How to Invoke Arbitration Proceedings in India

INTRODUCTION:

Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.

As per Section 2(s) of The Arbitration and Conciliation Act, 1996:

“arbitration” means any arbitration whether or not administered by a permanent arbitral institution.

HOW TO INVOKE ARBITRATION PROCEEDINGS AND ITS APPLICABILITY?

By adding a clause of arbitration in the contract during the drafting of a contract of any civil matter, so that in the future, if any disputes arise between the parties they can resolve it through arbitration.

If the parties had no arbitration clause in the contract, the parties can make a separate arbitration agreement with their mutual consent to solve the disputes arising out of an earlier contract.

The act extends to the whole of India, provided that Parts I, III and IV extends to the State of Jammu and Kashmir only in so far as they relate to international commercial arbitration.

KEY OBJECTS AND REASONS BEHIND ARBITRATION

To comprehensively cover international and commercial arbitration as also domestic arbitration.
To make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of the specific arbitration.
To provide that the arbitral tribunal gives reasons for its arbitral award.
To ensure that the arbitral tribunal remains within the limits of its jurisdiction.
To minimise the supervisory role of courts in the arbitral process.
To permit an arbitral tribunal to use mediation, conciliation or other procedures during the arbitral proceedings to encourage settlement of disputes.
To provide that every final arbitral award is enforced in the same manner as if it were a decree of the court.
To provide that a settlement agreement reached by the parties as a result of conciliation proceedings will have the same status and effect as an arbitral award on agreed terms on the substance of the dispute rendered by an arbitral tribunal; and
To provide that, for purposes of enforcement of foreign awards, every arbitral award made in a country to which one of the two International Conventions relating to foreign arbitral awards to which India is a party applies, will be treated as a foreign award.

KEY ELEMENTS/ESSENTIALS OF ARBITRATION AGREEMENT

The presence of a dispute amongst the parties is essential, if the dispute is already settled or has never occurred, no party can invoke arbitration clause. It must be a written agreement (Section 7(4)) and there should be an intention of the parties to resolve dispute between them through arbitration.

As also held by Hon’ble supreme court in K.K. Modi v. K.N. Modi and Ors. (1998) 3 SCC 573, following attributes must be present in an arbitration agreement:

The agreement must state that the decision of the tribunal will be binding upon by both the parties.
That the jurisdiction of the tribunal on the rights of the parties should be decided by both the parties consensually or from an order obtained by the Court which states that the proceeding shall be made through arbitration.
The tribunal has the right to determine the rights of the parties by being fair and just.
The agreement that the parties will refer to the tribunal must be enforceable by law.
The agreement must state that any decision made by the tribunal on the dispute must be formulated prior to the time when the reference is made.

Some of the common elements which should be included in an arbitration agreement are:

1. Seat of Arbitration
2. Place/Venue of Arbitration
3. Cost to be paid as decided mutually or to be borne by both the parties.
4. Procedure for appointing the Arbitrators.
5. Language e.g., English or Hindi etc.
6. Number and Qualifications of Arbitrators

Type of Arbitration e.g., institutional, or ad hoc

Governing Law

TYPES OF ARBITRATION

Based on who administers the arbitration proceedings, there are two types of arbitration:

Institutional Arbitration – An institutional arbitration is one that is administered by an institution e.g., Indian Council of Arbitration, International Chamber of Commerce, Federation of Indian Chamber of Commerce & Industry, World Intellectual Property Organization etc.
Ad hoc Arbitration – An ad hoc arbitration is one that is not administered by an institution.

Based on the country of the parties involved in the dispute, there are two types of arbitration:

Domestic Arbitration – Domestic arbitration takes place in India. The merits of the disputes are all governed by Indian law and the cause of action arises wholly in India. Where both parties are from the domestic country.
International Arbitration – International commercial arbitration refers to the arbitral proceeding which takes place either in India or outside the country or when the parties or subject matter of the arbitration belong to a foreign party.

