Updated: Aug 8, 2020
by Lipika Sharma
Arbitration law has a history from time immemorial right back from the middle ages, British, Post and Pre-Independence Era after a long scroll of trial and error, it is tailor-made to satisfy the litigants’ demands for both economic and commercial transactions essentially to secure ends of justice. The reason behind the adoption of the Arbitration and Conciliation Act, 1996, being the present legislative enactment of the arbitration law, is to come out with such methods that would make arbitral proceedings fair, efficient and worthy of fulfilling the very purpose of the arbitration act and reduce the supervisory role of the courts in the arbitration process.
This article aims to highlight the meaning, the historical background, cases in which Arbitration can be used or not and how is it better than litigation.
DEFINITION OF ARBITRATION
There is no definition of arbitration globally accepted. Only the Arbitration & Conciliation Act does not describe the term “arbitration”. It simply states that any arbitration whether or not administered by the permanent arbitral institution is Arbitration.
Arbitration is a process in which a dispute is taken before one or more arbitrators who make a final ruling on the case, by consent of the parties. The parties opt for a mutual dispute resolution method of preferring arbitration, rather than going to court.
Arbitration is a quasi-judicial mechanism in which a neutral person acts as a private judge, who confidentially settles the conflict between the parties. The decision of the judge is usually binding as in the case of a Court judgment.
In the case of State of Jammu & Kashmir v. Dev Dutt Pandit, it was held in Para 23 that “Arbitration is considered to be an important alternative dispute redress mechanism to be promoted due to the high pendency of cases in the courts and the expense of litigation. Arbitration must be looked at with all urgency so that the litigant public has confidence in the quick process of settling their disputes by this process.”
HISTORICAL BACKGROUND OF ARBITRATION
Dispute settlement outside courts is not a new concept, various societies have previously used non-judicial and traditional forms of dispute resolution. What’s new is the widespread promotion and proliferation of ADR models, wider use of court-related ADRs, and increasing use of ADR as a tool for achieving goals that are broader than settling specific disputes.
Earlier, Arbitration was promoted by the Bengal Regulation of 1772, 1780, 1781 and the Cornwallis Regulation of 1787 as a method of resolution of disputes. Thereafter arbitration was provided for in the Bengal Regulation of 1793, the Madras Regulation of 1816 and the Bombay Regulation of 1827. The concept of arbitration was found again in Codes for Civil Procedure during the years 1877 and 1882.
The Indian Arbitration Act, which deals primarily with arbitration rules, came into effect in 1899, but the Act did not apply to cases that were open to suit. The purpose of this Act was restricted only to arbitration arrangements, and only in the cities of the Presidency. The Civil Procedure Code was revised in 1908 and the limit of arbitration to the Towns of the President was abolished according to the amendment.
The Civil Justice Committee was appointed in the mid-1920s to report on the machinery of ‘civil justice in the country’ which suggested changes to the arbitration laws. Nevertheless, it was only in 1938 that the Government of India appointed an officer to amend the Arbitration Act, taking references from the British Arbitration Laws. As a result in 1940 the country’s first Arbitration Act was passed.
The scope of the 1940 Act was silent over foreign award execution. In addition, a separate law and Foreign Awards (Recognition and Enforcement) Act, 1961 was introduced to enforcement of awards according to the Geneva Convention and New York Conventions, of which India was a signatory. Over time, owing to too much judicial interference, the operations of the 1940 Act were found to be unsatisfactory.
In 1977, the Law Commission of India questioned and examined the functioning of the 1940 Act on the grounds of delay and hardship caused by clogs affecting smooth arbitral proceedings. Instead of reworking the entire framework of the Act, the Commission recommended, consequently, a change of the provisions. The Arbitration and Conciliation Act, 1996, was adopted in the context of the model law and rules of the United Nations International Commission on International Trade Policy (UNICTRAL), 1985.
