An Edge of the Institution Over Ad hoc Arbitration

The disputing parties have different forms of alternative dispute resolution (ADR) mechanism available to them through which they can resolve their disputes without intervention of the regular process of courts. These mechanisms are: (i) mediation; (ii) conciliation; and (iii) arbitration. Perhaps, the most apposite amongst the disputing parties is the “arbitration”. An arbitration emerges from an agreement between two or more parties where party autonomy is the foundation to the arbitration agreement. An arbitration is a process of dispute resolution which is “confidential and less formal” on one hand and “non-stressful as compared to the traditional court proceedings” on the other hand. As an alternative to traditional court proceedings, “arbitration” provides the parties firstly, with autonomy in selection of an arbitrator to resolve the disputes between the disputing parties; secondly, confidentiality that the arbitral proceedings will be completed by the Arbitral Tribunal in a time-bound manner and as per the mandate of the Arbitration and Conciliation Act, 1996¹ and thirdly, flexibility in resolving their disputes through a simple procedure without actually adhering to the complex process prescribed under the law.

There are two main models in the field of arbitration, institutional arbitration and ad hoc arbitration. In India, till a considerable time arbitrations have been synonymous with ad hoc arbitrations. In an ad hoc arbitration, the parties choose their arbitrator and the arbitral proceedings take place without there being anybody to regulate the proceedings. Due to the very nature of the ad hoc arbitration, it had become a cumbersome, lengthy and very expensive manner by which disputes were resolved and therefore, ad hoc arbitration has received much criticism. Debates were going on to streamline the entire arbitration ecosystem and in the past decade there has been a sea change in the landscape of arbitration mechanism. Because of India’s dedication to strengthening its arbitration ecosystem, encouraging investor confidence, passing legislative reforms, and resolving the increasingly complex disputes, institutional arbitration has gained a great deal of traction in the country in recent years. With the growth sprint with which India is moving, the Indian Government realised that if India needs to catch the race with its international counterparts, it needs to provide dispute resolution mechanism which is efficient and with an element of consistency. India hopes to improve its standing as an arbitration-friendly jurisdiction, draw in foreign investment, and give parties a dependable and effective way to settle their differences by embracing institutional arbitration. An attempt is being made to compare these two models, looking at their unique traits, benefits, and drawbacks in terms of effectiveness, independence and dependability. It also makes a brief mention of the elements that will encourage India to become a hub for international commercial arbitration.

The institutional arbitration has achieved prodigious heights. All over the world there are arbitration centres established themselves as premier institutions. There is London Court of International Arbitration (LCIA) in London, International Chamber of Commerce (ICC) in Paris, Hong Kong International Arbitration Centre (HKIAC) in Hong Kong, Singapore International Arbitration Centre (SIAC) in Singapore, etc. The Parliament of India is conscious of the fact that India too needs to have an institution which should be a flagship institution to represent India and therefore, the India International Arbitration Centre (IIAC) came into existence by way of an India International Arbitration Centre Act, 2019. These arbitral institutions give parties a structured framework and support throughout the arbitration process by providing administrative support, procedural rules, and lists of qualified arbitrators. Involvement of an institution can not only improve productivity but also guarantee procedural justice and make enforcement of the award easier and faster. Nevertheless, parties may have to give up some control over the arbitration process to institutional policies and guidelines.

Efficiency is one of the most crucial factors in arbitration because parties want their disputes resolved quickly and affordably. Although, ad hoc arbitration may save some of the administrative costs which is connected with institutional arbitration, but the institution provides flexibility in the timeliness of the proceedings to the parties as well regulate the entire arbitral process vide its set of rules that regulates the arbitral process. Ad hoc proceedings, however, may encounter difficulties in handling intricate disputes, protracted legal proceedings, and the enforcement of awards in the absence of institutional support. Conversely, institutional arbitration enjoys the advantages of streamlined processes, institutional resources, and well-established administrative mechanisms, which may lead to more effective dispute resolution outcomes.

Another essential component of arbitration is autonomy, which gives parties the freedom to customise the proceedings to their needs and maintain confidentiality. Parties to ad hoc arbitration have the greatest degree of autonomy when it comes to creating the arbitral process, choosing the arbitrators, and deciding which law will apply. This adaptability can be useful, especially when conflicts involve sensitive cultural issues or specialised subject-matters. On the other hand, institutional arbitration places restrictions on the autonomy of the parties through specific administrative and procedural requirements. But institutional involvement also provides administrative support, standardised procedures, and procedural certainty, which can improve predictability and reduce procedural conflicts.

