Focus on: Popularity of Arbitration for Commercial Dispute Resolution

Singhania & Partners LLP

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When it comes to resolving disputes of commercial nature between the two parties, arbitration emerges as a preferred choice of Dispute Resolution Mechanism. In India, it is the Arbitration & Conciliation Act, 1996 as amended by the Arbitration & Conciliation (Amendment) Act, 2021 (“Act”) that governs both the domestic and international arbitration. Like the domestic arbitrations,  International Commercial Arbitration is also a popular method of resolving commercial disputes in India where at least one of the parties to the contract is an individual having nationality of another country other than India or a body corporate which is incorporated in any country other than India or an association or a body of individuals whose central management and control is exercised in any country other than India or the government of a foreign country. One of the reasons behind International Arbitration being the preferred choice for resolving commercial disputes, is the expeditious process of dispute resolution. The Act sets out that the award in the matter of international commercial arbitration may be made as expeditiously as possible and endeavour may be made to dispose off the matter within a period of twelve (12) months from the date of completion of pleadings.

The law of arbitration in India is evolving to be more arbitration friendly as well as to be in tandem with the International legal arena. Recently, the Supreme Court of India in a landmark judgment in PASL Wind Solutions Private Limited Vs. GE Power Conversion has affirmed the concept of “Party Autonomy” thereby allowing even two Indian/Domestic parties to choose a foreign seated arbitration.

International arbitration is also chosen as a preferred mode of dispute resolution because of the impeccable reputation and credibility attached to the institutions conducting institutional arbitrations like the Singapore International Arbitration Centre (SIAC), International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), DIAC (Delhi International Arbitration Centre), ICA (Indian Council of Arbitration) etc.

Governing Law for Arbitration in India

The Arbitration and Conciliation Act 1996 governs international arbitration and is based on UNCITRAL Model Law. To bring India on par with the international practices adopted in the field of arbitration law, the courts in India through various pronouncements have observed parity with the UNCITRAL Model Law.

Enforceability of Arbitration Agreement

As per the Act, the following are the statutory requirements for an arbitration agreement:

  • Arbitration Agreement, which may be in the form of an arbitral clause in a contract or in the form of a separate agreement, to be in writing i.e. contained in a document signed by the parties or through exchange of letters, telex, telegrams or other means of telecommunications, including communication through electronic means, providing a record of the agreement.
  • Intention of the parties to refer any or all disputes arising of the underlying contract to arbitration must be indicated in the arbitration agreement.

Validity of Arbitration Agreement

As a general principle, disputes relating to “rights in rem” (i.e. issues/disputes against public at large) are incapable of being referred to arbitration such as issues in relation to criminal offences involving serious allegations of fraud, matrimonial, guardianship disputes, Insolvency petitions, testamentary suits, labour and Industrial disputes etc.

Non-Arbitrable Disputes

  • Disputes affecting third party rights held non-arbitrable
  • Disputes relating to sovereign and public interest functions of the state held non-arbitrable
  • Disputes non-arbitrable under a specific statute

National Courts’ Approach

Party autonomy weighs heavily with the Courts and the guiding factor continues to be the intent of parties to resort to arbitration. The courts have repeatedly held that where there is an arbitration clause in an agreement, parties would have to be mandatorily referred to arbitration.

The courts in India have observed that the true spirit and sanctity of arbitration needs to be kept intact with minimalistic intervention by judicial authorities.

Severability of an Arbitration Agreement

The rule of separability is recognised and applicable to arbitration clauses. In cases where the main contract expires or gets terminated, the courts have held that the arbitration clause would still exist and can be resorted to for resolution of disputes between the parties, including the dispute related to validity of the agreement.

Limits on Selection of Arbitral Tribunal

Under Indian law, there are no limits on the parties’ autonomy to select arbitrators. Parties are free to nominate any person of their choice as an arbitrator. The only condition to the appointment of an arbitrator is that the arbitrator/s so appointed is independent and impartial and fulfil requirements of section 12. In cases where it is specified, the arbitrator/s should possess such qualifications as agreed to by the parties. The parties are free to agree on the number of arbitrators, although there must be an odd number, as prescribed under S. 10 of the Act.

