What is an Arbitration?

Arbitration is a legal mechanism for resolving disputes outside the traditional court system, in which the parties agree to submits their disputes before arbitrator, whose decision is binding and enforceable by law.

Definition under section 2(a) of the Arbitration and Conciliation Act 1996:

“arbitration” means any arbitration whether or not administered by permanent arbitral institution.

According to the definition, it does not matter whether the arbitration is organized by a formal body or permanent authorities, the proceeding conducted by the neutral sole arbitrator or a private arbitrator, by the consent of the parties also called arbitration.

For example:

Suppose Company “A” and Company “B” sign a contract to work together. Under the contract they mentioned any dispute or disagreement will be settled by arbitration. Later, a dispute arise instead of going to the court the parties will approach arbitrator to resolve the dispute.

In summary, arbitration is a way for parties to resolve disputes privately and efficiently outside the traditional court or through a litigation.

What is an arbitration dispute?

A “dispute” in the context of arbitration means any disagreement or conflict between the parties that they agree to resolve by arbitration. Such dispute must arise out of legal relationship, and both the parties agree to resolve through arbitration.

Let’s understand with an example:

Company ‘A’ and Company ‘B’, enters into a contract for the supply of goods. The contract includes arbitration clause where it stated that if any dispute arise it should be settle through a private arbitrator.

Later, company A claims that Company B delivered goods that were defective or did not conform to specifications.

Company B denies this claim, stating that the goods met the contractual requirements.

This disagreement or conflict over quality and conformity of goods constitutes a “dispute”. To resolve this dispute both the parties opt for the arbitration as for their swift resolution.

What is the purpose of arbitration?

Arbitration resolves the disputes between the parties through private proceeding unlike the traditional civil trial. The purpose of arbitration under the Arbitration and Conciliation Act, 1996 is to provide a speedy, efficient, and binding alternative dispute resolution. Arbitration aims to:

• Resolves dispute through a neutral third party called arbitrator whose decision is binding and enforceable.
• Minimize court intervention and reduce the burden of judiciary.
• Allow parties to have autonomy over the arbitration process, including the selection of arbitrators.

Arbitration under the Act is designed to be a fair, expeditious, and effective methods of resolving commercial and legal disputes outside the court system, providing legal certainty.

What is the pre-requisite conditions to initiate arbitration?

To initiate arbitration under the Arbitration and Conciliation Act, 1996 several pre-requisite conditions must be satisfied:

Existence of Arbitration Agreement

There must be a valid arbitration agreement between the parties, either as a clause in a contract or as a separate written agreement. It must be in writing and signed by the parties or established through an exchange of communications that evidences its existence as per section 7 of the Act.

The arbitration agreement should relate to disputes arising out of a defined legal relationship, whether contractual or not.

Arbitral Subject Matter

The subject matter of the dispute must be capable of being settled by arbitration under Indian law as per Section 34(2)(b) of the Act, i.e., it must not be expressly barred from arbitration by statute or public policy .

Notice to invoke arbitration clause or agreement

The party wishing to commence arbitration must send a written notice to the other party requesting that the dispute be referred to arbitration under section 21 of the Act.

Arbitral proceedings are deemed to commence on the date the respondent receives this notice, unless otherwise agreed by the parties.

Dispute must have arisen

Disputes must have actually arisen between the parties on the basis of commercial transaction. The arbitration agreement typically provides for submission of all or certain disputes to arbitration as per the agreement or agreed upon both the parties.

Additional Requirements

If one party brings a dispute before a court, the other party can request the court to refer the matter to arbitration, but this request must be made before submitting the party’s first substantive statement under section 8 of the Act.

The party making this request must submit the original arbitration agreement or a certified copy, if it is in possession of the other party, a petition can be made for its production.

The above condition must be fulfilled before initiating an arbitration under the Arbitration and Conciliation Act 1996.

What is an Arbitration Agreement?

Arbitration agreement is an agreement where the parties amicably agree to resolve the dispute arise from their legal relationship through the appointed neutral third party called as arbitrator. Such agreement can be separately constituted agreement or made arbitration clause under the original contract itself.

Requirement to constitute a valid arbitration agreement:

In regard to constitute an arbitration agreement, the well settled principles are :-

• The agreement must be in writing, as stipulated by sub-section (3) of Section 7;
• Parties should have agreed to refer any disputes, present or future, between them to an arbitral tribunal;
• The arbitral tribunal should be empowered to adjudicate upon the disputes in an impartial manner giving due opportunity to the parties; and
• The parties should have agreed that the decision of the tribunal would be binding between them.

A valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 must fulfill certain essential conditions. Firstly, it must be in writing and arise out of a defined legal relationship between the parties, whether contractual or otherwise. Most importantly, the agreement must reflect a clear and unambiguous intention to refer disputes to arbitration, using mandatory language such as “shall be referred to arbitration.” The use of discretionary terms like “may” or “can” is insufficient and renders the clause non-binding. This principle was firmly established by the Supreme Court in *Jagdish Chander v. Ramesh Chander* (2007), where it was held that an arbitration clause lacking a binding obligation does not constitute a valid arbitration agreement. Additionally, the parties must agree that the decision of the arbitrator will be final and binding, and their consent to arbitrate must be free and mutual. Therefore, the enforceability of an arbitration agreement depends on the clarity of its terms, the intent to arbitrate, and compliance with the formal requirements under the Act.

