Management Notes

Reference Notes for Management

Arbitration – Concept, Features, Importance, Appointment, Power, Disputes & Major Provisions | Business Law

Meaning of Arbitration

As a form of alternative dispute resolution (ADR), arbitration allows parties to resolve their disputes in a private and legally binding manner outside of traditional court systems. An arbitral award is a binding decision made by a neutral third party, known as an arbitrator after the parties submit their dispute to them.

The purpose of arbitration is to resolve disputes in a less formal and more flexible manner than litigation. Parties can determine their own decision-maker, the procedural rules, and the governing law. Arbitration is suitable for a wide variety of disputes, including international, contractual, employment, and construction disputes.

Features of Arbitration

Some of the features of Arbitration are as follows:

Features of Arbitration

1. Voluntary:

Arbitration is voluntary, meaning parties must agree to submit their dispute to arbitration. It is typically based on a prior agreement between the parties, such as an arbitration clause in a contract.

2. Neutral and impartial Arbitrators:

Arbitrators are selected by the parties and are expected to be impartial and independent. They usually possess legal or industry-specific knowledge of the dispute.

3. Confidentiality:

Arbitration proceedings are generally confidential, which means that the dispute details, evidence, and arbitral award remain confidential. This confidentiality can be crucial to those who prefer to keep their disputes private.

4. Flexibility:

Parties can decide on a variety of aspects of the arbitration process, including the choice of arbitrators, the venue, the language used in the proceedings, and the procedural rules. This flexibility allows the parties to customize the arbitration to suit their specific needs and preferences.

5. Final and binding decision:

It is final and binding on the parties to accept the arbitrator’s decision, which is called the arbitral award. Under applicable national and international laws, such as the New York Convention on Recognizing and Enforcing Foreign Arbitral Awards, it can be enforced and recognized by courts.

To conclude, arbitration offers several key features as a voluntary dispute resolution process. It allows parties to resolve their disputes outside of traditional court proceedings. Arbitration is characterized by its voluntary nature, which allows parties to choose it as a means of resolving their disputes. Arbitration decisions are generally binding and enforceable, giving them finality.

Importance of Arbitration

The following are the importance of Arbitration: 

Importance of Arbitration

1. Speedy Resolution:

Arbitration offers a number of advantages over traditional litigation, including its speediness. It is often possible to schedule arbitration proceedings faster than court proceedings, and the arbitration process itself is generally more efficient. With more control over the timetable, the parties are able to resolve their disputes more efficiently.

2. Confidentiality:

As opposed to court proceedings, arbitration can be conducted privately, ensuring that sensitive business information and information remain confidential. Confidentiality is an essential part of arbitration. Businesses that want to keep their trade secrets, proprietary information, or sensitive commercial relationships private can find this confidentiality to be particularly important.

3. Simple:

The rules and procedures of arbitration can be tailored to meet the specific needs of the parties, making it easier and more user-friendly than court litigation. Arbitration is generally less formal and complicated than court litigation. Arbitration’s informality makes it easier for parties to present their cases, thus reducing the complexity of court proceedings.

4. Cost-effective:

A dispute can be resolved more effectively through arbitration than through traditional litigation due to its cost-effectiveness. The overall expenses of arbitration tend to be lower than those of court litigation, even though the arbitrator’s fees and administrative costs may be associated with them.

Additionally, arbitration avoids lengthy and costly pre-trial procedures that can significantly drive up the expenses in litigation.

5. Neutrality and Autonomy:

Arbitration allows parties to choose their arbitrators, ensuring they are impartial and neutral. The arbitration process is shaped by parties, including the choice of rules, venue, and language. This allows for a fair and impartial resolution of the dispute. As a result of this autonomy, the parties are able to have a greater say in the resolution of their dispute.

6. Easy in the execution of the award:

An arbitration award is generally easier to execute than a court judgment. Arbitral awards can be recognized and enforced across multiple jurisdictions under the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. This simplifies the process of enforcing the award and facilitates its recognition as a legally binding decision.

Arbitration is a powerful alternative dispute resolution mechanism because of these factors. Parties seeking a more efficient and tailored approach to resolving their disputes will find it appealing due to its speed, confidentiality, simplicity, cost-effectiveness, neutrality and autonomy, and ease of execution.

