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Evolution of arbitration in India and the lack of professionalism

October 09, 2021
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This article has been written by Ashutosh Singh, a student of BA.LLB(Hons) at Amity Law School, Amity University, Kolkata. The article analyses how arbitration has developed in India but isn’t growing fast enough to become a hub of international commercial arbitration, and why there is an urgent need to inject professionalism into our arbitration proceedings.

Introduction

Alternate dispute resolution (ADR) has various modes of dispute settlement which include, mediation, arbitration, conciliation, negotiation, and Lok Adalats. These instruments are used by many countries for resolving disputes effectively. But in India, alternate dispute resolution is still evolving. With the increased development of the world economy and the impact of globalization, it is hard to keep up with the ever-changing requirements of the current time period.

With a huge number of pending cases, the judicial administration through traditional processes became difficult and hence called for the implementation of such ADR practices. Moreover, the Malimath Committee recommended making it mandatory for the court to refer the dispute for settlement through conciliation, mediation, arbitration, negotiation through Lok Adalats but the most widely used form of ADR worldwide is Arbitration because of the confidentiality, speed, and flexibility that it offers.

This article studies the arbitration procedure in India and its lack of professionalism, and the resultant challenges faced thereof.

Arbitration

Arbitration is a form of alternative dispute resolution which has been around for a long time. The process of solving an argument between people by getting them to agree to an acceptable solution by a neutral person/s called arbitrators is called ‘arbitration’. One can say that it is the process by which settlement of the dispute between two agreeable parties is reached by appointing an arbitrator to give a binding solution to the dispute. The disputes are settled outside the courts, supposedly saving time and resources for all parties concerned and also the courts. Arbitration was needed to remove the extra load on the courts of the country by creating an alternate mechanism of dispute resolution to reduce the court’s intervention. It is also a favourable and time-saving method of resolution of disputes as against the time-consuming and resources exhausting procedure of the traditional justice delivery system.

A brief history of arbitration in India

Arbitration in pre-British era

Arbitration has a long history in India and has been prevalent from the Vedic times. In addition to the regular official courts, certain popular courts also existed side-by-side in ancient India. The disputes regarding the boundaries of the property were settled by the village elders. One of the earliest treaties that mentioned arbitration as per the Hindu Law, was “Brihadaranyaka Upanishad“. Sage Yajnavalkya mentions three types of popular courts—’Puga’ the local courts, ‘Srenis’ the people engaged in the same business or profession, and the ‘Kulas’, who were members concerned with the social matters of a particular community and all these three bodies were the early arbitration courts in India. These popular courts continued to flourish in India till the beginning of British rule. During British rule, the government courts only accepted certain cases which were unsettled by the popular courts and came as an appeal against the decisions of the popular courts. The popular courts tried only civil cases and did not enjoy any power to entertain criminal cases. Earlier many disputes were solved by a group of wise men of the community knows as “Panchayat” and the members were known as “panchas”.  The decision taken by them was binding on the parties. 

The 1st Arbitration Act in India was introduced on 1st July 1899.  This Act was founded on the English Arbitration Act, 1889  and the Indian Arbitration Act, 1899 was applicable only to the presidency towns of Bombay, Calcutta, and Madras. A uniqueness of this Act was that the names of the arbitrators had to be mentioned in the agreement and the arbitrator could also be a sitting judge then. The Indian Arbitration Act, 1889 was very complex, bulky, and needed reforms so a formal law, a more specific arbitration Act came into force in 1940, during the British regime itself. It applied to the whole of India but had many disputes, many criticisms and lacked in quite a lot of areas when it came to its implementation. Yet it can be credited for bringing uniformity in law across the country. The Arbitration Act, 1940 had a provision for protecting the agreement between the parties from being debased and diluted by the mere presence of some lacuna in it.

The Act had a provision to distinguish between an application for setting aside an award and also for a decision that the award is a nullity. One major setback was that the rules for filing awards differed from one high court to another. Another major drawback was that if the court-appointed arbitrator died during the arbitration proceedings, there was no other provision in the 1940 Act for the appointment of a new arbitrator. The Act was also silent about the shortcomings inbuilt in individual private contracts. There was no provision in the Act to prohibit an arbitrator from resigning at any time in the course of the arbitration proceedings subjecting the parties to heavy losses, especially where the arbitrators acted mala fide. It did make provision for arbitration without court intervention but it failed to achieve the desired objective and the entire process then became more litigation-oriented.

Arbitration in the post-British era

The present date arbitration law is an amalgamation of several declarations and ordinances passed by the Government of India to accept the challenges posed by the economic reforms taking place in the country from time to time. After independence, the Arbitration and Conciliation Act 1996 came into existence and it had been modelled on the lines of the UNCITRAL (United Nations Commission on International Trade Law) framework of laws. The aim was to modernize the Indian arbitration law and make it consistent with the best global practices while also making India a global centre for arbitration. 

