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Big Or Small Business, Why An Arbitration Clause In Your Contract Can Be Beneficial

A business contract is the foundation of a commercial relationship and also sets the guiding principles for operations. Yet, commercial relationships often run into choppy waters. In recent times, Alternate Dispute Resolution (ADR) mechanisms have found favour in the commercial-legal ecosystem to adjudicate on grievances in commercial relationships. Arbitration has emerged as the preferred mode of ADR.

Laws, like the Arbitration and Conciliation Act, have also been strengthened and amended multiple times to suit the requirements and address ambiguities in earlier versions. Since arbitration has become an important word for entrepreneurs, Manoj K Singh, Founder Partner of Singh & Associates, spoke to ET online about the importance of having an arbitration clause in contracts and how it can make life easier for ever business.

Let's start with the basics. Why and what is the importance of arbitration clauses in contracts, especially for small and medium enterprises?
Manoj K Singh (MKS): Arbitration clauses in commercial contracts allow disputing parties to resolve their dispute through arbitrators in a time-bound and cost-effective manner without having to resort to long-drawn litigation. Arbitration finds favour because arbitration laws allow a lot of autonomy to the parties to the contract.

If there is an arbitration clause in the contract, there must be clarity on the jurisdiction, and under which law/s would it be governed. If people write vague clauses, then it may be subject to endless interpretations regarding which contract, which law, which jurisdiction, and which court should be approached.

In the situation when one party is from India & the other, for example, from London and the seat of arbitration is Singapore, then in such a case it should be clearly spelt by parties which law they want - laws of Singapore, the UK or India, to apply to the arbitration. In a nutshell the applicability of law, the seat of arbitration and the jurisdiction of the respective Court should be clearly spelled out.

What are the key points to keep in mind when putting the arbitration clause?
MKS: The primary point of caution is, do not make the arbitration clause complex. Second, have clarity on jurisdiction. If both the parties are Indian and the arbitration is going to be in India, then the jurisdiction should be clear on which court would have jurisdiction. And if it is an international commercial arbitration, then jurisdiction and applicable law should be clear.

What kind of contract should have an arbitration clause? Can it be a part of all types of contracts or do you suggest that only some specific nature of contracts should have the clause?
MKS: I would say that the arbitration clauses are most effective for commercial transactions including, but not limited to road, transport, port, airport, telecom, infrastructure development, etc.

Now in the wake of new amendments, the Indian Arbitration Act has become very robust, quick, decisive, and the timeframe is clear. If you want to increase the time provided in the arbitration, then again, there are provisions to do so first, by the consent of the parties and then by the permission of the court. This kind of effective mechanism provides confidence and support to the commercial ventures as they know that the arbitration proceedings will decisively decide their dispute. I would say all business operations related transactions must have the arbitration clause.

If one has the arbitration clause, what are the benefits of having it vis-a-vis not having it?
MKS: Arbitration clause offers only benefits; there is no demerit at this moment. After amendment, under Section 17 the interim tribunal can pass any order which is enforceable as an order or decree order of the court. This was earlier possible only under Section 9 for which the party needed to go to the High Court.

Arbitration is time bound, and it is easy. There are lesser procedural issues while conducting an arbitration within the time frame. Further, appointment of arbitrator is based on party autonomy as the law gives complete freedom to the parties to choose an arbitrator or an arbitral institution. So, if you want to have an arbitrator having the domain knowledge, you can have.

With due respect, sometimes in the court you may not have a judge who is an expert in that particular domain, and sometimes it is hard to get an expert in half a day or two hours time. So, if you want to have a domain expert to appreciate the domain issue or critical issues related to the business, you can have an expert arbitrator having the legal and domain knowledge.

You merely need to say that parties have the right to nominate the arbitrator, and that both the nominated arbitrators will have to appoint an arbitrator who will act as an umpire or chairman of the Tribunal.

When it comes to the judgement being fair and sound, if one nominee is yours and one nominee is of the other party, then there is enough balancing act provided in the Act. And then there is a third person who is nominated by both the nominated arbitrators. This practice is followed globally, not only in India.

And the judgment passed by the arbitrator, is it binding on the companies? Can parties file an appeal?
MKS: The award passed by the tribunal is not called a judgement, but is called an Award. Firstly, the award passed by the tribunal is enforceable only as a decree of court. And secondly, yes, it can be appealed. Section 34 of Arbitration Act provides for the same.

What has been the performance of the arbitration system in India till now?
MKS: The adoption and performance have been very good. Especially after the 2015 amendment, which made the process time bound, it has been working very well. Even the foreign parties who were earlier not very interested in India having a jurisdiction for arbitration are now appreciating the same. Court intervention is decreasing, so yes, it works well and I am sure it will mature more in the coming years.

