Commercial Arbitration: Paradigmatic Shift from Courtroom Litigations

THIS ARTICLE WAS WRITTEN BY DRISHTI YADAV, A STUDENT OF HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA.

Introduction to the topic

We are living in exciting times, where the world is looking towards India, as a potential partner for the purpose of undertaking huge business transactions. Business in India, unlike most developed and developing countries, is a cluster of a variety of markets and industries which include both small as well as large enterprises. For this very purpose a country like ours has to perform two equally important and interlinked purposes, none of which can be ignored. One such purpose is to make efforts to perform efficient internal business by supporting both small as well as large market enterprises and another is to perform efficient external business which includes building strong business relations internationally. India has taken huge strides to make the environment conducive for foreign investors to commence business relations with it. As a consequence, the arbitration regime runs sine qua non and is sure to expand too. In today’s times it can hardly be debated that businesses have become an ever more unified global field in focus and the dispute resolution mechanism needs to have a unified global approach too. It can be said and agreed that one law can resolve every dispute no matter what the jurisdiction of the country is. Every country has its laws based on certain socio-economic conditions which make them distinct from others.

Inevitable role of Arbitration Law

No one country, however large its geographical area may be or however powerful it may be, cannot be said to have a law that can provide resolution to the cross-border disputes of another country. Here comes the role of Arbitration Law in force which is nothing but a mere contract between the parties to choose lex fori of their own choice. This can be one explanation of the emergence of arbitration law as the Alternative dispute resolution process but there are many more reasons that made this process a necessity rather than alternative. It is indeed true that courts deal with many civil as well as criminal matters and they are burdened with enough cases that can last centuries. Matters related to business and industries do not require remedies in the form of distressed relations between the parties since they are involved in transitions that require their participation. It is resolution of the dispute which is more important than winning or losing. These disputes involve huge amount of money and most of the times, business transactions which are subject matter of dispute can lead to negative impact on market which in turn can lead to negative impacts on business environment of the country hence it becomes the duty of the arbitrators to make sure that people have faith in speedy process of dispute resolution.[1]

Scope of Arbitration Law

Indian Arbitration act does not provide a description regarding matters that can or cannot be resolved through Arbitration. The intent of legislators behind doing so can be supported with the fact that such a description will limit the scope of Arbitration law and providing such a list will make the flexible nature of this law inclusive or restricted which will obviously run opposite to the legislative intent. Another reason can also be that restricting the ever increasing global and universally applicable field of dispute resolution process will restrict its application to the disputes that may need their resolution via Arbitration in future. Although the Act itself makes it clear that the authority in setting aside an award passed remains with the court which can very well set it aside with the authority of Section 34(2)(b) and 48(2) of the Indian Arbitration Act if it thinks that the subject matter is not capable to be settled by Arbitration. Nevertheless, whatever might be the legislative intent in leaving the interpretation open, this question arose in a plethora of cases and with these cases it is clear that the judiciary has limited the scope of Arbitration Law for now.

Dominant Paradigm of Judiciary in settlement of disputes

No rigid or inflexible rule has been provided by the judiciary in order to decide the scope of Arbitration Law in deciding what matters are best suited for settlement by Arbitration and which are to be excluded. Generally speaking, the apex court held that rights in personam are considered to be amenable by arbitration whereas rights in rem are not and they need to be adjudicated by courts and public tribunals. An exception to this is disputes that relate to the subordinate rights in personam arising out of rights in rem. Nevertheless, disputes that involve violation of civil rights wherein damages can be the remedy can very well be referred to the arbitration. An exception to this is those civil rights which are specifically prohibited either by decision of the courts or some express provision of law.[2] In the case of Booz Alien and Hamilton Inc. v. SEBI Home Finance Ltd. And Ors.,[3] court held that there are some well recognized examples of categories that cannot be arbitrated. The list of examples is not exhaustive and it only contains matters that are held unsuitable for arbitration taking in consideration past and present regime only which means there might be changes in the list in future based on facts and circumstances of a case. Examples of non-arbitrable matters is as follows:

1. Disputes that relate to rights and liabilities arising out of criminal offences;
2. Matrimonial disputes relating divorce, judicial separation, restitution of conjugal rights, custody of children;

• Matters regarding guardianship;

1. Matters that relate to insolvency and winding up;
2. Testamentary matters that include grant of probate, letters of administration and succession certificate; and
3. Matters that involve eviction of tenancy governed by special statutes where the tenant is protected via statutory provision against eviction and power to grant eviction rests only with specified courts.

