National Law Institute University

Bhopal

ALTERNATIVE DISPUTE RESOLUTION

Ninth Trimester
2011

Topic: Arbitration in Corporate Disputes

Submitted to: Made by:

Prof. (Dr.) S. Surya Prakash Katyayini Sharma
Professor of Law 2008BALLB 12
INDEX

S.NO. TOPIC PAGE

NO.

1. INTRODUCTION………………………………………................3-4

2. ARBITRATION MECHANISM…………………………………5-6

3. APPOINTMENT OF AN ARBITRATOR BY THE COURT…7-9

4. IS ARBITRATION BETTER SUITED TO GET

CORPORATE DISPUTES RESOLVED? ..................................10-12

5. CONCLUSION……………………………………………………13

6. BIBLIOGRAPHY…………………………………………………14

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INTRODUCTION

Despite the diversity of business activities and trading entities, there are nonetheless a
number of common threads. What defines or distinguishes most if not all of the
businesses is the importance of the skills, knowledge and reputation of the individuals
who make up or run the entity, and the fact that the proprietors/shareholders are also
the managers who carry out the day to day business of the entity. Another common
factor is the close relationship and implicit trust between the proprietors and between
the proprietors and their clients or customers. There is also in professional businesses
an overlay of regulation by and standards imposed by a professional body, the breach
of which often constitutes grounds for expulsion of a proprietor from the business.

A dispute within such entities cannot easily be side-lined or determined as it might be

in a mega corporation or medium-sized business, with the individuals concerned
resigning or being dismissed and being escorted off the premises, whilst the faceless
entity carries on with replacement managers or executives, with the perception of
outside world unaffected. Rather, in partnership and professional practice disputes the
very constituent (proprietors/managers) of the business entity are themselves in
dispute with one another destabilizing the business as a whole from within. In some
cases, all of the proprietor/managers and in due course many of the staff fall under a
malaise of uncertainty, jealous and mistrust, turnover plummets and the reputation
and goodwill of the business are affected, particularly when disaffected or
disheartened individuals start looking for alternative employment or share their woes
and opinions with colleagues and acquaintances both inside and outside the business.

Common contributing factors to such a malady are diminishing profits, top-heavy

proprietor/management structure, the dominance of a group or an individual reluctant
to share power and rewards, proprietors split down the middle by divergent interests,

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ambitions or agendas, or imbalance or perceived imbalance between individual
contributions to the business, by way of turn-over, reputation or management.

Unless there is an express bar under law and when there is an arbitration agreement
either express or implied, a dispute between or among the parties can be referred to an
Arbitrator or panel of Arbitrators as specifically agreed to. As everybody knows,
Alternative Dispute Resolution Mechanism is mooted to reduce the burden in
traditional courts and for providing a speedy relief to the parties. Arbitration and
Conciliation Act, 1940 was repealed and Arbitration and Conciliation Act, 1996 was
enacted with certain changes and improvements.

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ARBITRATION MECHANISM:

When there is an agreement between or among the parties, the agreement can contain
a clause saying that the disputes between or among the parties in the course shall be
referred to an Arbitrator. The clause in any Arbitration agreement can be detailed with
regard to the number of arbitrators, the place of arbitration, the procedure to be
followed and also the cost of Arbitration. Even in the absence of any agreement and
clause, if the parties mutually agree to refer a dispute between or among those to an
Arbitrator, then, such a dispute between or among the parties can be referred to an
Arbitrator.

In all cases, unless there is a specific bar, the parties or the litigants are free to have
their own say in getting an arbitrator appointed, place of arbitration, the procedure to
be followed by arbitrator, the reference of dispute and also costs of Arbitration. The
Arbitration and Conciliation Act, 1996 governs the issue of Arbitration or dispute
resolution through Arbitration and conciliation and as such the parties to the dispute
and even the Arbitrator shall follow the said Act. When there is an Arbitration
Agreement between or among the parties and even then if a party do not co-operate in
getting an Arbitrator appointed, then, the Court can interfere and appoint an Arbitrator
under section 11 of Arbitration and Conciliation Act, 1996.

In view of the rights of the parties and the urgent situations, even before getting an
Arbitrator appointed under section 11, a party can approach the Court under section 9
of Arbitration and Conciliation Act, 1996 seeking an interim relief. In the absence of
section 9 providing an opportunity to a party to approach the Court to get urgent
interim orders, the litigant may become remediless at times.

