This article is written by Ashutosh Singh and further updated by Neelam Yadav. The article discusses the history of arbitration in India and how it has developed over the years. Additionally, it analyses the various types of arbitrations, important provisions of the Arbitration and Conciliation Act, 1996, and the relevant landmark judgements.  

Introduction

Over the years, there have been many developments in the legal field when it comes to the resolution of disputes between different parties. One such development is alternative dispute resolution (ADR), which allows the parties involved in a dispute to reach an agreeable solution outside the traditional system of courts. The ADR mechanism and its various modes have gained immense popularity since they were introduced. Now, it is a preferred mode of dispute resolution in many countries worldwide. This is all thanks to their effectiveness and efficiency when it comes to dispute resolution between individuals, organisations, businesses, and other entities, who are involved in legal conflicts. These legal conflicts may be civil, commercial, and in some instances, even criminal. 

The various modes of ADR are arbitration, mediation, conciliation, and negotiation. Then there is lok adalat, which is unique to the ADR landscape in India. The need for a robust ADR mechanism can be credited to the increasing expansion of the international economy. Moreover, it can also be called the impact of globalisation. However, all these changes happening on a global scale might feel somewhat difficult to keep up with for any country, especially India. Despite everything, India has been able to respond to these ever-growing developments with an ADR system that can be said to be still evolving. 

We are now fully aware of the large number of pending cases before Indian courts. This pendency not only burdens the courts but also highlights how tiring the traditional process of judicial administration can get for a litigant. And this is exactly what gave rise to the need for the implementation of ADR practices in India. The Malimath Committee also recommended in its report that the courts must refer disputes for resolution via the suitable modes of ADR, namely, conciliation, mediation, arbitration, or lok adalats. Out of these, arbitration has come on top as the most extensively used type of ADR not just across the globe but also in India. All because of the speed, confidentiality, and flexibility it offers.

India clearly has a rich history of the development of arbitration. This article, therefore, dives into this very evolution of the arbitration mechanism in India along with the challenges faced during its evolution.

What is arbitration

Before discussing the history and evolution of arbitration in India, we must first understand what exactly is the concept of arbitration.

Arbitration, as a form of alternative dispute resolution, has been around for a long time. The Word Intellectual Property Organisation (WIPO) defines it as a procedure wherein parties achieve resolution by submitting their disputes to neutral person/s called arbitrators, whose decision is binding on such parties. In simpler words, arbitration is a process that allows two or more parties in a dispute to resolve their legal conflicts. Instead of arguing their case before a court of law, arbitration lets the involved parties achieve a mutually acceptable resolution by bringing in a third party, i.e., the arbitrators. These arbitrators are neutral and impartial, which enables them to get the parties in dispute to agree to terms that are acceptable to all.

As can be understood from the above definition and its explanation, arbitration does not happen within the traditional system of courts. It exists to lighten the burden of the traditional justice delivery system. It does so by creating an alternate mechanism of dispute resolution that works without the court’s intervention. Moreover, it saves time and resources for all involved parties, including the courts. It is more efficient and cost-effective as opposed to the traditional justice delivery systems which require a lot more resources to work out a resolution.  

Basic characteristics of arbitration

• It is consensual: The process of arbitration is consensual, meaning, all the involved parties must agree to participate in arbitration proceedings. If there is no mutual consent amongst the parties, arbitration cannot take place. This mutual consent is generally in the form of an arbitration clause in contracts. Apart from private entities, government bodies as well as public sector undertakings also include such clauses in their contracts and are often parties to arbitration proceedings. 
• It is neutral: The arbitration process is neutral. Neutral, fair, and impartial hearings are non-negotiable aspects of an arbitration proceeding. Such a characteristic aligns with the principles of natural justice and ensures fairness within this mode of an alternative justice delivery system. Whether the disputes are international or domestic, as long as they are arbitrable, the practice is to choose neutral arbitrators. Moreover, the disputing parties can choose amongst themselves important elements such as the applicable law, language, and location for arbitration. 
• Arbitration agreement: Arbitration cannot take place without the free consent of the parties concerned, thus they must reach an agreement in writing. This agreement is to be contained in a document called an arbitration agreement. It states that the parties intend to resolve their issue through the arbitration process. The arbitration agreement can be brought to an end just as it was brought into existence—by mutual consent. It can also be terminated in the event of any involved party’s death or if the principal contract between the parties is terminated.
• Parties can choose their arbitrator: The parties have the right to mutually appoint an arbitrator of their choice and determine the number of arbitrators, provided that the number is odd.
• Arbitration proceedings are confidential: The arbitration proceedings are confidential. Only the involved parties can participate in the proceedings. Any third party that is not part of the arbitration agreement is not allowed to attend or play a part in arbitration proceedings.
• Arbitral award: The decision taken by the arbitrator(s) or arbitral tribunal on the dispute is known as an arbitral award.

Brief history of arbitration in India

Arbitration in the Ancient and Mediaeval period 

Arbitration in India traces back to ancient times, even though it was not known as ‘arbitration’. Settling disputes was a necessity even back then as communities established themselves by building homes, rearing domestic animals, and owning properties, which often led to disputes among people. There was no formal legal framework in place nor was there a judiciary system as we have today. In such a situation, it was less about justice and more about strength. The stronger party to a dispute was often the winning party as those were the times of ‘jiski lathi uski bhains’. No wonder, this created an imbalance in society. Such informal norms and practices which often led to imbalances gave rise to the need for a more structured approach to dispute resolution. It was considered a necessity for the maintenance of law and order in society.

Soon official courts came into being in ancient India. Apart from these courts, ancient Indian society also saw the establishment of popular courts, which played a significant role in resolving disputes. For instance, the disputes regarding the boundaries of a particular property were settled by the village elders.

In the past, arbitration in India followed two main sets of laws, given their prevalence at that time: Hindu Law and Muslim Law. These laws provided the frameworks for settling disputes through the process of arbitration and were based on the respective religious and customary practices of both communities. Other than these laws, we had various customary laws, traditions, and local practices which played a significant role in resolving disputes. 