PROCEDURE/STAGES OF ARBITRATION

Arbitration Clause or Arbitration Agreement in writing with essential elements/attributes as discussed above.
Dispute arises between the parties.
Arbitration Notice from one party to other, requesting for that dispute to be referred to arbitration as per arbitration agreement. [Section 21]
Appointment of Arbitrators as per arbitration agreement, or If the parties fail to mutually decide or if parties fail to appoint the arbitrator then in such case by court. [Section 11]
Statement of Claim – the claimant shall state the facts for supporting his claim, point of issue and relief. [Section 23]
Hearing of Parties before arbitrator. Arbitrator may also pass interim award after preliminary hearings.
Final Arbitral Award by arbitrator. An arbitral award is final and binding on the parties to the contract. [Section 35]
Challenge in court [Section 34]

ISSUES/CHALLENGES IN THE ENFORCEMENT OF AWARDS

Enforcement of a foreign award may be refused, and a domestic award may be set aside [Section 34], if it is proven that –

The parties to the agreement were under some incapacity.
The agreement in question is not in accordance with the law to which the parties have subjected it, or under the law of the country where the award was made (especially in the case of foreign awards).
There is a failure to give proper notice of appointment of arbitrator or arbitral proceedings or the party against whom the award was rendered was otherwise unable to present his case.
The award is ultra vires the agreement or submission to arbitration.
The award contains decisions on matters beyond the scope of the submission to arbitration.
The composition of the arbitral authority or the arbitral procedure is ultra vires agreement.
The composition of the arbitral authority or the arbitral procedure is not in accordance with the law of the country where the arbitration took place.
The award (specifically a foreign award) has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which that award was made.
Subject matter of the dispute is not capable of settlement by arbitration under Indian law.
Enforcement of the award would be contrary to the public policy of India.

LIMITATION TO COMMENCEMENT OF ARBITRATION

As per Section 43(2) of The Arbitration and Conciliation Act, 1996, the period of limitation begins to run for the claimant to invoke the arbitration clause from the date on which the cause of arbitration occurred.

That needless communication or reminders cannot postpone this accrual of the cause of action nor stop the limitation period to begin, not even if there is no mention of the limitation period in the arbitration clause.

Any arbitration proceedings commenced after the period of three years from the date on which the cause of action arose will be time-barred.

ENFORCEMENT OF ARBITRAL AWARD

Executing court cannot re-examine the award, it has to only make enquiry as to enforceability of award and hold that it is enforceable and thereafter enforce it.

Once an award is found to be enforceable by a court, it would be enforced like a decree of that court following Section 36 to 74 and Order XXI of the CPC in respect of execution.

Both domestic and foreign awards are enforced in the same manner as a decree of the Indian court.

CONCLUSION

The most important step in the arbitral process is the arbitration clause/agreement which shall be framed with due diligence.

Arbitration supports the party’s autonomy. During the framing of the arbitration clauses, parties have to decide the appointment of the arbitrator, the number of arbitrators, rules applicable in the arbitration. After the final arbitration award, it is enforced by the law applicable in such jurisdiction of the arbitration.

ARBITRABILITY AND KOMPETENZ-KOMPETENZ PRINCIPLE:

Sbp & Co. v. Patel Engineering Ltd. And Another (Overruled by subsequent amendment)

decided on 26.10.2005, Supreme Court of India.

Coram:

7 Judge Constitution Bench of:

HON’BLE MR. JUSTICE R.C.LAHOTI (CJI)

HON’BLE MR. JUSTICE B.N.AGRAWAL

HON’BLE MR. JUSTICE ARUN KUMAR

HON’BLE MR. JUSTICE G.P.MATHUR

HON’BLE MR. JUSTICE A.K.MATHUR

HON’BLE MR. JUSTICE P.K.BALASUBRAMANYAN

HON’BLE MR. JUSTICE C.K.THAKKER

Case No.:

Civil Appeals No. 4168 of 2003 with Nos. 4169-73 of 2003, 4076 of 2004, 3777 of 2003 and 6562-66 of 2005

Issue:

Section 11–Appointment of Arbitrator by Chief Justice–Whether Chief Justice exercises judicial power or administrative power?

Fact:

Respondent No. 1 was awarded a contract by State of Maharashtra through its Irrigation Department for the construction of civil works pertaining to Stage IV of the Koyna Hydroelectric Project. Respondent No. 1 in turn entered into a sub-contract with the petitioner with respect to a piece work for that purpose. Disputes arised. Petitioner appointed respondent No. 2 as its Arbitrator, Respondent No. 1 appointed Shri S.L Jain as its Arbitrator. Shri Jain suggested the names of three retired Judges of high Court to act as the Third Arbitrator, however, respondent No. 2 rejected the contention to appoint the Third Arbitrator.

