Arbitration over litigation

- By Anubhuti Singh & Sneha Singh

Introduction

Arbitration is a sensible suggestion which is worth discussing.

-Matthias Platzeck

One of the main objectives of enactment on Arbitration and Conciliation in 1996 is minimising the supervisory role of the courts in arbitral process. The Statement of Objects and Reasons contained in the Arbitration and Conciliation Bill, 1995 emphasized the objective of minimisation of the interference of the courts in arbitration process. In accordance with the provisions of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act, 1996”) the interference of the courts is very limited in matters relating to arbitration except in specified circumstances as compared to the old Act, of 1940. Moreover, the interference of the courts can be termed as court assistance instead of saying court interference. The main objective of this research paper is to analyse the role of Courts and judicial intervention before and during arbitral process in Domestic law. The Court will not come in the way of arbitration matters at all from the commencement of arbitration proceedings till the arbitral award is made. Section 5 of the Act, 1996 provides for the extent of judicial intervention which says that “notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part”.. Therefore, the judicial intervention has been restricted and minimised. Under Section 5, the words used are “Judicial Authority” which is a wider term than the word “Court” and judicial authority includes all such authorities/agencies conferred with the judicial powers of the Government.

The very first chapter of the Research Paper deals with the Emergence of Arbitration, where the very reason of emergence of arbitration in India is dealt at great length. Also how arbitration is said to be very effective dispute resolution mechanism. Later the chapter deals that how Arbitration seeks to act as an alternative to the court system. And why the individuals of modern era prefer arbitration over court system. What are the benefits associated with preferring arbitrational proceeding for the adjudication of the dispute.

Second Chapter of the Research Paper deals with the basic problem related to the arbitration proceeding and court system and what is the tool dealing with the interaction between courts and the arbitral process. This chapter also includes the instances where the assistance of the courts is necessary for the smooth functioning of the arbitration system since the courts have statutory powers to execute and enforce an order. In the Arbitration and Conciliation Act 1996 there are many provisions where the intervention of the court is very much necessary.

The third Chapter of the Research Paper deals with the very important aspect of the Research topic i.e. Arbitration over Litigation. The chapter mentions about the Model Law i.e. UNCITRAL Law where no court shall intervene except where so provided in the provisions. The chapter also signifies the relationship between courts and arbitrators to that of a relay race. In the latter part, the chapter discuses about the situations in which the intervention of the court may be necessary. And also about The Arbitration Act, 1940 under which the intervention of the court was required in all the three stages of arbitration and the ineffectiveness of the act. This chapter also deals with the 1996 Act which contains two unusual features that differed from the UNCITRAL Model Law. And also discusses the curtailment of the judicial intervention to a great extent.

The fourth Chapter of the Research Paper addresses the problem and provides uniform and consistent solutions to the problem of court litigation over arbitration. The commencement of court litigation of a matter subject to arbitration is often characterised as a torpedo intended to complicate and delay the arbitration proceedings. Summarizing, this torpedo is often effective in thwarting arbitration proceeding because the applicable legal frame work fails to recognise arbitration as the default mechanism for such regularly failed claims.

This research paper briefly deals with the problem, as well as a few current proposed solutions, and then proposes its own novel solution in the form of a new convention making arbitration the default legal rule for resolution of civil disputes. This paper will consider that how far litigation remains to be the only real means of resolving a dispute, or whether there are, in fact, other options available.

 

Emergence of Arbitration

Arbitration has a long history in India. In ancient times, people often voluntarily submitted their disputes to a group of wise men of a community called the Panchayat for a binding resolution. Modern arbitration law in India was created by the Bengal Regulations in 1772, during the British rule. The Bengal Regulations provided for reference by a court to arbitration, with the consent of the parties, in lawsuits for accounts, partnership deeds, and breach of contract, amongst others. Until 1996, the law governing arbitration in India consisted mainly of three statutes:

  • The 1937 Arbitration (Protocol and Convention) Act,
  • The 1940 Indian Arbitration Act, and
  • The 1961 Foreign Awards (Recognition and Enforcement) Act.

The 1940 Act was the general law governing arbitration in India along the lines of the English Arbitration Act of 1934, and both the 1937 and the 1961 Acts were designed to enforce foreign arbitral awards (the 1961 Act implemented the New York Convention of 1958). The government enacted the Arbitration and Conciliation Act, 1996 (The 1996 Act) in an effort to modernize the outdated 1940 Act. The 1996 Act is a comprehensive piece of legislation modelled on the lines of the UNCITRAL Model Law. This Act repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940 Act). Its primary purpose was to encourage arbitration as a cost-effective and quick mechanism for the settlement of commercial disputes. The 1996 Act covers both domestic arbitration and international commercial arbitration.