Arbitration under Hindu Law

Arbitration has always been a part of our alternative dispute redressal mechanism. The proof can be traced back to the Vedic times and can be found documented in various Upanishads. The  Brihadaranyaka Upanishad, authored by Sage Yajnavalkya, is among the earliest texts to mention the common use of arbitration during this era. It mentions three distinct arbitral bodies, namely:

• Puga – A group of persons who live in the same locality, irrespective of their tribes and sects.
• Sreni – A council consisting of artisans and tradesmen connected by the same profession, irrespective of their tribes and sects.
• Kula – A group of people who belong to one family and are bound by familial ties.

These popular courts continued to flourish in India till the beginning of British rule. Over time, these three bodies collectively evolved into what we now recognise as ‘panchayats’. Disputes were resolved by a group of elders and wise men of society who acted as the arbitrators. This group was later known as panchayat and its members as ‘panchas’. 

The panchayats held proceedings that were informal and simple compared to the formalities and complex procedures of a municipal court. The decisions given by these panchayats were final and had a binding effect on all the involved parties. They handle a wide range of issues, from marital and family disputes to property ownership matters, and occasionally even criminal cases.

Arbitration under Muslim Law

In India, Muslims followed Islamic laws that were mentioned in detail in the Hedaya. The Hedaya is a detailed guide on Muslim Law in the form of commentary written by Imam Abu Hanifa, with the help of his students Imam Mohammad and Abu Yusuf. It also discusses arbitration as a method of resolving conflicts amicably while upholding the principles of fairness and justice.

In Arabic, the term ‘tahkeem’ is used to refer to arbitration. An arbitrator, known as ‘hakam’, oversaw the arbitration proceedings between the disputing parties. The arbitration agreement was known as Salisnama, which is a term derived from the Persian word for an arbitrator, Salis. According to Muslim law at that time, arbitrators were required to possess qualities similar to that of a Kazee, who was a judge in a court of law. The arbitrator’s decision was binding on everyone involved in the dispute. 

Arbitration law during the British Era

Regulation Acts

During the early British rule in India, the East India Company made several rules and regulations which primarily focused on the administration of justice to help resolve disputes through legal means. The Bengal Regulation Act of 1772 became the foundation of modern arbitration law in India. It recognised the legality of arbitration agreements to settle disputes through arbitration and provided a basic framework for arbitration proceedings. This Act was followed by the Bengal Regulation Act of 1781, which similarly allowed parties to submit their disputes to an arbitrator. After the success of these regulations, similar regulations, namely the Bombay Regulation Act of 1799 and the Madras Regulation Act of 1802 were enacted for the presidency towns of Bombay and Madras respectively. These regulations were similar in many ways to the Bengal Regulation Act of 1772. They established a basic structure for arbitration proceedings within their respective jurisdictions.

The Bengal Regulation of 1882 (Regulation VII of 1822) is considered the first formal legislation on arbitration in India. It provided a formal framework for conducting arbitration and was applicable to the Bengal Presidency. It allowed for disputes to be settled outside of the regular court system by appointed arbitrators. This regulation mainly dealt with the settlement of land revenue and related disputes. It provided procedures for appointing arbitrators, conducting arbitration proceedings, and enforcing their decisions.

The Madras Regulation of 1816 took it a step forward by providing the disputing parties to refer their matters to the panchayats. The Madras Regulation of 1823 (Regulation VI of 1823) and Bombay Regulation of 1825 (Regulation IX of 1825), similar to the Bengal Regulation of 1822, played an important role in deciding the path of laws related to arbitration. These laws laid down a detailed structure for arbitration within their respective presidencies. Their focus was on ensuring a fair resolution of disputes related to land revenue.

Indian Arbitration Act, 1899

In India, the first Arbitration Act was enacted in 1899. It came into force on July 1, 1899. Based on the English Arbitration Act, 1889, the Indian Arbitration Act, 1899 applied 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 arbitration agreement and that the arbitrator could also be among the sitting judges at the time.

The Indian Arbitration Act, 1889, being very complex and bulky, needed reforms, that is why a formal law, which was more specific, came into force in 1940 during the British regime itself. 

The Civil Procedure Code, 1908

The Code of Civil Procedure (CPC), 1908 had a significant impact on arbitration proceedings during the British era in India. The Second Schedule of the Code was entirely related to arbitration. However, it was repealed by the Arbitration Act, 1940. Together with the 1899 Act, the Code of Civil Procedure set the foundation for arbitration law in British India long before any comprehensive Acts, like the Arbitration Act of 1940, were introduced.

Later, the provisions related to arbitration were inserted in Section 89 by the Civil Procedure Code (Amendment) Act, 1999, which came after the enactment of the Arbitration and Conciliation Act, 1996.

The Arbitration (Protocol and Convention) Act, 1937

The Arbitration (Protocol and Convention) Act of 1937 was introduced to implement foreign arbitration agreements, specifically, those outlined in the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927.

The Act recognised and aimed to enforce foreign arbitral awards in India. Such recognition and enforcement, then, in turn, helped the arbitration laws of India to match the then-existing international standards. By providing a robust legal structure, this Act allowed the parties involved in international contracts to resolve their disputes through arbitration. Thus, it promoted and strengthened international business relationships. The Act ensured that India fulfilled its international commitments under the Geneva Protocol and Convention and promoted cross-border arbitration, enhancing India’s reputation and credibility in international trade and commerce.

The Arbitration Act, 1940

The Arbitration Act of 1940 came into force on July 1, 1940. It was the first formal legislation that specifically covered the ADR mode of arbitration in independent India. It obviously replaced the Indian Arbitration Act of 1899 and the provisions related to arbitration in the Second Schedule of the Code of Civil Procedure, 1908. 

This Act divided arbitration into three types: arbitration without court intervention, arbitration with court intervention, and arbitration in suits. Such categorisation was deliberate as it clarified when and how arbitration could be used as a mechanism for resolving conflicts. This Act also laid down several rules and regulations regarding the conduct of arbitration proceedings, ranging from rules on the duties and powers of arbitrators to rules on arbitration awards. One of the provisions of the Act, which is worth noting, is the provision that distinguishes between an application to set aside an award and a decision that the award is invalid. 

However, there are also several limitations and drawbacks to the Act. One major problem was that different High Courts had different rules for filing awards. Another major drawback was that if the court-appointed arbitrator died during the arbitration proceedings, there was no provision in the 1940 Act for appointing a replacement arbitrator. The Act was also silent about the in-built shortcomings in individual private contracts. There was no provision in the Act to prohibit an arbitrator from resigning at any moment during the arbitration proceedings. This subjected the parties to significant damages, especially where the arbitrators acted mala fide. It did contain a provision for arbitration without court intervention. However, it failed to achieve the desired result and the entire process then became more litigation-oriented.

