Arbitration is encouraged but has limitations
Alternative Dispute Resolution is promoted because courts face huge delay. Among ADR modes, arbitration under Arbitration and Conciliation Act 1996 is widely used now. Arbitration works well when parties have consensus on arbitrator and procedure. But if arbitration clause gives power to choose arbitrator to only one party, it may not give fair result. While courts have supported arbitration, there is criticism especially when it is forced. Apex Court in SBP & Co. v. Patel Engg. Ltd 2005 (8) SCC 618 discussed scope of section 11 and that ratio is applied to section 8 also. Still many questions remain and law needs reforms based on ground realities. For industry, arbitration is useful if key issues are addressed, but for common man and public interest matters it needs careful approach.
Why 397 398 is different from normal disputes
Proceedings under section 397/398 of Companies Act 1956 are not simple shareholder disputes. They involve oppression, mismanagement, functioning of company, rights of other shareholders and stakeholders, and public interest. That is why legislature created Company Law Board with expertise to handle them. The object is not just to decide between parties but to put an end to matters complained of and regulate affairs of company. Corporate disputes are complicated and CLB has to look at series of acts by majority. An arbitration clause cannot cover all such aspects.
Problems in applying arbitration to 397 398
These days in many 397/398 petitions, respondents file application under section 8 of Arbitration Act based on arbitration clause and ask to refer dispute to arbitration. This creates complications. First, adjudication under 397/398 requires expertise which CLB/Tribunal is designed to provide. Second, scope is wider than parties. CLB must consider company, other shareholders, third parties and public interest. Arbitrator cannot effectively do that. Third, 397/398 petitions are based on series of acts and arbitration clause will not cover entire scope. Fourth, CLB can look into issues even if parallel civil suit exists because object is different. If arbitration is applied mechanically, object of 397/398 will be defeated.
Can clb jurisdiction be ousted by arbitration clause
In my view jurisdiction of CLB under 397/398 cannot be taken away just by showing arbitration clause. CLB should decide based on averments and considerations whether reference to arbitration is proper. At times shareholders do forum shopping and prefer CLB even when civil court can decide. But that does not mean CLB should automatically refer to arbitration. Logically CLB need not entertain 397/398 if arbitration is the remedy, but parties can still initiate arbitration even after dismissal. From any angle, allowing arbitration to oust CLB will defeat purpose of oppression and mismanagement remedy. It is a complicated issue and must be handled carefully despite encouragement to ADR.
Conclusion
Arbitration section 397 398 companies act 1956 is a complicated issue and cannot be applied mechanically. While ADR is good for commercial disputes, 397 398 proceedings require expertise, public interest consideration and power to regulate company affairs which only CLB can provide. Therefore jurisdiction of CLB cannot be ousted by arbitration clause and law must ensure minority protection is not defeated by technical pleas.
