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Introduction to alternate dispute resolution processes

Approaching a court in the event of a dispute between private entities can be an intimidating and tiring process in India (and many other countries) for various reasons – court procedures are very formalized and cumbersome, courts are overburdened with cases and lawyers often use tactics to prolong the litigation. Also, litigation can be very costly and the parties often have to wait for years to get a final resolution for their dispute, as matters get mired in series of adjournments, appeals, revision and review petitions.


Nevertheless, disputes are almost inevitable in business. Many legal theorists have argued that disputes are inevitable in some transactions, as it is very difficult and costly to lay down or even negotiate the perfect terms and conditions for any transaction or business relationships. Hence, it is only reasonable to enter into contracts with optimum terms and conditions, and supplement the same with a robust and fair dispute resolution system. Disputes can be very costly if not resolved quickly and easily. Further, there is a cost of uncertainty that arises out of unresolved disputes which makes business decisions and transactions difficult.

As a matter of example, foreign investors are wary of making investments in India sometimes due to difficulty of enforcing agreements in the country. It is a risk for them since in case the promoters of the company start violating the investment agreement, they would find it very difficult to protect their business interests and since cases can be dragged on for years, they can incur significant loss on their investment. If the legal system was more efficient and quick in resolving disputes, many more investors would have been encouraged to invest in India.

Hence, various alternative dispute resolution mechanisms have evolved for quick resolution of private disputes which helps parties to avoid costly and time consuming litigations. Instead, parties can agree on a dispute resolution method by a written contract which is agreeable to both parties. Statutes have been drafted to give legitimacy and force of law to these private dispute settlement proceedings.

Alternative dispute resolution techniques have gained prominence today as a preferable choice over dispute settlement in courts. Parties take advantage of various alternative dispute resolution options supported by law and resolve disputes privately through negotiation or by appointing a third party to resolve the dispute. In most commercial agreements and transactions, alternative dispute resolution clauses, specifically arbitration clauses, have become a standard feature.

Typically, alternative dispute resolution processes are classified into arbitration, conciliation, negotiation and mediation. They are explained briefly in this chapter


a. Description of the process

When a dispute arises, one is often faced with the choice of initiating legal proceedings before a court. The state machinery has established the courts to decide criminal disputes, disputes against the government, and disputes between private entities. Arbitration is typically used to resolve disputes between private entities, outside the court machinery (though courts have some supervisory powers, as discussed in this writeup).

Even the government at present prefers to enter into arbitration agreements with the various private parties it has to deal with for various purposes, especially commercial transactions. The disputes which can be arbitrated are typically commercial in nature and affect only the parties involved in the dispute and not the public in general.

For instance, a dispute over correct interpretation of a sale of goods contract is suitable for arbitration, but a suit for public nuisance is not appropriate for disposal through private arbitration (as the general public is affected by public nuisance). Most public or statutory matters, say, a criminal proceeding (in Indian law it is considered that a crime affects the entire society and not just the victim), a winding up proceeding of a company, or a matter over which a sectoral regulator such as SEBI or Telecom Regulatory Authority of India (TRAI) has jurisdiction are not arbitrable.


Arbitration can only be conducted pursuant to an arbitration agreement or an arbitration clause in an agreement governing the commercial relationship between parties. The arbitration agreement/ clause must be in writing. Notably, even in case of an ongoing dispute, which may have resulted in litigation already, can still be referred to arbitration and court proceedings can be halted if both the parties can agree in writing with respect to the same.


Under the arbitration agreement or the arbitration clause, the parties to a dispute refer the dispute for adjudication to one or more persons (who are privately appointed, and are referred to as arbitrators) and agree to bind themselves by the decision of such persons.


A key advantage of arbitration is that details of arbitral proceedings and the award may be kept confidential (if specified by the parties in the arbitration agreement). Arbitration also enables parties to minimize the involvement of courts and to control the time and costs involved in resolution of disputes.

An arbitration proceeding is commenced by issuing a notice by one of the parties to the dispute.

In India, the statute that governs arbitrations is the Arbitration and Conciliation Act, 1996 (A&C Act). As per the A&C Act, it is not necessary to hold oral hearings. The arbitral tribunal is free to decide whether oral hearings are required (for presentation of evidence or for making arguments), or whether documents written submissions will suffice. The tribunal may also hold oral hearings upon the request of a party. If a party fails to appear at an oral hearing or to produce documentary evidence without showing sufficient cause, then the arbitral tribunal may continue with the proceedings and make the arbitral award based on the evidence available before it.


However, the parties can in the arbitration agreement or clause specify that there shall be no oral hearings. They can also provide that the arbitral tribunal does not have to power to continue with the proceedings and make the arbitral award on the evidence available before it on the failure of a party to appear at an oral hearing or to produce documentary evidence without showing sufficient cause.


A decision of an arbitrator is called an arbitral award. An arbitral award is similar to a judgment of a court – it contains reasons for the arbitrator’s decision, and is legally enforceable in the same manner as if it were a decree of the court.