Arbitration laws in the post-independence era

The Foreign Awards (Recognition and Enforcement) Act, 1961

Post-independence, a need was felt for new legislation so as to align India’s domestic laws related to arbitration with the rapidly globalising world. This ‘need’ could not be ignored as India became a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958. Therefore, the Foreign Awards (Recognition and Enforcement) Act, 1961 came into being. This was a significant step towards modernising India’s approach to arbitration, especially when it came to handling foreign arbitral awards under the jurisdiction of the New York Convention.

It applied to commercial arbitral awards made on or after October 11, 1960 in countries that are party to the New York Convention or with which India has declared reciprocal enforcement through a notification. A person interested in enforcing a foreign award could apply to a competent Indian court to have the award filed and registered. The court can then order enforcement of the award unless certain limited grounds for refusal are established.

The FARE Act was repealed in 1996 and its provisions are now incorporated into the Arbitration and Conciliation Act, 1996.

The Arbitration and Conciliation Act, 1996

The post-independence era saw significant developments in laws related to arbitration. One such development came to us in the form of the Arbitration and Conciliation Act, 1996. This Act replaced the Arbitration Act, 1940 and repealed the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. However, these latter two Acts were not done for. The provisions of the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961 were incorporated under Part II of the 1996 Act. These provisions can still be found under Part II of the Act, albeit with some modifications over the years.

There is no doubt that this Act of 1996 has marked itself as a landmark development when it comes to arbitration laws in India. It has aligned Indian arbitration practices with international standards, specifically those established by the United Nations Commission on International Trade Law (UNCITRAL). The Arbitration and Conciliation Act, 1996 aimed to modernise and bring consistency to the arbitration framework in India so that it could align with the existing global practices. Another significant objective behind the enactment of this Act was to facilitate India in becoming a global centre for arbitration.

Here are some more objectives of the Arbitration and Conciliation Act of 1996, which consolidated, strengthened, and amended arbitration laws in India:

• Amend and consolidate laws related to domestic arbitration and international commercial arbitration;
• Define the legal framework for conciliation;
• Facilitate the enforcement of foreign arbitral awards;
• Establish a just and effective arbitral procedure;
• Reduce the supervisory role of courts and limit their interference in the arbitral process.

That’s not all. This Act empowered arbitral tribunals to make use of other forms of ADR, including mediation, conciliation, and other procedures, throughout arbitral proceedings to resolve disputes effectively. Another noteworthy objective was to significantly limit the grounds on which an arbitral award could be contested in court.

Before delving further into the 1996 Act, let’s discuss, in brief, the law governing international arbitration in India, i.e., the UNCITRAL Model Law and the UNCITRAL Rules, 1976. 

Established in 1966, the United Nations Commission on International Trade Law is one of the core legal bodies of the U.N. in the field of international trade law. The official function of UNCITRAL is to modernise and harmonise the rules of international business. Its work includes globally accepted conventions, model laws, and rules; legal and legislative guides, and practical recommendations; up-to-date information on case law and uniform commercial law enactments; technical assistance in law reform projects; and regional and national seminars on uniform commercial law.

The guidelines provided in the Travaux Preparatoires led to the enactment of the UNCITRAL Model Law on International Commercial Arbitration. This Model Law was adopted in 1985 and later amended in 2006 so as to meet the evolving needs of the international community. Through this Model Law, the United Nations General Assembly aimed to instil proactiveness amongst the countries across the globe towards modernisation of their respective domestic arbitration-related legal frameworks. It suggested enacting arbitration legislation based on this Model Law. Of course, India was also heavily influenced by this global event. Soon, the Indian Parliament codified the guidelines of the Model Law on International Commercial Arbitration in the Arbitration and Conciliation Act, 1996.

The Model law, with the exception of a few provisions, was adopted in its entirety in India in the form of the Arbitration and Conciliation Act, 1996. The following provisions were adopted by the Act:

• Form and definition of the arbitration agreement,
• Duty of the courts to refer parties to arbitration where a suit is brought before the court in breach of the arbitration agreement,
• Power of courts and tribunals to provide interim measures of protection in support of an arbitration agreement,
• Composition of the arbitral tribunal,
• Appointing arbitrators,
• Grounds to challenge an arbitrator,
• Termination of the mandate of an arbitrator because of his failure to act,
• Provisions for substitution of an arbitration when his mandate is terminated,
• Procedure for arbitration,
• Enforceability of arbitral awards and appeal against them.

While the enactment of the 1996 Act is a significant development, the evolution of arbitration laws in India did not cease with its enactment. It has faced several criticisms. Over the years, many committees were formed to modify this Act. This is why it can be said that the 1996 Act that we know today in its present form is a culmination of the various reports submitted by the Law Commission and other committees. Apart from these reports, subsequent amendments of 2015, 2019, and lastly, 2021 along with judicial interpretations over the years have continued to shape and refine the arbitration landscape in India. All of this has been discussed in detail later in this article.

Amendments in Arbitration and Conciliation Act, 1996

The 176th Report of the Law Commission of India (2001)

The 176th Law Commission Report on the Arbitration And Conciliation (Amendment) Bill, 2001 was published in 2003. It not only discussed the drawbacks of the Arbitration and Conciliation Act, 1996, but also offered certain recommendations.