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Once an Arbitrator is appointed by the Court or by the parties to the dispute
themselves, then, the Arbitrator will proceed to decide the dispute before him
following the procedure agreed or as he wishes. There is no compulsion on the
Arbitrator to follow Civil Procedure Code, 1906, but, the Arbitrator is bound by the
principles of natural justice.
The Arbitrator is bound to observe substantial law and substantial law can not be
ignored even by the Arbitrator and he will be having no discretion in applying
substantial law to the dispute before him.

The order or the award passed by the Arbitrator can be appealed against under section
37 of the Arbitration and Conciliation Act, 1996. On certain grounds, an aggrieved
party can choose to file an application under section 34 of Arbitration and
Conciliation Act, 1996 to set-aside an order or an award. The order or the award of
the Arbitrator is similar to a court order and the decree and the order or the award as
the case may be, can be executed like an order of court or a decree of a civil court.
The Arbitration Clause in the agreement or a specific Arbitration Agreement between
or the among the parties, precludes him in approaching a Civil Court and in view of
the bar under section 8 of the Arbitration and Conciliation Act, 1996, the Civil Court
will refer parties before it to Arbitration when the existence of clause or the agreement
is pointed-out.

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APPOINTMENT OF AN ARBITRATOR BY THE COURT

Once it was settled that a Court exercising jurisdiction under section 11 of Arbitration
and Conciliation Act, 1996, discharges only an administrative function. But, the
proposition was changed and now it is settled that a court under section 11 of
Arbitration and Conciliation Act, 1996 exercises judicial functions and it is pursuant to
the landmark judgment rendered by the Hon’ble Supreme Court. The general rules
applicable to appointment of Arbitrator through court, are applicable to the
appointment of Arbitrator by court under section 11 even if the dispute to be referred
is a corporate dispute or company litigation.

The dispute resolution through Arbitration has become very costly though we can see
that there is no need of payment of court fee when a dispute is resolved through
Arbitrator. In view of compulsory procedures and other inevitable difficulties, an
Arbitrator too can have many hearings before a final award is passed. Like court, it is
very difficult to ascertain the time to be taken for getting dispute resolved by an
Arbitrator in most cases. It depends upon the complications in the case, the co-
operation rendered by the parties and the advocates representing them and further
proceedings in-between like preferring applications under section 34 of the Act.

For each hearing before an Arbitrator, the parties to the dispute should bear the costs
like sitting fee of an Arbitrator, the cost of place of Arbitration and other incidental
expenses apart from professional fee to be paid to the legal professionals or
professionals. In many cases, it is proved that dispute resolution through Arbitration is
very costly and even the Hon’ble Apex Court has rendered judgments on the aspect.

In view of the costs involved and other issues which are on logical footing, the
Hon’ble Apex Court has said that the Court while exercising jurisdiction under
section 11 of Arbitration and Conciliation Act, 1996, can look into the issues as to

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whether there exist any arbitration agreement, whether there is any live claim,
whether the dispute is capable of being arbitrated upon etc.

Earlier, there was an argument that all issues or challenges can be made to the
Arbitrator under section 16 of Arbitration and Conciliation Act, 1996 and as such
there was no need of looking into the arguments of the parties even before the
Arbitrator is appointed. But, in view of the costs involved and the unnecessary risk to
be taken by the parties, the proposition is now set that the Chief Justice exercising
functions under section 11 of Arbitration and Conciliation Act, 1996 discharges
judicial functions and can look into certain important issues even before the Arbitrator
is appointed.

In the case of Bharat Sanchar Nigam Limited and Anr. V. Dhanurdhar Champatray1,
the Court held that a plain reading of section 11(6) of the Arbitration and Conciliation
Act, 1996, would show that if one party demands appointment of an arbitrator from
the opposite party and opposite party does not do the same within thirty days of such
demand, the right of appointment at the instance of one of the parties is not
automatically forfeited. If the appellant makes an appointment even after thirty days
of demand but the first party has not moved to the court under section 11, that action
on the part of the appellant would be sufficient. In other words, in cases arising under
section 11(6), if the respondent has not made an appointment within thirty days of
demand, right to make an appointment of an arbitrator is not automatically forfeited
but continues but such appointment shall be made before the other party files an
application under section 11 seeking appointment of an arbitrator before the High
Court.

