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Arbitration Vis-a-vis A Substitute to Court in India

Arbitration under Arbitration and Conciliation Act, 1996

Arbitration is an old concept under the Indian legal system. It has been part of the system since 1777 when railways used arbitration to resolve its dispute relating to laying down of lines and business. However, the testimony that it's an old concept gets further fillip because the term 'Arbitration' never gets defined, even though special legislation is enacted relating to arbitration. In the absence of a legal definition, many legal luminaries tried to lay down the definition. The combined result would be resolving a dispute by a private judge by passing a judgment known as an award. Such award is binding on the parties.

The subject matter of arbitration

Arbitration being a judicial process headed by a private judge, he should be capable of settling any dispute. However, public policy and public interest restrict the scope of arbitration by classifying the dispute as arbitrate and non-arbitrate. Therefore, any dispute between parties having a legal relationship, whether contractual or not, could be referred to arbitration.
This blanket permission has certain restrictions like matrimonial matters, criminal, insolvency matters, anti-competition matters etc.

Arbitration Agreement and Its Effect

The arbitration agreement is a precondition for the arbitration process. Therefore, it shall be in writing. Therefore, no arbitration is possible in the absence of an Arbitration Agreement. However, to encourage arbitration, the legislature has given validation for arbitration agreement in the form of letters in exchange for statements[1].

Rickners Verwaltung Gmbh vs. Indian Oil Corporation, 1998 held that involves to knowing the intention of the party and in arbitration and to gather information and to conveys its meaning in the form of expression. An Arbitration Agreement is a statement of one party regarding the claim in dispute and agreed or not rejected by the other party to the dispute. It is a middle ground for the both parties involved.

Once Arbitration Agreement is signed, it leads to two significant consequences

The doors of the Court are closed for the disputing parties. They are expected to refer the matter to the arbitration and abide by his decisions. This logic flows from the principle of law, which states that a right created bilaterally cannot be abrogated unilaterally. Arbitration is treated as a contractual right.

In this case, the parties agree to an alternative process to settle the dispute. Once both parties agree together and create arbitration, it has to be annulled together. One party alone cannot cancel this contractual right approach Court[2].

The procedure agreed is simple, if a party approach Court in violation of the arbitration agreement, the judicial authority would refer the parties to arbitration on the application from the other party. However, it is essential to note that the judicial authority cannot refer the parties on its own, i.e. suo moto. In addition, it is important to note that, if the defendant files a written statement instead of an application for reference, the Court will proceed with the case.

It is understood that both parties have agreed to cancel the arbitration agreement.
Another necessary consequence is Interim measures. The existence of the arbitration agreement itself empowers the parties to approach Court and seek interim measures. These measures vary from the protection of subject matters to other steps which would ensure smooth functioning of the arbitrate proceedings.

Appointment of arbitrate Tribunal

As a matter of rule, the arbitrate Tribunal can be made of any number except even number. This is to avoid a split decision. Arbitrator of not even number ensures the majority decision.
Appointment is the area that could be misused for causing the delay. To avoid such misuse, the law on arbitration has prepared the various process of appointment. By following the spirit of ADRs, the law provides complete freedom to parties to agree on any procedure.

However, the law proposes different procedure if parties fail to agree on the method or deny to follow the agreed procedure. In case the parties had agreed for three Arbitrators to form an arbitrate Tribunal. Both parties will appoint their arbitrator, and both arbitrators together will appoint a presiding arbitrator. This simple process is adopted to avoid deadlock. It is important to note that this process cannot be followed if the parties agree for the sole arbitrator to form an arbitrate tribunal.

In the case of Konkan Railway Corporation v. Rani Construction Pvt Ltd, 2002 the SC held that-
the function of CJI and his designates is to ensure the nomination of an arbitrator who is independent, competent and impartial and settles the dispute between the parties to the best of his knowledge.

Role of Chief Justice

In the case of a sole arbitrator and no consensus among parties could be achieved. Similarly, parties fail to recommend their own arbitrator, or arbitrators fail to appoint a presiding arbitrator. Then, the aggrieved party can apply to the Chief Justice and seek the arbitrator's appointment on behalf of the parties. This process is created to avoid deadlock.

However, at the time of appointment, the Chief Justice has to provide due consideration to the qualifications prescribed by the parties and must give due weight-age to the scheme of appointment prepared by the parties.