Present scenario of arbitration in India

The dispute resolution mechanism in India is primarily conducted in ad hoc manner that is in the absence of an agreement between the parties about agreed arbitrator or the process to appoint an Arbitral Tribunal, the intervention of court is sought for appointment as an arbitrator or the Arbitral Tribunal. Such process of appointment of an arbitrator by the court is ad hoc arbitration. Under the Arbitration Act, 1940, in the absence of agreement between the parties regarding the agreed arbitrator, an aggrieved party, could approach the civil court for appointment of an arbitrator. Somewhat similar provision continued under the Arbitration and Conciliation Act, 1996 though the Act is modelled on UNCITRAL Model Law on International Commercial Arbitration. Initially, Section 11 of the Act contemplated appointment of an arbitrator by the Chief Justice of the High Court in respect of domestic disputes and by the Chief Justice of India in respect of international disputes. This was by modification in model law from the word “Court” to “Chief Justice”. This was substituted when the Arbitration and Conciliation Act, 1996 was amended in 2015 where the word Chief Justice of the High Court was substituted with the word High Court in case domestic disputes and Chief Justice of India was substituted as the Supreme Court in respect of the international disputes.

There were questions about the nature of power exercised by the Chief Justice as that the jurisdiction is akin to administrative power or a judicial power. In Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd.², a five-Judge Constitution Bench held that the nature and function performed by the Chief Justice or his designate being essentially to aid the Constitution of the Arbitral Tribunal, it could not be held to be a judicial function. However, such judgment was overruled by a later judgment in SBP & Co. v. Patel Engg. Ltd.³, holding that the power of the Chief Justice is judicial power. The majority judgment held that the High Court can examine the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of power and the qualifications of the arbitrator or arbitrators. The Court had held the proceeding before the Chief Justice while entertaining an application under Section 11(6) of the Act are adjudicatory, therefore, the outcome of that adjudication is a judicial order. In respect of the power of the court to designate an institution, the Court held that, what the Chief Justice can do under Section 11(6) of the Act is to seek the help of a non-judicial body to point out a suitable person as an arbitrator in the context of Section 11(8) of the Act and on getting the necessary information, if it is acceptable, to name that person as the arbitrator or the set of persons as the Arbitral Tribunal.

Furthermore, the 2019 Amendment in the 1996 Act in India modifies the arbitration procedure in several ways. It presents the Arbitration Council of India (ACI) as the supreme body for arbitration in an effort to organise the procedure. Among its many responsibilities, the ACI’s primary duty is to identify and grade India’s arbitration institutions. This was a pivotal element in the institutional arbitration reform process. Moreover, the 246th Law Commission Report suggested adding Section 11(6), which is read as following, to limit and define the court’s jurisdiction when appointing an arbitrator:

11. (6) … a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

(Emphasis supplied)

The newly amended provision allows arbitrators to be appointed by an “arbitral institution designated by the Supreme Court … or by the High Court”. Even though the amendment has not taken effect yet, it is a progressive legislative move to lessen judicial intervention and enable institutional arbitration to advance. Section 11 of the 1996 Act gives arbitral institutions considerable power over the selection of arbitrators. This clause is essential to the efficient operation of the arbitration procedure, especially when the parties cannot agree on the arbitrators’ choices.

The pool of arbitrators available with the courts is primarily former Judges or some members of the Bar. But in highly technical and scientific disputes, the appointment of experts in the subject remains a distant dream. In ad hoc arbitration, primarily the former Judges and the advocates having worked all through their life with the technicalities of Code of Civil Procedure or the Evidence Act. The procedure is so ingrained in the psyche of the arbitrator which is in the teeth of Section 19 of the Arbitration and Conciliation Act, 1996⁴. Thus, the strict principles of proof of documents of the Evidence Act, 1872⁵ or the strict rule of procedure of the Code of Civil Procedure, 1908⁶, will not be applicable to the arbitration proceedings. These provisions are in addition to Section 1 of the Evidence Act contemplates the said Act is applicable to the judicial proceedings and not to the arbitration proceedings, to the Armed Forces, etc. In fact, a three-Judge Bench judgment of the Supreme Court in State of Haryana v. Rattan Singh⁷, while considering the dismissal as a result of departmental proceedings, it was held that there is no allergy to hearsay evidence provided it has reasonable nexus and credibility. In terms of the Evidence Act, the evidence has to be direct and primary evidence whereas in departmental proceedings even hearsay evidence is admissible. Thus, in view of the interpretation given by the Supreme Court, it is creditability of the evidence which is relevant and not the mode of proof of such evidence. Therefore, the ad hoc arbitrators need to unlearn law in the arbitration proceedings conducted by them.