Types of arbitration

Arbitrations can either be ad hoc or institutional. In an institutional arbitration, an arbitral institution such as the London Court of International Arbitration (LCIA), International Chambers of Commerce (ICC), Singapore International Arbitration Centre (SIAC) is chosen by the parties for conducting the arbitration. The role of the institution is to provide a framework of administrative procedures for conducting arbitration proceedings including infrastructure, arbitrators and rules and procedures for the arbitration.


Arbitral institutions have qualified and experienced arbitrators who are empanelled with them. The arbitrators may have expertise of law as well as over the commercial area to which the dispute relates. For instance, a person experienced in the software industry or shipping industry may be appointed as arbitrator to deal with cases related to software or shipping industry related disputes. It is not necessary for an arbitrator to have legal qualifications in any case, though the institutions as discussed above usually take care to choose well qualified and suitable arbitrators who have a good command over the commercial issues involved while constituting the panel of arbitrators for a specific dispute. This enables the arbitrators to address the commercial intent of parties in a more effective way, compared to ordinary courts where judges may not have industry specific commercial knowledge or experience.

The institutions also provide arbitration services as well as other general business functions and in some cases assist in the administration of the arbitration through its infrastructure (for example, they may provide conference rooms for conducting arbitration proceedings). 

 Ad hoc arbitration

In an ad hoc arbitration, parties simply agree under the contract to resolve disputes by arbitration, but they do not specify an arbitral institution.  Often, contracts merely state that disputes would be resolved by arbitration in terms of the Arbitration and Conciliation Act, 1996 (A&C Act). Sometimes, they specify the number of arbitrators. This potentially subjects the contract to court intervention at multiple stages (the stages at which courts can intervene are discussed below. Not specifying a detailed procedure enhances the risk of intervention, especially when the other side intends to prolong legal proceedings). The simplest version of an ad hoc arbitration clause may look like this:


“Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the Arbitration and Conciliation Act, 1996.” Note that the risk of intervention from a court of law in case of such a simple arbitration clause without specifying further details is quite high.

The contract may also incorporate more detailed and customised rules for the arbitration. Incorporating a customised procedure may increase transaction costs for the parties (as it will involve additional time and money since the negotiation process becomes longer). The risk of adopting an ad hoc procedure which is tailor made is that the clause may be more susceptible to challenge in a court of law or it may even become unworkable in certain situations.

Advantage of 
ad hoc arbitration: An ad hoc arbitration offers more flexibility compared to an institutional arbitration – in an ad hoc arbitration, the procedure for arbitration may be incorporated in the contract (or a separate arbitration agreement) either at the time of entering into the contract or after a dispute has crystallized. Further, parties are free to choose the arbitrators themselves. If they fail to agree upon an arbitrator, an appointing authority is required to make the appointment. In India, the Chief Justice of the High Court concerned, or the Chief Justice of the Supreme Court (if one of the parties is a foreigner) is the appointing authority.

Institutional arbitration


Institutional arbitration is growing in popularity in India due to its numerous advantages over ad hoc arbitration. In an institutional arbitration the task of appointment of arbitration, provision of administrative and secretarial facilities, etc. is delegated upon an arbitral institution, such as the Indian Council of Arbitration (ICA), the Indian Institute of Arbitration and Mediation (IIAM), and the International Centre for Alternate Dispute Resolution (ICADR).  

However, this may not be suitable for all parties, since the cost of institutional arbitration can be quite high. Some arbitral institutions can be considerably cheaper than others. Doing some inquiry before agreeing on one is strongly recommended. For more information on this keep reading.

In case of an institutional arbitration, the procedure for arbitration is governed by the rules of the concerned arbitral institution. Sometimes, the institution may recommend the language that may be used for reference of a dispute to it.


For example, the LCIA India website suggests the following language:

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA India Arbitration Rules, which Rules are deemed to be incorporated by reference into this clause.
The number of arbitrators shall be [one/three].
The seat, or legal place, of arbitration shall be [City and/or Country].
The language to be used in the arbitration shall be [     ].
The governing law of the contract shall be the substantive law of [     ].”
Note on costs of institutional arbitration: Arbitration by a reputed international arbitral institution can be quite expensive. For example, LCIA India has fixed registration charges, and hourly rates for the involvement of its secretarial staff. In addition it separately charges an hourly rate for the arbitrators. For details see here.


Sample dispute resolution clause (including a reference to an ad hoc arbitration and to an institutional arbitration) is provided in the Annexure for reference purposes.

Interested students may also go through the rules of some arbitral institutions, available on the following links:


Comparison of institutional and ad hoc arbitration

There are a number of advantages of institutional arbitration over ad hoc arbitration in India, some of which are discussed below:


1.   Negotiation costs


In ad hoc arbitration, the procedures have to be agreed upon by the parties and the arbitrator. This requires cooperation between the parties and involves a lot of time. When a dispute is in existence, such cooperation is very rare. In institutional arbitration, on the other hand, the procedural rules are already established by the institution. Formulating rules is therefore no cause for concern. The fees are also fixed and regulated under rules of the institution.