The term Chief Justice gets a different meaning depending upon the nature of the dispute. In domestic arbitration, where the parties involved in the conflict are both Indians, the Chief Justice is the Chief Justice of the respective High Court having jurisdiction. On the other hand, suppose the dispute is International Commercial Arbitration, i.e. between Indian and a foreign national or corporation registered in a foreign country or whose head office is outside India, or any association or body of persons registered with a foreign country. In that case, the Chief Justice is the Chief Justice of India.


The arbitrate Tribunal is authorized to decide on the jurisdiction. Jurisdiction means power to decide. Granting power to decide on its power brings in certain complications if arbitrate Tribunal decides that the contract between parties is void. Then arbitration agreement, which is part of the contract, becomes void, then the award originating from invalid arbitration agreement pronounced by invalid arbitrate Tribunal has to be void.

If an award is invalid then, arbitration agreement continues to be valid. A legal fiction answered this complication; the legislatures declared that the arbitration clause has an independent existence. If the contract is declared void, then the arbitration agreement, which is part of the contract, remains valid for enforcement of the award. It has limited existence and validity to provide enforcement to the award.

Two types of questions could be raised regarding jurisdiction. First, the question would be of lack of jurisdiction, and the tribunal may lack jurisdiction because the dispute may be non-arbitrate or the contract is void or beyond the scope of the arbitration agreement. The other question would be exceeding the scope of jurisdiction. The tribunal starts functioning within jurisdiction and during proceedings, it exceeds its scope[3].

The question of jurisdiction should be raised at the earliest. The principle of 'waiver of right to object' acts against the disputing party. The delay in objecting may lead to the presumption that the parties agreed for jurisdiction.

Conduct of arbitrate Proceedings
The important aspect of the proceedings is the choice of the law. The arbitrate Tribunal not bound by the technicalities of the Civil Procedure Code and Indian Evidence Act. The diversion from the regular procedure is a welcome change as it allows the parties to have freedom as to the selection of procedure[4].

The next debate is whether the substantive law should bind the parties? Section 28 of the arbitration and conciliation act provides an answer to this question by dividing the arbitrate proceedings into two categories.

In case of domestic arbitration, where both parties are Indians, the Indian legal system would govern the proceedings sans the two legislation mentioned above. However, if the arbitrate proceedings are international commercial arbitration, then the law would be the parties' choice.


The final outcome of the arbitrate proceedings is an award. The award must be in writing and signed by the majority of the arbitrate tribunal. The important point to note is that the minority opinion holder cannot pronounce minority award. Instead, his opinion would be expressed in the majority award and reasons for omission from signing.

The award has to be accompanied with reasons. Till 1996 the legislatures, as well as judiciary, were equivocal as to the non-speaking award of the arbitrate tribunal. The lawmakers felt that it would be an unnecessary burden on the arbitrate tribunal, as it could be comprised of laymen. Moreover, a good award could be set aside on technicalities. To avoid such grounds for set aside, reasons were never mandatory.

But since 1996, there is a shift in the approach. The reasons have been made compulsory except for two circumstances, where the party have come up with an award on agreed terms under Sec 30. First, the reasons are not necessary, as it is an agreement between the parties rather than an award. Secondly, the parties themselves, through an agreement, mandate the arbitrate Tribunal not to give reasons. This permission has an overriding effect on Sec. 31.

The Saw Pipes Judgement

The Case of ONGC v. Saw Pipes Ltd., AIR 2003 SC 262 was a landmark case in the existence of arbitration.
Although, the courts doesn't have the power to participate in Arbitration proceedings, however, it was put into test in this case.

The court was worried that the arbitration process awards such rulings which disallowed the liquidated damages as mentioned under Section 74 of Indian Contract Act, 1872.

The Supreme Court held that:
The award granted if violates any Act or any provision of law will also be a ground to set aside the award made. Further, the judgement expanded the concept of public policy and held that if the award is contrary to the public policy, it is clearly illegal. However, this judgement is only confined to domestic arbitration awards.

The Arbitrate Tribunal is authorized to issue a final as well as Interim arbitrate Award. In addition, it can also impose interests and costs over the parties.
  1. Setting aside an arbitrate award

    The arbitrate proceedings are binding on the parties, unlike negotiation and other ADRs. Once a party submits to arbitration by entering into an arbitration agreement, the process is binding. The same principle applies to award also. Once the prize is final, it is binding on the parties. However, before the award becomes final, the parties are given an option of challenging it before the Court. Such challenge could be made on different grounds, and most of the grounds are procedural and technical.

