This article is written by Mahek Tamboli of Maharashtra National Law University, Aurangabad, an intern under Legal Vidhiya
ABSTRACT
Contractual disputes have been a timeless issue within the commercial law arena. In the Indian scenario, parties have traditionally resorted to the civil courts for adjudication; however, with the increasing demand for mechanisms that ensured time and cost-efficiency, arbitration emerged as an important alternative. This paper intends to compare the two routes of arbitration and litigation available for the resolution of contractual disputes under Indian law. It discusses the statutory basis of both mechanisms, with primary focus on the Arbitration and Conciliation Act, 1996, and the Code of Civil Procedure, 1908, along with some reference to judicial precedents, which catalyzed the growth of these laws. Indian courts’ changing stance toward arbitration receives special attention because the research analyzes recent Supreme Court decisions which demonstrate a pro-arbitration movement. Through a critical evaluation of both mechanisms this paper assists contracting parties together with legal professionals and policymakers to develop better dispute resolution strategies. The study finishes by analyzing the real effectiveness of arbitration in India as an alternative to litigation versus its increasing popularity based on situational factors.
Keywords
Arbitration, Litigation, Efficiency, Contractual Disputes, Civil Courts
INTRODUCTION
Resolving contractual disputes is a crucial aspect of commercial justice. In India, traditional litigation has always played a dominant role when a party requires legal recourse for contractual matter. However, traditional litigation in India entails a system that is prescriptive, fearful of procedural traps, plan overload and high number of cases pending, all of which hinder the timely resolution of disputes. As a result, both national and international players have searched for alternatives that are more expedient, flexible and discretionary.
Arbitration has become the alternative to litigation and in particular the part of commercial and contractual dealings. Promoted as a quicker, confidential and party-driven way of resolving disputes, arbitration has received legislative and judicial support through reforms and pro-arbitration approaches in courts in India. By the passage of the Arbitration and Conciliation Act in 1996, as amended, arbitration has become a viable, structured and systematic way of resolving disputes that comport with international best practices.
This article proposes to undertake a comparative approach to arbitration versus litigation for contractual disputes within the Indian legal system. It will set out the basic differences that arise from the two including procedural control, enforceability, cost, neutrality and finality.
CONCEPTUAL UNDERSTANDING
What is Arbitration?
Arbitration is an alternative means of resolving disputes whereby the parties agree to appoint one or more neutral arbitrators to resolve their dispute outside of the court system. Under the Arbitration and Conciliation Act, 1996 an Act which follows the UNCITRAL Model Law-arbitration applies to both domestic and international commercial disputes.[1]
The arbitration would generally be conducted as per a written arbitration agreement—usually within a contract, which specifies the seat, the agreed-upon rules, number of arbitrators, timeframe, and procedures. According to Section 7, the arbitration agreement may take written form, regardless of whether it is included in the principal agreement itself, in a separate document, or in correspondence emissions.[2]
When arbitration is initiated, the parties appoint arbitrators (or apply to the Chief Justice of a High Court for appointment), make statements of claim and defence (and may submit further evidence), and have hearings. The tribunal issues a binding award that is enforceable in the same manner as a court formation judgment, subject to limited review and/or intervention by courts under Section 5 and Section 34.
Arbitration has the advantages of procedural flexibility, confidentiality, party autonomy with respect to decision-makers, and a tendency for processes to occur quicker than court processes. Arbitrations are governed, as a private, self-regulated process, and generally created to accommodate the nature of the dispute and/or jurisdiction. Nevertheless, the arbitrated process must withstand the judicial process when enforcement and/or vacatur of awards is sought.[3]
What is Litigation?
