A quick insight of Dispute Resolution under Indian Contract Law

Objective of the Article:

Explain dispute resolution mechanism.

Brief introduction of offshore and onshore arbitration

Provide relevant amendments in Arbitration and Conciliation Act, 1996 vide Arbitration and Conciliation Amendment Act, 2019

  • Differentiate between seat of arbitration and venue of arbitration.
  • Section 1- Dispute Resolution Mechanism

Introduction

The law regulating a contract in India has been enumerated under India Contract Act, 1872, which states that a contract is a legally binding agreement between two parties, which obligates those parties to perform specific acts as agreed therein.

According to section 2 (h) of the India Contract Act,’’ An agreement enforceable by law is a contract. Thus, for the formation of a contract, there must be:

An Agreement; and
Such agreement must be enforceable by Law

Accordingly, one of the prime considerations while entering into an agreement is its enforceability under law.
The ability to make and enforce contract and resolve dispute is fundamental for development of any economy. A Good enforcement procedure enhance predictability in commercial relationships and reduce uncertainty by making available such mechanism through which an individual party’s contractual rights will be upheld promptly by the appropriate adjudicating authority. In this article we are covering the available dispute resolution mechanisms with the contracting parties and the recent changes introduced by the Government.

Manner of settlement of dispute between the Parties to contract

In the commercial relation between parties the disputes are inevitable, hence, whilst entering a contract, parties are equally concerned with enforcement of contract and dispute resolution. With increased cross border arrangements, the government of India in working towards ensuring the effective dispute and enforcement mechanism in India.

Institutions for Enforcement of Contract

The Central Government, in order to supplement the need of improved institutions for ensuring the enforcement of contract has introduced Commercial Courts, Commercial Division and Commercial Appellate Division so as to avoid delay disposal of dispute due overburdened legal system in India, and to aggravates the potential for inefficient case management and indefinite delays in disposal of cases by enacting Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015 (“Commercial Courts Act”). The Commercial Courts Act was amended in August 2018. The amendments were deemed to have come into force on May 3, 2018.
It is pertinent to note that the Commercial Court Act, was enacted to establish Commercial Courts, Commercial Division and Commercial Appellate Division in the High Courts for adjudicating commercial disputes of specified value and connected matters, hence it is important to understand the meaning of commercial dispute, which reads as follows:

Section 2(c) of the Commercial Courts Act provides a broad definition of Commercial Disputes. It covers every commercial transaction including general commercial contracts, shareholder & joint venture agreements, intellectual property rights, contracts relating to movable and immovable property and natural resources, amongst others. The amendment Act, amends the lower limit of “specified value” from INR 10,000,000/- (Rupees Ten Million) [approx. USD 1,50,000] to INR 300,000/- (Rupees Three Hundred Thousand) [approx. USD 4,500].

Alternate Dispute Resolution Mechanism

Alternative Dispute Resolution (ADR) refers to a variety of techniques for resolving disputes by means other than litigation. ADR encompasses a range of means like Mediation, Arbitration, Conciliation to resolve conflicts outside formal court system i.e. settlement of dispute by refereeing such dispute to third neutral person:

The government enacted the Arbitration and Conciliation Act, 1996, (Act, 1996) by incorporating the provisions of Model Law on arbitration as prepared and adopted by United Nations Commission on International Trade Law

The preamble of the Act, 1996 reads as:

An Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto.

Hence, the main objective behind development of Act, 1996 was to provide cost-effective and quick mechanism for the settlement of commercial disputes and to facilitate international as well as domestic commercial arbitration as well as enforcement of foreign arbitral awards in India.

Here, it is important to understand different kinds of Arbitrations found in India:

Ad-hoc Arbitration

This type of arbitration does not administer by an institution, rather parties to contract determine all aspects of the arbitration including who will be the arbitrator, their number, seat of arbitration etc;

Institutional Arbitration

An arbitral institution is that arbitration which is administer by a specialized institution with a permanent character intervenes and assumes the functions of aiding and administering the arbitral process, as according to the rules of that institution.

Statutory Arbitration

Statutory arbitration is one which is imposed on the parties by operation of law. Section 2(4) of the Arbitration and Conciliation Act 1996 provides, with the exception of section 40(1), section 41 and section 43, that the provisions of Part I shall apply to every arbitration under any other act for the time being in force in India.

Foreign Arbitration

Where the proceedings are conducted in a place outside India, such arbitration termed as Foreign arbitration.

Mediation

Mediation is a process in which the mediator, an external person, neutral to the dispute, works with the parties to find a solution which is acceptable to all of them. The objective behind selecting mediation as a mode of settlement of dispute as to include the room for negotiation, and exploration of options for resolution of dispute aided by the mediator.

It is imperative to note here that The Commercial Courts Amendment Act of 2018 inserted a new Chapter IIIA into the Commercial Courts Act. It entails that where a suit does not contemplate urgent interim relief, the plaintiff has to undergo pre-institution mediation. The mediation process must be completed within a period of three months from the date of receipt of application for pre-institution mediation. This period can be extended for two months with the consent of the parties. settlement arrived at by such mediation shall have the status and effect of an arbitral award under section 30(4) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). Across the globe experience of such pre-institution mediation provisions have been positive. Thus, the institution of this provision is laudatory.

