Difference between arbitration and negotiation

This article is written by Tannu Shree. This article discusses the two significant different modes of ADR i.e. arbitration and negotiation. Further, it also focuses on its differences, advantages and disadvantages.

Whenever we have any dispute regarding labour, commercial or personal disputes such as matrimonial and property related we often find ourselves in front of the court to get justice timely but due to its lengthy procedure, time-consuming nature and non-guarantee of justice, we prefer not to go. As per the data of the National Judicial Data Grid, the total number of pending cases in the year 2020 was 29.9 % in the Indian courts which itself is a concerning matter. Hence, to eliminate such issues, our legal system has come up with various solutions and one of such major issues is alternative dispute resolution. 

ADR is a game changer in the Indian judiciary as it not only lessens the burden on the Court but also gives equal freedom to the victim party and opposite parties to have a free conversation. In adopting such a method, we should have the knowledge of different types of ADR so that we can have a basic understanding out of which we can choose. This article aims to define the differences between arbitration and negotiation and explore their respective characteristics, its benefits, and applications. 

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Arbitration as already discussed is one of the modes of alternative dispute resolution wherein the parties involved in the dispute agree to submit their dispute to a third party called an arbitrator whose main job is to resolve the matter by being unbiased and making a binding decision in the form of the arbitral award to which each party has to follow. In the arbitration processes, even evidence which is not admissible in the regular Court is allowed. This process is generally less formal as compared to the traditional Court system and more flexible offering parties a different way to resolve matters outside of the judicial system. It is often used in commercial, labour, construction, and consumer disputes and other family disputes such as property related and matrimonial. Although arbitration is one such procedure which is cost effective, there are times we feel that it is not a good option as there are many loopholes which need to be addressed. Arbitration as one form of ADR offers flexibility in the procedure, arbitrator’s expertise in the matter, and high confidentiality in nature but also it can be a bit expensive for normal people and provides limited remedies in comparison to judgement Courts. Overall, it is a better alternative to litigation but being aware of its pros and cons is necessary.

Mechanism of arbitration in India

Arbitration in India is governed by the Arbitration and Conciliation Act, 1996. This legislation originated from the UNCITRAL (United Nations Commission on International Trade Law) Model Law on International Commercial Arbitration and the UNCITRAL Arbitration Rules of 1976 in the year 1985. To further enhance the arbitration framework in India, the Arbitration and Conciliation (Amendment) Act was introduced in 2015.

Advantages of adopting arbitration as a way of resolving dispute

In this busy era, it is very difficult to get yourself involved in the Court complexities as everyone wants the issue to be resolved quickly. The main reason why most people go after arbitration is that it is easy for parties to get an outcome in a timely manner, avoiding such inconvenience of getting into Court proceedings and waiting for the date of the case. The other reasons why opting for arbitration is advantageous are discussed below-

  1. Informal process– Because of the informal nature, the parties can speak their mind out freely and, hence, it is a step towards success where the judicial system has failed to do so.
  2. Self-awareness- In other processes of arbitration as there is no involvement of a third party, the parties related to the dispute are themselves decision makers and are very much aware of the truth of their consequences and therefore, the obstacle doesn’t exist.
  3. Less expensive– As discussed, most of the time, arbitration is a lot less expensive than litigation. Arbitration is less time-consuming and hence, the advocates often charge less fees as compared to litigation. In addition to that, there are lower costs involved in preparing for the arbitration than there are for a litigation or jury trial.
  4. Expertise– Parties in this procedure can select arbitrators with expertise in the subject matter of the dispute making it easy for the parties to rely on the arbitrator for a fruitful outcome as well as ensuring that the decision-maker has the necessary knowledge and experience in the field.
  5. No appeal-Arbitration awards are generally final and binding in nature, with limited to no opportunities for appeal. This provides parties with a better understanding of the dispute and allows them to move forward from prolonged legal battles with a final closure.
  6. Privacy– These processes are generally confidential in nature and hence, leaking of information regarding the dispute is less likely to occur. In the case of litigation, it is easy to get information regarding the case and a risk of public access to potentially sensitive business information is involved. 