2.   Costs of institutional arbitration vs. ad hoc arbitration


One cannot say with certainty whether institutional arbitration is more expensive than ad hoc arbitration. Arbitration by an internationally reputed arbitral institution can be fairly expensive. However, even in an ad hoc arbitration, if the arbitrator is appointed by the Chief Justice, costs can be very high and even the arbitration can continue for vey long. The Chief Justice typically appoints a retired judge (of the High Court or a Supreme Court) to act as an arbitrator, and it may be without any regard to budgetary constraints of the parties. Due to their seniority, the charges of such persons are very high and dates available are few, leading to delays in obtaining the verdict.


Further, in ad hoc arbitration, infrastructure facilities for conducting arbitration pose a problem and parties are often compelled to resort to hiring facilities of expensive hotels or other expensive venues, which increase the cost of arbitration. Other problems include getting trained staff and library facilities for ready reference. In contrast, in institutional arbitration, the institution has ready facilities to conduct arbitration, trained secretarial/administrative staff, as well as library facilities. Thus, institutional arbitration ensures professionalism in conducting arbitration reduces costs.


3.In institutional arbitration, parties are able to choose from a panel of experienced arbitrators. Further, the tribunal’s award is also internally pre-scrutinized by an experienced panel, reducing the risk of legal and technical defects.


Many arbitral institutions such as the International Chamber of Commerce (ICC) have an experienced committee to scrutinize the arbitral awards. Before the award is finalized and given to the parties, the experienced panel scrutinizes it. As a result, the possibilities of the court setting aside the award is lower, because the scrutiny may be helpful in removal of legal/technical flaws and defects in the award. This facility is not available in ad hoc arbitration, where the likelihood of court interference is higher.


Further, in the event an arbitrator is incapable of performing his functions in an institutional arbitration, it is comparatively easier for the institution to appoint a substitute to replace the arbitrator.


Also, arbitral institutions maintain a panel of arbitrators who have experience in relevant industry sectors. Parties can choose the arbitrators from the panel. Having arbitrators with an understanding of the relevant industry sector may help the parties in arriving at a solution which addresses the commercial interests of parties better. For instance, in a dispute involving hedge funds, the parties may prefer to appoint arbitrators who have prior experience of working in the hedge fund industry and are familiar with the commercial issues and challenges.


4. Arbitrators’ duty to conduct the arbitration properly

In institutional arbitration, the arbitrators are governed by the rules of the institution, and they may be removed from the panel for not conducting the arbitration properly. In ad hoc arbitration, the arbitrators are not subject to such restrictions, unless parties have specifically included them in the arbitration agreement.



It is easier to maintain confidentiality in an institutional arbitration as the secretarial and administrative staff is subject to the internal rules of the institution. In ad hoc arbitration, it may be difficult to expect confidentiality requirements to be honoured, unless independent documentation is executed with the secretarial staff, or the arbitrator is also under the obligation to ensure that his secretarial staff maintains confidentiality.


The proposed benefits of arbitration – with reference to having a standardised process (with minimum room for uncertainty and court intervention), resolution of disputes on an agreed time frame and customization of the arbitration process to a certain extent can be better realized in an institutional arbitration. As compared to an institutional arbitration, an ad hoc arbitration may procedure may be subject to court intervention at several stages. However, if a detailed arbitration clause or an arbitration is adequately drafted, ad-hoc arbitration could be very effective too.


Stages at which court intervention is possible

While the goal of arbitration is to minimize or eliminate the possibility of intervention by courts in the settlement of commercial disputes, there are certain stages where arbitration has an unavoidable interface with the court machinery. Court interference almost inevitably leads to much delay in final resolution, taking away a very significant benefit of arbitration.

From a strategic perspective, it is important to have a picture of this interface, provided in the points discussed below. It should also be noted that a well-drafted arbitration clause (which covers relevant details) reduces the extent to which a court may intervene in a dispute at each point discussed below.

 Before commencement of arbitration

If a party approaches a court in relation to a dispute that arising from a commercial relationship that is governed by an arbitration clause or agreement, the court is required to refer the parties to arbitration in terms of the arbitration agreement. This clause restricts intervention of courts in disputes where an arbitration clause governs the relationship. However, the court is required to perform a preliminary check to see if the following four conditions are met:

 there must be an arbitration agreement – thus, courts may ask for evidence of an arbitration agreement

(b) the court proceeding must have been initiated by one party (“Plaintiff”) to the agreement against the other party;

(c) the subject-matter of the court proceeding must be identical to the subject-matter of arbitration agreement; and

(d) the other party must apply to the court for referral to arbitration before submitting a statement on the substance of the dispute. If the other party submits its statement on the dispute to the court, then it may be considered as a waiver of his right to insist on arbitration.

The Plaintiff in such an event will have the right to have the dispute adjudicated by the court.


b.   Interim reliefs by courts

Under the A&C Act, a court can be approached by a party to obtain interim relief even before the arbitral tribunal is constituted, during the arbitral proceedings, or at any time after the award is made (but before it is enforced).

