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Why Commercial Civil Courts Have The Potential To Be And Possibly Are Better Than Domestic Arbitrations

Aaditya Vijaykumar
4 May 2020 6:28 AM GMT
Why Commercial Civil Courts Have The Potential To Be And Possibly Are Better Than Domestic Arbitrations
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The process of adjudication in domestic arbitrations has always been slow and has not gathered significant pace even with the multiple amendments in the Arbitration and Conciliation Act, 1996. This is primarily since arbitrators and attorneys assisting arbitrators take up multiple matters in courts and multiple arbitrations, whether on the same day or otherwise, the culture is incomprehensibly not "arbitration centric" yet, timelines set in arbitrations are taken particularly lightly and there is no real consequence to non-compliance of timelines, unlike in international arbitrations. The question is whether a domestic arbitration meets the hallowed purpose of being a speedy and cheaper dispute resolution mechanism? The answer to this is an emphatic "no". Is there an alternate resolution system, which is more efficient than arbitration? The answer, in the estimation of the author, is that commercial civil courts are cheaper and faster than arbitrations.

Originally, civil courts adjudicated every dispute between two or more parties. With time, the number of disputes increased and the nature of disputes became more complicated. Naturally, specialized statutes called for specialized tribunals to be set up. Thus, tribunals such as Company Law Board, the Central Administrative Tribunal, the Debt Recovery Tribunal etc., just to name a few, were set up to resolve a certain set of disputes arising from specific statutes.

Arbitration, which was essentially resolution of disputes outside the four walls of a court by experts in the field or by persons with judicial background, was also always envisaged to be alternate mechanism to resolve contractual disputes. It was thought that arbitration would not only resolve the high pendency but would be an alternate, efficacious, speedy and cheaper dispute mechanism system as compared to Courts.

Contrary to this basic understanding, the Arbitration Act, 1940 turned out to be a massive failure as it was neither cheap nor expeditious at all. This statute was overhauled and the Arbitration and Conciliation Act, 1996 was brought in, which was based on the internationally accepted UNCITRAL model.

Until the amendment in the year 2015[1] and later in 2019[2] in the Arbitration and Conciliation Act, arbitration under this statute as well was a time consuming process since there was no time limit to conclude the arbitration, parties had to approach courts for various issues including urgent interim orders prior to appointment of arbitrators, even for appointment and replacement of an arbitrator and for enforcement of the final orders/award of the arbitrator. Besides this, the enforcement of an interim order passed by arbitrators was also difficult. That apart, arbitration was a particularly expensive affair with arbitral tribunals charging almost upto 2-10% and at times a staggering 25% of the value of the claim as arbitral fee.

By the two amendments, which came into force on 23rd October, 2015 and 9th August, 2019, the Legislature sought to cap the arbitral fee on the basis of a fixed percentage of slab.[3] The Legislature also sought to make the entire arbitral process simpler and faster by effectively bringing about an outer time limit of 2 years to conclude the arbitration.[4] Arbitrators were given greater powers and freedom to enforce their own urgent/interim orders, which was not the case earlier. Monetary costs could be imposed on a particular party to the proceeding after looking at the conduct of the litigant and other factors, if the Arbitrator thought fit.[5]

Unfortunately, the process of appointment of arbitrators[6], replacement of arbitrators[7], extension of time period of arbitrators[8], determination of multiple appeals from certain orders of the arbitrators[9] and enforcement of the final order[10] still vested with civil courts, which naturally took their time in adjudication.

Additionally, while the Legislature sought to make things simpler, arbitral tribunals sought to complicate issues. Some tribunals reluctantly adhered to the schedule pertaining to the fee and sought to provide an absurd interpretation (to the IVth Schedule) to eke out the maximum arbitral fee. However, mostly the IVth Schedule, which was fundamental to the amendment, was and is not adhered to at all and conveniently bypassed.

Infact, some of the orders passed by the Arbitral Tribunal were contrary to judgments of various courts relating to a restriction in charging arbitral fees under the IVth Schedule. This is despite the fact that several arbitrators are cognizant of the prevailing judgments.[11] The arbitrators thus continue to charge arbitral fees as per their own whims and fancies, with the avowed objective to make up for lost time. The unfortunate situation for a litigant is that such an order as to determination of the arbitral fee/deposit of costs cannot be challenged until the final adjudication of the arbitration.[12] This challenge can be, at the most laid, in a petition under Section 34 of the Arbitration and Conciliation Act, 1996 to the Appellate Court. By that time, the litigant would have been compelled to pay the fee determined by the arbitrator the fee so arbitrarily determined by the Arbitrator.

The unfortunate situation is that the litigant not only therefore had to bear the fee of the arbitrator but also fee of the attorney, arbitral venue charges and eventually stamping of the arbitral award which was 0.1% of the value of the award/final order so rendered. These costs itself accumulated into a cost which the litigant had not foreseen when the litigant triggered arbitration. It can therefore hardly be said that arbitration is a cheap process or mechanism.

