The process of adoption of domestic arbitrations as an alternative dispute resolution mechanism has not gathered a significant pace even with multiple amendments to the Arbitration and Conciliation Act, 1996 ("the Act").
In India, the culture is still not "dispute resolution by way of arbitration". The Arbitrators (generally retired Judges) and the Advocates assisting arbitrators too, usually take up multiple matters in courts and multiple arbitrations, whether on the same day or otherwise. At times it has been observed that the timelines set in these arbitrations by the Act and by the presiding arbitral tribunal are taken lightly, particularly by the parties and at times even by the arbitrators also. In certain arbitration proceedings, it has been observed that there is no real consequence to non-compliance of timelines. The scenario is much different in an international arbitration, whether ad-hoc or institutional. In this article, we put forth a question whether a domestic arbitration achieves the particular legislative purpose of being a tool for speedy and pocket friendly (alternative) dispute resolution mechanism or, maybe not? Are the commercial civil courts a better option being more efficient and cost effective than domestic arbitration in India?
Need for arbitration
Under the Code of Civil Procedure, 1908, the civil courts usually adjudicate every dispute between the parties (usually 2 or more). With time, the number of disputes coming before these courts have increased, the litigation has become more diverse and complex in nature. Under the Constitution of India, the Parliament can pass specialized statutes to create specialized tribunals/ courts and agencies to be set up for effective dispute resolution between the parties [For example:- NCLT (National Company Law Tribunal), CAT (Central Administrative Tribunal), NGT (National Green Tribunal) etc.]. These tribunals are set up to adjudicate a certain set of disputes which are arising out from specific statutes.
Scenario prior to 2015 and 2019 amendments to the Act
Arbitration, by way of an alternative tool to dispute resolution, was seen as a solution to resolve disputes outside of the traditional courts. Commercially also, arbitration is considered as an alternate mechanism to resolve contractual disputes. At the time of introduction of arbitration in the system, it was thought that arbitration would not only resolve the high pendency but would be an alternate, efficacious, speedy and a cost effective dispute mechanism system as compared to traditional courts.
But in contrast to the above stated basic understanding, the Arbitration Act, 1940 turned out to be a massive failure, since it was neither cost-effective nor expeditious. This statute was overhauled and the Arbitration and Conciliation Act, 1996 was brought in, which was based on the internationally accepted UNCITRAL model. Yet, until the amendments in the year 20151 and later in 20192 were effected in the Arbitration and Conciliation Act, the process of conducting and completing arbitration proceedings under this statute was a time-consuming process. This was majorly attributable to the fact that the previous Act did not prescribe a time limit to conclude the arbitration. The parties had to approach courts for various issues including urgent interim orders prior to appointment of arbitrators, for appointment and replacement of an arbitrator and for enforcement of the final orders/award of the arbitrator. Not only this, in certain cases even the enforcement of an interim order passed by the Arbitral Tribunal was practically also difficult to enforce.
Apart from the time factor, Arbitration was a costly affair with Arbitral Tribunals charging almost up to 10%-30% of the value of the claimant's claim as Arbitral fee.
The 2015 & 2019 Amendments to the Act
However, with the recent two amendments dated 23rd October, 2015 (the 2015 amendment) and 9th August, 2019 (the 2019 amendment), the Legislature sought to cap the arbitral fee on the basis of a fixed percentage of slab3 . With regard to making it a time bound exercise, the Legislature has attempted to make the entire arbitral process simpler and faster by effectively bringing about an outer time limit of one year, (and an extension provision for up to six months further) to conclude the arbitration4 . With the new Amendment Acts in force, the Arbitrators are now given teeth to their powers and also the freedom to enforce the interim orders of arbitral tribunals.
For instance, the Arbitration Tribunal is well within its power and mandate for imposition of monetary costs on a party to the proceeding after looking at the conduct of the litigant and other factors, if such tribunal thinks fit5 .
Still Far from a Perfect Act
However, what the amendments still fail to effectively address is that the process of appointment of arbitrators6 , replacement of an arbitrator7 , extension of time period for conducting the arbitration proceedings8 , determination of multiple appeals from certain orders of the arbitrators and enforcement of the final order is still vested with civil courts. Even though it is a time bound statute, still it is seen that courts take their time in adjudication.
Further, while the Legislature sought to make things simple with the arbitration mechanism in practice, the arbitral tribunals tend to complicate certain issues which are not envisaged by the Act itself. It is observed that some of the Ad Hoc or Institutional Arbitral Tribunals reluctantly adhere to the schedule pertaining to the fee and tend to provide an absurd interpretation (to the IV Schedule). At times this is done with an intention to charge the maximum arbitral fee from the parties. However, it is usually the Schedule IV, which was fundamental to the amendment, was and is not adhered to at all and conveniently bypassed, especially by the erstwhile hon'ble judges of the court of record.
In certain instances, it has been a matter of concern for both parties as well as the courts that some of the orders passed by the arbitral tribunal are contrary to court judgments related to a restriction in charging arbitral fees under the Schedule IV of the Act. This happens even though several arbitrators are cognizant of the prevailing judgments9 . The arbitrators continue to charge arbitral fees as per their own whims and fancies, which makes it a costly affair for the litigating parties. Any such order relating to the Fee Schedule passed by the arbitral tribunal cannot be challenged by contesting parties until the final adjudication of the arbitration. This challenge can be, at the most be made via a petition under Section 34 of the Arbitration and Conciliation Act, 1996 to the appellate court. By that time, the litigant would have been compelled to pay the fee so arbitrarily determined by the arbitrator.
