21 Critiques of the ADR Mechanisms in Indian Law

Mr Madhav Mallya

1. INTRODUCTION

The rationale of alternative dispute resolution (ADR) mechanism – consent based systems of dispute resolution- lies in the backdrop of time consuming and expensive traditional justice delivery system. ADR does have many potential advantages, but there are also some possible drawbacks and criticisms of pursuing these alternatives to court-based adjudication. Some critics are concerned about the legitimacy of ADR outcomes, charging that ADR provides ‘second-class justice’. It is argued that people who cannot afford to go to ordinary courts, are those most likely to use ADR procedures. As a result, these people are less likely to truly ‘win’ a case because of the cooperative nature of ADR.1

Similarly, critics believe that ADR encourages compromise. Compromise can be a good way to settle some disputes, but it is not appropriate for others. In serious justice conflicts and cases of intolerable moral difference, compromise is simply not an option because the issues in dispute mean too much to the disputants. Another apprehension is that ADR settlements are private and are not in the public record or exposed to public scrutiny and therefore can be cause for concern in some cases. For example, using ADR to settle out of court could allow a company to resolve many instances of a defective product harming consumers, without the issue getting any public exposure. On the other hand, a court ruling could force the company to fix all problems associated with the bad product or even to remove it from the market.2

In the present socio-economic conditions of India, there is a definite tilt towards the benefits of mechanisms such as arbitration, mediation and conciliation. Nevertheless as explained below, there are a number of weaknesses of ADR mechanisms, influenced by various factors which are often overlooked or not evident in the ordinary course of things.

LEARNING OUTCOMES:

The aims of this module are as follows:

(i) Knowledge of the instance of judicial intervention in Arbitration,

(ii) Understanding of the shortcoming of ADR mechanism, and

(iii) Appreciate that the need of ADR mechanism despite having demerits.

(iv) Awareness that strong and effective ADR processes cannot be established at the cost of neglect of effective judicial reform which would also pave the way for the expeditious resolution of disputes.

2. JUDICIAL INTERVENTION IN ARBITRATION

2.1 Critique of Judicial Intervention under the Act of 1996

The Arbitration and Conciliation Act 1996 was designed primarily to implement the UNCITRAL Model Law on International Commercial Arbitration and create a pro-arbitration legal regime in India. The intention was to minimize the supervisory role of courts, ensure finality of arbitral awards and expedite the arbitration process. The essential foundation behind this Act was that there should be minimum interference by Courts. Arbitration and conciliation were meant to be a speedy, expeditious and cost-effective method of dispute resolution. The primary object of ADR movement is avoidance of vexation, expense and delay and promotion of the ideal of access to justice. Therefore, the principle of non-intervention by the Courts is the fundamental policy behind the enactment of Arbitration and Conciliation Act 1996.

Prior to 1996, the arbitration law of the country was governed by the Act of 1940. This Act was largely premised on mistrust of the arbitral process and afforded multiple opportunities to litigants to approach the court for intervention. Coupled with a sluggish judicial system, this led to delays rendering arbitrations inefficient and unattractive. A telling comment on the working of the old Act can be found in a 1981 judgment of the Supreme Court where the Court (Hon’ble Justice Desai) in anguish remarked, ‘the way in which the proceedings under the (1940) Act are conducted and without an exception challenged in Courts, has made lawyers laugh and legal philosophers weep …’.3 The Court has voiced caution on the new Act in the following terms:

To attract the confidence of International Mercantile community and the growing volume of India’s trade and commercial relationship with the rest of the world after the new liberalization policy of the Government, Indian Parliament was persuaded to enact the Arbitration & Conciliation Act of 1996 in UNCITRAL model and therefore in interpreting any provisions of the 1996 Act Courts must not ignore the objects and purpose of the enactment of 1996. A bare comparison of different provisions of the Arbitration Act of 1940 with the provisions of Arbitration and Conciliation Act 1996 would unequivocally indicate that 1996 Act limits intervention of Court with an arbitral process to the minimum.

