Arbitration : A Perspective

24th April, 2020 - 5:29 pm Categories: Legal Issues 0 Comments

Arbitration is a form of Alternative Dispute Resolution. ADR methods enjoy significant advantages such as lower costs, greater flexibility of process, higher confidentiality, greater likelihood of settlement, choice of forum, choice of solutions etc. Having said that one of the most popular widely recognised and practised forms of ADR is Arbitration.

Arbitration Law in India has always been trending since its inception, in 1940. The present date arbitration law is a formation of several promulgations and ordinances passed by the government of India to meet the economic reforms taking place in the country from time to time. Arbitration Law in India, is primary contained in the Act of 1996. An Act that was passed to consolidate the laws relating to domestic, international arbitration and its enforcement. In an attempt to make arbitration a preferred mode of settlement of commercial disputes and making India a hub of international commercial arbitration some major amendments were introduced in the year to 2015 and 2019. The current law is a composition of several such amendments with the latest amendments being introduced in 2019.

Arbitration is the buzz word in the present day business contracts. The law bestows a choice upon the parties to enter into commercial transactions knowing well that in case, of a dispute, they will refer their dispute to this simple, quick, convenient and cost effective process saving them from tedious and complicated procedures of a court. The Act covers both Domestic and International Arbitration. This article deals primary with domestic elements which also govern key elements of International Arbitration.

Key Elements of an Arbitration Agreement are as follows:

a. Consent: – An arbitration cannot happen without the consent of the parties. The consent is contained within an arbitration agreement. This agreement clearly specifies the desire of the parties to arbitrate their dispute. In other words, they clearly note that in the event of a dispute between them they would not go to the court, instead they will proceed to arbitrate their dispute. This agreement takes the form of a binding contract.As per section 7 of the Act, “arbitration agreement” means 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. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

b. Presiding Authority –  The Authority adjudicating the dispute is better known as the arbitral tribunal. It is similar to a judge that presides over a court of law. The presiding authority is known as the arbitrator, who is in charge of deciding the disputes between the parties. Just like the judge an arbitrator also has several responsibilities set out in the code. The arbitrator is under oath to perform its duties. He/She is bound to take decisions and conduct proceedings in a neutraland impartial manner.One of the key features of an Arbitration Agreement is the fact that the parties are free to choose their presiding authority. This legislative clause not only inspires confidence in the arbitrators but also the process and the decisions taken. The Act also has provisions for removing arbitrators, if found guilty of not being neutral and independent.

c. Seat of arbitration – The seat of arbitration determines the courts which would exercise jurisdiction over the arbitration proceeding. In absence of such an agreement, the 1996 Act solely operates within the territory of India.

d. Party autonomy and procedure – Arbitration gives the parties the choice to select applicable laws, especially if the arbitration is an international commercial arbitration. Additionally, there is an enormous flexibility to choose the procedure that shall be applicable. The Rules of the arbitration can be self – governed, however, the said rules have to be in the spirit of Public Interest of India.

e. Finality of outcome – No appeal lies against an arbitral award, however, an arbitral award can only be set aside if the said award suffers from as invalid arbitration agreement, party’s incapacity to enter into an agreement, independence and impartiality of an arbitrator, unfair procedure, etc.

LANDMARK CASE LAWS BASED ON ABOVE PRINCIPLE – (JUDICIAL DISTCA)

a. Mother Boon Foods Pvt Ltd v. Mindscape One Marketing Pvt Ltd O.M.P. (COMM) 136/2017

The Court held that an arbitration agreement, as per the 1996 Act, has to be in writing. Since the arbitration clause, which is a part of the contract, was in writing, the same could not have been superseded by any oral demand or agreement.

b. K.K. Modi v. K.N. Modi; Bharat Bhushan Bansal v. U.P. Small Industries Corpn. Ltd; Bihar State Mineral Development Corpn. v. Encon Builders (I) (P) Ltd; and State of Orissa v. Damodar Das

The Hon’ble Supreme Court of India had the occasion to refer to the attributes or essential elements of an arbitration agreement and 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. It was observed that the intention of the parties to enter into an arbitration agreement shall have to be gathered from the terms of the agreement. It has been held that 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.

