05/28/2024

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Adjudication vs. arbitration

This article is written by Sowbhagyalaxmi S Hegde. It emphasises on the differences as well as similarities between adjudication and arbitration and the impact they have on our lives. Being informed and making the right choice plays a pivotal role in dispute resolution, and this article seeks to contribute to the same. 

Introduction

Dispute resolution is the process of settling disputes between parties. Primarily, there exist two types of dispute resolution systems- an adjudication process; and a consensual process. In the consensual process, one of the methods is arbitration. One of the major factors in avoiding a more complicated litigation process, is the choosing of the right mechanism which solves the dispute quickly and cost-effectively. Arbitration is usually preferred here, but there are some situations where the arbitration cannot handle the situation at that time adjudication comes into picture. So, when arbitration cannot help, adjudication comes up with a fair and quick decision. So, when the legal battle hits the storm it’s not just about choosing the arbitration or adjudication, but it’s about picking the right tool to sail smoothly in the legal battle of the ocean. 

Adjudication and arbitration are both legal processes and methods that are used to resolve disputes, but they have a slight difference in their process and outcome. Adjudication is a process wherein a third party presides as a judge or adjudicator and their decision is legally binding but whereas, Arbitration is a process wherein an arbitrator, chosen by the parties, presides over and resolves the dispute amicably. Both adjudication and arbitration work towards achieving a common goal of quicker and cost-effective dispute resolution. 

What is adjudication

Adjudication refers to a legal process that aids in resolving the dispute or cases through a competent authority, such as a court, tribunal, quasi-judicial bodies, judicial bodies or administrative authority which are established by laws.

The adjudication process involves the following process:

  • Reviewing the evidence: Upon thorough examination of evidence and arguments, the adjudicator does a legal research and comes to the conclusion while delivering the judgement.
  • Determining the obligation and rights: The whole process determines the obligation and rights of the parties involved.
  • Delivering a Judgement: The process involves speeding up the delivery of the decision of the disputes that have arisen in conflict with the two parties. The result of the process is a legally binding judgement and a court opinion, and it has a further process of an appeal. 

In criminal law, adjudication typically occurs in the trial, where the accused is guilty or innocent based on the evidence presented before the judge. Under Criminal Procedure code (Cr.P.C) 1973, the judicial proceeding encompasses all the procedure in any court of justice such as investigation, enquiry, trial, and appeal. A significant case law that illustrates the adjudication in the landmark judgement of K.M. Nanavati v. State of Maharashtra (AIR 1962 SC 605), in this case the Supreme court of India conducted a thorough adjudication process of investigation, enquiry and trial to determine the guilt of the accused, Commander K.M. Nanavati, who was charged with the murder. The court’s adjudication involves a detailed examination of the evidence and also the legal principle before they reach the final decision.  Section 20 of the IPC defines a “court of justice” as, “The words “Court of Justice” denote a Judge who is empowered by law to act judicially alone, or a body of Judges which is empowered by law to act judicially as a body, when such Judge or body of Judges is acting judicially.”  Adjudication involves a formal traditional method as defined by the Cr.P.C and I.P.C in resolving the legal dispute. It also ensures a fair and impartial justice in accordance with the rule of societal law.

Additionally, as per Black’s Law Dictionary, adjudication also refers to the final and authoritative determination of the existing rights and claims of the parties in the dispute; the formal giving of judgement and decree of the court; the judgement or decree given.

Adjudication is a compulsory dispute-resolution mechanism that has the power to settle the disagreement when the dispute is still alive in any contract, as opposed to waiting till the project is over and then starting a lawsuit. 

Adjudication is a public process, which is carried out by an individual, neutral, third-party known as an adjudicator. The adjudicator could be an administrative person, a judge, a jury or any other authorised person or body. Such a person must possess vast experience and expertise in the concerned field. As an example, it can be seen that under Section 46 (3) of the IT Act 2000, no person shall be appointed as an adjudicating officer unless he possesses such experience in the respective field as prescribed by the central government. Adjudicators typically make a swift decision, within 28 days from hearing both sides’ arguments.

What is arbitration

Arbitration is a method of alternative dispute resolution and is governed by the Arbitration and Conciliation Act, 1996 (further amended in 2021). Arbitration is a private dispute resolution process where a neutral third party, called an arbitrator, facilitates the dispute and makes a binding decision. The significance of the aspect of neutrality can be inferred from an explanation under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, which states that a court can set aside an arbitral award on the grounds that the same was decided by means of being induced or by fraud. The parties involved in the disputes choose their arbitrator instead of going to the court. It is a binding procedure. 