Default Procedures for selection of Arbitral Tribunal

Indian law recognises party autonomy and keeps it in high regard. However, if the parties’ chosen method of appointing arbitrators fails, the Act under Section 11 provides for the appointment of arbitrators.

In the case of international commercial arbitrations, the power to appoint an arbitrator is vested with the Supreme Court of India, and in arbitrations other than international commercial arbitrations, the power to appoint an arbitrator is exercised by the High Court only. For the appointment of an arbitrator, a party has to file a petition under Section 11 seeking the appointment of an arbitrator.

Court Intervention in selection of the arbitrators

The intervention of court is seen only in cases where the court must determine whether the mandate of an arbitrator stands terminated on account of such arbitrator becoming de jure or de facto unable to perform his functions on the touchstone of independence or impartiality under Section 14.

The challenge by a party to selection/appointment by a party must be decided by the arbitral tribunal in the first place. However, the court intervenes only in such cases where an arbitrator fails to pass muster on account of one or the other grounds mentioned in the Seventh Schedule of the Act.

Challenge and Removal of Arbitrators in India

S.12, S.13 and S.14 of the Arbitration Act governs the grounds and procedure for challenge or removal of arbitrators.

Section 12: Following grounds for termination of arbitrator are provided:

  • Circumstances that give rise to justifiable doubts as to the arbitrators’ impartiality or independence under schedule V.
  • Lack of the qualifications agreed between the parties.
  • Anyone who falls under any of the categories specified in Schedule VII shall be ineligible to be appointed as an arbitrator.
  • Requirement of declaration under Section 12 read with Schedule V and VII of the Act about his independence and impartiality.

Grounds of Termination of Arbitrator

  • Inability to perform functions
  • Withdrawal from office
  • Parties agree for his/her termination

Section 13: Challenge procedure before the arbitral tribunal is discussed. A party must submit a written statement of the reasons for the challenge to the arbitral tribunal within 15 days from the date when the party learns the facts and circumstances on which the challenge is based. If the challenge is not successful, the arbitral tribunal continues with the arbitral proceedings and pronounces the award.

Section 14 – The court under Section 14 may entertain an application challenging the appointment of an arbitrator after its dismissal by the arbitral tribunal if the disqualification falls under the category of Schedule VII to the Act.

Criteria for Arbitrator

The Arbitration Act prescribes detailed litmus to ascertain the independence and impartiality of a potential arbitrator. Arbitrators must disclose the following details under Section 12 subject to subject to schedule V:

  • Personal and/or professional relationship with parties or their counsel.
  • Relationship with the dispute.
  • Interest in the dispute.

Circumstances for Court Intervention

As explained above, the power of the courts to intervene in arbitration matters is very limited, including the jurisdictional issue which is also decided by the arbitral tribunal under Section 16. It lays down that any objections to the jurisdiction of the tribunal must be raised before the filing of the Statement of Defence as stated under S.16(2). However, if the plea raised by a party under Section 16 is allowed by the arbitral tribunal, then the court can hear an appeal against such order under Section 37 of the Act. If a plea raised by a party under Section 16 is rejected, the arbitral tribunal continues with the arbitral proceedings and makes the arbitral award. If the arbitral tribunal rules that it does not have jurisdiction, the ruling can be challenged by way of appeal before a court under Section 37.

Breach of Arbitration Agreement

The court only looks for the existence of the arbitration agreement, and if the arbitration agreement does exist then the court, applying the principle of minimum court intervention, has to refer the parties for arbitration in the terms of Section 8 of the Act. The aggrieved party can make an application under S.8 of the Arbitration Act, seeking reference to arbitration in light of the arbitration agreement. If a party does not make its objection no later than filing its first statement then such a statement on the substance of the dispute before the court would be deemed as a waiver of the arbitration agreement.