A&C Act provides for interim reliefs by courts as well as by the arbitral tribunal. The interim reliefs ordered by a court are usually measures of protection, to prevent the subject matter from being destroyed, or deterioration. In the absence of such a power, a party could deal with the subject-matter in such a way that it could adversely affect the interest of the claimant. Therefore, the power of awarding interim reliefs is exercised to prevent the arbitration proceeding from being rendered infructuous.


For example, if the subject matter is a monetary claim of INR 1 lakhs, the court may pass an order to place the amount as security. If a party claims ownership over specific goods which are in possession of the other party, the court may pass orders for their safe custody and preservation. It may prohibit transfer of the goods outside India (or outside the jurisdiction of the court).


A&C Act specifically provides for the following kinds of interim reliefs:

for appointing a guardian for a minor or for a person of unsound mind for the purposes of arbitral proceedings; or


2. the preservation, interim custody or sale of any goods which are the subject matter of the arbitration agreement;

securing the disputed amount;


4. the detention, preservation or inspection of any property or anything which is the subject matter of the dispute in arbitration; and

5. interim injunction or the appointment of a receiver;

6. any other interim measure of protection as may appear to the court to be just and convenient

Please note that the court has very broad powers under the last head to provide interim relief.

 Comparison of the power of the court and the arbitral tribunal to award interim relief


A party has a legal right to obtain interim relief from Indian courts (unless one of the parties is a foreigner and the arbitration proceeding is conducted outside India). This right cannot be excluded by contract. However, power of an arbitral tribunal to order interim relief may be excluded by contract. Further, an interim relief granted by a court is more effective as a court can be approached even before the arbitral tribunal is constituted.


Note: When a party approaches a court of law seeking interim protection, it must establish that it contemplates the commencement of arbitration proceedings.


d.   Appointment of arbitrators while constituting an arbitral tribunal


i) Where the agreement does not specify any procedure for appointment of arbitrators

Parties are free to agree on a procedure for appointing the arbitrator or arbitrators. Often, parties merely specify the numerical strength of the tribunal, i.e. whether it consists of one or three members, but do not specify a detailed procedure for their appointment. In such cases, there is significant possibility of court intervention for constitution of the tribunal. Under the A&C Act, where the agreement does not specify a mechanism for appointment of the arbitrators, then the following procedure must be followed as per the A&C Act:

  • in an arbitration with a sole arbitrator; the parties must agree on the arbitrator within 30 days (Timeline 1) from the receipt of a request by a party.
  • in an arbitration with three arbitrators, each party must appoint one arbitrator; and the two appointed arbitrators shall appoint the third arbitrator who acts as the presiding arbitrator. The party who issues the request to arbitrate may appoint an arbitrator in the request itself. The recipient must appoint his arbitrator within 30 days from the receipt of the request (Timeline 2). Further, the two appointed arbitrators must agree on a third arbitrator within 30 days of their appointment (Timeline 3).

[Timeline 1, 2 and 3 are collectively referred to as the ‘Timelines’]

If any of the Timelines mentioned above are not observed by a party, then the Chief Justice of the High Court (or the Supreme Court, if one of the parties is a foreigner) may be approached to appoint arbitrators. However, this should be avoided wherever possible.

 Where a procedure is specified under the agreement


In order to avoid a situation like above, it is beneficial to agree upon an appointment procedure at the time of entering into the contract. Agreement on the procedure can reduce cost, time as well as the possibility and frequency of court intervention.

Sometimes, an arbitral institution may be assigned the responsibility of appointing the arbitrators, and the rules of the arbitral institution will govern the appointment procedure. In certain cases, the appointment procedure may leave it upon the parties to agree upon certain matters when a dispute arises, for example, an arbitration clause may specify the names of 2 arbitrators, but state that the third arbitrator will be jointly appointed by the parties within 30 days of the dispute. Alternately, it may specify that the arbitral tribunal will comprise three members, one of whom will be appointed by each party, and that the two arbitrators will in turn jointly appoint a third arbitrator. In either case, appointment of the third arbitrator is required at a future date.

A third mechanism could be to specify the number of arbitrators and designate an arbitral institution (such as the ICC) for constituting the tribunal.

In any of the above cases, that is, when an appointment procedure is specified, a party can approach the Chief Justice (or any person or institution designated by him) to take the necessary measure if the other party, an arbitrator, or an arbitral institution fail to act as per the procedure.

However, it is also possible to pre-select the arbitrator (or three of them, although it is to be kept in mind that more arbitrators would lead to higher costs of arbitration) if the parties can agree on a neutral arbitrator acceptable to them. As a matter of fact, it is much easier to pre-select an arbitrator as opposed to choosing them once a dispute has already come into existence.

However, the difficulty is that the pre-selected arbitrator may not agree or may not be available to become an arbitrator at the time when the dispute arises. To avoid this situation, the parties can also provide for alternative arbitrators provided the arbitrator of first choice would be absent. A more common practice is to pre-select a panel of arbitrators at the time of the agreement, on the condition that in case any dispute arises, parties will have to appoint the requisite number of arbitrators from within this panel. This significantly reduces the chance that parties will not be able to agree on an arbitrator or that they will have to approach a chief justice for appointment of an arbitrator.

