Conduct of Arbitral Proceeding: Section 21 of Arbitration and Conciliation Act | Law Optional Notes for UPSC PDF Download

Introduction

• Section 21 of the Arbitration and Conciliation Act, 1996, focuses on how arbitral proceedings begin.
• According to this section, arbitration proceedings start from the moment the respondent receives the request to refer the dispute to arbitration, unless a specific date has been agreed upon by the parties.
• Notifying the respondent through a legal notice about the referral of the dispute to arbitration is crucial.
• It emphasizes that arbitration is a process based on the mutual agreement of both parties.
• This provision in Section 21 is inspired by Article 21 of the UNCITRAL Model Law.

Essentials of Section 21 of Arbitration and Conciliation Act, 1996

• Section 21 deals with the initiation of arbitral proceedings and understanding its key components is vital.
• In a specific case (M/S D.P. Construction v. M/S Vishvaraj Environment Pvt. Ltd. (2021)), the court examined various legal precedents related to Section 21.
• The court emphasized the importance of providing notice before commencing the arbitration process, highlighting the significance of mutual consent.

The Importance of Notice under Section 21

• The notice mandated by Section 21 of the Act plays a crucial role in arbitration proceedings. It must be unambiguous, clearly indicating the party's intention to resolve a dispute through arbitration.
• For example, a party must not only inform the other party but also proceed with appointing arbitrators after issuing the notice. This proactive step sets the arbitration process in motion.

Necessity of Request for Arbitration

• Mere identification of claims and issues in a dispute is insufficient to trigger arbitration proceedings unless a formal request for arbitration is made by one of the parties involved.
• For instance, a party cannot unilaterally refer a dispute to arbitration solely based on outlining the matters in contention without a specific request for arbitration.

Adherence to Agreed Procedure

• Parties must adhere to the agreed-upon procedure outlined in the arbitration clause for initiating arbitration. Failure to follow this procedure can lead to jurisdictional issues under Section 11 of the Act.
• This failure to comply with the agreed procedure shifts the matter to the court's jurisdiction for resolution, as the prerequisite for invoking Section 11 jurisdiction is not met.

Legal Consequences of Issuing a Notice

• Judicial precedents highlight that issuing a notice in accordance with Section 21 of the Act triggers legal implications, such as the commencement of the limitation period for the dispute.
• This means that once a notice is officially issued as per the Act, various legal consequences, including the initiation of the limitation period, come into effect.

Particulars to be included in the notice

• Names of both parties
• Addresses of the parties
• Details about the relationship and commercial interactions between the parties
• Overview of the facts of the case
• Explanation of the issues related to the dispute
• Clarification on the responsibilities that the opposite party needs to fulfill
• Identification of the arbitration clause that led to the dispute being referred to arbitration
• Specification of the time period within which the opposite party is required to respond
• If an arbitral tribunal needs to be established, request the opposite party to nominate arbitrator(s)

In a legal case like Smt. Veena W v. Seth Industries Limited (2010), the Bombay High Court emphasized that a notice issued under Section 21 of the Act should outline the dispute or the facts that triggered the disagreement between the parties. It needs to highlight the subject matter for which the arbitration clause has been invoked, leading to the case being referred to arbitration.

Significance of issuing notice under Section 21 of the Act

One question that may come to mind is whether giving notice under Section 21 is obligatory. Issuing notice under this section is deemed mandatory due to the following reasons:

• Ensures legal compliance and adherence to statutory requirements.
• Facilitates transparency in communication between parties involved.
• Helps in providing a formal record of the communication exchange.
• Initiates a structured process for addressing issues or disputes.

Importance of Notice in Arbitration Agreements

• The party being accused in an arbitration agreement must be informed about the claims made and the referral to arbitration.
• Upon receiving the notice, the respondent can accept or deny claims, presenting their side of the story.

Opportunity for the Respondent

• Issuing a notice allows the respondent to contest claims, check for time limitations, estoppel, and assess if the dispute is arbitrable.

