance with the Arbitrator: The parties themselves appoint an arbitrator by mutual agreement. Hence the parties have a good acquaintance of the knowledge, expertise, and capabilities of the arbitrator. Due to acquaintance, the parties can express their opinion freely, which cannot be expressed before the court of law.
• Flexibility: There are lesser formalities in arbitration than in the traditional judicial system.  Parties have the freedom to choose the manner of proceedings, time, and place for resolution of disputes. Parties are also free to choose the rules and procedures to be applied for the resolution of disputes.In court of law, English is the commonly used language but in arbitration, parties can choose the language also. It gives flexibility to the process.
• Speed: As the parties have been given the freedom to determine the procedure, time, and place for the settlement of the dispute, it saves a lot of time compared to traditional courts. In this process the dispute is finally resolved, thereby obviating the possibility of successive appeals.
• Less Expensive: Normal judicial proceedings are technical and complex. The court fees and mounting charges of lawyers, adds to the cost factor in normal judicial proceedings. Similarly, there may be economic losses due to disputes, particularly in labor-related disputes.  Arbitration saves a lot of money and cost.
• Privacy and Confidentiality: In arbitration, the process of dispute resolution is within four walls and only in presence of parties and experts. It, therefore, maintains privacy and preserves the reputation of the parties. Due to privacy, reliable information regarding the case can be gathered. The final outcome of the process can also be made private if the parties so stipulate and agree. 
• Finality: There is a very limited avenue for appeals.  In case of arbitration because the grounds for challenging an arbitrator’s decision are severely limited by the Arbitration Act. The decision of the arbitrator is agreed to be final which can bring an end to proceedings which could have continued for years through the court.
• Complementary to C.P.C.: The Arbitration and Conciliation Act, 1996 works on the same principles, aims, and objects of the Civil Procedure Code, 1908. An award passed by an arbitral tribunal is equal to the decree of a civil court. Thus, Arbitration and Conciliation Act, 1996 is complementary and not contradictory to the Civil Procedure Code, 1908.
• Enforceability: The decision made at the end of the process draws a sense of culmination because of several factors such as the agreement between the parties, the inclusion of legality, the non-appealable conditions of the arbitral award, etc. The arbitral awards are enforceable which makes arbitration a binding process. Such awards are generally easier to enforce as compared to court verdicts.

In Northern Health Authority v. Derek crouch Ltd., (1984) 2 All ER 175 case, the Court observed: “The Court does not have the power which the arbitrator had to open up and review the exercise of the architect a discretion since the court’s jurisdiction was limited to determining and enforcing the contractual rights of the parties. The arbitrator, on the other hand, because the parties’ agreement expressly gave him such power, was entitled to modify the parties’ contractual rights by substituting his own discretion for that of the architect if he disagreed with the architect’s certificates and opinions. Accordingly, if the parties chose to litigate rather than arbitrate the court would not have the same power.”

In the State of Jammu and Kashmir v. Dev Dutt Pandit, AIR 1999 SC 3196 case, the court held that arbitration is to be encouraged because of the high pendency of cases in courts and the cost of litigation. Arbitration has to be looked up to with all earnestness so that the litigating public has faith in the speedy process of resolving their disputes by this process.

Disadvantages of arbitration:

The disadvantages of arbitration are as follows:

• Inability to Appeal: There is a very limited avenue for appeals. As a general and practical rule, the arbitrator’s decision cannot be appealed. Only in certain limited situations, such as when the arbitrator exceeded his or her authority or upon proof of corruption, fraud, or undue influence, will an arbitrator’s decision be reviewed by a district court.
• Lack of Formal Evidence: There is a lack of a formal evidence process. The parties have to rely on the skill and experience of the arbitrator to sort out the evidence, rather than a judge or jury. No interrogatories or depositions are taken, and no discovery process is included in the process.
• Mandatory Arbitration Contracts: Arbitration agreements are sometimes contained in ancillary agreements, or in small print in other agreements, and consumers and employees sometimes do not know in advance that they have agreed to mandatory binding pre-dispute arbitration by purchasing a product or taking a job.  If arbitration is mandatory as per the contract between the parties, then their right to approach the court is waived. Mandatory arbitration clauses in consumer contracts, employment contracts, and nearly every online agreement often work in favour of the company rather than the employee or consumer. Sometimes such agreements make the complainant pay for the arbitration process. It is not in favour of small consumers.
• Possibility of Bias: Arbitrator is presumed to be neutral, impartial. It is also assumed that he has no personal interest in the subject matter before him. But considering human nature we can say that arbitrators may not be unbiased. If an arbitrator has a history of siding against one side in a dispute, that arbitrator may not be chosen, against one who has a history of being impartial to either side. if the arbitrator depends on the party for repeat business, there may be an inherent possibility of bias.
• No Interlocutory orders: The process does not provide for the grant of interlocutory measures against a party, making it easier for a party to take steps to avoid enforcement of an award, such as the relocation of assets offshore.
• Execution of Award: Arbitration awards are not directly enforceable; they are executable subject to judicial sanction. A party seeking to enforce an award must resort to judicial remedies. Efforts to enforce the award can be fiercely fought, which necessitates legal costs. Thus the advantage of arbitration incurring less cost is lost.
• No Public Hearing: If the subject matter is important to the general public, it is necessary that the public should know about the proceedings. Arbitration is not done publicly. Hence general public cannot know the outcome and reasoning behind that outcome. There is a possibility of a settlement between parties, against the public interest.

