Consentia on International Law and Constitutional Law

Arbitration Agreement: The Myopic Check Nut to Commercial Arbitrations in India

Abstract

Disputes are inevitable part of human society from time immemorial.  In past few due to increase in globalization and industrialization dispute began to increase which eventually involved the courts to resolve those dispute resulting in the overburdened courts and delay in ligation. Thereby an necessity of an alternative mechanism cropped up which can reduce the litigations.

 “Alternative Dispute Resolution” is an alternative to traditional litigation and an amicable method to resolve civil dispute between the parties without involving the judicial machineries. Its main objective was to reduce the litigation burden and invoke speedy justice. Arbitration is  was a chief mode of such ADR scheme and thereby Arbitration and  Conciliation Act was passed in 1996 by Indian government so to bring reduction in commercial litigation and parties should get their disputes resolve in a speedy manner in an affable environment. This act proved very successful in reducing the disputes however there was scope of more and much is required to be done to match the need of modern times.

Targeting the above scenario the research aims to depict the existing arbitration laws in India. It aims to project the lacunas present in the existing laws by highlighting the loop holes relating to accountability of arbitrators and reasonability of awards and refining the preliminary stages of arbitration proceedings as to decisiveness of arbitration agreements on the interpretation of arbitration clause/clauses etc. It aims to project that the existing clauses are subject to interpretations and ultimately involves the court which was against the objective of the act. The research highlight certain grey areas which if amended can restore the objective of the acts. At last research presents certain recommendation which can resolve those lacunas of the existing laws.

Arbitration Agreement:  The Myopic Check Nut to Commercial Arbitrations in India

I had learnt the true practice of law. I had learnt to find out the better side of human nature, and to enter men’s hearts. I realized that the true function of a lawyer was to unite parties riven as under. The lesson was so indelibly burnt unto me that the large part of my time, during the twenty years of my practice as a lawyer, was occupied in bringing about private compromises of hundreds of cases. I lost nothing, thereby not even money, certainly not my soul[1].”

Mahatma Gandhi

Dissension is invincible part of humanity; it can neither be coined as good or evil. However the mode of resolving the dispute is the determining test which justifies its nature. Traditionally when a dispute occurs between two private parties the victim either waive of his legal rights thereby end the dispute or may knock the doors of the justice system to claim his remedies by filing a plaint and accusing the other parties and the other party has to defend himself in a trial and thereafter the court, on basis of the quantum of evidence and merit decide and grant suitable remedy to the concern parties[2].

However this system was too lengthy and time consuming and delays were inevitable, challenging the demand of modern times; thereby an alternative to traditional existing legal system was need of an hour and which resulted in evolution of the “Alternative Dispute Resolution”

Alternative Dispute Resolution (ADR) are various amicable dispute resolving techniques crafted to settle the turmoil which cannot be  easily settled by simple negation between parties and may require the attention of judicial machineries.. The term “alternative dispute resolution “or “ADR” is often used to describe a wide variety of dispute resolution mechanisms that are short of, or alternative to, full-scale court processes[3]. The main objective of the alternative resolution system to curb of pending litigation and reduce overburdened courts thus became  an alternative to litigation. The said system emanates from dissatisfaction of many people with the way in which disputes are traditionally resolved resulting in criticism of the Courts, the legal profession and sometimes lead to a sense of alienation from the whole legal system- thus, the need for Alternative Dispute Resolution[4]. The Division bench of Supreme Court consisting of justice R.V. Raveendran, A.K. Patnaik have observed that “The provision of  costs is an incentive for each litigant to adopt alternative dispute resolution (ADR) processes and arrive at a settlement before the trial commences in most of the cases.[5] It was further observed by The Hon’ble Justice R.Basant that  keeping in mind the law’s delays and the limited number of Judges which are available, it has now become imperative that resort should be had to alternative dispute resolution mechanism with a view to bring to an end litigation between the parties at an early date[6].

Arbitration, a form of alternative dispute resolution (ADR), is a technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”), by whose decision (the “award”) they agree to be bound[7]. It is a resolution technique in which a third party reviews the evidence in the case and imposes a decision that is legally binding for both sides and enforceable conciliation, mediation, negotiations have been and are the various modes in which disputes are settled outside ‘State Adjudicatory Mechanism’ or with minimum possible state intervention as to that of validating and supervising the legality of the said process.