The unfortunate situation is that the affected party has to not only bear the fee of the arbitral tribunal, but also the legal fee to be paid to the Counsel/ Advocate/ Law firm representing such party plus the legal expenses towards arrangement of the arbitral venue charges and the eventual stamping fee of the arbitral award which is 0.1% of the value of the Arbitral Award so rendered. These costs build-up to unforeseen costs which parties to arbitration do not account for before committing to the process of such arbitration proceedings. It can therefore, be noted that arbitration is still some way from being a pocket friendly and a cost effective Alternative Dispute Resolution mechanism.
Further, arbitrators are required to mandatorily disclose their interest, whether financial or otherwise, in the subject matter of the dispute. This also at times, is not adhered to, either in letter or in spirit by arbitrators, despite specific requests. To compound problems, arbitrations seldom conclude within a time period of one year, as set out in the statute. The practitioners who are not arbitration centric, are also particularly reluctant to trigger the "fast track arbitration" process.
The only redeeming factor however is that if an appeal is preferred against the award, the courts do not get into a full-blown fact-finding enquiry and have a particularly restricted approach. However, the problem still is that the restricted approach does not find resonance in every court of the country. Additionally, years are spent on having the appeals adjudicated.
On the same day as the 2015 Amendment was brought into effect i.e. 23.10.2015, the Legislature also promulgated the Commercial Courts Act, 2015, with the endeavor to set up commercial courts to adjudicate commercial disputes expeditiously. What in fact constitutes to be a commercial dispute is defined in the statute itself, for eg, A dispute relating to trading of goods etc. is a commercial dispute.
Commercial Disputes Handled in Courts vis-a-vis Arbitration
In the newly introduced Commercial Courts Act, a prelitigation mediation is mandatory, which implies that the parties have to essentially sit across the table to sort out their issues and negotiate with the help of a third person in a non-binding process. The timeline for this pre-litigation mediation is 90 days. It has been found that some disputes are actually resolved through this process. In cases where the prescribed prelitigation mediation fails, the parties can initiate a claim essentially praying for the interim urgent relief along with the main relief sought in a common claim petition. However, the same is not possible under the mechanism provided under the Arbitration and Conciliation Act, if a tribunal has not been constituted.
Additionally, while the arbitration fee is about 5-10% (at a minimum) of the value of the claim of the claimant, the court fee payable by the aggrieved party in case of approaching the court in places like Delhi is roughly 1% of the value of the claim. Some places like Ahmedabad and Bombay have a capped court fee of a meager Rs. 75,000 and Rs. 3,00,000 respectively, even if the adjudication of the dispute involved several crores or even several hundred crores. Clearly, approaching the court in such cases is a particularly cheaper approach.
Further, after the respective parties to the dispute file their pleadings including the claims and defence, a case for summary judgment could be made out and final orders could be passed if the court feels that the defence raised is frivolous. If such court is of the opinion that an order of summary judgment cannot be made and the defence is somewhat tenable, parties could be directed to proceed to evidence, subject to the deposit of the monies or a security deposited with the court. This is particularly comforting to the person initiating the case as the money so deposited could be withdrawn if eventually the litigant succeeds.
The courts have also started to convene case management hearings where a fixed, disciplined, and well-followed time schedule, subject to heavy penalties, is drawn up in every commercial case for every possible stage. Thus, if this is simply followed, there would be expeditious adjudication and disposal of cases. Besides this, a litigant does not have to approach two different forums for the purposes of summoning (calling) witnesses for evidentiary depositions, unlike in arbitrations.
Further, unlike the process of arbitration, neither does the litigant have to pay for the costs of venue nor does he have to pay an additional stamp duty of 0.1% of the value of the final order.
In the authors' opinion, therefore, if the commercial courts convene, conclude and adjudicate in a streamlined manner, approaching commercial courts would have greater benefits and myriad advantages rather than going through the tedious process of arbitration. This would also be a way for the courts to revamp and upgrade themselves to show that not all cases are pending for a period of 10-15 years and courts are performing at par with the leading international jurisdictions such as the United Kingdom, Singapore and the United States of America.
1. Arbitration and Conciliation (Amendment) Act, 2015 dated 31.12.2015 w.e.f. 23rd October, 2015
2. Arbitration and Conciliation (Amendment) Act,2019 dated 09.08.2019;
3. Section 11(14) read with the Schedule IV of the Arbitration and Conciliation Act, 1996;
4. Section 29A of the Arbitration and Conciliation Act, 1996;
5. Section 31A of the Arbitration and Conciliation Act, 1996;
6. Section 11(5) and Section 11(6) of the Arbitration and Conciliation Act, 1996;
7. Section 14 and 15 of the Arbitration and Conciliation Act, 1996 and HRD Corporation v. GAIL India Ltd.; [2018 (12) SCC 471]
8. Section 29A(3) and Section 29 A(4) of the Arbitration and Conciliation Act, 1996;
9. DSIIDC v. Bawana Infra Development Pvt. Ltd.; 2018 (4) ArbLR 168 (Delhi)
Originally published on May 2020. Vol. XIII, Issue V
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.