Discuss the provision of Contact Act, 1872 and its exceptions.

Introduction:

 

According to the Contact Act, 1872 under section 28 has laid down that, Agreements in restraint of legal proceedings void-[1] under this heading:

(a)“Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights;”

 This section does not affect the law relating to arbitration e.g, if the parties agree to refer to arbitration any dispute which may arise between them under the contract, such a contract is valid (exceptions 1 and 2 to section 28)

Exceptions to section 28: this section provides for the following two exceptions to the above general principle:

 Reference to the Arbitration

 Exception 1- Saving of a contract to refer to arbitration dispute that may arise- This section shall not render illegal a contact by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. Then such a contract will be valid by way of an exception to general principle relating agreement in restraint of legal proceeding is void

 This section before us affirms the common Law. Its provisions” appear to embody a general rule recognize in the English cods which prohibited all agreements purporting to oust jurisdiction of the court. It does not affect the validity of compromise of doubtful right, and this view supported by the provisions of the civil procedure code,  which enable parties to a  suit to go before the court and obtain a degree in a term of compromise,[2] if a contact were to contain an double stipulation dispute between the parties should be settled by arbitration, and neither party should enforce his rights under it in a court of law, that would be a valid stipulation so far as regards its first branch, viz. that all dispute between the parties should be referred to arbitration, because that of itself would not have the effect of ousting jurisdiction of the court, but latter branch of  stipulation would be void because by that the jurisdiction of the court would be necessarily excluded[3].

 Agreements to refer to arbitrator

 A contact whereby it is provided that all dispute arising between parties should be refer to competent London brokers and that their decision should be final, does not come within the purview of this section[4] nor does a contact whereby it is provide that all dispute arising between the parties “should be referred to the arbitration of the Bengal chamber of commerce, whose decision shall be accepted as final and binding on both parties to the contact[5]

 Contract to refer question that have already arisen second exception- nor shall section 28 render illegal any contact in writing, which two or more persons agree to refer to arbitration any question between them which has already arisen or affect any provision of any law in force for the time being as two references to arbitration.

 It was observe in Scott v Avery[6], that the parties have agreed that no action shall be brought until some question of amount has first been decided by arbitrator, as far instance the amount of damage which the assured has sustained in a marine or fire policy

 Definition of Arbitration:

 Arbitration is a well-established and widely used means to end disputes. It is one of several kinds of “Alternative Dispute Resolution” which provide parties to a controversy with a choice other than litigation. Unlike litigation, arbitration takes place out of court: the two sides select an impartial third party, known as an arbitrator; agree in advance to comply with the arbitrator’s award; and then participate in a hearing at which both sides can present evidence and testimony. The arbitrator’s decision is usually final, and courts rarely reexamine it.

 Arbitration can be voluntary or required. The traditional model is voluntary, and closely linked to contract law: parties often stipulate in contracts that they will arbitrate, rather than litigate, when disputes arise. For example, unions and employers almost always put an arbitration clause in their formal negotiations, known as collective bargaining agreements. By doing so, they agree to arbitrate any future employee grievances over wages, hours, working conditions, or job security—in essence, they agree not to sue if disagreements occur. Similarly, a purchaser and a provider of services who disagree over the result of a business deal may submit the problem to an arbitrator instead of a court. Mandatory arbitration is a more recent phenomenon. Some counties have enacted statutes that when disputes arise, mandatory go to the arbitrator rather then go to the court first. In addition, courts sometimes order disputants into arbitration.

 Most arbitration is considered binding: parties who agree to arbitration are bound to that agreement and also bound to satisfy any award determined by the arbitrator. Courts in most jurisdictions enforce awards. Moreover, they allow little or no option for appeal, expecting parties who arbitrate to assume the risks of the process. In addition, arbitration is subject to the legal doctrines of Res Judicata and Collateral Estoppel, which together strictly curtail the option of bringing suits based on issues that were or could have been raised initially.

  Arbitration clause:

An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause.

Sometimes government has expressed a policy of support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the Arbitration Act,940 which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator’s decision to a court. In  Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

the U.S. Supreme Court established the ” separability  principle”, under which enforceability of a contract must be challenged in arbitration before any court action, unless the arbitration clause itself has been challenged.

An arbitration clause may nevertheless be challenged and held invalid if it designates a biased party as the arbitrator. In Graham v. Scissor-Tail, Inc, 623 P.2d 165 (Cal. 1981), for example the Supreme Court of California found that an arbitration clause in a contract of adhesion which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations

Most arbitration arises because of an arbitration clause in a contract, in which the parties have agreed to resolve any disputes arising out of the contract through arbitration. Arbitration clauses can be simple – stating that claims will be settled according to applicable arbitration rules.

Advantages of Arbitration

 ü      Cost effective

 ü      Parties can choose their arbitrator.

 ü      parties can set some of their own rules for the conduct of the hearing

 ü      Faster

 ü      can be done at times more convenient to the parties

 ü      less stressful than other solutions

 Arbitration Procedures

Cases go to arbitration for one of two reasons.[7]

• Mandatory: Arbitration is required by law for some court cases. State law requires that some cases filed in state courts go to mandatory arbitration.
• Voluntary: Parties may agree to arbitration before or after filing a court case, or may have a contract that requires them to arbitrate disputes.

“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”.[8]

 So, if a contract bearing ‘arbitration clause’ binds the parties to arbitrate with each other in case of any dispute out of the contract the parties can resolve the dispute.