Litigation is a formal legal process by which parties take disputes to a law court. In India, civil litigation of contracts is governed by the Code of Civil Procedure of 1908, which prescribes procedural rules including the commencement of a suit (the process for starting a dispute), trial procedures, and the mode of execution of a decree.[4]
The courts in India have a hierarchical structure with District Courts at the bottom, High Courts at the State level, and the Supreme Court of India at the top.[5] Most contractual disputes that are litigated start in the District Courts unless either the value or nature of the contract gives an original jurisdiction to the High Court.³ In addition, specialized tribunals such as the National Company Law Tribunal (NCLT) or Consumer Forums, may determine certain contractual matters.[6]
Litigation provides a remedy that is judicially enforceable, and with the benefit of precedent, it is criticized for the lengthy court processes, the backlogged court system, and the formal nature of the courtroom, all of which can lead to delays in the resolution of commercial disputes.
COMPARATIVE ANALYSIS
Arbitration and litigation are the two key mechanisms for the resolution of contractual disputes, and have their own sets of advantages and disadvantages. In India, in light of continuing delays in commercial/civil litigation and a movement towards alternative dispute resolution.
Litigation operates within a formal judicial framework, governed by the Code of Civil Procedure, 1908.[7] Dispute resolution occurs in a hierarchy that starts with substantive subordinate courts and continues to include High Courts, then to the Supreme Court of India. Litigation involves the filing of pleadings, evidence and cross-examination, and is followed with a judicial ruling, and potentially by appeal. Although litigation has the advantages of procedural fairness and the ability to appeal, this often comes with considerable delays because of congestion on the court dockets, frequent delays, and adherence to the letter of procedural rules.
On the other hand, arbitration operates under the system outlined by the Arbitration and Conciliation Act, 1996,[8] which provides for a more flexible and time effective system. In arbitration, the parties determine their rules for the procedure, the seat of arbitration and even appoint expert arbitrators. This flexibility enables resolution of disputes relative quickly, as arbitral proceedings are structured in a manner that captures the essence and avoids the
procedural complexities of trials in court. Section 19 of the 1996 Act states that the arbitral tribunal is not bound by the Code of Civil Procedure or the Indian Evidence Act.[9]
The cost factor raises a more complicated issue than some people might think. Most would say that arbitration is cheaper with quick resolution and it often is, but not always. Arbitrator fees, institutional fees, and simply the cost of the venue can lead to arbitration being a costly thing especially in ad hoc arbitration situations or when very senior professionals are engaged by the parties. Litigation, on the other hand, involves a processing of court fees that are predictable and limited, as well as regulated advocate fees which helps with predictability of overall costs in the long-term if the time it takes is longer. The 246th report of the Law Commission noted the idea that arbitration at times can become more costly than litigation when there is delay or parties appoint high fees arbitrators.[10]
The second significant distinction is confidentiality. The arbitration process is private and the arbitral award is also kept from the public unless they case is taken to court to challenge enforcement. This is particularly helpful in commercial matters where the parties may prefer to avoid publicity and keep any proprietary or reputational interests in private.
It is also important to note that litigation is public. Courtrooms are public and judgment letters are public documents, which could lead to revealing sensitive contractual information. The High-Level Committee (2017) looking into arbitration reforms in India recommended that confidentiality protections ought to be strengthened. In 2019 the Act was amended to include Section 42A which requires confidentiality for arbitral proceedings.[11]
The enforceability of outcomes is yet another comparative dimension. Judgments by the court are enforceable across India, and if recognized by bilateral treaties, in foreign jurisdictions. Arbitration awards, in particular those made in accordance with the New York Convention and the Geneva Convention, are generally enforceable internationally, thus better for cross-border contracts. India is a party to both treaties, and has notified a number of countries as reciprocating places with respect to any enforcement action under Part II of the Arbitration Act. Yet, enforcement of arbitral awards in India still requires the assistance of the courts, and, at times, delays related to enforcement action discredited the effectiveness of arbitration.
