Arbitration vs. Commercial Courts

By Varoon Biyani, 2nd Semester, Amity Law School, Noida

Intern at Counsel Quest

To understand this topic, we need to understand what is arbitration and the jurisdiction of commercial courts over certain category of disputes. ADR which stands for Alternate dispute resolution, are the methods which are used for out of the court settlements. ADR has two methods Arbitration and Conciliation. Arbitration is a process where the dispute between two parties is submitted to the third party called the arbitrator, whose decision is binding upon both the parties before it. Conciliation, on the other hand, is a non-binding mediation, which is voluntary as the parties are free to attempt and resolve their issues by conciliation, also the ultimate decision to agree on the settlement remains with the parties. Arbitration has no defined procedure but the most common practice is:-

Several disputes which come under Arbitration are:-

Disputes which do not come under Arbitration:-

Commercial Courts were introduced by an act of the Parliament and was called ‘The Commercial Courts Act, 2015’. The aim of the act was to initiate the speedy disposal of high commercial value cases in India. It was done to improve India’s ranking in the World, when it comes to ‘Ease of Doing Business’. The act allowed the State Government and High Courts to designate courts at the High Court and District Court level as Commercial Courts to hear commercial matters above a certain value. The specified value of a commercial dispute which will bring the matter to commercial court was 10 Million INR (1 Crore), which was later amended in 2018 and reduced to INR 3 Lakhs.

For disputed which involved the recovery of money arising out of Commercial Contracts and Agreements, prior to the coming of the Act of 2015, the method had been of arbitration or the cumbersome recovery suits, which were effective, but apparently, both the modes had its own shortcomings both by way of cost and especially of them being more time-consuming. For that reason, companies and individuals hesitated from indulging in the cases relating to the monetary recovery, unless the value was high or worthy enough of the cost and time involved, and for that reason, the Act of 2015 opened a gateway for a speedy recovery for Redressal of money relating cases arising out of Commercial Contracts and Agreements.

If we think, which platform is better for the recovery of money arising out of Commercial Contracts and Agreements, the answer is quite simple, the main function of the commercial courts is to help with the speedy recovery for the matters relating to money so as of now the Commercial courts are the better option as it is more effective, but yes the cases for recovery of the money whose principal amount is less than Rupees 3 Lakhs cannot be entertained in the commercial court as it does not fulfill the criteria given in the Act of 2015 and for a dispute less than that of Rupees 3 Lakhs, can submit their case in regular court or initiate an Arbitration, provided there is an Arbitration Clause in the Contract.

When we compare Arbitration with the commercial courts in respect to the regular recovery suits, the main topic which should be given importance is the money itself. How much money you spent on the recovery of money also matters, lets analyze the facts and find out which of the following is cheaper to the parties in the matter. According to the ‘The Bombay High Court (Fee Payable to Arbitrators) Rules 2018’ this schedule states that the Amount of money being spent on the fees of the arbitrators during the course of the arbitration:-

Sum in DisputeFees
Up-to  Rs. 500000Rs.45000
Above Rs.500000 and Below Rs.2000000Rs.45000 +3.5% of the Claim amount over and above Rs. 500000
Above Rs.2000000 and Below Rs.10000000Rs.97500 + 3% of the Claim amount over and above Rs.2000000
Above Rs.10000000 and Below Rs.100000000Rs.337500 + 1% of the Claim amount over and above Rs.10000000
Above Rs.100000000 and below Rs.200000000Rs.1237500 + 0.75% of the Claim amount over and above Rs.100000000
Above Rs.200000000Rs.1987500 + 0.5 % of the Claim amount over and above Rs.200000000

Note.— In the event, the arbitral tribunal is a sole arbitrator, he shall be entitled to an additional amount of twenty-five percent on the fee as per the Table set out above.

And along with it comes we also see that the parties have to pay the arbitrators not once or twice but the total of four times during the course of arbitration, this is also stated in the Rule 3 of the ‘The Bombay High Court (Fee Payable to Arbitrators) Rules 2018’ and the following are

(i) 40% of the fees if the pleadings are complete.

(ii) 60% of the fees if the hearing has commenced.

(iii) 80% of the fees if the hearing is concluded but the award is yet to be passed.

(iv)100% after the award is passed.

According to the Section 38(2) of Arbitration and Conciliation Act 1996 , The Fees of the Arbitrator has to shared equally between the parties .

