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It is generally believed that whenever two or more people involve themselves in business or commercial transactions, conflicts may occur. For a judicial system like ours which is long drawn and plagued by more than just delays, turning to other effective forms of dispute resolution mechanisms is the way to go. So, if you are one of those wise souls who want to avoid protracted rounds of litigation in Courts then ‘Arbitration’ is your angel in disguise.

For the uninitiated, arbitration is a form of Alternative Dispute Resolution mechanism. The primary purpose of arbitration is settlement of disputes in a speedy, informal and cost effective manner. It aims to obtain a fair and effective dispute redressal mechanism without the interference of Courts. It can also be termed as a conscious effort by the parties involved to avoid dragging their matters to Court and further delay the dispute redressal procedure.

Origin Of Arbitration In India

The beginning of arbitration can be traced back to the system of ‘village panchayats’ in ancient Indian civilisations, when all the disputes were submitted to the panchas for redressal. The decisions taken by the panchas of the panchayats were highly regarded and respected because of the popular notion that they were the embodiment of God’s voice and therefore their decisions were to be abided by without fail.

India enacted the Bengal Regulation Act, 1772, which provided the parties to the dispute an option to submit the dispute to an arbitrator/adjudicator. The arbitrator would be appointed by the parties with mutual consent. The arbitral awards would be binding on the parties to the dispute. The Act provided for reference by a court to arbitration, with the consent of the parties.

Arbitration was governed by the Indian Arbitration Act of 1859 which was replaced by the Arbitration Act of 1940, which act was further replaced by the present day Arbitration and Conciliation Act of 1996. This act was introduced in light of the globalisation of the economy which demanded an effective and speedy dispute resolution mechanism.

The Arbitration and Conciliation Act of 1996 is a comprehensive piece of legislation and is modeled on the lines of the UNCITRAL Model Law. The said act of 1996 was brought up with the intention to cover international and commercial arbitrations. The said act also envisaged the setting up of an arbitral scheme which was effective, speedy, fair and able to meet the growing needs of a  growing economy. It covers under its ambit both domestic as well as international commercial arbitration

Arbitration Defined

Arbitration is a type of dispute resolution mechanism in which an impartial third party (the arbitrator) delivers a decision after hearing both the parties to the dispute. Parties to a dispute get their disputes settled with the help and intervention of a third party, i.e. the arbitrator, who is appointed with the mutual consent of both the parties to the dispute but, without taking recourse to courts. By opting for arbitration, the parties to the dispute opt for a private dispute resolution procedure instead of approaching the courts.

Section 2 (1) (a) of the Arbitration and Conciliation Act, 1996 says “’arbitration’ means any arbitration whether or not administered by permanent arbitral institution”. The term arbitration in the said act connotes the same meaning as under Article 2 (a) of the Model Law of UNCITRAL.

The essence of arbitration as per a leading author on arbitration is: “Certain disputes are referred by the parties for settlement to a Tribunal of their own choice instead of to a Court of Law.”

Types Of Arbitration

Arbitration can be broadly classified into:

1. Ad hoc- It refers to an arbitration wherein the procedures are set forth by the parties to the dispute themselves or by the arbitral tribunal in case of absence of any agreement. Ad hoc arbitration is not administered by any arbitral institution. The parties to the dispute have to determine for themselves aspects like – appointment of arbitrators, number of arbitrators, procedure for conducting arbitration, governing law, etc.If parties to the dispute are unable to come to a mutual consent with regard to the appointment of arbitrator, then such an appointment of the arbitrator can be made by the Chief Justice of the High Court (cases related to domestic arbitration).
2. Institutional- In this kind of arbitration, in case there occurs a dispute between the parties, the parties can refer the disputes to a particular institution such as FICCI or WIPO. These institutions have their own framework of arbitral rules which would apply to arbitral proceedings conducted by them. It is also important to mention that these institutions don’t arbitrate disputes, the disputes are arbitered by arbitrators only but only the arbitral rules as set down by these institutions will apply.
3. Contractual- Owing to the globalisation of the economy and the increase in trade and business, there are frequent disputes arising between the parties which need to be resolved. Instead of bearing the brunt of long drawn, expensive court procedures and to seek a speedy and fair redressal parties opt for the insertion of the arbitral clause as a part of the contract, thereby mentioning that in case of any dispute between the parties to the contract, the parties will refer their disputes to an arbitrator/ arbitrators to be appointed by some designated authority.
4. Statutory- In this type of arbitration, as the name suggests arbitration is statutorily imposed on the parties to the dispute by the law of the land and the parties have to mandatorily abide by it. This kind of arbitration is different than the other three types because the other three types of arbitrations are based on the consent of the parties to the dispute which isn’t the case with statutory arbitration.

Advantages Of Arbitration Over Litigation

1. Arbitration is speedier and more cost effective than litigation.
2. Arbitration hearings are not public which is not the case in judicial proceedings. Only the parties in dispute receive copies of the arbitral award.
3. In case of arbitration parties can choose their own arbitrators which is not true in case of court cases. The arbitrators are competent and have expertise in their respective fields and therefore are better capable of resolving disputes in a fair, convenient and speedy manner.
4. Arbitral awards get more international recognition than judgments of Courts.
5. The decision of the arbitral tribunal is final and binding on the parties in dispute.
6. The place of arbitration can be decided by both parties with mutual consent. It need not be a formal set up like in Court cases.

Arbitrator Defined

The Arbitration and Conciliation Act of 1996 does not define the term arbitrator. However, he can be defined as a neutral third party to whom the matters are referred for dispute redressal. While discharging his functions the arbitrator needs to be fair and impartial in his dealings with the parties in dispute.

Arbitration Agreement

Sec 2 (1) (b) of the Arbitration and Conciliation Act of 1996 defines arbitration agreement as an agreement between the parties in dispute to submit or refer all, or some disputes, which have arisen or may arise in the future with respect to defined legal relationship, whether contractual or not.

An Arbitration Agreement to refer disputes between the parties to arbitration is the very basis or essence of arbitration. This clause can be brought into being at the time of entering into a contract or after the dispute has arisen. This agreement must be in writing, should be signed by both the parties in dispute. It can either be in the form of an arbitration clause in a contract or it can even be a separate agreement.

LegalDesk To Your Aid

So folks, now we presume you have acquired a pretty good understanding of the term arbitration that you come across all legal drafts these days. We, at LegalDesk, have a volley of drafts and deeds which also contain the arbitration clause in them. Why don’t you just drop whatever it is you are doing for a minute and go through our online legal documents, formats of business agreements and opt something that suits your need.

Just in case you want a draft that is not available on our website at the moment, just send us a tinker and we would be more than happy to update our list with the draft of your need. You can even opt for our new Print ‘n’ Deliver service, wherein you can upload your own self drafted document and have us get it printed on a Stamp paper and delivered to you at the earliest, at the place of your liking.