Third Parties

Ordinarily, arbitration takes place between persons who have been parties to both the arbitration agreement and the substantive contact underlying it.

Therefore, essentially parties that are not a party to the arbitration agreement cannot be forced to resolve disputes through arbitration in terms of S.7 of the Arbitration Act, unless there is explicit consent, even if their presence has a bearing on the matter in dispute.

Group of Companies’ Doctrine: An arbitration agreement entered by a company within a group of corporate entities can in certain circumstances bind non-signatory affiliates. Under this doctrine, a non-signatory party could be subjected to arbitration. The Supreme Court in the case of Chloro Controls (I) Pvt. Ltd. v Severn Trent Water Purification Inc. and Ors. (2013) 1 SCC 641 has also taken the view that parties involved in a composite transaction executed through several agreements may be subject to the arbitration agreement under the main or the parent agreement.

Preliminary and Interim Relief

The arbitral tribunal in India is empowered to award interim relief during the arbitral proceedings. The power to grant interim relief has been expressly provided under Section 17 (1) of the act. The interim relief ordered by the arbitral tribunal are enforceable under Section 17 (2). A party may, seek the following kinds of interim relief:

  • The appointment of a guardian for a minor or person of unsound mind
  • Interim measure like preservation, interim custody or sale of any goods etc.
  • Securing the amount in dispute in the arbitration.
  • Detention, preservation or inspection of any property or thing
  • Interim injunction or the appointment of a receiver.
  • Other interim measures of which are just and convenient.

Interim measures by court

The courts in India are also empowered to grant interim relief. The power to grant interim relief has been expressly provided in Section 9 of the act which sets out interim measures by the court. The court under Section 9 can grant interim relief at three stages, i.e., before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36 of the Act.

In interim relief sought by a party before the commencement of arbitral proceedings, if the court orders protection before the commencement of the arbitral proceedings then the arbitral proceedings shall have to be commenced within a period of 90 days. If a party seeks interim relief from a court even when the arbitral tribunal is constituted, then the court shall not entertain an application seeking unless the court finds that circumstances exist which may not render the remedy provided under Section 17 efficacious. Apart from granting interim relief under Section 9 of the Act, the courts also possess the appellate jurisdiction under Section 37 of the Act

The courts in India can grant interim relief under Section 9 of the Act in aid of foreign-seated arbitrations. Section 2 (2) of the Act, confers right upon the parties to a foreign-seated arbitration to approach Indian courts for interim relief provided there is no agreement to the contrary.

The Arbitration & Conciliation Act, 1996 governing the arbitral proceedings in India does not provide for the use of emergency arbitrators. However, in case a party needs urgent interim relief when the arbitral tribunal is not constituted then in such an eventuality a party can approach the court in the meanwhile and seek urgent interim relief under Section 9 of the Act.

Security for Costs

Although the act does not allow for the courts or arbitral tribunal to order security for costs, the Act under Section 31A allows a discretionary power to the court or arbitral tribunal to determine the following:

Section 31A – Arbitration & Conciliation Act

  • Costs are payable by one party to another
  • Amount of costs
  • When costs are to be paid

Procedure

Governing Rules

In India, parties to arbitration, unless otherwise agreed between the parties, are governed by the rules prescribed under the Arbitration & Conciliation Act, 1996 in respect of pleadings, trial and completion of arbitration proceedings. The Act, however, gives full autonomy to the parties to mutually agree and adopt any other rules for conducting the arbitral proceedings.

The parties may also choose to adopt rules specified by arbitration institutions, to the extent they are not in contravention of the non-derogable rules prescribed under the Act.

