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Arbitration How Ineffective In India

Settlement of disputes by Arbitration is on the increase in India. In this article the writer intends to examine whether the arbitration under the 1996 Act, including its latest Amendments, is effective to obtain relief to the person who has entered into arbitration agreement. Whether the continued use of arbitration clauses in contracts will be really useful or not is the prognosis examined in this article.

Arbitration as a mode of dispute resolution:

Starting with traditional panchayath by village panchas, arbitration has got deep legal history in this country. This is what an eminent British Judge, Chief Justice Marten, of Bombay High Court stated:
".....(A)rbitration or mediation without the intervention of the Court ought undoubtedly to be permitted in India. It is indeed a striking feature of ordinary Indian life. And I would go further and say that it prevails in all ranks of life to a much greater extent than is the case in England. To refer matters to a panch is one of the natural ways of deciding many a dispute in India. It may be that in some cases the panch more resembles a judicial court because the panch may intervene on the complaint of one party and not necessarily on agreement of both, e.g., in a caste matter. But there are many cases where the decision is given by agreement between the parties."[1]

The Supreme Court of India observed thus:
Arbitration, that is a reference of any particular dispute by consent of the parties to one or more persons chosen by the parties with or without an umpire and an award enforceable by the sovereign power were generally unknown to ancient India. Hindus recognized decisions of Panchayats or bodies consisting of wealthy, influential and elderly men of the community and entrusted them with the power of management of their religions and social functions. The sanction against disobedience to their decision was excommunication, or ostracism and exclusion from all religious and social functions of the community. …….[2]

After advent of British Rule in this country, Regulations were framed empowering the Courts in India to refer the disputes for arbitration. The Codes of Civil Procedures of 1859, 1877 and 1882 contained provisions relating to arbitration. In 1899 the first enactment known as Indian Arbitration Act was enacted. It applied to Presidency Towns. The Second Schedule in the Civil Procedure Code of 1908 contained the provisions of arbitration as regards the areas not covered by the Act of 1899.

The first comprehensive law regarding domestic arbitration came into force with the enactment of the Arbitration Act of 1940. As regards foreign awards, the law initially passed was the Arbitration (Protocol and Convention) Act, 1937, and later on, the Foreign Awards (Recognition and Enforcement) Act, 1961.

The 1940 Act relating to Arbitration was adversely commented upon by law courts. This paved the way for its wholesale abrogation and adoption of UNICTRAL model law, again without much rumination on its pros and cons. By suitably rectifying glaring defects of 1940 Act it could have been made more effective, instead of introducing the model law prepared in an alien system. In our system of law making the persons who have experience in the field and who are likely to be affected are not consulted at the drafting stage. Current law of arbitration, even after its latest Amendment, is one such example. The law, meant to serve society by overcoming outdated 1940-Act, is not achieving its object.

Grievance of litigants on Arbitration Act:

Those who get involved in arbitration cases have grievances galore. Having noticed from close quarters the way arbitration is being conducted now-a-days, the grievance of litigants who are compelled to seek arbitration should be voiced. Social impact of an enactment would be known to lawyers at grass root level before whom the client's open up their grievances.

What with stamp duty on Awards and fees of advocates and arbitrators, and other expenses, and the time consumed for final result in actually getting the benefit of the relief, the party, who willy-nilly enters into agreement containing arbitration clause, suffers silently more than a litigant who approaches the court for redressal of grievance or seeking a remedy for the problem without the hassles of arbitration agreement.

Arbitration sans freedom of contract:

It is observed that a party willy-nilly enters into contract containing arbitration clause in this country. One can give examples to show how true it is in practical life. In the financing contract with any NBFC, there is arbitration clause, to be arbitrated by its chosen arbitrator. In works contract with government or public bodies there is arbitration clause. Take any field of commercial activity, now–a-days you can find an arbitration clause, sometimes vague and sometimes with varying depths and ramifications as to who would be arbitrator and where arbitration will take place and so on.

Unfortunately, instead of law giving freedom in the matter of choosing mode of redressal of grievance, law supports such one-sided clauses. While in medical contracts of surgery and other procedures, the principle of informed consent is required, regarding commercial transactions, law has been so interpreted that printed clauses are binding. The principle of contract of adhesion is invoked for justifying such binding nature.

Sec.7 (1) of the Arbitration Act of 1996, when read, indicates that parties have to agree to submit disputes for arbitration. However, sub-sec (5) of sec.7 states that there can be arbitration clause by mere reference. There does not appear to be a direct authority of Supreme Court of India to hold how far printed arbitration clause is tantamount to a consensual arbitration agreement. But in USA such one sided clauses are upheld.

One learned author has stated thus on this subject, by referring to citations:

In the domestic arena, the necessity of arbitration was not the result of a general consensus within the affected professional community. The need for arbitral recourse was propounded by the U.S. Supreme Court. In fact, the Court reduced the rigor of the law of contract to achieve the legal validity of questionable agreements to arbitrate. As a result, unilaterally imposed agreements to arbitrate which altered or limited or even eliminated the rights of the weaker party generally became enforceable under FAA Section Two.

