Fundamentals of Arbitration - The ICAI PDF

CHAPTER 2 FUNDAMENTALS OF ARBITRATION LEARNING OUTCOMES At the end of this chapter, you will be able to understand:  Introduction and General Provisions relating to Arbitration  Arbitration Agreemen...

CHAPTER 2 FUNDAMENTALS OF ARBITRATION LEARNING OUTCOMES At the end of this chapter, you will be able to understand:  Introduction and General Provisions relating to Arbitration  Arbitration Agreement with basic characteristics and features and conditions for its enforcement  Conduct of Arbitral Proceedings – Prerequisites and Procedure  Making of Arbitral Award and Termination of Proceedings  Recourse against Arbitral Award,  Finality and Enforcement of Arbitral Awards ©The Institute of Chartered Accountants of India  1.2 2.2 THE ARBITRATION AND CONCILIATION ACT, 1996 CHAPTER OVERVIEW Arbitration Process of Arbitration Arbitration- General Provisions Basic features of Arbitration Authoriities Definition and General principles Requirement of valid Arbitration Agreement Arbitration Termination of Fundamentals of Arbitration Arbitration Agreement Conduct of Arbitral Prerequisites Proceedings Making of Arbitral Awared and termination of proceedings Recourse against Arbitral Award Finality and Enforcement of Arbitral Award ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.3 1. INTRODUCTION Arbitration proceedings in India, are governed by Part I of the Arbitration and Conciliation Act, 1996 (The Act). The Act deals with the law relating to Domestic Arbitration, International Commercial Arbitration, enforcement of Foreign Arbitral Awards and Conciliation. The said Act extends to the whole of India. It came into enforcement on 22nd of August 1996 vide Notification G.S.R. 375(E) by Central Government. Need for the establishment of a unified legal framework: According to the Preamble of the Act, the General Assembly of the United Nations has recommended that all countries shall give due consideration to the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. It will help in bringing uniformity in the law and procedures of arbitration proceedings and thereby facilitate International Commercial Arbitration practice. The General Assembly of the United Nations has also recommended the use of and the UNCITRAL Conciliation Rules, 1980 in cases where a dispute arises in the context of international commercial relations and the parties seek an amicable settlement of that dispute by recourse to conciliation. The above-said Model Law and Rules make significant contribution to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations. The Arbitration and Conciliation Act, 1996 has been drafted, taking into account the aforesaid Model Law and Rules. Importance of the Legislation: Various courts in India have uphold from time to time, the importance of Arbitration and Conciliation mechanism as an alternate method of depute resolution. The Supreme Court of India in its landmark judgment in the matter, "Salem Advocate Bar Association, Tamil Nadu Vs. Union of India" directed that all courts shall direct parties to alternative dispute resolution methods like Arbitration, Conciliation, Judicial Settlement or Mediation. The High Court of Madras, India had pronounced a landmark judgment on 21st February 2012 in the matter, “A.K. Balaji v. Government of India & others”, holding that foreign lawyers cannot be debarred to come to India and conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration. Structure of the Act: The Arbitration and Conciliation Act,1996 is divided into 4 Parts, Containing 88 sections along with seven schedules. Part I contains ten chapters which deal with the Arbitration, Part II contains two chapters which deal with the Enforcement of Certain Foreign Awards, Part III deals with the Conciliation and Part IV deals with the Supplementary provisions. ©The Institute of Chartered Accountants of India  1.4 2.4 THE ARBITRATION AND CONCILIATION ACT, 1996 In the study material, we shall be covering general provisions related to Arbitration, enforcement of certain foreign awards and the law relating to Conciliation proceedings. 2. ARBITRATION – GENERAL PROVISIONS Alternative Dispute Resolution (ADR) mechanisms have evolved to address some of the major shortcomings of the court-based adjudication system. One of the popular methods of ADR is Arbitration. Arbitration Arbitration can be understood as a method of dispute resolution involving one or more neutral person/s, selected by the disputing parties and whose decision is binding. Thus, arbitration has few defining features: ♦ Flexibility in procedure to be adopted; ♦ Disputing parties have a choice to select decision makers; ♦ Existence of privacy and confidentiality; ♦ Renders final and binding decision. Process of arbitration Arbitral Tribunal (neutral third party) Adjudication Appointment Appointment by Party 2 by Party 1 Arbitral Award (binding decision) Party 1 Party 2 ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.5 Basic Features of Arbitration (a) Arbitration Agreement - Arbitration cannot happen without the consent of the parties. The consent is contained within an Arbitration Agreement. This agreement clearly specifies the desire of the parties to arbitrate their dispute. In other words, they clearly note that in the event of a dispute between them, they would not go to the court, instead they will proceed to arbitrate their dispute. This agreement takes the form of a binding contract. As per section 7 of the Act, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. An arbitration agreement shall be in writing. The reference in a contract to a “document containing an arbitration clause” constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. (b) Arbitrator -It is also known as the Arbitral Tribunal, is similar to a judge of the court. The arbitrator decides the disputes between the parties. Just like a judge, an arbitrator is also required to be completely neutral, impartial and not to favour any party. In case the arbitrators are not independent, they could be removed by the court. Example: A dispute has been arisen between Raghu and Sameer. They appointed Lalit as their arbitrator. Afterwards, Raghu found that Lalit is cousin of Sameer. Now, court may remove Lalit as arbitrator on the request of Raghu. (c) Seat of arbitration – It means the legal place of arbitration decided by the parties. It determines the applicable law governing the Arbitration including the procedural aspects. The Principal Civil Courts of the seat of Arbitration would provide assistance through supportive measures. For example, if India is the seat of Arbitration, then Indian laws would apply and Indian courts would have the authority to provide supportive assistance such as issuance of interim measures, etc. It would also be the Indian court which would hear challenges against the arbitral award. (d) Autonomy of Parties in respect to procedure of Arbitration - Arbitration gives the parties enormous flexibility to choose the type and kind of procedure they want to adopt for the arbitration like kind of hearing (oral/written), number of Arbitrators, method of appointing arbitrator, place of hearings, language of hearing, etc. It also gives the parties choice of applicable law, etc. especially, if the arbitration is an international commercial arbitration. ©The Institute of Chartered Accountants of India  1.6 2.6 THE ARBITRATION AND CONCILIATION ACT, 1996 (e) Finality of outcome - Usually there is no appeal against an arbitral award. An arbitral award can only be set aside on very few grounds such as invalid arbitration agreement, party’s incapacity, independence and impartiality of an arbitrator, unfair procedure, etc. (f) Confidentiality - An important feature of arbitration is that whatever that happens in arbitration remains private. It is only known to the parties and the arbitrators. All of them are prohibited to share with third parties who are not involved in arbitration, any document or information that is received during the course of arbitration. This is done to ensure that parties feel free to share all information during arbitration, so that a proper solution can be arrived at. (g) Arbitral Awards – An arbitral award is a decision by the arbitrator on the dispute that was submitted to it for adjudication. (h) Enforcement of international arbitral awards - It is much simpler to enforce an arbitral award in foreign nations than a judgment rendered by a court as such enforcement happens under an international treaty. Distinction between Litigation and Arbitration Basis Litigation Arbitration Place Litigation takes place in court. Place of arbitration is chosen by the parties. Appointment Judge is assigned by the court. The The arbitrator(s) is/are selected by litigants have no say on who will judge the parties. Parties, therefore, are their disputes. able to choose arbitrator with the appropriate expertise, educational qualifications, trade experience, etc. Procedure The procedure followed by the court is The parties have adequate fixed and determined by the Rules of flexibility to choose the the court. In India, it would be procedures that would apply to governed by the Code of Civil their arbitration. They could either Procedure and rules applicable to the make such procedures or adopt particular court. procedures of an arbitral institution. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.7 Confidentiality The proceedings are generally open Confidentiality is one of the most to public. In other words, there is very important characteristics of little privacy and confidentiality. arbitration. In other words, apart from the parties (including their lawyers), no other person is permitted to participate in the arbitral proceedings. Grounds of Court decisions are subject to Arbitral awards can be challenged Appeals numerous appeals. on very limited grounds. Foreign Matters It is often difficult to enforce Enforcing an arbitral award in judgments of court of one country in a foreign nations is much easier and foreign country. is governed by international treaties such as the Recognition and Enforcement of Foreign Arbitral Awards, 1958. Authorities under Act Under the Arbitration and Conciliation Act, 1996, there are three kind of authorities mentioned with different powers, functions, and duties to perform. (a) Judicial authority – the term judicial authority is not defined in the Act. The Supreme Court in SBP Vs. Patel Engineering observed “A judicial authority as such is not defined in the Act. It would certainly include the court as defined in Section 2(e) of the Act and would also, in our opinion, include other courts and may even include a Special Tribunal like the Consumer Forum.” Therefore, it is a concept wider than courts as ordinarily understood and would include Special Tribunals and Quasi-Judicial authorities. The functions performed would include reference to arbitration. Every court would be a judicial authority, but every judicial authority need not be a court. (b) Court [Section 2(1)(e)] –The term Court for international commercial arbitration, would only be the High Court, and for all other arbitration, it would be the District Court and High Court exercising original jurisdiction. (c) Supreme Court or High Court or any person or institution designated by such Court (Section 11): Supreme Court and High Court are entrusted with a specific task that of appointment of arbitrators upon request of a party. The Supreme Court would be the authority for appointing an arbitrator in case of international commercial arbitration, while High Court would be the authority for ©The Institute of Chartered Accountants of India  1.8 2.8 THE ARBITRATION AND CONCILIATION ACT, 1996 appointing an arbitrator in case of domestic arbitration. The Act also authorizes any person or institution so designated by the Supreme and High Court to appoint the arbitrators. Definitions - Section 2(1) 1. Section 2(1)(a): “Arbitration” means any arbitration whether or not administered by permanent arbitral institution. 2. Section 2(1)(b): "Arbitration agreement" means an agreement referred to in section 7. As per section 7, an arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. 3. Section 2(1)(c): “Arbitral award” includes an interim award. 4. Section 2(1)(ca): "Arbitral institution" means an arbitral institution designated by the Supreme Court or a High Court under this Act. 5. Section 2(1)(d): "Arbitral Tribunal" means a sole arbitrator or a panel of arbitrators. 6. Section 2(1)(e): "Court" means: (i) in the case of an arbitration other than international commercial arbitration, the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes; (ii) in the case of international commercial arbitration, the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, and in other cases, a High Court having jurisdiction to hear appeals from decrees of courts subordinate to that High Court; 7. Section 2(1)(f): "International Commercial Arbitration" means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is— (i) an individual who is a national of, or habitually resident in, any country other than India; or (ii) a body corporate which is incorporated in any country other than India; or ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.9 (iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country; 8. Section 2(1)(g): "Legal representative" means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased, and, where a party acts in a representative character, the person on whom the estate devolves on the death of the party so acting; 9. Section 2(1)(h): "party" means a party to an arbitration agreement; 10. Section 2(1)(i): "prescribed" means prescribed by rules made under this Act; 11. Section 2(1)(j): "regulations" means the regulations made by the Council under this Act. Scope - Section 2(2) – 2(9) 1. Section 2(2): Part I of Arbitration Act, 1996 (Section 1 to Section 43M) shall apply where the place of arbitration is in India: Provided that subject to an agreement to the contrary, the provisions of sections 9, 27, 37(1)(b) and 37(3) shall also apply to international commercial arbitration, even if the place of arbitration is outside India and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act. 2. Section 2(3): This Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration. 3. Section 2(4): This Part except section 40(1), sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except insofar as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder. 4. Section 2(5): Subject to the provisions of sub-section (4), and save insofar as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto. ©The Institute of Chartered Accountants of India  1.10 2.10 THE ARBITRATION AND CONCILIATION ACT, 1996 Construction of references 5. Section 2(6): Where this Part, except section 28, leaves the parties free to determine a certain issue, that freedom shall include the right of the parties to authorise any person including an institution, to determine that issue. 6. Section 2(7): An arbitral award made under this Part shall be considered as a domestic award. 7. Section 2(8): Where this Part— (a) refers to the fact that the parties have agreed or that they may agree, or (b) in any other way refers to an agreement of the parties, that agreement shall include any arbitration rules referred to in that agreement. 8. Section 2(9): Where this Part, other than section 25(a) or section 32(2)(a), refers to a claim, it shall also apply to a counter-claim, and when it refers to a defence, it shall also apply to a defence to that counter claim. Clarification regarding Section 2(2) It was decided in case of Bharat Aluminium Company Vs. Kaiser Aluminium Technical Service, Inc. MANU/SC/0722/2012 that Part I of the Arbitration Act, 1996 shall apply to all arbitrations which take place within India. Part I would have no application to international commercial arbitration held outside India. Therefore, such awards would only be subject to the jurisdiction of the Indian Courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996. The provisions contained in the Arbitration Act, 1996 make it crystal clear that there can be no overlapping or intermingling of the provisions contained in Part I with the provisions contained in Part II of the Arbitration Act, 1996. This was also mentioned in Section 2(2). Clarification regarding Section 2(1)(e) Court is one which would otherwise have jurisdiction in respect of the subject-matter. The definition does not provide that the Courts in India, will not have jurisdiction if an international commercial arbitration takes place outside India. Courts in India would have jurisdiction even in respect of an international commercial arbitration. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.11 Clarification regarding Section 2(1)(f) The definition makes no distinction between international commercial arbitrations held in India or outside India. Receipt of written communications (Section 3) Section 3- (1) Unless otherwise agreed by the parties,— (a) any written communication is deemed to have been received if it is delivered to the addressee personally or at his place of business, habitual residence or mailing address, and (b) if none of the places referred to in clause (a) can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee's last known place of business, habitual residence or mailing address by registered letter or by any other means which provides a record of the attempt to deliver it. (2) The communication is deemed to have been received on the day it is so delivered. (3) This section does not apply to written communications in respect of proceedings of any judicial authority. Waiver of right to object (Section 4) Section 4- A party who knows that— (a) any provision of this Part from which the parties may derogate, or (b) any requirement under the arbitration agreement, has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided for stating that objection, within that period of time, shall be deemed to have waived his right to so object. Section 4 provides for waiver of right to object. It was held in case of Darnley Vs. London, Chatham and Dover Rwy, that waiver must be intentional act by a person with full knowledge of his rights. Important points regarding right of waiver: 1. There must be a voluntary relinquishment of a known right by the party. 2. Either party can waive his right. 3. There is no waiver of right if party is proceeding with the arbitration under objection. 4. Objections should be raised within time limit. ©The Institute of Chartered Accountants of India  1.12 2.12 THE ARBITRATION AND CONCILIATION ACT, 1996 5. There is no waiver if party is prevented on account of circumstances beyond his control for an extended period of time from sending any communication. Example: Company A initiates arbitration proceedings against Company B for a contract dispute. Despite knowing its right to object, Company B actively participates in the arbitration without raising any objections. Company B's subsequent attempt to challenge the proceedings or award may be barred, as it could be deemed to have waived its right to object under the Arbitration and Conciliation Act, 1996. Extent of judicial intervention (Section 5) Section 5- 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. Example: Two parties, Company A and Company B, have a commercial contract containing an arbitration clause. A dispute arises regarding the interpretation of certain contractual terms, leading to potential arbitration. Both Company A and Company B voluntarily agree to submit their dispute to arbitration as per the contract. Company A initiates arbitration proceedings by appointing an arbitrator, and Company B acknowledges receipt of the notice. Section 5 emphasizes that the court should not intervene unless there is a specific provision allowing it. The court, in adherence to Section 5, refrains from intervening in the arbitration process initiated by the parties. The principle is to uphold the autonomy of the parties and let the arbitral proceedings continue without unnecessary judicial interference. After arbitration hearings, the arbitrator or arbitral tribunal renders an award in favor of Company A. Section 5 reinforces that the court should respect and enforce the arbitral award, recognizing the finality of the arbitration process. In this example, Section 5 underscores the importance of parties' autonomy and their commitment to resolve disputes through arbitration. The court's role is limited, and it intervenes only in situations expressly provided by the Act, promoting a pro-arbitration stance. Administrative assistance (Section 6) Section 6- In order to facilitate the conduct of the arbitral proceedings, the parties, or the arbitral tribunal with the consent of the parties, may arrange for administrative assistance by a suitable institution or person. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.13 3. ARBITRATION AGREEMENT Since arbitration is a private method of resolving dispute as opposed to litigation in a court system, at the heart of arbitration lies an arbitration agreement. Nature and Scope of Arbitration Agreement Requirement of valid Termination of Definition and arbitration Arbitration General Principles agreement agreement Arbitration agreement: Definition and General Principles Definition Under the Indian law, every individual has the right to approach the court for resolution of his/her dispute that may involve infringement of right(s) vested upon that individual. This protection is so stringent that it cannot be contracted away. Section 28 of the Indian Contract Act, 1872, however, notes an exception in favour of arbitration. Arbitration cannot happen without the parties consenting to submit their dispute to arbitration. Consent of the parties, therefore, is the most fundamental requirement for an arbitration to happen. The document which notes this consent is referred to as the arbitration agreement. In other words, an arbitration agreement records the consent of the parties that in the event of a dispute between them that matter instead of being taken to court will be submitted for resolution to arbitration. Arbitration agreement therefore is necessary to start arbitration. (SN Prasad, Hitek Industries (Bihar) Ltd Vs. Monnet Finance Ltd (2011) 1 SC 320). However, instead of a separate agreement, there may be an arbitration clause in a contract. ©The Institute of Chartered Accountants of India  1.14 2.14 THE ARBITRATION AND CONCILIATION ACT, 1996 In India, arbitration agreement is governed by the Arbitration and Conciliation Act, 1996 in particular sections 2(1)(b) and Section 7. Section 2(1)(b) - In this Part, unless the context otherwise requires “arbitration agreement” means an agreement referred to in section 7. Section 7 Arbitration Agreement - (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing. (4) An arbitration agreement is in writing if it is contained in – a) a document signed by the parties; b) An exchange of letters, telex, telegrams or other means of telecommunication including communication through electronic means which provide a record of the agreement; or (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. The purpose of an arbitration agreement is to submit disputes to arbitration and the law defines an arbitration agreement on the basis of whether existing or future disputes would be submitted to arbitration. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.15 The two basic types of arbitration agreement are: Arbitration clause – It is a clause contained within a principal contract. The parties undertake to submit disputes in relation to or in connection with the principal contract that may arise in future to arbitration. Submission agreement – It is an agreement to refer disputes that already exist to arbitration. Such an agreement is entered into after the disputes have arisen. Example: In 2014, Company A, an automobile manufacturer entered into a joint venture agreement (JVA) with Company B, the largest manufacturer of tyres for supply of all terrain tyres for its latest car. Both the companies are registered under the Companies Act, 2013. Scenario I- The JVA carries the following clause “Clause 56.1. All disputes shall be arbitrated in Mumbai.” This would be an arbitration clause. It is contained in the principal contract (JVA) and no disputes have arisen till date. It concerns future disputes that may arise. Scenario II - The JVA does not have any clause relating to arbitration. Disputes arose between the parties concerning quality of tyres in 2016. In order to resolve this dispute, parties entered into an agreement that noted “That all disputes including quality of tyres supplied by Company B to Company A shall be submitted to arbitration. The parties hereby agree to abide by the decision of the arbitrator.” Such an agreement that is made after the disputes have arisen would be called a submission agreement. Example: Generally, an arbitration clause is added in Partnership Deed. The specimen for that as- “That in case of any dispute arising during the existence of this partnership or afterwards or in regard to interpretation of the terms and condition of this deed and in general relating to any matter in regard this partnership business, the same shall be referred to a sole arbitrator to be mutually appointed by the partners and shall be governed by the provision of the Arbitration and Conciliation Act, 1996.” ©The Institute of Chartered Accountants of India  1.16 2.16 THE ARBITRATION AND CONCILIATION ACT, 1996 General Principles 1. Arbitration agreement is an agreement enforceable under the law. In other words, it is a contract, and has to fulfill all requirements of a valid contract. 2. Consent (consensus ad idem): Parties have to clearly give their consent to arbitration. Words utilized by the parties should clearly indicate that all parties want to proceed to arbitration. Thus, if words used are uncertain or ambiguous, then there can be no consensus ad idem, and in turn there can be no arbitration agreement. It was also confirmed in case of Dresser Rand SA Vs. Bindal Agro Chem Ltd (2006) 1 SCC 751. Section 29 of the Indian Contract Act, 1872 clearly notes that ‘agreements, meanings of which are not certain or capable of being made certain are void’. 3. Ouster of jurisdiction: It is vital to understand that once the parties have agreed to arbitrate their matter, neither of the parties can unilaterally proceed to court to litigate that matter. Any party attempting to do that would be referred to arbitration, if the other party so requests. 4. Doctrine of Separability: The doctrine provides that an arbitration agreement even though contained in a contract, is a separate agreement from the contract itself. In other words, an arbitration agreement is an agreement independent of the main contract. It is done to ensure that the agreement to arbitrate would not be rendered invalid merely because the principal contract was invalid. 5. Competency to rule on its jurisdiction (Section 16): The arbitral tribunal has the capacity to rule on its own jurisdiction even if involves a question of validity of the main contract. This allows the arbitral tribunal to determine the validity of the main contract without contradicting its own jurisdiction. Requirements of a valid arbitration agreement Requirements of an arbitration agreement can be gathered from two sources: ♦ Statutory Provisions, and ♦ Decided case laws 1. Writing - Unlike the possibility of an oral contract, arbitration agreement are required to be mandatorily in writing. There is also no particular form or template for an arbitration agreement. Example: C owns a shop in Chandni Chowk dealing in readymade clothes. D is a supplier of clothes to C. They have been doing business for many years. No separate written contract ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.17 exists between them. However, for each consignment D issues an individual invoice to C on the basis of which payment is made. Each invoice contains the following note “Disputes, if any, pertaining to this transaction will be subject to the Arbitration Rules and Regulations of Bharat Merchant Chamber". This is an arbitration agreement in writing. Example: Vikram wants to start a sweet and confectionary shop and contacts Ahuja Confectioners & Bakers for supply of cakes. The entire communication between the parties took place over email. One of the emails received by Vikram from Ahuja Bakers had, among other terms of service, the following condition “any disputes regarding quality or delivery shall be submitted to arbitration conducted under the aegis of Indian Confectionary Manufacturers Association. Please place your order if the above terms and conditions are agreeable to you.” Vikram placed an order. The contract stood affirmed by reason of their conduct. This would be an arbitration agreement in writing contained in correspondence between the parties. 2. Clarity of consent: The intention to go to arbitration must be clear in other words there must be consensus ad idem. Utilization of vague words cannot be considered to be adequate. The intention has to be gathered from the wordings of the agreement. The words used should disclose a determination and obligation on the part of parties to go to arbitration and not merely contemplate the possibility of going for arbitration. If it is only a possibility, then it is not an arbitration agreement. (Jagdish Chander Vs. Ramesh Chander (2007) 5 SCC 719) Example: The parties had a contract with a clause (16) that if during the continuance of the partnership or at any time afterwards any dispute touching the partnership arises between the partners, the same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine." This would not be an arbitration agreement, because of the need for parties to further agree whether or not to go for arbitration. The underlined portion clearly highlights the need for further agreement between the parties. 3. Defined Legal relationship - This term has been borrowed from the UNCITRAL Model Law. The statute does not define this term. The important idea here is that any dispute that arises from a legal relationship can be submitted to arbitration unless it is expressly or impliedly barred by a Statute. Thus, disputes concerning illegal activities cannot be submitted to arbitration. 4. Final and binding award: Parties to the arbitration agreement must agree that the determination of their substantive rights by a neutral third person acting as the arbitral tribunal would be final and binding upon them. ©The Institute of Chartered Accountants of India  1.18 2.18 THE ARBITRATION AND CONCILIATION ACT, 1996 Example: ‘Any other questions, claim, right, matter, thing, whatsoever, in any way arising out of or relating to the contract designs, drawings, specifications estimates, instructions, or orders, or those conditions or failure to execute the same whether arising during the progress of the work, or after the completion, termination or abandonment thereof, in the first place, be referred to the Chief Engineer who has jurisdiction over the work specified in the contract. The Chief Engineer shall within a period of ninety days from the date of being requested by the Contractor to do so, give written notice of his decision to the contractor. Chief Engineer's decision shall be final.’ Is this a valid arbitration agreement? Answer: In the given case Chief Engineer is not a neutral party and has a Control over the work specified in the contract, so this is not a valid arbitration agreement. 