Arbitration is a consensual process wherein the parties agree to resolve their dispute with an arbitral tribunal. The tribunal is usually appointed by the disputed parties, and the number of arbitrators is the choice of the disputed persons.  In arbitration proceedings, the dispute is decided by a single arbitrator or a panel of arbitrators (usually an odd number). The arbitrator performs the role of the judge and gives a final award which is binding on the parties. Arbitration clauses are a crucial part of commercial contracts. Contracts usually contain clauses specifying whether any disputes that arise would be settled by arbitration, the seat of arbitration, number of arbitrators and any other procedural aspects. 

As per Section 108(3) of the 1996 Act, the decision of the arbitrator is binding on the parties, and they shall comply with it until the dispute is finally determined by the final proceedings, by arbitration, or by mutual agreement between the parties. It is pertinent to note that, apart from the dispute initially referred to the arbitration, if a claimant seeks additional claims, and the respondents raise no objection, it can be inferred that they have agreed to settle these additional issues through arbitration as well. This underscores the interconnected nature of these disputed resolution mechanisms.

K. K. Modi v. K. N. Modi & Ors (1998) speaks about the importance of a clear intention as well as the parties’ explicit consent to arbitration. The intention must clearly exhibit their desire to resolve their dispute through arbitration and to include an arbitration clause in their contract. The Court elaborated on the principle that parties cannot be forced into arbitration against their will. Instead, they must voluntarily agree to resolve disputes through arbritration. Without the clear consent, arbitration cannot take place. 

McDonald’s India Pvt. Ltd v. Vikram Bakshi and Others (2016) mentioned that the Court would be in a position to grant an anti-arbitration injunction only in the circumstances wherein the arbitration agreement is null and void, inoperative or is incapable of being performed. In essence, the court emphasises on the principle of upholding the arbitration agreement while also recognizing instances wherein the agreement may be rendered ineffective. It also underscores the importance of ensuring that the parties cannot be compelled to arbitrate in a situation wherein the circumstances of arbitration itself is unfair. These principles were reaffirmed in  ADM International Sarl v. Sunraja Oil Industries Pvt. Ltd. And Others (2022).

Arbitration primarily is of two forms, i.e., Consensual and Statutory. Consensual arbitration is a voluntary agreement between the parties to resolve the dispute through arbitration. On the other hand, statutory arbitration is prescribed by the statutes. It reflects the legal obligation of the parties to resolve the dispute through alternative dispute resolution mechanisms.  Understanding the nature of arbitration clauses and their implication is essential in going through complexities of contractual relationships.

Arbitrations are usually divided into two types; 

1. Ad hoc arbitration 

In an ad hoc arbitration, the parties do not choose an institution to administer the arbitration. This gives the parties flexibility in conducting arbitration. The parties or the appointed authority have a right to appoint an arbitrator. These offer the parties’ flexibility with respect to the conduct of the arbitration. However, it faces the disadvantage of less external support.

The advantages of Ad hoc arbitration include-

  • Flexibility: Ad-hoc arbitration is more flexible. Parties can choose their own arbritrator, rules, applicable laws, procedure and administrative laws. They can also set their own timing and control.
  • Confidentiality: Ad-hoc arbitration is more confidential, since the parties who are present are the disputed parties.
  • Cost-effectiveness: Ad-hoc arbitration is more cost-effective, since it lacks administrative fees. 
  • Speed: Ad-hoc arbitration proceedings are more flexible and cost-effective hence it is faster too.    

Ad hoc arbitration can also be disadvantages, since it lacks the aid of supportive and administrative institutions. Additionally, the ad hoc arbitration system faces various levels of challenges in delivering the awards and lacks the ability to establish a body of precedents or case laws that shall guide in future disputes.

2. Institutional arbitration

Institutional arbitration is a type of arbitration that is managed by an arbitration institution. In institutional arbitration, the parties agree to the rules of the recognized arbitration institution and adopt it as their authority.

Here are a few roles of an arbitration institution in institutional arbitration-

  • Receiving the request for arbitration and distributing it to the respondent.
  • Appointing the tribunal 
  • Setting and administering the financial arrangements for the arbitrator.
  • Assisting the tribunal in dealing with any issues relating to the conduct of the arbitrator, that may arise. 