Also, in the case of Ace Pipeline Contracts Private Limited v. Bharat Petroleum
Corporation Limited2, the court held that it has been clearly given in sub-section 6
that where the procedure has already been agreed upon by the parties and in that event
if a party fails to act as required under the procedure or the parties or the two
appointed arbitrators, fail to reach an agreement expected of them under that
procedure or a person, including an institution, fails to perform any function entrusted
to him or it under that procedure, a party may, in that event, request the Chief Justice
or a person or an institution designated by him to take necessary measures unless the

1
2010(1) Arb. LR 280(SC)
2
(2007) 5 SCC 304

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agreement on the appointment procedure provides other means for appointment of
arbitrator. Therefore, so far as the period of thirty days is concerned, it is nowhere
mentioned in sub-section (6). The period of limitation is mentioned in su-section (4)
and (5) of section 11.

In the cases of International Commercial Arbitration , the appointment or sole or third

arbitrator is done by Chief Justice of India or the person or institution designated by
him may appoint an arbitrator of a nationality other than the nationalities of the parties
where the parties belong to different nationalities. Thus, in the case of Denel
(Proprietary) Limited v. Bharat Electronics Ltd. and Anr 3, the appointment of the
arbitrator was done by the Chief Justice of India where the dispute was between a
company wholly owned and incorporated in the Republic of South Africa and the
other party was Ministry of Defence under the Govt. of India. And there was a dispute
regarding the appointment of the arbitrator.

.As such, the court exercising jurisdiction under section 11 of Arbitration and
Conciliation Act, 1996 discharges judicial functions.

3
2010(2) Arb. LR 431 (SC)

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IS ARBITRATION BETTER SUITED TO GET CORPORATE DISPUTES
RESOLVED?

A corporate dispute can not be seen at par with other civil disputes. There will be lot
of urgency in getting a corporate dispute resolved and the stakes will be more in many
cases. If we don’t consider the proposed companies bill, at present, a corporate dispute
can be adjudicated by the competent Civil Court at times, the Company Law Board
and the Company Court. Despite getting a special tribunal like Company Law Board
constituted, there tend to be some delay in disposal of disputes and it may not be solely
attributed to the functioning of the Company Law Board and even the Tribunal in
future. But Not all corporate disputes be referred to an Arbitrator and in certain cases
even the express arbitration clause, can not oust the jurisdiction of a Company Law
Board or a Company Court. But one fact that is always accepted when cases are solved
through arbitration is A corporate dispute resolution through Arbitration is certainly
costly.

Again, there is a proposition that an arbitration clause or agreement can not oust the
jurisdiction of Company Law Board and the Company Court. The proposition laid
down by the Courts and followed is on logical footing. For example, there can not be
any alternative to an application under section 397/398 of the Companies Act, 1956
and a petition to the Company Court seeing to wind-up the Company. However, if
there is dispute solely based on a share-purchase agreement, then, such a dispute can
definitely be resolved through arbitration. Giving clarity on the issue as to which all
the corporate disputes can be resolved through Arbitration is a complicated exercise.

Normally, as everybody knows, Arbitration proceedings are so costly and it is very

costly when the dispute to be resolved is a corporate dispute. In corporate disputes,
normally, an expert corporate lawyer or a judge having experience of deciding
corporate disputes is appointed or selected as an Arbitrator or Arbitrators. In view of

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many other consequential things, a corporate dispute resolution through Arbitration is
more costly. However, the companies or the corporates will be willing to bear the
costs as corporates value time rather money.

Even if the dispute to be resolved is a corporate dispute, there tend to be delay if the
parties or the professional representing parties do not co-operate for a speedy disposal
of dispute. But, when the parties to a corporate dispute are keen in getting their
dispute resolved, then, Arbitration Mechanism is certainly useful for them.