Clarifying Arbitration Process

• Notices help in outlining the arbitration process, including determining the arbitration seat, applicable laws, and arbitrator appointments.
• Section 11 emphasizes the mutual appointment of arbitrators by both parties, resorting to courts or institutions if they fail to agree.

Significance of Mutual Consent

• If one party unilaterally appoints an arbitrator, the other party can object, potentially disqualifying the appointed arbitrator for that specific dispute.
• Issuing a notice under Section 21 ensures the crucial element of arbitration—consent from both parties.

Objective of Section 21 of Arbitration and Conciliation Act, 1996

The main goal of arbitration and conciliation is to alleviate the burden on courts, reduce pending cases, and expedite justice delivery. Section 21 of the Act plays a crucial role in achieving these objectives. It governs the initiation of arbitral proceedings while upholding the principles of natural justice by notifying the respondent about the arbitration referral.

Alupro Buildings System Pvt. Ltd. v. Ozone Overseas Pvt. Ltd. (2017)

• The Delhi High Court clarified Section 21 of the Arbitration and Conciliation Act, 1996, emphasizing its mandatory nature.
• Notice under Section 21 is a prerequisite before commencing arbitral proceedings.
• Filing a claim before an arbitrator necessitates compliance with Section 21.

Arbitral Process under Arbitration and Conciliation Act, 1996

Arbitration Agreement

• Integral to arbitration, an agreement signifies mutual consent between parties.
• As per Section 7, the agreement should be in written form, whether within a contract, separate document, or clause.
• Courts have debated the necessity of signing the agreement. The Supreme Court ruled in M/S Caravel Shipping Services v. M/S Premier Seafoods Exim Pvt. Ltd (2018) that a signature isn't mandatory, but written form is essential.

Notice under Section 21 of the Act

• When a party initiates arbitration, they must inform the opposing party about the dispute resolution process. This ensures that both parties consent to arbitration and allows the respondent to present their perspective.
• Think of this notification like serving summons to defendants in a civil case. Just as a defendant must respond after being summoned, informing the opposing party under Section 21 of the Act sets the stage for the arbitration process.

Appointment of Arbitrators

• Arbitrators are chosen mutually by both parties involved in the dispute resolution process.
• According to Section 10 of the Act, parties can select any odd number of arbitrators. The selection process is detailed in Section 11 of the Act.
• If the parties cannot agree on arbitrator selection, they can seek assistance from the high court for domestic arbitration or the Supreme Court for international commercial arbitration, or designated institutions for guidance.

Statements of Claim and Defence

After the appointment of arbitrators and the formation of an arbitral tribunal, the claimant is required to file a statement of claim while the respondent is required to file a statement of defence. According to Section 23 of the Act, the claimant must provide relevant facts supporting the claim, issue at hand, and relief or remedy sought. The respondent can file his defense concerning these specifics. Additionally, the respondent can submit a counter-claim or claim set off, subject to arbitration agreement terms. If falling within the agreement's scope, the tribunal may decide on these claims. Both the statement of claim and defense should be submitted within 6 months from the arbitrators' notice of appointment.

• Requirement after Arbitrators' Appointment: Following arbitrators' appointment and tribunal formation, the claimant must submit a statement of claim, and the respondent must file a statement of defense.
• Details in the Claimant's Statement: The claimant needs to present relevant facts that support the claim, describe the issue at hand, and outline the sought relief or remedy.
• Respondent's Defense Filing: The respondent should respond to the claim and address the particulars provided by the claimant.
• Submission Timeline: Both statements, along with any counter-claims or claim set-offs, must be lodged within 6 months from the arbitrators' appointment notification.

Hearing of parties

• After the submission of claims and defenses by both parties, they are provided with an opportunity to present their arguments before the arbitral tribunal.
• Based on these presentations, the arbitral tribunal makes its decision on the matter.