The practice of arbitration in India is unfortunately taking on the hues of litigation with increasing delays and court intervention. Lawyers representing parties in arbitrations also appear in courts and adopt the similar dilatory tactics in arbitration.Section 5

If the Act provides, through a non-obstante clause, that in maters governed by Part I, no judicial authority shall interfere except where provided for in the law. There are following instances where a person can approach to the court of law:

i. Under section 9 for interim measures.

ii. Under section 11 for appointment of arbitrator.

iii. Under section 14 for ruling on whether the mandate of the arbitrator stands terminated due to inability to perform his functions or failure to proceed without undue delay .

iv. Under section 27 court assistance may be taken for taking evidence including in the situation where the default is committed by any party in complying with the direction issued by the Arbitral Tribunal leading to initial of contempt proceeding by the court.

v. Under section 34 for setting aside arbitral award.

vi. Under section 37- appeal against order passed under section 9, 16 and 17 including second appeal against an order passed under section 34.

vii. Under section 36 Court assistance can also be taken to execute the award as a decree.

In case of foreign award (Part II of the Act) the court/judicial authority can intervene in following circumstances:

Under section 50 and 59 on the ground of refusal of judicial authority to refer the parties to arbitration under section 45 or under section 54.

For enforcement foreign award under section 48 and 57 arising from refusal of the court to execute foreign award.

The above instance of judicial intervention does not limit the power of the supreme court of India to intervene at any stage as envisaged under sections 37(3), 50(2) and 59(2) of the act.

2.2 Scope of Judicial Intervention under Act of 1996: Some Judicial Pronouncement

Section 34 of the Arbitration and Conciliation Act 1996 which provides certain limited procedural grounds for the setting aside of arbitral awards, is widely misused by parties who do not wish to execute an arbitral award going against their interests.

Again, section 37 states that an appeal shall lie from original decrees passed by the court under section 34. Despite the fact that the grounds in section 34 are purely procedural in nature, often in a hearing under Section 34, the parties end up arguing on the merits of the dispute. Section 37 also provides for appeals from original decrees of a Court passing an order granting or refusing to grant an interim measure under section 9 or section 17 of the Act. It can reasonably be argued that these appeals lead to unnecessary judicial intervention in the arbitral process, which after the coming into being of the 1996 Act, is meant for the quick and expeditious resolution of disputes and that the scope of appeals could be limited. At the same time, arbitral processes cannot function without judicial checks and balances.

One of the grounds under section 34, for setting aside an award is the arbitral award being in conflict with the public policy of India. In the ONGC v Saw Pipes5 the Supreme Court expanded the grounds of public policy to state that if an award is legally flawed it could be held to be ‘patently illegal’ and if an award contravenes the Act or any substantive provision of law or the contract governing the parties it could be set aside.6 An earlier Supreme Court decision, with a larger bench, Renusagar Power Co v General Electric Company7 had construed the ground of public policy narrowly to include “fundamental Policy of Indian Law or the Interest of India or Justice and Morality’. The Saw Pipes judgment introduced ‘patent illegality’ as a new ground for setting aside an award. This paved the way to interfere with an award on merits since even a difference of opinion on the interpretation of a particular law or clause of the governing contract, could be a ground to set aside an award.

The Supreme Court of India distinguished the ONGC from the Renusagar on the ground that the Renusagar judgment involved the enforcement of a foreign award in India and therefore there would not be a greater number of checks and balances on the award as it would also have been under scrutiny in the country of primary jurisdiction (the country where the award was passed), whereas the ONGC award was passed in a purely domestic context and hence the need for greater levels of scrutiny.

The Saw Pipes Judgment has been widely criticised on the ground of introducing a new ground under public policy for challenging the arbitral award in the court.

In the Bhatia International8 the matter involved an application under section 9 of the Act to a court for interim relief. The arbitration in this case was under the rules of the International Chamber of Commerce to be conducted in Paris. Since Part II of the 1996 Act which deals with the enforcement of foreign awards did not provide for interim relief, the Supreme Court held, applying judicial creativity and interpreting the Act in a highly objectionable manner that Part I of the Act applied to arbitrations held outside India.9 The Court held despite presence of section 2(2) of the Act stating that Part I applied to arbitrations held in India. This judgment led to a situation where there could have been unnecessary judicial intervention with a foreign award and where more stringent domestic standards of public policy as introduced in ONGC could be applied to foreign awards, thus creating a scenario where India would be viewed as an unfriendly destination for foreign awards which could have adverse economic effects.

However, the Bhatia has been overruled in September 2012 by the BALCO10 judgment holding that Part I will only apply to arbitrations where the seat of arbitration is in India. The lacuna in the Act, that there is no provision for a party involved in arbitration seated outside India to apply for interim measures to a Court, however remains unresolved.

