Arbitration

The subject matter for today is the "Need, importance and relevance of arbitration".  The art and science of arbitration is a living and changing thing.  The essence of arbitration is the settlement of disputes by a tribunal chosen by the parties themselves, rather than by the Courts constituted by the State.  The popularity of arbitration as a mode of settling disputes is due to the fact that "the arbitration is regarded as speedier, more informal and cheaper than conventional judicial procedure and provides a forum more convenient to the parties who can choose the time and place for conducting arbitration and the procedure.  Further, where the dispute concerns a technical matter, the parties can select an arbitrator who possesses appropriate special qualifications or skills in the trade".

As a concept and as a process, arbitration is well embedded in commercial practices and social life.  Arbitration is the means by which parties to a dispute get the same settled through the intervention of a third person, but without having recourse to a court of law.  When two persons agree to have a dispute settled through arbitration, what they really mean is that the actual  resolution of the dispute will rest with a third person called the arbitrator.  The essence of arbitration, therefore, is that it is the arbitrator who decides the case and not the ordinary civil courts established by the state.  The law of arbitration, is based upon the principle of referring the disputes to a domestic tribunal substituted in the place of a regular Court.  Thus arbitration can be defined as a reference to the decision of one or more persons called arbitrators of a particular matter in difference or dispute between the parties.  It can be defined as the determination of a matter in dispute by the award of one or more persons called arbitrators. Halsbury defines "arbitration" as the reference of dispute or difference between not less than than two parties for determination after hearing both sides in a judicial manner by a person or persons other than a  Court.  An equivalent in the old Indian system for arbitration is Panchayat.  In India arbitration has a very ancient heritage.  Indian civilisation expressly encouraged the settlement of differences by Tribunals chosen by the parties themselves.  In the Western world also arbitration has a very long history.  The Greeks attached particular importance to arbitration.

 Submission of disputes to the decision of private persons was recognised also under the Roman law known by the name of compromysm (compromise), arbitration was a mode of settling controversies much favoured in the civil law of  the continent.  The attitude of English law towards arbitration has been fluctuating from stiff opposition to moderate welcome.  The common law courts looked jealously at agreements to submit disputes to extra-judicial determination.

 It was the exigencies of business that brought about an increasing demand for commercial arbitration in England.  The realities of business in due course brought about a change in judicial  attitude. In India the history of statute relating to arbitration begins with the regulations under the East India Company made for the Presidency of Bengal, Madras and Bombay.  These regulations were later expanded in the Civil Procedure Act of 1859.  In 1940, an Arbitration Act was passed for the whole of British India.  On 26.01.1950 the Act was extended to the whole of India except the Part B States.  That Act was repealed by the Arbitration and Conciliation Ordinance 1996 (Act 8 of 1996) which came into force on 25.01.1996 and on its expiry Arbitration and Conciliation Ordinance (Act 11) of 1996 and thereafter during the Parliament  session in 1996 came to be enacted as the Arbitration and Conciliation Act, 1996.

What is meant by arbitration is not defined in the Arbitration Act, but  an arbitration agreement is defined as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between the parties.  Ronald Bernstein defines an arbitration as under

"Where two or more persons agree that a  dispute or a potential dispute between them shall be decided in a legally binding way by one or more impartial persons in a judicial manner, that is, upon evidence put before him or them, the agreement is called an arbitration agreement or a submission to

arbitration".  Sec.7(5) of the Act expressly provides that reference to a document containing an arbitration clause would constitute an arbitration agreement.

When after a dispute has arisen it is put before such person for decision the procedure is called an arbitration and decision when made is called an award.  Sometimes the submission instead of being voluntary is imposed by statute. Such arbitrations are called statutory arbitrations.  There are more than 25 central Acts providing for statutory arbitration in India.  For example, under the Co-operative Societies Act and under the Telegraph Act etc arbitration is provided for statutorily.  The provisions of these statutes to the extent inconsistent with the provisions of the Arbitration Act will prevail over the provisions of the Arbitration Act.

Arbitration offers definite advantages that litigation from its very nature can never provide.  Courts have always adopted a conservative approach to problems.  The Courts of law are put into a straight jacket as it has to follow fixed procedure and fixed rules of evidence.  Arbitration, on the other hand, is more informal.  The Evidence Act is not applicable to arbitration.  The Civil Procedure Code has no application.  The arbitrator need only proceed in a manner conforming to justice, equity and good conscience.  He is not henched in by any formulated rules.  One of the major advantages of arbitration is that an expert arbitral tribunal can be selected considering the field of dispute, so much so, the entire procedure can be conducted without the intervention of expert lawyers, with major gains in speed and economy.  Thus many disputes as to quality in commodity trades, many disputes arising out of construction contract etc. can be settled through arbitration in a speedy manner at lesser cost and more quickly than through courts.