Arbitral award

• Following the hearing of the parties and the submission of necessary evidence, the arbitral tribunal issues an arbitral award that carries the same legal weight as a court decree.
• Upon receiving a favorable arbitral award, the opposing party has a 90-day window to contest the decision as per Section 34 of the Act.
• During this period, the awarded judgment cannot be enforced.
• The arbitral tribunal is authorized to grant interim relief if deemed necessary during the arbitration process under Section 17 of the Act.

Important case laws 

M/S D.P. Construction v. M/S Vishvaraj Environment Pvt. Ltd. (2021)

Facts of the case

• In this legal case, the Nagpur Municipal Corporation assigned pipeline work to Vishvaraj Environment Pvt. Ltd (the respondent), who subcontracted D.P. Construction (the applicant) through a work order.
• The work order included an arbitration clause for dispute resolution. When a disagreement arose, the applicant notified the respondent about claims and arbitration.
• After the respondent rejected the claim in response, the applicant sought court assistance for arbitrator appointment.

Issues involved in the case

• Whether the court should appoint arbitrators in this scenario.
• Whether the notice sent to the respondent complied with Section 21 of the Act.

Judgement of the court

• The respondent contended that the arbitration clause outlined a two-step dispute resolution process, suggesting the applicant bypassed the initial step, therefore deeming the Section 11 application inappropriate.
• Additionally, it was argued that the notice failed to meet Section 21 requirements, as it did not mention the arbitration agreement or indicate the dispute was being referred to arbitration.

Understanding the Application of Section 11 by the Bombay High Court

• When moving to the second-tier of arbitration, the applicant must fulfill all requirements of the first-tier arbitration clause.

Key Considerations Regarding Notice under Section 21

• The notice invoking arbitration must be unambiguous, expressing a clear intent to refer the dispute to arbitration and summoning the opposing party accordingly.
• A formal request from one party to refer the dispute to arbitration is essential; merely outlining the issue and claim does not suffice to enable arbitration.
• Prior to seeking the court's intervention under Section 11, parties must adhere to the agreed-upon arbitration procedure outlined in the arbitration clause. This adherence is a prerequisite for both court jurisdiction activation and arbitrator appointment.

The court's ruling in this case found the initial notice sent by the applicant to be inadequate under Section 21. Nonetheless, the court preserved the applicant's right to initiate arbitration pending the issuance of a compliant notice under Section 21 and submission of a fresh application under Section 11 of the Act.

West Bengal Power Development Corporation Limited v. Sical Mining Limited (2023)

Facts of the case

• In this legal matter, the involved parties had a contract related to coal mining that included a provision for arbitration to settle any disputes. 
• When a disagreement arose, the Additional Chief Secretary of the Power Department appointed a single arbitrator. 
• The respondent contested this appointment under Section 14 of the Act. 
• The applicant then sought court assistance to appoint an arbitrator, but the respondent objected, citing the absence of a notice under Section 21 of the Act.

Issues involved in the case

• The main question at hand was whether the request for an arbitrator's appointment in this scenario should be accepted.

Judgement of the court

• The Calcutta High Court ruled against appointing arbitrators and rejected the application made under Section 11 of the Act. 
• The court emphasized that the requirement for a notice under Section 21 of the Act—considered a prerequisite for submitting an application under Section 11—had not been met. 
• It was reiterated that issuing a notice under Section 21 is mandatory before seeking the appointment of an arbitrator under Section 11 of the Act.

Alupro Buildings System Pvt Ltd v. Ozone Overseas Pvt. Ltd. (2017)

Facts of the case

• In this legal instance, Alupro Buildings System Pvt Ltd, a company headquartered in Bangalore, placed four purchase orders with Ozone Overseas Pvt. Ltd. The full payment for these orders was duly made. 
• Subsequently, Alupro received a notice from an arbitrator appointed by Ozone Overseas Pvt. Ltd. demanding payment for goods sold to Alupro. 
• Alupro argued that the appointment of the arbitrator was invalid since no prior notice under Section 21 of the Act had been issued, thus contesting the legitimacy of the arbitration process.

Issues involved in the case

• The central question at hand was whether the arbitration proceedings could be rightfully commenced in this scenario.

