When can one initiate an arbitration proceeding?

When the resolution of disputes through courts became lengthy and time taking, the process of arbitration was introduced. There are way too many commercial transactions that are entered into, which lead to innumerable disputes, and not too many courts are available to resolve these disputes. Alternative dispute resolution was introduced as, as the name suggests, alternative methods to resolve commercial disputes. There are several types of alternative dispute methods such as arbitration, mediation, conciliation, etc.

Out of these, arbitration is the most structured method of resolving a dispute outside courts.

What is Arbitration?

Arbitration is one of the methods of alternative dispute resolution. The intent behind Arbitration is to resolve the disputes between two conflicting parties without knocking on the court’s doors. Under this mechanism, an independent third/neutral party is appointed as the Arbitrator to resolve the disputes which are persisting between the parties. 

How can arbitration be invoked?

This method of alternative dispute resolution can only be invoked in cases where the parties have entered into a valid and duly executed agreement, which contains a properly drafted arbitration clause. The law also defines and specifically states the manner in which these clauses are to be drafted and the essential elements they ought to contain.

Arbitration Agreement

Arbitration, as mentioned, can only be invoked when the agreement entered into between parties, contain a clause to this effect.

When two or more parties to a contract have a stipulated clause which may read as “in case of any disputes arising between the parties, the dispute between the parties to be adjudicated by way of arbitration”, it can be construed for the parties to have entered into an Arbitration Agreement. The Arbitration Agreement between the parties is a kind of binding contract between the parties. 

For an agreement to constitute an “Arbitration Agreement”, it is essential that the agreement must be in writing and must have the above-stipulated clause for it to be referred to as an Arbitration Agreement. 

Section 7 of the Indian Arbitration and Conciliation Act, 1996 (“Arbitration Act”) also explains Arbitration Agreement. 

Nature of Disputes adjudicated through Arbitration 

Owing to the extended period since arbitration was introduced, there have been several cases and judgments that set out the types of disputes which are arbitrable and the types of disputes which cannot be resolved through arbitration. Under this mechanism, there exist various categories of disputes: commercial, civil, labour and family disputes can be referred and adjudicated through arbitration. 

Certain disputes like intellectual property rights, antitrust, matters related to insolvency and bankruptcy are considered to be not arbitrable. However, in some instances even though while there exists a construction contract between the parties, the allegations that may be carved under the dispute relate to fraud/ forgery and such serious allegations are out of the purview of arbitration and other modes of adjudication available should be chosen instead.

There lies a series of judgments where the Hon’ble Supreme Court has taken a view that while allegations of fraud and forgery are serious of nature and they do become a criminal dispute, yet they are arbitrable and can be and can be adjudicated through Arbitration.

Up until a few years ago, there were various judicial pronouncements that were laid down by our judicial system which held that the minute the Hon’ble Arbitral Tribunal realised that the disputes are not arbitrable, there should terminate their mandate, even if the process of arbitration has been initiated. The argument that initiation of a process waives off the Tribunal’s right to terminate such proceedings and suggests other modes of dispute resolution are not sustainable.

In a judgment delivered by the Hon’ble Supreme Court in the matter between N Radhakrishnan v. Maestro Engineers, (Maestro Engineers) the Hon’ble court held that serious allegations of fraud cannot be arbitrated and have to be settled in the court of law by leading evidence in the matter, through the due process of trial. 

Subsequently in the year 2016, Hon’ble Supreme Court in the matter between A.Ayyasamy v. A Paramasiwam, (Ayyasamy) held that just because allegations of fraud have been carved out, it does not nullify the election of an Arbitration Agreement between the parties. 

However, the rulings passed by the Hon’ble Supreme Court are not applicable in the present times. Both the judgements mentioned did not hold the correct position of law and failed to hold any percentile value.

Evolving the Law: Game Changer 

Since the above judgments did not hold any law, the legislatures felt the need to bring a new perspective.  The Law Commission, in its 246th report proposed for the addition of sub-section (6) to Section 16 wherein the Arbitral Tribunal will be empowered to adjudicate serious questions of law, complicated questions of fact or allegation of fraud, corruption, etc. where an arbitration clause was invoked in a duly executed agreement or an arbitration agreement was entered into.

Subsequently, while adjudicating the dispute between World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd. while dealing with a dispute in relation to foreign seated arbitration, the Hon’ble Supreme Court held that every kind of fraud is arbitrable and there does not exist any difference between domestic arbitration and foreign arbitration, apart from the seat details, jurisdiction, language chosen, etc.

Taking into account, these recommendations by the Law Committee, Hon’ble Supreme Court recently, while adjudicating the dispute between Vidya Drolia v. Durga Trading Corpn (Vidya Drolia) held that allegations of fraud are arbitrable when the crime relates to a civil dispute. In this case, the tenancy disputes had arisen between the parties, and allegations of fraud were culled out. The  Supreme Court narrowed the scope of disputes which are not arbitration. Since the tenant-landlord disputes are not in rem, the same can be arbitrated. 

Essentials of an Arbitration Agreement or a valid Arbitration clause:

For parties to be able to efficiently and effectively invoke arbitration, the agreement or relevant clause shall mention and pre-define the following requirements that the Parties mutually agree to:

– There should exist a valid Arbitration Agreement between the parties. The Arbitration Agreement should be in writing;

– The written agreement not only need to be signed by both the parties but must contain an exchange of letters, telex, telegrams or other means of telecommunication that provide a record of the agreement; 

– It should also contain an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. 

The Arbitrator chosen – not agreeable to Parties:

In case the arbitrator chosen is not agreeable to parties, and the parties have reached a deadlock to this effect, they may approach the court of the relevant jurisdiction and seek the appointment of an arbitrator from the court. 

Conclusion 

The observations laid down by the Hon’ble Supreme Court in Vidya Drolia in a way is a landmark judgment as it paved way for arbitrating the disputes which deal with serious allegations, even beyond the scope of only civil or commercial disputes. The parties to the dispute also cannot simply level the allegations of fraud, escape the arbitration proceedings. 

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