Under the Court's strained doctrine, recourse to arbitration-as a matter of law-did not affect substantive rights and was always in the parties' best interest. Arbitration was nothing more or less than another type of trial process.The law, therefore, validates non-negotiated arbitration agreements and allows the superior party to select a procedure that favors its interests. Mutuality has not been the hallmark of arbitration agreements in the domestic employment and consumer contexts.[3][italics for emphasis]

What a contract should be:

One cannot overlook what the Contract Act lays down for formation of a contract. Two persons are said to consent when theyagree upon the same thing in the same sense.[4]Agreements are contracts if they are made by free consent of parties, competent to contract[5].

Position under 1940 Act:

Section 2(a) of the Arbitration Act of 1940[for short, 1940 Act] by its very definition contemplated written agreement to submit present or future difference to arbitration. This meant that there should be conscious decision to seek arbitration.

On this aspect this is what Supreme Court had said:

But it is settled law that to constitute an arbitration agreement in writing it is not necessary that it should be signed by the parties, and that it is sufficient if the terms are reduced to writing and theagreement of the parties theretois established.[6][italics supplied for emphasis].Under the 1940-Act the freedom of contract was protected as regards arbitration agreement.

Position under current law:
But see what is the position under sec.7 of Arbitration & Conciliation Act of 1996 [for short, the Act].
While subsection (1) of sec.7 of the Act preserves the concept found in the 1940-Act, requiring arbitration to be consensual, subsection [4] and [5] are so framed as to give room for interpretation ignoring sub-section (1).

In several rulings rendered under the Act such interpretations of understanding clauses 4 and 5 as independent from clause 1 abound in law journals. Subsections (4) and (5) should be read subject to sub-section (1). Then only freedom of contract would stand preserved. Scanning the decided cases shows that the Courts have expanded these sub-sections as if they are independent provisions.

Supreme Court's decision - sub-sec (4):

In Monnet Finance Ltd case, on facts the Supreme Court had, on facts, held that there was no arbitration agreement between the party [gurantor] who challenged the award and the financier.

But in the course of its judgement the Supreme Court laid down thus:
But the words, statements of claim and defence occurring insection 7(4)(c)of the Act, are not restricted to the statement of claim and defence filed before the arbitrator. If there is an assertion of existence of anarbitration agreement in any suit, petition or application filed before any court, and if there is no denial thereof in the defence/counter/written statement thereto filed by the other party to such suit, petition or application, then it can be said that there is an exchange of statements of claim and defence for the purposes ofsection 7(4)(c)of the Act.It follows that if in the application filed undersection 11of the Act, the applicant asserts the existence of an arbitration agreement with each of the respondents and if the respondents do not deny the said assertion, in their statement of defence, the court can proceed on the basis that there is an arbitration agreement in writing between the parties.[7]

Views under sub-section (5):

Sub-section (5) of section 7 states that reference in a contract to a document containing an arbitration clause constitutes arbitration agreement. This is arbitration by incorporation. If impact of sub-section (1) of sec.7 is ignored and sub-section (5) is treated as independent provision, the concept of want of consensus to arbitrate disputes in such cases would stand ignored. This is what happened in the rulings rendered by Orissa and Madras High Courts.[8]

However Kolkata High Court had pointed out that there should be a conscious incorporation specifically referring to arbitration clause and that there cannot be implied incorporation of arbitration.[9]This would be in consonance with the concept that arbitration should be consensual.

Compulsion of arbitration:

Thus arbitrations are taking place by compulsion of terms incorporated, rather than agreed by understanding its implications. Once party is in the web of arbitration, civil suit would be not a viable remedy, what with sec.8 of the Act preventing suit from proceeding ahead if the opponent seeks such remedy. Suit will not survive for decision.[10]Sec.89 of C P Code as amended also enables court to direct parties to seek arbitration.

Hurdle to appoint arbitrator:

With the introduction of Amended sec.12 of the Act, the hurdle at the stage of appointment of arbitrator is greater than what it was under sec.8 to 10 of 1940-Act or previously under the present Act itself. Apart from sec.12, finding suitable arbitrator itself becomes an issue and time consuming for any party to the agreement.

Financial burden is more:

By the time the stage of passing award is reached, the financial burden for a party is heavier than it is for a suit. Arbitrator's sitting fees, arranging for place of arbitration, fee to be paid to one's own advocate are quite taxing to the party who seeks arbitration, though it was supposed to be inexpensive and speedier remedy. At the stage of award, the stamp duty and GST payable by business entity [if party] on arbitrator's fees by way of reverse burden would be other expenditure from taxation angle. Supreme Court itself had occasion to consider the costly nature of arbitration in India.

