What is Arbitration?
Arbitration is a dispute-resolution process in which the parties select a neutral third party to resolve their disputes. It is a process in which parties typically agree to arbitrate in order to avoid the time, expense, and complexity of litigation. According to Section 2(1)(a) of the Arbitration and Conciliation Act, 1996 “Arbitration means any arbitration whether or not administered by permanent arbitral institution”. Arbitration is a simplified trial, with simplified rules of evidence and with no discovery. Hearings in an Arbitration are usually not a matter of public record and the Award passed in an arbitration is binding on the parties just like a court decree or order. Arbitration is a viable alternative where relationship between the parties is strained by the litigation process as it is time-consuming and expensive.
Types of Arbitrations
- Ad Hoc Arbitration: Ad hoc arbitration is a process where parties agree to resolve their dispute outside the realm of an established arbitration institution. The parties directly appoint arbitrators and determine the rules and procedures to be followed. Ad hoc arbitration provides flexibility and allows the parties to tailor the process to their specific needs. To ensure smooth arbitration process, careful planning and cooperation between the parties is required.
- Institutional Arbitration: Institutional arbitration takes place under the supervision and administration of established arbitration. These institutions provide a structured framework for resolving disputes, including rules, guidelines, and a roster of qualified arbitrators. Institutional arbitration offers parties a reliable and well-defined process, ensuring procedural fairness and reducing the burden of organizing the arbitration.
- Domestic and International Arbitration: Depending on the geographical scope of the dispute, Arbitration can be further categorized into domestic and international arbitration. Domestic arbitration refers to disputes that arise within the borders of a particular country, and the arbitration process adheres to the laws and regulations of that country. While international arbitration involves disputes with cross-border elements and is governed by international conventions, such as the United Nations Commission on International Trade Law (UNCITRAL) Model Law. International arbitration offers parties a neutral forum to resolve complex, cross-border disputes, ensuring the enforceability of awards across multiple jurisdictions.
Arbitration Agreement
Arbitration agreement is an agreement formed when two parties enter into a contract and agree in writing that any disputes arising between them out of that contract will have to be resolved without going to the courts and with the assistance of a neutral person: a third party appointed by both of the parties, known as the Arbitrator, who would act as a judge and whose decision will be binding upon the parties.
Section 8 of the Arbitration and Conciliation Act, 1996 states that after taking cognizance of a valid arbitration agreement between the parties the court shall abstain from dwelling into the merits of the dispute and refer the parties to arbitration. Once an arbitration agreement is made, it cannot be deterred when a dispute arises. In Ravi Prakash Goel v. Chandra Prakash Goel, the Supreme Court held that it is mandatory for the courts under Section 8 of the 1996 Act, to refer the parties to arbitration when there is an applicable arbitration agreement.
Essentials of a valid Arbitration Agreement in India
In the landmark case of K.K. Modi v. K.N. Modi and Ors. (1998) 3 SCC 573, the Hon’ble Apex Court highlighted several crucial characteristics that must be present in an arbitration agreement:-
Dispute between the parties: There must be dispute between the parties. If no dispute is present, the arbitration clause cannot be used to challenge a settlement that has already been reached by the parties.
Written Agreement: An arbitration agreement must always be in writing. It can take various forms to qualify as a written agreement.
The intention of the Parties: Fundamental aspect of the arbitration agreement is the intention between the parties. While specific terms like “arbitrator” or “arbitration” need not be explicitly stated, the intention of both parties to abide by the terms of the arbitration agreement is crucial.
Signatures of the Parties: The signatures of the parties play a crucial role in forming a valid arbitration agreement.
Binding Decision: The agreement should explicitly state that the decision of the tribunal will be legally binding on both parties involved.
Jurisdictional Consent: Both parties must mutually agree on the jurisdiction of the tribunal to arbitrate the matters concerning their rights. This consent can either arise from a consensual decision or from a court order directing that the proceedings proceed through arbitration.
Fair and Impartial Determination: The responsibility to impartially determine the rights of the parties, ensuring a fair judgment is on the Tribunal.
Legal Enforceability: The terms of the agreement must comply to the legal framework and be enforceable by law.
Timely Formulation: The agreement should specify that any decisions rendered by the tribunal on the dispute must be formulated prior to the commencement of the arbitration process.
Determining the seat of Arbitration
The seat of arbitration is very important in defining the legal framework for arbitral proceedings. The parties are able to choose the legal environment in which they wish to operate by selecting the seat. While negotiating arbitration agreements, the parties should not neglect the seat.
The arbitration seat is a key factor in any arbitration and is of major practical importance. The seat is the legal home of the arbitration and provides its supporting legal framework. Given its specific legal effect, parties should specify the arbitral seat in their agreement to arbitrate.
The seat influences a number of key issues
It determines which procedural laws will apply to various practical aspects of the arbitration including any rights of appeal. The availability of interim remedies and the extent to which local courts will support, supervise and/or hinder the arbitration process. The seat of the arbitration will be the place where the award is deemed to have been made. Therefore, the law of the seat will determine the grounds on which an award can be challenged before the local courts.
In cases where the parties have failed to designate a seat or failed to do so clearly, parties more often than not lose their right to choose the seat. In the case of institutional arbitration, the arbitration rules may provide a default seat. If there is no default seat under the arbitration rules, then the arbitration institution may determine the seat. Alternatively, a court may also be called upon to decide the seat (e.g. ad hoc arbitrations).
Difference between seat of arbitration and place of arbitration
This has been becoming an issue especially in situations where exclusive jurisdiction is conferred on courts at a place other than the place of arbitration. Place of arbitration means the place where arbitration proceedings were conducted and it includes the venue for hearings and meetings.
Seat of arbitration is more important and determines the applicable laws and courts having appellate power over the arbitration. Both the concept are not synonymous and place of arbitration does not become seat of arbitration unless specifically provided by the arbitration agreement.
This difference removes any doubt and ensures clarity and predictability in application of an arbitration agreement. The cases of Indus Mobile Distribution Ltd. V. Datawind Innovations and Mankastu Impex Pvt. Ltd. V. Airvisual Limited clearly defines the above explained differences.