The Arbitration and Conciliation Act, 1996

The Act of 1996 contained amalgamated, strengthened, and amended laws relating to arbitration. It was applicable to the whole of India and the purpose of the Act was to:

Guru Nanak Foundation v. Rattan Singh & Sons (1981)

In this case, the Supreme Court stated that they saw the Arbitration Act, 1940 as an alternate medium to resolve disputes less formally, more effectively, and expeditiously. The Apex Court added that the way proceedings under the Act were conducted and challenged without an exception in the courts, had defied its purpose and had been clothed with the legalese of unforeseeable complexity.

Food Corporation of India v. Joginderpal (1989)

The Supreme Court observed in this case that the law of arbitration should be made simple, less technical, and more responsive to the actual reality of the situations and at the same time it should be responsive to the canons of justice and fair play. The arbitrator should adhere to those procedures and rules which create confidence, not only by doing justice between the parties but also create a sense that justice appears to have been done.

India doesn’t have any compulsory/mandatory laws for arbitration, except the Arbitration and Conciliation Act, 1996 that safeguards the autonomy of the parties in respect of most procedural matters. The Arbitration and Conciliation Act, 1996 is the fundamental regulation governing arbitration in India. The Act consists of four parts and they are as follows: 

India applies the New York Convention only to the recognition and enforcement of awards that are made in the territory of another contracting state. Also, it is applicable only to differences due to legal relationships that may be contractual/non-contractual, and are considered commercial under the national law. India, however, is not a signatory to the International Centre for the Settlement of Investment Disputes Convention 1965.

Some other treaties and conventions in relation to arbitration that India is a part of are:

The Arbitration and Conciliation (Amendment) Act, 2015 

The Arbitration and Conciliation (Amendment) Act, 2015 came into being on 23rd October 2015. The Amendment Act of 2015 has substantially modified the existing arbitration regime in the country which has made arbitration a lucrative form of ADR. These changes were critical in supporting international arbitration in the country. Some of the key changes brought in were: 

Therefore, there were progressive changes brought about by the 2015 amendment though some of these provisions were further amended by the 2019 amendment.

Arbitration and Conciliation (Amendment) Act, 2019

The 2019 Amendment Act, is a Government initiative of making India an arbitration-friendly jurisdiction and also make the arbitration law in India in consonance with many international jurisdictions. Some of its salient features are: 

The Arbitration and Conciliation (Amendment) Ordinance, 2020 

It came into force on 4 November 2020 to address the concerns raised by affected parties, after the enactment of the Arbitration & Conciliation (Amendment) Act, 2019.  The 2020 Ordinance amended Section 36(3) that provides for additional grounds for an unconditional stay on enforcement only if the seat of arbitration is within India. It removed the Eighth Schedule altogether from the Act and replaced it with ‘the regulations’ meaning that the accreditation of arbitrators will now be governed as per the requisites laid down in the ‘regulations’. There is still no clarity about what these ‘regulations’ might be but It would be better if the stakeholders like scholars and practitioners are consulted before finalizing these regulations to prevent any further controversy on this issue. 

The Arbitration and Conciliation (Amendment) Act, 2021

The Arbitration and Conciliation (Amendment) Bill, 2021 was passed by the Parliament in March 2021 and it replaced the Arbitration and Conciliation (Amendment) Ordinance, 2020. However, most of the recommendations of the 2020 Ordinance have been retained.

The Arbitration and Conciliation (Amendment) Act, 2021, has been added with the provision for domestic and international arbitration and the laws for conciliation proceedings. The Eighth Schedule had been criticized for its restrictive nature as its removal meant that the parties were now free to appoint arbitrators regardless of their qualifications. The Eighth Schedule debarred a foreign national from being appointed as an arbitrator in an arbitration seated in India and hence it has been condemned by jurists. But the Amended Act does away with the qualifications of the arbitrators under the 8th Schedule of the Arbitration and Conciliation Act, 1996. The qualifications for accreditation of arbitrators is now proposed to be prescribed by regulations to be framed by an Arbitration Council to be set up. The omission of the Eighth Schedule is observed as a welcomed move that shall aid in effectively strengthening the arbitration landscape in India. As per the Amended Act of 2021, if the award is given on the basis of a fraudulent agreement/corruption, then the court can allow an unconditional stay only if an appeal under Section 34 of the arbitration law is pending. India aims to become a hub of domestic and international arbitration but through the implementation of these legislative changes, resolution of commercial disputes could take a much longer time now.

Although most of these amendments have been pro-arbitration, yet some of these have been criticized by the international and domestic arbitration community.

