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Why you should incorporate an effective arbitration clause into contracts?

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One of the major challenges India is facing today, in convincing the international investors to invest in India is the “judicial delivery system” in India. We are one of the few countries that have a judiciary with predominantly competent judges and a strong judicial system. But the delay in the judicial delivery system due to various issues including the “insufficient” man power, is making India one of the risky investment countries.

In such a situation startups and small companies, that cannot take legal advice from competent lawyers end up in court corridors because of prolonged litigations. The main objective of the Arbitration and Conciliation Act,1996 the law which governs the arbitrations in India, is to reduce the court interferences and speedy disposal.

Advantage in choosing Arbitration to resolve contractual disputes: Arbitration is one the mechanisms legally available to resolve disputes between the parties. Arbitration is nothing but allowing a non-judicial person to decide the disputes instead of going to court. The following are the main advantages in choosing arbitration to court litigation,

Speedy conclusion: Even very complex arbitrations are concluded within 6 to 12 months period. Whereas a court case in a commercial mater can go for about 5 to 6 years. Further if parties choose to appeal to High Court and then to Supreme Court another 6- 10 years will go in getting the final conclusion. In arbitration matters even if parties challenge the award (verdict of the arbitrator) in a court, getting an arbitration appeal is difficult because scope of appeal is very small.

Less Expensive procedure: Since court litigations go for a very long time, corresponding expenses make it very expensive. Arbitration expenses are comparatively lesser. If parties choose an arbitral Institution for administering the arbitration, then fee structure is transparent and less expensive.

Experts decide the matters: Many commercial disputes, involve technical issues and they can be decided by domain experts than a normal judge. In the arbitrations parties can choose the arbitrators with certain qualifications and expertise but they cannot choose a judge with certain qualifications in a court proceeding.

For example a construction dispute can be understood and effectively decided by a Civil Engineer than a normal Judge.   While drafting the arbitration clause in the contract, parties can specify the qualification of the arbitrator, which cannot be changed by anybody including courts later, in the absence of consent of all the parties.

Globally Recognised Mechanism: Enforcing a National Court Judgement or a decree in a foreign country is a difficult process and many a times, foreign courts do not recognise court judgments from other countries. But an award passed in India in an international commercial arbitration is enforceable in about 100 countries of the world. For example a Judgement of Delhi High court cannot be enforced in Singapore easily but an award passed in Delhi can be easily enforced against a party in Singapore.

Drafting an arbitration clause: But again a vague, unclear arbitration clause will invite unnecessary court interferences. Hence an effective arbitration clause should contain Number of arbitrators, Applicable laws, applicable arbitral Institution Rules, language of arbitration, seat of arbitration, waivers if any.If an arbitration clause does not specify an Institutional arbitration then for appointment of arbitrator you need to approach the court, which will take away about 6 months’ time.

Moreover, if Arbitral Institution is not chosen by the parties and not specified in the contract then the fee of the arbitrator and arbitration procedure will be finalised by arbitrator only. Some arbitrators charge higher fees. So by all means it is better to choose ant one of the Arbitral Institutions like Delhi International Arbitration Centre(DIAC- Delhi), Indian Council of Arbitration (ICA- Delhi), International Domestic Arbitration Centre (IDAC- Vadodara), London Court of International Arbitration – India (LCIA India New Delhi), NaniPalkiwala Arbitration Centre –Chennai etc.

If you require a Foreign arbitration Centre you can choose Hong Kong International Arbitration Centre (HKIAC), Singapore International Arbitration Centre(SIAC), Kuala-lumpur Regional Centre for Arbitration (KLRAC), Dubai International Arbitration centre (DIAC) etc.