When a party can approach the High court under the Arbitration and Conciliation Act 1996?

The party can approach the High Court under the Arbitration and Conciliation Act, 1996, in the following situations:

• For appointment of an arbitrator under Section 11 when the parties fail to agree on an arbitrator or the agreed arbitrator fails to act.
• To seek interim measures or temporary reliefs before or during arbitration under Section 9.
• To extend the time for making an arbitral award or to substitute an arbitrator under Section 29A.
• For challenging or setting aside an arbitral award under Section 34.
• In case of execution of arbitral awards under Section 36.

The High court has original jurisdiction in the area of civil dispute. However, the court’s intervention is generally limited to preserve the arbitration mechanism for dispute resolution privately and confidentially.

What is the arbitration process for dispute resolution?

The arbitration procedure under the Arbitration and Conciliation Act, 1996, involves a series of structured stages, beginning with the initiation and culminating in enforcement of the arbitral award:

Primary Stages of Arbitration

• Arbitration Agreement

The process begins with the existence of a valid written arbitration agreement or arbitration clause in the original contract between the parties, as per Section 7.

•  Notice of Arbitration

One party serves a written notice to the other, requesting the dispute be referred to arbitration as per Section 21.

Arbitral proceedings officially commence on the date the respondent receives this notice, unless otherwise agreed.

•  Appointment of Arbitral Tribunal

The parties appoint the arbitrator or arbitrators as per their agreement or, failing agreement, as provided in Sections 10–11.

Where there is a need of a panel each party appoints one arbitrator, and the two appointed arbitrator select the third arbitrator as a presiding arbitrator.

• Conduct of arbitral proceedings

The arbitral tribunal may conduct a preliminary meeting to set the procedure and timelines, including filings, hearings and the place of arbitration as per Sections 19 & 20.

•  Submission of Statements

Both the claimant and the respondent make statements of claim and defence within the period agreed or determined by the tribunal under Section 23of the Act.

•  Hearings and written proceedings

The tribunal decides if there will be oral hearings or if matters will proceed on written materials as per section 24.

Parties present evidence, witnesses, and experts as needed.

• Interim Measures (Optional)

Either party may seek interim relief from the tribunal under Section 17 or from the Court under Section 9.

• Default of a Party

If a party fails to adhere (e.g., not submitting statements), the tribunal may proceed or terminate proceedings as per Section 25.

•  Appointment of Experts (Optional)

The tribunal may appoint experts to report on specific issues, parties may question the experts in hearings as per section 26.

• Assistance from Court (Optional)

The tribunal or a party (with the tribunal’s consent) may seek court assistance in taking evidence as per Section 27.

• Proceedings Terminated and Award Made

After hearings and submissions, proceedings are formally closed.

The tribunal makes its arbitral award in writing, with duly signed and delivered to both the parties, as per section 31 & 32.

• Correction and Interpretation of Award

Parties may apply for corrections, clarifications, or additional awards within the statutory period of 30 days under Section 33.

• Recourse against Award

Application for setting aside the award can be made to the court on specific grounds specified under section 34(2) (a) i.e. incapacity of party, arbitration agreement is not valid, proper notice was not served etc.

•  Finality and Enforcement of arbitral award

The award becomes final and binding under Section 35, and may be enforced as a decree of court unless stayed by a court order under Section 36 of the act.

The arbitration process make sure that both the parties heard equally and fairly by taking care of due procedure of law or as consented by the parties for efficient and swift resolution.

Difference between arbitration and litigation

Arbitration is a private and alternative way of dispute resolution, the process is quasi- judicial where parties choose an arbitrator to make a binding decision. It is quicker, usually less expensive, and confidential. Parties have more control over the process and can select an expert arbitrator suited to the dispute. Arbitration decisions are generally final with limited appeal options.

Litigation is a formal and traditional way to resolve dispute, and the trial conducted in court, where a judge appointed by the state makes a decision. It is more rigid, often more costly and time-consuming, and the outcome can be appealed in higher courts. Litigation follows strict legal procedures and is less flexible, with less party control.

What is an arbitration award?

An arbitration award is the final, binding decision made by an arbitrator or arbitration panel to resolve a dispute. It is similar to a court judgment or decree and may order payment, declare rights, or require actions. The award is in writing, signed, and concludes the arbitration process.

Third party litigation funding for arbitration

Third party litigation funding for arbitration is a financing arrangement where an independent third party, not involved in the dispute, provides funds to cover the costs of arbitration for one of the parties. Usually the claimant, In exchange, the funder receives a share of the monetary award if the arbitration is successful. This funding is typically non-recourse, meaning if the party loses, they owe nothing to the funder. Third-party funders are often banking or non banking companies, or specialized litigation finance firms. This practice helps parties who may lack sufficient resources to pursue or defend arbitration claims, making arbitration more accessible while the funder gains a potential financial return from the arbitration award.

What does legalFund do in arbitration dispute?

The Legalfund is a third party litigation funding company which provides funds associated with the expenditure and support to pursue arbitration process. Which includes:

• Financial assistance by covering cost associated with filing, Attorney or Advocate’s fee and Administrative expenses as per needed.
• Case Management: Legalfund provide complete legal assistance and act as a bridge between the client and the advocate for smooth procedure and records day to day update in the case progress.
• Execution for arbitral awards: Legalfund also provide funds for the execution of the arbitral awards.