Key Elements of an Arbitration Procedure are as follows

As aforestated key elements of the agreement states that the parties have the right to choose the procedure and persons as to who would act as arbitrators in their dispute. However, this right to choose is not absolute but is subject to certain limitations.There are two aspects to appointment, namely number of arbitrators, and the actual procedure of appointment. There are many things that should be kept in mind at the time of appointment of arbitrators, for instance the fees of the arbitrators, complexity of the matter, time required for meetings, duration of sessions when oral arguments would be made, etc. More than two arbitrators result in greater discussions which can improve the quality of awards. It also brings greater expertise as arbitrators may be from different speciality and background. Law mandates that an odd number of Arbitrators constitute the tribunal always. It may be noted that the India arbitration is governed by the Arbitration and Conciliation Act, 1996 read with the Indian Contract Act, 1872. The two Acts together provide the legal framework governing and regulating arbitration in India. The 1996 Act is based on the UNCITRAL Model Law of 1986, and was recently amended vide the Arbitration and Conciliation (Amendment) Act, 2015.

Since the arbitrators cannot act ultra – vires of their powers under the code, the act has established a higher authority to keep checks and balances on the practices of the ADR. The Courts have been defined in the act as they are required to performs several important functions for setting up this institution. The Court performs the Supervisory function as regards that arbitration. This supervisory function would include granting of interim measures, challenge to an arbitral tribunal, review of an award, and enforcement of awards, etc.

The Chart Below depicts which court will exercise original jurisdiction on the type of arbitration, post 2015 amendment.

It has been observed that on several occasions, the parties come to a loggerhead, in appointing an arbitrator on their own. On several occasions if one party nominates the name of an Arbitrator, the opposite party fails to comply in appointing one at its end. This is when the Supreme Court and High courts are entrusted the task of appointing an arbitrator best suited for the dispute in hand. The code entails Supreme Court to be the designated the authority for appointing an arbitrator in cases of international commercial arbitration, while High Court is the authority for appointment of an arbitrator in cases of domestic arbitrator. The Act also authorizes any person or institution so designated by the Supreme and High Court to appoint the arbitrators.

LANDMARK CASE LAWS BASED ON ABOVE PRINCIPLE – (JUDICIAL DICTA)

a. Arbitration Application No. 197/2014 along with Arbitration Petition No. 910/2013

The Bombay High Court in the recent case of M/s Addhar Mercantile Private Limited vs Shree Jagdamba Agrico Exports Pvt Ltd in a section 11 Application under the Act had considered the important issue as to whether two Indian parties can choose a Foreign Seat of Arbitration.The Hon’ble Bombay High Court relying upon the judgement passed by Hon’ble Supreme Court in the case of TDM Infrastructure Private Limited v UE Development India Private Limited has held that the intention of the legislature would be clear that Indian parties and Companies incorporated in India should not be permitted to derogate from Indian law which being part of the public policy of the country and hence cannot chose a foreign Seat of Arbitration and therefore relying upon the same went ahead to appoint an Arbitrator in the aforesaid case

b. TRF Ltd v. Energo Engineering Projects Ltd Civil Appeal No. 5306 of 2017

Once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. It is inconceivable in law that a person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. 

Key elements of an Award are as follows:

An award is the passing of the conclusive reasoning to the questions, issues forming the disputes that are put forward before the arbitral tribunal to decipher. The award is passed after reasonable opportunity has been granted to all parties to present their case and produced the evidence.

An arbitral award is similar to a judgment given by a court of law. In other words, an arbitral award is given by the arbitral tribunal as a decision on various issues in a matter which the parties had placed before the arbitral tribunal. The awards are several types: Final Award – Interim Award and Settlement Award. A settlement award is reached by the consensus amongst the parties, hence the said award in non-appealable. The Arbitration and Conciliation Act, 1996 prescribes certain requirements for an arbitral award. The necessary requirements are:

a. Must be a decision by the majority – An arbitration Tribunal consisting of three arbitrators must pass an award in light of the majority consensus in which they shall also record the objection of the arbitrator not in alignment of the two arbitrators.

b. Must be made in writing, signed and dated – An award has to be in writing and having the signature of majority of the members of the arbitral tribunal.

c. Must be reasoned – An award should be reasoned. Failure to state reasons would make the award invalid. It must not be vague. The arbitral award should be both certain and clearly note which party has to do what.

d. Capable of being performed – Apart from being enforceable it should be must be realistic in what it suggests, and should not ask parties to do something that is not possible or illegal. An unenforceable award would .be set aside.