Conciliation

Conciliation is a process of in which a neutral person tries to resolve the dispute between the parties amicably, however, the conciliation is unstructured method of dispute resolution in which a third party facilitates communication between parties in an attempt to help them settle their differences. Conciliation has been inserted in Part III of the Act and it has been adopted as one of the efficient means of settlement of disputes.

Arbitration:

It is an adjudicatory method where an advisable proceeding is conducted with the aid of arbitrator.  

The most important question to be asked here is whether there is a requirement of entering an arbitration agreement or is there any formal clause to be entered into a contract. In reply it is to be noted that it may be in form of agreement or arbitration clause, however, it should be in writing. The arbitration agreement shall be deemed to be in writing if it has been agreed in a letter or any other means of communication which could be recorded. Also, the government vide the Arbitration and Conciliation (Amendment) Act, 2015 has inserted that agreement which has been concluded via electronic means would be a valid arbitration agreement between parties.

Section II-Offshore and Onshore Arbitration

Onshore Arbitration is one on which Part I applies to disputes with their seat of arbitration in India and gives the Indian courts significant powers to appoint or replace arbitrators, hear procedural appeals, grant interim measures, and set aside arbitral awards. However, in this case Ad hoc arbitration in India is best avoided because it allows greater scope for Indian court intervention and subsequent delay – for example, if one party fails to appoint an arbitrator, it can take over a year for the Indian courts to appoint that arbitrator and the courts often embark on an enquiry into the merits at this stage.

Offshore arbitration on the contrary is that on Part II applies to disputes where the seat of arbitration is outside of India and incorporates the New York Convention and the Geneva Convention into Indian law. This is often termed "offshore arbitration". This provides a neutral forum for the resolution of disputes and is often acceptable to both Indian and foreign parties.

Section III- Relevant amendments in Arbitration and Conciliation Act, 1996

Arbitration and Conciliation (Amendment) Act, 2015

The amendments under Arbitration Act vide Arbitration and Conciliation (Amendment) Act, 2015, were made with the objective of making arbitration as a preferred mode for resolution of dispute between parties. We are including some of the major amendments under Act, 1996 in this Article:

The definition of court under section 2(1)(e) of Act, 1996 shall for domestic courts are same, however, for the purpose of international commercial arbitration, 'Court' has been defined to mean only High Court of competent jurisdiction, hence after the amendment, the district court will have no jurisdiction and the parties may now refer the issue to high court for speedy and efficacious determination.

By virtue of amendment under section 2(2) of the Act, 1996, applicability of section 9 (interim measures), Section 27(taking of evidence), and Section 37(1)(a) (appeal when court refuses to refer the parties to arbitration), 37(3) (No second Appeal)  of the Act, 1996 have been made to international commercial arbitrations even when the seat of arbitration is outside India, provided the applicability of these sections shall not have been restricted by the Parties under the Agreement. Accordingly, on domestic arbitration, Part I of the Act, 1996 shall apply, whereas in case of International commercial arbitration section 9, 27 and 37(1)(a), 37(3) of the Act, 1996 unless otherwise contrary agreed under the Agreement.

Under section 11 the expression ‘Chief Justice of India’ and ‘Chief Justice of High Court’ used in erstwhile provisions have been replaced with Supreme Court or High Court, respectively. The decision made by the Supreme Court or the High Court or person designated by them have been made final and only an appeal to Supreme Court by way of Special Leave Petition can lie from such an order for appointment of arbitrator. Further, the supreme court or high court, may, fix limits on the fee payable to the arbitral tribunal.

Insertion of section 29A and 29B, which prescribe the time limit for arbitral award in the matters other than international arbitration shall be within 12 months from the date of completion of pleading. This period can be extended to a further period of maximum 6 months by the consent of the parties, after which the mandate of the arbitrator shall terminate, unless the Court extends it for sufficient cause or on such other terms it may deem fit, subject to conditions as prescribed thereunder.

Amendment under section 28 which prescribed that now the tribunal shall take account the terms of contract and trade usages applicable to the transaction without ignoring the terms of the Agreement.

Amendment under section 34 which now explain that an award passed in an international arbitration, can only be set aside on the ground that it is against the public policy of India if, (i) the award is persuaded by fraud or corruption; (ii) it is in contravention with the fundamental policy of Indian law; (iii) it is in conflict with basic notions of morality and justice.

Amendment under section 36 which prescribed that the award would not be stayed automatically by merely filing an application for setting aside the award under Section 34. There should be a specific order from the Court staying the execution of award on an application made for the said purpose by one of the parties.

