August 8, 2024

Your Guide to Effective Dispute Resolution: Choosing the Perfect Arbitration Seat and Keep the Courtroom Out of the Fight

“Differences we shall always have but we must settle them all, whether religious or other, by arbitration.” - Mahatma Gandhi

Introduction

Arbitration today is the default dispute resolution mechanism for not only commercial dispute resolution, but also for private affairs governed by contracts in India. The Arbitration & Conciliation Act of 1996 (the “Act”) was modelled on the UNCITRAL (United Nations Commission on International Trade Law) Model Law on International Commercial Arbitration. It consolidated the law of arbitration law in India, repealing all three earlier statutes. The Courts in India were burdened with files pending adjudication for over 20 years. The Act aimed to modernize the arbitration law in India, making it more responsive to contemporary needs. It also sought to restrict the intervention of courts in arbitration matters, whilst envisaging a cooperation between the judicial system and the arbitration process.

Almost three decades since the introduction of the Act and several amendments later, the criticisms reached their zenith, and India’s reputation, its nadir. Indian courts were reputed as being particularly interventionist. They were exercising jurisdiction even over arbitration proceedings, defeating the concept of “party autonomy”.

This blatant delays in the Indian judicial system resulted in the country being shunned as a seat of arbitration at all costs. A country seeking to be a star on the global stage, was avoided at all costs. A NITI Ayog Report published in 2016 found that it took about 5 years even for disposal of an arbitration in the construction sector (proving the domestic arbitration was beginning to suffer from similar delays). Additionally, it took an extra 2 ½ years in court for any challenge to the decision.

This also highlights a crucial decision for anyone drafting legal agreements: choosing the right location for arbitration. It can make or break the efficiency and outcome of the entire process.

Seat and Venture of Arbitration

The ‘venue of arbitration’ refers to the appropriate or convenient geographic location where the tribunal conducts its hearings. In contrast, the ‘seat of arbitration’ serves as the legal domicile of the arbitration and generally determines the procedural law applicable to the arbitration proceedings. Additionally, the seat establishes which court possesses supervisory jurisdiction over the arbitration.

The Seat of Arbitration determines the applicable law governing the Arbitration including the procedural aspects. Put in simple words, the Seat of Arbitration governs the Arbitration proceedings once they commence.

For example, if the Seat of Arbitration is Bengaluru, then the Courts having the original jurisdiction in Bengaluru will have the jurisdiction to govern the aspects of appointment of Arbitrator, granting interim measures, and others

Significance

Under the law laid down by the Apex Court in Bharat Aluminium Co v. Kaiser Aluminium Technical Services, Parties’ choice of seat of arbitration has significant legal consequences: it endows exclusive jurisdiction on the local court not only to supervise the arbitration proceedings but also to decide the challenge to the arbitral award resulting from it. Such choice also operates as choice of law of the seat as the law governing the arbitration. The choice of seat therefore assumes great importance in the conduct of arbitration and in the proceedings that follow it.

Each state in India has different forum notified as having “original jurisdiction” over arbitral proceedings. For example, in Bengaluru, the City Civil Courts have original jurisdiction over Arbitral Proceedings. However, in Delhi and Mumbai, the Single Bench of the respective High Courts have original jurisdiction over the Arbitral Proceedings. 

Consequently, when drafting an Arbitration clause in a new contract, it is important to consider myriad factors when deciding upon the seat, particularly, how the local arbitration law of the seat operates and whether the local courts are arbitration-friendly. Most drafters see the choice of seat as more a matter of convenience than of legal significance.

Judicial Intervention in Arbitration

Even though Arbitration was introduced as a quicker and efficient method of dispute resolution, the repeated judicial intervention by Courts governing the seat curbed the legislative intent of the Act. Even though the Parties to the arbitration agreement agree to follow the Award, the court may intervene and set the award aside, albeit under certain limited grounds. However, courts are not limited to acting solely after an award has been made. Such intervention may also occur during the proceedings in appropriate instances.