At this stage, the parties have significant opportunity to control the cost on arbitrator’s fee by choosing arbitrators who agree to fees which are within the range of the parties’ budget.

Possibility of court intervention after the award is made

After an award is made, the aggrieved party can approach a court to set it aside on very limited grounds (see discussion below for Procedure for Challenge of an Arbitral Award)

Strategy to minimize the extent of court intervention

In order to minimize court intervention in arbitration proceedings, it is suggested that parties may either choose institutional arbitration or specify detailed rules for the entire arbitral process. The rules should include provisions relating to the qualification and experience of arbitrators, their fees, the number of hearings within which the arbitral tribunal must decide the matter, permissibility of oral hearings, the time-limit within which the final award must be given and whether the tribunal can provide interim relief to parties).

Procedure for challenge of an arbitral award


The A&C Act does not provide for an appeal against an arbitral award. However, the aggrieved party (who must be a party to the arbitration agreement, or a party’s legal representative) may approach a court to set aside the award on any of the grounds mentioned in Section 34(2) of the A&C Act. These grounds offer very limited scope for scrutiny compared to an appeal in litigation. In an appeal, a superior court goes into the merits of the decision of the lower court, while in case of setting aside an arbitral award, the court is only required to check if the award violated specific requirements. It may examine the clauses of the agreement to determine the validity of the award. 


An application for setting aside an arbitral award must be made within three months from the date of receiving the arbitral award. An extension of thirty days, subject to the court’s satisfaction that the party could not apply to it within three months due to a existence of a sufficient cause. No further extension is permissible.

There is no special form prescribed for making an application under Section 34 of A&C Act. As per the A&C Act, an award can be challenged on the following grounds (for convenience the grounds are classified into process-related and subject-matter related):

i) Process related grounds

 If it contains decision on matters beyond the scope of submission of arbitration. However, if the decisions on matters submitted to arbitration can be separated from the rest, then only that that portion of the award which contains decisions on matters that were not submitted to arbitration can be set aside.

If the i) composition of the arbitral tribunal, or the ii) procedure adopted for arbitration is not consistent with the agreement between the parties, or iii) in case the arbitration has taken place outside India, if the arbitral procedure adopted was contrary to the law of the country in which the arbitration took place.

An arbitral award can be set aside on the ground of misconduct of arbitrator/s as also the misconduct of arbitral proceedings by the arbitrators.

ii) Subject-matter related grounds


a) If the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

the award is in conflict with the public policy of India


An award will be considered to be in conflict with the public policy of India if it is induced by fraud, corruption or if it involves disclosure of confidential details related to any conciliation proceedings between parties (See Section 75 (confidentiality) or Section 81 (admissibility of evidence) of A&C Act). In addition, the Supreme Court has given a broad meaning to the expression ‘public policy’, by specifying five additional situations when it may be breached,(ONGC v. SAW Pipes Ltd., AIR 2003 SC 2629). For example, if the award is contrary to: 

  • fundamental policy of Indian law
  • interest of India;
  • justice or morality;
  • is patently illegal; or
  • it is so unfair and unreasonable that it shocks the conscience of the court.

The role of courts in setting aside the award is limited – although the five substance-related grounds added by the Supreme Court introduce a sense of subjectivity and vagueness to the principles for setting aside the award. There is no consensus on what is ‘patently illegal’ or what is violative of the ‘fundamental policy of Indian law’.

Effect of setting aside an award

Once an award is set aside, it no longer remains enforceable by law and the parties are relegated to their former position as to their rights in the subject-matter of the dispute. Sometimes, an arbitral award may be set aside partially. If it is set aside partly and that part can be separated from the rest of the award, then the remaining part would remain valid and binding in the same way as a court’s decree.

The setting aside of an award does not affect the arbitration agreement or the arbitration clause and they continue to be operative.


Note: While a proceeding challenging an arbitral award is pending, the aggrieved party must not act or cooperate in enforcement upon the arbitral award, else it could amount to an acceptance of the award, and a court could refuse to set it aside on that ground.


Grounds to challenge an arbitrator

For the impartial conduct of arbitration proceedings, it is critical that every member of the arbitral tribunal must be independent and impartial to the disputing parties, irrespective of which party has appointed him.

An arbitrator may be challenged in the event of circumstances that raise doubts as to his i) independence or impartiality or ii) if he does not possess the qualifications agreed to by the parties.


Circumstances where an arbitrator is related to a party, or indebted to it, or has worked as a lawyer, counsel or conciliator for the party earlier, or where he is interested in the subject-matter of arbitration, are sufficient to disqualify him, because he cannot perform his function as an arbitrator impartially or fairly in such circumstances.



