Introduction to Arbitration
Conflicts are a part of human behaviour. Every person every day has faced conflicting situations. Certain conflicts are on a small scale – an argument with a shopkeeper or a fight over a seating space. These are not taken to courts, because of their mere petty nature. But certain conflicts escalate unexpectedly, in such cases the parties seek legal help from the courts.
Even though our Indian court system is well-equipped to deal with conflicts daily, they have been overburdened with several cases since time immemorial. Hence, a viable solution was found that took the form of Alternative Dispute Resolution Methods such as Arbitration, Negotiation, Conciliation, Mediation etc was necessary.
The rise in globalization grew the number of disputes immensely as more and more organisations and companies expanded their businesses in and outside India. Therefore, a vast majority of the people diverted their disputes to Arbitration and other forms of alternative dispute resolution techniques due to its numerous advantages. Let’s dive deeper into what arbitration is, how it works, what an arbitration agreement and its importance.
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Definition and Meaning
The most important component of arbitration is the arbitration agreement. It is a contract between the parties wherein they agree beforehand to resort to arbitration in case of disputes. This agreement is binding on the parties who entered into it. The agreement guarantees that when any dispute arises, the parties will approach arbitration as a method for solving the dispute rather than burdening the litigation process.
The core aim of arbitration is to forego the traditional judicial process. Generally, litigation puts a lot of pressure on the parties as well as the Court and it results in delayed orders and decisions. Parties are left unhappy or are left stuck in the process for years on end. Arbitration gives an alternative way for parties to resolve disputes speedily. The arbitration agreement is tailor-made for the parties according to their needs.
It is either a fully separate agreement of arbitration or it can be a simple clause in a broader contract.
Arbitration agreement under the Arbitration and Conciliation Act, 1996 has been defined under Section 7. It states that it is an agreement by the parties to submit to arbitration, all or certain disputes which have arisen or which may arise in respect of their defined legal relation, whether it is contractual or not.
Which means that the agreement can cover all disputes that may arise between the parties or only specific kinds of disputes referenced by the parties themselves. The parties have freedom to choose which type of disputes are to be referred to arbitration.
Key Components of Arbitration Agreements
An arbitration agreement has certain essential elements that must be fulfilled for it to be valid and enforceable.
a) The arbitration agreement must be for a present or future dispute.
b) An arbitration agreement must always be in writing. It can be through the exchange of statements or it can be in the form of a document containing signatures or it can be a telegraph.
c) For an arbitration agreement to be enforceable, it must have the unambiguous intention of the parties. The intention of the parties to arbitration matters more than the terminology used in the agreement.
d) The parties must sign the arbitration agreement. It can either be done through mutual signatures or as an alternative, where only the party receiving the agreement signs it, it is also valid.
In a landmark case, K.K. Modi v. K.N. Modi and Ors (1998), SCC 573, the Supreme Court had held that an arbitration agreement must have the following attributes present –
The arbitration agreement must contemplate that the decision of the tribunal will be binding on both the parties
The jurisdiction of the tribunal to decide the rights and obligations of the parties must be derived from either the consent of the parties or from a Court order or from a statute, which must clearly state that the process to be chosen must be arbitration
The agreement referred to the tribunal must be legally enforceable
The agreement must also state that any decision that the tribunal makes on the dispute must be formulated before time when such reference was made.
Another notable observation in this case was, the answer to the issue- ‘Whether the correspondence between the two parties using the term arbitration constituted to be referred to arbitration’. The court observed that mere usage of the term “arbitration” did not conclusively categorize the proceedings as arbitration.
Hence, this case set a significant legal precedent for future cases to come within the ambit of arbitration law in corporate disputes. The court emphasized the attributes of an arbitration agreement which are necessary for it to be enforceable in the court.
Advantages of having an Arbitration Agreement
Having an effectively drafted arbitration agreement is the cornerstone of arbitration. A party who wishes for their dispute to be referred to arbitration must pay keen attention to a well-drafted arbitration agreement. There shall be no ambiguity in the wording, the interpretation must be easily understandable, and the reference made must be to the point. The agreement must be so well-drafted that it takes into account the issues of both parties and must aim at mitigating the risks of the disputes.
It is not only in recent times that the majority of parties have preferred arbitration or other alternative dispute resolution methods but these have been present for ages. They are just now gaining a lot of momentum and importance due to the following reasons-
Arbitration gives parties a lot of freedom to make independent but mutual decisions regarding the arbitrator's appointment, rules and procedure, even deciding the place or venue and time of the arbitration.
The decision-making in arbitration processes is generally faster and more acceptable to the parties.
Civil litigation being so expensive and time-consuming, more and more persons opt for arbitration as a method of dispute resolution. It is comparatively cheaper and less time-consuming and the cost of appointing arbitrators is also low.
Parties to an arbitration can expressly mention their choice of arbitrator in the arbitration agreement.
The rules associated with arbitration are comparatively more flexible than court litigation.
Decisions that are made through arbitration procedures are enforceable all over the world. They are recognized globally which provides it as a reliable mechanism for resolution.
Disadvantages of having an Arbitration Agreement
Once the parties enter into an arbitration agreement, they do not have the option to go to court to solve their dispute. They compulsorily have to opt for arbitration once they agree in writing for the same. Unless, they challenge the validity of the agreement itself.