Appointment of Arbitrators

The appointment of arbitrators is a crucial step in the arbitration process. The appointment of arbitrators can be done by two ways

1. By the parties themselves
2. By the order of a court

Appointment of Arbitrators

1. By the parties themselves

In many cases, the parties involved in the arbitration can appoint the arbitrators themselves. The appointment procedure typically follows these steps, based on the party autonomy of the process, allowing the parties to actively participate in the decision-maker selection process.

  • a. Agreement:

By mutual consent during the dispute, or by the pre-existing arbitration agreement, the parties agree to submit their case to arbitration. It is common for this agreement to include provisions regarding the number, qualifications, and appointment process of arbitrators.

  • b. Nomination:

Each party may nominate a candidate for arbitration. Generally, nominated arbitrators should be impartial and independent, with no conflict of interest. They can either agree on one arbitrator or each party can nominate one arbitrator.

  • c. Selecting an arbitrator:

If the parties nominate a single arbitrator, that arbitrator will make all decisions in the arbitration. Following the nomination of multiple arbitrators, the nominated arbitrators may select a presiding arbitrator or chairperson for the arbitral tribunal.

  • d. Confirmation and Acceptance:

Nominated arbitrators must confirm and accept their appointment, which ensures their commitment and impartiality in the dispute resolution process.

  • e. Agreement on arbitral tribunal:

It is the responsibility of the parties and the appointed arbitrators to collectively form the arbitral tribunal once the nominated arbitrators have accepted their appointments. It is the court’s responsibility to hear the case, to consider the evidence, and to make a binding ruling.

2. By the order of a court

An arbitrator can be appointed by a court in certain circumstances. It usually happens when the parties cannot agree on the appointment or when the agreed-upon process fails. In order to make a court appointment, the following steps must be taken:

  • a. Request for court appointment:

An application for court appointment can be filed by one party seeking the appointment of arbitrators. The application should explain why the parties could not agree on an appointment or why the agreed appointment process failed.

  • b. Court consideration:

As part of its decision, the court will examine the application, as well as evaluate the circumstances of the appointment issue. It will consider the arbitration agreement, any applicable laws, and any relevant arbitration rules.

  • c. Court Decision:

Based on the court’s assessment, the court will appoint one or more arbitrators to ensure the arbitration process proceeds, despite the parties’ incapacity to agree on appointments.

  • d. Confirmation and Acceptance:

Just as the parties need to confirm their appointments, the court-appointed arbitrators need to confirm and accept their appointment. Their confirmation and acceptance show their commitment to the arbitration process.

  • e. Formation of the arbitral tribunal:

Once the court-appointed arbitrators have confirmed their appointment, as well as any other arbitrators already agreed upon by the parties, the arbitral tribunal is formed. After reviewing the evidence and arguments presented by the parties, the arbitration tribunal will issue a binding decision.

Depending on the jurisdiction and the specific laws governing the arbitration process, court appointments may not be available or applicable. When the parties cannot reach an agreement on their own, the court is involved in the appointment process to ensure that the arbitration progresses.

Power of Arbitrators

Arbitrators are individuals who are appointed to resolve disputes between parties in a private and alternative manner to the court system. They are typically selected based on their expertise and knowledge in a particular field relevant to the dispute. Arbitrators’ powers can vary depending on the rules and regulations that govern the arbitration process, as well as on the agreement that has been reached between the parties.

In general, arbitrators have the following powers and authority:

1. Determining Jurisdiction:

Arbitrators determine whether they have jurisdiction to hear and decide a particular dispute. This includes determining the scope of their authority and whether the dispute falls under the arbitration agreement.

2. Conducting proceedings:

It is up to the arbitrators to determine the timeline, location, and format of hearings, as well as the rules of evidence and submission of documents related to the arbitration process.

3. Gathering evidence:

Arbitrators have the authority to request and receive evidence from the parties involved. This can include documents, witness testimony, expert reports, or any other relevant information.

4. Issuing subpoenas:

Arbitrators may have the power to issue subpoenas to compel the attendance of witnesses or the production of documents in some jurisdictions.

5. Making decisions:

Arbitrators make decisions on the merits of disputes; they evaluate the evidence presented, interpret relevant laws and contractual provisions, and render final, binding decisions.

