Law Of And Procedure For Appointment Of Arbitrator(S)

Article by Ginny J. Rautray and Saurendra Rautray*

1. Introduction:

   Arbitration may be defined as "the process by which a dispute or difference between two or more parties as to their mutual legal rights and liabilities is referred to and determined judicially and with binding effect by the application of law by one or more persons (the arbitral tribunal) instead of by a court of law"1.

   There can be reference to arbitration only if there is an arbitration agreement between the parties. The Act makes it clear that an arbitrator can be appointed under the Act at the instance of a party to an arbitration agreement only in respect of disputes with another party to the arbitration agreement. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also nonparties to the arbitration agreement, reference to arbitration or appointment of arbitrator can be only with respect to the parties to the arbitration agreement and not the non-parties2.

   The source of the jurisdiction of the arbitrator is the arbitration clause. The arbitration clause is normally a part of the main contract governing the parties. An arbitration agreement on the other hand constitutes a separate agreement, distinct from the main contract, and is binding on the parties. Parties can, even after the disputes have arisen, agree to have their disputes referred to arbitration. The agreement, however, must be in writing. Although contracts are required to be signed by the parties, arbitration clause need not be signed by the parties. An arbitration clause is binding if the parties have given their express or implied or tacit consent to refer the disputes to arbitration. Subject to the law of limitation, parties can refer their disputes to arbitration any time.

   There are two forms of arbitration namely, ad hoc and institutional arbitration. Both forms have separate mechanism for appointment of arbitrators. In ad hoc arbitrations, parties make their own arrangements for selection of arbitrators and for designation of rules, applicable law, procedures and administrative support. However, an institution administers the arbitral process as per the institutional rules on payment of administrative fees by the parties. The institution also allows the parties to select arbitrator(s) from the institution's panel of arbitrators comprising experts drawn from various parts of the world.

2. Arbitration Agreement:

   An arbitration agreement is collateral to the substantial stipulation of the contract. It is merely procedural and ancillary to the contract and it is a mode of settling the disputes, though the agreement to do so is itself subject to the discretion of the court. It is distinguishable from other clauses in the contract. It embodies an agreement of both parties with consensus ad idem that if any dispute arises with regard to the obligations undertaken therein which one party has undertaken towards the other, such a dispute shall be settled by a tribunal of their own constitution3. It is the procedural machinery which is activated when disputes arise between parties regarding their rights and liabilities4.

3. Rule of 'incorporation by reference':

   The rule of 'incorporation by reference' asserts that, even though the contract between the parties does not have a provision for arbitration but is contained in an independent document it will be imported and engrafted in the contract between the parties, by reference to such independent document in the contract, if the reference is such as to make the arbitration clause in such document, a part of the contract. The wording of provisions of the Act5 makes it clear that a mere reference to a document would not have the effect of making an arbitration clause from that document, a part of the contract. The reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document, into the contract. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing.

   The intention of the Indian Legislature is not to incorporate an arbitration clause contained in a separate document, merely on reference to such document in the contract. The intention was to ensure that the reference is such as to make that arbitration clause part of the contract and there is a conscious acceptance of the arbitration clause in another document, by the parties, as the part of their contract, before such arbitration clause could be read as a part of the contract between the parties6.

   The Act does not contain any indication or guidelines as to the conditions to be fulfilled before a reference to a document in a contract can be construed as a reference incorporating an arbitration clause contained in such document, into the contract. In the absence of such statutory guidelines the normal rules of construction of contracts would have to be applied. The court in ascertaining the intention of the parties would determine as to whether the intention of the parties was to borrow specific terms and conditions contained in the separate document or the reference to that document was made with the intention to incorporate the contents of that document in its entirety into the contract.

   The test is that there should be a special reference indicating a mutual intention to incorporate the arbitration clause from another document in the contract. The exception to the requirement of special reference is where the referred document is not another contract, but a standard form of terms and conditions of a trade associations or regulatory institutions which publish or circulate such standard terms and conditions for the benefit of the members or others who want to adopt the same. The standard forms of terms and conditions of trade associations or regulatory institutions are drafted by experience gained from trade practices and conventions, frequent areas of conflicts and differences, and dispute resolutions in the particular trade. They are also well known in trade circle and parties using such formats are usually well versed with the content thereof including the arbitration clause therein. Therefore, even a general reference to such standard terms, without special reference to the arbitration clause therein, is sufficient to incorporate the arbitration clause into the contract7.

4. Ad hoc arbitration:

   Ad hoc arbitration is an arbitration which is not administered by an institution providing arbitration facilities and it is left to the parties to determine all aspects of the arbitration like appointment of arbitrators, manner in which appointment is made, procedure for conducting the proceedings and for designation of rules, applicable law, procedures and administrative support. Ad hoc arbitration is mainly governed by the provisions of Arbitration and conciliation Act 1996 ('Act') and parties are free to determine the procedure.

5. Institutional arbitration:

   In institutional arbitration, a specialized institution with a permanent character intervenes and assumes the functions of aiding and administering the arbitral process, as provided by the rules of that institution. The institution only facilitates and administers the process and the tribunal is appointed either by the parties or the institution. Often, the contract between the parties will contain an arbitration clause which will designate an institution as administrator by stating that the arbitration would be conducted as per the party designated institutional rules. For administering and facilitating the arbitration and providing secretarial services and facilities for conducting the arbitration proceedings, the institution normally levies administrative charges on the parties. The primary disadvantages of the institutional arbitration are:

   (i) Administrative fees are imposed ad valorem and depend on the claim amount. Fees for services and use of facilities are high in disputes over large amounts;

   (ii) Pre-established rules and procedures without any flexibility for conducting the proceedings may contribute to parties dis-satisfaction;

   (iii) Parties to the arbitration may be required to comply with procedural requirements in unrealistic time frames.

   In institutional arbitration, the first issue arising for agreement of the parties is choice of the institution appropriate for the resolution of disputes arising under the contract. Whilst making such choice, there are various factors to be considered i.e. nature & commercial value of the dispute, rules of the institution (as these rules differ), past record and reputation of the institution and also that the institutional rules are in tune with the latest developments in international commercial arbitration practice.

   The advantages of institutional arbitration outweigh those of ad hoc arbitrations. Some of the advantages are:

   (i) Administrative fees for services and use of facilities are often borne by the losing parties.

   (ii) Institutions provide administrative assistance in the form of a secretariat or court of arbitration;

   (iii) Maintains a panel of qualified arbitrators having expertise in different commercial sectors;

   (iv) Institution can act as appointing authority of arbitrators on parties consent;

   (v) Provides hearing room facilities and support services for arbitrations;

   (vi) Extends assistance in encouraging reluctant parties to proceed with arbitration; and

   (vii) Offers an established rules and procedure for conducting arbitration proceedings.

6. Number of arbitrators:

   The Act8 provides that parties are free to determine the number of arbitrators which however, should not be an even number. Failing any determination by the parties, the arbitral tribunal shall consist of a sole arbitrator9. The statutory requirement of odd numbers of arbitrators is a derogable provision10. The words in the provision "the parties are free to...