Held by 6:1 Majority:

The Majority, speaking through P. K. Balasubramanyan, J.:

The object of minimizing judicial intervention while the matter is in the process of being arbitrated upon, will certainly be defeated if the High Court could be approached under Article 227 of the Constitution of India or under Article 226 of the Constitution of India against every order made by the arbitral tribunal. therefore, it is necessary to indicate that once the arbitration has commenced in the arbitral tribunal, parties have to wait until the award is pronounced unless, of course, a right of appeal is available to them under Section 37 of the Act even at an earlier stage.
We, therefore, sum up our conclusions as follows:
1. The power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Act is not an administrative power. It is a judicial power.
2. The power under Section 11(6) of the Act, in its entirety, could be delegated, by the Chief Justice of the High Court only to another judge of that court and by the Chief Justice of India to another judge of the Supreme Court.
3. In case of designation of a judge of the High Court or of the Supreme Court, the power that is exercised by the designated, judge would be that of the Chief Justice as conferred by the statute.
4. The Chief Justice or the designated judge will have the right to decide the preliminary aspects as indicated in the earlier part of this judgment. These will be, his own jurisdiction, to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice or the judge designated would be entitled to seek the opinion of an institution in the matter of nominating an arbitrator qualified in terms of Section 11(8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the judge designate.
5. Designation of a district judge as the authority under Section 11(6) of the Act by the Chief Justice of the High Court is not warranted on the scheme of the Act.
6. Once the matter reaches the arbitral tribunal or the sole arbitrator, the High Court would not interfere with orders passed by the arbitrator or the arbitral tribunal during the course of the arbitration proceedings and the parties could approach the court only in terms of Section 37 of the Act or in terms of Section 34 of the Act.
7. Since an order passed by the Chief Justice of the High Court or by the designated judge of that court is a judicial order, an appeal will lie against that order only under Article 136 of the Constitution of India to the Supreme Court.
8. There can be no appeal against an order of the Chief Justice of India or a judge of the Supreme Court designated by him while entertaining an application under Section 11(6) of the Act.
9. In a case where an arbitral tribunal has been constituted by the parties without having recourse to Section 11(6) of the Act, the arbitral tribunal will have the jurisdiction to decide all matters as contemplated by Section 16 of the Act.
10. Since all were guided by the decision of this Court in Konkan Railway Corporation Ltd. and Anr. v. Rani Construction Pvt. Ltd. (2000)2SCC388 and orders under Section 11(6) of the Act have been made based on the position adopted in that decision, we clarify that appointments of arbitrators or arbitral tribunals thus far made, are to be treated as valid, all objections being left to be decided under Section 16 of the Act. As and from this date, the position as adopted in this judgment will govern even pending applications under Section 11(6) of the Act.
11. Where District Judges had been designated by the Chief Justice of the High Court under Section 11(6) of the Act, the appointment orders thus far made by them will be treated as valid; but applications if any pending before them as on this date will stand transferred, to be dealt with by the Chief Justice of the concerned High Court or a Judge of that court designated by the Chief Justice.
12. The decision in Konkan Railway Corporation Ltd. and Anr. v. Rani Construction Pvt. Ltd. (2000)2SCC388 is overruled.

C.K. Thakker, J., in his minority opinion:

As the Chief Justice is performing an administrative function under sub-section (6) of Section 11 in appointing an arbitrator, there is no “duty to act judicially” on his part, nonetheless there is “duty to act fairly” which requires him to issue notice to the other side before taking a decision to appoint an arbitrator. I am, therefore, of the view that clause 7 of the scheme as it stood prior to the amendment, could neither be held bad in law nor inconsistent with Section 11 of the Act. I am, therefore, in respectful agreement with the majority judgment on that point.
On the basis of the above findings, my conclusions are as under:
1. The function performed by the Chief Justice of the High Court or the Chief Justice of India under sub-section (6) of Section 11 of the Act (i.e the Arbitration and Conciliation Act, 1996) is administrative, pure and simple, and neither judicial nor quasi-judicial.
2. The function to be performed by the Chief Justice under sub-section (6) of Section 11 of the Act may be performed by him or by “any person or institution designated by him”.
3. While performing the function under sub-section (6) of Section 11 of the Act, the Chief Justice should be prima facie satisfied that the conditions laid down in Section 11 are satisfied.
4. The Arbitral Tribunal has power and jurisdiction to rule “on its own jurisdiction” under sub-section (1) of Section 16 of the Act.
5. Where the Arbitral Tribunal holds that it has jurisdiction, it shall continue with the arbitral proceedings and make an arbitral award.
6. A remedy available to the party aggrieved is to challenge the award in accordance with Section 34 or Section 37 of the Act.
7. Since the order passed by the Chief Justice under sub-section (6) of Section 11 of the Act is administrative, a writ petition under Article 226 of the Constitution is maintainable. A letters patent appeal/intra-court appeal is competent. A special leave petition under Article 136 of the Constitution also lies to this Court.
8. While exercising extraordinary jurisdiction under Article 226 of the Constitution, however, the High Court will be conscious and mindful of the relevant provisions of the Act, including Sections 5, 16, 34 to 37 as also the object of the legislation and exercise its power with utmost care, caution and circumspection.
9. The decision of the Constitution Bench in Konkan Rly. Corpn. Ltd. III to the extent that it held the function of the Chief Justice under sub-section (6) of Section 11 of the Act as administrative is in consonance with settled legal position and lays down correct law on the point.
10. The decision of the Constitution Bench in Konkan Rly. Corpn. Ltd. III to the extent that it held clause 7 of “The Appointment of Arbitrators by the Chief Justice of India Scheme, 1996” providing for issuance of notice to affected parties as “beyond the term of Section 11” and bad on that ground is not in accordance with law and does not state the legal position correctly.
11. Since the Chief Justice is performing administrative function in appointing an Arbitral Tribunal, there is no “duty to act judicially” on his part. The doctrine of “duty to act fairly”, however, applies and the Chief Justice must issue notice to the person or persons likely to be affected by the decision under sub-section (6) of Section 11 of the Act.
12. All appointments of Arbitral Tribunals so far made without issuing notice to the parties affected are held legal and valid. Henceforth, however, every appointment will be made after issuing notice to such person or persons. In other words, this judgment will have prospective operation and it will not affect past appointments or concluded proceedings.

Arbitration and Conciliation Act, 1996.sub-section (6) of Section 11

This interpretation by the Supreme Court in SBP & Co. v. Patel Engineering Ltd.(Overruled by subsequent amendment) undermined the effect and importance of the kompetenz-kompetenz principle encapsulated in Section 16 of the Act.

Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. & Others (Overruled by subsequent amendment)

decided on 15.04.2011, Supreme Court of India.

Coram:

2 Judge Bench of:

HON’BLE MR. JUSTICE R.V. RAVEENDRAN

HON’BLE MR. JUSTICE J.M. PANCHAL

Case No.:

Civil Appeal No. 5440 of 2002

Issue:

Scope of Arbitration agreement.

Fact:

The suit had been filed by SBI to enforce mortgage to recover amounts due to it – In that context, SBI had also sought delivery of vacant possession, enforcement of charge/mortgage over flat, realisation of sale proceeds therefrom and right of Appellant to stay in possession – Till entire deposit was repaid, all were matters specifically mentioned in Clause 16 as matters to be settled by arbitration.

Held:

The well-recognised examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

In Booz-Allen (Overruled by subsequent amendment), the Supreme Court observed that the question of arbitrability is to be decided on the basis of the ‘nature of rights’ involved in the dispute. If the dispute involves a right in rem, i.e., a person’s right against the world at large, the dispute is not arbitrable. On the other hand, if a dispute involves a right in personam, i.e., rights against specific individuals, such as in a contract, the dispute is arbitrable.

Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & Others (Overruled by subsequent amendment)

decided on 17.08.2016, Supreme Court of India.

Coram:

2 Judge Bench of:

HON’BLE MR. JUSTICE J. CHELAMESWAR

HON’BLE MR. JUSTICE ABHAY MANOHAR SAPRE

Case No.:

Civil Appeal No. 8164 Of 2016

Issue:

Whether Clause in Trust Deed, which provides for resolving disputes arising between beneficiaries of Trust through arbitration, can constitute arbitration agreement within meaning of Section 2(b) and 2(h) read with Section 7 of Act.

Fact:

The settlor executed a family Trust Deed as author of the Trust in relation to his properties. Clause 20 of the Trust Deed provides that every dispute therein would be arbitrable. The differences cropped up.

Held:

We thus add one more category of cases i.e Category (vii), namely, cases arising out of trust deed and the Trusts Act, 1882, in the list of six categories of cases specified by this Court in para 36 at pp. 546-47 of the decision rendered in Booz Allen & Hamilton Inc. which as held above cannot be decided by the arbitrator(s).