Institutional arbitration has several advantages-

  • It has default arbitration rules 
  • It receives the service of a permanent organisation 
  • It has a higher degree of certainty with respect to procedural arbitration

Institutional arbitration also faces a disadvantage of the possibility of parties losing their freedom of will over the course of arbitration, due to the lack of bureaucracy. 

How is arbitration more advantageous than adjudication

Aspects that depict how arbitration is more advantageous than adjudication:

Party autonomy

Party autonomy in arbitration refers to the principle that allows the parties in choosing an arbitration procedure by selecting an arbitrator, and process. This principle is enshrined in the Section 19 of the Arbitration and Conciliation Act 1996, which allows the parties to allow the number of selection of arbitrator and its procedure. Arbitration procedure allows the parties to select their arbitrator, along with the prescribed rules and procedure as to how they would like to conduct their arbitration. This flexibility ensures that the arbitration process is tailored to the needs of the parties involved.

In the case of TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd. (2019), the Supreme Court emphasised the importance of the party autonomy in arbitration proceedings. The court upheld the parties right in choosing their arbitrator in the arbitration proceedings and also said that it’s their fundamental right in arbitration.  However, in administrative and judicial adjudication such autonomy is limited. Administrative agencies and courts largely determine adjudicators and procedures, thus, reducing the parties influence over the process. 

Less formal

Arbitration proceedings are characterised by their informalities. These help the parties to present their cases in a more informal and comfortable way, and also it is more expressible. Section 19(1) of the Arbitration and Conciliation Act 1996, grants the arbitrator to conduct proceedings in a less formal way, promoting flexibility. Section 19(4) of the Arbitration and Conciliation Act 1996, grants the arbritrator the authority to determine the admissibility and the weightage of the evidence presented. This approach  fosters a comfortable and expressive environment for effective dispute resolution.  

In the case of Konkan Railway Corporation Ltd. v. Mehul Construction Co. (2000), Supreme Court of India recognized the informal ways in conducting the proceedings of the arbitration. The court ruled that the arbitrator has a discretion power to choose the proceedings in conduction arbitration with effective solution to the disputes.   

Speedy disposal

Arbitration offers the faster dispute resolution method. As the procedure is informal there is no strict timeline rule that governs the arbitration and along with it the parties has full control over the hearing period and deciding the proceedings in resolving the disputes.

In the case of Delhi Metro Rail Corporation Ltd. v. Voestalpine Schienen GmbH (2017), the Delhi High Court, recognized the efficiency of the arbitrator in delivering speedy justice. The court highlighted the flexibility in procedure and absence of unnecessary delay is the main reason in delivering the speedy resolution of the disputes.

Cost-effective

Arbitration is mostly cost-effective. As the procedure is less formal, and the procedure is decided by the parties, the delay in the process is minimised. All these factors contribute to the process being cost-effective. The affection management and reducing the lengthy procedure of the court contribute to be cost-effective. Section 19 of the Arbitration and Conciliation Act 1996 empowers the arbitrator to conduct the proceedings economically, and it contributes to its cost-effectiveness.

Confidentiality

Arbitration proceedings are generally confidential, offering the parties to maintain their privacy and discretion in resolving their disputes. Arbitration allows the parties to maintain confidentiality throughout the procedure, it also helps in safeguarding the sensitive information and maintaining the trade secrets. Section 42A of the Arbitration and Conciliation Act, 1996 addresses this by imposing the duty of confidentiality to all the parties who are all involved in the arbitration process.

Gas Authority of India Ltd. v. Spie Capag (1994) in this case the Delhi High Court observed that the arbitration maintains the confidentiality by involving the private firm in dispute resolution so that the confidentiality is maintained.  

Finality of decision

As the parties involved in the dispute resolution contribute to the certainty and predictability so the chances of appealing is limited, as the parties have a greater confidentiality and finality in decision.  Section 35 of the Arbitration and Conciliation Act, 1996 states that once the award is made it shall be final and binding on the parties.

Section 34 of the Arbitration and Conciliation Act, 1996 sets out the three months time limit for challenging the arbitral award, grounds for challenges are limited to matters such as Arbitration agreements, lack of jurisdiction, violation of public policy and procedure irregularities. Parties have to exhaust the remedies before seeking the court intervention. However, awards may be challenged if they violate the principle of natural justice.   