Drawbacks of the Act

1. Difficulty in implementing the Act: The Act was based on the UNCITRAL Model Law, which was primarily intended for international commercial arbitration. However, the Act applied similar provisions to domestic arbitration between Indian nationals, which caused difficulties for purely domestic arbitration. The limited grounds for challenging an award under Section 34 and Section 37 felt insufficient for domestic arbitration cases where arbitrators might not be well-versed in the law.
2. Conflicting judgements: The Report mentioned that there were conflicting judgments in various High Courts regarding certain provisions of the Act, such as the mandatory nature of time limits fixed in Sections 11(4) and (5). It specifically related to whether the time limits fixed in Sections 11(4) and (5) were mandatory or not, and whether a party could move the court under Section 11 for appointment if the opposite party does not appoint an arbitrator within the period.
3. Lack of public record of awards: The Report highlighted that there was no public record of the contents of the award, which led to difficulties in enforcing the award.
4. Interim Relief (Section 9): Difficulties were noted in obtaining prompt interim relief pending proceedings in international arbitration agreements, especially where the seat of arbitration is outside India. This led to Indian parties being disadvantaged.
5. Appointment of arbitrators: The Report suggested that clauses in contracts that enable a party to appoint their own employer, adviser, or consultant as an arbitrator violate Section 18 of the Act, which mandates equal treatment to the parties.Section 37
6. Vagueness in Section 42: The Report indicated that Section 42 of the Act was vague and required detailed restructuring.
7. Lack of immediate appeal rights: The Report stated that there was no immediate right of appeal if an arbitrator rejected objections regarding jurisdiction or bias during proceedings. Parties must continue with the arbitration until an award is made, which was considered to be problematic. The Report recommended amendments to Section 37 to cover appeals against orders passed by the arbitral tribunal under Section 13 and Section 16, where certain jurisdictional pleas are rejected by the tribunal.
8. Insufficient powers to arbitrators: The Report suggested that arbitrators did not have sufficient powers to ensure that their interim orders or dates of hearing were duly honoured by the parties.

Recommendations made in the report

The 176th Report discussed the following recommendations for the Arbitration and Conciliation Act, 1996:

1. Amendments: The Law Commission recommended necessary amendments in the following sections—

• Section 11 clarifies the time limits and provides for the appointment of an arbitrator if the opposite party does not appoint one within the period.
• Section 9 provides for interim orders and clarifies the procedures for obtaining such orders.
• Section 18 to clarify the provisions related to equal treatment to the parties in arbitration.
• Section 42 to clarify its provisions to address the vagueness therein
• Section 37 covers appeals against orders passed by the arbitral tribunal under Section 13 and Section 16, where certain jurisdictional pleas are rejected by the tribunal.

2. Separate provisions for domestic arbitration: To consider separate provisions for domestic arbitration to address the specific needs and realities of purely domestic cases, where arbitrators may not always be legal experts​.
3. Broaden grounds for court interference: Broaden the grounds for court interference in domestic arbitration awards to ensure fairness and address issues arising from awards made by non-legal arbitrators​.
4. Fast track procedure: Proposed a fast track procedure by way of a Schedule to speed up arbitration proceedings.
5. Sufficient powers for arbitrators: Arbitrators are to be given sufficient powers to ensure that their interim orders or dates of hearing are duly honoured.

The Arbitration and Conciliation (Amendment) Bill, 2003

The recommendations of the 176th Report were considered by the Government of India, which consulted with the State Governments and various institutions. Accordingly, the Government accepted almost all the recommendations of the Report and introduced the Arbitration and Conciliation (Amendment) Bill, 2003 in the Rajya Sabha on December 22, 2003. The Bill aimed to address the recommendations made by the Law Commission of India in its 176th Report.

The Bill was then referred to the Departmental-related Standing Committee on Personnel, Public Grievances, Law, and Justice for examination and report. The Standing Committee submitted its report in August 2005, recommending several changes to the Bill. However, due to the large number of amendments recommended by the Committee and the contentious nature of some provisions, the Bill was withdrawn from the Rajya Sabha.

Justice Saraf Committee Report (2004)

In July 2004, the Government constituted a Committee under the Chairmanship of Justice Dr. B.P. Saraf to study the implications of the recommendations made by the Law Commission in its 176th Report and all aspects relating to the Arbitration and Conciliation (Amendment) Bill, 2003. The Committee’s detailed report, submitted on January 29, 2005, emphasised the need for establishing an institution in India that would measure up to international standards and the institutionalisation of arbitration.

The Parliamentary Standing Committee Report (2005)

After the Justice Saraf Committee submitted its report, the Bill wasn’t enacted right away. Instead, it was referred to the Departmental-related Standing Committee on Personnel, Public Grievances, Law, and Justice for further review. This Committee included lawyers, business representatives, and government officials. The Committee identified several issues, such as the Bill allowing courts too much involvement in arbitration processes, which should be independent. Additionally, many provisions were found to be unclear, insufficient, or even contradictory. Thereafter, the Committee submitted its report to the Parliament on August 4, 2005, recommending that the Bill should be withdrawn and that fresh legislation be introduced after considering their suggestions.

The 246th Report of the Law Commission of India (2014)

The Law Commission of India’s 246th Report, submitted in 2014, proposed significant amendments to the Arbitration and Conciliation Act of 1996. The Report recommended the insertion of a new section i.e. Section 29A, to provide for a fast-track procedure for arbitration. It also suggested the establishment of an Arbitration Council of India to regulate and promote arbitration in the country. 

The Arbitration and Conciliation (Amendment) Act, 2015 

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

• Substantial restriction and reduction of judicial intervention;
• Extension of provisions of Part I to international commercial arbitrations, even if the place of arbitration is outside India unless the parties agree otherwise;
• For the purpose of international commercial arbitration, ‘Court’ was defined to mean only the High Court of competent jurisdiction; 
• Addition of Section 2(2), stipulates that, subject to an agreement to the contrary, the provisions of Sections 9, 27, and 37(1)(a) shall also apply to international commercial arbitrations. 
• In a major change, the 2015 Act imposed a strict time limit for concluding the process of arbitration. The period was fixed at 12 months with an additional six-month extension available, for which the Arbitration Tribunal will take extra fees at a rate of five percent for each month of delay.

These progressive changes brought about by the 2015 Amendment aimed to streamline and expedite arbitration processes.

However, even after the inclusion of the significant amendments mentioned above, the Act continued to face various issues that necessitated further revisions to eliminate the inconsistencies. These issues included excessive judicial intervention, ambiguity in provisions, appointment of arbitrators, etc. Thus, these provisions were further amended by the subsequent 2019 amendment.