 Generally, an arbitration clause binds only the persons or companies who sign the agreement.[9] This requirement reflects the fact that arbitration is consensual in nature, and is dependent upon the parties’ agreement.

  A clause in a contract, by which the parties to a contract undertake to submit to arbitration the disputes that may arise in relation to that contract (arbitration clause); or an agreement by which the parties to a dispute that has already arisen submit the dispute to arbitration (submission agreement)

 The arbitration clause therefore refers to disputes not existing when the agreement is executed. Such disputes, it must be noted, might never arise. That is why the parties may define the subject matter of the arbitration by reference to the relationship out of which it derives.

 The submission agreement refers to conflicts that have already arisen. Hence, it can include an accurate description of the subject matters to be arbitrated. As we shall discuss later; some national laws require the execution of a submission agreement regardless of the existence of a previous arbitration clause. In such cases, one of the purposes of the submission agreement is to complement the generic reference to disputes by a detailed description of the issues to be resolved.

 However, sometimes parties prefer to go to litigation in a national court.

 This is because:

ü      The range of remedies in litigation is usually wider than in arbitration. It is possible to obtain     orders affecting third parties which are not party to the agreement to arbitrate

 ü      Litigation in some jurisdictions is quicker and cheaper than international arbitration;[10] or

 ü      They wish to seek publicity for a claim or set a precedent.

 Place

 Arbitration can take place almost anywhere that the parties agree. Usually it is more appropriate for arbitration sessions to be held in conference and board rooms. Norman is able to arrange for those facilities. Arbitration does not take place in a court room.

 Number of Arbitrators

 Most arbitration rules provide for the number of arbitrators and a method for selecting them if the parties do not specify the number or a mechanism for their appointment. Nevertheless, it is generally desirable that the parties express their preference. The custom in international arbitrations involving significant monetary amounts is to appoint a three-person panel, but when the amount in dispute does not justify three, a single arbitrator may be preferred.

 Enforcement of Arbitral Awards

 An arbitration award (or arbitral award) is a determination on the merits by an arbitration tribunal in arbitration, and is analogous to a judgment in a court of law. It is referred to as an ‘award’ even where the entire claimant’s claims fail (and thus no money needs to be paid by either party), or the award is of a non-monetary nature.[11]

 The effectiveness of arbitration in providing final and binding resolution of international commercial disputes depends upon the ability to obtain court recognition and enforcement if a party refuses to satisfy an award. When entering into an international business contract, parties should consider whether the country where they expect to enforce an award (usually the country where the losing party is located) has a domestic legal framework in place for the enforcement of arbitral awards and whether that country is a signatory to a treaty that obligates it to enforce arbitral awards.

 The Convention provides that each country must “recognize [arbitral] awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied on.” This means the party only needs to supply the local court with an authenticated original or duly certified copy of the award and the original or a certified copy of the arbitration agreement in order to apply for enforcement.

 There are six primary requirements,[12] four of which are, so to speak natural requirements. The natural requirements are that it should be cogent, complete, certain and final. In addition, if it is to attract the benefits of support and enforcement within a legal system, it must be substantively compliant and procedurally compliant.

 Except under very limited circumstances, arbitration awards may not be appealed. Generally, an arbitrator’s decision can only be appealed if there is proof that[13]:

• corruption, fraud, or undue influence was used in securing the award
• the arbitrator was corrupt or biased
• the arbitrator refused to postpone the hearing even though there was sufficient cause to delay it, or
• the arbitrator exceeded his or her power

 Conclusion

 Arbitration Clause can resolve any disputes which are arisen out of the contact and decision of arbitration binds upon the parties, if the parities agreed between them. Where an arbitration clause is inserted in contact paper then if any dispute arise later , before seeking any remedies before Court of law is to  be exhausted  the Arbitration Procedure. There are no guarantees that arbitration will be a fair process. As noted, once a decision is rendered in a binding arbitration, the parties are generally stuck with that decision. Without the right to appeal, there is always the risk of being subject to the whims and injustice of the arbitrator. Overall, this is probably the biggest drawback to the arbitration process.

 Bibliography

1. The Contract Act [IX of 1872], Published by Esrarul Huq Chowdhury, Third Edition, [page-71]
2. Law of Contract Published by Avtar Singh, Ninth Edition.[page 280]
3. The Contract Act Published by Mulla, Eleveenth Edition
4. The Contract Act [DLR] Third Edition 2002[page70]
5. Mercantile Law Published by MC Kuchhal, Sixth Edition
6. http://www.anthemlaw.com/articles/arbitration-basics/
7. http://courts.oregon.gov/OJD/programs/adr/whatisarbitration.page [21st  February, 2012]
8. http://www.out-law.com/en/topics/projects–construction/international-arbitration/drafting-an-arbitration-clause/
9. http://en.wikipedia.org/wiki/Arbitration_award
10. http://www.adr.org/sp.asp?id=33994
11. http://www.normanpickell.com/Arbitration-Advantages.htm
12. F.C. & S.C. v. F.D. & S.D., Partial Award of 17 March 1983 in ICC Case No. 4402, 9 Y.B. Com. Arb. 138,140 (1984); Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773, 780 (2d Cir. 1995). See also Pierre Lalive, Le droit suisse de l’arbitrate, in L’Arbitrage 279, 281; Roger Perrot, Le droit francaise del’arbitrage, in L’Arbitrage 249, 250.

1. UNCITRAL Model Law and the New York Convention
2. http://www.dispute.it/?page_id=7
3. http://legal-dictionary.thefreedictionary.com/arbitration
4. http://en.wikipedia.org/wiki/Arbitration_clause