In recent times, arbitration in India has emerged as one of the most efficacious and cost-effective methods of dispute resolution in our country. It is very common to have an arbitration clause in all types of contracts, ranging from an appointment letter to large-scale joint ventures. The growth of arbitration can be dedicated to many reasons, such as time-saving, informal nature and avoiding adversarial litigation. In India, the arbitration law is governed by the provisions of the Arbitration & Conciliation Act, of 1996. The said Act was substantially amended in the year 2015 to ensure more transparency and fairness in the arbitration process.
In this article, we are going to discuss the meaning and scope of arbitration law in India. Further, we will shed light on the appointment of the arbitrator, the pronouncement of the arbitral award, enforcement of the award and the grounds to challenge the award.
What is Arbitration?
Before moving further, it is essential to understand the meaning of arbitration. As per Black Law Dictionary, arbitration is defined as a method to resolve a dispute by a neutral third-party known as an arbitrator, who pronounces the award which is binding on the parties and enforceable by the courts. In simple words, an arbitrator being a neutral party pronounces its award in a time-bound manner after hearing both parties.
It is pertinent to note that time and again our judiciary has held that the parties must have a clear intention to refer the dispute to arbitration. To express this intention, the parties must have a written arbitration agreement covering the scope of the dispute along with the seat and venue. If there is an oral agreement between the parties, the dispute cannot be referred to arbitration.
Types of Arbitration in India
Arbitration can be conducted in different ways, including ad hoc arbitration and institutional arbitration. In ad hoc arbitration, the parties agree on the rules and procedures that will govern the arbitration, whereas, in institutional arbitration, the arbitration is conducted under the rules and procedures of a specific organization, such as the International Chamber of Commerce (ICC) or the American Arbitration Association (AAA). In India, ad hoc arbitration is widely preferred by the parties as it offers greater flexibility and ensures cost-effectiveness. However, with the establishment of the International Arbitration & Mediation Center (IAMC) in Hyderabad, the government and judiciary are taking some key steps to promote institutional arbitration in India.
Meaning of Arbitration Agreement in India
As discussed earlier, the condition precedent for arbitration in India is having a written arbitration agreement between the parties. As per Section 7 of the Arbitration Act, an arbitration agreement must be in writing and it must be signed by both parties. Here, it is important that both parties put their signature on the document. In our country, it is not mandatory to have a separate arbitration agreement and it can be incorporated by a separate Clause in the main agreement. Interestingly, the doctrine of severability is followed in arbitration law, which states that even if the main agreement between the parties is declared void, the arbitration agreement will be treated separately from the main agreement and it will be considered legally valid.
Appointment of an Arbitrator
The appointment of an arbitrator is a critical step as he is the umpire of the entire proceedings. According to the Act, the appointment of an arbitrator can be made in three different ways:
- By agreement between the parties: The parties can mutually agree on a person to act as an arbitrator or a panel of arbitrators.
- By the appointment of a third party: If the parties cannot agree on an arbitrator or a panel of arbitrators, either party can request a third party or an institution to make the appointment.
- By the court: If both parties fail to appoint an arbitrator or a panel of arbitrators, either party can approach the court for the appointment under Section 11 of the Arbitration Act. The Court is bound to appoint an arbitrator within 30 days of the request so made by the parties. At the time of appointment, the Court is not required to go into the merit of the dispute as the area of enquiry is limited to ascertaining whether a valid dispute arising from the arbitration agreement exist between the parties.
Qualification of Arbitrator in India
The Act also lays down certain qualifications for the appointment of an arbitrator. An arbitrator must be:
- An individual who has the necessary qualifications and experience to act as an arbitrator.
- Independent and impartial.
- Free from any bias or conflict of interest.
- Willing to accept the appointment.
- There must not be any justifiable doubt about his independence or impartiality.
- No conflict of interest in the dispute.
In addition to this, an arbitrator is required to perform his duty carefully and diligently. If a challenge is raised, the arbitrator must be given an opportunity to respond. It is not important to have only one arbitrator for the purpose of resolving the dispute. The numeric strength of the arbitrator is determined by the arbitration agreement.