Arbitration and Conciliation (Amendment) Act, 2019

The 2019 Amendment Act represents a significant government initiative aimed at making India an arbitration-friendly jurisdiction and aligning its arbitration laws with international jurisdictions. Key features of this amendment include: 

• Reduced judicial intervention;
• Appointment of arbitrators by arbitral institutions, streamlining the process; 
• Addressing issues arising out of the 2015 Amendment Act to make India a more robust market for foreign investors as well as a preferred seat for arbitration;
• Amendment to Section 11 of the Arbitration Act, enabling the appointment of the Arbitral Tribunal through courts in situations where parties fail to do so under their arbitration agreement;
• Expedited appointment of arbitrators, alleviating delays caused due to a huge backlog of cases before the courts and reducing the burden of the courts to a certain extent;
• Removal of the previously mandated time limit of 12 months for making an award in international arbitrations. The Tribunals, however, must do their best to dispose of the international arbitration matters within 12 months;
• Clarification on the division of responsibilities between the arbitral tribunal and courts for seeking interim reliefs post the arbitral award but before its enforcement;
• Requirement for parties challenging awards to rely only on the record of the Arbitral Tribunal, which will help in expediting the arbitration process;
• Provision for confidentiality of arbitration proceedings. 

The Arbitration and Conciliation (Amendment) Ordinance, 2020 

The Arbitration and Conciliation (Amendment) Ordinance, 2020, promulgated on November 4, 2020, aimed to address concerns raised by affected parties after the enactment of the Arbitration & Conciliation (Amendment) Act, 2019. The 2020 Ordinance introduced amendments including:

• Amendment of Section 36(3) to provide additional grounds for an unconditional stay on enforcement only if the seat of arbitration is within India; 
• Removal of the Eighth Schedule from the Act and its replacement with ‘the regulations’, meaning that the accreditation of arbitrators will now be governed as per the requisites laid down in the ‘regulations’. However, the specifics of these were still unclear.

The Arbitration and Conciliation (Amendment) Act, 2021

The Arbitration and Conciliation (Amendment) Bill, 2021 was introduced in the Lok Sabha in February 2021 and finally passed by the Rajya Sabha in March 2021. It not only amended the 1996 Act but also replaced the Arbitration and Conciliation (Amendment) Ordinance, 2020. While most of the recommendations of the 2020 Ordinance were retained, significant changes were introduced.

The Arbitration and Conciliation (Amendment) Act of 2021 expands provisions for both domestic and international arbitration, as well as laws governing conciliation proceedings. The removal of the Eighth Schedule, which had been criticised for its restrictive nature, allows parties to appoint arbitrators regardless of their qualifications. Previously, the Eighth Schedule barred foreign nationals from being appointed as an arbitrator in an arbitration seated in India, drawing condemnation from jurists. However, the Amended Act does away with the specific qualifications of the arbitrators as outlined in the Eighth Schedule of the Arbitration and Conciliation Act, 1996. Instead, the Act proposes that the qualifications for accreditation of arbitrators be prescribed by regulations and framed by an Arbitration Council to be set up. This omission was seen as a positive step towards strengthening the arbitration landscape in India. 

As per the Amended Act of 2021, courts can allow an unconditional stay only if an appeal under Section 34 of the Arbitration Act is pending in cases where the award is given based on fraudulent agreements or corruption. While India aims to become a hub of domestic and international arbitration, the implementation of these legislative changes may cause the resolution of commercial disputes to take a much longer time.

Although most of these amendments have been pro-arbitration, yet some of these have been criticised by the international and domestic arbitration community. Continuous changes to the Arbitration Act, such as those to Sections 43J and 36, suggested that the government was uncertain about its own laws. The amendments use unclear terms like “fraud” and “corruption” in Section 36, without providing an exhaustive list or clarification of what would constitute fraud and corrupt practices. This ambiguity allows parties to delay enforcement by raising accusations of fraud or corruption. Moreover, the term “regulated” in Section 43J was undefined, leading to further confusion. The new provision for an automatic stay on awards could be misused to delay enforcement, which, in turn, would undermine the efficiency and reliability of the whole arbitration process.

Salient features of Arbitration and Conciliation Act, 1996

India’s legal framework for arbitration primarily revolves around the Arbitration and Conciliation Act, 1996, which is the cornerstone of arbitration regulation in India. It safeguards the autonomy of the parties in respect of most procedural matters and consists of four parts. They  are as follows: 

• Part I: This part delineates general provisions governing domestic arbitration. It is very significant and draws heavily from the UNCITRAL Model Law. It lays the foundation for arbitration proceedings in India.
• Part II: This part is focused on the enforcement of foreign awards. It is crucial in handling international arbitration. Chapter I of Part II specifically deals with awards falling under the New York Convention whereas Chapter II deals with awards governed by the 1927 Geneva Convention.
• Part III: This part deals with conciliation, outlining the legal framework for resolving disputes through conciliation.
• Part IV: This part sets out certain supplementary provisions.

Before moving forward, it is important to note that India applies the New York Convention only to the recognition and enforcement of awards made in the territory of other contracting states. However, this recognition is contingent upon the awards arising from legal relationships that may be contractual or non-contractual, deemed commercial under national law. India, however, has not ratified the International Centre for the Settlement of Investment Disputes Convention, 1965.

In addition to the New York Convention, India is a party to various other international treaties and conventions related to arbitration. These include the European Convention providing a Uniform Law on Arbitration, 1966 (Strasbourg Convention), along with the recommendations issued in 2006 regarding the interpretation of specific Articles within the New York Convention, such as Article II(2) and Article VII(I).

Now, let’s delve into the salient features of the Arbitration and Conciliation Act, 1996, in detail.

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. This tribunal consists of one or more arbitrators that adjudicate and resolve the dispute to ultimately grant 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 must then decide on the matter. The decision is given in the form of an arbitral award, which is binding on all parties involved.

Arbitration is often a choice amongst parties for quick redressal of their disputes. It helps them avoid the lengthy process of courts which generally leaves both parties exhausted financially. However, certain statutes, protocols, and guidelines require obligatory arbitration on specific subject matters, such as stock market disputes, electricity law, and industrial disputes. Some statutes provide for mandatory and specialised dispute resolution systems, preventing a party from arbitrating on certain sorts of disputes. For instance, disputes on the subject of works contracts in certain states have to be tendered to a specialised tribunal. Legislation prevents the parties from submitting such disputes to private arbitration. 

Arbitration agreement 

Section 7 of the Act outlines the provision for the arbitration agreement. It defines the arbitration agreement as an agreement between the parties to submit certain disputes, whether they have already arisen or may arise on a later occasion, between them in respect of their legal relationship, to arbitration. It can be a separate agreement between the parties or it can also be included in the form of an arbitration clause in a contract. Sub-section (3) of this section specifies that an arbitration agreement must be in writing. This means an oral arbitration agreement is not recognised as an arbitration agreement under this provision.