Arbitrators and judges are similar in the business of dispensing justice - the judge in the public sector and the arbitrator in the private sector.  The public legal system of any country represents a compromise between conflicting demands for quality, speed and cheapness of the decision - making process.  Of these, quality of decision making is usually given the highest priority.  Speed of the

decision and cheapness have suffered considerably.  Litigants had to que up for the services of the Court and to accept the delay, the inconvenience and often the loss consequent on the delay.

However, it must be said that the result of any arbitration depends upon the personality of the arbitrator.  The arbitrator should always bear in mind the range of procedures open to him so as to be able to suggest to the parties the course which will save costs without reducing to an unacceptable extent the quality of the decision making process.  To summarise, properly conducted arbitrations give acceptable results with speed and thoroughness at relatively lesser costs.  As there is no right of appeal in Courts, the decision gains finality saving further time and costs.

However, in practice, one sometimes comes across disputes where the issue is how much is to be awarded or the assessment of damages for breach of contract.  Here the proceedings generally tend to be bedevilled by wild overestimates for the claimant or underestimate for the respondents.  The amount of claim is magnified and costs over-stated.  Proceedings which should be an amicable attempt to resolve a genuine difference of opinion are turned into an adversarial and cynical game in which it is thought that victory will go to the most convincing liar or at least a long drawn out battle in which the initial wild exaggerations have first to be demolished before the real dispute is explored.  What is termed in legal parlance as the ‘forest technique' of pleading is used by claimants.  The farrago of obscurities in the contract is highlighted - all instructions and drawings are without exception alleged to have caused disturbance and additional loss or to have been issued late in an attempt to avoid the exposure to the critical examination involved in a more selective analysis of the claim.

Such disputes are fertile soil for the lawyers.  If  the rival claims are small and each side believes that the difference results from a genuine difference of opinion the parties may be normally content to appear in person or by an employee before the arbitrator.  They may even square up the disputes behind the back of the arbitrator.  The resulting procedure shows arbitration at its most useful.  But if

the difference is great and one or both the parties think that the other is knowingly exaggerating, the tendency is to appoint advocate partly because the amount in issue is such as to justify the additional

expense involved or partly because of  the fear that unless every possible point in defence is taken the exaggeration of  the opponent  may be accepted by the arbitrator also partly because the task of exposing by cross examination the exaggerations of the claimant and his witnesses is the expert task of a lawyer.

The relevance of arbitration, its importance and its needs can never be over-emphasised.  The rapid and phenomenal growth of commerce and industry and the complex and varied problems thrown out by them can find solution only through arbitration.  Conventional courts are ill equipped to meet the needs.

ENFORCEMENT OF ARBITRAL AWARDS

An arbitration comes into being as a result of an enforceable agreement.  An agreement enforceable under law is called a contract.  To be enforceable the agreement must be made by free consent of the parties.  Parties are said to consent when they agree upon the same thing in the same sense.  A consent can be said to be free when it is not induced by coercion, undue influence, fraud, mis-representation or mistake as to matter of fact essential to the agreement.  The onus of proving that free consent was not given is upon the party asserting it.  An arbitration agreement is void if a party is a minor or is not of sound mind or is disqualified  from contracting by any law to which he is subject.  When both the parties to the agreement are under a mutual mistake as to a matter of fact essential to the agreement, the agreement is void.  An arbitration agreement of which the object or consideration is unlawful is void.  The consideration or object is unlawful if it is forbidden by law or is of such a nature that if permitted it would defeat the provisions of any law or is fraudulent or involves or implies injury to the person or property of another or the courts regard it as immoral or opposed to public policy.

The Arbitration Act provides that an arbitration agreement should be in writing.  Hence, no oral arbitration is possible in India.  It is not necessary to constitute the agreement in any single document.  It can spread over so many documents.  A contract may by express language incorporate the provisions of another contract containing an arbitration clause.  If so, the arbitration clause will be deemed to have been incorporated in the contract.

If a contract is illegal and void an arbitration clause which is one of its terms is also rendered illegal.  The taint of illegality attaches to every part of the contract.  Thus an arbitration clause for stifling prosecution or involving criminal proceedings is of no effect.

It was mentioned earlier that an arbitration agreement is an agreement to submit present and/or future disputes to arbitration.  The existence of a dispute is one of the essential elements for invoking an arbitration.  A dispute implies assertion of a right by one party and the refutation thereof by another.  The refutation may be express or implied and may be by words or conduct.  Failure to pay under a claim or right is a dispute.  Failure to perform the contract in time may lead to an inference of refutation and denial of  the right by the other  party.  Such conduct and such silence may be more eloquent than words and  will show that the party is disputing liability.  There can be no dispute unless there is a denial of a claim.  There is a dispute whenever there is a matter capable of being agitated in a civil court.  It is not exactly necessary that the claim should be valid or sustainable in a court of law.