Example: Two technology companies may agree in a contract that the arbitral tribunal must comprise of a single arbitrator, and that the arbitrator must possess a B.Tech degree in computer engineering. In such a case, appointment of an arbitrator with a B. Tech in mechanical engineering would not meet the requirements of the parties, even though the arbitrator possesses excellent computer skills.



Note: An arbitrator in whose appointment one of the parties has participated can be challenged by that party only for reasons of which it has become aware after making the appointment. Therefore, in the above example, if the entity challenging the arbitrator’s appointment knew that he did not possess a B.Tech. in computer engineering, he will not be permitted to challenge his appointment.


An arbitrator is also under an obligation to make disclosures pertaining to his independence to parties. As per Section 12 of the A&C Act, an arbitrator must disclose in writing any circumstances which are likely to raise doubts relating to his independence or impartiality, when he is approached to arbitrate a dispute. The obligation to make a disclosure continues if a situation affecting independence or impartiality arises after his appointment.


Ideally, parties should conduct a background check on the arbitrator, to ensure that he is independent and impartial.


A challenge to an arbitrator must be decided by the arbitrator himself, unless the arbitrator withdraws from his office willingly, or if the other party agrees to the challenge. In such cases a new arbitrator may be appointed to replace him, and there is no requirement to decide on the challenge. Where neither of the above situations occur, the arbitrator must decide on the challenge. If he arbitrator overrules the challenge, the aggrieved party does not have an immediate remedy, but can approach the court to set aside the award once the award is made by the arbitrator.


The parties are free to agree on a procedure for challenging an arbitrator. If no procedure has been agreed upon, the party who wants to challenge an arbitrator must i) within fifteen days after becoming aware of the constitution of the arbitral tribunal, or ii) or after becoming aware of any circumstances that affect his independence or impartiality, send a written statement to the tribunal, indicating reasons for the challenge.


Arbitration proceedings in case of a foreigner (including latest developments)


In arbitration, the ability to obtain interim reliefs from a court of law is very useful. Depending on the nature of a commercial transaction, a foreigner who enters into a contract with an Indian party may choose to arbitrate in India or at an offshore location. The A&C Act is divided into two parts – Part I and Part II. Arbitrations conducted in India are governed by Part I of A&C Act, which allows for claiming interim relief. However, those conducted offshore are governed by Part II which does not provide for interim relief. Thus, the option of claiming interim relief in proceedings involving a foreigner is always available if the arbitral proceedings conducted in India.


Part II, on the other hand, had been especially drafted in this manner so that intervention from the Indian judicial setup is minimised in respect of arbitrations with foreigners that are conducted outside India. However, in 2002 the Supreme Court had held that interim relief was available even if the arbitration was conducted outside India, unless the parties specifically excluded it by way of contract (by excluding the applicability of Part I;Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105).Thus, foreigners who had chosen to arbitrate outside India realised that they were vulnerable to proceedings for obtaining interim relief from Indian courts, which imposed additional costs for them, and for which they were unprepared.


This position has now been overruled by the Supreme Court of India in a recent judgment where it held that interim reliefs from Indian courts will not be available in arbitrations (with foreign parties) that are conducted offshore.(BALCO & Ors. v. Kaiser ATS, Inc & Ors., decided on 06th September, 2012).Thus, Indian courts cannot issue injunctions freezing assets, or order the arrest of ships, where the dispute is subject to arbitration outside India.


However, the Supreme Court of India has clarified that the new position of law would only be applicable to arbitration agreements signed after 6th September, 2012.  The previous position of law (and resulting difficulties) remains for current arbitrations and any arbitration that arises in future from contracts signed before 6th September, 2012.

Ways to reduce risk of litigation, and of court intervention in an arbitration proceeding


a. Drafting strategies to reduce risk of litigation


Risk of litigation can be minimised by drafting the parent contract wisely, and by attempting to cover various commercial possibilities. Usually, while drafting the contract, parties should answer the ‘what if’ question. For example:


What if a party fails to cooperate in a particular situation? Would that amount to a breach?  


What if the cost of inputs increases? Should that affect the prices charged to you?


Parties should try and contemplate various possibilities that can occur, even if they seem unlikely. If more possibilities are covered in the contract, the possibility of disputes arising reduces. However, at the same time, the cost of contracting increases (think of legal fee, time spent in negotiation etc.) as more and more scenarios and possibilities are covered – hence there is a practical limit to this approach.


Another issue which leads to protracted disputes is the claim by a party that their contract must be interpreted in light of a prior or subsequent oral understanding. Numerous disputes can arise when a contract provides X and a party to it alleges that an understanding Y had been arrived at orally, or when a party alleges that a particular course of conduct by the other party led it to assume that the former had waived its rights.


For example, a purchaser may argue that since interest was not specifically claimed on the previous two instances of delayed payment (when the delay was less than two months), the supplier has waived his right to claim the interest. He could also extend the argument to claim that no payments made within the two month period of the due date will attract interest for delay.

