Is Arbitration Fulfilling Its Purpose?

While the concept evolved as a cost-effective, speedy alternative to litigation, exorbitant arbitrator fees, liberal adjournments and unreasonable delays are defeating its very objective

The Arbitration and Conciliation Act 1996 was enacted to provide a speedy and efficacious dispute resolution mechanism within the existing judicial system, which is otherwise marred by inordinate delays and a huge backlog of cases. However, an analysis of the arbitration system, as practised under the 1996 Act, has revealed a failure to achieve its objectives due to exorbitant costs and unreasonable delays. The concept of arbitration evolved as an alternate mechanism for settlement of disputes as against the often lengthy and expensive court litigations. However, due to exorbitant arbitrator fees and liberal adjournments, arbitration too has become a costly affair.

Arbitration in India, particularly ad hoc arbitration, is becoming quite expensive vis-à-vis traditional litigation. This is a crucial factor, which cripples the development of a cost effective, quality arbitration practice in India. In the 1980s, arbitration gained popularity and was increasingly used by the corporate world to resolve disputes. In recent years, delays in the arbitration process have become widespread, hampering the efficient dispensation of dispute resolution, where time is of essence. Though the 1996 Act confers greater autonomy on arbitrators and insulates them from judicial interference, it does not fix any timeframe for completion of the proceedings.

Analysis Of Arbitration Versus Litigation As A Dispute Resolution Mechanism:

• Although the scope of judicial intervention under the 1996 Act has been curtailed to a great extent, courts, through their judicial interpretation, have widened the scope of review, resulting in the admission of a larger number of cases that otherwise ought to be dismissed at the first instance itself. As a result, parties call upon arbitration with a similar mindset as litigation, challenging awards in courts and increasing the time required for resolving the disputes. Parties abuse the existing provisions, which allow the 'automatic stay' of the execution of the awards based on a mere filing of an application Thus, the objective of arbitration as a mechanism for speedy resolution of disputes gets nullified due to such obtrusive delays. In reality, most arbitrators are retired judges, who treat arbitration proceedings in the same manner as traditional litigations, whereby, they are willing to give long and frequent adjournments, as and when sought by the involved parties. This has raised genuine concern amongst many lawyers and business people, who have come to believe that arbitration is becoming increasingly cumbersome and uneconomical just like the trials it was meant to replace.
• The trend in public sector enterprises is to incorporate an arbitration clause in their contracts, wherein, they appoint their own officers as arbitrators. It has been found that these arbitrators act prejudicially and many a times, the awards delivered by them are unjust, biased and partial. This in turn leads to extended litigations causing unnecessary delay that defeats the very purpose of arbitration.

Arbitration costs include the arbitrator's fees, rent for arbitration venues, administrative or clerical expenses, and professional fees for the representatives of the parties involved (which may include lawyers and expert witnesses). The sum of these fees may differ significantly between ad hoc and institutional arbitrations and there is no regulated fee structure for arbitrators in an ad hoc arbitration. The fees are decided by the arbitrators with the consent of the concerned parties and it normally varies between INR 50,000.00 to INR 1,00,000.00 approximately, per hearing. This is the fee for an arbitrator, which depends upon the professional standing of the arbitrator and the size of the claim. The number of hearings required and the cost of the arbitral venue also vary widely. When the cost of arbitration is compared to the cost of the litigation, it can be seen that, the cost involved in court proceedings is limited to lawyers' fees and court fees, which is calculated ad valorem on the claim amount or the value of the suit. In case of writ petitions or first appeals, court fees are fixed and are very nominal. High Courts across India have their own schedule, which fixes the rates for court fees. In case of suits, court fees do not generally exceed 10% of the claim amount of the suit. The only recurring expenditure is the professional fees of the lawyers, who charge per appearance. In addition, separate fees may be charged for drafting of the suits, plaints or petitions, counter affidavits, written statements and interim applications. There is great variation in the professional fees of the lawyers depending upon the seniority and reputation of the lawyer, the stakes involved, the hierarchy of the competent court deciding the case and the location of the concerned court.

