Ambiguous Arbitration Clauses Can Increase Litigation Costs by 20%, Delay Dispute Resolution

New Delhi, Sept 8 (KNN) Ambiguity in arbitration clauses can increase dispute resolution costs by at least 20 per cent and delay proceedings as companies may first have to approach courts to determine the seat and jurisdiction of arbitration.

Law firms are advising companies to use more precise arbitration clauses in commercial contracts, particularly by clearly specifying the seat, venue, jurisdiction and procedural rules, reported The Mint.

The issue assumes significance amid a substantial arbitration backlog in Indian courts. According to data from legal-tech and data analytics firm CubicTree, 289,525 arbitration-related cases were pending as of September 2, out of 729,761 cases tracked in its dataset.

Ambiguous Clauses Add To Arbitration Costs

Mumtaz Bhalla, Partner, Economic Laws Practice, said disputes arising from unclear arbitration clauses can add at least 20 per cent to arbitration costs compared with a clearly drafted clause.

Ambiguity over the seat of arbitration remains a particular concern, she said, especially as ad-hoc arbitration continues to be widely used in India and its clauses are not governed by uniform institutional rules.

An arbitration clause generally specifies how disputes will be resolved, including the appointment of arbitrators, seat, venue and applicable rules. 

While the seat determines the courts that supervise the arbitration, the venue refers to the location where hearings are conducted, and the two may be different.

Lawyers said the use of standard or boilerplate clauses without tailoring them to individual contracts can create disputes over jurisdiction and the appropriate forum.

Nearly 2.9 Lakh Cases Pending

CubicTree’s dataset shows that 440,236 cases had been disposed of, representing a disposal rate of 60.3 per cent, while 289,525 remained pending.

Of the pending cases, 152,649 were more than three years old, including 98,379 cases pending for over five years and 21,494 cases that were more than a decade old.

The median age of a pending case stood at 40 months, while the average was 52.2 months.

District and sessions courts accounted for 598,792 cases in the dataset, compared with 130,966 cases in high courts. The average disposal time was 21.1 months, while the slowest 10 per cent of cases took at least 59.1 months to dispose of.

Financial Institutions Account For Over Half Of Cases

The data also highlights the significant role of financial institutions in arbitration-related litigation.

Banks, non-banking financial companies (NBFCs) and other financiers accounted for 55.2 per cent of cases filed, indicating the substantial involvement of the financial sector in arbitration proceedings.

Legal experts said clearer drafting of arbitration clauses could help reduce preliminary jurisdictional disputes and allow parties to move more quickly to resolution of the underlying commercial dispute.

MSMEs may end up litigating before arbitration even begins

MSMEs are disproportionately affected by the cost and delay of commercial dispute resolution. For a small business, a procedural dispute over the arbitration clause can result in significant costs.

If the contract does not mention jurisdiction and appointment mechanism for arbitrators, parties may first have to approach courts to resolve these preliminary issues. This defeats the intended purpose of ADR mechanisms which is to achieve speed and efficiency in dispute resolution.

(KNN Bureau)