The Arbitration Tribunal

In commercial disputes between two parties, if they decide to use arbitration for the dispute resolution then an Arbitral Tribunal is set up which consists of one or more arbitrators that adjudicate and resolve the dispute and even provide an arbitral award. The arrangements for the composition of an Arbitration Tribunal are laid out in Chapter III of the 1996 Act. A dispute is tendered to the Arbitral Tribunal instead of a regular civil court. The Arbitral Tribunal has to then give a decision on the dispute which is binding on the parties in the dispute since they have no grounds to appeal. An arbitration proceeding is an informal process and doesn’t involve a judicial proceeding that takes place in a court involving a lengthy process which generally leaves both parties exhausted financially. It not only saves money but time too. Certain statutes and protocols/guidelines also provide for obligatory arbitration on specific subject matters such as disputes of the stock market, electricity law, and industrial disputes. Certain statutes also provide mandatory, specialist dispute resolution mechanisms which prevent a party from arbitrating specific types of disputes.  For instance, disputes on the subject of works contracts in certain states have to be tendered to a specialised Tribunal, and the legislation prevents the parties from submitting such disputes to private arbitration. 

UNCITRAL (The United Nations Commission on International Trade Law)

The law governing international arbitration in India is based on the UNCITRAL Model Law and the UNCITRAL Rules, 1976. 

Bharat Aluminum Co. v. Kaiser Aluminium Technical Service Inc.(2012)

Post the judgment of the Supreme Court in the BALCO case, the Indian courts had no jurisdiction to arbitrate in arbitration proceedings that took place outside India. In this case, after reconsidering its various earlier decisions on the Indian Arbitration and Conciliation Act, 1996, the SC concluded that the Act should be interpreted so as to incorporate the intent of the Indian Parliament. In Balco Judgement, the Supreme Court reversed its earlier verdicts in the cases of Bhatia International v. Bulk Trading S.A & Anr (2002), and Venture Global Engineering v. Satyam Computer Services Ltd and Anr (2010), stating that the absence of the word ‘only’ did not mean that the Indian legislature intended Part I of the 1996 Act to be applicable only to the arbitrations with their seats outside India. In fact, Part I applies when the place of arbitration is in India and any award passed under this part is considered to be a domestic award. Some of the changes that were made regarding arbitration laws in India, post the BALCO case are:

Union of India v. East Coast Boat Builders & Engineering Ltd., (1998)

This case explored the effect of the UNCITRAL Model Law and Rules. The Delhi High Court observed that not every provision of the Model Law and Rules forms part of the Arbitration and Conciliation Act, 1996. Although, the preamble of the Act says that it is practical to make laws on arbitration and conciliation taking into account the UNCITRAL Model Law and Rules. Also, although the Model law and Rules were taken into account while drafting and enacting the Act, what can be enacted is the law on arbitration that is enforceable in India.

If there was a lacuna in the provisions of the Arbitration and Conciliation Act, 1996, and it contained such provisions which are capable of two or more different interpretations, then the help of the preamble to the Act could be taken for interpreting such provision. The relevant provisions of the UNCITRAL Model Law and Rules could also be read so as to interpret that provision because while enacting the Indian Act, the said Model Law and Rules were taken into consideration.

Applicability of arbitration

All disputes cannot be settled by arbitration and there are certain disputes which do not fall within the categories of arbitrable disputes. This was held in the case of Booz Allen and Hamilton Inc v. SBI Home Finance Ltd., (2011).

Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. (2011) 

The disputing parties, in this case, were brothers and partners in a partnership firm that was in the business of running a hotel. Certain disputes relating to the business arose between the parties. When disputes arose between the partners regarding their business, in spite of the partnership deed containing an arbitration clause, the Respondents filed a civil suit against the other partners (the Appellant) before the local District Court. The suit was regarding getting a declaration that they, as partners, were eligible to participate in the administration of the hotel and hence, they wanted a permanent injunction against the Appellant from interfering with their right. 

The Appellant applied under Section 8 of the Arbitration and Conciliation Act, 1996, objecting to the maintainability of the civil suit on the ground that the partnership deed had an arbitration clause and thus it was obligatory for the disputes to be referred to arbitration. The District Court and subsequently the High Court also rejected the petition after which the case was moved to the Supreme Court. The Bench in the case observed that the 1996 Act did not contain any definite provision excluding any category of disputes terming them non-arbitrable. The order, in this case, held that only in instances where the subject matter of the dispute fell exclusively within the domain of courts, the dispute was said to be non-arbitrable. 

The Apex Court added that a right ‘in rem’ cannot be arbitrable but a right ‘in personam’ is capable of a settlement in private fora. The Supreme Court further held that a plain allegation of fraud ‘simpliciter’ is not a satisfactory ground to invalidate the effect of an arbitration agreement between the parties. 

