What is Arbitration and why should you prefer arbitration over courts?

Authors’ Note

This blog is pretty straight forward and goes on to discuss the very basics of arbitration.

We’ve tried to discuss why and when should you prefer arbitration over courts of law.

This blog is the first blog in the series of Arbitration 101 on Lawbriefcase.

The whole idea of this blog is to familiarise you with Arbitration before dwelling into more serious and complex concepts.

Feel free to leave comments and help us improve the content.

Table of Contents

1. What is Arbitration?
2. Principle of Kompetenz – Kompetenz
3. Types of Arbitration
4. When should you go for Arbitration instead of Courts?

What is Arbitration?

Arbitration is a form of an alternate dispute resolution that is used to resolve disputes outside the court. Arbitration laws in India are governed by the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act) which has its genesis from the UNCITRAL Model Law. The matters are referred to the panel through mutual agreement between the parties or are referred due to a mandatory arbitration clause in the contract. The disputes are referred to an arbitrator or a panel of arbitrators and are resolved by an ‘arbitral award’. Simply put, an arbitral award means the decision taken by the arbitration panel at the end of the discussion. Section 2(c) of the Act^[1] says that an “arbitral award” includes an “interim award”. An arbitral award means the decision taken by the arbitration panel at the end of the discussion, however, by the virtue of Section 2(c) an interim award is also to be considered an arbitral award.

According to Section 19(1) of the Act^[2], the arbitration procedure is not governed by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872.

The parties can decide on the procedure to be followed by the tribunal for conducting the procedure, failing which the panel can decide the manner of proceedings in the way it deems fit. [Section 19(2) and 19(3) of the Act].

Principle of Kompetenz – Kompetenz

The term Kompetenz-Kompetenz is of German origin and literally means competence – competence.

The doctrine of Kompetenz-Kompetenz lays down that the arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.”

Section 16 of the Act has given immense powers to the arbitral tribunal to ensure justice, even though their decision may question their own existence.

Types of Arbitration

1. Institutional Arbitration: There are specialized institutions that provide arbitration facilities. They have their own set of rules and regulations for conducting arbitration proceedings. They determine the appointment, process, and administrative factors (e.g. Indian Council of Arbitration, New Delhi). One can easily search the internet for names, rules, and fees of all the Arbitration Centers practicing in a particular geographical area or in a particular sector/industry.

NOTE: Delhi High Court Arbitration Center is the first Arbitration Institute annexed to a High Court.^[3] It is now known as DIAC (Delhi International Arbitration Center).

1. Ad-hoc arbitration: Ad-hoc is a Latin term that means ‘when necessary or needed’ or ‘to this’. In ad-hoc arbitration the parties are free to determine all the aspects of arbitration such as arbitration rules, location, language, laws applicable to the dispute as well as number and identity of arbitrators. It is mainly governed by the provisions of the Arbitration and Conciliation Act, 1996. The majority of arbitrations in India are ad-hoc.

When should you go for Arbitration instead of Courts?

We have listed some key reasons to consider opting for arbitration instead of Courts. However, we have purposefully made this list concise, as one needs to consider many other factors and conduct due diligence in order to make an informed decision. The reasons are:

1. Time saving. No hassle of appearing before courts and managing filing work. Dates for proceedings can be mutually fixed.
2. Handcrafting the procedures. Ease of setting your own rules and principles. No formalities like the ones before courts.
3. Utmost privacy. No public hearings. Parties are free to mutually choose a location for proceeding. No information is made public by the arbitrator without the consent and permission of the parties.
4. Parties have the flexibility to appoint their own decision-makers. They can pick someone who understands the nature of the dispute. They generally pick someone who either has experience or qualifications in the field of their dispute.
5. You don’t need to be represented by an Advocate. So, you save money which is spent as attorney fees.
6. Companies can use arbitration clauses to have an upper hand in consumer disputes. Companies can also prevent Class Action Suits by properly using arbitration clauses. Though these practices are not illegal, they are also not very ethical.

Pro-tip: You can charge your clients more money for drafting agreements if they ask you to mention an Arbitration clause in their agreement because then you will have an opportunity to draft an arbitration framework for them.

1. The Arbitration and Conciliation Act, 1996 ↑
2. The Arbitration and conciliation Act 1996 ↑
3. Home, Delhi International Arbitration Centre, http://www.dacdelhi.org/ (last updated 12:14 AM 27 February, 2020). ↑