Alternative Dispute Resolution System

Module 4: Arbitration
Q. Purpose of Arbitration Act is to provide quick Redressal to Commercial dispute by
private arbitration.
Object of Law of Arbitration
The primary objective of the law of arbitration is to provide a structured framework for the
resolution of disputes outside of traditional court proceedings. It aims to facilitate a fair,
impartial, and efficient process for parties to resolve their conflicts through arbitration, thereby
reducing the burden on courts and promoting the finality and enforceability of arbitral awards.
Additionally, the law seeks to ensure that arbitration proceedings are conducted in accordance
with agreed-upon rules and principles, allowing for flexibility and autonomy in resolving
disputes.

What is Arbitration?
In legal terms, "arbitration" refers to a method of resolving disputes outside of traditional court
systems, regardless of whether it is conducted through a permanent arbitral institution. It
involves appointing a neutral third party, known as an arbitrator, to make a binding decision on
the dispute after hearing arguments and evidence from both parties involved. This definition
encompasses all forms of arbitration, whether administered by established institutions or
conducted independently.
“Arbitral Tribunal” means a sole arbitrator or a panel of arbitrators;

International Commercial Arbitration

"International commercial arbitration" refers to arbitration proceedings concerning disputes
arising from legal relationships, whether contractual or not, that are deemed commercial under
Indian law. It applies when at least one of the parties involved meets any of the following
criteria:
1. An individual who is a citizen of or regularly resides in a country other than India.
2. A corporate entity incorporated in a country other than India.
3. An association or group of individuals whose central management and control are based in a
country other than India.
4. The government of a foreign country.
Ingredients
1. Dispute Resolution: Arbitration involves a dispute or difference between at least two parties,
indicating that it is a method of resolving conflicts between them.
2. Third-Party Determination: The dispute is referred to a person or panel of persons, distinct
from a court of law, for resolution. This reflects the involvement of an impartial arbitrator or
arbitral tribunal in rendering a decision.
3. Judicial Process: The determination made by the arbitrator(s) occurs after hearing both sides
in a judicial manner, indicating that the arbitration process involves a fair and impartial
consideration of arguments and evidence from each party, akin to judicial proceedings.

Nature of Arbitration
a. Party Choice: Arbitration is chosen by the parties involved.
b. Quasi-Judicial: It functions as a quasi-judicial body.
c. Award Decision: The decision is called an "award."
d. Finality: The award is usually final but may be challenged in exceptional cases.

Procedure and Evidence

a. Flexible Procedure: Arbitrators aren't bound by strict procedural rules but follow quasi-
judicial proceedings.
b. Freedom from Legal Formalities: Arbitrators don't adhere to judicial rules of evidence but
must ensure fairness based on natural justice principles.
c. Adherence to Agreement: Arbitrators decide disputes based on the arbitration agreement,
aiming for swift and cost-effective resolution. This alleviates the burden on overloaded courts
and reduces the expenses associated with traditional litigation.

History of Passing of Arbitration and Conciliation of 1996

Arbitration in India has a long history. The first formal law relating to arbitration was the Indian
Arbitration Act of 1899, which applied only to certain cities. Later, the Code of Civil Procedure
in 1908 also addressed arbitration. These laws were replaced by the Arbitration Act of 1940,
which mainly dealt with domestic arbitrations.
However, the process for enforcing foreign awards had separate laws. Internationally, to create
consistency in arbitration laws, the UNCITRAL Model Law on International Commercial
Arbitration was adopted in 1985. This model law aimed to provide a standard approach to
arbitration across different countries.
In India, the need for a modern arbitration law became evident due to globalization and the
influx of foreign investments after 1991. Investors sought a more efficient dispute resolution
mechanism, which the existing Arbitration Act of 1940 couldn't fully provide.
To meet these needs, India passed the Arbitration and Conciliation Act in 1996, which came into
force on August 22, 1996. This new law was based on the UNCITRAL Model Law on
International Commercial Arbitration and aimed to align India's arbitration laws with global
standards.

The Key Objectives of the Arbitration and Conciliation Act, 1996

Here's a simplified version:
1. The law aims to cover all types of arbitration and conciliation, whether international or
domestic.
2. It's designed to ensure fairness, efficiency, and meeting the specific needs of each arbitration.
3. The arbitral tribunal must explain its decisions.
4. It sets boundaries for the tribunal's authority.
5. Courts have limited involvement in the arbitration process.
6. The tribunal can use mediation or conciliation to encourage settlements.
7. Arbitral awards are enforced like court judgments.
8. Settlement agreements from conciliation have the same legal standing as arbitral awards.
9. Foreign awards are recognized and enforced under international conventions like the New
York Convention and the Geneva Convention.

DOMESTIC ARBITRATION
Domestic arbitration is a process to resolve disputes within the borders of a country, such as
India. Even though the term "domestic arbitration" isn't defined in the Arbitration and
Conciliation Act of 1996, certain sections clarify its meaning. For instance, when the place of
arbitration is mentioned as India, and when the term "domestic award" is used, it refers to
disputes related to India governed by Indian laws.
Features of Domestic Arbitration:
1. Agreement between Parties: In domestic arbitration, both parties must agree to resolve any
disputes through arbitration. For example, if A and B enter into a sales agreement, they should
include an arbitration clause in the agreement.
2. Proceedings in India: The parties involved must opt for arbitration proceedings within India
and under Indian laws.