5. Specific words: The mere use of words like ‘arbitration’ or ‘arbitrator’ in a clause will not make it an arbitration agreement. Usage of such words is not a necessary requirement. 6. Dispute: There must be a present or a future dispute/difference in connection with some contemplated affairs that is proposed to be submitted to arbitration. 7. Arbitrability: The disputes submitted/ proposed to be submitted to arbitration must be arbitrable. In other words, law must permit arbitration in that matter. There are certain disputes that the law retains exclusively for the court, and the same cannot be submitted for arbitration. The rationale is that given the nature of disputes, the courts are the only appropriate forum for adjudicating the matter. For example, criminal offences, matrimonial disputes, guardianship matters, testamentary matters, mortgage suit for sale of a mortgaged property, etc. cannot be arbitrated. 8. Signature: It is only required when the arbitration agreement is contained in a contract i.e. in one set of documents. However, no signature is required if the arbitration agreement is contained in correspondence or exchange of pleadings. Arbitration agreement through reference The Arbitration and Conciliation Act, 1996 envisages a possibility of an arbitration agreement coming into being through incorporation. In other words, parties to an agreement could agree to arbitrate by referring to another contract containing an arbitration agreement. The requirement is that the reference must leave no doubt in the mind of the reader that the parties indeed wanted to incorporate the arbitration agreement into the agreement between them. Example: In Groupe Chimique Tunisien SA Vs. Southern Petrochemicals Industries Corpn Ltd 2006 (2) ArbLR 435 (SC), the respondent had placed an order of purchase of various quantities of ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.19 phosphoric acid from the petitioner. The purchase order noted that the terms and conditions were to be as per the Fertilizer Association of India (FAI) Terms and Conditions for Sale and Purchase of Phosphoric Acid. Clause 15 of the terms provided for settlement of disputes by arbitration. Is this a valid reference for an arbitration agreement to come into existence? Answer: Yes. It was held by the Supreme Court of India that for a reference to constitute an arbitration agreement, the contract should be in writing and reference should be such as to make that arbitration clause part of the contract. Both the conditions were held to be fulfilled in the present instance. Termination of an arbitration agreement Like the manner in which parties enter into an arbitration agreement, they can also terminate an arbitration agreement. Thus, an arbitration agreement could be put to an end by: 1. Mutual consent: Like any contract, the parties involved can jointly agree to put an end to a particular arbitration agreement. 2. Termination of principal contract: An arbitration agreement always operates in relation to a principal contract. If the principal contract is terminated through discharge or novation (substitution), the arbitration agreement terminates with the contract. However, if the principal contract is breached, then the arbitration agreement survives because of the operation of the doctrine of separability. 3. The above view was upheld by Delhi High Court (“Delhi HC”) in B.L. Kashyap and Sons Limited Vs. Mist Avenue Private Limited, where it inter alia held that the arbitration clause in the original contract stands extinguished upon novation thereof. Example: Raj Air-Conditioning services (RACS) and Voltas Limited entered into a service agreement whereby RACS would provide annual maintenance services for all Voltas commercial air conditioners in the NCR region. The contract provided that in the event of a dispute between the parties, the matter would be submitted to arbitration. Scenario 1: At the end of the third year, the Service Agreement was not renewed. The contract terminates, and along with it the arbitration agreement also terminates. Scenario 2: At the end of the second year, the two parties enter into a new contract, which replaces the existing service agreement between the parties. The new contract does not have an arbitration agreement. The arbitration agreement contained in the superseded service agreement does not survive. ©The Institute of Chartered Accountants of India  1.20 2.20 THE ARBITRATION AND CONCILIATION ACT, 1996 Scenario 3: Voltas raises a dispute with RACS as regards quality of services provided and terminates the agreement. Here, owing to separability doctrine, the arbitration agreement survives to allow parties to arbitrate their dispute. 4. Death of parties: Under the Indian law, an arbitration agreement is not discharged by the death of any party. It shall be enforceable by or against the legal representatives of the deceased. 5. Operation of Law: An arbitration agreement can be extinguished by the operation of law by virtue of which any right of action is extinguished. 4. CONDUCT OF ARBITRAL PROCEEDINGS In the present scenario, arbitration maintains a robust scope, serving as a preferred method for resolving business disputes, particularly in commercial, construction, and investment contexts. The Arbitration and Conciliation Act, 1996 was enacted to consolidate and amend the laws pertaining to domestic as well as international commercial arbitration and enforcement of foreign awards. The Act also considered laws related to conciliation and connected matters. In case of “State of Orissa Vs. Gangaram Chhapolia (1982)”, the court first time found the sequence of the formal codification of law on arbitration which starting from Bengal Regulations of 1772 and 1780 to Bengal Regulation IX of 1883 which authorised Settlement Officers to refer disputes to arbitration. Further the British Rulers introduced Arbitration law during their ruling in India which includes the Act IX of 1840, the Specific Relief Act of 1878, the Code of Civil Procedure of 1908 and the Indian Arbitration Act of 1940. Pre-requisites for conducting of Arbitral Proceedings (a) Arbitration Agreement: We already discussed in this chapter that Section 7 of this act provides the requirement of an arbitration agreement. This arbitration agreement must be in writing and duly signed by the parties. The arbitration agreement can be in the form of an arbitration clause in a contract or in the form of a separate agreement. In was decided by Hon’ble Supreme Court in case of P.A.G Raju Vs. P.V.G. Raju (AIR 2000 SC 1886), that Arbitration agreement is not a pre-requirement for arbitration. If one party applies to the court with a request to refer the matter to arbitration and if the other party does not have any objection, then the court may refer the parties to the arbitration. Parties are allowed to go for arbitration. The important requirement is the consensus of parties. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.21 Further in case of in the case of Bihar State Mineral Dev. Corpn. Vs. Encon Builders (I) Pvt. Ltd. (AIR 2003 SC 3688), the court laid down the essential elements of an arbitration agreement. According to the court, for arbitration agreement there must be: (i) an intention to resolve differences through arbitration. (ii) a written agreement to be bound by the decision of arbitration. (iii) consensus ad idem among the parties to arbitration. (iv) consent to refer the dispute to arbitration. Example: M/s Ramanaa Fresh Fruits & Co. entered into a contract with Hotel Crimson Palace to supply of the fruits of particular quality at certain price for the period of one year. Both parties signed the agreement for terms and conditions in the contract but there was no clause in the agreement regarding transfer of the dispute to arbitration. After two months, Hotel Crimson Palace denied to make the payment of particular supply of fruits as that supply did not match the quality as agreed. M/s Ramanaa Fresh Fruits & Co. filed the case to the court. Hotel Crimson Palace requested the court to refer the matter to the arbitration. M/s Ramanaa Fresh Fruits & Co. did not agree to refer the matter to arbitration. Now question arises whether matter can be referred to the arbitration by court even if there was no clause in the agreement regarding arbitration and other party i.e. M/s Ramanaa Fresh Fruits & Co. did not agree for that? Answer: Held, the matter under dispute could be referred to arbitration even if there was no arbitration agreement for that. However, there should have been a consensus ad idem (meeting of the minds) among the parties to arbitration. As the M/s Ramanaa Fresh Fruits & Co. in this case did not agree to refer the matter to arbitration, court should not refer the matter to arbitration. (b) Notice required prior to referral of disputes: Section 21 of this Act provides “Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.” On the analysis of this section, it can be said that notice by one party to another party is mandatory before referring the disputes to arbitration. In the case of Alupro Building Systems Pvt Ltd Vs. Ozone Overseas Pvt. Ltd., Delhi HC, it was observed by the court that the bare reading of Section 21 provides that the date of commencement of arbitration proceedings is based on the receipt of notice by the other party. The court further ascertained the object behind this provision is that the other party to the arbitration agreement against ©The Institute of Chartered Accountants of India  1.22 2.22 THE ARBITRATION AND CONCILIATION ACT, 1996 whom a claim through notice is made, should know what the claims are. The notice under this provision serves an important purpose of reaching a consensus between parties on the appointment of an arbitrator. In case of Delhi Transport Corp. Ltd. Vs. Rose Advertising (2003), appointment request of arbitrator was made by a party to the agreement before 25th January 1996 i.e. prior to the new act came into being. But the arbitrator was appointed after 25th January 1996. The arbitration agreement provided that the parties shall be governed by the law as in force at the relevant time. As the parties acted under the 1996 Act, the Award would be governed by 1996 Act. Section 21 provides the freedom to the parties to decide upon the date from which the proceedings shall be deemed to have commenced. If there is no agreement between the parties as to the date of commencement of arbitral proceedings, the arbitral proceedings shall commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent. It is stated that determination of the date of commencement is of critical importance to the parties in view of the applicability of the Law of Limitation. Once the date of commencement of arbitration proceedings is decided, there can be no question of the time limit subsequently expiring as regards cause of action included in the reference. Note 1: Making a claim by party does not commence the Arbitral Proceedings: In case of Babanaft International Vs. Avant Petroleum, the court observed that making a claim by party does not show the existence of dispute, whereas request would arise only when the dispute has arisen between the parties. Example: A, B & C were partners in M/s ABC & Co. A filed a claim of Rs. 1,00,000 to the firm. This claim cannot be considered as dispute among the partners. Note 2: In case Arbitral Proceedings commence before enforcement of the Act, 1996 In case of U.P. State Sugar Corporation Ltd. Vs. Jain Construction Co., dispute between concerned parties arose in 1991. The respondent filed an application u/s 20 of the Arbitration Act, 1940 on 01.05.1991. According to section 21 of the Arbitration and Conciliation Act, 1996, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent. It was held that in respect of arbitral proceedings commenced before coming into force of the Act 1996, the provisions of the Act 1940 would apply. