Arbitration In IndiaArbitration v. Commercial Courts

August 17, 20200
Arbitration and Conciliation Act, 1996 (“Arbitration Act”) is based on the UNCITRAL model law for arbitration. The legislative intent to enact the Arbitration Act is to ensure speedy resolution, reduce the backlog of cases, and reduce the cost for resolution of disputes.
Another important aspect of the Arbitration Act is that it gives the arbitral tribunal the authority to pass an ‘award’ which is like the decree of a Court passed under the Civil Procedure code, 1908. The Arbitration Act’s aim was to consolidate the laws relating to domestic and international arbitration.
The legislative intention behind enacting the Commercial Courts Act, 2015 (“the Act”) was to accelerate disposal of high-value commercial disputes. The 253rd report of the Law Commission provided the draft bill to the government which was latter enacted. In the report the commission stated that this act will help India increase its ‘Ease of Doing Business’ ranking (released by the world bank) and also increase foreign investment in the country. This will increase the speed of enforceability of contracts.
Commercial arbitration has long been the hallmark of alternative dispute resolution mechanism. However, with the establishment of Commercial Courts dealing solely with commercial disputes, the popularity of arbitration is being called into question.
Whilst the arbitral process is often criticized for its costs, procedural delays, or lack of power against the third parties, the question remains whether Commercial Courts will be able to deal with these issues any better.
1. Limitation to Party Autonomy
Arbitration is a popular forum for dispute resolution over litigation because it gives parties the autonomy to conduct the proceedings.
This has changed after the introduction of Section 11 (3A) through 2019 Amendment. The provision confers power on the Supreme Court and the High Courts to designate arbitral institutions. These institutions were introduced because in several cases parties do not reach an agreement to appoint an arbitrator, thereby these institutions will appoint an arbitrator to conduct the arbitration proceedings.
The Arbitration Council of India (“ACI”) is a government body to institutionalize arbitration in India and is responsible to grade these institutions. The disadvantage of such institutions appointing arbitrators is that it limits the autonomy of parties in the proceedings through governmental and Court interference.
The ACI will provide the Court with limited options to designate the arbitral institution. The discretion is left with the executive body and thereafter the Court to decide who will form the Arbitral Tribunal.
Foreign arbitrators are also at a disadvantage because if they are not graded by the ACI, then they are ineligible to be appointed. This undesirable consequence will have an impact more on the international arbitration as in such cases parties choose to have arbitrators of global repute. Foreign parties might refrain from opting this arbitration regime because of significant interference of Court and government.
Thus, the amendment provides excess power to the judiciary and executive to decide arbitral institutions which can be misused by virtue of red-tapism, nepotism, no transparency, etc.
2. Arbitrary Arbitrator’s fees
When the Arbitration Act was enacted, it was predicted to be one of the biggest legislative reforms as it would resolve disputes with lower costs than lengthy litigation cases. This prediction was reported as a failure when the Law Commission’s in its 246th report, stated that arbitration fees is exorbitant and a uniform model should be adopted to decrease such exorbitant costs for the parties.
The Arbitration and Conciliation (Amendment) Act, 2015 inserted Schedule IV to the Arbitration Act to provide a model for fees to be levied in domestic arbitration. According to this, the Court will frame rules to appoint an arbitrator under Section 11.
Subsequently the government amended the Arbitration Act in 2019 and made Schedule IV rules mandatory for arbitral institutions. The Supreme Court interpreted this Schedule in a slightly different manner in the case of National Highway Authority of India v. Gammon Engineers and Contractors Pvt. Ltd. CC OnLine Del 10183, and held that the fourth schedule is not mandatory in determining the arbitrator’s fees, if it has been fixed by the agreement.
Thus, through this judgement the Supreme Court has removed the maximum cost to be paid to the arbitrator, if there is an agreement. This has created ambiguities in the law. Another issue with the fourth schedule is that not all arbitral institutions follow it, thus if there is no agreement fixing the fees of the arbitrator the manner in which the fees is to be calculated is still unclear.  
Another issue is with Ad-Hoc arbitrations where the institutions or Courts do not intervene. These ad-hoc arbitrations do not fix the fees in the agreement and the arbitrators can also decide their own fees. Such issues need to be resolved while ensuring that the intention of the legislature to cap the arbitrator’s fees is achieved.