Essential ingredients of an arbitration agreement

The case of Jayant N. Seth v. Gyneshwar Apartment Cooperative Housing Society Ltd. (1998) highlighted the essential elements for an arbitration agreement. In this case, 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. The Bombay High Court clarified that Section 2(1)(b) read with Section 7 of the Act outlines the essential ingredients of an arbitration agreement, which include:

• The parties should have entered into a valid and binding agreement;
• Such agreement may be included as a clause in a contract or established through a separate agreement;
• The agreement must be in writing, whether it is part of a document and signed by the parties or exchanged through letters, telexes, telegrams, or any other means of telecommunication that provide a record of the agreement. If the contract contains an arbitration clause, it becomes an arbitration agreement provided the contract is in writing and explicitly references the arbitration clause;
• Parties must express their intention to refer present or future disputes to arbitration;
• The dispute referred to arbitration must relate to a defined legal relationship, whether contractual or not.

Number of arbitrators

Section 10 addresses the number of arbitrators. Sub-section (1) specifies that the parties have the discretion to select any number of arbitrators as feasible for them, provided the number of arbitrators must not be even. Further, Sub-section (2) stipulates that in case the parties fail to select the number of arbitrators, then the arbitral tribunal must consist of a sole arbitrator.

Appointment of arbitrator

The rules for the appointment of an arbitrator are laid down under Section 11 of the Arbitration and Conciliation Act, 1996. According to this section, parties can agree on any procedure for the appointment of arbitrators. Additionally,  provisions are made under sub-sections 2 to 14 to ensure timely appointments.

Sub-Section (1) allows for an arbitrator to be any person of any nationality.

Sub-section (2) allows parties to agree on a procedure for appointing the arbitrator or arbitrators.

Sub-section (3) states that if the parties fail to agree on the appointment procedure, for a three-member arbitration panel, each party shall appoint one arbitrator, and those appointed arbitrators shall appoint a third arbitrator, who will act as the presiding arbitrator.

Sub-section (4) states that if a party fails to appoint an arbitrator within 30 days of receiving a request from another party, or if the two appointed arbitrators fail to agree on the third arbitrator within 30 days, the Supreme Court or the High Court as the case may be, or their designated person or institution can be approached to make the necessary appointment.

Sub-section (5) provides that if the arbitration agreement specifies a sole arbitrator and the parties fail to agree on the arbitrator within 30 days, the Supreme Court or the High Court as the case may be, or their designated person or institution can be approached to appoint the arbitrator.

Sub-section (6) states that if, under an appointment procedure agreed upon by the parties:

• A party fails to act as required under procedure, or
• The parties or appointed arbitrators fail to reach an agreement, or
• A person, including an institution, fails to perform any function,

the party may request the Supreme Court/High Court or their designated person or institution to take necessary measures.

Sub-section (7) states that the decisions made by the Supreme Court, High Court, or their designated authority regarding the appointment of an arbitrator are final and cannot be appealed.

Disclosures by arbitrator

Section 12 outlines the requirements for disclosures to be made by an arbitrator when approached in connection with an appointment. The arbitrator must provide written disclosure of (i) the existence of any past or present relationship, any interest (direct or indirect), whether financial, business, professional, or otherwise, with any of the parties involved or the subject matter in dispute, likely to give rise to justifiable doubts about their independence or impartiality; and (ii) any facts which are likely to affect their ability to devote sufficient time to the arbitration, particularly in completing the entire process within the stipulated period under the Act.  

Furthermore, Sub-section (3) of this section provides two grounds for challenging the appointment of an arbitrator—(i) the existence of any circumstances that may give rise to justifiable doubts about their independence or impartiality, or (ii) their failure to possess the qualifications agreed by the parties for the appointment of an arbitrator.

Powers and obligations of arbitrators 

The Arbitration and Conciliation Act, 1996 grants the arbitrators a comprehensive set of powers to oversee arbitration proceedings. These include:

• Power to rule on jurisdiction and validity of the arbitration agreement;
• Administer an oath to parties and witnesses involved in the arbitration;
• Pass interim measures (Section 17);
• Decide on the admissibility and influence of the evidence presented; 
• Power to proceed ex-parte (Section 25);
• Settle the dispute based on merits keeping in mind the governing law, and determine the rules of procedure and terms of the contract (Section 19)
• Power to appoint experts (Section 26)
• Support settlement even through other methods such as conciliation are available
• Determine and apportion the costs of the arbitration between the parties 
• Deliver a reasoned and just award and a duty to interpret or correct the award (Section 33)

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

Time limit for arbitral award

Section 29A of the Act provides the rules for making an award. Sub-section 1 to Section 29A provides that the awards shall be made within 12 months from the date of completion of pleadings by the arbitral tribunal except in the case of International commercial arbitration. Further sub-section 3 to Section 29A provides that the parties, by their consent, may extend 12 months for making an award but not exceeding 6 months. 

The Supreme Court, in the case of Tata Sons Pvt. Ltd. v. Siva Industries And Holdings Ltd. (2023), held that while international commercial arbitrations are encouraged to complete proceedings within a 12-month time frame, they are not obligated to adhere strictly to this time limit. Section 29A serves as a non-binding guideline for international commercial arbitrations.

Fast-track Arbitration

The provision related to the fast-track procedure of arbitration is laid down under Section 29B of the Arbitration and Conciliation Act, 1996. It is a productive method of dispute resolution. It is time-bound and follows limited procedures to speed up the process. The Arbitration & Conciliation (Amendment) Act, 2015 introduced this provision and has made the process of arbitration even more effective.

Fast-track arbitration enables the parties to come to an agreement and resolve the disputes within six months. Undoubtedly, it has become a popular option in India as it allows the parties to resolve disputes quickly.

The essential features of fast-track arbitration are as follows:

1. The objective of fast-track arbitration is to expedite the arbitral process and resolve disputes within time limits set by the Act and to be followed by arbitrators and the involved parties.
2. The arbitrator must make the award within six months from the date the arbitration proceedings started. In case the award is not passed within this given time limit of six months, the parties are allowed to extend the time limit further. However, such an extension must not go beyond six months.
3. The parties decide the fees of the arbitrators based on their agreement.
4. The parties must expressly state in writing, at any stage, either before or at the time of the arbitral tribunal’s appointment, that they agree to resolve their disputes through a fast-track procedure. 
5. Fast-track arbitration holds written proceedings and not oral ones. The arbitral tribunal decides the dispute based on written submissions and documents filed by the parties with no oral hearing. However, if all the parties submit a request or if the arbitral tribunal believes it is necessary to clarify certain issues, an oral hearing may be held.
6. The arbitrator is selected by the parties. The parties may agree that the arbitral tribunal will consist of only one arbitrator if that is what they want. Courts do not intervene in the selection process.