Recently in 2013 in Shri Lal Mahal v Progetto Grano Spa,11 the Supreme Court drew a clear distinction between the setting aside of an award under section 34 of the Act and the enforcement of a foreign award under section 48 of the Act, thus overruling the Phoolchand12 which had laid down that there was no difference in the term ‘public policy’ in setting aside and enforcement proceedings. Enforcement proceedings occur only in relation to the enforcement of a foreign award in India and as per the ONGC ruling, the definition of public policy needed to be expanded only in relation to the setting aside of a domestic award under section 34 of the Act, since a foreign award which is brought to India for enforcement under section 48 would have already been under scrutiny in the country of primary jurisdiction. The Shri Lal Mahal Judgment seems to have finally settled the law on this issue.

The system of arbitration under the 1996 Act has been a failure, especially since there is no time set for the completion of arbitral proceedings, unlike the 1940 Act, arbitrators often tend to reflect practices in litigation by granting long adjournments. It is also argued that the 1996 Act has paved the way for greater judicial intervention and parties approach arbitration with the same mind-set as in litigation.13

3. A CRITIQUE OF SETTLEMENT MECHANISMS

3.1 Compatibility of Disputes

Alternative dispute resolution system may not be suitable for each and every dispute. In Afcons Infrastructure Ltd v Cherian Varkey Construction Co14 the Supreme Court remarked about the category of cases to be suitable/ none suitable for resolutions through ADR mechanism. Some cases are to be dealt in the court of law, there is no other ‘informal’ means of solving the said cases. Section 30 of the Act; chapter VI and VIA of the Legal Services Authorities Act 1987; section 89 and Order X Rule 1A, 1B and 1C and Order XXXIIA of the Code of Civil Procedure

1908; Chapter IV of the Family Courts Act 1984; section 23 (2) and 23 (3) of the Hindu Marriage Act 1955; section 34 (3) of the Special Marriage Act 1954; section 10A of the Industrial Dispute Act 1947 and section 26 of the Gram Nyayalayas Act, 2008 envisaged the situation and the category of the dispute which may be referred for settlement through various ADR mechanisms.

3.2 Wastage of Time/ Money if the Case is Not Resolved.

The cases referred for a settlement through ADR go unresolved, the parties to the unresolved cases have no choice but to approach court of law for adjudication of the disputes on merits leading to wasting time and money spent in ADR mechanism.

3.3 The Possibility of Bias

The possibility of bias, though negligible, or a conflict of interest or at least the appearance of impropriety, may arise if even a neutral person in ADR gets a good deal of repeat business from the same institution.

3.4 Compromising Confidentiality

Confidentiality is one of the most talked after phenomenon of the ADR mechanism. However, in practice, it might prove to be a double edged weapon, as it may lead to certain difficulties and obstructions. In the proceedings confidential it may be difficult for the parties to use the award or any other part of the arbitration in later proceedings. In many a cases, it is necessary to disclose the time/ date and place of the said arbitration proceedings to the third parties and or concerned officers and thereby compromising the confidentiality of the system.15

3.5  Limited Judicial Review

Another everlasting problem faced by parties taking recourse to the ADR system is the power of limited or negligible Judicial Review. An arbitral award is final and binding on the parties and excluded from appeal to the courts in connection with it. The court review of arbitral awards is quite limited. All the Statutes dealing with ADR mechanism states that the settlement reached through ADR mechanism is final and binding and can be enforced by a court as decree.

3.6 Informal, more Opportunity of Abuse of Power

The statutes governing the ADR mechanisms do not cast a duty upon the arbitrator, mediator or conciliator to follow any written procedural system to bring the parties at dispute to a settlement. They are free to follow their own procedure which may sometime leads to, though very uncommon, abuse of power.

3.7 Lack of Power to Establish Legal Precedents

The remedies established, or afforded to the parties in dispute, in ADR, cannot be binding on future cases, i.e. the remedy of one case cannot be taken as the guiding stone for another and cannot be taken as a legal precedent.

3.8 Unfamiliarity with the Procedure and Lack of Awareness

Last but not the least, one of the most glaring difficulties faced by the alternative methods of dispute resolution is that most of the people are unfamiliar with the processes since this is a fairly novel concept. It is the lack of knowledge and awareness with respect to the various methods for dispute resolution that more often than not discourage parties from considering this option seriously.