The most important step of all in the development of the supportive modern approach was the promulgation by UNCITRAL of the Model Law, which has now been adopted in some form or another in over 60 countries. Article 5 of the Model Law significantly limits the occasions for Court intervention in arbitral matters. As is well known Article 5 provides that, “In matters governed by this law, no Court shall intervene except where so provided in this law

The new law on arbitration and conciliation was enacted in the year 1996 basing on the UNCITRAL Model Law and Rules. The Act, 1996 repealed the old Act, 1940, legislation on foreign awards basing on the Geneva Protocol and Convention and New York Convention. The Act, 1996 is unique in its nature as it contains comprehensive provisions on various issues relating to domestic arbitration, conciliation, international commercial arbitration, conciliation and recognition and enforcement of foreign awards basing on the Geneva and New York Conventions. The main objectives of making this legislation are to cover comprehensively international commercial arbitration and conciliation as well as domestic arbitration and conciliation, to make comprehensive procedure for arbitral process, to provide that the arbitral tribunal gives reasons for its award, to ensure that the arbitral tribunal remains within its limits of jurisdiction, to minimize the supervisory role of courts in arbitration, to permit the arbitral tribunal to use the other methods of alternative dispute resolution mechanisms, such as mediation and conciliation during the course of arbitral proceedings for settlement of disputes, to make the provision that the arbitral award is to be enforced as a court decree and to give similar status to the settlement arrived at , during the course of arbitral proceedings.

There is an old Chinese saying "may you live in interesting times". From a legal point of view, we cannot think of a time in the recent past that is more interesting than the present. Whatever views may be on the merits or otherwise of the changes that are taking place, there is no doubt that we are experiencing a sea change in all aspects of the law and this change is not merely one of practice and convenience, but it is of fundamental underlying theory as well.

Most people consider litigation as the main mechanism by which a dispute can be resolved. Traditionally this was true. But there is no denying that court action is a costly experience and many people in the modern arena wants to avoid court proceeding for this reason. So where does that leave individuals who think that they cannot access to justice? There are benefits associated with taking a dispute to be heard before a court, the popularity of resolving the dispute through court proceeding has caused innumerable problems. Due to the sheer volume of cases that were being seen by the courts, the process became very slow and individuals had to wait months, even years, to have their cases seen before a judge. This length of time increased more if an individual was unhappy with the judgment and wished to appeal the decision. The time element of litigation became very unpredictable.

The cost of litigation became extremely exorbitant. This began to concern a social class argument, raising issues around the equality of rich and poor litigants, the latter of which would have been unable to pursue their action. Moreover, the adversarial characteristic of litigation was, and still remains, an element that concerns many people who are unfamiliar with the system and the process of pursuing a dispute in the court.

In recent times individuals have seen the development of alternative dispute resolution in India. This has been driven largely by the inaccessible nature of the litigation system. It is conspicuous that arbitration has evolved over the years as the ideal tool for resolution of disputes that saves the court's time and largely contributory in assisting the parties to resort to quick remedial measures. Every arbitration is based on insightful application of law and its evolution is proof of its significance in the actual proceedings. Thus, arbitration has emerged as the most preferred platform for quick resolution of disputes especially in the industrial and the corporate realm.

Essentially, Arbitration seeks to act as an alternative to the court system, while providing a remedy to disputing individuals where possible. This approach is much more informal and considerably less adversarial than litigation, aimed at reaching a settlement based on compromise by both parties. This method has numerous benefits particularly attractive when compared to litigation. The reduction of time and cost associated with pursuing ADR, despite the potential delay if a claimant wishes to appeal a decision. Furthermore, if there is a specialised issue, ADR seeks to use an expert to assist in the decision making process. This is useful when considering a judge who may deal with the cases in which they have a very limited area of expertise.

Arbitration is a more adjudicative method and it can be considered to be the most similar to litigation. However, there is a considerable amount of party autonomy, which gives the disputing parties the option to decide how to shape their arbitration.  This provides much more flexibility than the option of litigation. The arbitrators in these scenarios will often be experts in a particular field and so this is a popular method of dispute resolution in the commercial world, owing to the requirement of expertise in specific areas. The growth of ADR in recent times has been significant. Under the Civil Procedure Rules, ADR should be encouraged before pursuing court action as many disputes can be settled outside the court.