3. Challenges in Enforcing the Arbitral Award
Section 36 of the Arbitration Act deals with the enforcement of an arbitral award. The award shall be enforced unless a party appeals against it under Section 34. The Court should also not have ordered a stay on the award for it to be enforced. Arbitral award is enforced in same manner as a decree of a Court in accordance with the Civil Procedure Code, 1908. Section 38 provides for the Court which may execute the decree i.e. the arbitral award.
The principal issue with enforcing the arbitral award is the jurisdiction conundrum. Earlier the Bombay High Court in the case of L&T Finance Ltd. v. Abhishek Talwar & Anr.2015 SCC OnLine Bom 1489, held that the Court in whose jurisdiction the arbitral award was passed has the authority to enforce the arbitral award.
But the Delhi High court in the case of Daelim Industrial Co. Ltd. v. Numaligarh Refinery Ltd. (2009) 159 DLT 579, concluded that the meaning of ‘Court’ under Section 36 does not necessarily have to mean the same as under Section 2(1)(e) of the Arbitration Act. The Court observed that under Section 36 the expression ‘Court’ is used to provide the manner of enforcement and not to be understood as the Court which has territorial jurisdiction to enforce the arbitral award.
This conundrum was finally settled by the Supreme Court in the case of Sundaram Finance Limited v. Abdul Samad and Anr. (2018) 3 SCC 622 where it held that enforcement of award cannot be confined to the jurisdiction of a Court where the tribunal passed the award. An application for the enforcement of an award can be filed where the award can be executed without the application of Section 39 of the Arbitration Act i.e. the order to transfer enforcement of the decree.
This interpretation was altered in the case of West Bengal v. Associated Contractors (2015) 1 SCC 32 where the Apex Court ruled on Section 42 of the Arbitration Act. Section 42 of the Arbitration act states that any application made under part I before the Court, only that Court will have jurisdiction over the proceedings. The Court decided that the term “with respect to an arbitration agreement” mentioned in Section 42 to include applications to the Court made before, during or after the arbitral award is passed. Therefore, Section 42 includes the application made to the Court for enforcement of the arbitral award under Section 36.
The two judgements of the Supreme Court are contradictory because in the Sundaram Finance case the Court decided that Section 42 of the Arbitration Act shall not apply to an execution application. The Court reasoned that the arbitral proceedings under Section 32 will end after the award is made, hence Section 42 will be inapplicable.
1. Poor Implementation of the Act
Section 19 of the Act envisaged that the state governments would provide necessary’ infrastructure for the functioning of the Commercial Courts. The infrastructure includes skilled persons who can adjudicate on commercial disputes. The judges need to have prior experience in dealing with commercial litigation to ensure that the cases are being handled effectively.
Despite the statutory provisions, due to acute shortage in the number of judges there have been cases where Judges preside over Commercial Courts without having any prior experience in resolving commercial disputes.
In Uttarakhand, due such shortage of judges, a family Court judge once presided over the Commercial Courts [Government of Uttarakhand Notification dated 01 December 2018 No.327 (1)/XXXVI(1)/2018].
Such appointments are not in alignment with the suggestions given by the Law Commission in its 253rd Report stating that specially trained judges who have expertise and experience in commercial litigation should be appointed to preside the Commercial Courts. The state governments have not provided infrastructure to ensure effective implementation of the Act. Lack of judges increases the burden on the judiciary which is against the legislative intention for this reform.
Another vital issue is regarding the inadequate number of Commercial Courts. The Act directs every state government to designate ‘Commercial Court’ but it has been reported by the RTI filed by Vidhi Centre for Legal Policy that Manipur and Kerala have yet to designate Commercial Courts.
Though the Act has not made it mandatory for the state government and the High Court to designate ‘Commercial Courts’ but without the notification of a ‘Commercial Court’ the legislative intent to expeditiously resolve commercial disputes cannot be achieved. These infrastructural issues prove that the Act has been poorly implemented.