As a result of this case, these disputes are outside the purview of arbitration:

Disputes which can be settled by arbitration are:

Vidya Drolia v. Durga Trading Corporation (2019)

The Supreme Court, in this case, elucidated that allegations of fraud alone are not adequate grounds for courts to deny the parties to the arbitration. It further added that allegations of fraud can be grounds to refuse reference to arbitration, only where the arbitration clause/agreement itself doesn’t exist and if the allegations are made against the state/state institutions, thereby requiring public inquiry. 

The Supreme Court also held in this same case that intra-company disputes are not arbitrable. This most likely would include disputes involving oppression and mismanagement claims in shareholder disputes, on which some courts had taken a varying view. 

Basic characteristics of arbitration

MM Aqua Technologies Ltd v. Wig Brothers Builders Ltd., (2001)

This case explains the definition of a binding agreement between parties. A binding arbitration agreement between the parties must be in writing and the parties should have particularly agreed to settle their disputes by arbitration. An arbitration agreement cannot be concluded by implication.

It was held in this case that the jurisdiction of the judge arises from an existing arbitration agreement and as there is no arbitration agreement in writing between the parties,  the clauses of the contract between them will not in any way be binding on the Petitioner. It was also held that if the Petitioner is unable to raise any dispute regarding the obligations which the Respondents have entered into amongst themselves, then there is a lack of a dispute being referred to the arbitrator. Therefore, the question of appointing the arbitrator does not arise as there is no arbitration agreement between the Petitioner and the second Respondent. 

Essential ingredients to an arbitration agreement

The essential elements for an arbitration agreement were underlined in the case Jayant N.Seth Vs Gyaneshwar Apartment Cooperative Housing Society Ltd., (1998).

The Petitioner filed an application under sub-section (4) of Section 11 of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator to settle the disputes between the Petitioner and the Respondent housing society. In this case, the Bombay High Court said that Section 2(1)(b) read with Section 7 of the Act has provisions for the essential ingredients of an arbitration agreement and it is as follows:

Powers and obligations of arbitrators 

The Arbitration and Conciliation Act, 1996, gives the arbitrators a set of wide-ranging powers to conduct the arbitration proceedings. These include:

The arbitrators in exercising these powers are required to adhere to the principles of natural justice and must give both parties proper notice of hearing and equal opportunity to present their case. They should be impartial and fair and show no interest in the appointing party. Their conclusions and awards should be based only on material provided by the parties and their personal knowledge should not interfere with the arbitration proceedings.

Lack of professionalism in arbitration in India 

India is an emerging global economic powerhouse, and to keep pace and integrate with the global business community, our laws have regularly undergone amendments to keep India at par with legal regimes regarding commercial law in other parts of the world.

International scenario

Domestic scenario

Union of India v. Singh Builders Syndicate, (2009)

In this case, the Supreme Court observed that it was unfortunate that delays, high cost, frequent and sometimes unwarranted judicial interruptions at different stages are seriously hindering the growth of arbitrations which is an effective alternative dispute resolution process. The Apex Court also pointed out that it is necessary to find an urgent solution to the problem of high arbitration costs and opined that institutional arbitration has come close to providing a solution. 

To make India an arbitration-friendly destination high costs are a hurdle yet to be crossed. The above points are the main reason why arbitration in India isn’t growing faster and why there is a desperate need to inject professionalism in our arbitration proceedings.

Conclusion

Arbitration in India is not a new concept and it was already existing in ancient India. But, it can be said that arbitration is still in its development phase and it is not the popular choice for settling disputes in India. The present arbitration system needs to undergo further amendments so that it can be made more effective in the days to come, both in the matters of domestic and international commercial arbitration. Arbitration is correctly called one of the types of ADR which means it is a settlement of disputes out of court, yet we have a lot of intervention by the court in the arbitration process defeating the very meaning of ADR.

The amendments to the Act are praiseworthy but it is still a few steps away from making arbitration the preferred mode of dispute resolution in India. Efficiency and professionalism in arbitration are unlikely to come merely from the imposition of legislative change. There should be more legal practitioners who specialize in arbitration and arbitration should also be viewed as the priority rather than playing only second fiddle to the Indian court litigation work.

ONGC v. Saw pipes, (2003), is an example of how judicial interference in the arbitration process can take foundation when there is even the slightest vagueness and ambiguity in the arbitration law, with the intrusion being of such magnitude that legislative change is necessary to remedy it. 

Suggesting that the legal format of the arbitration process must undergo a change, retired Chief Justice of India, T.S. Thakur said that the lack of professionalism by arbitrators was bringing a bad name to the country. He said further that the legal format of the arbitration process has to undergo a change and the overburdened judiciary is supportive of the ADR mechanism of arbitration because of the huge pendency of cases.

References

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