The grounds for appeal are very limited from an arbitral award. Section 37 under the Arbitration and Conciliation Act, 1996 states about Appealable orders. It is a provision that allows appeals from certain orders of the Arbitrator or the Court. The orders that can be appealed are listed under Section 37(1). It includes granting or refusing to grant any measure under Section 9 of the Act i.e. interim relief in an arbitration proceeding; Section 34 i.e. setting aside arbitral award and others.
As per Section 37(3) of the Arbitration and Conciliation Act, There is no provision for second appeal from any order passed under this Section. However, it further provides that nothing under this Section affects the right to appeal to the Supreme Court.
Enforceability of an Arbitration Agreement
Like any other contract law principle, all arbitration agreements are enforced the same way.
If an arbitration agreement has been entered into by fraud, coercion, misrepresentation or inadequacy of information, they are considered to be unenforceable. Similarly, if an agreement shows absence of mutuality, it becomes unenforceable.
In India
The legal framework that governs the arbitration agreement in India is the Arbitration and Conciliation Act. The Act provides a concrete legal foundation for enforcing an arbitration agreement.
Similarly, each jurisdiction has its specific laws which govern arbitration. The United States of America follows the FAA i.e. The Federal Arbitration Act.
International treaties such as The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) exist. The treaty is a landmark one as it facilitates enforcing the arbitration agreement and awards across signing countries.
As we have seen, certain elements must also be present for an agreement of arbitration to be enforceable. Elements such as Written Agreement, Mutual Consent, and Well-defined Scope of the Agreement are some of the most important to have an enforceable arbitration agreement.
Practically, an arbitration agreement must be drafted with precision and must include an accurate venue for the arbitration procedure. The agreement must also contain the appropriate governing law.
Certain arbitration agreements often specify institutional rules like the ICC, LCIA, IAC, AAA and the like, which provide defined procedures and guidelines for enforcing arbitration agreements.
India is an integral party to the New York Convention on the enforcement of Arbitration awards. The Civil Procedure Code, 1908 which is applicable in India also urges the parties to opt for out-of-court settlement and it encourages Alternative Dispute Resolution Methods for better resolving of disputes.
Tips for drafting an effective Arbitration Agreement
a) Number of Arbitrators
Selecting the number of arbitrators is crucial in drafting a well and precise arbitration agreement. Clearly elaborate the number of arbitrators and also the method for their selection. Specify their qualifications and their expertise and ensure they have the necessary knowledge required to lead a successful arbitration process
b) Clarity and Precision
Make sure that the arbitration agreement is as precise as possible. Leave no room for vagueness or ambiguity. Include types of dispute to be covered and the procedural rule to be followed too.
c) Choice of Law
Choose the governing law and the seat or place of arbitration. It determines the legal framework governing the arbitration agreement. The seat of arbitration influences the jurisdiction and procedure. The seat chosen must be neutral and arbitration-friendly.
d) Cost
Allocation of fees and cost of arbitration should also be included. Specify what costs will be included and their breakdown, who will incur which costs etc. This must also include fees for appointing arbitrators and administrative fees and any other expenses.
e) Interim Measures
The agreement must also contain interim injunctions and any other such orders in furtherance of preserving evidence. The agreement should specify whether the parties can acquire interim relief from courts or if arbitrators have the jurisdiction to grant such measures.
f) Enforcement
The arbitration agreement must include provisions regarding the enforcement of the arbitral award. The provisions must be clear and must state how the award is enforceable.
Conclusion
Arbitration is a very effective tool being an alternative dispute resolution technique and it offers parties an efficient solution and alternative to traditional litigation and court processes. Meticulous planning and foresight are two key elements in drafting a well-defined arbitration agreement. Arbitration not only provides a quicker and cheaper way of dispute resolution but it also promotes a level of confidentiality that is not offered by traditional court litigation. In the near future, arbitration surely promises a dynamic and effective solution for global use.
Concluding the article, while there are numerous challenges in the face of arbitration as an alternative dispute resolution method, it remains a cornerstone of efficient dispute resolution.
Frequently Asked Questions
Q1) What is an Arbitration agreement?
A) An arbitration agreement is a contract in which parties agree to resolve disputes through arbitration instead of court litigation. It outlines the arbitration process and rules.
Q2) Are arbitration agreements enforceable in court?
A) Yes, arbitration agreements are generally enforceable in court, provided they meet legal requirements and do not violate public policy.
Q3) What are the advantages of arbitration agreements?
A) Arbitration agreements offer confidentiality, faster resolution, lower costs, and the ability to choose expert arbitrators, providing more control over the dispute resolution process.
Q4) Why do parties prefer arbitration over litigation?
A) Parties prefer arbitration for its confidentiality, quicker resolution times, lower costs, and the ability to choose arbitrators with specific expertise.
Q5) How is the decision of an arbitrator?
A) The decision of an arbitrator, known as an arbitral award, is typically final and binding, with limited grounds for appeal or challenge in court.
This Article is written by Tanaya Moholkar, a final year law student at Yashwantrao Chavan Law College, Pune.
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Good information 👍
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