In order to prevent parties from raising such claims, contracts should contain an ‘entire agreement’ clause which specifies that the written contract specifies the ‘complete understanding’ of the parties as to their relationship, and that any other prior documents or oral understandings must not be relied upon for the purpose of interpreting its terms. Further, all contracts should provide that any alterations will only be valid if they are signed by both parties and made in writing, and that a party can only waive its contractual rights in writing.


b. Mechanisms to minimize risk of court intervention in arbitration


In any arbitration proceeding, the power to apply for interim relief from the court (unless the arbitration is being conducted outside India) and the power to challenge an arbitral award is a statutory right of the parties and cannot be excluded by contract. Thus, court intervention arising from these challenges cannot be eliminated.

However, at these stages, defaulting parties (who intend to delay the process) often raise preliminary objections relating to the existence of the arbitration clause, the validity of the arbitration clause, or the competence of the arbitrators.

For minimizing (or in enabling courts to quickly resolve) challenges based on preliminary objections, having suitable documentation such as the parent contract defining the commercial relationship and a carefully defined arbitration clause is handy.


In addition, possibility of court intervention at the stage of appointment of an arbitrator can be reduced by specifying the process of appointment of the arbitrator and alternative mechanisms for appointment (which can be utilized if the appointment process is not observed by a party). Further, specifying the procedure for challenging the independence of arbitrators will help the arbitral tribunal in speedily disposing of such challenges.


To sum up, specifying the following details may help in making tighter arbitration clauses which are less susceptible to court intervention and other procedural delays:

  • Qualifications of arbitrators – educational qualifications, industry experience, etc.
  • Number and process of appointment of arbitrators – How many arbitrators should there be, how should they be appointed (including timelines for appointing them), and the procedure if the timelines are not followed.
  •  Procedure for challenge of arbitrators
  • Specification of the role of an arbitral institution (if any)
  •  Any limit on the costs of the arbitration proceedings – type of venue and its cost, amounts payable to arbitrators (per hearing), proportion in which costs must be borne by the parties
  • Power to issue interim orders
  • Time limits for passing interim orders and for final award

Expert determination

Expert determination is a popular method to resolve a technical issue. The expert has technical knowledge of the issues on which he is required to make a finding. The name of the expert may either be specified in contract between the parties or he may be appointed after a matter for his determination has arisen. There is no separate legislation or legal provision governing expert determination in India.

In arbitration proceedings, parties typically are in dispute over whether their legal rights have been violated – e.g. one party’s right may have been violated by the other, and the other may be claiming compensation. In an expert determination, the expert is required to make findings on particular issues which both parties can rely on.


For example:

  1.  An investor and the investee may decide that the exit price after 5 years of making the investment will be determined by an independent Chartered Accountant on the basis of the discounted cash flow method.
  2.  Whether the computer matches the specifications mentioned in a contract;
  3.  Whether the malfunction is due to a design or a manufacturing fault; valuations of shares; rent reviews and contract performance matters. 

The expert does not decide the dispute, although his findings may lead the parties to resolve a dispute by themselves or to initiate arbitration or other proceedings. The decision of the expert is binding, unless i) the parties have agreed to the contrary, or ii) the expert has committed fraud, iii) the expert is biased. Parties usually specify that proceedings before the expert must be confidential.
Arbitral institutions such as the LCIA-India also provide expert-determination services to parties.

Negotiation, mediation and conciliation clauses and processes in India


Negotiation, mediation and conciliation are other dispute resolution mechanisms, apart from litigation and arbitration. These employ a consensual process to a much greater extent than arbitration.


In the event of a civil litigation, a court has the ability to direct the parties to attempt resolving their disputes through an alternate dispute resolution mechanism.


In India, there are certain indigenous mechanisms that are used. For example, Lok Adalats are frequently approached for settling motor accident cases and marital disputes through a consensual process.


In commercial contracts, parties usually specify that disputes would be attempted to be settled amicably within a pre-specified time limit, e.g. 30 days, failing which they may commence arbitration proceedings. It may also specify the methods they can use - negotiation is the most commonly specified method.


1.   Negotiation


In commercial situations in India, negotiations are extensively resorted to. Negotiation is a non-binding procedure and does not involve a third party. Commercial contracts often specify a minimum negotiation period (say 30 or 60 days) in which parties must try to resolve disputes. They are only permitted to approach a court on the lapse of this period.


This is not always a very good approach to adopt, and in many cases obtaining speedy resolution is very important. Mandatory negotiation period can delay the resolution.


While resorting to negotiations, both parties initiate discussions with an aim to reach at a settlement. Often, parties merely issue a formal notice indicating their position to each other and wait for the pre-specified period to elapse so that they can initiate arbitration proceedings before a court or for arbitration (if arbitration is specified).


Assuming that parties commence negotiations and a settlement is reached at, it is always advisable to consolidate and reduce into writing the terms of the settlement in the form of a ‘Settlement Agreement’ (and stamped with the appropriate stamp duty) which is signed by the parties. That makes the outcome of negotiations are made binding upon the parties by the parties themselves.