Advantages of Domestic Arbitration:

1. Speedy Resolution: Domestic arbitration offers quicker decisions compared to court
proceedings, where cases often get delayed due to backlog.
2. Cost-Effective: Arbitration is less expensive as the fees paid to arbitrators are lower than court
costs, and the process involves fewer expenses for evidence and witnesses.
3. Privacy: The arbitration process is private and confidential, avoiding public scrutiny and
preserving the parties' reputations.
4. Expert Decision-Making: Arbitrators are experts in their fields, chosen by both parties,
ensuring fair and impartial decisions.

Disadvantages of Domestic Arbitration:

1. Limited Appeal: Parties have minimal recourse for appealing an arbitrator's decision, as it's
usually binding and cannot be challenged in court.
2. Lack of Evidence: Arbitrators may rely on documents instead of witnesses, leading to
potential inaccuracies due to insufficient evidence.
3. Potential Bias: The arbitrator's expertise and appointment process may introduce bias,
affecting the fairness and consistency of decisions.
4. Rules of Evidence: Arbitrators may not have legal expertise, leading to decisions based on
incorrect interpretations of evidence.
5. Lack of Transparency: Since arbitration is private, there's limited transparency, making it
challenging to question decisions or processes.

INTERNATIONAL ARBITRATION
International arbitration is a way to resolve disputes between parties from different countries.
Unlike court proceedings, it doesn't happen in public courts but in front of private arbitrators.
This method is neutral, consensual, binding, private, and enforceable, making it quicker and
easier than going to court.
Features of International Arbitration:
1. Consensual: Both parties agree to resolve disputes through arbitration, without involving third
parties like in court.
2. Neutral: Arbitrators from different nationalities ensure impartial decisions and provide a
neutral forum for dispute resolution.
3. Choice: Parties have control over various aspects of the arbitration process, such as selecting
arbitrators, the location, language, and procedure.
4. Privacy and Confidentiality: Proceedings are private, and arbitrators keep evidence
confidential, unlike public court hearings.
5. Finality: Arbitral awards are generally not subject to appeal, ensuring swift resolution and
avoiding lengthy legal battles.
6. Enforceability: Awards are easily enforceable internationally through conventions like the
New York Convention, making them binding in multiple countries.

Advantages of International Arbitration:

1. Award Enforcement: Arbitral awards are recognized and enforceable in many countries
worldwide, simplifying the enforcement process.
2. Flexibility: Parties have more flexibility in determining the procedure and location of
arbitration compared to court proceedings.
3. Autonomy and Freedom: Parties have complete freedom to choose arbitrators, the process,
timing, and cost of arbitration, providing autonomy in dispute resolution.
4. Expert Advice: Parties can select arbitrators with expertise in relevant fields, ensuring
accurate and informed decisions.
5. Neutrality: Arbitration provides assurances against bias, as parties can choose arbitrators and
locations unrelated to their interests.

Disadvantages of International Arbitration:

1. Time: Arbitration may take longer than expected due to busy schedules and procedural steps,
delaying the resolution process.
2. Cost: The process can be expensive, as parties must cover arbitrator fees, administrative costs,
and other expenses.
3. No Appeal: Arbitral awards are final and binding, with limited options for appeal, even if
parties disagree with the decision.
4. Biased Decision Making: Private arbitrators may favor one party, leading to biased decisions
and unfair outcomes.
5. No Fixed Procedure: Lack of standardized procedures can cause confusion among parties, as
arbitrators may use different methods to resolve disputes.

ADVANTAGES AND DISADVANTAGES OF ARBITRATION

Advantages of Arbitration:
1. Efficient and Flexible: Resolves disputes quicker and scheduling is easier compared to court
trials, which can take years to get a date.
2. Less Complicated: Rules of evidence and procedure are simplified, making it easier to admit
evidence and reducing the need for extensive paperwork.
3. Privacy: Proceedings are private, keeping sensitive information confidential, unlike public
court hearings.
4. Impartiality: Parties choose the arbitrator together, ensuring impartiality and trust in the
decision-maker.
5. Cost-Effective: Often less expensive than litigation due to reduced attorney fees and lower
preparation costs.
6. Finality: Limited opportunities for appeal provide finality to the dispute resolution process.
7. Class Action Waiver: Employers can include a class action waiver in arbitration agreements,
limiting their risk exposure.

Disadvantages of Arbitration:
1. Questionable Fairness: Mandatory arbitration clauses may force parties into arbitration
without mutual consent, potentially favoring one party.
2. Subjective Arbitrator: The process of choosing an arbitrator may not always be objective,
leading to potential bias.

3. Unbalanced: Arbitration clauses may favor large employers or manufacturers over employees
or consumers, creating imbalance.
4. Inconsistent Legal Standards: Arbitrators may not strictly follow the law, leading to
unpredictable outcomes and potential unfairness.
5. Lack of Jury: Lack of a jury may result in biased decisions, as the arbitrator acts as both
judge and jury.
6. Lack of Transparency: Private arbitration hearings may lack transparency, increasing the
likelihood of bias.
7. Limited Appeals: Limited opportunities for appeal mean parties give up their right to
challenge the decision.
8. Higher Costs: Arbitration fees can be substantial, especially for quality arbitrators, making it
more expensive than court proceedings in some cases.
9. Unpredictable Outcomes: Arbitrator decisions may not follow formal courtroom rules,
leading to unconventional outcomes and unpredictability.