So, you are a growing business that signs contracts with your partners, suppliers, vendors and customers every other day. You are sure that you are completely covered by having the essentials of a contract like standard and specific terms and conditions, representations and warranties, indemnity, entry clauses, exit clauses, payment plans, jurisdictional and sectoral requirements, liabilities, and other ancillary clauses needed and just for your respective businesses.
And then somewhere towards the end of the contract, you have a Dispute Resolution Clause and somewhere in that clause, it is written that
1. all the parties to the contract agree to Arbitration as a dispute resolution mechanism, with further clauses that
2. one of the parties appoints the sole arbitrator to settle the disputes OR parties to the contract can appoint their own arbitrators, who can in turn appoint a third arbitrator.
3. the seat of the arbitrator will be <name of any local jurisdiction or in the case of cross border contracts any international city, from where you may or may not operate from>
4. and the arbitral award will be final and binding on all the parties.
Now what does this mean for a growing business. Is this a clause which is favourable to your business or is it something that you should worry about? This article very briefly touches upon the key considerations that every business should keep in mind while choosing Arbitration as a dispute resolution mechanism.
The answer to this revolves around various factors. The business is never a straight line, and neither is the dispute resolution. Some disputes are resolved within a flash of time, with parties to the dispute sitting across the table and discussing their pain points, while some disputes would require a lot more time, energy and resources and even then, they may not get resolved to the satisfaction of the relevant parties. Arbitration is an alternate dispute resolution mechanism in which the parties without going to the courts for costly and time-consuming litigation, try resolving their disputes with the help of the neutral authority, known as an Arbitrator, who is authorized either by the parties to the dispute or by the courts and is supposedly has the competence and powers to arbitrate upon the relevant matters.
So, what does the dispute resolution clause in the contracts include:
Agreement to agree for Arbitration as dispute resolution mechanism: The parties to the contract unanimously agree for Arbitration as their preferred dispute resolution mechanism. The clause typically says that in an event of any dispute the parties will resort to the Arbitration and will try avoiding getting into litigation.
Appointment of an Arbitrator: It is agreed that the parties to the contract will be free to appoint the arbitrator who is neutral to the parties and is able to adjudicate the matter without any prejudice to any of the parties.
Challenging the appointment of an Arbitrator: There might be scenarios wherein the powerful party to the contract try to enforce their own preferred arbitrator as the sole arbitrator to settle the disputes. In Telecommunication Consultants India Ltd v. Shivaa Trading [Judgment dated April 9, 2024, in O.M.P. (COMM) 311 of 2022, this arrangement was challenged and the courts, including the apex court has made their stance clear that either the arbitrator is to be appointed by the mutual consent of the parties and in case of any dispute with respect to the appointment of a common arbitrator, each of the parties can appoint one arbitrator and the third arbitrator as the chief arbitrator. In case of no agreement being reached between the parties with respect to the appointment of arbitrators, the aggrieved party can reach out to the courts as per the provisions of Section 12 and Section 13 of the Arbitration and Conciliation Act, 1996 and challenge the appointment of the arbitrator. Section 12 of the A&C Act outlines the grounds for challenge and Section 13 outlines the challenge procedure.
Seat of an Arbitration: The seat of an arbitration is the Jurisdiction where the arbitration is supposed to take place. It is extremely important to understand the relevance of the seat of the arbitration from commercial, judicial and procedural standpoint, especially in cross border arbitration agreements. The Supreme Court in its decision given in the case of Bharat Aluminium Company Ltd v. Kaiser Aluminium Technical Service Inc (“Balco”) held that the choice of another country as the Seat of Arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of Arbitrations will apply to the proceedings. The seat of the arbitration is to be carefully thought through to avoid hefty cost or expenses for the arbitration and getting entangled in the procedural complexities of an unknown jurisdiction.
Arbitral Award: Arbitral award is the interim or final award announced by the arbitral tribunal or an arbitrator. It is final and binding on the parties, unless challenged in the court of competent jurisdiction under Section 34 of the Arbitration and Conciliation Act
Challenging and setting aside the Arbitral Award: An arbitral award may be challenged and an application for setting aside can be made by the aggrieved parties within 3 months of the award by the arbitration tribunal. The award can be set aside only on 5 grounds that are outlined in Section 34 of the Arbitration and Conciliation Act. They are:
1) A party was under some incapacity
2) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
3) the party making the set aside application was not given the proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
4) the 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 the submission to arbitration
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
5) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
Enforcement of Arbitral Award: The enforcement of the arbitral award is done in accordance with the provisions of the Section 36 of the A&C Act. A mere declaration of award does not trigger its enforcement. A separate application is to be made before the competent court for the enforcement of the arbitral award.
International Commercial Arbitration: International Commercial Arbitrations are governed by UNCITRAL Model Law on International Commercial Arbitration. In case of international commercial arbitration, the competent court shall be the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, and in other cases, a High Court having jurisdiction to hear appeals from decrees of courts subordinate to that High Court. In case of International Commercial Arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of The Arbitration and Conciliation Act.
While Alternate Dispute Resolution aims for an easy, time saving and cost-effective way to resolve disputes, the businesses ought to be extremely careful while drafting the arbitration agreements or having that little arbitration clause in their contracts. A well thought of and a well negotiated arbitration clause or agreement may serve the purpose for which the ADR is adopted. However, any leaks through the cracks can cause the business dearly in terms of cost and time of dispute resolution.
Disclaimer: This article outlines very basic provisions and principles of Arbitration, along with some key considerations while opting for Arbitration as a dispute resolution mechanism. This may not be treated as a legal advice. The provisions relating to International Commercial Arbitration have not been touched upon in detail and just the basic information on International Commercial Arbitration is provided here. A comprehensive article on International Commercial Arbitration will be published in subsequent editions of the newsletter for the benefit of the readers.
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