Commercial Arbitration

When we talk about similarities in cross border activities, it is inevitable to leave the matters of commerce out of the discussion. Commerce is one such activity that remains common in various diversities in nations all over the continent. It is not a night long process and has its roots in history wherein commerce was an essential practice that gave rise to various rules based on fair trading and good faith i.e., ex aequo et bono which ultimately gave rise to Laws backed by legal sanction. Since the legal system of a country is flexible and takes into consideration changings needs of the society, a new concept of resolution of business disputes by arbitration law emerged out of necessity and need since basic human rights include right to judicial access and possessing rights only in statute which cannot be enforced due to lack of effective resolution mechanism for their redressal would be meaningless.[4] Unlike Court based litigation, Arbitration is an extra-judicial approach and can only be applied to resolution of those matters which are capable of being resolved under law, by effect of an agreement entered into by the parties. In commercial disputes the most important intent behind redressal of disputes is not to punish another party with fine or imprisonment rather it is done in order to make both the parties settle their differences since a huge amount of money is at stake and timely justice needs to be served without making relations of the party bitter and beyond repair. The categories of disputes that are arbitrable are business disputes, banking disputes, performance under contract, partnership differences, product liability etc. Those types of cases that relate to trade, commerce and contracts more specifically including, money claims under contracts, disputes regarding specific performance and other like business disputes can be settled through arbitration.[5] Earlier Arbitration was used for the settlement of disputes between members of trade associations and different exchanges in the securities and commodities trade. Nowadays contracts entered upon by the parties contain arbitration which makes arbitration a compulsory and binding procedure to be followed in case a dispute arises. Business contracts in industries and commerce provide arbitration of controversies arising out of contracts for the sale of manufactured goods, terms of service of employment, construction and engineering projects, financial operations, for agency and distribution arrangements and many other undertakings. the arbitration practice of countries may differ from each other but most of the countries nowadays have taken huge strides to make the environment conducive for foreign investors to commence business relations with it to ensure that businesses are attracted by the country by comforting the foreign investor in the apparent neutral dispute resolution mechanism. State established courts of each country complement the functioning of arbitral tribunals and not contradict it. An award passed by an arbitral tribunal is valid and binding upon the parties. The statutory law of various countries and the rules of agencies administering commercial arbitration may contain provisions on the form, certification, notification, and delivery of the award, with which requirements the arbitrator has to comply according to the laws of the country it is subjected to. A much debated and controversial question arises regarding which law of the land needs to be applied to arbitral proceedings. This question is easy to answer if parties have mentioned in their agreement as to what law of the land they want to apply and govern their dispute but difficulty arises where parties have not mentioned any law of any country. In such difficulty, the role of arbitrator comes into play who needs to apply its mind in deciding as to what law is proper in consideration with the matter of dispute with reference to the terms of the contract and nature of the business and trade. It is indeed true that procedural laws like Indian Evidence Act, 1872 and Code of Civil Procedure, 1908 do not apply to Arbitral Proceedings but the basic general principles of the Evidence will apply. International commercial arbitration which is basically arbitration of commercial disputes at cross border level between traders of different countries has long been recognized and the procedure in international commercial arbitration is more or less the same as in domestic arbitration. Various efforts have been made at International level in order to settle international disputes effectively through arbitration wherein the countries which are parties to an agreement will be free to choose a procedure, method and law of their choice.

Conclusion

Though arbitration is a method for resolution of disputes, it is not the only method. It is most preferable in business disputes unlike others for example labour disputes. One reason can be that parties in business disputes might be in equal position to or not to dominate the will of another and willing to come to a settlement that will respect their claim and will also not be detrimental to the business. Legislators have tried their best in providing rules and provisions in order to make arbitration law efficient in resolving disputes in a time bound manner. There is a separate statute for settlement of disputes by arbitration[6] and a certain part of Code of Civil Procedure[7] also deals with the same. As per Section 89 of Code of Civil Procedure, court is conferred with the jurisdiction to refer a dispute to the Arbitration whereas Rules 1Ato 1C of Order X lay down the manner of jurisdiction that needs to be exercised by the court. A mandatory duty has been casted upon civil courts to refer the disputes through arbitration and failure of settlement via arbitration will make the dispute liable for trial. It is no doubt true that Courts are well versed and competent to deal with business disputes but the fact they are already overburden with disputes that needs their attention instantly makes business disputes to go in pending for years and various investors hesitate to invest in a country wherein dispute settlement mechanism is unsatisfactory and tedious. This is the reason that a neutral dispute settlement mechanism like arbitration which guarantees party autonomy in choosing the law and procedure has become more crucial for business operations and succeeds in ensuring party autonomy and delivery of time bound justice.

[1] State of Jammu & Kashmir v. Dev Dutt Pandit, AIR 1999 SC 3196

[2] Booz Alien and Hamilton Inc. v. SEBI Home Finance Ltd. And Ors. (2011) 5 SCC 532

[3] Ibid.

[4] Mario Cappelletti and Bryant Garth, Access to Justice- a worldwide survey 8-9 (Sijthoff & Noordhoff, Alphanaanderijan 1978).

[5]Afcons Infrastructure Ltd. V. Cherian Varkey Construction Co. (P) Ltd. & ors., (2010) 8 SCC 24

[6] The Arbitration and Conciliation Act, 1996.

[7] Code of Civil Procedure, 1908, s. 89.