Arbitration was both private (adhoc) as well as official (institutional). The similar kind of arbitration and conciliation model as was found and applied in ancient Greece has evolved to be adapted in modern law.[8]  The model is UNCITRAL[9] model. This model of ADR law is universal bedrock to many countries adapting and applying arbitration and conciliation law, so that uniformity is maintained in trade and commerce dispute resolution and enforcement of awards.  Proceeding directly to the objective behind the research we shall look proceed toward the two core areas of primary concern with respect to arbitration law in India.

Arbitration is a key of quick and speedy trial across the globe however the Arbitration Act of 1996 which had an objective of reducing burden of litigation on courts has left certain lacunas which eventually lead the parties to knock the doors of courts. The loop holes and many phrase in the clause are subject to open interpretation and thereby involve courts raising a strong question on its object of reducing court’s burden. Though immense success has been seen due to the alternative system however still there exist many terms and clause due to which litigation continues to burden the shoulders of courts. There are many other areas of improvisation in the concerned law. But it would be more meaningful and fruitful to amend the law relating to accountability of arbitrators and reasonability of awards and refining the preliminary stages of arbitration proceedings as to decisiveness of arbitration agreements on the interpretation of arbitration clause/clauses etc.

Arbitration Law Purpose and Function in India:

In our country, prior to the year 1996, the law related to ADR, especially arbitration and application of foreign awards, was divided in to three specific legislations.[10] The concerned law was later regularized and much comprehensive and uniform law in the name of The Arbitration and Conciliation Act, 1996 came to be enforced on 16th August 1996. [11]

Society is not created for purposes of law, but the law is created for the  purpose is for society .  Law regulates human conduct but no law works smoothly unless the interaction between the two i.e. men and law is willingly made. An act shall be justified by law, only when it’s warranted, validated by law.  The law must function in such a way that all the people have access to justice in spite of economic disparities. The expression “access to justice” focuses on the following two basic purposes of the legal system: The system must be equally accessible to all. It must lead to results that are individually and socially just.[12]

Applying this philosophy and to avoid judicial delays and costs of litigation in trade and commerce disputes arbitration was introduced in India. Same was the reflection of Apex Court as well “The main objectives of the Arbitration Act is to make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of the specific arbitration and to minimize the supervisory role of courts in the arbitral process and to permit an arbitral Tribunal to use mediation, conciliation or other procedures during the arbitral proceedings in settlement of disputes, etc.” [13]

But along with all this, purpose of the law has to be kept alive which can be done only by keeping the law and relevant adjudicative mechanism of its application under microscope of review.

This kind of review  helps law to be responsive to the reasonable demands of the time and in particular  elimination of delays, speedy clearance of arrears and  bringing reduction in costs  ensuing quick and economical disposal of cases without affecting the cardinal principle of fair  justice. Secondly this paves out way for simplification of procedure to reduce and eliminate technicalities and devices for delay so that it operates not as an end in itself but as a means of achieving justice. Thus lastly leading to improvement of standards of all concerned with the administration of justice.

As of current times after nearly two decades of enforcement, arbitration law in India seeks over haulage.  Revision on the matters of certain peculiar concerns of enforcement issues related to avoidance of litigation and speeding up the process of dispute resolution is urgently required.

Arbitration Clause Common Cause of Dispute and Delay:

Since the time of inception of commercial ages application of arbitration as a legal mechanism of dispute settlement in commercial transactions’ was in vogue. Before proceeding further  it shall be  cleared that the existence of a written arbitration agreement /clause[14] of such agreement is a pre requisite for referring a dispute for arbitration. Section 7 of the Arbitration and Conciliation Act is the mother law, on the matter. It very particularly requires a valid arbitration agreement.[15] The existence and validity of arbitration agreement has been a prime area of litigation in jurisprudence of arbitration.

There have been a number of cases put up before Supreme Court where facts and situations were different but dispute was common i.e. “Whether there was an agreement to arbitration or not?” When a party files suit on the said ground that neither there is, nor there was, any such agreement, to sort out dispute under perusal. The challenge occurs either at initial stage of arbitration proceedings or at the final stage nearing closure of dispute, thus clearly frustrating the purpose of the said law.[16]  Each time the Court is pulled in to decide the validity or existence of an arbitration agreement.