This paper will focus on to what extent courts are precluded from exercising jurisdiction over matters at least arguably subject to arbitration.

 

 The Basic Problem

Court proceeding over the existence or validity of arbitration agreements is a major threat to the efficacy of arbitration. Once upon a time, arbitration was seen as a means of avoiding courts in resolving party’s contract disputes. Today, however, an arbitration agreement too often leads to a second dispute over the forum for resolving the first. This often obstructs the border between litigation and arbitration arguably presents the greatest threat to the effectiveness of arbitration. The threat is particularly acute in the context of commercial arbitration, where parties may seek to invoke the jurisdiction of courts, with a broad variety of views regarding the proper role of courts with respect to the arbitral process. The primary tool for dealing with the interaction between courts and the arbitral process is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).

This question requires a review of the “negative” aspect of “competence-competence.” While “positive” competence-competence provides an arbitral tribunal with the power to decide its own jurisdiction, the negative version goes further in precluding a court from addressing this same issue at least as a preliminary matter.

This negative version of competence-competence is subject to significant variation under different national arbitration laws. Thus, parties challenging the jurisdiction of arbitrators will often bring parallel challenges in court, adding to the overall cost of resolving the original dispute and reducing the efficiency of arbitral process. This potential for parallel court proceedings may also sometimes add further complexity and uncertainty to the process, such as the issuance of anti-suit injunctions and questions with respect to the preclusive effect of any given court determination on another, or on the arbitral process, itself.

It is important to note that the assistance of the courts is necessary for the smooth functioning of the arbitration system since the courts have statutory powers to execute and enforce an order. But at the same time courts should avoid entertaining applications against the arbitration proceedings because the court proceedings delay the arbitral process and consequentially the objective of the arbitration gets defeated. Hence the courts which are exercising the supervisory powers should exercise the powers with caution so that the arbitral process does not get affected. The Arbitration and Conciliation Act, 1996 gives scope to the Courts only with respect to the following issues:

(a) Reference to arbitration (Section 8, 45 & 54)

(b) Appointment of arbitration (Section 11)

(c) Interim measures (Section 9)

(d) Challenge to arbitrators (Section 12, 13 & 14)

(e) Challenging the arbitration awards (Section 34)

(f) Seeking Courts assistance with regard to Witnesses (Section 27)

(g) Contempt Proceedings (Section 27)

(h) Enforcement of awards (Section 36, 49 & 58)

(i) Appealable orders (Section 37 and Section 59)

 

Arbitration over Litigation

The Model Law seeks to eliminate the involvement of the courts as far as possible. It states that in matters governed by UNCITRAL Law, no court shall interfere except where so provided in this Law.

The relationship between courts and arbitrators has been compared to a relay race. Ideally, the handling of arbitral disputes should resemble a relay race. In the beginning stages, the wand is in the hand of the court; for at that stage there is no other organisation which could take steps to prevent the arbitration agreement from being ineffectual. When the arbitrators take charge they take over the wand and retain it until they have made an award. At this point, having no longer a function to fulfil, the arbitrators hand back the wand so that the court can in need advance its coercive powers to the enforcement of the award.[1]

There are at least three situations in which the intervention of the court may be necessary at the beginning of the arbitral process. These are:

  • The enforcement of the arbitration agreement;
  • The establishment of the tribunal; and
  • Challenges to jurisdiction.

The Arbitration Act, 1940, dealt with only domestic arbitration. Under the 1940 Act, intervention of the court was required in all the three stages of arbitration, i.e. prior to the reference of the dispute to the arbitral tribunal, in the duration of the proceedings before the arbitral tribunal, and after the award was passed by the arbitral tribunal. Before an arbitral tribunal took cognizance of a dispute, court intervention was required to set the arbitration proceedings in motion. The existence of an agreement and of a dispute was required to be proved. During the course of the proceedings, the intervention of the court was necessary for the extension of time for making an award. Finally, before the award could be enforced, it was required to be made the rule of the court. While the 1940 Act was perceived to be a good piece of legislation in its actual operation and implementation by all concerned, the parties, arbitrators, lawyers and the courts, it proved to be ineffective and was widely felt to have become outdated.[2]

The 1996 Act contains two unique features that differed from the UNCITRAL Model Law. First, while the UNICITRAL Model Law was designed to apply only to international commercial arbitrations, the 1996 Act applies both to international and domestic arbitrations. Second, the 1996 Act goes beyond the UNICITRAL Model Law in the area of minimizing judicial intervention.[3]