  2. Incapacity of the parties

    The parties to the agreement are suffering from incapacitates, of the parties to the proceedings suffered incapacitates like age of minority, insanity, insolvency etc, the award could be set aside.

    The general incapacity of the party could be assessed by referring to the Indian Contract Act. The Act would deal with age, sound mind, and other requirements of a valid contract. However, there are various other incapacities projected by different legislation. Therefore, the inability of the party depends of applicable legislation.

  3. Arbitration agreement not valid

    The other ground for setting aside is an invalid arbitration agreement. As mentioned above, the Court is looking into the technicalities of the arbitration agreement. Again the Indian Contract Act plays a major role to ensure the deal is with free consent in the absence of mistake, coercion, misrepresentation or fraud.

  4. Lack of notice

    Sometimes the parties involved in the dispute were not in a position to present the case effectively, if it is due to lack of notice, then the award could be set aside. The parties are expected to be informed about the appointment of arbitrator or commencement of the proceedings, or they have the right to be informed of various stages of the proceedings.

    Therefore, it is important to issue notice of each and every stage of the proceedings. In case of failure to grant notice or intimate could lead to setting aside of the award.
    In the case, Sundaram Finance v. NEPC,�1999 (2) SCC 479 the Apex Court of India held that:
    if a party approaches the court before the commencement of arbitration proceedings, he must serve a proper notice to the opposite party as to invoking the arbitration and further, the court must satisfy the party as to first approach the arbitrator and take effective steps to settle the dispute without any delay.�

    That's why the court must be contented as there exists a valid arbitration agreement between the parties.

  5. Ultra-vires award

    After the completion of the proceedings, the award pronounced by the arbitrator is beyond the scope of the arbitration agreement, such award is liable to be set aside. In addition, the award could be ultra vires if it is not with in terms of agreement or not contemplated by terms of reference. Sometimes the arbitrate Tribunal passes the award which is beyond the scope of the arbitration agreement, under all these circumstances, the award is liable to be set aside.

  6. Subject matter not capable of arbitrated

    As discussed above, arbitration is a suitable process for commercial disputes, whereas certain disputes cannot be referred for arbitration. In furtherance of the rule, if a non-arbitrate dispute is referred and consequently an award is pronounced, such award is liable to be set aside.
  7. Award against public policy

    Last but very controversial ground for setting aside is public policy. If award is against public interest, then such award is liable to be set aside. The whole controversy revolves around the definition of 'public policy. The Act itself provides for the restricted definition in the form of an explanation. However, the Court preferred to follow the wider definition provided under different legislation. The wider definition provided an opportunity to challenge the arbitrate award for all frivolous grounds.

  8. Composition of arbitrate Tribunal

    While commencement of the arbitrate proceedings, the parties or arbitrators or Chief Justice is expected to constitute the arbitrate tribunal. The arbitrate Tribunal has compulsorily adhered to the terms and conditions laid down by the arbitration agreement. Accordingly, the qualifications, procedure, and other conditions that ensure independent and impartial arbitrator must follow by the parties and the Chief Justice. If the appointment is not in accordance with the agreement, then the award is liable to be set aside. However, if the arbitration agreement is disregarded to fulfil the requirement of the law, such deviation is excused. Otherwise, in all other circumstances, the award would be set aside.

In addition to the grounds for setting aside, the parties have the opportunity of redressal against the orders and decisions of the tribunal and Court in the form of an appeal. For example, the granting and refusing to grant interim measures by the Court could be challenged through an appeal. Similarly, the decision of the Court to set aside or refusing set aside an arbitrate award also could be subjected to appeal.

Similarly, orders of the arbitrate Tribunal also could be challenged through an appeal. The order of accepting the challenge of lack of jurisdiction could be challenged in an appeal. However, rejecting challenge of lack of jurisdiction is not subjected to appeal as parties have to co-operate the arbitrate tribunal till the end of proceedings and challenge the same ground for setting aside the arbitrate award. Under Sec 17, the arbitrate tribunal is also authorized to grant interim measures. Such granting or refusing to grant interim measures could also be challenged through an appeal.

  1. Section 7 of Arbitration and Conciliation Act, 1996
  2. Section 8 of Arbitration and Conciliation Act, 1996
  3. Section 16 of Arbitration and Conciliation Act, 1996
  4. Section 18 of Arbitration and Conciliation Act, 1996

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