  In a dispute with respect to that was a given clause an arbitration clause  the Supreme Court happened to elucidate what constitutes an arbitration agreement and when can be so inferred.[17]

The principles formulated in the said case[18] were

(i) The intention of the parties to enter into an arbitration agreement shall have to be gathered from the terms of the agreement. If the terms of the agreement clearly indicate an intention on the part of the parties to the agreement to refer their disputes to a private tribunal for adjudication and willingness to be bound by the decision of such tribunal on such disputes, it is arbitration agreement. While there is no specific form of an arbitration agreement, the words used should disclose a determination and obligation to go to arbitration and not merely contemplate the possibility of going for arbitration. Where there is merely a possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.

(ii) Even if the words ‘arbitration’ and ‘arbitral tribunal (or arbitrator)’ are not used with reference to the process of settlement or with reference to the private tribunal which has to adjudicate upon the disputes, in a clause relating to settlement of disputes, it does not detract from the clause being an arbitration agreement if it has the attributes or elements of an arbitration agreement. They are: (a) The agreement should be in writing. (b) The parties should have agreed to refer any disputes (present or future) between them to the decision of a private tribunal. (c) The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it. (d) The parties should have agreed that the decision of the Private Tribunal in respect of the disputes will be binding on them.

(iii) Where the clause provides that in the event of disputes arising between the parties, the disputes shall be referred to Arbitration, it is an arbitration agreement. Where there is a specific and direct expression of intent to have the disputes settled by arbitration, it is not necessary to set out the attributes of an arbitration agreement to make it an arbitration agreement. But where the clause relating to settlement of disputes, contains words which specifically excludes any of the attributes of an arbitration agreement or contains anything that detracts from an arbitration agreement, it will not be an arbitration agreement. For example, where an agreement requires or permits an authority to decide a claim or dispute without hearing, or requires the authority to act in the interests of only one of the parties, or provides that the decision of the Authority will not be final and binding on the parties, or that if either party is not satisfied with the decision of the Authority, he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.

(iv) But mere use of the word ‘arbitration’ or ‘arbitrator’ in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration. For example, use of words such as “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” or “if any disputes arise between the parties, they should consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement. Similarly, a clause which states that “if the parties so decide, the disputes shall be referred to arbitration” or “any disputes between parties, if they so agree, shall be referred to arbitration” is not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. Such clauses require the parties to arrive at a further agreement to go to arbitration, as and when the disputes arise. Any agreement or clause in an agreement requiring or contemplating a further consent or consensus before a reference to arbitration is not an arbitration agreement, but an agreement to enter into an arbitration agreement in future.

Myopic Outlook over the Matter:

In spite of such beautiful articulation the status quo sustains the dilemma of construing arbitration agreement due to various other reasons like, after expiry of duration of contract   whether arbitration clause survives?[19] Though the common sense reply is no it could not be, but Apex Court, inferring from the conduct of respondent, applying the principle of Sub Silentio, which is in similarly of doctrine of estoppel, construed the existence of such agreement. In an another matter the question arose whether arbitration agreement could be inferred by interpretation of incorporation by reference of clauses which purport to import arbitration clauses from another contract.[20] Supreme Court laid that “not a general reference but a specific and particular reference can create such agreement”[21] But here in this situation a question comes to a Benthamite mind of law whether such a question could have aroused, at all, had the law been clear and pithy?  Too much a myopic outlook on the aspect has led us in to these kinds of legal mazes, of re interpreting the same law again and again. We must move out for simple logical solutions. We must reach the other ends to find possible solutions.

The dilemma and doldrums of construction/interpretation of Section 7 of the said Act are further multiplied by Section 8 of the Arbitration Act 1996. Application of which depends on solution of the question arbitration agreement whether respires or not.[22]

In all the matters coming up before the Court creates focus on clarity of ‘Arbitration Clause’ and simple language of arbitration agreement.  But still the primary firmament of introducing arbitration and avoiding lengthy court procedures is an elusive concept practically. To facilitate easy and fast justice along with easing out trade and commerce is being made a far cry by multiplied litigation on the factual establishment of an arbitration agreement.