The intention of legislature regarding limited scope of judicial intervention in arbitral proceeding was made absolutely clear in section 5 of the Act, 1996 and same is extracted as herein below:

“5. Extent of judicial intervention.— Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

The term “no judicial authority” is very wide. Moreover, words “shall intervene” goes a long extent to ensure that there is no judicial discretion involved. Judicial intervention is allowed to some extent, but it should enhance and support the arbitration process. Role played by Judiciary is more of administrative framework and help rather than its conventional judicial one. The role played is administrative rather than that of adjudicator in an arbitral proceedings. While doing so, it was ensured that arbitration is not completely aloof from judicial intervention. Same is well explained by words like “except where so provided in this part”.

The doctrine of non-intervention is founded on the idea that the judiciary would not have any justification to intervene in an arbitration proceeding where the parties to any commercial contract have freely chosen to resolve their issues through mediation and negotiation. However, despite these legislative safeguards, the reality often deviates from the ideal. Prolonged delays undermine the very purpose of arbitration.

Delays During and After the Arbitral Proceedings

Years go by and an arbitral award remains in limbo despite being finalized. Challenges to overturn the award create significant obstacles to its enforcement, hindering the party entitled to it from pursuing their rights. Only after considerable delay does the court finally rule, potentially advancing towards enforcement or, in some instances, allowing appeals under Section 37 for further recourse. However, these appeals prolong the process, turning the arbitration into an interminable affair.

The Arbitration Act itself adds to the prolonged nature of setting aside applications. Section 34(6) specifically mandates that a Section 34 application should be resolved promptly within one year from notifying the other party. However, this requirement is often seen more as a guideline than a strict rule because there are no consequences specified for failing to comply with Section 34(6). This highlights a contradiction within the statute itself, which was originally meant to promote swift dispute resolution.

Due to delays in court proceedings, instances where courts have not adhered to time constraints in the setting aside stage are evident. For example, in the case of Sepco Electric Power Construction Corporation v. Power Mech Projects Ltd., an Arbitral Award was issued on 17th October 2017, and an application to set it aside was filed before the Delhi High Court on 3rd December 2017. Subsequent applications under Section 36(2) and Section 9 of the Arbitration Act were also made. However, even after reaching the Supreme Court, it was noted that the setting aside application had been pending before the Delhi High Court for the past 5 years. In its judgment on 19th September 2022, the Supreme Court not only ruled on the subsequent applications but also instructed the Delhi High Court to ideally dispose of the Section 34 application within 3 months of the judgment’s communication. Despite this directive for expeditious disposal, the Delhi High Court has yet to resolve the application. This case illustrates how delays at the setting aside stage contribute to prolonged legal processes. It has been a year since the Supreme Court’s judgment and nearly 6 years since the issuance of the final award, with no certainty that the case will not face further appeals. Regrettably, this is not an isolated incident.

In the case of M/s Alpine Housing Development Corporation Pvt. Ltd. v. Ashok S. Dhariwal and Others, an arbitral award issued on 12th March 1998 remains unresolved at the stage of being challenged under Section 34 of the Arbitration and Conciliation Act, 1996 before the Additional City Civil and Sessions Judge in Bangalore. Despite a significant Supreme Court ruling on 19th January 2023 on a crucial matter of citing additional evidence in an interim application filed with the Section 34 application and emphasizing the prompt handling of related interim applications, the Section 34 application has kept the arbitration process ongoing since it was filed on 16th November 1998. 

It is noted that the shortest delay observed spans approximately 4 years, while the longest delay extends up to 24 years. Although arbitral awards are issued promptly, the availability of legal avenues to challenge these awards in courts presents a significant challenge. Given the substantial caseloads already burdening the courts, incorporating arbitration cases further exacerbates this issue. Consequently, these cases become mired in appeals and court hearings, resulting in the passage of decades, as evidenced in the aforementioned data.

Based on the paramount evidence used to substantiate the unnecessary longevity of Arbitration, it is not incorrect to suggest that the adage “Once a litigator, always a litigator” gets exemplified.

Despite a multitude of judgments and amendments aimed at curtailing parties from re-examining the award in Section 34 proceedings, delays persist. Presently, courts are inundated with numerous cases. This phenomenon threatens to erode the fundamental essence of arbitration itself.