Litigation entails judicial intervention, while arbitration is meant to limit such intervention. Section 5 of Arbitration and Conciliation Act incorporates a legislative desire to limit court intervention only to the cases provided for in the Act. Despite this, the courts in India have sometimes intervened in arbitration, and especially at the appointment of arbitrators and in considering challenges under Section 34. While there are recent decisions like Vidya Drolia v. Durga Trading Corp.,[12] which are encouraging with respect to a pro-arbitration stance, [but] there are concerns of inconsistent decisions at [the] lower court level, and delayed procedures in litigation, even when related to arbitration.
As a result, the decision whether to arbitrate or litigate must be context specific. When confidentiality, timeliness, and expertise are of primary importance, arbitration is optimal – especially when parties are crossing borders. Conversely, when parties’ goals entail considerable oversight by appellate courts, seek the judicial legitimacy of public process, or are more comfortable pursuing a high degree of control over costs, litigation is preferred. India is moving towards a point in the development of its legal infrastructure where arbitration and litigation can coexist with substantial levels of interaction and converging processes, mainly through the courts’ resourcing of arbitration, and courts’ recognition of arbitral outcomes.
CURRENT CHALLENGES AND CRITICISM
Arbitration has gained traction as a form of alternative dispute resolution in contractual disputes but is not without substantial issues and criticisms. One frequently cited problem has been the exorbitant costs of arbitrating complex matters. The widespread understanding of arbitration that it is more cost effective than litigating is questionable, as hiring and paying arbitrators, especially senior counsels (or retired judges), administrative fees from an institution, expert witness fees, and room rental fees can easily exceed the total costs collected in traditional litigation, typically.[13] Further complexity is also primary in ad hoc arbitrations where no common fee structure exists this added element of unpredictability compounds the costs of arbitration.
Delays in arbitration are a further feint in the very purpose of arbitration being timely. Although arbitration is designed to be timely, complex almost always means three member tribunal, lengthy witness examination, duplicated documentation, or otherwise tactical use of the flexibility afforded by the parties to the arbitration, results in delay longer than what would occur in a court. Further complicating matters is the frequency at which arbitrators—specifically arbitrators appointed as they are extremely busy in their legal practices, are able to provide in their schedules to be sensitive to scheduling. This means pre-empting adjournments. The misuse of process by tribunals has prompted comments by judges for more protection by timelines and added to changes in the Arbitration and Conciliation Act by the 2019 amendments to the same to provide timelines under part I and in particular timelines appearing under Section 29A.[14]
Another issue associated with limited opportunities for appeal under arbitration law is the narrow grounds upon which awards can be set aside set out in Section 34 of the Arbitration Act. These grounds can include incapacity, procedural irregularity or a violation of public policy. While this is helpful for finality and efficiency, given that you cannot seek to correct an error of law or fact through a substantive appeal in a high-value dispute, it generates concerns about error correction and even miscarriage of justice.
Additionally, bias is a concern for the parties. Where each party chooses its own arbitrator here, issues around bias (especially conscious or unconscious bias) often arise. This is especially true in particular sectors with small or tightly connected pools of available arbitrators. Although the courts have emphasized the duty of impartiality found in section 12 of the Act, there is inconsistent judicial enforcement.
Inconsistent judicial patience from lower courts remains a barrier to the arbitration process. While the CAA suggests that the legislature wants to restrict intervention by courts, trial courts often allow challenges to jurisdiction that are sometimes premature, while enforcement proceedings get delayed which undermines the finality intended by the arbitral process. The Supreme Court has repeatedly noted the risks of these behaviours however implementation is clearly very inconsistent across jurisdictions.
CONCLUSION
Amid changes to dispute resolution in India, litigation and arbitration will continue to play critical and different roles in resolving contractual disputes. While litigation has legal certainty, state enforcement, and public accountability, its procedural rigidity and significant delays discourage parties—especially where complex commercial disputes need to be resolved quickly by experts and with confidentiality.
Arbitration has emerged as a preferable mechanism, even more so with the introduction of an element of control over the process afforded to the parties, especially as arbitration incorporates party autonomy, flexibility, confidentiality, and cross-border enforceability. Its stature as a legitimate mode of resolution, particularly as it pertains to arbitration aligned with domestic and global best practices within comparative legality parity increases its allure with international engagements involving key territories. After remarkable developments in regard to progressive legislative reforms over the past 10 years, arbitration, and specifically institutional arbitration will play a dominant role in addressing contracts that demand legal resolution.