Bruce Myerson16, has argued that many mediators and arbitrators are celebrating the vanishing trial and the increased use of ADR, viewing this as a vindication of ADR over litigation.17 ADR should be appreciated and valued on its own merits and not as a failed system of litigation. While we celebrate the advent and success of our ADR mechanisms, we tend to forget that it is the failings of our court systems and public grievance redressal mechanisms which have necessitated the need to actively promote ADR mechanisms.

In the early eighties, Professor Owen Fiss, expressed concerned about the loss of accountability of public and private institutions, the public institutions, being the courts and private institutions being alternative dispute resolution institutions. He argued that the dispute resolution story trivializes the remedial dimensions of lawsuits. When parties settle, society gets less than what appears, and for a price it does not know it is paying.18

As a significant number of disputes involving the public interest are currently resolved in private, confidential settings, it is appropriate to ask whether business and government will remain truly accountable when important questions about their conduct are resolved out of the watchful eyes of the public and the press.19

Bruce Myerson also refers to the loss of precedent and the public standards of conduct. Although no one is predicting a world without case law and a complete absence of legal precedent, the growth of mandatory arbitration has taken many cases out of court.20 In Indian, though, it can be argued that this is not something which is a cause for major concern, since a majority of cases are still pending in the Courts and have not been referred to ADR mechanisms.

Yet given the fact that the legal and judicial mind-set in India tends to promote alternative dispute resolution mechanisms and even more aggressively in recent times, judicial reform in the direction of promoting settlement with justice and equity, which creates equally important precedent, is necessary.

Fiss criticises ‘settlement’ saying that ADR mechanisms implicitly ask us to assume equality of bargaining power between the parties to a dispute. He states that ADR mechanisms assume settlement to be simply a prediction of the outcome of trial and does not take into account the financial resources available to each party to finance the litigation which are frequently distributed unequally. The distribution of financial resources would invariably affect a party’s power to negotiate.21 It would be especially true in cases where one party is a state or a powerful corporation or in an accident claims and compensation case where the injured party is an indigent person. There is an imbalance of power that affects presentation, which influences judgment22.

While these observations in relation to the differences and settlement are in the American context, they are equally applicable in the Indian scenario. Parties may be urged to settle in the interest of a quick resolution of the dispute, but distributional inequalities which ought to have been remedied through judicial remedies are left out from consideration. The issue can be seen in the light of the fact that the procedural lacunae and the lack of mechanisms to expeditiously resolve disputes in our justice system discourages litigants from pursuing remedies in courts.

4  SUMMARY

There is a certain social interest in the facilitation of the harmonious resolution of disputes by ADR mechanisms. Disputes do arise in the course of business or personal relationships. With increased economic activity and the changing of the social fabric as well as the attitudes and perceptions of people, the number of disputes are bound to increase. The enlarged amount of workload in the various courts, essentially turns people away towards an easy and cheap (in some cases expensive yet feasible) system, which resolves their dispute. Sometimes at the disposal of the judge and sometimes due to some contractual agreement, people do turn their backs onto the courts and move in direction of the ADR system. Given the contemporary drawbacks of the litigation systems in India, mechanisms which seek to resolve differences in an amicable way and with a balanced solution are beneficial in the long run, even if one does not realize the immediate benefits. The ADR system is more of a gratifying system. It has already deepened its roots in the various legal systems of the world, to the extent that there is an individual international body governing the procedures of resolution of disputes through alternative means.

It may be conclude that the ADR system is developing a life of its own, one shall not stand surprised when s/he sees the number of unresolved disputes being narrowed to zero in the near future. Though it has its demerits, as sometimes the whole process may prove disastrous yet in many ways it is the most appropriate way of proving the very famous saying, ‘justice delayed is justice denied’, to be true, one shall not wait for justice being delivered if s/he is in the hands of the ADR system.23

Web Resources:

• <http://www.beyondintractability.org/bksum/goldberg-dispute> <http://cddrl.stanford.edu.>
• N.R.M. Menon, “Settlement in the Open”,
• <www.telegraphindia.com/archive/1001212/editoria.htm>
• ‘Report of the International Conference on ADR, Conciliation, Mediation and Case Management’ <http://www.isdls.org/reports_india_may2003.html.>