Disadvantages of arbitration

It is an old saying that everything has a good side as well as a bad side and so is arbitration. The many disadvantages of arbitration are discussed below-

  1.  It is mandatory: In case there is a contract between the parties having an arbitration Clause, then there is a mandate to opt for this process for resolving the matter even if one of the parties is not very fond of the idea. The other party can take it as an advantage and benefit from this.
  2.  Absence of Precedent: We generally don’t have precedent cases to guide future cases. The absence of precedent in the cases can result in inconsistent outcomes and uncertainty in the law.
  3.  Costs and expense: While arbitration can be less expensive than litigation in some cases in case of a dispute having a complex nature or involving multiple hearings can get a little more expensive. Parties are themselves responsible for the payment of the whole expense.
  4.  No appeal: While this is an advantage on the side of parties to get a final closure from the dispute, sometimes it can create chaos among the parties. As there is a very low to no appeal system, the parties who are not satisfied with the outcome can be affected.
  5. Matter of privacy: While the privacy of the documents and disclosure of the secrets can be an advantage of arbitration as the arbitrator is chosen by the parties themselves but it can be a little concerning about the lack of public scrutiny or accountability in the process.
  6. Biasness: As we already know the parties themselves choose arbitrators which can also create favouritism among the parties and a lack of impartiality. Although arbitrators are generally expected to be neutral, there can be a case when parties can question the arbitrator also.

Related case law

Hindustan Construction Company Ltd. vs. Union of India, (2019) 2 SCC 311

Facts of the case:

·    The case revolves around an infrastructure company called Hindustan Construction Company Ltd (HCC) which acts as an agent to the government bodies. The company had taken on large-scale projects involving roads, hydropower, bridges, tunnels, etc. As the company works on behalf of the government and often faces cases of cost overrun. To prevent such issues the company agreed to go into arbitration in case of recovering the dues. Accordingly, the petitioner filed the case and was granted an arbitral award in his favour as a result of which the government body challenged it as per Sections 34 and 37 of the Act leading to a stay on awards. Furthermore, the government bodies escaped the Insolvency Bankruptcy Code for the sole reason of being a statutory body but the petitioners had to suffer and were not exempted from the Act. This results in the petitioner going into financial debt being a private company. As a result of this, the petitioner had to suffer and was not able to recover the debt and the creditors from whom the petitioner had asked for financial assistance could ask for repayment with the help of IBC.

Issues Raised

  • Whether Hindustan Construction Company is entitled to compensation for the termination of the contract under the Arbitration and Conciliation Act, 1996.
  • Whether Section 87 of Arbitration and Conciliation Act, 1996  is constitutional or not.

Judgement: The Indian Supreme Court held that the Union of India’s decision of termination of the contract was unlawful and arbitrary. The Court observed that the termination was done on filthy grounds and needed proper justification. Procedural inconsistencies were also missing in the termination process. In light of this, the Court directed the Union of India to re-establish the agreement with HCC and pay the damages. The SC mandates to emphasise more on fairness and justice in the cases where practices of government-funded organisations are being questioned.

Negotiation as already before discussed is a process of resolving the dispute arising between the parties without any third-party interference with only the aim of reaching a negotiated settlement. In the process of negotiation, parties have to compromise as the process is about give and take. Negotiation can be used in various situations from business transactions,  and contractual disputes to interpersonal relationships. The ultimate target of the process is to get a satisfactory result for both parties involving cooperative decision-making. It is the most simplest form of ADR and is non-binding in nature. Negotiation has many advantages and disadvantages as well as any other mechanism of ADR but the most effective way to resolve a dispute is to communicate and that is what makes negotiation unique in its own way and preserves relationships however it relies on mutual agreement and may not always yield satisfactory outcomes.

Advantages of negotiation

  1. Flexibility: Negotiation is a process which allows parties freely to make the terms and conditions of the agreement as per the parties’ interest. It also provides freedom to parties to explore more and find alternatives to resolve the dispute without any hindrances.
  2. Relationship among parties: As we know no third-party involvement is needed in this process making it easy for parties to come to a conclusion easily and preserve their relationships as well.
  3. Control over the matter: Without third-party involvement, the parties are in control over everything from finding a solution to the outcome of the dispute or agreement.
  4. Cost-Effective: Negotiation is less expensive as compared to traditional litigation and requires fewer resources and less time, as parties are themselves decision makers, hence, easily avoid an extra litigation cost.
  5. Creativeness and Innovation: Negotiation is a process which involves parties’ active participation and gives them space to think more openly regarding the dispute and find favourable alternatives. It allows for parties to create unconventional ideas and compromises which they cannot avail during legal proceedings.
  6. Privacy concern: Negotiation offers an open forum for parties to share their ideas regarding the dispute without the involvement of third-party interference. Unlike court proceedings, negotiation allows the parties to maintain their privacy and confidentiality is also maintained in this way.