LANDMARK CASE LAWS BASED ON ABOVE PRINCIPLE– (JUDICIAL DICTA)

a. In Ravindra Kumar Gupta & Co. v. Union of India reported at 2010 (1) SCC 409

It is reiterated that reappraisal of evidence by the Court is not permissible. Where the reasons have been given by the arbitrator in making the award the court cannot examine the reasonableness of the reasons. If the parties have selected their own forum, the deciding forum must be conceded the power of appraisement of evidence. The arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the court to take upon itself the task of being a Judge on the evidence before the arbitrator.

b. Food Corporation of India-vs-Joginderpal Mohinderpal & Anr. reported at AIR 1989 SC 1263;Steel Authority of India Ltd.-vs- Gupta Brother Steel Tubes Limited reported at 2009 (10) SCC 63-;III) K.V. Mohammad Zakir-vs- Regional Sports Centre reported at 2009 (9) SCC 357;P.R.Shah, Shares and Stock Broker (P) Ltd.-vs-B.H.H. Securities (P) Ltd. and Ors. reported at 2012 (1) SCC 594.

The court should not substitute its own view for the view taken by the arbitrator while dealing with the proceeding for setting aside an award. Where the arbitrator acts within jurisdiction, “the reasonableness of the reasons” given by the arbitrator is not open to scrutiny by court.

Key elements of an Appeal are as follows:

The Act provides for setting aside of an Arbitral Award by the Court. A comprehensive list of circumstances under which an Arbitral Award can be set aside by the Court and they are where the party is under some incapacity; Arbitration agreement between the parties is not valid; Lack of notice of appointment of arbitrator or of holding of arbitral proceeding; Arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or it contains decisions on matters beyond the scope of submission of arbitration; Composition of arbitral tribunal or arbitral procedure was not in accordance with the agreement of the parties; The Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the Law; and lastly, the Award is in conflict with the Public Policy. The unlikely challenges to be entertained by the courts are that the arbitral tribunal is favouring or is biased in favour of one of the parties. Such a challenge should be first at the first instance of its knowledge coming to the parties. The parties to the dispute may appeal to the court establishing vested interest of the arbitrator.

LANDMARK CASE LAWS BASED ON ABOVE PRINCIPLE – (JUDICIAL DICTA)

a. Hemadari Cements Pvt. Ltd. v. Walchandnagar Industries Ltd

Unreasoned Arbitral Award [Section 31(1)]– In this case, the Petitioners filed for setting aside the award under Section 34 on the ground that the award passed by the Arbitral Tribunal is an unreasoned award and liable to be set aside in view of the provision under Section 31(1) of the Act. In the case of Hemadari Cements Pvt. Ltd. v. Walchandnagar Industries Ltd., the Division Bench of Andhra Pradesh High Court held that an award even if it is valid is liable to be set aside, if the award in question does not contain any reasons.

b. Jajodea (Overseas) Pvt. Ltd. v. IDC of Orissa Ltd

The Supreme Court in the case of Jajodea (Overseas) Pvt. Ltd. v. IDC of Orissa Ltd., settled the legal position that A speaking or reasoned award is one which discusses or sets out the reasons which led the Arbitrator to make the award. Setting out the conclusions upon the questions of issues that arise in the arbitration proceedings without discussing the reasons for coming to these conclusions does not make an award a reasoned or speaking award.

Author: Vibhor Gupta, Senior Associate, at Khurana & Khurana, Advocates and IP Attorneys.  In case of any queries please contact/write back to us at vibhor@khuranaandkhurana.com.