6. Granting remedies:

The Arbitrator can award monetary damages, specific performance, or injunctive relief to the prevailing party. It is usually the law or the agreement between the parties that determines the range of remedies that may be awarded.

7. Award enforceability:

Arbitrators’ decisions, known as arbitration awards, are usually enforceable in a court of law. The form and content of the award can be determined by the arbitrator, and all parties must comply with it.

8. Deciding on procedural matters:

During the arbitration process, the arbitrator has the authority to decide various procedural matters. In addition to determining the admissibility of evidence, granting extensions of time, and deciding the order of presentations, there may be other procedural disputes to resolve.

9. Conducting site inspections:

Arbitrators may have the authority to conduct site inspections or visits to relevant locations or properties involved in a dispute to gather first-hand information and more accurately assess the situation.

10. Appointing experts:

It is possible for arbitrators to appoint independent experts to provide specialized knowledge or opinions on specific issues related to the dispute. These experts may be called upon to provide reports, attend hearings, or provide expert testimony as part of the arbitration process.

11. Mediating or conciliating:

In some instances, arbitrators may be able to act as mediators or conciliators to facilitate a negotiated settlement between the parties. By doing so, they can explore possible resolutions and help the parties reach an agreement that is mutually acceptable.

12. Controlling costs:

Arbitrators can control the costs associated with arbitration proceedings by allocating costs between parties, deciding how fees and expenses will be paid, and imposing sanctions for frivolous or dilatory conduct.

13. Granting interim measures:

Arbitrators may issue interim measures to preserve the status quo or prevent irreparable harm pending the resolution of the dispute. This may include issuing injunctions, preserving evidence, or awarding temporary relief.

According to the arbitration rules agreed upon by the parties or the arbitration law, arbitrators’ powers can be limited or expanded.

Functions of Arbitrator

Arbitration is a widely recognized alternative dispute resolution process that allows parties to resolve their disputes outside of traditional court systems. The arbitrator plays a central role in the arbitration process. An arbitrator is an impartial third party who is appointed by the parties or designated by an arbitral institution to preside over the dispute and render a final and binding decision, known as an arbitral award.

An arbitrator has a number of responsibilities throughout the arbitration process, and they perform a variety of functions. From the initiation of the arbitration process to the issuance of the final decision, all the essential functions of an arbitrator are given below:

1. Acceptance:

First of all, an arbitrator must be appointed. Arbitrators are typically appointed by mutual agreement between the parties, from a predetermined list, or by a particular arbitral institution. In order to preside over the case, the arbitrator must review the case details and accept the appointment, ensuring they have the necessary expertise and impartiality.

2. Determine the jurisdiction:

Arbitrators must determine the jurisdiction or authority to hear and decide a dispute as one of their critical functions. Arbitrators must determine whether the arbitration agreement is valid, whether the dispute falls within its scope, and if any prerequisites or procedural requirements have been met. As a result, the arbitration process is based on this function.

3. Managing the Arbitration Process:

Arbitrators are responsible for setting procedural rules, setting timelines, and organizing the logistics of the arbitration proceedings. It may include deciding where and how hearings will be held, coordinating the exchange of pleadings and evidence, and providing equal opportunity for all parties to express themselves.

4. Give a fair chance:

Arbitrators are entitled to request, gather, and evaluate evidence relating to the dispute. For a thorough understanding of the issues at hand, this can include documentary evidence, witness statements, expert reports, and other materials. It is the arbitrator’s responsibility to make sure the parties are given a fair chance to present their evidence and to evaluate how admissible and probative it is.

5. Conducting Hearings:

Arbitrators oversee hearings, where parties can make arguments, examine witnesses, and present their cases. In a hearing, the arbitrator maintains order, ensures a fair and equitable process, and takes into account the positions of the parties. They may ask questions, seek clarifications, and facilitate the discussion of issues.

6. Using the Law and Making Decisions:

Arbitrators make decisions based on the evidence presented and the arguments advanced by the parties. In order to resolve the disputes, they must render a fair and reasoned decision. As long as the applicable law provides a limited right of review or challenge, the arbitrator’s decision called an arbitral award, is final and binding upon all parties.

