Arbitration Clauses and Their Utility : An Analysis

Arbitration Clauses and Their Utility

By Vishal M.

It is now becoming a fashion to incorporate arbitration clauses in the agreements.

But is it economically viable to have an arbitration in India ?

After the Arbitration and Conciliation (Amendment) Act, 2015,  4th Schedule was added to Arbitration and Conciliation Act, 1996. The model fee of arbitrator for a sum in dispute of Rs. 5 lacs is Rs. 45000/- and if it is between above Rs. 5 lacs but below Rs. 2 lacs, then it is Rs. 45,000/- plus 3.5% of amount over Rs. 5 lacs. The Act does not makes it mandatory that parties have to pay fees according to 4th Schedule. Parties can agree to pay lesser fees to arbitrators, if arbitrator has agreed to it. 

As is visible, if a sum in dispute is Rs. 50,000/- even then the fees of arbitrator would be Rs. 45000/- if 4th Schedule is followed. This makes arbitration a bad choice. More so, when there is sole arbitrator in such case when 25% extra fees might also be added. So, in order to recover an amount of Rs. 50,000/- a person has to first spend more than Rs. 50,000/- on arbitrator [plus the vague "expenses" that arbitrator might add, plus the fees of lawyers], if an arbitration agreement exists. Arbitration should leave most of the things to parties' choice, but the rigidity of arbitrators in fixing their fees and propagating the myth that fees below 4th Schedule is impermissible makes the entire arbitration mechanism uneconomical and frustrates the object of the Act itself.

S.11 (14) of A&C Act, 1996 was introduced and now contains 4th Schedule. 

If we compare the costs which one would incur in a civil suit or commercial suit, then the one major costs incurred by party would be on expenses of lawyers, and the Court fees. A Judge deciding a civil suit or commercial suit cannot ask for his expenses / fees from the party.

In arbitration, some arbitrators fix the fees according to 4th Schedule and then would even say that other expenses will be separate [in addition to the fees under 4th Schedule] which will also be charged from the party. This leaves everything to uncertainty. 

The costs that one would incur on lawyers in a civil suit or arbitration would be similar. So there is not much variation in that. 

There have been instances where arbitrators have insisted that they would charge fees based on 4th Schedule even after they have accepted the appointment as arbitrator at lesser fees. 

The other risk is S.11 ; when a petition is filed before HC/SC under S.11, a large number of arbitrations are referred to Former Judges. What is not clear in the order passed under S.11 is about the fees that arbitrator would take and whether arbitrator can add random expenses to be paid by the parties. S.11 leaves no choice with parties ; choice of arbitrator is with HC/SC and they are almost imposed on the parties. 

Coming to the timelines : ideally an arbitration should be over in 12 months and in fast track, in 6 months. But a deluge of applications under S.29A shows lethargic pace of arbitration. Many of them are by Retired High Court Judges as arbitrators. On the contrary, an ordinary civil suit have gained reputation for being slow. But, Order 37 or Commercial Courts Act, 2015 provide avenue for a faster resolution. Order 17, Order 9, S.35B are methods to expedite disposal of commercial suits or civil suits. 

S.14 (1)(a) of A&C Act, 1996 provides for termination of arbitrator when there is undue delay. But this section has rarely been invoked and it causes further delay as well as increased expenses on arbitration. 

Third aspect is : Enforcement. An arbitral award cannot be enforced by arbitrator alone. It has to follow the process given under Code of Civil Procedure, 1908. S.36 (1) of A&C Act, 1996 is an acknowledgement of the fact that enforcement of arbitral award cannot be done without understanding the provisions of Code of Civil Procedure, 1908. Nobody wants a paper decree or paper arbitral award.

Conclusion

Given these negative aspects of arbitration in India, whenever parties draft an agreement they should always try to ensure that incorporation of arbitration clauses is not done as a matter of course as once an arbitration agreement is there, civil suit or commercial suit becomes difficult to be initiated due to S.8 of Arbitration and Conciliation Act, 1996. Incorporation of arbitration clauses is to be done only when the parties know what it means and what will be the economical costs of indulging in arbitral proceedings.