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.23 (c) Appointment of arbitrators: Section 10 provides that the parties are free to determine any odd number of arbitrators. In cases where the parties fail to determine the number of arbitrators, the arbitral tribunal shall consist of a sole arbitrator. In fact, the main advantage of arbitration is that parties to an arbitration agreement are free to submit a dispute to judges of their own choice. Section 11 provides that the parties are free to agree on a procedure for the appointment of arbitrator or arbitrators. But if there is no consensus on the appointment of the arbitrator, the arbitrator cannot make a binding order award and if he makes any award, it will be a null and void. The appointment of an arbitrator by a party is complete only on its communication to the other party. As per the Arbitration and Conciliation Act, 1996 an arbitrator or tribunal cannot consult third parties without disclosing it to the parties. In case of Husein Ebrahim Vs. Keshardeo Kanaria & Co., the arbitrators approached a third person, who was not the party to the arbitration agreement, by writing a letter to him. The arbitrators asked that third person for certain information which was related to arbitration proceedings. However, they did not discuss or disclose this information to the parties. The court held that the arbitrators were guilty of misconduct. Example: M/s Taj Leather was the regular supplier of raw materials to M/s Dabur Shoes, Agra. A dispute arose between them which was referred to arbitration. Mr. Ankit Sharma was appointed as the sole arbitrator in the matter. Mr. Ankit Sharma, to verify the reputation of M/s Taj Leather, consulted other customers of it, which was not in the knowledge of either party. Held, Mr. Ankit Sharma, the sole arbitrator was guilty of misconduct. (d) Period of Limitation: Section 43 of the Act provides for the applicability of the Limitation Act, 1963 to arbitration proceedings. Accordingly, the date of commencement of arbitral proceedings assumes relevance for calculating the time-limit for arbitral proceedings under the Limitation Act, 1963. Any arbitration proceedings commenced after the limitation period, will be time-barred. Example: Sudeep has taken a loan of ` 1,00,000 from Kishore which was to be repaid on 01.03.2018. The loan was not repaid by Sudeep on the due date. Kishore filed the application to refer the matter to arbitration on 15.04.2023. Held, as the repayment of loan has become time – barred, it cannot be referred to arbitration. ©The Institute of Chartered Accountants of India  1.24 2.24 THE ARBITRATION AND CONCILIATION ACT, 1996 Equal Treatment of Parties Section 18 – “the parties shall be treated with equality and each party shall be given a full opportunity to present his case.” In other words, Section 18 of the Act has two fundamental principles. ♦ Firstly, the parties to an arbitration proceeding shall be treated with equality. ♦ Secondly, that each party shall be given a full opportunity to present their case. This section is a mandatory provision and the arbitral tribunal has to comply with it. The tribunal has to act in an impartial manner to the parties and no party should be given an advantage over the other. The basic principles of natural justice for arbitrator may be: 1. Not to receive any information from one party, which is not disclosed to the other party. 2. Not to examine or witness one party in the absence of opposite party. 3. Without being expressly authorised by the parties, not to decide the matter on the basis of secret enquiries. The basic requirements for proper hearing that each party must have notice of place, date and time of hearing. They must be given reasonable opportunity to be present throughout the hearing and to present statements, documents, evidence and arguments in support of case. They must have reasonable opportunity to cross-examine his opponents’ witness and reply to the arguments. It was observed by the Court in the case of Wazir Chand Karam Chand Vs. Union of India (1989) that the person who is to be prejudiced by the evidence, it should be present to hear it, should be allowed to cross examine it, and should be given ample opportunity to find evidence to rebut it. Determination of procedure to be followed for conduct of proceedings Section 19 – (1) The arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 (5 of 1908) or the Indian Evidence Act, 1872. (2) Subject to this Part, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings. (3) Failing any agreement referred to in sub-section (2), the arbitral tribunal may, subject to this Part, conduct the proceedings in the manner it considers appropriate. (4) The power of the arbitral tribunal under sub-section (3) includes the power to determine the admissibility, relevance, materiality and weight of any evidence. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.25 In other words, section 19 provides that the application of the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872 to the arbitral proceeding is also at the discretion of the parties. Further, the Act recognises the right of the parties to agree on the procedural rules which are applicable in conducting the arbitral proceedings. This provision provides the procedural autonomy to the parties. In fact, in case the parties fail to agree on a procedure or frame the procedure, it grants the arbitral tribunal a wide range of discretionary powers to frame the arbitral proceedings. In case of J. Kaikobad Vs. F. Khambatta (1930), it was held that an arbitrator is not bound by all the provisions of the Evidence Act, and his decision cannot be challenged on ground that he relied upon documents which are inadmissible under the Indian Evidence Act, 1872. But the arbitrator should be clear that – ♦ he should not violate the principles of natural justice, ♦ he should give a hearing to the parties, and ♦ he should give a reasonable time and opportunity to them to present their respective claims. Example: In case of an arbitral proceeding between A & B, the arbitrator wants to take the oral statement of A as evidence in the arbitration matter. Whether he can do so? Answer: Generally oral evidence is not admissible as per the Indian Evidence Act but section 19 provides that the arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 (5 of 1908) or the Indian Evidence Act, 1872. Hence, arbitrator can do so. It was also decided in case of SREI Infrastructure Finance Limited Vs. Tuff Drilling Private Limited, that arbitral tribunal is not prohibited from drawing sustenance from the fundamental principles underling the Code of Civil Procedure or Indian Evidence Act but the tribunal is not bound to observe the provisions of Code with all its rigour. Place of Arbitration Section 20 – (1) The parties are free to agree on the place of arbitration. (2) Failing any agreement referred to in sub-section (1), the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties. (3) Notwithstanding sub-section (1) or sub-section (2), the arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of documents, goods or other property. ©The Institute of Chartered Accountants of India  1.26 2.26 THE ARBITRATION AND CONCILIATION ACT, 1996 The place of arbitration is of most importance because the laws of the place of arbitration play a fundamental role in the arbitral proceeding. Section 20 provides that the parties are free to agree on the place of arbitration and if they fail to agree, then the arbitral tribunal has to determine the place of arbitration in a judicial manner, considering the circumstances of the case and convenience of the parties. Some important points regarding the place of arbitrations are as below: 1. The arbitrator should not fix the venue of arbitration of his choice regardless of the convenience of the parties. 2. Concerned parties are free to choose the venue of their choice. 3. If the parties fail to reach an agreement on the choice of venue, then and only then arbitral tribunal should determine the place for holding arbitration meetings having regard to the circumstances of the case, including the convenience of the parties. In case of “Jagson Airlines Ltd. Vs. Bannari Amman Exports (P.) Ltd.”, the Court held that, merely because a venue is at a different place, conducting the proceedings by the Arbitrator would not nullify a binding clause, which gives exclusivity to a Court. Further in case of “Aarka Sports Management Pvt. Ltd. Vs. Kalsi Buildcon Pvt. Ltd.”, it was held that this is autonomy of the parties to choose a neutral seat of arbitration where no part of the cause of action arose. Once the seat is determined, the Court of that place would have exclusive jurisdiction to regulate the arbitration proceedings arising out of the agreement between the parties. It is to be noted that the arbitral award shall state its date and the place of arbitration as determined in accordance with section 20 and the award shall be deemed to have been made at that place. Example: Mr. Ram and Mr. Shyam are partners in the firm M/s Sanatan Publishers registered at Agra. A dispute arose between them regarding the distribution of profit of the firm. The matter was referred to arbitration. Mr. Vishnu of Mathura was appointed as arbitrator in the matter with consent of both the partners. Both Mr. Ram and Mr. Shyam could not decide the venue or place of arbitration proceedings. Hence, Mr. Vishnu determined his office at Mathura as a place for arbitration proceedings as he belongs to Mathura but parties did not agree. Can Mr. Vishnu do so? Answer: Held, as per section 22 the parties are free to agree on the place of arbitration. In case parties could not reach an agreement on the choice of venue, then and only then arbitrator should determine the place for holding arbitration meetings having regard to the circumstances of the case, including the convenience of the parties. Therefore, if the parties are dissatisfied with the selection of the arbitration venue, Mr. Vishnu should change the venue. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.27 Language to be used in Arbitral Proceedings Section 22 – (1) The parties are free to agree upon the language or languages to be used in the arbitral proceedings. (2) Failing any agreement referred to in sub-section (1), the arbitral tribunal shall determine the language or languages to be used in the arbitral proceedings. (3) The agreement or determination, unless otherwise specified, shall apply to any written statement by a party, any hearing and any arbitral award, decision or other communication by the arbitral tribunal. (4) The arbitral tribunal may order that any documentary evidence shall be accompanied by a translation into the language or languages agreed upon by the parties or determined by the arbitral tribunal. In other words, Section 22 deals with the language which has to be used in arbitral proceedings. The parties to the arbitration agreement are free to choose the language or languages which have to be used in the arbitral proceedings. But where the parties fail to arrive at such an agreement then arbitral tribunal will decide the language or languages to be used in the arbitral proceedings. The language shall also apply to any written statement by a party, any hearing and any arbitral award, decision or other communication by the arbitral tribunal. When the arbitral tribunal agrees on the language to be used in arbitral proceedings, it may order that any documentary evidence shall be accompanied by a translation into the language agreed. The arbitral tribunal must ensure that all the parties are able to follow and understand the proceedings. Example: Mr. Venkataraman of Chennai is the regular supplier of raw material to Mr. Chaman of Delhi. A dispute arose between them and was referred to Arbitral Tribunal for resolution. Mr. Venkataraman insisted that proceedings should be in Tamil language while Mr. Chaman wanted it to be in Hindi language. When there was no agreement between the parties regarding the language, tribunal decided to do the proceedings in English language for which both agreed. Now, written statements by the parties, any hearing, any arbitral award, decision or other communication by the arbitral tribunal should be in English language only. ©The Institute of Chartered Accountants of India  1.28 2.28 THE ARBITRATION AND CONCILIATION ACT, 1996 Statement of Claim and Defence Section 23 – (1) Within the period of time agreed upon by the parties or determined by the arbitral tribunal, the claimant shall state the facts supporting his claim, the points at issue and the relief or remedy sought, and the respondent shall state his defence in respect of these particulars, unless the parties have otherwise agreed as to the required elements of those statements. (2) The parties may submit with their statements all documents they consider to be relevant or may add a reference to the documents or other evidence they will submit. (2A) The respondent, in support of his case, may also submit a counter claim or plead a set-off, which shall be adjudicated upon by the arbitral tribunal, if such counter-claim or set-off falls within the scope of the arbitration agreement. (3) Unless otherwise agreed by the parties, either party may amend or supplement his claim or defence during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow the amendment or supplement having regard to the delay in making it. (4) The statement of claim and defence under this section shall be completed within a period of six months from the date the arbitrator or all the arbitrators, as the case may be, received notice, in writing, of their appointment. The party who makes the claim is called the claimant while the party against whom the claim is made is called the respondent. Section 23 provides that the claimant should file a statement of claims with all facts and enclose all the relevant documents. The respondent, in support of his case, may also submit a counter claim or plead a set-off. These will be adjudicated by the arbitral tribunal. Such counter claim or set-off will be adjudicated only when they fall within the scope of the arbitration agreement. The parties are permitted to amend or supplement their claim or defence during the proceedings. But the arbitral tribunal may disallow such amendments or supplements if there is delay in presenting it in the views of the arbitral tribunal. In case of Ram Sarup Gupta Vs. Bishun Narain Inter College, the honorable Supreme Court held that for the purpose of fair trial, the party should state the essential material facts so that the other party may not be taken by surprise. Further in case of Ramchandran Vs. R.V. Jankiraman, it was observed that pleadings or statement of claim and defence in absence of full particulars would not be relevant. It was also decided in case of Manoharlal Vs. N.B.M. Supply, that the arbitral tribunal may disallow the amendments or supplements if a mala fide intention is shown of the party submitting amendments or supplements which may cause injury to other party. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.29 Example: Two companies, Company X and Company Y, are involved in a commercial contract that includes an arbitration clause for dispute resolution. Company X alleges that Company Y breached certain delivery timelines, causing financial losses. Company Y denies the allegations and insists that the delays were justified due to unforeseen circumstances. As the arbitration proceedings unfold, Company X realizes that they want to amend their initial claim to include additional damages related to what they believe are long-term consequences of the delays. There was a specific agreement between the parties regarding the deadlines for amending claims. If Company X fails to adhere to these deadlines and submits the amendment request after the specified timeframe, the arbitrator may deny the request on procedural grounds. Hearings and written proceedings Section 24 – (1) Unless otherwise agreed by the parties, the arbitral tribunal shall decide whether to hold oral hearings for the presentation of evidence or for oral argument, or whether the proceedings shall be conducted on the basis of documents and other materials. Provided that the arbitral tribunal shall hold oral hearings, at an appropriate stage of the proceedings, on a request by a party, unless the parties have agreed that no oral hearing shall be held. Provided further that the arbitral tribunal shall, as far as possible, hold oral hearings for the presentation of evidence or for oral argument on day-to-day basis, and not grant any adjournments unless sufficient cause is made out, and may impose costs including exemplary costs on the party seeking adjournment without any sufficient cause. (2) The parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of documents, goods or other property. (3) All statements, documents or other information supplied to, or applications made to, the arbitral tribunal by one party shall be communicated to the other party, and any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties. In other words, section 24 provides that in the absence of any prior agreement between the parties on whether hearing are to be done orally or on the basis of written documents submitted to arbitral tribunal, the arbitral tribunal has the power to decide whether the proceedings shall be held orally or on the basis of documents and other materials. It was confirmed in case of ADV Consultants Vs. Pioneer Equity Trade (India) Pvt. Ltd, if parties request to have an oral hearing it becomes duty of the arbitrator to provide for the same. ©The Institute of Chartered Accountants of India  1.30 2.30 THE ARBITRATION AND CONCILIATION ACT, 1996 Example: In a contractual dispute between Company A and Company B, arbitration proceedings unfold. Company B, the respondent, requests an oral hearing to delve into technical nuances. The arbitral tribunal, consisting of neutral arbitrators, assesses the request's merits. Recognizing the case's complexity, they decide to grant the oral hearing. During the proceeding, both parties present arguments in person, providing a dynamic forum for clarification. Expert witnesses testify, enhancing understanding. The tribunal's decision balances fairness and efficiency, ultimately contributing to a comprehensive resolution that considers both written submissions and the insights gained from the oral hearing. Default of Party Section 25 – Unless otherwise agreed by the parties, where, without showing sufficient cause,- a) the claimant fails to communicate his statement of claim in accordance with sub-section (1) of section 23, the arbitral tribunal shall terminate the proceedings; b) the respondent fails to communicate his statement of defence in accordance with sub-section (1) of section 23, the arbitral tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegations by the claimant and shall have the discretion to treat the right of the respondent to file such statement of defence as having been forfeited; c) a party fails to appear at an oral hearing or to produce documentary evidence, the arbitral tribunal may continue the proceedings and make the arbitral award on the evidence before it; If the claimant, without any sufficient cause, do not submit his statement of claim, the arbitral tribunal has discretion to terminate the proceedings while the respondent fails to submit his statement of defence, the arbitral tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegations made by the claimant. Further, if a party fails to appear at an oral hearing or to produce documentary evidence, the arbitral tribunal may continue the proceedings and make the arbitral award on the evidence already before it. It was observed in case of NRP Projects Private Limited Vs. Bharat Petroleum Corporation