Landmark case laws on arbitration

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

Facts of the case

The appellant and the first respondent entered into a contract dated April 4, 1972, to construct a building. Clause 47 of this contract outlined an arbitration agreement between the parties. The Delhi High Court appointed respondent No. 2, Shri M. L. Nanda, a retired Chief Engineer from CPWD, as the sole arbitrator to conduct the arbitration proceedings and examine the differences between the parties before making an award. 

During the pendency of the arbitration proceedings, the appellant filed a petition with the Delhi High Court seeking the removal of Shri Nanda as arbitrator. This petition was dismissed on December 23, 1975. The appellant then filed a Special Leave Petition (SLP) questioning the petition’s dismissal and to dispose of the same as expeditiously as possible. The SLP was granted, and the Court passed an order, wherein by the mutual agreement of the parties the second respondent was removed and the third respondent, Shri C. P. Malik was appointed as the sole arbitrator.

Shri Maik, upon entering arbitration, asked the parties to file new pleadings, marking a fresh start for the proceedings. The first respondent then filed an application for the continuation of arbitration from where the second respondent had left it.  In other words, they sought that the pleadings and evidence recorded before and by the former arbitrator be considered part of the proceedings before the third respondent. The Court directed the third respondent to resume the arbitration proceedings from the point where the previous arbitrator left off with an instruction to conclude the proceedings within four months. 

Subsequently, the arbitrator made his award and notified the parties. The first respondent then requested that the award, along with pleadings and documents,  be filed before the Supreme Court.

Issues framed

• Whether the Supreme Court has jurisdiction to entertain the award? 

Judgement

The Supreme Court, in this case, emphasised that they saw the Arbitration Act, 1940 as an alternate medium to resolve disputes less formally, more effectively, and expeditiously. However, the manner in which proceedings under the Act were conducted and challenged in court, without an exception, defied its purpose and was cloaked in the legalese of unforeseen complexity.

The Supreme Court held that when an application related to arbitration is submitted to a court, that court has exclusive authority over all related matters. This means any issues or further applications regarding the arbitration must be handled by the same court. In this case, since the Supreme Court referred the arbitration to the third respondent and provided specific instructions on how the arbitration should proceed, only the Supreme Court had the authority to deal with the arbitration award. According to Section 31(4), the award must be filed in the Supreme Court, and no other court can handle it. This ensures the right to appeal is not denied, and the Supreme Court is open to hearing all arguments related to the case just as it would in any other legal proceeding.

Food Corporation of India vs. Joginderpal (1989)

Facts of the case

In 1979, the Food Corporation of India (FCI) entered into a contract with Joginderpal, a rice mill owner. Joginderpal agreed to take paddy (unprocessed rice) from FCI, mill it into rice, and return 70% of it to FCI. However, disputes arose regarding the fulfilment of the contract, leading to arbitration. FCI claimed that Joginderpal failed to collect all the paddy from their storage and sought a penalty of Rs. 55,060.29, based on a penalty rate of Rs. 2 per quintal of paddy. The arbitrator ruled against FCI because they did not provide enough evidence of actual losses, thus, dismissing the penalty. 

Additionally, FCI demanded compensation for undelivered rice, calculating the amount at Rs. 165 per quintal of paddy for 137.39549 tonnes of rice. The arbitrator found FCI’s calculations too high and adjusted the compensation to a lower amount. Both FCI and Joginderpal challenged the arbitrator’s award. Initially, a subordinate judge modified the award in favour of FCI. However, an Additional District Judge reversed this decision, ruling in favour of Joginderpal. FCI then appealed to the High Court of Punjab & Haryana, which upheld the Additional District Judge’s decision, stressing that the arbitrator’s decision should be respected unless there were clear legal issues.

Issues framed

• Whether the arbitrator acts within the norms of justice, equity, law, and fair play?
• Whether the award of the arbitrator can be set aside?

Judgement

The Hon’ble Supreme Court ruled that the award could not be set aside since the arbitrator provided reasons for his decision. Unless such reasons are found to be erroneous propositions of law or if the arbitrator’s opinion cannot be sustained in any view of the matter by the court, then the challenge to the arbitrator’s award cannot be sustained. The arbitrator’s conclusion was deemed plausible, and the Court had no jurisdiction to intervene with or amend the award in the manner sought by the appellant. The Court also held that the Additional District Judge was justified in correcting the Subordinate Judge’s order and that the High Court was justified in refusing to interfere with the Additional District Judge’s order.

The Supreme Court observed in this case that arbitration law should be simplified, less technical, and more sensitive to the actual realities and at the same time adhere to the canons of justice and fair play. The arbitrator should follow rules and procedures that foster confidence, not only by resolving disputes between the parties but also by creating a sense that justice has been served.

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

Facts of the Case

The Union of India (UOI) entered into a contract with East Coast Boat Builders & Engineering Ltd. (East Coast) for the construction of boats. The contract contained an arbitration clause. A dispute arose regarding the contract, leading East Coast to invoke arbitration. UOI objected to the arbitrability of the dispute. On June 11, 1998, the arbitral tribunal ruled that the disputes stated in the claim petition were arbitrable. The petitioner, who was aggrieved by this order, treated it as an interim award and challenged it under Section 34 of the Arbitration and Conciliation Act, 1996.

Issues Raised

• Whether disputes involving the government are arbitrable?

Judgement

The Delhi High Court held that disputes involving the government are arbitrable, provided they relate to subordinate rights in personam arising from the contract. The Court stated that the Government can enter into commercial contracts, and disputes arising from them can be resolved through arbitration.

This case investigated the impact of the UNCITRAL Model Law and Rules. The Delhi High Court observed that the Arbitration and Conciliation Act of 1996 does not incorporate every provision of the Model Law and Rules. Although the Act’s Preamble suggests that it is practical to enact laws on arbitration and conciliation in accordance with the UNCITRAL Model Law and Rules, what is enacted as law is what is enforceable in India.

