Voluntary and Compulsory Arbitration

The World Intellectual Property Organisation defines 'Arbitration' as a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.  

India's rapid economic growth and technological advancement need supportive legislative developments to ensure better ease of doing business. This 'ease of business' is achieved and improved through an efficient judicial system. In India, the judge-to-population ratio does not meet the volume of litigation, effectively adding to the delay in redressal. Therefore, the resolution of these disputes outside our court system for our inevitable commercial breach is a game changer.  

The Arbitration and Conciliation Act of 1996 governs domestic and international Arbitration in India. The statute authorises Voluntary as well as Compulsory Arbitration. According to Section 7 of the Arbitration and Conciliation Act of 1996, an arbitration agreement must exist in writing to settle the dispute under Arbitration. This arbitration agreement may be a separate contract or a clause in a contract defining the legal relation between parties. Therefore, parties can either choose to submit the dispute or be compelled to do so. In this regard, there are two types of Arbitration:  

-         Voluntary Arbitration 

-         Compulsory Arbitration 


Voluntary Arbitration is when parties voluntarily submit a dispute to the arbitrator before or after approaching the court of law. The voluntary arbitration provision permits and liberates the parties only when a civil cause is filed, to elect to resolve their dispute by Arbitration.  

Voluntary Arbitration takes mainly two forms:  

Pre-dispute Arbitration: There must be a contract between the parties before the dispute arises through an arbitration clause. 

Post-dispute Arbitration: There may not be an arbitration clause beforehand, but the parties may enter into an agreement after the dispute arises to resolve the dispute through Arbitration. 

This process begins with commencement of notice of Arbitration by one party accompanied by a reply to this notice by the other party. In Voluntary Arbitration the disputing parties opt for one or more than one arbitrator to listen to their dispute associated to render a judicial decision or award when a facilitated hearing is a binding and adversarial form of the dispute resolution process. Voluntary Arbitration has implications that the two contending parties between whom the disputes have arisen are usually unable to compromise their differences by themselves or with the help of a mediator or conciliator. Therefore, they invoke the Arbitration clause in their commercial contract and agree to submit the conflict or dispute to an impartial authority and they are ready to accept their decisions. An award may be appealed only on a very limited basis and any award to the plaintiff is limited. Voluntary arbitration is desirable to all parties due to the lower costs involved and with limits on discovery and expert witnesses and the promise of a certain resolution in a shorter period. 

Section 10A of the Industrial Disputes Act of 1947 gives parties the choice of entering into an agreement for voluntarily resolving their disputes through arbitration before it has been referred by the government to the Labour Court or Industrial Tribunals. 


Compulsory Arbitration is a form of non-binding, adversarial dispute resolution process in which either one or more than one arbitrator will hear arguments of both the parties referring to Arbitration, weigh the evidence provided and issue a non-binding judgement on the merits after an accelerated hearing. If the Arbitration is necessary and binding, the parties waive their rights to access the courts and to possess a decision to decide the case. Either of the parties may reject the ruling and request a trial in the court of Law. In Compulsory Arbitration, the parties are required to accept arbitration as solving their dispute without any willingness on their part. When one of the parties to an industrial dispute feels aggrieved or violated by an act of the other, it may apply to the appropriate government to refer the dispute to adjudication machinery. Such reference of a dispute is thought of as a “compulsory” or “involuntary” reference, as a result of reference in such circumstances does not rely on the need of either the opposite parties or any party to the dispute. It is entirely the discretion of the appropriate government upon whom it is based on the question of existing dispute, or on the contentions that industrial dispute will emerge establishments. 

Under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, if any reference has been made to the Facilitation Council for disputes regarding recovering of due amount under section 17, then, the parties must refer to conciliation followed by Arbitration (in case the conciliation fails to settle the dispute).  Arbitration shall apply to the dispute as if the Arbitration was in pursuance of an Arbitration Agreement. 


The main difference is that in Voluntary Arbitration, the parties involved mutually give their consent to submit to the third party for covering and settling down the conflicts by their own wish; on the other hand, in Compulsory Arbitration, the parties involved are ordered or instructed to move to the third party for settling down the disputes as a compulsion to resolve their matter. Compulsory Arbitration aims to reduce Tribunal/Court cases by mandating it under the statute or rules. The objectives of Voluntary Arbitration are not any different to Compulsory Arbitration. It allows parties to enter into an arbitration agreement at any point in their dispute, reducing court cases.