Voluntary intention to settle

Arbitration reflects the voluntary settling of disputes. These voluntary dispute resolution shows that the parties are willing to cooperate and settle the dispute amicably along with mutually agreed solution. In the case of S.B.P. & Co. v. Patel Engineering Ltd. (2005), the Supreme Court recognised the consensual nature of the arbitration agreement. The court observed that arbitration reflects the parties mutual intention to resolve the dispute in private and expeditious manners.

When adjudication by courts is preferred over arbitration 

Adjudication by court or tribunal is usually preferred over arbitration over specific circumstances including criminal cases, cases involving question of law, matters of public interest, matters which are non-arbitrable, when there is no prior arbitration agreement, etc.. Let’s deal with it in details:

Criminal cases

In criminal cases, the criminal justice system which is administered by the court is very important due to the nature of the offence and the need to maintain the law and order in accordance with public safety. Arbitration has no authority to impose criminal sanction. 

In State of Punjab v. Gurmit Singh (1996), the Supreme Court of India emphasised the exclusive jurisdiction of criminal court in prosecuting criminal offences.

Cases involving question of law

Courts are often preferred over arbitral tribunal for the complex legal issues that the arbitration tribunal is not able to handle. For instance, in Sundaram Finance Ltd. v. NEPC India Ltd. (1999), the Supreme Court held that disputes involving the question of public law, criminal and fraud are not suitable for arbitration. Similarly, even in the case of Vidya Drolia v. Durga Trading Corporation (2020), the Supreme Court stated that the arbitrator cannot decide the question of law that needs a specialised legal expertise.

Matters of public interest

Matters of public interest such as environmental protection, public health and constitutional rights are necessitated by adjudication by court as there is an absence of transparency, accountability and adherence to legal principle. Courts play a vital role in safeguarding the public welfare, and also it addresses the issues that have an impact on the larger societies.  

Matters which are non-arbitrable

Non-arbitrable are those issues that cannot be resolved through arbitration due to their nature or legal restriction. Certain matters are considered non-arbitrable as they involve public rights, criminal offence and the matters that are not settled by the contractual private agreement. In case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011), the Supreme Court of India said that the arbitrator cannot decide the matter such as criminal and public rights, it categorises it as non arbritrable.  Therefore, non arbitrators are those that fall out of the arbitration and must be adjudicated through other legal procedures.

When there is no prior arbitration agreement

Section 7(1) of the Arbitration and Conciliation Act 1996, states that arbitration agreements can cover disputes that have risen or may arise in the future. When there is no prior arbitration agreement between the parties, or if one party contends the validity of the such agreement, the dispute would generally be adjudicated by the court. However, the parties involved in the disputes can enter into mutual consent of arbitration agreement. So, if one party disagrees with the mutual consent, then he can seek remedy from adjudication of court.  This provision emphasised the enforceability of arbitration agreement and also promotes the preference for arbitration when parties agree.

What to choose: Arbitration or adjudication

Choosing between arbitration and adjudication has several factors such as confidentiality, complexity, urgency of disputes, finality of decision, cost, time, enforceability, and relationship preservation. Arbitration is preferred when there is a commercial complexity that offers confidentiality, finality, and enforceability but potentially with higher cost, while adjudication solves the similar disputes with the lower cost and speedy, but it lacks the confidentiality and finality. Administrative adjudication offers some specialised experts which leads to efficient resolution. However, the court adjudication may expose the dispute to public scrutiny and appeal is allowed, it may be time-consuming and may cost financially. So, while deciding, the above factors must be carefully examined and then make the right choice to resolve the disputes. 

Difference between arbitration and adjudication

Adjudication and arbitration are two methods of dispute resolution. However, in reality, they are very different in their approaches and outcomes, and it is important to understand the difference when considering which method to choose in resolving the disputes.