Challenges to arbitration persist. Costs have risen, procedures require more time, an appeal remains limited, and an applicable standard in which impartiality is viewed must also be addressed. While, rules exist regarding the constituition of tribunals in arbitration, they just need to be fully embraced by the sector in terms of implementing resolution impasses, which could be remedied with commitment and a standard.
When choosing to arbitrate or litigate, many aspects of the contract need to be considered, such as the complexity and value of the dispute, the nature of the contract and relationship, how confidentiality is to be achieved, and respect accorded to the process and level of control required, to ensure that any decision is perceived as legitimate settlement that concludes the dispute. Therefore, a viable option may be to create a hybrid and contextual model to reflect a contracted tiered dispute resolution regime incorporating negotiation, mediation, and finally arbitration, with litigation as the last resort only if all other measures have failed.
While improving institutional arbitration, rationalizing costs is an important part of fostering future relations with users in the broader context of sustainable tourism development and the organisational investor organisation systems supporting that goal.
REFERENCES
- Code of Civil Procedure, No. 5 of 1908, INDIA CODE (1908).
- Arbitration and Conciliation Act, No. 26 of 1996, INDIA CODE (1996).
- Law Commission of India, Report No. 245, Arrears and Backlog: Creating Additional Judicial (Wo)manpower (2014).
- Law Commission of India, Report No. 246, Amendments to the Arbitration and Conciliation Act, 1996 (2014).
- Ministry of Law and Justice, Report of the High-Level Committee to Review Institutionalisation of Arbitration Mechanism in India (2017).
- Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, No. 4 of 2016, INDIA CODE (2016).
- Constitution of India, arts. 132–136.
- New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3.
- Sumeet Kachwaha, Costs in Arbitration: A Comparative Analysis, Asian Disp. Rev., Apr. 2020, at 24.
- Pankaj Jaiswal, Delays in Arbitration: Causes and Remedies, (2021) 3 SCC J-45.
- Vidya Drolia v. Durga Trading Corp., (2021) 2 S.C.C. 1 (India).
[1] Arbitration and Conciliation Act, No. 26 of 1996, Statement of Objects and Reasons.
[2] Arbitration and Conciliation Act, supra note 7, sec 7.
[3] Sumeet Kachwaha, “Arbitration in India,” in Asian Dispute Review, April 2020, at 24–26
[4] See INDIA CONST. art. 124–136 (Supreme Court); art. 214–227 (High Courts); Code of Civil Procedure, supra note sec 1, & sec 3.
[5] Bose v. Atmaram, (2006) 13 SCC 709 (India) (discussing original civil jurisdiction of High Courts).
[6] Companies Act, No. 18 of 2013, sec 408 (NCLT); Consumer Protection Act, No. 35 of 2019, sections 34, 47, 58 (District, State, and National Commissions)
[7] Code of Civil Procedure, No. 5 of 1908, INDIA CODE (1908), sec 9–11, 26–35B.
[8] Arbitration and Conciliation Act, No. 26 of 1996, INDIA CODE (1996).
[9] Id. sec 19.
[10] Law Commission of India, Arrears and Backlog: Creating Additional Judicial (Wo)manpower, Report No. 245, (2014)
[11]Ministry of Law and Justice, Report of the High-Level Committee to Review Institutionalisation of Arbitration Mechanism in India, (2017)
[12] Vidya Drolia v. Durga Trading Corp., (2021) 2 SCC 1 (India).
[13] Sumeet Kachwaha, “Costs in Arbitration: A Comparative Analysis,” Asian Dispute Review, April 2020, at 25–27.
[14] Arbitration and Conciliation Act, No. 26 of 1996, sec 29A (as amended in 2019)
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