The ad hoc arbitration faces another challenge such as fee per session and 2 or 3 sessions in a day apart from the dates are not available with some of the arbitrators. The result is that the ad hoc arbitration becomes expensive in terms of time and money. There is another difficulty with the ad hoc arbitrators of storage of record before transmitting it to the court in the vent of the proceedings under Section 34 of the 1996 Act. On the other hand, the institutional arbitration starts immediately as there is no dispute that an institution is exercising a judicial power or administrative power. The power of appointment of an Arbitral Tribunal with the institution is administrative power only that means the Tribunal is able to start the arbitration proceedings right away when a dispute is submitted by an aggrieved person to the institution. In arbitral institution, the fee due to an arbitrator is paid through the arbitral institution and that the institution oversees as to how the proceedings progress. It is responsibility of the arbitral institution to collect fee from the parties and to pass on to the Arbitral Tribunal in phases or at the conclusion of the proceedings depending upon the regulation applicable.

Additionally, the enforceability of arbitration awards is improved by the institutional appointment of arbitrators. Awards made by tribunals established through institutional appointment are more likely to be upheld by courts because these tribunals are thought to have been appointed in compliance with established protocols and standards. One of the main goals of the arbitration process is to improve the finality and enforceability of arbitration awards. When a contract between the parties includes an arbitration clause designating an institution as the arbitrator, that contract can be used to invoke the jurisdiction of these institutional arbitrations. To conduct arbitrations, these institutions follow pre-established rules and regulations. The parties may select, suggest, and appoint an arbitrator from a list of qualified arbitrators that these institutions also maintain. The Vice-President of India, in his address to 6th ICC India Arbitration Day, in New Delhi, on 2-12-2023 lauded the erstwhile bold remark of Chief Justice of India in his address at Delhi Arbitration Week, 2023 which quotes “the arbitration space in India resembles an Old Boys’ Club”. He further said that “institutional arbitration is better than ad hoc mechanisms as it provides a sound system for reaching conclusions”. He called for necessary changes, including legislative reforms, to ensure a fair, equitable and conclusive dispute resolution mechanism. While acknowledging the natural occurrence of disputes in commercial activities, the Vice-President of India emphasised the need for robust, fast, scientific, and effective system to handle disputes. In my opinion, the goal of expeditious resolution of arbitration dispute can be achieved by prioritising institutional arbitration and advancing towards making India a hub for international arbitration.

The “duality syndrome” afflicts India’s current regulatory framework

Even though it offers institutional arbitration, there is enough room for parties to use ad hoc arbitration by bringing a case before the court using the provisions of the 1996 Act. Therefore, the regulatory framework essentially allows for an institutional structure that could be called loose set up. Due to this, disputing parties have chosen ad hoc arbitration over institutional arbitration in most of the cases. Ad hoc arbitration is beset with certain flaws. For example, there is no set cost and charges are made on a seat-by-seat basis without any guidelines. Regular adjournments, hearings, and procedural inertia cause delays in the delivery of awards. Ad hoc arbitrations typically take the form of court hearings, which means that lawyers would much rather appear in court than finish the arbitration process.

The standard procedure that arbitral institutions follow after receiving a request for the appointment of arbitrators is described in their respective rules and regulations. These protocols could involve keeping up-to-date directories of eligible arbitrators, performing conflict assessments, and guaranteeing independence and impartiality throughout the selection process. Parties can gain from an impartial and transparent process that strengthens the arbitration process’s legitimacy and integrity by giving these organisations responsibility for the appointment of arbitrators. For the parties engaged in arbitration proceedings, the appointment of arbitrators by arbitral institutions has various benefits. First off, it reduces the possibility of delays and disagreements at the beginning of the arbitration process by doing away with the need for parties to negotiate over the choice of arbitrators in potentially heated negotiations. In addition, it guarantees that arbitrators appointed are impartial, skilled, and qualified because institutions usually have strict guidelines for choosing arbitrators.

A step towards the institutionalising the commercial arbitration in India

To examine and revise the institutionalisation of arbitration, the Central Government established a High-Level Committee in December 2016 that was chaired by Justice B.N. Srikrishna (Retd.) which ultimately led to the passing of the IIAC Act which in turn created the IIAC, an institution to regulate arbitration proceedings in India and to become India’s flagship institution. The IIAC has been established for creating an independent and autonomous body for enabling institutional arbitration in India. The IIAC, apart from being an institution of national importance, aims to provide facilities and administrative assistance for arbitral proceedings, maintain a panel of arbitrators and promote studies and undertake teaching in the field arbitration, mediation and alternative dispute resolution matters.

In India, ad hoc arbitration is expanding far more than institutional arbitration. The reason being the lack of awareness to the parties and support from authorities concerned. The recommendations propounded by the High-Level Committee had given few marvellous suggestions to reform institutional arbitration within India. For ensuring the most efficient and satisfactory resolution of their disputes, parties should carefully consider the benefits and drawbacks of each option, whether choosing the structured framework of institutional arbitration or the self-directed approach of ad hoc arbitration. Understanding the subtle differences between institutional and ad hoc arbitration is essential for navigating the complexities of dispute resolution. This will enable parties to make well-informed decisions and expedite the attainment of just and equitable outcomes.