When domestic and international commercial disputes arise, arbitration and other alternative dispute resolution (ADR) mechanisms offer many advantages over litigation in civil courts. Under the Arbitration Act, 1940, courts were allowed to interfere at every stage of an arbitration proceeding. The Arbitration and Conciliation Act, 1996, which replaced it, aimed at providing faster and efficient resolution of disputes but could not achieve the purpose.
In order to make India a hub for international arbitration and to facilitate quick enforcement of contracts, easy recovery of monetary claims and faster disposal of cases in courts, the 1996 act was amended in October 2015. Some of the major changes are: commencement of arbitral proceedings within 90 days or time given by the court and limiting the scope of the court’s subsequent interference (section 9); fixing 60 days for disposal of an application for appointment of arbitrator and fixing the arbitrator’s fee (section 11); declaration by the arbitrator about independence and impartiality, and insertion of the 5th and 7th schedules listing grounds for doubting independence and impartiality and for ineligibility (section 12); substitution of one arbitrator by another (section 14); making orders passed by the tribunal enforceable as those of courts (section 17); providing for filing a counter-claim or pleading a set-off falling within the scope of an arbitration agreement (section 23); requiring a tribunal to hold a hearing on a day-to-day basis and allowing for exemplary costs (section 24); requiring the tribunal to take into account contract terms and trade usage applicable to the transaction (section 28); mandating the passing of an award in 12 months with a maximum extension of six months and terminating the mandate beyond that, extendable only by the court and providing for substituting one or all the arbitrators and for reduction of the arbitrator’s fee (section 29A); providing fast-track procedure for deciding disputes without any oral hearings and passing of award in six months (section 29B); awarding future interest at 2% higher than the prevailing rate if not decided by the arbitrator (section 31); limiting the scope of public policy to challenge the award and providing for service of advance notice and disposal within one year of such notice (section 34); stay of award only if granted by the court (section 36).
The Arbitration and Conciliation (Amendment) Bill, 2018, aims to further improve the ADR process by providing for: (a) the Supreme Court or a high court directly approaching arbitrators from designated arbitral institutions; (b) creation of the Arbitration Council of India; and (c) clarification on the applicability of the 2015 amendment act.
Now that the 1996 act has been amended to ensure that arbitration is economically viable, efficient and speedy, companies need to devise a strategy to use the mechanism to their best advantage. An appropriate customized arbitration clause in line with overall corporate strategy will partly depend on which side of a dispute the company is likely to stand. Key factors to be considered are outlined below.
Seat of arbitration and procedural law: The seat usually determines the procedural law to be followed unless agreed otherwise. Preferably the seat should be in a country which is a signatory to New York Convention.
Governing or substantive law: Failure to specify the governing or substantive law might itself result in a dispute and can be of great advantage or disadvantage.
Number of arbitrators: Multi-level clauses for referring disputes up to a certain value to a sole arbitrator and beyond that to a larger number of arbitrators can be incorporated.
Language of arbitration: This can pose a major concern in countries where English is not an official language. The use of two or multiple languages can also be agreed.
Institutional or ad hoc arbitration: The pros and cons of both should be carefully evaluated depending on the anticipated dispute as what may appear to be effective in terms of cost and time may not be.
Scope of arbitration agreement: The scope should be enlarged or minimized depending on the potential disputes.
Mandatory and non-mandatory rules: Since mandatory rules cannot be changed they should be specifically incorporated along with waiver of all non-mandatory rules.
Appellate arbitration: The Supreme Court has upheld the legality of a two-tier arbitration procedure or second instance arbitration. This can be an effective mechanism.
Due to the amendments discussed above, most companies have realized that by thinking strategically and tactically drafting an arbitration clause they can not only reduce business risks but can also reduce costs and increase the odds of successfully resolving disputes.
Deepak Sabharwal is the managing partner of Deepak Sabharwal & Associates.
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