 With all due respect to Indian Legislature and Apex Court it is humbly submitted that the language of Section 7 is very wide, comprehensive and unnecessarily complicating.  The Section is put up in 16- 17 lines, which is not required in current times. Too much wide section creates too many a interpretative grounds which can be used as tool of litigation. This all add time solution sought.  This delay of litigation leads to unjustness. Even though apt solutions are provided by the respected Judiciary, but still the urgency of solution is been washed away in doldrums of interpretation of arbitration clauses. Thus leaving the true party wrenched out with not so fruitful results even when justice is been done.

Conclusion:

The Section 7 can be easily said to be colorable used time and again by party at default to protract the outcome of dispute and extract possible benefits if any. This statement is made with an emphasis from the author because devil only knows the conspiring tendencies of human mind whether working alone or in oligarchic connivances misusing a law in democracy.

 In many a case Supreme Court time and again interpret various words, phrases or clauses of the said clause in various cases, all over one simple question whether there is agreement of arbitration or not.[23] There may be other problems also in the current application of arbitration law and enforcement of awards etc.  But if we find a positive solution to simplify Section 7 a major chunk of unnecessary litigation could be warded off.

 The primary question is establishment of the fact that parties had a clear intention to arbitrate if in any situation dispute occur. Though the clause of arbitration is their but complicacy of language suggesting arbitration creates awkward question of fact and law which could not be ignored in an adversarial system of adjudication as is followed in India.

Had there been a simple law as filling up a separate “Form of Arbitration” or filing an “annexure certificate” separately along with Contract between party’s things could have been quite easier. To establish that parties intended since inception of their dealings and that dispute was to be sorted by arbitration only would not have been a legal nightmare even if the matter went to Court. As such kind of excessive litigation would have been avoided because of separate simple statement undersigned by both parties would have been enough for the Court to decide that parties shall go for arbitration. Filling up separate form with requisite fees and positive registration would not have allowed any discrepancy as to existence of arbitration agreement as is commonly seen in self-devised arbitration clauses in contractual commerce and trade.  Simplicity brings in clarity and washes away ambiguity be it law or machine or system.

The Arbitration is an alternative machinery that has a purpose of resolving the dispute and an implied usage of such instrumentality was the reduction of the pendency of suit. This instrument was an direct outcome of the speedy justice system which was the demand of the new era of twenty first century. With effect of international trade and globalization there was an increase of traction consequently dissensions among the parties were bound to occur and to avoid the burden on court the Arbitration and Conciliation Act of 1996 have come into existence. However the sole purpose of the act has lost its importance under the legal remedies of appeal. It has been well noted that under section 9 of Arbitration Act 1996 Court enjoy full discretion of  interference and parties on several instance invoke this right to interrupt the proceeding . It shall be noted that this act was well created to stop court interference however the loophole existing in section 5 where intervention of judicial machinery is yet to existing. Thus to crystal the existing ambiguity it shall be seen that certain amendment to the existing law is require. The loop interpretation existing in section 7, section 8, section 34, section 36 etc. shall be amended and strict interpretation shall be given by legislature so that the sole purpose of the act can see the light of the day.

Recommendations

  • Section 7 of the existing at shall include a clause which shall lay mandatory provision of appointing an arbitrator in the agreement of the contracting parties so that the question regarding the absence of arbitration clause shall never see light of the day in future.
  • Further in sec 11 of the said act parties shall fix the arbitrator at the time of the contract so that the judicial machinery could survive without taking the burden of appointing the arbitrator.
  • Further on in the same act a clause shall be added which mandate the parties to set a qualification of the arbitrator in the arbitration agreement and the arbitrator should be familiar with the legal system of the nation where arbitration is taking place.

  Grounds of appeal should be made strict and until a gross violation of law in time being has been done no appeal shall be maintain in any court of law.