LITIGATION v. ARBITRATION
Litigation is the most traditional and formal form of dispute resolution. Litigation is based on the system of adversarial trials, where one side is challenged by the other, and only one side is going to prevail. Both sides are represented by legal counsel. The case is taken to the State or Supreme Court, where claims are made, witnesses are questioned and cross-examined and testimony is presented. Ultimately, in compliance with relevant applicable law, the judge makes a decision. The decision may be appealed, in a higher court.
The difference between Arbitration and Litigation are-
1. Appointment of Judge: Court litigation is conducted by the courts operated by the State to provide dispute settlement between the parties. Such courts are led by duly trained judges appointed by the state to regulate the basis of jurisdiction and undertake the case before them in compliance with the procedural laws.
Whereas, Arbitration gives the parties discretion in sending their disputes to an arbitrator or private tribunal appointed of the parties to adjudicate their disputes.
2. Confidentiality: Arbitration is a confidential matter between the parties, as contrasted to the public nature of court litigation. Consequently, the nature of arbitration, the subject matter, the facts, the documents submitted for and shared in the arbitration and the award of the arbitrator cannot be revealed to third parties.
3. Party autonomy: The parties have the ultimate power to determine the arbitration’s form, structure, procedure, and other details. Arbitration is a powerful ally of court jurisdiction. Indeed, a section of this Act requires the court to interfere in matters regulated by arbitration law to the extent provided for in the Act.
4. Nature of Judgment: The arbitral award shall be final and binding on the parties and the parties claiming under them in compliance with section 35 of the Act and shall be enforceable under the 1908 Code of Civil Procedure as if it were a court order.
5. Nature of Suit: Arbitration is always something of a civil nature, while court proceedings may be either civil proceedings or criminal litigation.
6. Expense of Suit: The arbitration process costs are comparatively less than the litigation costs.
WHICH ONE IS BETTER OUT OF THE TWO?
The question, that is, what is the best way to settle conflicts, whether arbitration or litigation? There is no definitive answer about which method is necessarily stronger.
Arbitration is generally preferred over traditional litigation, because arbitration is less expensive than litigation. It provides for faster dispute resolution through flexible scheduling times and simpler rules. Arbitration offers advantages which the litigation cannot provide. A key benefit in many cases is that the arbitrator or arbitral tribunal is an expert in the dispute area and that the whole proceeding can be handled without the intervention of lawyers or other representatives with significant gains in speed and economy.
MATTERS WHICH MAY BE REFERRED TO ARBITRATION
In fact, the Indian Arbitration Act does not exempt any category of disputes as not arbitrable. However, sections 34(2)(b) and 48(2) of the Indian Arbitration Act make it clear that an arbitral award must be set aside if the court determines that the subject-matter of the dispute is not, for the time being, eligible to be resolved by arbitration under Indian law.
MATTERS WHICH MAY NOT BE REFERRED TO ARBITRATION
Usually, civil rights disputes were damages the remedy can be referred to arbitration. But there are certain civil disputes that cannot be referred to arbitration, because either court decisions or some express law provisions prohibit reference to arbitration of such disputes.
In the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ors., the court in Para 22 held that the well-recognized examples of non-arbitrable conflicts are-
1. Disputes relating to the rights and liabilities resulting from criminal offences;
2. matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
3. guardianship matters;
4. insolvency and dissolution matters;
5. testamentary matters (grant of probate, letters of administration and succession certificate); and
6. Eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.
Arbitration is simply a dispute settlement process in which the case litigants have a dispute settled by a third party named the arbitrator without having to go through the traditional form of law. Recently, arbitration is gaining considerable importance as one of the methods of dispute resolution and is also recognized as an instrument for dispute settlement on a world stage. Nowadays, almost all business undertakings have an arbitration clause.
 Arbitration and Conciliation Act, 1996, Sec. 2(a).
 What is Arbitration?, The World Intellectual Property Organization, https://www.wipo.int/amc/en/arbitration/what-is-arb.html AIR 1999 SC 3196.  Alternate Dispute Resolution, Center of Democracy and Governance, https://agora-parl.org/sites/default/files/pnacb895.pdf.  AIR 2011 SC 2507.