Limited, where the respondent does not file any response to the claim of the claimant, then the claim should not be straightway allowed by the arbitrators and the arbitrator must go into the merits of the claim irrespective of the fact whether a response has been filed or not and the arbitral tribunal shall not consider the failure to file response as an admission to the allegations of the claimant. The very wordings of section 25 show that clause (a) is preceded by the expression “without showing sufficient cause”. Thus, if sufficient cause is shown, there would be no need to terminate the ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.31 proceedings before the Arbitral Tribunal even if the claimant has failed to file it claims on time. In case of Bharat Heavy Electricals Ltd. Vs. Jyothi Turbopower Services 2016, it was held that the claimant would have the right to move the Arbitral Tribunal to show, even if there was termination of proceedings, that such termination was erroneous or was required to be recalled on sufficient cause being shown. Appointment of Experts Section 26 – (1) Unless otherwise agreed by the parties, the arbitral tribunal may- a) appoint one or more experts to report to it on specific issues to be determined by the arbitral tribunal, and b) require a party to give the expert any relevant information or to produce, or to provide access to, any relevant documents, goods or other property for his inspection. (2) Unless otherwise agreed by the parties, if a party so requests or if the arbitral tribunal considers it necessary, the expert shall, after delivery of his written or oral report, participate in an oral hearing where the parties have the opportunity to put questions to him and to present expert witnesses in order to testify on the points at issue. (3) Unless otherwise agreed by the parties, the expert shall, on the request of a party, make available to that party for examination all documents, goods or other property in the possession of the expert with which he was provided in order to prepare his report. Section 26 provides that on specific issues the arbitral tribunal may- ♦ Appoint one or more experts, ♦ Ask such experts to determine specific issues, ♦ Deliberate upon such issues, Further, the arbitral tribunal may also direct the party to: ♦ Give the expert any relevant information ♦ Produce and provide access to all relevant information/documents/goods etc. for inspection The tribunal on written or oral request of any party shall: ♦ Ask the expert to participate in the oral arbitral proceedings, ♦ Permit the parties to put questions to such experts who had made the report, ♦ Permit the parties to present their own expert witnesses to have viewpoints over the issue. ©The Institute of Chartered Accountants of India  1.32 2.32 THE ARBITRATION AND CONCILIATION ACT, 1996 However, it is to be noted that the arbitral tribunal cannot appoint experts and delegate the duty of determination of the dispute. Example: In a construction dispute between Developer X and Contractor Y, the arbitral tribunal faces technical intricacies related to structural defects. Both parties agree to the appointment of a neutral structural engineer as an expert. The tribunal selects the expert based on their qualifications. The appointed expert assesses the construction issues, presents a detailed report, and participates in an arbitration hearing. The tribunal relies on the expert's findings to make an informed decision, ensuring a fair resolution. The use of an appointed expert adds a specialized perspective, facilitating a more thorough and accurate assessment of the disputed construction matters. Court assistance in taking evidence Section 27 – (1) The arbitral tribunal, or a party with the approval of the arbitral tribunal, may apply to the Court for assistance in taking evidence. (2) The application shall specify- (a) the names and addresses of the parties and the arbitrators; (b) the general nature of the claim and the relief sought; (c) the evidence to be obtained, in particular,- (i) the name and address of any person to be heard as witness or expert witness and a statement of the subject-matter of the testimony required; (ii) the description of any document to be produced or property to be inspected. (3) The Court may, within its competence and according to its rules on taking evidence, execute the request by ordering that the evidence be provided directly to the arbitral tribunal. (4) The Court may, while making an order under sub-section (3), issue the same processes to witnesses as it may issue in suits tried before it. (5) Persons failing to attend in accordance with such process, or making any other default, or refusing to give their evidence, or guilty of any contempt to the arbitral tribunal during the conduct of arbitral proceedings, shall be subject to the like disadvantages, penalties and punishments by order of the Court on the representation of the arbitral tribunal as they would incur for the like offences in suits tried before the Court. (6) In this section the expression "Processes" includes summonses and commissions for the examination of witnesses and summonses to produce documents. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.33 Section 27 provides the arbitral tribunal with the power to apply for the court assistance in taking evidence. A person can also be held guilty and tried before the court, if they refuse to give evidence or cooperate in arbitral proceedings. A request to the court for recording evidence may be made by the arbitral tribunal or any of the parties with the approval of the arbitral tribunal. The court can punish any witness if he is guilty of any contempt to the arbitrator. As there is no prescribed procedure for service of notice through the court under the act, it should be served according to the procedure prescribed in Civil Code. A tribunal cannot require the attendance of a witness who refuses to attend and give evidence. A party may use courts procedure to compel his attendance. The Delhi High Court in case of Lilit Madhvan Vs. Building Committee, that the court assistance can only be provided for the execution of the recording of the evidence because the court has no power to direct evidence to be produced or recorded. It would be not proper on the part of an arbitrator to disallow the request of a party for moving to the court to take out summons for the appearance of the witnesses, especially when it is very important for the case. Example: There is an international arbitration between M/s Delhi Fruits Bazar and M/s London Fruits Juice Plc. The crucial evidence resides in a foreign jurisdiction. As the arbitral tribunal is facing challenges in obtaining the evidence, it seeks court assistance. The tribunal files a request with the relevant national court, outlining the need for assistance. The court, recognizing the importance of the arbitration process, issues an order to facilitate the collection of evidence. This court assistance proves instrumental in securing vital documents and witness testimony, ensuring a comprehensive and just resolution to the dispute. The collaboration between the arbitral tribunal and the court demonstrates the effectiveness of cross-jurisdictional cooperation in arbitration proceedings. 5. MAKING OF ARBITRAL AWARD AND TERMINATION OF PROCEEDINGS In the realm of arbitration, the making of an arbitral award and the termination of proceedings are pivotal milestones that encapsulate the resolution process. Crafting an arbitral award involves the meticulous examination of evidence, legal arguments, and applicable laws to render a final and binding decision on the dispute. The arbitrators, acting as impartial adjudicators, meticulously weigh the presented facts before formulating the award. Simultaneously, the termination of proceedings ©The Institute of Chartered Accountants of India  1.34 2.34 THE ARBITRATION AND CONCILIATION ACT, 1996 signifies the conclusion of the arbitration process. This phase is reached when the arbitrators issue their final decision, providing closure to the disputing parties. These twin processes, marked by precision and adherence to procedural guidelines, underpin the efficacy of arbitration in delivering swift and equitable dispute resolution. Arbitral Award An arbitral award is similar to a judgment given by a court of law. In other words, an arbitral award is given by the arbitral tribunal as a decision on various issues in a matter which the parties had placed before the arbitral tribunal. The Arbitration and Conciliation Act 1996, does not clearly define the idea of an arbitral award. However, the concept of an award could also be understood as a final determination of a particular issue or claim that had been submitted for arbitration. It represents a resolution of dispute between the parties. The arbitral award is a remedy to the parties depending on the issue of the dispute. This includes: Injunction: It is order of the court directing a party to stop an action. Monetary Award: Sometimes, one party will need to pay the opposite party based on the contract or dispute controlling the award. Incentives: An arbitrator has discretion to add incentives for certain behaviours to encourage the parties to suits the award. General Principles (a) Who can challenge – Only a party to the arbitration agreement can challenge an arbitral award. A person who is not a party to the arbitration cannot raise a challenge against an arbitral award. (b) Authority – An award can only be challenged before a court, which would include a District Court and a High Court exercising original jurisdiction (for awards from domestic arbitration) and High Court (for awards from international commercial arbitration). (c) Timeline – Timeline refers to by when a challenge against arbitral award can be raised. The law notes an initial time period of three months from when the award is received by party, with a maximum extension of thirty more days by the court. (Consolidated Engineering Enterprises Vs. Principal Secretary (Irrigation Department) 2008 (7) SCC 169). Example: The award was rendered on 1st January 2023. Therefore, the award can be challenged by 31st March 2023. This date could be extended by another 30 days on application to the court i.e. till 30th April 2023. There can be no further extensions. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.35 (d) Automatic stay – According to the Act, there is no automatic stay on the enforcement. A party has to specifically request for a stay, and the court at the time of granting stay can impose conditions. [Section 36(2) & (3)] An application for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing. Where the Court is satisfied that a prima facie case is made out,- (a) that the arbitration agreement or contract which is the basis of the award; or (b) the making of the award, was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award. Explanation.— For the removal of doubts, it is hereby clarified that the above proviso shall apply to all court cases arising out of or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015. Types of Arbitral Awards Final Award Additional Award Interim Award Settlement Award Final Award – An award that is made in accordance with the requirements of the law (including signature, reason and delivery), and finally adjudicates on the issues submitted to arbitration, would be a final award. Interim Award – There can be two types of interim awards, one which remains in force till the final award is rendered, and another is final as regards the matters it deals with but not in respect to all the matters under dispute. The latter is referred to as interim, because when it was rendered, there were still other pending issues. ©The Institute of Chartered Accountants of India  1.36 2.36 THE ARBITRATION AND CONCILIATION ACT, 1996 Settlement Award – During the arbitration process, the parties may choose to settle the matter instead of having it adjudicated by the arbitrator. In such a situation, the arbitrator could assist the parties in arriving at the settlement. If a settlement is arrived at, and the arbitrator has no objection with it, then terms of the settlement could be made part of an award. This is referred to as a settlement award. (Section 30) Additional Award – When a final award has been rendered, but it is later found out that certain claims that had been submitted to the arbitral tribunal were not resolved/adjudicated, the parties can request the arbitral tribunal to make an additional award covering the issues that had been left out. Such a request must be made within 30 days from the date of receipt of the final award. [Section 33(4)] Example: Nagpur Metro Rail Corporation (NMRC) entered into a long-term concession agreement with Nagpur Airport Metro Express Private Limited (NAMEPL), a subsidiary of Reliance Infrastructure to develop and operate the airport express metro project which included brining in rolling stock. NAMEPL was to run the metro services for 30 years. This agreement was entered into in 2008 and was terminated in 2012. The main disagreements were – a) failure to fix civil structure defects, b) misrepresentation as to viability of the project including expected passenger, c) failure to transfer outstanding amounts, and d) failure to acquire land hampering development of further lines. All these according to NAMEPL led to delays in turn contributing to cost escalations. The matter was submitted to a three-member arbitral tribunal for adjudication. Scenario I – The arbitral tribunal gives an award dealing with all the four disagreements. It is one comprehensive award with reasons for all conclusions. This would be a final award as it conclusively deals with all the questions submitted to arbitration. There is nothing further left to be adjudicated. Scenario II – The arbitral tribunal renders an award (Award no.1) which deals only with disagreements (a), (b) and (c). The arbitrators inform the parties that they will render another award dealing with disagreement (d). Award no.1 is an interim award. Scenario III – The arbitral tribunal gave an award and informed the parties that this was the final award. However, when the parties examined it, they realised that the award only dealt with disagreement (a), (c) and (d). They bring it to the notice of the arbitral tribunal which gives another award dealing with disagreement (b). This latter award is an additional award. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.37 Scenario IV – While the arbitral proceedings were going on, the lawyers of both parties met for long discussions. They later informed the arbitral tribunal that the parties had settled the matter on all disagreements. They submitted the settlement agreement to the arbitral tribunal with the request that it be incorporated into an arbitral award. The arbitral tribunal after scrutinizing the agreement gave an award in which they included all the terms of the agreement. This would be a settlement award. 6. ARBITRAL AWARD Rules applicable to substance of dispute Section 28 – (1) Where the place of arbitration is situated in India- (a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India, (b) in international commercial arbitration- (i) the arbitral tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute; (ii) any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws/rules; (iii) failing any designation of the law under clause (a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute. (2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so. (3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction. Arbitrations other than international commercial arbitration i.e. domestic arbitrations should follow Indian arbitration law. However, for deciding disputes in international commercial arbitration, the arbitral tribunal should follow the laws which the parties have agreed to apply in their agreement. The selected law as agreed within the agreement should be construed unless expressly agreed otherwise. In case of the absence of any such agreement or any indication of what would be the ©The Institute of Chartered Accountants of India  1.38 2.38 THE ARBITRATION AND CONCILIATION ACT, 1996 applicable laws once a dispute arises, the arbitral tribunal shall apply laws that are applicable and relevant to the dispute. Furthermore, while deciding and making an award, the arbitral tribunal should additionally take into account the terms of the contract and trade usage applicable to the transactions. The words “ex aequo et bono” means decision taken on equitable principles of justice and good conscience without adhering to strict rule of court of law. Decision-making by panel of arbitrators Section 29– (1) Unless otherwise agreed by the parties, in arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal shall be made by a majority of all its members. (2) Notwithstanding sub-section (1), if authorised by the parties or all the members of the arbitral tribunal, questions of procedure may be decided by the presiding arbitrator. Section 29 provides the method of decision making by panel of arbitrator. In case of sole arbitrator, such decisions are to be taken by such a sole arbitrator. Where there is a penal of arbitrators, the opinion of majority shall prevail. The presence of arbitrators is not required at the same place. They may make their decisions by using the modern means of communication such as telephone, telex, fax etc. Further, the decision on questions of procedure should be decided by all the members of arbitration or by the presiding arbitrator if authorised by all the parties. In case there is difference of opinion between each member of arbitration, the arbitral proceedings may have to be terminated as per section 32. It is to be noted that there is no umpire system under arbitration proceedings but it was observed by SC in case of RBI Vs. S.S. Investment Ltd., when two arbitrators have given different arbitral awards, appointment of arbitrator for making reference as umpire was justified. Example: M/s Ranganathan Coconut Oil Company and M/s Middlearth Blu & Company entered in contract to supply certain goods by former to later. There arose contractual dispute between them and a three-member arbitral tribunal is tasked with rendering a decision. After thorough deliberations on the evidence and legal arguments, a majority of the arbitrators, comprising two members, reach a consensus on liability and damages. Despite a dissenting opinion from the third arbitrator, the majority decision prevails, resulting in the issuance of the final award. This scenario highlights the significance of majority rule in the arbitral process, ensuring that a clear decision is reached even in the presence of differing perspectives within the tribunal. ©The Institute of Chartered Accountants of India  FUNDAMENTALS OF ARBITRATION. 2.39 Time limit for arbitral award The Arbitration and Conciliation (Amendment) Act, 2015 has inserted a new section 29A which deals with time limit for arbitral award. Accordingly – Section 29A– (1) The award in matters other than international commercial arbitration shall be made by the arbitral tribunal within a period of 12 months from the date of completion of pleadings u/s 23(4). Provided that the award in the matter of international commercial arbitration may be made as expeditiously as possible and endeavor may be made to dispose of the matter within a period of 12 months from the date of completion of pleadings u/s 23(4). (2) If the award is made within a period of 6 months from the date the arbitral tribunal enters upon the reference, the arbitral tribunal shall be entitled to receive such amount of additional fees as the parties may agree. (3) The parties may, by consent, extend the period specified in sub-section (1) for making award for a further period not exceeding 6 months. (4) If the award is not made within the period specified in sub-section (1) or the extended period specified under sub-section (3) the mandate of the arbitrator(s) shall terminate unless the Court has, either prior to or after the expiry of the period so specified, extended the period. Provided that while extending the period under this sub-section, if the Court finds that the proceedings have been delayed for the reasons attributable to the arbitral tribunal, then, it may order reduction of fees of arbitrator(s) by not exceeding 5% for each month of such delay. Provided further that where an application under sub-section (5) is pending, the mandate of the arbitrator shall continue till the disposal of the said application. Provided also that the arbitrator shall be given an opportunity of being heard before the fees is reduced. (5) The extension of period referred to in sub-section (4) may be on the application of any of the parties and may be granted only for sufficient cause and on such terms and conditions as may be imposed by the Court. (6) While extending the period referred to in sub-section (4), it shall be open to the Court to substitute one or all of the arbitrators and if one or all of the arbitrators are substituted, the a