It's helpful for the whole legal ecosystem. It's going to boost the commercial scenario and also attract foreign investors, it will give confidence to the investor who is coming to the country to invest, that disputes will be cleared in time, and if you have arbitration clauses, then you don't have to go to the court. So, the court's burden is also lessened.

Is arbitration then only for bigger companies or can it be for companies regardless of size?
MKS: Arbitration is agnostic of a company's size and. This means anyone can use it. If you have a small business, and the dispute is small, yet that minor dispute can have the repercussions of a large dispute for that small entrepreneur. Therefore, he can also opt for arbitration as a dispute resolution process. Arbitration is a fast track optional substitute to the court system.

What are the major emerging trends of Indian arbitration with regard to the pandemic?
MKS: As compared to litigation matters, arbitration was less affected by the pandemic. Arbitration gives parties leeway, based on their agreement, to mold the power of the tribunal and the arbitral procedures. These advantages of arbitration proceeding proved immensely valuable in pandemic and the lessons learnt might even be carried on. Some trends that emerged during the pandemic and can be carried forward are:

Virtual Hearing:
The arbitral tribunal and the parties have taken the advantage of the flexibility and autonomy offered by Arbitration Act by adopting innovative measures such as virtual hearing. Using virtual hearings, though not new, became a necessity and has accelerated a shift from in-person hearings to virtual hearings. A key question here is, if one party objects to virtual arbitration, can the arbitrator compel it to participate in a virtual arbitration?

The answer is yes, if one party is not giving consent for the virtual hearing or both the parties cannot agree to a common procedure w.r.t hearing then the Arbitral Tribunal under sub-section 3 of Section 19 of Arbitration Act, has wide discretion to pass procedural order and to compel parties to attend virtual hearing, and if the objecting party still refuses to cooperate, then the arbitral tribunal can proceed ex-parte under Section 25(c) of the Arbitration Act.

Documents: only Arbitration: An alternative to virtual hearing is a document-only arbitration proceeding. In document-only arbitration proceeding parties dispense with a formal hearing entirely. As the name suggests, documents-only arbitrations are those in which tribunals pass awards based on written submissions and documentary evidence, with no opportunity for oral hearings.

In this process, the tribunals and parties can work remotely with no need to attend hearings, and it helps parties to avoid incurring the huge costs of attending hearings, and disputes resolution is expedited. It is important to mention here that it will not be suitable or even possible for all disputes to be resolved entirely on a documents-only basis.

Need for Emergency Arbitrators:
In international arbitration, many arbitral bodies have established emergency arbitrator provisions which can be utilised where urgent relief is required. Recourse to this provision was taken during the pandemic. Access to emergency relief can provide companies speedy resolution to a dispute. Emergency arbitrators can be more frequently used for preliminary determination on the applicability of default, termination, and material adverse change clauses.

How successful is Indian arbitration in solving the cross-border disputes?
MKS: The recent amendments in the Act, and the Government's aim at making India a hub for international commercial arbitration, combined with judicial pronouncements have had a very positive role to play in the successful resolution of cross-border disputes.

On applicability of law, international commercial arbitration is defined under Section 2(1)(f) of the 1996 Act as an arbitration relating to disputes arising out of a legal relationship, whether contractual or not, which are considered as commercial as per the law in force in India; where one or more of the parties are entities (personal or impersonal) which reside outside India.

It can be seen from the very definition of international commercial arbitration that Part II of the Act is primarily to deal with the cross-border disputes.

Part I of the 1996 Act is applicable only to such arbitrations which take place within the territory of India.

On jurisdiction, the Supreme Court of India has held that the "venue" of an arbitration is the geographical location chosen based on the convenience of the parties and differs from the "seat" of arbitration, which decides the appropriate jurisdiction.

The court has held that the courts of the country where the seat of arbitration is will have exclusive jurisdiction to exercise supervisory powers over the arbitration process. Further, it has said that the courts of the country where the venue of arbitration is, will not and cannot have concurrent jurisdiction, as it would be contrary to the underlying principle of the policy of dispute resolution through arbitration.

On enforceability, there are very limited circumstances under which an Indian Court may refuse the enforcement of a foreign arbitral award. It is pertinent to note that even such refusal of enforcement includes a discretionary power in the hands of the judge. The enforcement of a foreign arbitral award may also be refused, amongst other limited grounds, if the Court finds that the enforcement of the award would be contrary to the public policy of India.

The Supreme Court has clarified that Section 48 of the 1996 Act does not offer any opportunity for a second glance at the foreign award which is at its enforcement stage nor do they permit review of such an award on the merits.

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