A brief understanding of the benefits of arbitration and litigation by Ms. Diya Champavat

Disputes are an inevitable part of business dealings. Be it any sort of dispute regarding services agreement, shareholder dispute, breach of contract, non-payment of money or business dealings, the approach selected to solve such disputes makes a huge difference to the duration, costs involved, and business relations.
India being home to many companies, there are two main methods that businesses use to resolve disputes – litigation and arbitration. Litigation is the process wherein disputes are solved by way of courts, while arbitration is a way wherein disputes are settled privately by appointing a private tribunal. While both processes are legal and widely recognized, arbitration has emerged to be more preferred by commercial organizations.

Litigation is the usual mode of dispute settlement through court procedures. Disputes involving commercial matters are usually dealt with by the Commercial Courts under the Commercial Courts Act, 2015. Court decisions are binding and enforceable, and there are many modes of appeal available to the aggrieved party. However, arbitration is governed by the Arbitration and Conciliation Act, 1996. It is a private system of dispute settlement wherein the parties agree that their disputes would be settled by one or more arbitrators instead of a judge from the court. The decision of the arbitrator, called an “arbitral award,” is enforceable like a court decree.

Why Businesses Often Prefer Arbitration
1. Quick Resolution of Disputes: The other major benefit of arbitration is that it makes the need for prolonged legal proceedings unnecessary. Despite the great progress
made by Indian courts in making commercial litigation quicker, the process of resolving a dispute may last for years, especially when there is an appeal process
involved. This way, arbitration may provide a faster solution to a problem since parties are able to determine the process timelines without going through numerous
courts.

2. Confidentiality: Another great benefit is the element of confidentiality. Court proceedings tend to be open, while arbitration proceedings are kept confidential.
When businesses deal with sensitive commercial matters, trade secrets, price structures, technologies or strategies, confidentiality will become a real advantage.

3. Increased Flexibility: Arbitration is also more flexible. Parties are able to appoint arbitrators with special knowledge, select arbitration location, determine the
procedure and decide upon the timeline.

4. Better for International Transactions: In case of international transactions, arbitration is always the better choice since arbitral awards rendered in foreign
countries will have enforceability in various places based on the New York Convention, which India has ratified.

5. Preservation of Business Relations: While litigation is an adversarial process, arbitration is more consensual. Businesses which plan on continuing their business
relationship despite disputes can use arbitration as a more convenient process.

The type of arbitration will depend on the nature and importance of the business deal.

1. Institutional arbitration: Institutional arbitration is the ideal method for companies. In institutional arbitration, the entire arbitration process is run through an institute which provides procedural guidelines and administers it.

2. Ad Hoc Arbitration: Ad hoc arbitration is another popular form of arbitration, wherein the arbitration process is managed without any institute’s involvement. Although it helps save costs, procedural differences might cause delay in the arbitration process.

3. Domestic Arbitration: Domestic arbitration is applicable when all parties and the business dealings are situated within India.

4. International commercial arbitration: International commercial arbitration is the most suitable arbitration method when either the party or the business interest is
foreign.

In general, for commercial contracts like service agreement, technology agreements, shareholders agreements and joint ventures agreements, institutional arbitration is the best suited. However, there are certain situations when Arbitration might not be the most suitable option:

1. Non-arbitrable Matters: Some disputes are not arbitrable and need to be heard in courts or specific tribunals, such as criminal proceedings, insolvency, matrimonial
disputes, testamentary disputes, and statutory disputes among others.

2. Need for Interim Relief from the Court: In some instances, businesses might need urgent help from the courts to preserve evidence or protect their property from any
damage.

3. No Existence of Arbitration Clause: Parties might desire arbitration but have no basis to enforce it in the event that there is no arbitration agreement in place.
Practical Issues in Deciding on Arbitration

One error that companies commit is assuming that the dispute resolution clause is a formality. Poor drafting in arbitration clauses often results in jurisdiction challenges, challenges to appointing arbitrators, and even litigation. Companies need to include details regarding the seat of arbitration, the number of arbitrators,
the applicable law, language used, and the arbitral institution overseeing the process. Another issue is the cost. Although arbitration is faster compared to litigation, there are costs that come with hiring arbitrators and institutions overseeing the process, especially when large sums of money are involved. However, many companies view these costs as worth it because of the other benefits offered by arbitration. Another issue that needs to be considered is reviewing contracts regularly to ensure that the provisions in the dispute resolution clauses meet current company needs.

Thus, there are many advantages to choosing arbitration in cases where disputes arise between parties that engage in business. The process is more efficient, confidential, flexible, industry- specific, and easier to enforce compared to litigation in cross-border transactions. Although litigation has to be resorted to in specific types of disputes, businesses would do better by opting for arbitration. Arbitration is especially suitable in disputes related to service contracts, shareholding
disputes, technology contracts, supply contracts, and investments. An effective arbitration agreement drafted in the initial phase of contracting will save businesses from many risks in the future.