The decision of an arbitrator is called an award.  Our law does not impose any legal requirement as to the form of a valid award.  The only requirement is that it should be in writing, signed by the arbitrator.  But, if the agreement contains requirements as to the form of the award then those requirements should be met.  For example, if the agreement says that the arbitrator need not give a speaking award, the award need not contain reasons to support his conclusions.  Otherwise in all cases an arbitrator is obliged to give a speaking award.  As a matter of fact there are certain basic

requirements for an award.  The award should identify the parties by name.  The date of the award should be shown at some place of the award.  If there are more than one arbitrator all should sign the award.  But if there is omission of any signature the reasons should be stated.  There is no requirement of witnesses attesting the award.  The award should be certain, i.e, one should be able to clearly understand the arbitrator's decision by reading the award.  The Arbitration Act defines an award as including an interim award.  This is a formal definition.  In essence an award is the judgement of the arbitrator on the merits of the case.  The Arbitration Act confers on the arbitrators the right to conduct the proceedings in the manner they consider appropriate.  It has been held that parties by consent can also agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.  Arbitrators are not at liberty to make an award without giving reasons unless it  is so stipulated in the agreement.  The powers of   the Court to interfere with the awards are now very limited.  Section 34  of the Arbitration Act provides for an application to the Court for setting aside an award under the following circumstances:- 

 a)  Incapacity of party

 b)  Invalidity of the agreement

 c)  Want of proper notice

 d)  Award deals with disputes not referred to arbitration

 e)  Arbitral Tribunal was defective in composition

 f)   Subject matter not capable of arbitration

 g)  Award is in conflict with public policy.

An award can be enforced as such because it  is now equated with a decree of the Court.  A party who wishes to enforce the award can file it before the Court and it will be treated as a decree unless set aside in an application under section 34.  An application for setting aside shall not be made after three months of  the receipt of the award or after three months of an application under section 33 to the arbitration for any correction of the award.  An arbitrator has got the power to file the award and

the connected papers in Court ‘suo-motu' at any time.  There is no period of limitation fixed for it.  The arbitrator has to give a signed copy of the award to the parties.  After receiving the award the concerned party has to apply to the Court to execute the award and obtain reliefs.  The court will issue notice to the judgement debtor.  After receipt of notice if the judgement debtor does not appear before Court, exparte execution may be ordered granting the relief prayed for in the Petition.  If the

judgement debtor appears and files objection, the objection will be heard and disposed of and only thereafter necessary relief will be granted by the Court.  Under Order XXI of the Code of Civil Procedure a judgement debtor can be proceeded against either in person or against his property.  Personal execution is by arresting the judgement debtor.  A judgement debtor can be imprisoned for a period of three months.  The expenses for this have to be met by the decree holder.  Execution against property is by attaching and selling through Court the saleable interest of the judgement debtor in the property.  If a judgement debtor has no assets, he is safe in spite of a decree against him as he cannot even be imprisoned for the decree debt.

The procedure for enforcing foreign awards is as per Part II of the present Act and incorporates the Geneva Convention of 1927 and the New York Convention of 1958.  Pursuant to this any person interested in enforcing a foreign award shall apply to a Court having jurisdiction over the subject matter of the award.

The parties seeking to enforce a foreign award must produce:

 a)  The original award or a duly authenticated copy thereof.

 b)  Evidence proving that the award  has become final and

 c)  Such evidence as is necessary to prove that the award  is a foreign
      award.

Even though arbitration is a more efficacious, equitable and quick remedy, it is often misused to make unlawful gains.  One of our judges remarked:

"The malady of the racket of arbitration is rampant in our country.  Arbitration of late is being considered as a sure way to overnight riches and affluence.  It has become a big business.  A judge can no longer be impervious to the winds that blow outside leaving the seclusion of his ivory tower, he  should come to the streets to feel the total push and pressure of the cosmos.  In a social welfare

state the need is social justice.  It is true that today in every department the social value of the rule of law becomes a test of growing power and importance."

Instances of arbitrators awarding huge amounts by way of non-speaking awards was prevalent in many departments, such as PWD, Irrigation and Electricity Boards and the Kerala Government was forced to take away the Arbitration clause forcing the contractors to seek remedy through court.  If a suit is to be filed, Court fee has to be paid and the case has to be established through incontrovertible evidence.  If one court goes wrong there is an appellate court.  Details and reasons are to be given by the Court for its findings.  Because of these only genuine claims will be brought by the parties in a court of law.  Avaricious contractors and dishonest arbitrators have given a bad name for the process of arbitration.  Hence an honest man dreads arbitration even more than the dreaded law suits.

The general rule in matters of arbitration awards is that where parties have agreed upon an arbitration thereby displacing a Court of law, they must accept the award for good or worse.  In such cases, the discretion of the Court will not be readily exercised  and will be strictly confined to the specific grounds set out under section 34.

The arbitrator is the final judge on fact.  Adequacy of evidence is not to be examined.  The arbitrator is not bound by technical rules of evidence.  The Court cannot look into the reasonableness of the arbitrator's reasons.  In deciding a controversy, the arbitrator works in an environment which is different from that of the judge.  The ropes and pulleys that he uses in the arbitral process are different from the foot-rules and set-squares that the judge uses in the judicial process.