2.   Mediation


As a dispute resolution mechanism, mediation involves the act of a neutral third party (usually a retired judge or an experienced lawyer) to facilitate the settlement of dispute between the contending parties. It is different from arbitration in the sense that arbitration is governed by the arbitration agreement or the arbitration clause. However, in a mediation proceeding, the mediator asks the parties to put forth their views and claims in a joint session before meeting them separately to explore the possibilities of settlement of the dispute.


Just like negotiations, even mediation is a non-binding procedure. However, it involves a third party- the mediator. If the mediation is successful, that is, parties have been able to arrive at an understanding, they may crystallize the terms of such understanding into a settlement agreement, which becomes binding. It is always advisable that the settlement is converted into a written agreement between the parties in the form of a ‘Settlement Agreement’ and if the parties sign it, then it would have a binding effect.


In a nutshell, the mediator’s chief function is to appraise the parties about the pros and cons relating to the subject-matter of the dispute and help them in reaching a settlement by mutual consent. A mediator is faced with the following restrictions, as compared to anarbitration:


a.    He cannot compel attendance of a party or production of a document, unlike an arbitrator.

b.    Unlike in the case of arbitration, he cannot assist in arriving at a settlement in the absence of a party, as mediation is a consensual process.

c.    A mediator cannot compel parties to arrive at or accept a proposed settlement.

d.   A party can at any point withdraw its consent for the mediator.


3.   Conciliation


Conciliation is recognised under A&C Act. As per the act, if there is only one conciliator, the parties must agree on the person. In case of two conciliators, each party may appoint one conciliator and in case of three conciliators, each party must appoint one conciliator each and both parties must agree on the third conciliator, who shall act as Presiding Conciliator. The A&C Act expressly lays down that the conciliator must act honestly, impartially and independently and maintain confidentiality of the conciliation proceedings.


Like negotiation and mediation, conciliation can commence and proceed even in the absence of a provision for conciliation in the dispute resolution clause. Unlike mediation and negotiation, conciliation is specifically addressed in Indian law.

  • Conclusion of conciliation proceedings

Note that conciliation is a non-binding procedure and its outcome does not necessarily result in a binding settlement. They may conclude in a binding settlement, or may completely fail. If parties arrive at a settlement, the settlement agreement signed by them (which is authenticated by the conciliator) is legally binding in the same way as a decision of a court of law.


As per A&C Act, conciliation proceedings terminate when the settlement agreement is signed by the parties, or when both parties jointly notify the conciliator of their intention to terminate the proceedings. The conciliator and the parties have power to terminate conciliation proceedings. The conciliator may by a written declaration intimate the parties that conciliation proceedings have failed. Any of the parties to a conciliation proceeding has the power to individually notify the conciliator and the other party that the proceedings have terminated. Each party retains this power until it has put its signature to the settlement agreement.


Note: Even if a dispute resolution clause does not provide for the said mechanisms, they can be resorted to before going for arbitration.


In case of failure of conciliation proceedings, parties may revert to arbitration (if it is provided for in the contract) or litigation.




Sample Dispute Resolution Clause


a. Governing law

This Agreement shall be governed by and construed in accordance with the laws of India.

    Dispute Resolution:

i. In the event any Party is in breach of any of the terms of this Agreement, another Party may serve written notice to require the Party in breach to cure such breach within thirty (30) days of the receipt of such written notice thereof.

ii. In the case of any dispute or claim arising out of or in connection with or relating to this Agreement, or the breach (where such breach has not been cured by the Party in breach within thirty (30) days of a written notice thereof), termination or invalidity hereof, the Parties shall attempt to first resolve such dispute or claim through discussions between senior executives of the Investor and the Promoters.

iii. (in case of ad hoc arbitration)

If the dispute is not resolved through such discussions within thirty (30) days after one Party has served a written notice on the other Party requesting the commencement of discussions, such dispute or claim shall be finally settled by arbitration under the Arbitration and Conciliation Act, 1996. The arbitral tribunal shall comprise 3 members. The Promoters and the Company shall jointly appoint one (1) arbitrator, and the Investor shall appoint one (1) arbitrator. The two (2) arbitrators shall then jointly appoint a third arbitrator.


(in case of institutional arbitration)

If the dispute is not resolved through such discussions within thirty (30) days after one Party has served a written notice on the other Party requesting the commencement of discussions, such dispute or claim shall be finally settled by arbitration under the Arbitration and Conciliation Act, 1996, by an arbitral tribunal comprising 3 members. Such arbitration shall be in accordance with the Rules of the International Chambers of Commerce (which rules are deemed to be incorporated in this Agreement by reference herein) and shall be held in New Delhi.

iv. All arbitration proceedings shall be conducted in the English language and the place of arbitration shall be in New Delhi. The Parties shall be entitled to seek interim relief from the courts of India.

v. The costs and expenses of the arbitration, including, the fees of the arbitrators shall be borne equally by each Party to the dispute. Each Party shall pay its own fees, and other charges of its counsel. The arbitral tribunal would have the power to award interest on any sum awarded pursuant to the arbitration proceedings and such sum would carry interest, if awarded, until the actual payment of such amounts.



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