Power and Jurisdiction of Arbitral Tribunal
Since an arbitrator is the creature of the contract, the jurisdiction and power of an arbitral tribunal are derived from the agreement between the parties. As per Section 16 of the Arbitration Act, the arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. In simple words, the arbitral tribunal can decide whether it is competent to adjudicate this dispute or not.
It is important to note that the jurisdiction of the arbitral tribunal is not unlimited. The Act provides that the arbitral tribunal shall not have the power to decide disputes that are not contemplated by the arbitration agreement. Additionally, the arbitral tribunal shall not have the power to grant relief that is beyond the scope of the agreement. This means that the arbitral tribunal can only grant relief that is specifically requested by the parties in the arbitration agreement.
Further, there are certain disputes which are not considered arbitrable and cannot be resolved through arbitration. These disputes are listed as follows:
- Disputes involving rights and liabilities which are not capable of being settled by arbitration under the laws in force.
- Disputes that relate to or affect the public interest or public policy.
- Disputes that arise out of criminal offences.
- Disputes that involve or relate to insolvency and winding up of a company.
- Disputes relating to the validity of intellectual property rights.
- Disputes relating to family law, including matters such as divorce, guardianship, and adoption.
- Disputes arising under the Indian Trusts Act, of 1882.
Arbitral Award in India
An arbitral award is a decision made by an arbitrator or a panel of arbitrators, and it is legally binding on the parties to the dispute. The award is the final outcome of an arbitration proceeding, and it settles the dispute between the parties. The award can be made on the basis of the evidence and arguments presented by the parties, and the arbitrator’s interpretation of the law.
The Arbitration Act, of 1996 lays down various provisions regarding the contents and form of an arbitral award. As per Section 31 of the Act, the award must be in writing, signed by the arbitrator or the panel of arbitrators, and it must state the reasons upon which it is based. The award must also contain the date and place of arbitration, the names of the parties, and the relief awarded.
The award must be made within the time limit specified by the parties or as per the provisions of the Act. If the parties have not specified a time limit, the arbitrator must make the award within six months from the date of the arbitrator’s appointment. However, the parties may agree to extend this time limit for making the award. Once the award is made, the parties must be notified of the award, and a copy of the award must be given to each party. The parties can then enforce the award in the same manner as a court decree. The award is enforceable in any court having jurisdiction over the subject matter of the dispute.
Grounds to Challenge an Arbitral Award
The award rendered by the arbitrator is not absolute and it can be challenged under Section 34 on some limited grounds, which are as follows:
- Jurisdictional error
If the arbitral tribunal exceeded its jurisdiction or acted without jurisdiction, the award can be challenged. This ground is significant as it goes to the very core of the arbitration process, and a party cannot be forced to accept an award by an arbitral tribunal that exceeded its jurisdiction.
- Patent illegality
Patent illegality is one such ground for the challenge, where the award is found to be based on an incorrect application of the law. However, this ground is narrowly interpreted by courts and the error must be apparent on the face of the award to consider patent illegality.
- Procedural irregularities
This ground is concerned with whether there were any procedural irregularities that prevented a party from presenting its case adequately. Examples of procedural irregularities include a failure to give a party notice of the proceedings, a failure to allow a party to present evidence or arguments, or a failure to apply the agreed rules of procedure.
- Violation of the public policy
An award can be challenged on this ground if it violates the fundamental policy of Indian law. This is a broad ground and has been interpreted to mean that an award can be challenged if it is against the basic notions of morality or justice. It is important to note that this ground is not concerned with the merits of the award but rather the way it was arrived at.
- Contrary to the terms of the contract
If an award is in conflict with the terms of the contract or if the arbitral tribunal has gone beyond the scope of the arbitration agreement, it can be challenged under Section 34 of the Arbitration Act.
- Failure to provide reasons
An award must provide reasons for the decision made by the arbitral tribunal. If the award fails to provide adequate reasons for the decision, it can be challenged on this ground.
As discussed above, arbitration is a process through which a neutral umpire, popularly known as an ‘arbitrator’ resolves the disputes between the parties in a time-bound manner. The Arbitration & Conciliation Act, of 1996 provides a comprehensive framework for the appointment of the arbitrator, making of award and grounds for challenging the same. It seeks to provide a fair and efficient mechanism for the resolution of disputes, while also promoting international trade and commerce. The Act has been amended several times to reflect changes in the legal landscape and to improve the arbitration process further.