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Introduction
In the previous article, of which this is a continuation, we saw the process as to how an Arbitration Clause is invoked and what should be done to have arbitration at a place which is nearby. Further we saw other intricacies as to how to make a party come to arbitration and attend its proceedings.
In this article we will see arbitration from two different angles. One will be the perspective of the Respondent, a party which you want to settle your dispute in Arbitration, and why they generally avoid Arbitration. The resistance is so high that the Delhi High Court has One Bench specifically dedicated to the hearing of Section 11 (6) petitions.
The other perspective will be the of a company or a person who have not signed an Arbitration Agreement/Clause with the Claimant and can it be forced to attend Arbitration.
So, keeping these two perspectives in mind let’s begin from where we left.
Brief Facts Continued
Some dispute arose between the parties and A resorted to arbitration which was opposed by C. Hence A filed a petition under Section 11 (6) of Arbitration and Conciliation Act, 1996 in Madras High Court for appointment of an arbitrator. But it also included C as a party despite C not being a signatory to the arbitration agreement. But despite this Madras High Court allowed appointment of arbitrator and sent A, B & C to arbitration on the ground that the directors of B&C are same and both B&C have their offices at the same residence, hence an agreement signed by B can be considered to be signed by C as well.
This was challenged by C before the Honourable Supreme Court.
But why is C challenging this order which sends it to the arbitration? Why does not it simply go to arbitration?
For this we have to understand what arbitration is and what its nature is
Arbitration is a mechanism of dispute resolution in which the parties rather than fighting their case in a court of law goes before a person who is called an Arbitrator or Arbitral Tribunal. It is not necessary, though it’s common, that an Arbitral Tribunal will only have a Sole Arbitrator and it may consist of more than a person in odd numbers (Three or Five). The advantage of going to arbitration is that the long time taken to decide a case in a Court is shortened in arbitration, as according to the Section 29A Arbitration and Conciliation Act, the Arbitral Tribunal has to decide a dispute within one year of its appointment. For this reason arbitration is also called Alternative Dispute Resolution.
Some people confuse Arbitration with Conciliation or Mediation, but they are different. While in the later two methods parties try to settle their dispute and are trying to find a middle path which suits both parties, in Arbitration parties fully fight their cases and there is either victory of one party or it’s defeat (unless of course they come to a compromise or settlement during arbitration proceedings).
But then why does a party wants to run away from Arbitration?
Shortfalls of Arbitration
The problem with sending a party to arbitration is that the rigorous procedure of law which a Court follows is not followed in the case of arbitration. The proceedings in arbitration are generally of informal nature. Even nowadays most of the arbitrations are held through video conferencing.
Secondly even the party who has not filed the case (called the Respondent) have to pay the arbitrator’s fees. This doesn’t not happen in the case of the Court proceedings. Let’s see it from the above example of you and the Contractor. Let’s say there is no Arbitration Clause and you directly approach the Court for recovering a sum of Rs. 20,00,000 ( Rupees Twenty Lacs Only) in damages against the Contractor, then you have to pay Court Fees worth Rs. 21,864/- into the Court (This Court Fees varies from State to State). Not a single dime is to be paid by the Contractor.
Now if there would have been an Arbitration Clause and you have approached an Arbitrator for the same Rupees Twenty Lacs, then as per IV Schedule of the Arbitration and Conciliation Act, the total fee payable to the Arbitrator would be Rs. 97,500/- (Rupees Ninety Seven Thousand Five Hundred Only). This fee does not include the administrative expenditure which is incurred in the conduct of the proceedings and they will be separately charged from parties. Further as per the number of persons in the Arbitral Tribunal this fees can vary. Here the most important aspect is that both, you and the Contractor, each have to pay half the fee.
3rd problem with arbitration is that if the arbitrator gives wrong decision or conduct proceedings in an irregular manner, the grounds of challenge are very limited and even courts do not like to interfere with it even under Article 226 and article 227 of the Constitution of India.
4th issue with arbitration is that most of the arbitrators have not been able to complete arbitration and pronounce award within the time stipulated i.e. 1 year and in some cases arbitration is prolonged for even more than 3 years, hence defeating the very logic which gave birth to it.
These are the reasons why a party generally opposes going to arbitration.
Should a Non Signatory be forced into Arbitration
Now the question which should be asked is, can a party which has not signed an Arbitration Agreement be forced into arbitration?Hon’ble Supreme Court very clearly says no and hence has decided this case in favour of C on the following grounds.
One of the grounds is that only because 2 companies have same director or same set of shareholders or same office does not mean that both are same. Because when a company is incorporated under Companies Act, 2013 it becomes a separate entity and only because B is the promoter of C does not mean B&C are one and same. This has been very lucidly explained in Sudhir Gopi V/s Indira Gandhi National Open University and Anr. [O.M.P. (Comm.) 22/2016] by Delhi High Court. (This judgment is about lifting of Corporate Veil which says that the Court cannot connect the acts of one company with its shareholders or directors or promoters or parent company unless there are compelling reasons, like fraud, to do so. As this is an exhaustive topic in itself and I don’t want to stray from our topic of arbitration, I have only succinctly dealt with it).
Second the scope of Section 11 (6) petition is very limited. When Madras High Court decided that B&C are in collusion and hence C should be compulsorily sent to arbitration it committed a gross error of law. The scope of section 11 (6) is only summary. Summary necessarily means very short or small. As per Constitution Bench (7 Judge Bench) of Hon’ble Supreme Court in S.B.P. & Co. V/s Patel Engineering Ltd. & Anr. [2005 (8) SCC 618] very clearly laid down that in an Arbitration petition a Court can only see two things.
Firstly whether there is an arbitration agreement between the parties. Secondly, whether the parties have approached the right High Court (Like in the above Contractor dispute which arose in Delhi, parties cannot approach Bombay High Court and they must resort to the jurisdiction of Delhi High Court). If these two conditions are not met the court is not entitled to send the parties to arbitration. As is the case here, C has not signed the arbitration agreement and hence it’s not a party to the arbitration agreement. So first condition of sending the party to arbitration is not met and hence Madras High Court could not send it to the arbitration. In default of first condition it is not necessary to look into the second condition.
So we saw that as per the test laid down in SBP & Co. supra, Hon’ble Supreme Court set aside the order of the Madras High Court and declined to send C to arbitration.
Conclusion
Assume you purchased a house from a Builder/Seller and the contract specifically mentions that in case of dishonesty by any party, arbitration will be resorted to. The Builder/Seller will always be wary of any breach or shrewd tactics as arbitration will settle the dispute within one year.
That’s why we concentrated on Arbitration in this and the previous Article and saw it from both point of views i.e. Claimant (the person who starts Arbitration) and the Respondent (who answers the Claimant’s claim). The aim of these Articles is to illumine the readers about the benefits of the Arbitration as well as its pitfalls, because it is here to stay as more and more people are resorting to it. There is no doubt that its knowledge will surely make people aware as to the importance of Arbitration Clause as a deterrent to dishonesty by other parties.
Parveen Semwal
Advocate, High Court of Delhi and Supreme Court of India