Alternative Dispute Resolution – The Real Alternate? (Part 2)

In our previous post, we provided a brief background on the increasing economic growth in India, the stumbling role of the Indian judicial system in it, and the existing understanding of alternative dispute resolution in the country. Given this backdrop, we now move on to explore the relationship between the judiciary and the growth transformation in business and how arbitration has fared so far as an alternate model, in bridging the gap between the two.

The significance of an overlapping interplay between economic functions in a market system and the judiciary as a public institution in such a system arises because of the traditional understanding that by protecting property rights, ensuring enforcement of contracts, etc., the judiciary creates an environment in which business and private investment can flourish. While it may be an exaggeration to say that the judiciary has not kept its pace in this aspect, it is also true that commercial disputes constitute a significant 51.7% of all civil cases pending across 5 High Courts in India, with a 6.27% increase in pendency of such cases over the previous year. Such statistics has led to suggestions by the Law Commission of India (“LCI”) in its 253rd report for setting up commercial divisions and commercial appellate divisions of High Courts and specialized commercial courts for resolving disputes of high complexities and values within short time span. While various High Courts, including the Delhi High Court is moving towards implementing this recommendation of the LCI, the effectiveness of this concept still remains to be seen, given the fact that the Commercial Division and Commercial Appellate Division of High Courts and the Commercial Courts Bill, 2015 is yet to be passed in the Parliament.

However, the introduction of such systems within the judiciary is undoubtedly pointing towards the fact that at least at the policy-making level there is an wide-spread acceptance that “the Indian judicial system is collapsing due to inordinate delays; and there is a need to ensure the fast disposal of high value commercial disputes to provide assurance to domestic and foreign investors” (188th report of the LCI). What is more relevant for the purpose of this discussion is that this acceptance is also leading to the logical conclusion that the effectiveness of the large-scale adoption of arbitration for resolving commercial disputes is equally under scrutiny.

Presently, the Indian law of arbitration is contained in the Arbitration & Conciliation Act, 1996 (the “Act”), the Statement of Objects and Reasons of which recognizes that India’s economic reforms will become effective only if the nation’s dispute resolution provisions are in tune with the international regime to comprehensively cover both international and domestic commercial arbitration. The Supreme Court has also observed that “to attract the confidence of International Mercantile community and the growing volume of India’s trade and commercial relationship with the rest of the world after the new liberalization policy of the Government, Indian Parliament was persuaded to enact the Arbitration & Conciliation Act of 1996” (Konkan Railway Corporation case 2000).

Some of the salient features of arbitration as provided under the Act are as follows:-

  • Arbitration agreement: It is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship and it needs to be in writing;
  • Subject-matter of reference: Any commercial matter including an action in tort if it arises out of or relates to a contract;
  • Role of Courts: Substantially minimized. Parties can approach Courts only for four purposes, (a) for any interim measure of protection, (b) for the appointment of an arbitrator in the event a party fails to appoint an arbitrator or if two appointed arbitrators fail to agree upon the third arbitrator, (c) for ruling on the mandate or ability of an arbitrator, and (d) for challenging an arbitral award, although the scope of this is very limited;
  • Power of the arbitrators: Arbitrators are empowered to rule on their own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement;
  • Conduct of proceedings: Arbitrators have complete control over the proceedings and subject to parties agreement, if any, arbitrators may conduct the proceedings in any manner as they consider appropriate.
  • Award: An arbitral award is final and binding on the parties resorting to arbitration.

The legislation, therefore, is a progressive one, aimed at reducing intervention by Courts and dispensing speedy and effective solutions to commercial disputes. However, as reported by the LCI in its 246th report (available here), “although arbitration has fast emerged as a frequently chosen alternative to litigation, it has come to be afflicted with various problems including those of high costs and delays, making it no better than either the earlier regime which it was intended to replace; or to litigation, to which it intends to provide an alternative. Delays are inherent in the arbitration process, and costs of arbitration can be tremendous. Even though courts play a pivotal role in giving finality to certain issues which arise before, after and even during an arbitration, there exists a serious threat of arbitration related litigation getting caught up in the huge list of pending cases before the courts. After the award, a challenge under section 34 makes the award inexecutable and such petitions remain pending for several years. The object of quick alternative disputes resolution frequently stands frustrated.

It is in the wake of such lacunae noticed in the functioning of the Act that the LCI has suggested amendments to the Act for giving more recognition to institutional arbitration, where the scope and procedures of arbitration are institutionalized, thereby providing certain operative advantages over ad-hoc arbitration, which brings in more scope for malfunctioning, ironically, by providing more autonomy to parties in deciding on their own rules of proceeding. However, having accepted the advantages that institutional arbitration has over ad-hoc arbitration, it also remains to be addressed that institutional arbitration also has its own flaws, what with lesser control on parties and lesser scope of providing enforcing solutions in case a party decides to give the proceedings a miss. In such cases, there remains no way but to approach Courts, thereby falling back with the scope of Court-controlled method of dispute resolution.

It is in this backdrop that we intend to explore in our next post other alternates in alternative dispute resolution that may be explored before arbitration, especially in case of commercial disputes.

Author: Sohini Mandal.