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Arbitration: The white elephant in the room

Contributed by: Samvad Partners


Over the course of the past few decades in India, it has become an almost intuitive practice amongst lawyers to select arbitration as the preferred mode of dispute resolution over court litigation. The over-burdened state of Indian courts could be one of the reasons attributable to the popularity of arbitration. Another reason could be the successful outreach of institutions and the larger arbitration community. The arbitration clause which is one of the key clauses in the contract unfortunately finds itself in the residual/boiler-plate clauses that appear at the end of the contract and are often not paid requisite attention during negotiation. This could have adverse implications should disputes arise. In this article, we will address why an arbitration clause, should move from being a boiler plate, to one that is only inserted after a nuanced appreciation of the underlying transaction, time factors, location of the assets of the other party, business relation between the parties and costs both in terms of transactional costs and enforcement costs.

Merits of arbitration

The merits of arbitration are many-fold. It can provide parties a timely, cost effective and flexible resolution of disputes among others, if administered in its true form and spirit. The fact that the conventional route of appeal is not available against arbitral awards gives finality to a dispute as opposed to regular suits before courts which makes arbitration commercially and financially attractive. Arbitration gives parties the option to have a tribunal which is suited to the nuances of complex disputes such as construction, maritime, securities and technology disputes. Arbitral Institutions such as the Singapore International Arbitration Centre (SIAC) and the International Chamber of Commerce (ICC) have arbitrators with expertise who can assist with expeditiously resolving complex technical disputes.

Factors which diminish the merits of arbitration

However, while in principle arbitration is a preferred alternative to court, disputes practitioners will acknowledge that the merits of arbitration are often diminished due to it being administered contrary to its true essence and by saddling it with rigid procedural requirements, often seen in ad-hoc arbitrations. A few such factors are set out below.

Procedural Flexibility

Procedural flexibility is an important facet of arbitration. The Act entrenches the position of party autonomy when it comes to the procedure to be followed by the arbitral tribunal while excluding the application of the Code of Civil Procedure, 1908 or the Evidence Act, 1872. However, while excluded, it is often the case that an ad-hoc tribunal will try and follow a procedure that closely resembles the Code of Civil Procedure, 1908.

Appointment of the arbitral tribunal

Issues of service continue to haunt court litigation where sometimes considerable amount of time is spent to get an evasive defendant on record thereby delaying the commencement of the proceedings. Unfortunately, it has been noticed that significant amount of time is spent in the process of appointing arbitrators. While at the time of memorialising the clause, the relations between the parties may be cordial, at the time of a dispute, one party often turns hostile. A hostile party will not cooperate with the appointment of an arbitrator. In such a scenario the party raising the dispute is often constrained to approach the court under Section 11 of the Arbitration & Conciliation Act, 1996 (“Act”) for appointing the arbitral tribunal. It is noticed that most often a respondent will raise a procedural objection with an intent to delay the constitution of the tribunal. These objections may vary from stamp duty to the arbitrability of the dispute itself. This delay results in time and costs implications for the party raising the dispute. These delays and costs were exactly what was sought to be avoided by having an arbitration clause in the first place. The delay is augmented by the divergent judicial precedents surrounding the power of the court under Section 11 of the Act.

Power of court under Section 11-judicial or administrative

The law concerning the full extent of the power of the court at the appointment of tribunal (Section 11) stage (whether it is judicial or administrative) is one that has been constantly evolving and has been a subject matter of divergent judicial precedents. The issue on whether the power of the court under section 11 of the Act is judicial or administrative started with the Konkan Railways case (Konkan Railways decision (Konkan Railways v. Rani Construction (P) Ltd (2002) 2 SCC 388) in which the Supreme Court held that the power of the court under Section 11 of the Act was administrative in nature effectively to mean that the court had to satisfy itself on the existence of the arbitration agreement and not involve itself in the issues of arbitrability. This position was overruled by a seven-judge bench of the Supreme Court in the Patel Engineering case (S.B.P. Engineering v. Patel Engineering Ltd (2005) 8 SCC 618), wherein it was held that the power under Section 11 is judicial rather than an administrative function. This decision broadened the scope of the powers of the court under Section 11 of the Act and paved way for several objections being raised at the appointment stage which had a significant impact on the timelines for appointment of the arbitrator.