Disadvantages of negotiation

While negotiation allows the free will of the parties to share their numerous ideas and thoughts, it also has its disadvantages as well. Some of the key disadvantages of negotiation are discussed below:

  1.  Imbalance: Negotiation can be challenging as it involves parties acting in free will and hence can create imbalance in the outcome giving the chance of influential parties to dominate the other party in coming to a decision. A party with more influence and information can easily impact the outcome leading to an unfair advantage.
  2. Inequality during negotiation: Parties with more experience and knowledge have a greater advantage leading to one party gaining an unfair advantage over the less experienced one.
  3. Non-binding in nature: The process is non-binding in nature making it difficult for the parties to go in a systematic way. In the end, if one party infringes the contract, the other party may have limited resources to enforce the other.
  4. Unwanted disputes: Negotiation involves the parties finding alternatives with mutual settlement which may cause unwanted disputes between the parties. On one hand, it is favourable for the parties to preserve the relationship on the other hand it can also be the reason for conflict as well. 
  5. Time consuming in nature: Negotiation can be time-consuming in nature in case parties are finding it difficult to come to a mutual conclusion.
  6. Impasse: Negotiations can reach an impasse if parties are not able to overcome their differences on time and which may result in differences. This can result in a communication gap and may prevent parties from reaching  a resolution
  7. Not every issue is negotiable in nature: In some cases, it is very difficult for parties to come to a conclusion and the involvement of the court is very much needed in such matters. Parties may use pressure or influence over the other party to gain an advantage, undermining the fairness and integrity of the negotiation process.
  8. Absence of legal rights: The negotiation process is informal making parties may unintentionally compromise their legal rights or entitlements. Without any legal involvement , one party may get the advantage over another and will revolve around a circle without finding any outcome.

Overall, we can say that negotiation is a valuable tool for resolving conflicts and reaching disagreements without the interference of any wanted interference that has no connection with the dispute whatsoever. But it is also very important to recognize there must be some limitations as well. Parties should approach negotiation with caution and be mindful during any dispute. 

Related case law

Harsh Gopal Khandelwal vs. Aarti Khandelwal 15 Nov, 2021

      In this case, the court suggested both the parties engage in discussions under the condition that there shouldn’t be any disagreement between them and proceed peacefully. It was also mentioned that if the negotiations had no outcomes, the parties were to proceed in accordance with the applicable laws.

Key of difference Arbitration Negotiation
Definition It is a type of formal dispute resolution process where a third party is involved called as arbitrator to resolve the matter. It is the simplest form of ADR in which communication between the parties regarding the matter is discussed without any third-party interference with the single aim of reaching a mutually acceptable negotiation.
Nature of the dispute Generally, the disputes resolved in this way are formal in nature and create a systematic way of proceeding wherein all the guidelines are written to follow. Generally, these are informal in nature making the parties the decision maker and work according to their will. involved.
Decision Maker in the matter  The decision-makers in this case are a third party known as an arbitrator. The parties themselves can choose the arbitrator it is upon the organisation. The parties themselves negotiate in the dispute without any third-party involvement. So, the parties are the decision-makers.
Binding or non-binding The decision of the arbitrator is binding in nature and the parties have to act as if it is passed by the court itself.  The decision in these disputes is generally not binding and totally depends upon the parties to act upon.  
Speed of the case  Arbitration proceedings can take longer than negotiation, as it involves a formal way of proceeding and takes days to resolve. Negotiation can be quicker as compared to arbitration as parties can schedule everything at their convenience.
Expense The Arbitration process can be more expensive as compared to the negotiation process and the parties have to bear the cost of an arbitrator, legal representative, etc.  Negotiation is less costly than arbitration as the parties themselves resolve the matter.

In conclusion, alternative dispute resolution methods offer a variety of options to get valuable alternatives and go beyond traditional litigation for resolving any conflict. ADR includes various modes such as arbitration, mediation, negotiation, and conciliation, each having different advantages on its own.

Overall, ADR methods promote efficiency, flexibility, confidentiality, and cost-effectiveness in resolving disputes. This is the only method where parties actively participate in the dispute resolution having full control over the matter. There are many disadvantages as well which need to be resolved so that more and more people adopt the procedure of ADR. This will not only help people to resolve their own disputes but also make things easier. It is the responsibility of the government as well to promote such camps to spread knowledge regarding ADR. The main focus should be on expense so that normal citizens of this country can also go for such procedures and get justice timely.

What is mediation?

Mediation is one of the modes of the ADR wherein parties resolve their dispute with the involvement of a mediator who acts as a medium between the parties.

Is ADR better than litigation?

ADR  is a process where the parties have space to share their interests and ideas as there is no third-party involvement whereas, in the case of litigation, the parties have to follow the guidelines of the court and no personal opinion will be taken making it more time-consuming. In the case of ADR, parties have multiple choices in which way they want to resolve their dispute in the form of arbitration, negotiation, conciliation and mediation. ADR is cost-effective and less time-consuming in comparison to litigation.

How does arbitration work?

Firstly, parties have to submit their dispute to a third party known as an arbitrator. Accordingly, after presenting all the evidence and arguments, the arbitrator gives a decision often called an arbitral award.

 What type of disputes come under arbitration?

Arbitration is suitable for various disputes from commercial in nature, and labour disputes to domestic disputes related to property and matrimony.

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