Subject Matter for Arbitration:

Generally, all disputes involving private rights (disputes about property or money, or about the amount of damages payable for breach of contract etc.) and which can be decided by a civil court, can be referred to arbitration. However, according to the general practice, following matters are not referred to arbitration. It is to be noted that the list is not exhaustive. Any matter involving morality, status and public policy cannot be referred to arbitration.

Matters Which Cannot be Referred for Arbitration:

The following matters cannot be referred for arbitration:

• Matrimonial matters, like divorce or conjugal rights;
• Insolvency matters, Ex- declaring a person insolvent;
• Criminal offences;
• Insolvency matters, dissolution or winding up of a company;
• Matters relating to guardianship of minors or lunatics or another person under disability;
• Testamentary matters like validity of a will;
• Matters related to intellectual property rights;
• Matters relating to anti-trust and competition law;
• Matters falling within the purview of the Monopolies and Restrictive Trade Practices Act.

Steps involved in Arbitration:

Steps involved in an arbitration proceedings:

1. Arbitration Clause: There should be a clause in the agreement which states that the parties will adopt an arbitration method to resolve the dispute.
2. Arbitration Notice: In case of a dispute between the parties arise, the aggrieved party will send a notice to the defaulting party for initiating the procedure of arbitration known as arbitration notice.
3. Appointment of Arbitrator: The parties appoint arbitrator a neutral, expert in the subject matter, but not having any personal interest in the subject matter as they think fit to resolve the dispute.
4. Preliminary Hearing: The arbitrator conducts a preliminary hearing with the parties, to discuss the issues in the case and procedural matters, such as witnesses, depositions, sharing information, and other matters.
5. Submission of Statements of Claims: In this step, the parties prepare for presentations and exchange information. Thus both the parties draft their claims like compensation claim (by aggrieved party), a written statement by defending party, counterclaims or set-offs if any, etc.
6. Hearing of Parties: An arbitrator or arbitral forum will hear both parties.
7. Post-Hearing Submissions: After the hearing, both parties may present additional documentation, as allowed by the arbitrator.
8. Arbitral Award: The decision given by the arbitral tribunal is referred to as ‘arbitral award’ and it is binding on both parties.
9. Execution of Award: Once, the arbitral award has been passed, it has to be executed. Arbitration awards are not directly enforceable; they are executable subject to judicial sanction.

Distinction Betwen Arbitration and Adjudication

Arbitration	Adjudication
Arbitration is an ADR 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 adjudication, when a person violates the rights of another the person injured approaches the court.
The main object of arbitration is to settle disputes between two or more parties.	The main object of adjudication is to protect the natural rights of a person.
Generally, arbitration occurs in civil cases and particularly involving the commercial transaction.	Adjudication may be civil or criminal
It is a voluntary process	It is a compulsory process
The parties themselves appoint the sole arbitrator, as per their agreement.	In adjudication appointment of a judge is not done by the parties. They have to follow the procedure.
The presiding officer of the process is called an arbitrator	The presiding officer of the process is Judge or Magistrate or any other appointed official
The arbitral tribunal follows natural laws of justice and does not follow the process of laws. i.e. the Evidence Act, the Civil Procedure Code, etc. are not followed.	The adjudication follows all procedural and adjective laws like the Evidence Act, the Civil Procedure Code, the Criminal Procedure Code, etc.
It is a speedy, flexible, less expensive process.	It is a time-consuming, strictly procedural, and lengthy process.
The arbitrator may not have legal knowledge but he is an expert in the trade or the subject matter of the dispute.	The presiding officer during adjudication has the legal knowledge and may not be knowledgeable about the trade or the subject matter of the dispute.
In arbitration, importance is given to the question of facts than to the question of law.	In adjudication, equal importance is given to the question of facts and the question of law.
If both the parties agree, the arbitrator can pass interim orders.	Whether parties agree or not, if the court satisfies itself with the evidence submitted before it, then it can pass interim orders.
The parties have to pay arbitration costs inclusive of fees of the arbitration and administrative expenses. These expenses are paid directly by the parties.	In adjudication, the parties do not pay costs, expenses, and fees to the judge. However, they have to fee necessary Court Fees and Stamp duties. Judges and their staff receive salaries from the State. The administrative expenses are borne by the state.
If parties fail to pay requisite fees to the arbitrator, then the arbitrator has the power of ‘lien’ on the award.	In adjudication, there is no such type of lien.
The final decision of arbitration is called an award.	The final decision of adjudication is called judgment, decree, order, etc.
Parties may or may not get assistance from legal practitioners.	Most of the adjudication process requires assistance from legal practitioners.
It is an act of parties.	It is an act of law.
Besides arbitration, the arbitrator may also use processes like mediation, conciliation, negotiation, and settlement.	The courts themselves are not involved in the processes like mediation, conciliation, negotiation, and settlement.

Conclusion:

Arbitration is a private process where disputing parties agree that one or several individuals can make a decision about the dispute after receiving evidence and hearing arguments. Generally, all disputes involving private rights and which can be decided by a civil court, can be referred to arbitration. Compared to traditional trials, arbitration can usually be completed more quickly and with less formalities. Cost of arbitration is less compared to court trial.

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