The controversy was settled by the legislature who amended the Act to introduce a new Section 11(6A) which clearly mandates that the court shall confine itself to the examination of existence of the arbitration agreement. Post the amendment the Supreme Court in the Duro Felguera case (Duro Felguera v. Gangavaram Port Ltd AIR 2017 SC 5070), gave a literal interpretation to Section 11 (6A) of the Act and held that the court under Section 11 has to limit its examination solely to the existence of the arbitration agreement. Despite the legal position being settled by the statute, it is not beyond a seasoned litigator to find a way to create a procedural hurdle. Care while drafting an arbitration clause, may avoid needless reference to court especially given that the appointment by arbitral institutions contemplated under the 2019 amendment to the Act are yet to take form.

It is noteworthy that issues on jurisdiction of the tribunal under Section 16 of the Act must be raised as a preliminary issue. Having said that, if an arbitration clause is inserted in an agreement concerning a dispute which is regarded as non-arbitrable the arbitration can run

into a rough weather and have adverse impact on time and costs. It is therefore advisable to try and clearly forecast the nature of disputes which could arise before treating an arbitration clause a boiler plate arbitration clause.

This becomes particularly relevant considering that the 2019 amendments to the Act have laid out detailed qualifications for who may be arbitrators. Clauses in existing contracts with named arbitrators who do not meet the qualification under the Act will have to be revisited and redrawn/recast in accordance with recent amendments to ensure that precious time is not lost at the time of constitution of the arbitral tribunal.

Emergency reliefs

Further India unlike other arbitration friendly countries does not make provision for an emergency arbitrator outside institutional arbitration. Given this position, parties requiring urgent relief may face difficulties given the problem of constitution of the arbitral tribunal outlined above. Though Section 9 of the Act makes provisions for interim measures by the court, the reliefs thereunder are often ad-interim in nature till the tribunal is constituted and a decision on interim relief is awarded by the arbitral tribunal. It also needs to be noted, that the requirement that a party seek an injunction undertake to pay damages, is something that is not wholly found across India nor is it something Indian courts are often comfortable with imposing. As a result, a respondent party, may find itself on the receiving end of an injunction for an extremely long period of time with no hope of recovering the damages it suffers as a result.

Arbitral institutions such as the SIAC and ICC have provisions for appointment of emergency arbitrators, and it has become a trend for Indian parties to resort to institutional arbitration for various benefits including emergency appointments. However, it is important to understand the costs associated with institutional arbitration.

Boiler Plates can spell doom

Boiler plate provisions in a contract are those standard terms clauses which appear at the end of the contract and are often not paid the required attention during the negotiation. While the recent pandemic has thrown the boiler plate Force Majeure clause into limelight, it is probably the right time to give the dispute resolution clause its desired importance as it can have a significant impact on parties should the transaction run into rough weather.

When does arbitration not make sense?

Care should be taken while inserting arbitration clauses in contracts the subject matter of which is not arbitrable. While the test in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 which provided that questions that did not touch on a question of public law (i.e. affecting rights in rem) were generally arbitrable provided such issues were not reserved by statute for resolution via a statutory mechanism (i.e. disputes under tenancy laws). However, the test is not comprehensive as can be seen with the open question of the arbitrability of intellectual property disputes which was dealt with somewhat in the case of Ayyasamy v. A. Paramasivam (2016) 10 SCC 386 however it wasn’t comprehensively settled (the question of fraud was the issue before the court in the aforesaid Ayasamy decision). The lack of clear guidance from the Supreme Court or the legislature, has led to conflicting precedents on the point. For example, Eros International Media Ltd. v. Telemax Links India Pvt. Ltd. and Ors. 2016 (6) ARBLR 121 (BOM) the High Court at Bombay held that disputes relating to license fees in an IP agreement were disputes in personnem and therefore could be arbitrated upon. However, a coordinate bench of the High Court in Intellectual Property Rights Society (IPRS) v. Entertainment Network, 2016 SCC OnLine Bom 5893 held that a dispute arising from a breach/termination of an IP licensing agreement could not be the subject matter of arbitration.