Auhtors:

Prof Vikram Shyam,
Institute – Symbiosis Law School Noida
contact -0997149544
Yashasvi Virendra
3rd year student
Institute – Symbiosis Law School Noida
Contact- 09540166069

[1] Justice Jitendra N. Bhatt, A Round Table Justice Through Lok-Adalat (Peoples’ Court)— A Vibrant-ADR-In India,(2002) 1 SCC (Jour) 11,http://www.ebc-india.com/lawyer/articles/2002v1a3.htm, last visited on 22.12.13

[2] Joon Shin, Discussion on the Models of ADR,

[3] Alternative Dispute resolu tion Guide http://www.usaid.gov/sites/default/files/documents/1868/200sbe.pdf last visited on 22.12.13

[4] Nishita Medha, Alternative Dispute Resolution in India “A study on concepts, techniques, provisions, problems in

implementation and solutions http://www.fdrindia.org/publications/AlternativeDisputeResolution_PR.pdf last visited on 22.12.13

[5] Sanjeev Kumar Jain vs Raghubir Saran Charitable Trust CIVIL APPEAL NO.8610 OF 2011

[6] M/S.Afcons Infrastructure  vs M/S.Cherian Varkey Construction  CRP No. 1219 of 2005

[7] Sullivan, arthur; Steven M. Sheffrin (2003). [http://www.pearsonschool.com/index.cfm? locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4 Economics: Principles in action]. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 324. ISBN 0-13-063085-3.

[8] ibid

[9] The United Nations Commission on International Trade Law, adopted a Model Law on international Commercial Arbitration in the year 1985.

[10] The Arbitration (Protocol and Convention Act,1937, The Arbitration Act, 1940, and The Foreign Awards(Recognition And Enforcement) Act 1961.

[11] Act No. XXVI of 1996.

[12] W. Friedmann, ‘Law in A Changing Society’,2nd Edn., Universal Law Publishing Co. New Delhi.

[13] Bharat Sewa Sansthan  v. U. P. Electronics Corporation AIR 2007 SC 2961

[14] Supreme  Court held that a clause in a contract can be construed as an ‘arbitration agreement’ only if an agreement to refer disputes or differences to arbitration is expressly or impliedly spelt out from the clause. Kindly see State of Orissa v. Damodar Das [1996 (2) SCC 216], K K Modi v. K N Modi [1998 (3) SCC 573], Bharat Bhushan Bansal v. U.P. Small Industries Corporation Ltd. [1999 (2) SCC 166] and Bihar State Mineral Development Corporation v. Encon Builders (I)(P) Ltd. [2003 (7) SCC 418].

[15] Sub-section (1) of Section 7 of the Act defines ‘arbitration agreement’ as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. Sub-section (2) provides that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. Sub-section (3) requires an arbitration agreement to be in writing. Sub-section (4) provides that an arbitration agreement is in writing, if it is contained in – (a) document signed by the parties; or (b) in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

[16] See Note 5 Supra.

[17] Jagdish Chander v.Ramesh Chander (2007) 5 SCC 719

[18] ibid

[19] Bharat Petroleum Corp.Ltd. v. The Great Eastern Trading Co. 2007 (12) SCALE 247

[20] Section 7(5).The Arbitration and Conciliation Act 1996.

[21] M.R Engineers & Contractors pvt Ltd. v. Som Dutt Builders Ltd. (2009) 7 SC 696.

[22]  Booz Allen  and Hamilton  v.  SBI Home Finance Ltd (2011) 5 SCC 532, N. Radhakrishnan v. M/s Maestro Engineers (2010) 1 SCC 72. Also See, Bharat Sewa Sansthan v. UP Electronics  Corporation Ltd. (2007) 7 SCC 737,  The Empire Jute Co. Ltd & Others v. The Jute Corporation of India Ltd & Anr. 2007(12) SCALE  514.

[23] Kindly see  Branch Manager, Magma Leasing And Finance Ltd. v. Potluri Madhavilata (2009) 10 SCC 103 Deepak Kumar Bansal v. Union of India (2009) 7 SCC 223Eastern Coalfields Ltd. v. Sanjay Transport Agency (2009) 7 SCC 345 ,H. Lathakumari v. Vamanapuram Block Panchayat (20097 SCC 230,M.K Abraham & Co. v. State of Kerala (2009) 7 SCC 636 ,  Trimex International FZE Ltd. v. Vedanta Aluminum Ltd. (20100 3 SCC 1,  Dolphin Drilling Co. Ltd. v. ONGC Ltd. (2010) 3 SCC 267 , Indowind Energy Ltd. v. Wascare (I) Ltd. (1010) 5 SCC 306, State of Orissa v.Bhagyadhar Dash (2011) 7 SCC 406 , M/s SMS Tea Estate P.Ltd v. M/s Chandmari  Tea  Co. P.Ltd 2011 (7) SCALE 747

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