The main differences between Adjudication and Arbitration are tabulated below-

S. No. Basis of difference Arbitration Adjudication
Meaning Arbitration is a form of dispute resolution where parties agree to resolve the dispute to a neutral third party by binding the decision which is out of the court. Adjudication is a formal procedure of resolution of the disputes with the judge or authorised body within the judicial or administrative system, by following the legal procedure. 
Nature of process It is a private dispute resolution process conducted by the voluntary consent of the parties and is a form of alternative dispute resolution It is a formal dispute resolution process which is conducted by a judge or panel of judges, and it is characterised by its public nature.
Selection of decision maker Parties in the dispute choose their arbitrator and arbitration process by signing an arbitration agreement. Parties may be required to participate in the adjudication as prescribed  by law.
Decision-making authority The decision is given by the arbitrator or panel of arbitrators, who are chosen by the parties or agreed upon by them.   Decisions are made by the judge or panel of judges who are appointed by the government authority. It can also be made by administrative adjudicators.
Speed and cost The process is faster and less expensive, and resolves issues quite quickly. The process is slower and more expensive. It takes a lot of time to resolve a dispute. However, in tribunals where adjudication are done comparatively faster.
Finality of the decision The decision given by the arbitrator is final and binding, and it is enforceable by law. The judge passes a final decision, which is appealable to the higher court.
Formality of process Arbitration process is less formal Adjudication process is more formal
Application Often used for commercial purposes such as contract disputes, employment disputes, property disputes, etc. Often used in legal processes such as civil and criminal cases.
Confidentiality The confidentiality is maintained. It is a public record.
Expertise of decision maker The arbitrator can be a subject expert who specialises in the related field of disputes. The Judge who is appointed by the government authority may not be specialised in the related field of disputes.

Similarities between arbitration and adjudication

In the view of the Indian legal framework, the concurrence of the arbitration and adjudication signifies  two  distinct yet intertwined dispute resolution mechanisms. Despite all the similar differences, there still exist certain similarities. Here are some of the key similarities between two:

Resolution of disputes

Both prioritise the equitable resolution of disputes, so that both the parties get fair chances in presenting their cases. Through adherence to the principle of natural justice, such as impartiality and fairness both the methods seek to achieve the outcome of procedural integrity.

Third party involvement

In both the process the neutral third party is involved in resolving the dispute. Adjudication typically entails the appointment of a professional adjudicator, often an expert in relevant fields. But whereas, an adjudicator is a person who has been appointed by the parties. Despite a different mechanism in selection of a neutral third party, the overall goal remains the same as to have an impartial mediator facilitate a resolution that is acceptable by all the parties.   

Framework of hearing

The presentation of the cases to the submission of the evidence and cross examination including the arguments submitted by the parties all the procedure is conducted systematically as according to the structured framework for conducting the hearing. This framework ensures procedural fairness and allows for the systematic consideration of arguments and evidence, ultimately contributing to the legality of the dispute resolution process. 

Legal binding decision:

Both the decision given by adjudication and arbitration is legally binding and enforceable on the parties involved. This legal binding nature underscores the significance and finality of the resolution, which provides the assurance to the disputed parties that their rights and obligations are upheld by the law of the land. 

Conclusion

Arbitration and Adjudication are two dispute-resolving mechanisms in the Indian legal system. In recent times, arbitration has been more preferred to the adjudication court proceedings by the dispute parties because it is a matter of time and cost. 

Arbitration is likely to be the people’s court, due to being cost-effective, budget friendly and easily accessible. This dispute resolution method prioritises amicable settlement between disputed parties. It is a streamlined process which results in quicker resolution, as compared to traditional court proceedings.

Adjudication, while offering a more reliable outcome, tends to be more time-consuming and expensive. The process involves detailed examination and arguments and, hence, also spans across a long period of time. However, in the adjudication process, the decisions are more reliable and certain, since they can be appealed and can be made public. This transparency allows for accountability and ensures that legal disputes are resolved through established law and facts. 

Understanding the difference between adjudication and arbitration is crucial when choosing dispute resolution methods. As India continues to be a global leader in dispute resolution, our choices would play a pivotal role in shaping the future of dispute-resolving methods in the country.  

Frequently Asked Questions (FAQs)

How is adjudication different from litigation?

Adjudication and litigation are both methods for resolving legal disputes. Some differences are in Speed, Cost, Procedure and Decision making.

What is the period of adjudication?

Adjudication determines the disputes within 20 working days of receipt of the response to the adjudication claims; it can be extended to 30 days with the consent of the parties. 

Who pays the adjudicators?

All the fees are shared by the claimant and the respondent equally. However, the adjudicator may award 100% of fees against the respondent if the payment claim is found justified. 

What is the difference between mediation, arbitration and adjudication?

Mediation, arbitration, and adjudication are all alternative dispute resolution (ADR) methods. They can help parties resolve conflicts without the expense and hassle of litigation.

Does the Limitation Act apply to the arbitration?

According to the Limitation Act 1963, Section 43 the limitation is applied to arbitration as it applies to court proceedings. 

References 

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