The 1996 Act was brought on the statute book as the earlier law, the 1940 Act, did not live up to the aspirations of the people of India in general, and the business community in particular.[4] Even though the 1996 Act was enacted to plug the loopholes of 1940 Act, the arbitral system that evolved under it led to its failure. The main purpose of the Act was to provide a speedy and effective dispute resolution mechanism to the existing judicial system, marred with inordinate delays and backlog of cases. But an analysis of the arbitration system, as practiced under the 1996 Act, reveals that it failed to achieve its desired objectives.[5]

The scope of judicial intervention under the 1996 Act has been curtailed to a great extent, courts through judicial interpretation, have widened the scope of judicial review, resulting in the admission of large number of cases that ought to be dismissed at the first instance.[6] Moreover, the parties usually approach arbitration with a similar mindset as for litigation, with the result that awards invariably end up in courts, increasing the timeframe for resolution of the disputes. Parties also abuse the existing provision that allows ‘automatic stay’ of the execution of the awards on mere filing of an application for challenge of the awards. So, the objective of arbitration as a mechanism for speedy resolution of disputes gets obstructed due to obtrusive delays.[7]

Addressing the Problem

To the extent we desire to provide for a uniform and consistent solution to the problem of court litigation over arbitration agreements, the New York Convention seemingly provides the ideal vehicle in terms of its extraordinarily broad application. However, in attempting to resolve the issue, we face two significant challenges. First, how do we specifically propose to solve the problem? Second, how do we bring about the selected approach under the Convention?

The commencement of court litigation of a matter subject to arbitration is often characterized as a “torpedo” intended to “sink” or at least complicate and delay the arbitration proceedings.[8] It is a fact that preventing “torpedoes‟ which operate by selected court proceedings finds in its way the principle of judicial protection for regularly filed claims, which opposes any “torpedo”. In short, this “torpedo” is often effective in thwarting arbitration proceedings because the applicable legal framework fails to recognize arbitration as the default mechanism for such “regularly filed claims” Instead, the current default jurisdictional rule for “regularly filed claims” involving commercial transactions is national courts—a default that is fully inconsistent with normative practices. Instead of attempting to weave an ever tighter torpedo net against a contrary default mechanism for resolving civil disputes in court, why not simply recognize the obvious and make arbitration the default? With a default rule providing for arbitration, a court would have no basis for exercising jurisdiction absent an affirmative agreement of the parties. Thus, the effectiveness of court actions as a means to delay or obstruct arbitration proceedings would be substantially diminished, if not largely eliminated. Arbitration is almost certainly the normative method for resolving disputes in the majority of civil disputes.[9] As such, this normative reality should be recognized through a default legal rule providing for arbitration in the absence of any agreement to the contrary. While such a change of the default rule from national courts to arbitration would certainly be significant, the change could arguably be accomplished with a few relatively small steps beyond the status quo.

Any suggestion for treatment of arbitration as a “default rule” for dispute resolution raises obvious and significant questions regarding “consent.” It is often repeated that consent is the cornerstone of arbitration. A commercial transaction is always based on consent, as a matter of universal contract law. The vast majority of contract regimes provide a broad array of default terms, typically based on normative business behaviour[10]. In one respect, an agreement to arbitrate disputes arising under the party’s main contract is no more than a typical majoritarian default contract term provided in a variety of contractual contexts.90 admittedly, this is arguably inconsistent with the doctrine of separability, but that doctrine would be rendered largely unnecessary if arbitration were the default.

Moreover, tacit “consent” may be found in the parties‟ failure to contract around an established default legal rule, provided (1) the parties had reason to know of the default rule; and (2) the cost of contracting around the default rule is not prohibitive. Any effective default rule providing for arbitration would almost certainly have to take the form of a well promoted and publicized convention, so business people would seemingly have reason to know of its existence. While negotiating a dispute resolution provision can sometimes have higher than normal transaction costs, providing a well-structured legal regime for agreeing on court adjudication instead of arbitration, would seem to reduce such costs, at least to some degree. In fact, parties could indeed opt out of arbitration in favour of court adjudication, as long as they chose a specific court. Assuming broad support of Convention on Choice of Courts, the parties‟ choice would be fully effective. Thus, contracts fully addressing issues of dispute resolution would be unaffected by this change in the default rule. The change in default would apply only to parties who fail to provide for a dispute resolution forum in their agreement. One might reasonably ask if this effect will fall disproportionately on smaller, less sophisticated parties. If so, a default rule providing for arbitration is even more essential. Large multinational corporations typically have a significant presence in many of the countries in which they do business including a legal team. Thus, they are much more likely to be able to take advantage of a contracting partner’s own local courts in the event litigation arises. Moreover, the large multinational corporation, as a defendant, is more likely to have significant assets in multiple jurisdictions, thus providing a potential plaintiff with a variety of possible options from which to choose. While arbitration remains the normative preference, a large multinational corporation is somewhat less affected when required to resort to courts in the absence of an effective dispute resolution agreement.