7. Issuing award:

The arbitrator issues the arbitral award after carefully considering the evidence and arguments. Preparing a written report that outlines the findings of facts, the legal analysis and the decision on each issue is part of this function. Besides determining liability, determining costs, and awarding remedies or damages, the arbitrator ensures that the award is well-reasoned, clear, and enforceable.

8. Ensure Confidentiality and Neutrality:

Arbitrators must adhere to strict confidentiality and neutrality throughout the arbitration process. In order to protect sensitive or proprietary information, they are entrusted with maintaining the confidentiality of the proceedings and the information shared by the parties. It is also imperative that arbitrators act impartially and avoid conflicts of interest that may impair their impartiality and integrity.

9. Managing Costs and timelines:

Arbitrators are responsible for managing arbitration costs and timelines. Monitoring the progress of a case, preventing unnecessary delays and prolongations, and ensuring that the parties’ costs are reasonable and proportionate are all part of this function. The final award of arbitration may include an allocation of costs between the parties.

10. Facilitating settlement:

The primary function of an arbitrator is to render a binding decision, but he or she may also facilitate settlement discussions between the parties. By leveraging their mediation skills and their knowledge of the case, arbitrators can encourage the parties to explore mutually acceptable solutions. It is important to note that the arbitrator’s role in settlement negotiations varies depending on the terms agreed upon and the legal framework in the jurisdiction.

Arbitrators perform multiple stages of the arbitration process, and their responsibilities are extensive. Arbitrators manage the dispute from the beginning to the end, gather and evaluate evidence, apply the law, and ultimately deliver a fair and enforceable decision based on the complexities of the dispute.

In addition to providing parties with a viable alternative for resolving their disputes, their role maintains the integrity, efficiency, and effectiveness of the arbitration process.

Disputes to be settled by Arbitration

In arbitration, parties can submit a dispute to one or more arbitrators, who render a final and binding decision known as an arbitral award as an alternative to litigation. There are many types of disputes that can be resolved through arbitration, depending on the jurisdiction, the applicable laws, and the parties agreements.

It will be covered in depth here how arbitration is commonly used to resolve different types of disputes.

Disputes to be settled by Arbitration

i. Commercial Disputes:

Arbitration is frequently used to resolve commercial disputes arising from contractual relationships. These disputes can encompass a wide range of issues such as breach of contract, interpretation of contractual terms, non-payment or delayed payment, disputes over the quality or performance of goods or services, distribution or agency agreements, intellectual property rights, construction contracts, and international trade disputes.

ii. Construction disputes:

Arbitration is particularly popular in the construction industry because of its specialized nature and complexity. Construction disputes can include contract interpretation, delays, cost overruns, design defects, payment disputes, scope changes, and damages claims.

Arbitration provides a suitable forum for resolving these disputes as arbitrators with expertise in construction matters can efficiently assess the technical and legal aspects involved.

iii. Employment Disputes:

Arbitration is increasingly used to resolve employment-related disputes, particularly in the context of executive-level contracts and collective bargaining agreements. There are several types of disputes in this category, such as wrongful terminations, discrimination, harassment, breaches of employment contracts, non-compete agreements, and compensation disputes.

For sensitive matters like employment disputes, arbitration can be a confidential and efficient method of resolving them.

iv. Consumer disputes:

Arbitration mechanisms have been established in certain jurisdictions for handling consumer disputes. Consumer disputes commonly involve product defects, warranty claims, consumer protection violations, billing disputes, and disputes arising from services provided to individuals.

When the parties are in a weaker bargaining position, consumer arbitration can provide a cost-effective and accessible way of resolving these disputes.

v. International Disputes:

Arbitration is commonly used to resolve international disputes that arise in cross-border commerce. Parties can choose the applicable laws and procedural rules to suit their specific needs, and international arbitration offers a neutral forum.

International trade disputes, investment disputes, joint ventures, licensing agreements, and international commercial disputes may be involved in these disputes.

vi. Intellectual property disputes:

Arbitration can be an effective way to resolve intellectual property (IP) disputes, including patent disputes, trademark disputes, copyright disputes, and trade secret disputes. Infringements, license disputes, ownership disputes, or breaches of confidentiality agreements can all be involved in IP disputes.

vii. Sports and Entertainment Disputes:

Arbitration is commonly used to resolve disputes involving athlete contracts, sponsorship agreements, media rights, royalties, and disciplinary actions in the sports and entertainment industry. The arbitration rules and procedures of sports governing bodies and entertainment organizations provide a specialized forum for resolving disputes within these industries.

viii. Shipping and maritime disputes:

Arbitration is frequently used to resolve maritime and shipping disputes. Charter party agreements, bills of lading, cargo damage or loss, demurrage, insurance claims, and shipbuilding contracts may be involved in these disputes. For these disputes to be effectively resolved, maritime arbitration can utilize specialized expertise and industry-specific rules.