The relevant observation is quoted thus:
There is no doubt a prevalent opinion that the cost of arbitration becomes very high in many cases where retired Judge/s are Arbitrators. The large number of sittings and charging of very high fees persitting, with several add-ons, without any ceiling, have many a time resulted in the cost of arbitration approaching or even exceeding the amount involved in the dispute or the amount of the award.[11]

Stamp duty:

Except when Award is passed on a reference in the course of a suit, Stamp duty on Award is payable under Stamp Act. Rates will vary depending on the State amendment. In Karnataka State by Stamp Act as in force in this State, Award has to be stamped at the scheduled rate on value of the subject matter of Award. After 2011, though it is slightly reduced, it is by no means cheaper. [Rs.37,500/- plus ½ % of the amount exceeding Rs.50 lacs.]

Registration fees/charges:
Where the arbitration relates creating rights to immoveable property, registration is also compulsory. Registration fee would be extra expense in such cases.

Arbitrator's fee:

Arbitrator's fee is now regulated by Amended Act. It is quite expensive. Rate-wise it is ranging from Rs.45,000/- to Rs.30 lacs. It will be 25% more if the arbitral tribunal is a sole arbitrator.[Fourth Schedule of the Act as introduced by Amendment of 2015]. Administrative expenses will be separate.

Less expensive is suit:

Compare this with expense for a suit. Only court fee is payable when initially the suit is filed. Lawyer's fee is anyway to be borne by the party, be it for arbitration or for suit. No other monetary expense in involved.

Suit is quicker:

After the 2002 Amendment of C P Code, with time limits being fixed for several steps to be taken in a suit, comparatively suits get decided earlier than the decision by arbitration and the award reaching finality under the Act.

Challenge to Award and Execution of award:

Execution of award decree and recovery is by itself a separate chapter of difficulty for the person who obtains the award. Challenge to award through court, its two tier appeals to higher courts, [High Court & Supreme Court] are all aspects which deter the person who wants rights to be adjudicated through arbitration. In Court litigation, the litigant's problem is over in one go as it were, from beginning of trial to end of appeal to the highest court.

But in Arbitration, litigant is twice vexed, - once at the stage of arbitration and another at the stage of its challenge and obtaining finality to it. The latest ruling of Supreme Court in the case where at the final stage of execution of arbitration award how the party did not get ultimately required relief is quite illustrative of frustrating experience of a litigant.[12]Instead of arbitration, if the party had resorted to suit, final relief could have been granted because a court can always mould relief.[13]In Arbitration, the decision has to be within the four walls of what is referred for decision.

In sum, even under the present Arbitration & Conciliation Act, arbitration is not practical from the point of view of the person who intends to obtain relief. Legislation has not so far provided with any machinery for cheap and quick resolution of all types of disputes, though for certain types of commercial disputes the recent legislation[14]appears to be preferable to the remedy of arbitration.Laws are meant to serve the society and the community and must adapt in order to meet those needs. It is here that the system of law of arbitration fails. One has to say: arbitrate don't, litigate. Corollary is, drop arbitration clauses. This is the prognosis.

  1. Chennabasappa v. Basalingayya, AIR 1927 Bom. 565 [FB], at pages 568 and 569.
  2. Food Corporation ofIndiav. Joginderpal Mohinderpal, AIR 1989 SC 1263, at p.1266.
  3. Thomas E. Carbonneau, The Exercise of Contract Freedom in the Making of Arbitration Agreements, 36 Vand. J. Transnat'l L. 1189 (2003)
  4. Section 13 of Contract Act.
  5. Section 10 of the said Act.
  6. Jugal Kishore Rameshwardas vs Mrs. Goolbai Hormusji, AIR 1955 SC 812 = 1955 SCR (2) 857.
  7. S N Prasad vs. Monnet Finance Ltd (2011) 1 SCC 320 at page 325.
  8. National Aluminium company Ltd Vs. Doaba Indl Trading Co P Ltd 2008(1) Arb L R 330[Orissa] and Ramco Super Leathers Ltd. V. Associates India Financial Services P Ltd, 2004 (I) Arb L R 241[Madras].
  9. Ghanshyam Sharma's case reported in 2012 (Supl 2) Arb L R 281 and Planet Retail Ltd case reported in 2016(3) Arb L R 21.
  10. Ashok International vs. State of A P 2013(4) Arb L R 406(AP); Tandev Films Entertainment P Ltd vs. Four Frames Pictures, 2010(1) Arb L R 79(Delhi); M.Vijaya Narayanan v.M Prabhakaran,2007(1) Arb L R 1[Ker].
  11. Union of India vs. M/S. Singh Builders Syndicate decided on 26 February, 2009.[2009(4) SCC 523].
  12. Firm Rajasthan Udyog & ors vs.Hindustan Engineering Industries Ltd, CA 2376/2020 dtd.24-04-2020.
  13. Order 7 rule 7 of CPC.
  14. The Commercial Courts Act, 2015
Written By M.V.Shanker Bhat, B.A. B.L., Advocate, Mangaluru

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