Moreover, a convention providing for arbitration as a default rule and ratified by each contracting state would provide a positive legal rule, through which one might reasonably find implied “consent.”

 

Conclusion

Alan Redfern and Martin Hunter have said the following with respect to court intervention:

“The relationship between national courts and arbitral tribunals swings between forced cohabitation and true partnership. In spite of protestations of "party autonomy", arbitration is wholly dependent on the underlying support of the courts that alone have the power to rescue the system when one party seeks to sabotage it”.[11]

Traditionally, litigation would have been the only route to be seriously considered by parties wanting to resolve a dispute. This has led to a considerable backlog of cases, a very slow system and, ultimately, too much work for the court system to handle efficiently. The growth of ADR has provided a viable alternative for those who were put off by the adversarial nature of litigation, the cost or the time delay. Above all, this contributes to the accessibility of justice in the United Kingdom and ensuring that we have a fair and just legal system that is available to all. The most ‘suitable’ option is arguable and undoubtedly depends on the type of dispute, however, it is very likely that ADR will continue to grow over the coming years and the court system remains overburdened.

All of this added complexity and uncertainty is seemingly at serious odds with the simple efficiency often touted as one of arbitration’s most basic virtues.

There is a very subtle balance between assistance from the national courts and their intervention in arbitration proceedings, but arbitration still needs national court assistance.

The involvement and assistance of the courts in arbitral proceedings is limited, substituted by alternative mechanisms or even eliminated in many areas. Every arbitration is based on insightful application of law and its evolution is proof of its significance in the actual proceedings. Thus, arbitration has emerged as the most preferred platform for quick resolution of disputes especially in the industrial and the corporate realm.

It is evident that arbitration has evolved over the years as the ideal tool for resolution of disputes that saves the court's time and largely instrumental in assisting the parties to resort to quick remedial measures. It is important to note that the assistance of the courts is necessary for the smooth functioning of the arbitration system since the courts have statutory powers to execute and enforce an order. But at the same time courts should avoid entertaining applications against the arbitration proceedings because the court proceedings delay the arbitral process and consequentially the objective of the arbitration gets defeated. Hence the courts which are exercising the supervisory powers should exercise the powers with caution so that the arbitral process does not get affected.

 

[1] Blackaby Nigel, Partasides Constantine, Redfern Alan, Martin J“The Role of National Courts During the Proceedings”, (Oxford University Press 2009), pp. 439 – 464.

[2] Arbitration and Conciliation Act, 1996, Statement of Objects and Reasons.

[3] S K Dholakia, ‘Analytical Appraisal of the Arbitration and Conciliation (Amendment) Bill, 2003’, ICA’s  Arbitration Quarterly, ICA, New Delhi, 2005 vol. XXXIX/No.4 at page 3. S K Dholakia is a member of ICC International Court Of Arbitration and Senior Advocate, Supreme Court Of India.

[4] Professor Anurag Agarwal, ‘Resolving Business Disputes in India by Arbitration: Problems due to the Definition of the ‘court’ Indian Institute of Management, Ahmadabad, 2008 at p 10.

[5] Sarma Krishna, Oinam Momota, kaushik Angshuman“Development and Practice of Arbitration in India –Has it Evolved as an Effective Legal Institution”, Centre on Democracy, Development, and The Rule of Law Freeman Spogli Institute for International Studies, Stanford 94305.

[6] https://cddrl.fsi.stanford.edu/sites/default/files/No_103_Sarma_India_Arbitration_India_509.pdf.

[7] http://cddrl.stanford.edu.

[8] Guido Carducci, Arbitration, Anti-Suit Injunctions and Lis Pendens under the European Jurisdiction

Regulation and the New York Convention, 27 ARBITRATION INT‟L 171, 176-77 (2011)

[9] GARY BORN, INTERNATIONAL COMMERCIAL ARBITRATION, 653 (2009)

[10] The U.S. Uniform Commercial Code; The United Nations Convention on International

Contracts for the Sale of Goods

[11] Redfern Alan & Hunter Martin, Law and Practice of International Commercial Arbitration, (London:Sweet & Maxwell, 2004) at 328.