A Survey Of Arbitration Trends In India

Considering the changing trends in arbitration in India, a survey was conducted, where 68 respondents including general counsels of large companies, attorneys of various organisations in India, and senior partners of domestic and international law firms participated. The Surveyors also interviewed some of the key lawyers and eminent personalities in this field to gain their perspective on arbitration in India.

Significant findings of the Survey:

ParticularsDetailsArbitration clause74% of survey respondents stated that an arbitration clause is an essential part of their legal contract.Indian regulationsMore than 50% of the respondents said that the ministry's recent steps to develop dispute resolution mechanism are in the right direction.Cost and time disadvantage50% of the respondents said that arbitration in India is expensive and does not provide timely resolution, which highlights the need for radical changes in procedural aspects.Arbitrator selectionSubject matter experts should be appointed as arbitrators - 68%. Retired judges should be appointed - 22%

Overview

This survey clearly indicates the growing need of arbitration in India and the primary reason cited is that courts in India are overburdened with innumerable cases and their disposal takes a long time. The Arbitration Act, 1940 was enacted to mitigate the growing needs of dispute resolution. However, the procedure under the old Act was cumbersome and dilatory and the courts' intervention put a roadblock on the pace of arbitral proceedings. This paved the way for the new Act being the Arbitration and Conciliation Act, 1996. This Act repealed the earlier Act of 1940 as well as the Acts of 1937 and 1980, consolidating and amending laws relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards while incorporating the law of conciliation and mediation. With this Act, expectations that commercial disputes will be resolved in an efficient manner increased as it envisaged minimum intervention of the courts.

Arbitrators also take their own time to complete the arbitration proceedings and generally tend to extend the number of sittings for their own gain

It is quite common to find in commercial agreements, an arbitration clause for parties to resolve the disputes arising out of their contracts without recourse to courts. If an amicable settlement is not arrived at, then parties resort to invoking of the arbitration clause for which an agreement in writing must exist between the parties (Section7).

Arbitration can be domestic or international. In the former, both the parties are generally from India while in the other, one of the parties can be a resident outside India or a corporate body incorporated outside India. In case, one of the parties to the dispute is a foreign party, the parties can still agree to domestic arbitration and subject themselves to the Indian laws. There is no timeframe prescribed under this act for completing the arbitration proceedings.

The power given to the courts under Section 9 of the Act is very wide. The court may, on application, grant interim relief "before or during the arbitral proceedings or at any time after making of the arbitral award but before it is enforced u/s 36iv". Even though the power contemplated under section 9 is not intended to frustrate the arbitration proceedings, in reality, litigation starts even before the proceedings commence.

Arbitrators also take their own time to complete the arbitration proceedings and generally tend to extend the number of sittings for their own gain. Often, even when the arbitration proceedings end, the arbitrators get busy in new arbitrations, losing focus of the completed ones, causing delay in the pronouncement of the award. Some arbitrators, mostly retired judges, charge heavy fees and insist on specific venues, thereby increasing costs.

The speedy disposal of disputes or effectiveness of arbitration can be greatly enhanced by choosing an appropriate arbitrator. The criteria to be considered include subject matter expertise, experience and availability, accessibility.

If good arbitrators are appointed, the proceedings are conducted as per the principles of natural justice, reducing cumbersome and time-consuming procedural aspects in evidence and adjournments. In disputes involving smaller claims, institutional arbitration should be considered as a first choice as it strictly adheres to time limit or rules framed. Lastly but most importantly, it must be ensured that while drafting an arbitration clause, a timeframe to begin the process, reference to institutional arbitration, choice of venue and jurisdiction are clearly incorporated to minimise judicial intervention.

Disclaimer-The views and opinions expressed in this article are those of the authors based on their experience and research and do not necessarily reflect any official policy or guidelines.