What to Do if Someone Ignores Arbitration Agreement?

Arbitration is a private dispute resolution process where two or more parties agree to resolve their dispute by appearing before an arbitral tribunal instead of Courts or any legally established public forum. By signing such agreements, both parties mutually consent to give up their right to initiate any proceedings in Courts or public forums.

Although this provides a smooth dispute resolution process, a question that commonly arises is – what can be done if one party ignores the arbitration agreement and approaches the Court to resolve the dispute?

Well, keep reading to learn what can be done in such instances.

Relevant Provisions

The provision relevant in cases where a party chooses to ignore the arbitration and approaches a Court for dispute resolution is Section 8 of the Arbitration and Conciliation Act, 1996 (referred to hereafter as ‘Act’).

• In case there is an arbitration agreement between two parties and one party chooses to ignore it and file a case in any Court of law or public forum and the other party raises an objection stating the presence of an arbitration clause, the presiding judicial authority must acknowledge such objections.
• If the objection is found to be sustainable, it shall be referred to arbitration by the judicial authority.

Section 8 of the Act basically grants a judicial authority the power to refer parties that approach them for dispute resolution and who are parties to an arbitration agreement to resolve their dispute via arbitration rather than deciding the action itself. However, this power shall only be exercisable when:

• A party to an arbitration agreement, or any person claiming through or under such party files an application, and
• The application is filed not later than the date of submission of their first statement on the substance of the dispute.

Here is an example to help you understand Section 8:

Consider A supplies certain goods to B and raises an invoice for the goods delivered. The invoice raised mentions that any dispute between the parties (A and B) shall be resolved through arbitration. B does not make the payment required as per the invoice to A. Thereafter A files a suit to recover the same before a civil court. In this case, the invoice in question noted that disputes are to be resolved through arbitration and as such, B must, in the case filed by A, file an application under Section 8 of the Arbitration and Conciliation Act, 1996 and request the entire case to be referred to arbitration.
Certain crucial points that must be kept in mind when deciding about such an application mentioned under Section 8 are:

• The Court shall refer the parties to arbitration unless it, in the first impression, finds that no valid arbitration agreement exists. This basically means that the Court must simply determine the existence of a valid arbitration agreement between the disputing parties.
• The original arbitration agreement or a duly certified copy of the same must be duly attached with the Application.
• The application is not filed later than the date on which they submitted their first statement on the substance of the dispute.

At this point, it is important to discuss the meaning of the phrase ‘first statement on the substance of the dispute’. This phrase, which is provided under Section 8 of the Act, is quite different from a ‘written statement’, which is understood to be a form of pleading under the Code of Civil Procedure. This expression basically refers to the submission made by the party filing the application under Section 8 of the Act to the judicial authority. To put it simply, the point that must be kept in mind when considering the meaning of the above-mentioned expression is whether the party making reference to arbitration has waived their right to invoke the arbitration clause of their agreement.

Here is an example to help you understand:

Say, a suit is filed against a defendant. There is an arbitration agreement that exists as well. In addition to the suit, an injunction is filed against the defendant. Now, simply replying to the injunction filed against them cannot be claimed to be their ‘first statement on the substance of the dispute’ that they intend to resolve.

In such cases, it is advisable that the defendant clearly states in their reply that their response is without prejudice to their objection regarding the judicial authority’s jurisdiction.

In Section 8 of the Act, the interpretation for ‘valid’ arbitration agreement means the ‘formal validity’ of the arbitration agreement. This basically refers to whether it was a written agreement or consists in some exchanged letters, etc.

• Determining whether the subject matter of a dispute is arbitrable may not be apt when referring under Section 8 of the Act. However, it is clear that the subject matter is not arbitrable at all, Courts may simply declare so and save the effectiveness and efficiency of the arbitration process.

In Section 8, furthermore, the term ‘prima facie’ can be interpreted as: ‘the individual who files the application under Section 8 (‘Defendant’) must make it evident at the first instance that a valid arbitration agreement does not exist and summarily portray that they are entitled to such a finding.’

However, if the individual fails to convince the Court of the same based upon the presented documents and need a thorough examination of documents and facts to prove their claims, the case must be referred for a full trial under the Tribunal.

This adherence was established on the jurisdictional power granted to Courts at the pre-reference stage to balance the Tribunal’s power with judicial interference.

This Section’s ‘negative’ language must be considered when assessing and interpreting this Section. As such, Courts should only refer cases if it cannot be established whether an arbitration agreement exists. The Courts’ rule is - whenever in doubt, refer.

Conclusion

Arbitration agreements cannot be ignored simply because one party to the agreement wishes to do so. When they violate the agreement and initiate proceedings, the other party may object to the proceedings stating the existence of an arbitration agreement between the disputing parties. In cases where the objection is valid, the Court of law shall uphold the agreement and refer the matter for fair arbitration.