Corporate Arbitration: Companies Act, 2013 and Arbitration Clauses
Corporate arbitration is a process of resolving disputes between corporate entities. A dispute can be resolved through arbitration if the parties agree to use it, or if the contracts entered into between the parties has an arbitration clause. It also allows for the resolution of legal disputes between businesses and their customers, as well as any other disputes that arise within the business’s industry sector. In order to avoid expensive litigation and lengthy court proceedings, arbitration clauses are often used in contracts.[1]
Arbitration clauses come into effect when parties agree to use this process towards an end result, which is commonly defined as “the final decision” or “award” This decision is usually made by an arbitrator or a panel of arbitrators after all the evidence has been presented by all the parties in question. There are several factors that influence the type of process used or what protection is provided to the business and its customers.[2] This is dependent on each case, although it is likely that in one example, the customer will be provided with more consumer protection than a business would be provided with.
When is a corporate arbitration clause used?
The use of arbitration clauses can differ depending on the industry sector, but there are common grounds for its use in many situations. In order to achieve the desired end result in an efficient manner, parties may decide to negotiate an arbitration clause into their contract.
Companies may decide that they would like an arbitration clause in their contracts or commercial agreements because it allows them to avoid lengthy and expensive litigation which can cause a huge financial strain or bad public relations.[3] For example, a company may decide to have an arbitration clause in its contract with customers if they wish to avoid a situation where a customer decides to pursue legal action and tarnish the reputation of the company.
In theory, the arbitration clause would allow the parties in question to resolve their dispute without having to go through the entire process of court proceedings.
Arbitration and Companies Act
The Companies Act 2013 made significant changes to how businesses operate and introduced alternative dispute resolution as a key tool for resolving disputes involving corporate affairs. According to the previous Companies Act 1956, there were many conflict resolution organisations and forums to offer judicial resolution in a variety of business matters, and Indian companies were compelled to approach these various forums for dispute resolution depending on the issue at hand.[4]
This led to a backlog of cases and prolonged litigation, which were serious barriers to India’s ability to conduct business easily.[5] The introduction of mediation and arbitration for the resolution of major corporate disputes in India helped streamline the process. Additionally, the Indian government has made a number of changes to its dispute resolution system over the past several years to ensure the prompt and effective settlement of corporate and commercial disputes in India.[6]
The creation of Commercial Courts, modifications to the Arbitration and Conciliation Act, adoption of the Insolvency and Bankruptcy Code, creation of the National Company Law Tribunal (NCLT), and publication of the Companies Mediation and Conciliation Rules, 2016 all represent a complete overhaul of the dispute resolution framework in India’s Corporate Litigation.[7]
Section 442: Mediation and Conciliation Panel
In everyday speech, mediation refers to the involvement of a neutral third party in a disagreement with the goal of resolving it. One of the new clauses that was added to the Companies Act 2013 was the Constitution of Mediation and Conciliation Panel. A panel of specialists known as the mediation panel may be maintained by the Central Government under Section 442 of the Act in order to facilitate mediation between parties throughout any proceedings that are currently before the Central Government, NCLT, or NCLAT.[8]
According to MCA’s announcement of March 26, 2014, this provision became effective on April 1st. The Companies (Mediation and Conciliation) Rules, 2016, which set forth requirements and procedures for appointment as Mediators or Conciliators, were published by MCA.[9] The Rules guarantee that the Panel acts in good faith by laying forth specific ethical standards that each member of the Panel must uphold toward the parties, particularly by bearing in mind the relationship of faith that must be maintained throughout the proceedings.
This clause states that the disputing parties may voluntarily apply to the appropriate body, such as the Central Government, NCLT, or NCLAT, to submit the disagreement to the Mediation Panel. Alternatively, any case relating to any current processes before the Central Government, NCLT, or NCLAT may be independently referred to the Mediation Panel.[10] Within three months of the reference date, the Mediation Panel must attempt to settle the dispute.[11]
However, disputes involving investigations started under Chapter XIV of the 2013 Act, such as those involving serious and specific allegations of fraud, misfeasance, or malfeasance of the company’s officers, or situations involving prosecution for criminal and non-compoundable offences, cannot be referred to a mediation conciliation panel.[12] Every mediation session aims to make it easier for the parties to arrive at a mutually agreeable resolution while also guaranteeing the secrecy of the parties’ information and forbidding its use in any other actions.
In addition, mediation is less expensive and time-consuming as compared to litigation before courts, quasi-judicial tribunals, or even arbitral tribunals.[13] If the mediation is successful, there may be a settlement agreement with the consent of all parties; this agreement will then be filed before the appropriate authority by the panel and becomes binding. If the parties to the dispute are unable to reach a solution, the panel may send the case back to the appropriate body for decision-making.
Researchers’ Note
With the use of alternative dispute resolution methods, parties are able to resolve their disputes more efficiently and avoid the trouble of formal litigation. Alternative dispute resolution methods are: Collaborative practices involving consultations or co-operation; Mediation, a process by which a neutral third party facilitates the parties to resolve a dispute; Arbitration, which is a form of adjudication in which a neutral third party hears evidence and appeals from both sides prior to deciding the outcome; Negotiation, where parties try to come to an agreement out of court through mutual concession. The Companies Act 2013 has given rise to new processes of resolving corporate disputes. Conciliation and Mediation are effective tools for speedy disposal of disputes. It has provided for an expeditious means of dispute resolution by the constitution of mediation and conciliation panel.
Conclusion
In the present competitive and dynamic corporate environment, every company is engaged in a perpetual battle between those who want to grow their companies and those who are threatened by this growth. In order to win the battle and survive in such an atmosphere, companies need to consolidate their position against external threats by maintaining a powerful legal team. Arbitration clauses embedded within commercial contracts provide an excellent opportunity for employing companies to reap the benefits of this consolidation strategy.