Way Forward

To overhaul arbitration legislation and promote institutional arbitration, the Government established a High-Level Committee chaired by Justice B. N. Srikrishna in 2017. The committee’s report recommended extensive measures to improve arbitral institutions and position India as a preferred arbitration seat.

For example, the Mumbai Centre for International Arbitration (MCIA) was established in 2015 with support from the Maharashtra Government, which mandated institutional arbitration for government contracts above INR 50 million and nominated the MCIA as the preferred institution. The Supreme Court has also directed parties in ad-hoc international arbitrations to approach the MCIA for arbitrator appointments.

Parties should consider incorporating institutional arbitral clauses in their agreements to reduce court intervention and enhance arbitration governance. The High Courts of Delhi and Mumbai have adopted a pro-arbitration, minimal interference approach.

Conclusion

The primary objective of the 1996 Act was to facilitate prompt and efficient resolution of disputes through arbitration, minimizing the need for judicial intervention. Over time, challenges have emerged in its application, necessitating court intervention through case-specific interpretations to uphold the Act’s underlying goals. Hence, it is undeniable that judicial activism in arbitration is necessary, albeit with prudent consideration. However, judicial involvement in arbitral proceedings should be exercised judiciously, addressing specific gaps that may require court intervention.

In traditional Indian courts, civil disputes are regulated by procedural codes that provide numerous avenues for litigants to file appeals and revisions, often resulting in prolonged proceedings. To prevent unscrupulous litigants from exploiting these loopholes and needlessly delaying arbitration awards, the 1996 Act was carefully crafted to minimize court intervention. Even while doing so, autonomy was given to parties to dispute to make provisions in contract for intervention of courts.

Although by above described provision, scope and extent of intervention by judiciary has been restricted, but as it is practically seen now a days that despite said clear intention of limitations intervention, in reality there is still substantial amount of superfluous judicial intervention.

Courts are expected to function as administrators who facilitate the Arbitral Tribunal’s operations smoothly. While fulfilling their judicial responsibilities, courts must remember that their primary role is to promote and support alternative dispute resolution mechanisms. This ensures disputes are resolved in a manner that is user-friendly, cost-effective, and expeditious. Such efforts not only enhance the legal framework of the country but also contribute significantly towards establishing India as a hub for Arbitration.

A Bonus for You - Practical Tips and Advice

Drafting effective arbitration clauses in India is crucial for ensuring that disputes can be resolved efficiently and effectively through arbitration. Use clear and unambiguous language to specify that disputes arising out of or in connection with the contract shall be resolved through arbitration. Ambiguity can lead to disputes over the scope of the arbitration clause. Clearly specify the law governing the arbitration agreement and the seat of arbitration. The seat determines the procedural rules that will govern the arbitration proceedings and the court with supervisory jurisdiction over the arbitration. Specify whether the arbitration will be administered by a recognized arbitral institution (e.g., ICC, SIAC, LCIA, etc.) or conducted ad-hoc. Designating an institution can provide administrative support and procedural rules, while ad-hoc arbitration offers flexibility but requires detailed procedural clauses. Specify procedures for interim measures of protection and emergency relief, including the authority empowered to grant such measures.

Have the arbitration clause reviewed by legal counsel experienced in arbitration law to ensure it complies with Indian law and best practices.

Minimizing judicial intervention in arbitration proceedings in India is crucial for maintaining the efficiency and effectiveness of the arbitration process. Draft a clear and comprehensive arbitration agreement that specifies all relevant details, including the seat of arbitration, governing law, number of arbitrators, and procedural rules. Ambiguities in the arbitration clause can lead to judicial intervention for interpretation.

Consider including a requirement for pre-arbitration mediation or conciliation in the contract. Resolving disputes at this stage can prevent the escalation of disputes to arbitration, thereby reducing the likelihood of judicial intervention.

“The obligation of the legal profession is to serve as healers of human conflicts, we should provide mechanisms that can produce an acceptable result in the shortest possible time, with the least possible expense, with the minimum stress on the participants. That is what justice is all about” - Warren. E. Burger

FAQs

What is the time limit for arbitration?

According to the Act, the arbitration process should be completed within 12 months from the date the arbitral tribunal is constituted as per Section 29A of the Arbitration and Conciliation Act.