In the matters where Govt. Companies are involved in public undertakings, there
position has always been vulnerable. It has been held in the case of Bharat Sanchar
Nigam Limited v. Telehone Cables Ltd.4 that public undertakings by the govt.
companies are subjected to more and more vexatious litigation and other travails
which their competitors in the private sector generally do not face. When the public
undertakings used to have monopoly and discharged public duties, control by the
government and legislature and judicial review by the judiciary was an absolute
necessity to safeguard public interest and ensure transparency and accountability. But
when the public undertakings are required to compete with private sector, in
commercial areas, controls by the executive and legislature (sometimes referred to as
political bondage) and judicial review of their action became a handicap which
impedes their progress. A public undertaking is required to ensure fairness, non-
discrimination and non-arbitrariness in their dealings and decision making progress.
Their action is open to review and scrutiny under the Right to Information Act, 2005.
They are required to take out advertisements and undergo elaborate and time
consuming selection processes, whether it is purchase of materials or engaging of
contractors or making appointments. Just to ensure that everyone is given a fair and
equal opportunity, public undertaking are required to spend huge amounts and
enormous time in elaborate tender processes. A proposal for a purchase of the value
of Rupees Ten lacs may involve a material procurement expenditure of Rupees Two
lacs in advertisement and tender evaluation cost and a total tender process period
ranging from three to six months. A competing private undertaking can go straight
into market and negotiate directly and get the same material for Rupees Five lakhs
without any expenditure in a week. Public undertakings to avoid being accused of
mala fides, bias or arbitrariness spend most of their time and energy in covering their
4
2010(4) Arb. LR 218 (SC)

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back rather than in achieving development and progress. When courts grant stay, the
entire projects or business stands still or gets delayed. Even if the stay is ultimately
vacated and the complaint is rejected as false, the damage is done as there is
enormous loss to the public undertakings in terms of time and increase in costs. The
private sector is not open to such scrutiny by Courts. When the public sector is tied
down by litigants and controls, the private sector quietly steals a march, many a time
at the cost of public sector. In these circumstances arbitration becomes a very good
option where the parties are allowed to go on with the arbitration proceedings as per
their schedule and without hampering the continuity of the work.

One more advantage of solving corporate disputes through arbitration is that once an
arbitration agreement is signed between two different companies, it becomes very
certain as to who is to be held liable while in litigation, any party howsoever related
can be drawn into proceedings and even if later they are not held as liable, it results in
a loss of wastage of time and money. In the case of Indowind Energy ltd. v.
Wescare(I) Ltd. and anr.5, had there not been an arbitration agreement between
Subuthi and Wescare, Indowind would have unnecessarily been a party to the
litigation proceedings. In the present case, only Subuthi and Wescare had signed the
arbitration agreement, Subuthi being promoter of Indowind. Wescare wanted to make
Indowind a party to the arbitration proceedings on the basis that the Board of
Directors of both the Companies is same but the Court held that company is a separate
legal entity and the BoD never signed the agreement on the behalf of Indowind.
Therefore, Indowind not being a party to the agreement cannot be a party to the
arbitration proceedings.
The speedy disposal of a corporate dispute depends upon the complications in the
case, the bonafides on the part of the parties in getting the dispute resolved early and
the co-operation rendered by the professionals representing parties before the
Arbitrator.

5
2010(2) Arb. LR 232(SC)

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CONCLUSION

Not all corporate disputes be referred to an Arbitrator and in certain cases even the
express arbitration clause, can not oust the jurisdiction of a Company Law Board or a
Company Court and also, a corporate dispute resolution through Arbitration is
certainly costly. But arbitration is these days a preferred mechanism to solve the
disputes between two companies especially when the work which they carry out
affects not only their own position but also the public at large. So rather than delaying
the work and keeping it pending for the time when the litigation is going on between
the two parties, parties prefer to choose arbitration where they can decide each and
everything related to arbitration by their own wish
The general rules applicable to appointment of Arbitrator through court, are
applicable to the appointment of Arbitrator by court under section 11 of the
Arbitration and Conciliation Act, 1996 even if the dispute to be referred is a corporate
dispute or company litigation. The parties are overall governed by the provisions of
Arbitration and Conciliation Act, 1996 in every area of arbitration. In an international
commercial transaction, it depends on the parties as to which law they want to be
governed by.
The speedy disposal of a corporate dispute depends upon the complications in the
case, the bonafides on the part of the parties in getting the dispute resolved early and
the co-operation rendered by the professionals representing parties before the
Arbitrator.

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BIBLIOGRAPHY

BOOKS:

 Malhotra O.P. “ The law and Practice of Arbitration and

Conciliation”, 2006, 2nd Edn.
 Bansal Ashwini Kumar “Arbitration agreement and Awards- Law
of International and Domestic Arbitration”, Universal Law
Publication, 2nd Edn.

WEBSITES

 www.taxguru.in
 www.indlaw.com
 www.manupatra.com

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