Contributed by Parv Lodha

Introduction

Post-dispute arbitration agreements refer to agreements that are entered into between disputing parties after the dispute has arisen or after the claim and counter-claim have been made. The Arbitration and Conciliation Act, 1996 (“A&C Act”) and the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) both recognise the possibility of a post-dispute arbitration agreement being entered into. Section 7 of the A&C Act and Article 7 of the Model Law describe an arbitration agreement as an agreement to submit to arbitration disputes “which may have arisen,” (or which may arise between the parties), suggesting the pre-existence of a dispute which could be the subject of a subsequent arbitration agreement.  

According to Victor E. Schwartz and Christopher E. Appel, post-dispute arbitration agreements are “virtually non-existent in the ‘real world,’” because unlike a pre-dispute arbitration agreement, the parties are better poised to determine which dispute resolution mechanism would be more advantageous to them and the parties would either prefer arbitration or litigation based on which one would be more conducive to their claim or defence or counter-claim, making it improbable for both the parties to arrive at a common intent to arbitrate. David Sherwyn makes a similar observation,

“…for a post-dispute voluntary arbitration system to work, both the plaintiffs and the defense lawyer need to conclude that arbitration’s benefits outweigh its costs and that arbitration represents the best chance for success for each lawyer. As this article ultimately concludes, however, this rarely occurs. Invariably, what is advantageous to one side is disadvantageous to the other.”

While this reasoning may be logically sound, it so happens that many parties after litigating a dispute are exposed to the ineffectiveness and sluggishness of judicial procedures, often inducing them to arrive at a settlement or an agreement to arbitrate during the pendency of the judicial proceeding. In fact, at times, even the Judge presiding over a suit would suggest the parties to enter into a post-dispute arbitration agreement and avoid the troubles of a judicial procedure.

Examples of Post-Dispute Arbitration Agreements

In the fairly recent case of Kolkata Municipal Corporation v. Rajpath Contractors & Engineers (AP/1985/2014),  a contractor filed a civil suit against the Kolkata Municipal Corporation and it was during the pendency of an application that the parties agreed to arbitrate the dispute. Subsequently, when the municipal authority sought  an application for assailment under Section 34 of the A&C Act, the Calcutta High Court refused to allow the application and upheld the award of the arbitral tribunal. Therefore showing, that not only are post-dispute arbitration agreements observable in actual practice, but awards arising from proceedings originating from  such agreements are even upheld by High Courts.

In another recent case before the Delhi High Court – Skypower Holdings LLC v. Sterling and Wilson International FZE (2023 DHC 8189), it was observed that when a dispute regarding payments pertaining to an Engineering, Procurement & Construction Agreement and an Offshore Supply Agreement (“OSA”) arose between the parties leading to discussions between them to resolve the same, the respondent through an e-mail accepted the addition of an arbitration clause to the OSA in accordance with the Rules of the Singapore International Arbitration Centre, thereby proving that post-dispute arbitration agreements are often entered into even in cross-border disputes and remain a common international practice.

Similarly, in Anand Gajapathi Raju v. P.V.G Raju (2000 SCC 4 539), when the parties to the suit, entered into an arbitration agreement during the pendency of the suit, the Supreme Court upheld the agreement and found it “obligatory for the Court to refer the parties to arbitration.” Most importantly, the Supreme Court  observed that it was not necessary that the arbitration agreement had to be in existence before the action was brought in Court, thereby laying an important precedent in line with the concept of post-dispute arbitration agreements.

 Anand Gajapathi Raju (supra) was referred to in Tamil Nadu Electricity Board v. Sumathi And Others (2000 SCC 4 543), where the Supreme Court reiterated that  arbitration agreements entered into by the parties during the pendency of the suit  would bind the parties to proceed in accordance with the A&C Act. 