 

Further, sub-section (3) of Section 29A of the Act allows an extension of 6 (six) months by mutual consent of the parties for passing the award. Similarly, sub-section (4) of Section 29A of the Act provides that in the event the award is not passed in terms of Section 29A(1) or within the extended period of Section 29A(3), the parties can make an application to the court for extension of mandate of the arbitral tribunal.

How to choose the seat of Arbitration?

Choosing the seat of arbitration in India is a crucial decision as it determines the legal framework and jurisdiction for the arbitration proceedings.

 

Choose a seat that is convenient and appropriate for the nature of the dispute. For instance, if the dispute involves parties from different regions of India or countries, a neutral and accessible location may be preferable.

 

Different seats may be governed by different local laws and regulations. Ensure that the seat you choose aligns with the procedural rules and legal framework that are conducive to the arbitration process. The article provides a better understanding of the same.

Can parties choose their own procedure for arbitration proceedings in India?

Yes, parties in India can generally choose their own procedure for arbitration proceedings. The Arbitration and Conciliation Act, 1996 (as amended) provides flexibility for parties to agree on the procedural rules governing their arbitration.

Parties can agree on the rules and procedures to be followed during arbitration. This includes aspects such as the process for appointing arbitrators, the submission of evidence, and the conduct of hearings. This agreement can be incorporated into the arbitration clause in the contract or determined after the arbitration has commenced.

Parties may choose to follow the rules of a specific arbitration institution if they agree to use an institution such as the Indian Council of Arbitration (ICA) or the Mumbai Centre for International Arbitration (MCIA). These institutions provide their own set of procedural rules which will govern the arbitration process.

The Act emphasizes party autonomy, meaning that parties have significant freedom to design their arbitration process, provided it does not violate the mandatory provisions of the Act. This flexibility allows parties to tailor the arbitration process to fit their specific needs and preferences.

In summary, while parties have the freedom to choose their arbitration procedures, they must ensure that their agreed procedures align with the legal framework set out by the Arbitration and Conciliation Act, 1996.

Is arbitration possible without intervention of court?

Yes, arbitration in India can proceed with minimal or no intervention from the courts, particularly when the arbitration process is well-managed and the parties adhere to the procedures set out in the Arbitration and Conciliation Act, 1996.

If parties have a clear and comprehensive arbitration agreement, they can proceed with arbitration without requiring court intervention, except for specific matters such as appointing arbitrators or enforcing awards.

Courts generally play a supportive role rather than an active one in the arbitration process. Their involvement is typically limited to specific situations such as appointing arbitrators, enforcing awards, or resolving disputes about the tribunal’s jurisdiction.

Can arbitration be conducted online?

Yes, arbitration can be conducted online in India. The Arbitration and Conciliation Act, 1996, does not explicitly address online arbitration, but it provides the flexibility to adapt to modern practices.

The Act allows parties and arbitral tribunals to determine the procedures for arbitration, including the use of technology. This flexibility enables parties to conduct hearings, submit documents, and communicate electronically. Online platforms and technology tools can be used for virtual hearings, document submission, and other procedural aspects of arbitration. This has become increasingly common, especially for international arbitrations or when parties are located in different regions.

Many arbitration institutions in India, such as the Indian Council of Arbitration (ICA) and the Mumbai Centre for International Arbitration (MCIA), support online arbitration. They provide platforms and guidelines for conducting virtual hearings and managing cases electronically.

The Indian judiciary has also adapted to the use of virtual hearings, reflecting a broader acceptance of online procedures.

written by

Suneha Bhandary

Senior Associate, Dispute Resolution

Suneha graduated from the School of Law, CHRIST, with a profound passion for commercial arbitration. She aspires to transform the arbitration landscape with her dedication and innovative approach. Outside the courtroom, Suneha channels her energy into playing multiple sports, expressing her creativity through painting, or baking up a storm in the kitchen.

Understanding the intricacies of arbitration, from choosing the right seat to minimizing judicial intervention, is essential for ensuring swift and effective dispute resolution. For businesses and legal professionals looking to draft airtight arbitration clauses and navigate the legal framework with ease, expert guidance is crucial. If you’re ready to streamline your arbitration process and keep disputes out of the courtroom, our team is here to assist you.

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