The above conflicting position implies that disputes which relate to intellectual property in India, may have to deal with a jurisdictional objection one way or the other. This ruling will then also be subject to appeals. In such a situation, having an arbitration clause provision without careful consideration may pose difficulties in the long run.

Disputes where there is already a statutory remedy available is another area where care should be taken while inserting boiler plate arbitration clauses. Examples of this include consumer disputes, where despite there being an arbitration clause, a consumer will often approach the consumer forum. Telecom disputes have an existing statutory mechanism via the TDSAT and there are also tribunals for electricity disputes. Further, an arbitration clause in a Shareholders Agreement is often left unused as parties often try and seek equitable reliefs before the NCLT under the Companies Act, 2013. In Rakesh Malhotra v. Rajinder Malhotra, (2015) 2 CompLJ 288 (Bom) the High Court at Bombay laid down the general rule that matters covered by sections 241 & 242 (erstwhile 397 and 398 of the 1956 Act) of the Companies Act, 2013 are not amenable to arbitration, however, it laid down an exception that where a party had invoked the jurisdiction of the NCLT (erstwhile CLB) merely to avoid the arbitration, the NCLT could entertain an application to refer the matter to arbitration.

In such cases a hostile party may take advantage of an arbitration clause, to use procedural hurdles to slow down a dispute by raising jurisdictional objections to delay the commencement of the arbitration proceedings. The Act requires an arbitrator to issue reasoned orders, which means the dismissal of such applications at the threshold stage is unlikely and will therefore result in delay. Further these orders are also subject to challenge before the court in terms of the Act.

Instances of cases where arbitration makes sense

Disputes where the evidence is largely going to be documentary and oral testimony may be avoided are a class of disputes that may be well-suited for arbitration as these disputes may not require oral hearings, which reduces costs and time. Examples of such disputes would be construction and maritime disputes where the claims are largely contractual. In such disputes it is easy to forecast the potential disputes that would arise Arbitration may be ideal for cross border transactions. Enforcing an Indian award is easy in countries that are party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958. The Convention makes an arbitral award easier to enforce than a decree of an Indian

court. Indian decrees may only be automatically enforced in reciprocal jurisdictions. These jurisdictions are far fewer in number than are countries that are party to the convention.

Commercial Courts Act, a viable alternative?

Further, it may be prudent to consider the Commercial Courts Act, 2015 (“CCA”) which provides for a quick and efficacious means of resolving disputes before commercial courts. The definition of a Commercial Dispute under the CCA is wide enough to cover a wide spectrum of disputes. The amendments to the Code of Civil Procedure, 1908 (“CPC”) mean that commercial disputes under the CCA can be resolved efficiently and further the party who does not succeed is liable to pay realistic costs incurred by the succeeding party.

In jurisdictions where there is a cap on the court fee as well as a commercial division of the High Court, a commercial suit may be a more cost and time-effective option. Especially if a party is largely seeking substantial interim reliefs and only nominal final reliefs. Even in states where there is no cap on the court fee, the overall costs may be cheaper as a commercial court will not charge a sitting fee per hearing as is charged by most tribunals. In some jurisdictions in India, a refund of the court fee may also be possible should the parties settle their dispute midway through a suit.

The fact that parties can mutually agree to arbitrate even after a dispute has arisen is often not considered. It is noteworthy that an arbitration which has the acquiescence of both parties to save time and costs in resolving their disputes, is a far meaningful way of resolving disputes.

Conclusion and Way Forward

In conclusion, before inserting an arbitration clause in an agreement, it is imperative that a forecast as to how a dispute may play out, should be conducted to see if arbitration is indeed the more viable option. Factors that may need to be considered include the nature of the transaction, timelines, the business relationship of the parties and the possible costs of the process and enforcement. It may bode well to rethink the arbitration clause as a boiler plate.

Contributed by Samvad Partners

The above article has been authored by Ms. Poornima Hatti (Partner), Ms. Pinaz Mehta(Counsel) and Mr. Ajay Kumar (Senior Associate).

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