In Adhikari Venkunaidu v. Mahadevu Sanyasi (1935 SCC ONLINE MAD 319) (“Adhikari”), a suit for settlement of partnership accounts and recovery of amounts was filed, during the pendency of which, the parties agreed to arbitrate the dispute and the decision of the arbitrator that was passed was thereafter held by the Madras High Court. In Rahim Baksh v. Ram Nath (1905 SCC ONLINE ALL 97) (“Rahim Baksh”), an appeal was sought against a decree confirming an arbitral award, however, it was observed that during the pendency of the appeal, the parties, at the recommendation and under the influence of the Judge agreed to arbitrate the dispute. It is interesting to note that the judgments in Adhikari and Rahim Baksh were passed in 1935 and 1905 respectively which demonstrates that the concept of a post-dispute arbitration agreement precedes even the Arbitration Act, 1940 along with its successor, the A&C Act.

Encouraging Post-Dispute Arbitration Agreements

Alternative Dispute Resolution mechanisms have been increasingly promoted (and even mandated) by statutory provisions. Section 89 of the Civil Procedure Code, 1908 (“CPC”), for example, provides that where an element of settlement appears to exist in a dispute, the Court can formulate the terms of a settlement and refer the dispute to one of the four modes under Section 89. Similarly, in 2018, Section 12A of the Commercial Courts Act, 2015 (“CCA”) was introduced which provided for mandatory pre-institution mediation and settlement.

Post-dispute arbitration agreements can provide an additional layer of incentive for arbitration, which may be opted for during the pendency of a suit or even before the institution of a suit. Judges can even recommend and influence parties to enter into post-dispute arbitration agreements in litigations where they are of the opinion that arbitral proceedings would be more efficient, as was done in Rahim Baksh. Introducing specific rules or provisions for post-dispute arbitration agreements in the A&C Act, CPC and CCA will not only make litigants more conscious and aware of the alternative to litigation available to them in the form of a post-dispute arbitration agreement but would even facilitate Judges in referring parties to arbitration in pursuance of a post-dispute arbitration agreement by providing them with a standard procedure to be followed for such referral.

Post-dispute arbitration agreements also differ from pre-dispute arbitration agreements in terms of the autonomy and free-will that is exercised by parties when entering into such agreements. Unlike the ‘take-it-or-leave-it’ adhesive nature of pre-dispute arbitration agreements, post-dispute arbitration agreements allow for a more conscious and calculated choice.

Nonetheless, the influence of a judge would play a vital role in inducing parties to arbitrate after the dispute arises. However, even then, since arbitration is a consensual process, a post-dispute arbitration agreement cannot be forced on parties and can be brought about only by the will of the parties to the dispute, which would happen only in a scenario where both the parties feel that arbitration would be advantageous to them.

Post-dispute arbitration agreements have gained considerable recognition in foreign jurisdictions. The CIArb Arbitration Rules, 2015, for example, provide a model clause for post-dispute arbitration submission. The Rules of Arbitration of the Better Business Bureau (an American nonprofit organisation that handles consumer disputes) provide for a scenario “where the parties agree to arbitrate the dispute after it arises.” The United States Department of Education also allows a student to enter into a post-dispute arbitration agreement with its school for borrower defence claims (claims made by students in America against misconduct or harmful behaviour by their schools warranting discharge of federal loans).

Conclusion

While it is true that post-dispute arbitration agreements are not widely prevalent as of yet, the urgency to promote the practice can be demonstrated by the sheer  length of an average commercial trial in India, which comes to 626 days on an average in Mumbai and 744 days in Delhi. For even lengthier trials where the dispute is not covered by a pre-dispute arbitration agreement, the parties need to be reasonable-minded enough to agree at the initial stages of a litigation to arbitrate the dispute so as to cut short the time taken to resolve the dispute and the procedural entanglements of a litigation. This view was also expressed by the Court of Appeals of Texas in Wylie ISD v. TMC Foundations (770 S.W.2d 19) where it was held that there could be no bar to the enforcement of post-dispute arbitration agreements if a consumer and a building contractor entered into one to “hold down expense and materially shorten the time necessary to conclude the matter.” Moreover, the influence and recommendations of a judge will also play an important role in promoting the practice.