Understanding Arbitration: Meaning, Agreement, Advantages &
Disadvantages
Introduction
Disputes are a common
part of life—whether in business, contracts, property, employment, or services.
Traditionally, such disputes are resolved in courts. However, due to delays,
high costs, and public exposure in court proceedings, people often look for
alternative dispute resolution methods. Arbitration is one of the most
popular and effective alternatives.
This article explains what
arbitration is, the concept of an arbitration agreement, its types,
and the pros and cons of choosing arbitration over traditional court
litigation.
What is
Arbitration?
Arbitration
is a legal process where a dispute is resolved by an impartial person known as
an arbitrator, rather than a judge in court. The arbitrator hears both
sides of the case and then makes a decision, called an award. This award
can be binding (final and enforceable) or non-binding (advisory
only, unless both parties agree to accept it).
Key Features of
Arbitration:
- It is conducted outside the court.
- The process is less formal
than a trial but follows a structured procedure.
- The arbitrator listens to evidence
from both parties.
- Only one side wins—like in
court cases.
- Parties often agree beforehand
to resolve disputes through arbitration.
- It can involve one or multiple
arbitrators (usually three in complex cases).
- Hearings usually take place in offices
or meeting rooms, not in courtrooms.
In binding arbitration,
parties must follow the arbitrator's decision. In non-binding arbitration,
the decision is only a suggestion unless both parties accept it.
What is an
Arbitration Agreement?
An arbitration
agreement is a written agreement between two or more parties to resolve
their disputes through arbitration rather than going to court. This agreement
is the foundation of arbitration. Without such an agreement, the
arbitration process cannot take place.
Legal
Definition:
According to Section
7(1) of the Arbitration and Conciliation Act, 1996 (India):
"Arbitration
agreement means an agreement by the parties to submit to arbitration all or
certain disputes which have arisen or which may arise between them in respect
of a defined legal relationship, whether contractual or not."
This means that the
parties must clearly express their intention to refer disputes to
arbitration. Vague language like "may refer" is not valid, while
clear phrases like "shall refer" are valid and enforceable.
Important Points About
Arbitration Agreements:
- Clear consent
is essential. If it’s unclear whether parties agreed to arbitrate, the
court may not enforce it.
- Only the parties who signed the
agreement can be bound by it.
- It is often included as a clause
in a contract.
- The arbitration agreement can survive
even if the main contract becomes invalid, due to the Doctrine
of Severability.
Types of
Arbitration Agreements
There are different ways
an arbitration agreement can come into existence:
1. Arbitration Clause in
a Contract:
Most commonly, contracts
contain a separate clause stating that if any dispute arises, it shall be
resolved through arbitration. This is called an arbitration clause and
is widely used in commercial agreements.
2. Incorporation by
Reference:
Sometimes, a contract may
refer to another document (like general terms and conditions) that contains an
arbitration clause. If the reference is clear and the intention is evident,
this is treated as a valid arbitration agreement.
3. Communication Through
Letters or Emails:
In some cases, even exchange
of letters, emails, or other communications where both parties agree to
arbitrate can qualify as an arbitration agreement under Section 7(4)(b) and
(c) of the Arbitration Act.
Advantages
of Arbitration
Arbitration is often
preferred over litigation for the following reasons:
1. Flexibility
Arbitration is more
flexible than court proceedings. The parties can choose:
- The arbitrator
- The procedure
- The venue
- The language
This makes it adaptable to the needs of the parties involved.
2. Speed
Arbitration is generally faster
than court trials, which can take years. Arbitrators usually follow a set
schedule and conclude matters quickly.
3. Confidentiality
Unlike court trials,
arbitration proceedings are private. The hearings, documents, and final
awards are not made public. This is especially helpful in sensitive business
disputes.
4. Cost-Effective
Although arbitrators
charge fees, arbitration usually saves money by avoiding prolonged court
battles, multiple hearings, and legal formalities.
5. Party Autonomy
The parties have the
right to choose:
- Who will be the arbitrator (an expert
in the field can be selected).
- The rules that will govern the
process.
This allows for more control over the outcome.
6. Enforceability of
Awards
Arbitration awards are
legally recognized and can be enforced in courts under the Arbitration and
Conciliation Act. In international disputes, awards are enforceable in
foreign countries under the New York Convention.
Disadvantages
of Arbitration
Despite its benefits,
arbitration also has some drawbacks:
1. Limited Right to
Appeal
One of the biggest
criticisms of arbitration is the very limited right to appeal. Courts
can set aside an award only on specific grounds like fraud, bias, or procedural
irregularities.
2. Mandatory Arbitration
Clauses
Some contracts force
parties into arbitration without giving them the option to go to court. This
can restrict a person’s legal rights.
3. No Interlocutory
Relief
Arbitrators generally cannot
grant interim orders, such as injunctions or restraining orders. For such
relief, parties must go to court, which defeats the purpose of avoiding courts.
4. Costs in Complex
Disputes
Although arbitration can
be cheaper than court cases, it can still be expensive in complex
disputes, especially when a panel of arbitrators is appointed or if proceedings
go on for long.
5. Not Suitable for All
Disputes
Some disputes (like
criminal matters or family disputes) cannot be settled through arbitration. It
is mainly meant for civil and commercial disputes.
Conclusion
Arbitration offers a
practical, private, and flexible method for resolving disputes outside the
court system. It can be a faster and more efficient way to settle
disagreements, especially in commercial and contractual matters. However, it is
important to draft arbitration agreements carefully, with clear intent
and terms, to avoid confusion and future litigation.
While arbitration is not
perfect and may not be suitable for every situation, it remains a valuable
tool in modern dispute resolution. Parties must weigh the advantages and
disadvantages before choosing arbitration and should always seek legal
advice before entering into an arbitration agreement.
Disclaimer: All the Information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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