If you compare the above with the Expense of the commercial court, it would be next to nothing as the judges appointed in the commercial courts are paid by the Government. The only Expense in commercial court is that of the Court Fee (for the plaintiff only), and the Legal Fee of lawyers appointed by their clients to represent them in the case.

To Understand it better lets take an Example,

Let A be a Plaintiff And B the Respondent , The Case is of Bills of Exchange worth 50 Crore, In this case let their be an Arbitral Tribunal consisting of 3 arbitrators. So now if calculate the Amount that would be given to the arbitrators is would be Rs.19,87,500 + Rs.15000 (0.5% over and above up-to Rs.30,00,000) =Rs.20,02,500 Per Single Arbitrator and if you count all three  of them, the Arbitrator Fee would some sum to be around Rs. 60,07,500 ( Rs.20,02,500 x 3) and that is excluding the Fees of the Lawyers and the over head expenses to set up the meeting which could be anywhere, depending upon the personal choice of arbitrators. So as to summarize it , it totals up-to Rs.30,03,750 which each party (assuming it to be 2 disputants) has to pay for conducting the arbitration in 50 Crore worth of bill of exchange (Excluding Lawyer Fees and over head expenses).

Overhead expenses in this case are related to the venue of the arbitration, which means where the arbitration will take place. This here is little bit tricky as it depends on the City of the disputants and also that of the arbitrators. Suppose if the court has decided to appoint a Retried High court judge he/she would conduct the arbitration in some private chambers (supposedly). But if the court appoints a Retired Chief justice of India as an arbitrator or such high profile person then the place of arbitration can be an expensive Conference Room in a 5 star hotel or somewhere of equal facility. The cost of that should also be considered in such a scenario.

Another issue which arises in arbitration is the day on which the Arbitration proceedings actually take place. Usually when an arbitrator is appointed and if that person is a Retired a Judge and the Lawyers representing them are practicing Advocates, so the days of arbitration would be the weekends when usually arbitrations are conducted. This in fact is very problematic for the lawyers as they work all the weekdays and keep the drafting of the new cases for the weekend but the meetings of arbitration take up their weekends, this creates unnecessary burden on the Advocates on the case and the chances of inefficiency or fatigue rise, however small but it is still an issue which one cannot overlook.

When we compare the same scenario with that of Commercial Courts Act, we know that after the Amendment of 2018 in the ‘The Commercial Court Act of 2015’ it brought about a huge change in Section 2 (i) which is related to the specified value of it jurisdiction (From 1 Crore to 3 Lakhs), but it is not the only major change, the amendment also included a New chapter III (A) which states the procedure of ‘Pre-Institutional Mediation’, which basically meant that the suits of non-urgent nature are to be compulsorily sent for mediation before proceeding with the suit itself and only if the mediation fails, only then the dispute it will be adjudicated by a Commercial Court, after an extensive trial.

The Mediation process according to the Article 12A (Sub Clause 3) shall be completed within 3 Months of the filing of the case and it can also be extended with the consent of the parties. Furthermore, according to the Section 12A (Sub Clause 5) the settlement after the mediation will have the same affect and status as that of the Commercial Suit Decree or Judgment.

Now if we compare Arbitration with the Commercial Courts in respect to the Recovery of Money, we can just deduct Rs. 60,07,500 + the Overhead Expense as the we do not have to pay the judges and also not for the meeting rooms or conference halls, only the Court Fees and the fees of the lawyer which has to be borne by the respective disputants, assuming that the time consumed by a Commercial Court and Arbitral Tribunal for passing a Judgment or Award is same.

Conclusion

India today is very different from the way it was half a decade ago, many things have changed, one of those is of the Recovery Cases which have become less Expensive and more efficient with the introduction of the Commercial Courts Act of 2015. This was a huge step as it will attract Foreign investment and also be beneficial to general public as the money spent in Recovery cases decreases substantially. Finally, if you think “Is Commercial Court for recovery more efficacious than arbitration? The Answer would definitely be “Yes”. Since many institutions are advertising institutional arbitration as it becomes a business hub for generating profits for the institution, arbitration is strongly propagated and Commercial Suits are not canvassed even when the later is much cheaper. Moreover, commercial contracts in India have since ages incorporated ‘Arbitration Clause’ in their contracts, thus binding a party to Arbitration in case of disputes, but the inclusion of Arbitrable Disputes as a Commercial Dispute (emphasis on section 10 of the Commercial Courts Act,2015) has changed the entire scenario of Arbitration being treated as a Commercial Dispute and thus attracting the jurisdiction of The Commercial Courts.

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