Arbitration and Conciliation (Amendment) Act, 2019

The Central Government with a view of including India as hub of institutional arbitration for both domestic and international arbitration has enacted Arbitration and Conciliation (Amendment) Act, 2019. We are including some of the major amendment in Arbitration and Conciliation Act, 1996 which are as follows:

Supreme Court (in case of international commercial arbitration ) and the High Court (in case other than international commercial arbitration) vested with the ability to designate the arbitral institutions which have been accredited by the Arbitration Council of India with the power to appoint arbitrators. Also a definition of arbitral institution has been inserted to mean such arbitral institution as designated by Supreme court and high court. Where such appointment shall be made in event (i) there is no procedure for appointment;(b) such procedure as agreed under agreement has failed to work.

Under the Arbitration Act, the arbitral tribunals were required to complete the arbitral proceedings within a period of 12 months from the date on which the arbitral tribunal enters upon reference. However, the Amendment Act has now amended the start date of this time limit to the date on which the pleadings are completed. Moreover, the 12 months' time limit has now been exempted for international commercial arbitrations which now provides that the tribunals must endeavor to complete international matters within a period of 12 months from the date of completion of pleadings.
The Amendment Act has inserted a new section 42A which stipulates that all details of arbitration proceedings will be kept confidential except for the details of the arbitral award in certain circumstances. Disclosure of the arbitral award will only be made where it is necessary for implementing or enforcing the award.

A new section 23(4) has been inserted in the Amendment Act stating that filing of the statement of claim and defense should be done within a period of 6 months from the appointment of arbitrator.

The Amendment Act has added a new section namely, Section 87 which has a retrospective effect from October 23, 2015, this section states that the Arbitration and Conciliation (Amendment) Act, 2015 is applicable only to arbitral proceedings which commenced on or after October 23, 2015.

Section IV Different between the seat of arbitration and venue of arbitration.

Here, it is important to understand the difference between the term venue and seat as agreed under the contract between parties. The distinction between venue and seat may be read as that the seat of arbitration is what determines the court having jurisdiction over the nullity claim of an award, while the venue is the physical location where the arbitration hearings or deliberations are held.

Supreme Court in the matter of Mankastu Impex Private Limited Vs Airvisual Limited No. 32 of 2018 dated 05.03.2020, the hon'ble Supreme Court held as follow:

The seat of arbitration is a vital aspect of any arbitration proceedings. Significance of the seat of arbitration is that it determines the applicable law when deciding the arbitration proceedings and arbitration procedure as well as judicial review over the arbitration award.

In Enercon (India) Limited and Ors. v. Enercon GMBH and Anr. MANU/SC/0102/2014: (2014) 5 SCC 1, the Supreme Court held that "the location of the Seat will determine the courts that will have exclusive jurisdiction to oversee the arbitration proceedings. It was further held that the Seat normally carries with it the choice of that country's arbitration/curial law". It is well-settled that "seat of arbitration" and "venue of arbitration" cannot be used inter-changeably.

There are some of the important points to be considered here as mentioned below:

The Seat of Arbitration it is of vital importance, for it is the courts of the Seat that have the supervisory jurisdiction over the arbitral process.

Selection of seat of arbitration, implied selecting the law applicable on arbitration i.e. appointment of arbitrator, procedure, awards etc.

It is not necessary that the seat of arbitration and venue of arbitration should be same, the seat and venue may be different, and the chosen Seat of Arbitration will remain unaffected independent of the geographical place where the hearings take place.

Before, ending this article, we would bring forth our readers some of the important points to be considered while drafting arbitration clause:

Contract shall clearly define the composition of the arbitral tribunal, time for appointment and the language of the proceedings

Parties must decide on law governing the arbitration agreement and also the procedural rules if any for conducting arbitration which, in addition to the arbitration law of the seat of the arbitration, will govern the arbitration procedure Some of the more common arbitration rules used by parties include the SIAC Rules, the ICC Rules and the UNCITRAL Rules.

In the event, if the seat of arbitration and venue are different, the contract should clearly provide that the seat of Seat of Arbitration would be the governing law of arbitration and the same will remain impervious even if the hearings happen at various places/locations.

Correct phrases like 'disputes arising out of the contract' should be used in the contract instead of 'disputes under the contract', as the earlier confines the scope of disputes whilst the later enlarges the scope of disputes to include all disputes arising out of the contract.

Parties should specify the language of the arbitration, particularly if the parties and their respective witnesses speak different languages, or if the law of the country governing the arbitration specifies that in the absence of any agreement between the parties, the arbitration should be conducted in the national language of that country. Failure to specify the language of the arbitration may ultimately result in parties having to incur expensive and unnecessary costs for translating documents and witness evidence.

For the reader

Parties who are considering India as a seat of arbitration should think carefully about the implications of Arbitration and Conciliation Act, 1996 including amendment vide Amendment Act, 2015 and 2019. In particular, the increasing role of government in arbitration and the limits on who may sit as an arbitrator in Indian seated arbitrations may mean that an Indian seated arbitration would be chosen after complete deliberation.

Disclaimer-
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

The author is a Company Secretary and Lawyer by Profession with over 7 years of indigenous experience under Corporate Legal Compliance, Situation based advisory and drafting of commercial agreements, including share purchase agreements.

 

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