Further, arbitrators were to mandatorily disclose their interest, whether financial or otherwise,[13] in the subject matter of the dispute. This also was and is never adhered to either in letter or in spirit by arbitrators, despite specific requests. To compound problems, arbitrations seldom conclude within a time period of 1 year[14], as set out in the statute. Lawyers, who are not arbitration centric, are also particularly reluctant to trigger the "fast track arbitration" process.

The only redeeming factor however is that if an appeal is preferred against the award, the courts do not get into a full blown fact-finding enquiry and has a particularly restricted approach. However, the problem still is that the restricted approach does not find resonance in every court of the country. Additionally, years are spent on having the two appeals adjudicated.

As opposed to this, on the same day i.e. 23rd October, 2015, the Legislature brought in Commercial Courts Act[15], with the endeavor to set up commercial courts to adjudicate commercial disputes expeditiously. What infact constitutes to be a commercial dispute is defined in the statute itself. Illustratively, a dispute relating to trading of goods etc. was a commercial dispute.

In the Commercial Courts Act, a pre-litigation mediation[16] was made mandatory, which implied that the parties had to essentially sit across the table to sort out their issues and negotiate with the help of a third person in a non binding process. The timeline for this pre-litigation mediation was 90 days. It was found that some disputes were actually resolved through this process.

If this pre-litigation mediation failed, the parties could initiate a claim essentially clubbing the interim urgent relief with the final relief in one petition, unlike under the Arbitration and Conciliation Act, if a Tribunal had not been constituted. Additionally, while the arbitration fee was about 2-10% (at a minimum) of the value of the claim, the court fee (fee payable for the adjudication process) in case of approaching the court in places like Delhi was roughly 1% of the value of the claim[17] and Ahmedabad and Bombay etc. had a capped court fee of a meager Rs. 75,000 and Rs. 3,00,000 respectively, even if the adjudication of the dispute involved several and in some cases several hundred crores. Clearly, approaching court would be a particularly cheaper via media.

Further, after the litigants file their respective cases and defence, a case for summary judgment[18] could be made out and final orders could be passed if the court feels that the defence raised is frivolous. If the court feels that an order of summary judgment cannot be made and the defence is somewhat tenable, parties could be directed to proceed to evidence, subject to deposit the monies or a security in court. This is particularly comforting to the person initiating the case as the money so deposited could be withdrawn if eventually the litigant succeeds.

The courts have also started to convene case management hearings[19] where a fixed non-derogable time schedule, subject to heavy penalties, is drawn up in every commercial case for every possible stage. Thus, if this is simply followed, there would be expeditious adjudication and disposal of cases. Besides this, a litigant does not have to go to two different forums for the purposes of summoning (calling) witnesses for evidentiary depositions, unlike in arbitrations.

Further, unlike in the process of arbitration neither does the litigant have to pay for the costs of venue nor does he have to pay an additional stamp duty of 0.1% of the value of the final order.

Clearly therefore, if the commercial courts convene, conclude and adjudicate in a streamlined manner, approaching commercial courts would have greater benefits and myriad advantages rather than going through the rigmarole of arbitration. This would also be a way for the courts to reinvent themselves to show that not all cases are pending for a period of 10-15 years, as is the general impression.

Views Are Personal Only

[1] Arbitration and Conciliation (Amendment) Act, 2015 dated 31st December, 2015 w.e.f. 23rd October, 2015;

[2] Arbitration and Conciliation (Amendment) Act,2019 dated 09th August, 2019;

[3] Section 11(14) read with the Fourth Schedule of the Arbitration and Conciliation Act, 1996;

[4] Section 29 A of the Arbitration and Conciliation Act, 1996;

[5] Section 31 A of the Arbitration and Conciliation Act, 1996;

[6] Section 11(5) and Section 11(6) of the Arbitration and Conciliation Act, 1996;

[7] Section 14 and 15 of the Arbitration and Conciliation Act, 1996 and HRD Corporation v. GAIL India Ltd.; Civil Appeal 11127 of 2017;

[8] Section 29A(3) and Section 29 A(4) of the Arbitration and Conciliation Act, 1996;

[9] Section 37 of the Arbitration and Conciliation Act, 1996;

[10] Section 36 of the Arbitration and Conciliation Act, 1996;

[11] Delhi State Industrial Infrastructure Development Corporation Ltd. v. Bawana Infra Development Pvt. Ltd.; O.M.P. (Misc.) 52018;

[12] G & S Sarovar Park Plaza v. Poorva Sanskritik Kendra Society, W.P. (C)10040/ 2015 before the High Court of Delhi and Rajeev Gupta v. Delhi Metro Rail Corporation, W.P. (C) 8085/ 2015 of the High Court of Delhi;

[13] Schedule V-VII of the Arbitration and Conciliation Act, 1996;

[14] supra at 8;

[15] Commercial Courts Act dated 31st December, 2015 w.e.f. 23rd October, 2015;

[16] Commercial Courts (Amendment) Act, 2018 w.e.f. 20th August, 2018;

[17] Court Fees Act, 1870;

[18] Order XIII A of the Code of Civil Procedure, 1908;

[19] Order XV A of the Code of Civil Procedure, 1908.

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