It’s important to note that the types of disputes that can be resolved through arbitration may vary depending on the jurisdiction and the specific rules or laws applicable to the arbitration process.

Major provisions of Nepal Arbitration Act, 2055

In Nepal, the Nepal Arbitration Act, 2055 (1999 AD) governs arbitration proceedings in the country. The following are some of the major provisions of the Act:

Major provisions of Nepal Arbitration Act, 2055

1. Definition:

The Act begins by defining various terms related to arbitration under section 2, such as a dispute, counterclaim, arbitration agreement, arbitral tribunal, award, and others. These definitions provide clarity and provide a shared understanding of the terms used throughout the Act.

2. Matters referable to arbitration:

The Act under section 3 specifies that any dispute arising out of a legal relationship, whether contractual or not, can be referred to arbitration if both parties agree. As well as commercial contracts, construction projects, international trade, and other similar disputes, this includes disputes involving international trade.

3. Number of arbitrators and their appointment:

In the act, the parties have the option of choosing the number of arbitrators. If the parties do not agree on that number, one arbitrator will be appointed by default. In cases where there are three arbitrators, each party selects one arbitrator, and the two party-appointed arbitrators then select the third arbitrator, who serves as the presiding arbitrator or chairman of the arbitral tribunal. such provisions are mentioned under sections 5 to 8.

4. Qualification of arbitrator:

The qualification of the arbitrator is mentioned under sections 9 and 10. The Act describes the qualifications an individual needs to meet to serve as an arbitrator. An arbitrator must possess legal capacity, good character, and the necessary knowledge and experience to conduct the arbitration.

As a result of the Act, certain disqualifications are also outlined, including being a minor, an undischarged bankrupt, or having a conflict of interest with the parties.

5. Revocation of arbitrator’s authority:

In certain circumstances, parties may revoke the authority of an arbitrator, including situations where an arbitrator becomes incapable or delays in performing their duties. Various grounds for the removal of an arbitrator from his/her post are mentioned under section 11.

6. Powers and duties of arbitrators:

Arbitral proceedings and powers and duties of an arbitrator are mentioned in chapter four and section 21 mentions the different powers. As part of the Act, arbitrators are given a variety of powers and duties to ensure that arbitration proceedings run smoothly.

As well as determining the admissibility and relevance of evidence, arbitrators administer oaths, issue subpoenas, and issue interim orders. In addition, they must ensure that the parties are given an equal chance to present their case and conduct the proceedings in a fair and impartial manner.

7. Award:

Provisions for the award are mentioned in section 24 of the Act. An award must be in writing, signed by the arbitrators, and contain the reasons for the decision unless otherwise agreed by the parties. The Act outlines the requirements for making an arbitral award.

The Act allows the parties to agree on the language of the award, and if there is no agreement, the default language is Nepali. The award should also state the date and place of arbitration.

8. Appeal:

There is limited scope for appealing an arbitral award under the Act. An appeal can be filed within 35 days of the date of receipt of the award by either party. Appeals can be filed on grounds of procedural irregularities, lack of jurisdiction, or public policy violations.

Court intervention in arbitral proceedings is generally limited and the arbitral award is generally binding and final under the Act. Such provisions are mentioned under section 3.

9. Execution of award:

Execution of the award is mentioned under section 31 of the Act. If an arbitral award becomes final and binding, either party may apply to the court for enforcement. The court enforces the award in accordance with international conventions and treaties as a decree.

The Act also provides for the recognition and enforcement of foreign arbitration awards in Nepal. Such as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Act provides for the recognition and enforcement of foreign arbitration awards in Nepal.

In Nepal, the Nepal Arbitration Act, of 2055, aims to provide a comprehensive legal framework for arbitration proceedings, promoting alternative dispute resolution, efficiency, and fairness in resolving disputes outside of traditional court processes.

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