2. Delay in Adjudication of Cases
The Act envisages an expedited disposal of cases. Speedy resolution will help resolve high-stakes commercial litigations. The Law Commission also suggested to put a cap of two years for resolution of disputes in the Commercial Courts. The Act provides a timelines for filings, objections, etc.
But the ground reality is far different than the objective of the Act.  As per the statistical data of institution disposal and pendency of commercial cases is by Delhi High Court, Delhi had 18547 cases pending at the end of February 2020, out of which only 4275 of these cases were instituted in February.
The reasons for rising backlog of the cases can be due to lack of judges, the time taken to issue summons, violation of the mandatory timelines provided by the Commercial Courts Act, unjustified adjournments etc. The Act provides for a 120 days mandatory timeline for filing written statements [M/s SCG Contracts India Pvt. Ltd. vs. M/s KS Chamankar Infrastructure Pvt. Ltd C.A. No. 1638/2019] which is not followed by the Courts.
Excessive adjournments have also been reported because of the absence of the presiding officer i.e. the Judge. Such adjournments violate Order 17 Rule 1 of the Civil Procedure code, 1908 which states that maximum of three adjournments can be allowed. Thus, this legislative reform should crease out such unjustifiable factors which cause delay and go against the purpose of the Act.
1. Mandatory Pre-Mediation
The Act envisages a mandatory pre-mediation between parties before filing the suit. The Commercial Courts (Pre Institution Mediation and Settlement) Rules, 2018’ (“the Rules”) have been drafted under Section 21A(2) read with Section 12A(1) of the Act.
If the parties resolve their commercial dispute through mediation within three months then the settlement between them is recognized in the same effect as an arbitral award. Introduction of pre-mediation is very beneficial for the long run for both the bench and the parties as it will reduce the backlog of cases and save the litigation costs.
This makes it imperative for the authorities to ensure that quality mediators are being provided to the parties. This also increase the probability of parties who opt-outi.e. choose not to institute proceedings in the Court and resolve disputes through mediation.
The Supreme Court in the case of Salem Advocate Bar Association v. Union of India [(2003) 1 SCC 49 recognized the need for regulation of the mediation proceedings so that out of Court settlement for disputes is an effective remedy for the parties.
2. Limiting Adjournments
Recently, the Department of Law Ministry wrote to the High Courts of Delhi, Bombay, Calcutta and Karnataka to direct the Court officials/ and Judges to allow only three adjournments.
The purpose behind this letter is two-fold, firstly to expediate the resolution of cases and secondly, to mitigate the effect of covid-19 in resolution of commercial cases i.e. alleviate the costs of litigation on the distressed financial entities. This request is in alignment with Order XVI, Rule 1, Code of Civil Procedure, 1908 which allows only three restrictions in suits.
The Commercial Courts need to be increased in a targeted manner. More number of Courts should be notified in districts where there are more pending cases as per the disclosure under Section 17 of the Act.
As per the reply to the RTI filed by Vidhi Centre for Legal Policy, in Karnataka there were around 1089 cases pending as of October 2018, but Bangalore itself constituted for more than 50% of the pending cases as it had 531 pending cases.
Another problem identified is the lack of Judges and the lack of expertise to deal with commercial disputes. More number of Judges should be designated in the Commercial Courts to reduce the burden and Judges should regularly be trained as per Section 20 of the Act. This will ensure that not only there are adequate number of Judges to preside over Commercial Courts but they have the required expertise to effectively deal with commercial disputes.
The question for litigants to select Commercial Courts or Arbitration arises after concluding that both these acts have certain limitations. Both these Acts were enacted for different purposes.
The Arbitration Act has capped the arbitrator’s fees in absence of a contrary agreement whereas there is not provision capping the fees of a litigant practicing in the Commercial Court. Both the acts also prescribe timelines for various purposes as they aim to resolve disputes expediently, though the ground reality is far away than the legislative intent.
Another important aspect is that international parties prefer Arbitration over Commercial Courts as they have the autonomy of appointing their arbitrators and due to the existing comprehensive framework for International Commercial Arbitration.
Therefore, it can be concluded that both these remedies shall be elected on a case to case basis, i.e. it is subjective and a ‘one Court fits all’ approach shall not be an effective remedy for the disputes.
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