Judgement of the court

• The Delhi High Court, in its ruling, emphasized the critical nature of issuing a notice under Section 21 of the Act. 
• It highlighted that a party facing a claim must be informed about the specifics of the claim to respond appropriately. 
• Notably, such a party might choose to accept certain claims while refuting others. 
• Additionally, issuing a notice under Section 21 enables the opposing party to raise objections concerning the claims, such as whether they are time-barred, barred by estoppel, or to present counter-claims if necessary. 
• Moreover, in cases where parties have agreed upon a specific procedure for arbitrator appointment, the absence of such a notice makes it challenging to ascertain whether the agreed procedure was adhered to.

Malvika Rajnikant Mehta v. Jess Construction Pvt. Ltd. (2022)

Facts of the case

• In this legal case, three applicants transferred property rights to the respondent through a conveyance deed.
• According to the deed, the respondent was obligated to construct a new building within 42 months and deliver it.
• If the construction was delayed, the respondent would be liable to pay interest and liquidated damages monthly.
• The time frame for construction was later adjusted to 34 months.
• The deed stipulated that any disputes would be resolved through arbitration with a sole arbitrator, Mr. Kirti K. Shah.
• Due to the respondent's failure to fulfill obligations, the case proceeded to arbitration.
• The respondent claimed that the arbitrator, Mr. Kirti K. Shah, was biased due to a personal relationship with the applicants.
• Efforts to select a new arbitrator outside of court intervention were unsuccessful.
• An application under Section 11 was submitted to the court to appoint an arbitrator, contested by the respondent citing non-compliance with the prescribed procedure under Section 21 of the Act.

Issues involved in the case

• Transfer of property rights and obligations under the conveyance deed.
• Construction timeline and liabilities for delay.
• Arbitration clause and appointment of sole arbitrator.
• Dispute over the eligibility and impartiality of the arbitrator.
• Efforts to resolve the dispute outside of court intervention.
• Application under Section 11 for court-appointed arbitrator.
• Contestation regarding compliance with the prescribed arbitration procedure.

Whether the parties followed the correct process to initiate arbitration:

• The Bombay High Court emphasized the significance of correctly invoking arbitration and the purpose behind sending a notice under Section 21 of the Act.
• Sending such a notice to the opposing party outlines the nature of claims being made by the party requesting a dispute to be referred to arbitration.
• It allows the other party to accept or challenge the claims and to raise any concerns regarding the appointment or impartiality of the arbitrator.
• The timing of receiving the notice is crucial in determining the start date of the arbitration proceedings.
• Mere nomination of an arbitrator by the parties does not imply a waiver of the notice requirement.
• The court ruled that the respondent also initiated arbitration by suggesting an arbitrator, which confirms the presence of an arbitration agreement, a dispute, and the arbitrability of the matter.
• Therefore, the central issue was the appointment of an arbitrator.

Judgement of the Court

• The Bombay High Court underscored the importance of correctly initiating arbitration and the purpose of serving a notice under Section 21 of the Act. This notice informs the opposing party of the claims being made and allows them to respond and raise objections. The timing of notice receipt is crucial for establishing the start date of arbitration proceedings. The court clarified that nominating an arbitrator does not negate the need for a formal notice. The respondent’s suggestion of an arbitrator was deemed as invoking arbitration, indicating the presence of an arbitration agreement and a dispute. Therefore, the primary issue revolved around appointing an arbitrator.

Conclusion

• Alternative Dispute Resolution (ADR) mechanisms offer parties alternative ways to settle disputes, either with the assistance of a third party or independently. Arbitration, a commonly used mechanism, results in an award that holds the same legal weight as a court decree. To initiate arbitration, one party must formally request it, and the other party must be informed through a proper notice under Section 21 of the Act.
• It is evident from legal rulings that sending a notice under Section 21 holds significance in the process of appointing arbitrators as per Section 11 of the Act. In instances where parties are unable to mutually select arbitrators, they have the option to petition the High Court for domestic arbitration or the Supreme Court for international commercial arbitration to aid in the appointment.