Procedural Steps

  1. The Act prescribes that an arbitration can be initiated only by way of a notice invoking it where the arbitral proceeding is deemed to have commenced on the date when the notice invoking of a dispute is received.
  2. Parties are free to determine the number of arbitrators however; the arbitrators are to be in odd numbers. In case of his death, a substitute arbitrator will be appointed by following the similarly process.
  3. The arbitration proceeding, in the absence of an agreement to the contrary, shall resume from the stage as may be directed by the tribunal in its discretion.
  4. In a domestic arbitration the pleadings have to be completed within a maximum period of six months.
  5. The arbitral tribunal after completion of pleadings shall proceed to trial in the matter whereby parties shall be allowed to lead their respective witnesses who would be subject to cross-examination by the opposite side.
  6. On the conclusion of oral hearings, the arbitral tribunal is obliged to make an award on the disputes between the parties. In a domestic arbitration (where parties are Indian entities), it is obligatory for the arbitrator to make the award within a period of 12 months from the date of completion of pleadings for making the award. The time limits for completion of pleading and for making of an award are not mandatory in the case of an international commercial arbitration where any one or more parties are foreign entities, however, the endeavour is made to pronounce the award with 12 months of completion of pleadings.
  7. A party may apply for injunction or interim protection during the arbitral proceedings.

Confidentiality

In terms of Section 42A of the Act, it is mandatory for the parties to the arbitral proceedings, the arbitral tribunal, and the arbitration institution to keep the arbitral proceedings including pleadings, documents, etc, confidential.

The Award

Legal Requirements of an Arbitral Award

  • Must be in Writing and signed by each member of the tribunal
  • Contain reasons on which it is based
  • State the date and place of the award
  • A signed copy must be delivered to each party
  • Stamp duty must be paid on the award

An application seeking extension of time for the tribunal to pronounce the award can be made only before the court which is competent to appoint arbitration in each case.

In international commercial arbitrations (where one of the parties to the dispute is a foreign entity the Act provides that the tribunal should endeavour to deliver the award within the period of twelve (12) months from the date of completion of pleadings. However, it is not mandatory.

Types of Remedies

The Act does not provide any specific limits on the remedies that an arbitral tribunal may award. However, the tribunals are bound to publish the award only in respect of the subject matter of the case. The remedies that can be granted by arbitral tribunal are the same as can be allowed by the civil courts in India in contractual matters. However, an arbitral tribunal can pass an award only in respect of parties to the arbitration agreement and not against third parties. Damages can only be compensatory in nature and punitive damages for breach of contract are not permitted in India.

Recovering Interest and Legal Costs

Interest

The Act empowers the arbitral tribunal to award interest on whole or any part of the sum awarded, unless otherwise agreed by the parties. The Act also provides that an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest prevalent.

Legal Cost

Unless otherwise agreed between the parties under the agreement, the arbitral tribunal is empowered to award legal costs in favour of the successful party, for costs incurred during the pendency of the arbitration proceedings, including the arbitrator’s fee, administrative expenses and any other expenses.

Review of an Award

Grounds for Appeal

The Act, though, allows a party to challenge the arbitral award on very restricted grounds under Section 34 of the Act by making an application for setting aside of the same.

Challenge to Domestic Awards: The domestic award can only be challenged on the following grounds:

  • A party was under some incapacity; or
  • The arbitration agreement is invalid or
  • No proper notice of appointment of arbitrator was given
  • The award dealt with was beyond the scope of the reference to arbitration; or
  • The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement between the parties
  • The subject is not capable of being settled by arbitration; or
  • The award conflicts with the public policy of India
  • The award is vitiated by patent illegality appearing on the face of the award.

A party challenging the award under Section 34 of the Act is required to serve a prior notice of 30 days upon the opposite party. The Act prescribes that courts should endeavour to dispose of an application for setting aside the award expeditiously or within a period of one year from the date when the notice was served upon the opposite party

Limitation Period

Under the Act, an application must be made within three months from the receipt of the award from the arbitral tribunal, or in the case where a request has been made by any party under Section 33 of the Act, i.e., for correction, three months from the date on which that request had been disposed of by the arbitral tribunal.

Recourse against a Foreign Award in India

Part II of the Act deals with the provisions relating to enforcement of certain foreign awards. However, a foreign award cannot be executed in India if the same is falling within the grounds mentioned in Section 48 of the Act.

