The Arbitration clause is perhaps the most common clause of any type of agreement. But in most cases, one fails to understand it or its importance. Many feel that it is used as it can resolve the dispute between the parties; however few understand that it can have various impacts and have long term consequences. In this article, we shall try to dive deep to understand and understand the nuances behind this clause.

So, what is Arbitration?

Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. An Arbitration clause helps to resolve friction in the most amicable way. In choosing this, the parties opt for a private dispute resolution procedure instead of going to court. In India, it’s governed by the Arbitration and Conciliation Act 1996 as amended in 2015.

….But, isn’t this similar to conciliation? 

Not really. The process wherein both the parties are brought together in front of a third party so as to persuade them to arrive at a decision by mutual agreement between them is called Conciliation. In other words, conciliation is a method of resolving the dispute, wherein an independent person, who meet the parties jointly and severally and helps them to arrive at, negotiated settlement or resolve their differences. Unlike arbitration process, the decision of the conciliator is not enforceable in the Conciliation process. If any of the party wants, he can walk away from the conciliation process.

 

……….So, why should one draft any arbitration clause or go for Arbitration Agreement before hand? What are its advantages?

1. Arbitration Process can be done in a time-bound manner. It can be scheduled, conducted and concluded more quickly and conveniently than a court or jury trial. In fact, one can even ‘hand-craft’ an arbitration procedure that fits the dispute. 

2. One can pick the Arbitrators or Arbitrating Authority beforehand. Unlike a court proceeding, the decision-maker(s) can be chosen by the parties by mutual agreement.

3. With relaxed rules of proceedings, it is often easier, less time-consuming and thus cost effective to put on the case.

4. Arbitration can be held in private, without public scrutiny, and transcripts of sworn testimony or other proceedings are not made except pursuant to the agreement. In today’s world where business secrecy plays a huge role, Arbitration can help in managing dispute in a private manner.

5. The decision-maker generally will focus on the merits of the case and will make a decision based upon what’s fair, which means there is less chance of a harsh result based on a technicality or procedural fluke.

 

……Okay, so is there any disadvantage of Arbitration or is it perfect?

Like any coin, the arbitration process has two sides. The other side of arbitration process state-

1. The arbitrators once appointed cannot be usually changed by the parties. Hence, the possibility of biases can’t be ruled out.

2. Even if there is any procedural or technical issue, one can’t exploit it as the process is usually based on fairness rather than legal proceeding.

3. Arbitrators are usually highly qualified and experienced individuals. In a three member panel, by the time one pays his own arbitrator and half the neutral arbitrator’s bill, rent the office space for the arbitration to take place over a period of say six months, the bills can mount nearly as high as they might for a trial.

4. The Arbitration Agreement plays a huge role in any arbitration process. So, if the Agreement is not properly drafted then there is a likelihood that the entire arbitration process crippling down.

 

….Got it! But is the award by the arbitrator enforceable and can it be challenged by the aggrieved party?

An award of arbitration is enforceable on all the parties. However, as per section 36 of Arbitration and Conciliation Act 1996 as amended in 2015, arbitral awards may be set aside by the Court only if the party making the application furnishes proof that-

a) A party was under some incapacity
b) Arbitration agreement is not valid under law
c) Party was not given proper notice of the Appointment of the Arbitrator or of the Arbitral Proceedings or that he was otherwise unable to present his case
d) Arbitral award was beyond the scope of the submission to arbitration
e) Composition of the Arbitral tribunal was faulty
f) The award was against public party

One should take a note that arbitral awards cannot be interfered by the courts on merits and their jurisdiction.

 

….So what are the important points to be kept into consideration while drafting any arbitration Agreement?

 

1. The scope of the Agreement and the Arbitrators- It is very important to define the scope of the agreement in regards to the dispute one wants to be covered. The language of the Agreement depends on it. So, if the parties want it to be exhaustive, the language should be broad in nature. However, if the parties want it to be limited to certain dispute then it should specifically highlight the same.

2. The power of arbitrators- The power of the Arbitrators should be well defined. A well-drafted clause in this regards shall save undue complications at a later stage. A clause stating monetary limit on limits of damages beyond which an award cannot be passed by the arbitrators is very common during arbitration.

3. Location, Time Frame, and Panel Size- The location of the Arbitration Process and time frame along with the panel size of the arbitrators must be specially stated so as to make the process very unambiguous in nature.

4. Separate Law suit- During the time of Arbitration, no parties should file any separate legal law-suit against the company. It would hamper the existing arbitration proceeding.

All in all, the Arbitration Clause or Agreement plays a very important role in the entire scheme of things. Not only it helps in having a quick dispute resolution to the differences but also an effective unbiased proceeding. Though there are certain difficulties of arbitration procedure, but if we look closely the pros heavily outweigh the cons. However, one should see to it that the agreement/clause is properly done as the desirable impact of Arbitration can only be felt based on how it’s drafted. A carefully crafted one can often be an effective way of dealing with many different types of disputes in the most amicable way.

 

We at taxmantra.com assisting in drafting customized Arbitration Agreement. In case, you want us to draft such an agreement for you to feel free to drop a line at Taxmantra.com

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