Under the legal framework prevailing in India, arbitration agreements have been specifically defined by the Arbitration and Conciliation Act, 1996.[14] Arbitration is an alternate dispute resolution mechanism that allows disputes to be decided by an independent neutral and is ancillary to the court proceedings.
In India, arbitration agreements are not provided for under any specific statute and are therefore governed by general principles of contract law. Under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Arbitration Act”), an arbitral tribunal can be constituted only if a party to a commercial agreement initiates and thereby gets recognized as a party to this particular arrangement.
Arbitration clauses contribute to the means of achieving the above objective. Secondly, they also offer a level playing field between companies and their rivals by curbing the excessive power of corporate directors vested with legal immunity to act in a certain manner. Arbitration clauses protect the proper operation and maintenance of commercial relationships between companies by providing an effective mechanism for dealing with issues relating to contractual obligations.
-P. Renuka Sai
Intern
Damodaram Sanjivayya National Law University
References
- Allotti, Valentina. “Corporate Mediation and Company Law.” Corporate Mediation Journal 5, no. 1 (2021): 7–11. https://doi.org/10.5553/cmj/254246022021005001003.
- Anesa, Patrizia. “Arbitration Practice in India.” International Arbitration Discourse and Practices in Asia, 2017, 54–67. https://doi.org/10.4324/9781315229799-6.
- Doyle, Anna. “The Gift of Corporate Mediation Skills.” Corporate Mediation Journal 5, no. 1 (2021): 1–2. https://doi.org/10.5553/cmj/254246022021005001001.
- Jhunjhunwala, Shital, and B Deepa. “Corporate Governance Law in India: An Update Comparative Analysis of Companies Act 2013 and Companies Act 1956.” Indian Journal of Corporate Governance 6, no. 2 (2013): 52–114. https://doi.org/10.1177/0974686220130204.
- Kohli, KPS. “ADR under the Companies Act, 2013 – Is India Inc.. Ready? – Corporate and Company Law – India.” ADR Under The Companies Act, 2013 – Is India Inc. Ready? – Corporate and Company Law – India. Dhir & Dhir Associates, May 21, 2018. https://www.mondaq.com/india/corporate-and-company-law/702928/adr-under-the-companies-act-2013—is-india-inc-ready.
- Raz, Asaf. “Mandatory Arbitration and the Boundaries of Corporate Law.” SSRN Electronic Journal, 2020. https://doi.org/10.2139/ssrn.3754604.
- Simmonds, Kenneth R. “International Arbitration between States and Corporate Entities: A Cautionary Note.” Contemporary Problems in International Arbitration, 1987, 273–78. https://doi.org/10.1007/978-94-017-1156-2_25.
- Spahr, Ballard, and Carl Schneider. “Arbitration Provisions in Corporate Governance Documents.” The Harvard Law School Forum on Corporate Governance, April 27, 2012. https://corpgov.law.harvard.edu/2012/04/27/arbitration-provisions-in-corporate-governance-documents/.
[1] Asaf Raz, “Mandatory Arbitration and the Boundaries of Corporate Law,” SSRN Electronic Journal, 2020, https://doi.org/10.2139/ssrn.3754604.
[2] Kenneth R. Simmonds, “International Arbitration between States and Corporate Entities: A Cautionary Note,” Contemporary Problems in International Arbitration, 1987, pp. 273-278, https://doi.org/10.1007/978-94-017-1156-2_25.
[3] ibid.
[4] Shital Jhunjhunwala and B Deepa, “Corporate Governance Law in India: An Update Comparative Analysis of Companies Act 2013 and Companies Act 1956,” Indian Journal of Corporate Governance 6, no. 2 (2013): pp. 52-114, https://doi.org/10.1177/0974686220130204.
[5] Ballard Spahr and Carl Schneider, “Arbitration Provisions in Corporate Governance Documents,” The Harvard Law School Forum on Corporate Governance, April 27, 2012, https://corpgov.law.harvard.edu/2012/04/27/arbitration-provisions-in-corporate-governance-documents/.
[6] Valentina Allotti, “Corporate Mediation and Company Law,” Corporate Mediation Journal 5, no. 1 (2021): pp. 7-11, https://doi.org/10.5553/cmj/254246022021005001003.
[7] KPS Kohli, “ADR under the Companies Act, 2013 – Is India Inc.. Ready? – Corporate and Company Law – India,” ADR Under The Companies Act, 2013 – Is India Inc. Ready? – Corporate and Company Law – India (Dhir & Dhir Associates, May 21, 2018), https://www.mondaq.com/india/corporate-and-company-law/702928/adr-under-the-companies-act-2013—is-india-inc-ready.
[8] Section 442, Companies Act, 2013.
[9] The Companies (Mediation and Conciliation) Rules, 2016.
[10] Supra Note 11.
[11] Ibid.
[12] Anna Doyle, “The Gift of Corporate Mediation Skills,” Corporate Mediation Journal 5, no. 1 (2021): pp. 1-2, https://doi.org/10.5553/cmj/254246022021005001001.
[13] Valentina Allotti, “Corporate Mediation and Company Law,” Corporate Mediation Journal 5, no. 1 (2021): pp. 7-11, https://doi.org/10.5553/cmj/254246022021005001003.
[14] Patrizia Anesa, “Arbitration Practice in India,” International Arbitration Discourse and Practices in Asia, 2017, pp. 54-67, https://doi.org/10.4324/9781315229799-6.
Disclaimer: The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of BIMACC, any of the members of the Board, or the empanelled neutrals.