Excluding/Expanding the Scope of Appeal

Under the Act, the scope for challenging the arbitral award is very limited.

The Supreme Court of India has held that even an appeal would not be allowed to be filed beyond 120 days unless there is any exceptional circumstance preventing the parties to prefer an appeal within the said period of 120 days.

Standard of Judicial Review

While reviewing the challenge to the arbitral award, the courts in this jurisdiction are strictly prohibited from reviewing and re-examining the merits of a case or substituting their own views for those of the arbitral tribunal.

Further, the courts can either set aside or uphold the award but cannot modify an arbitral award. However, if an award in respect of some disputes is severable from the award passed in relation to other disputes, courts can set aside only a part of the award which is liable to be set aside.

Enforcement of an Arbitration Award in India

Procedure for Enforcement of Arbitration Awards in India

Domestic Arbitral Awards:

In India, Domestic Arbitral Awards can be executed/enforced like a decree by making an application under Section 36(1) of the Act. A party must positively pay the requisite stamp duty on the award which varies from state to state. An award that has been set aside by the court cannot be enforced/executed in India. In India, an arbitral award may be enforced/executed even if the proceedings for setting aside such award is pending before the court, unless the court grants a stay of the operation of such award by recording reasons in writing and subject to the conditions it may deem fit.  There is no sovereign immunity available to the state or state entity against enforcement of an arbitral award.

Foreign Awards:

Chapter I of the Act deals with provisions relating to the New York Convention Awards and Chapter II with the provisions relating to the Geneva Convention Awards. In practice, only awards relating to the New York Convention are sought to be enforced in India. In India, a foreign award can be enforced by filing an application under Section 47 of the Act before the competent court having jurisdiction. Requirements of section 47 are:

  • Application to state all relevant facts
  • Application to be submitted with original documents
  • Any other evidence necessary to be submitted

The court may refuse to enforce a foreign award in India, if it is satisfied that under section 48 of the act it is based on:

  • Incapacity of parties
  • Invalid agreement under the law
  • No proper notice of appointment of arbitrator was given
  • Foreign award was beyond scope of Indian Laws
  • Matter beyond scope of arbitration
  • Composition of tribunal was incompetent
  • Award was in conflict with public policy

Approach of the Courts

Indian courts generally adopt a pro-arbitration approach, even when the award is subjected to a challenge by one of the parties. Broadly speaking, unless the award is such as would shock the conscience of the court or be violative of public policy in India, courts would be reluctant to interfere.

The courts have held that the award of the arbitrator is generally treated as the last and final word.

The courts in India can refuse to enforce a foreign award on the grounds of the public policy of India, only if the courts find that the award was induced or affected by fraud or corruption, or if the award is in contravention of the fundamental policy of Indian law.

Miscellaneous

Class-Action or Group Arbitration

In a few cases like matters relating to payment of compensation by the government for land acquisition or where landowners are clubbed together Class Action or Group Arbitration is considered.

Third-Party Funding

Third-party funding by advocates is not permissible in India due to the Bar Council of India’s rules of professional conduct. However, there is no restriction on third parties who are non-lawyers to fund the litigation and get repaid after the outcome of the same.

Consolidation

The arbitral tribunal does not have any power to consolidate separate arbitral proceedings, even if the parties are the same. However, the Supreme Court of India in P.R. Shah v BHH Securities [(2012) 1 SCC 594], allowed the consolidation of arbitral proceedings if the contracts under question have arbitration agreements. In a situation where parties have multiple arbitrations and the same arbitrator is appointed, either separate awards can be passed in respect of each contract or a common award can be passed.

Third Parties

The Act does not specifically provide that a third party or the non-signatory can also be bound in an arbitration proceeding. The Supreme Court of India, in catena of judgments have concluded that even a non-signatory can be said to be bound by the arbitration agreement.

The Act allows a third party to apply for the referral of arbitration proceedings when it is ‘through’ or ‘under’ or on behalf of the party to the arbitration agreement.