If there was a lacuna in the provisions of the Arbitration and Conciliation Act, 1996, and it contained such provisions that may be interpreted in two or more ways, the Preamble to the Act could be used to interpret those provisions. The relevant provisions of the UNCITRAL Model Law and Rules could also be used to interpret such provisions, as they were considered when the Indian 1996 Act was enacted.

M.M. Aqua Technologies Ltd vs. Wig Brothers Builders Ltd. (2001)

Facts of the case

The petitioner and the first respondent entered into an agreement on January 17, 1994, in which the petitioner agreed to supply 7480 cubic metres of finished fill as per the specifications mentioned in the agreement. This agreement included an arbitration clause, stating that any disputes arising from the supply order would be referred to arbitration, with Delhi as the venue and Delhi courts having exclusive jurisdiction.

The petitioner subsequently filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking to resolve disputes through arbitration as per the contract’s arbitration clause.

Issues raised

• Whether an arbitration agreement exists between the petitioner and the second respondent?
• Whether an arbitrator be appointed to determine the disputes between parties who are not signatories to the arbitration agreement?
• Whether there was any assignment of the contract involving the second respondent or any agreement by the second respondent to make payments to the petitioner?

Judgement

The Delhi High Court held that there was neither an assignment of the contract nor was there any record indicating that the second respondent agreed to make payments to the petitioner at the instance of the first respondent. Consequently, an arbitrator cannot be appointed to resolve disputes between parties who are not signatories to the arbitration agreement.

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

The Court ruled that the jurisdiction of the judge arises from an existing arbitration agreement. Since the petitioner and the second respondent did not enter into a written arbitration agreement, the clauses of the contract were not binding on the petitioner. Further, it was held that if the petitioner was unable to raise any dispute regarding the obligations entered into by the respondents among themselves, then there was no dispute to refer to the arbitrator. Therefore, the appointment of the arbitrator is unnecessary because the petitioner and the second respondent have no arbitration agreement.

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

Facts of the case

This case involved a dispute between Booz-Allen and Hamilton Inc. (the appellant) and SBI Home Finance Ltd. (the respondent) regarding the enforcement of a mortgage by sale.

The appellant had entered into leave and licence agreements with Capstone Investment Co. Pvt. Ltd. and Real Value Appliances Pvt. Ltd. to use their flats. Capstone Investment and Real Value Appliances had secured loans from SBI Home Finance Ltd. under two loan agreements. A dispute arose when SBI Home Finance Ltd. filed a suit for redemption of the mortgage by sale of the flats. The appellant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking a stay on the suit and referring the parties to arbitration.

Issues raised

• Whether a suit for enforcement of a mortgage by sale can be adjudicated by an arbitral tribunal?
• Whether the subject matter of the dispute is arbitrable?

Judgement

The Hon’ble Supreme Court ruled that a suit to enforce a mortgage by sale is not arbitrable. The Court reasoned that the enforcement of a mortgage by sale is not merely a suit for money but involves the enforcement of a right in rem. Therefore, such actions cannot be adjudicated by an arbitral tribunal and must be decided by courts of law.

The Court also held that when considering an application under Section 8 of the Arbitration and Conciliation Act, 1996, the court must decide on the issue of arbitrability. The Court recognized three conditions that need to be satisfied for any subject matter to be arbitrable:

1. The disputes must be capable of adjudication and settlement through arbitration;
2. They must be covered by the arbitration agreement; and
3. They must be referred to arbitration by the parties.

These conditions have now come to be known as the “Booz-Allen Test”.

Apart from laying down these conditions, the Court ruled that the arbitrability of a dispute hinges on the nature of the rights involved. Disputes that are related to a right in rem are typically deemed non-arbitrable. On the other hand, disputes related to a right in personam are considered arbitrable. 

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

• Disputes regarding rights and liabilities arising out of criminal offences,
• Matrimonial disputes,
• Disputes of guardianship,
• Disputes of insolvency and winding up,
• Disputes arising due to testamentary matters,
• Tenancy and eviction disputes,
• Disputes between trust, trustees, and beneficiaries,
• Matters relating to unlawful consideration are void as per Section 24 of the Indian Contract Act.

Disputes which can be settled by arbitration are:

• Disputes of a civil/quasi-civil nature that involve civil rights 
• Disputes which arise from civil, commercial, labour, and family disputes where the parties are entitled to conclude a settlement 
• Dis​​putes that arise from construction projects, joint ventures, intellectual property rights, real estate securities, contract interpretation and performance, Banking transactions are arbitrable

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

Facts of the case

Bharat Aluminium Co. (BALCO) signed a contract with Kaiser Aluminium Technical Service Inc. (Kaiser) for the supply and installation of computer systems. The contract allowed for arbitration in London under English law, but it was governed by Indian law. A dispute arose, and Kaiser sought arbitration in London, resulting in two awards in its favour. BALCO filed applications in an Indian court to have the two awards set aside under Section 34 of the Arbitration and Conciliation Act, 1996.

BALCO argued that Part I of the 1996 Act allowed Indian courts to set aside foreign awards and that “the law under which the award was made” in Section 48(1)(e) (mirroring Article V(1)(e) of the New York Convention) meant Indian law as the law governing the contract.

Issues

• Whether Part I of the 1996 Act applies to international commercial arbitrations held outside India and provides for setting aside such awards?
• Whether the expression “the law under which the award was made” in Section 48(1)(e) of the 1996 Act means the law of the seat of arbitration or the law governing the contract?

Judgement

The Supreme Court held that Part I of the 1996 Act only applies to arbitrations that take place in India. Part II, on the other hand, deals with the enforcement of foreign arbitral awards in India. It does not, however, address the setting aside of such awards. Further, the Court clarified that the expression “the law under which the award was made” in Section 48(1)(e) refers to the curial law or the law of the seat of arbitration. It does not mean the law governing the contract itself. This interpretation was based on the New York Convention, which established the “territorial link” between the seat of arbitration and curial law.

The Court rejected BALCO’s argument that the 1996 Act allows Indian courts to set aside foreign awards. It held that the 1996 Act does not deal with awards made in non-Convention countries.

Impact of the case

Post the judgement of the Supreme Court in the BALCO case, Indian courts no longer have jurisdiction over arbitration proceedings that take place outside India. In this landmark decision, the Supreme Court re-evaluated its earlier rulings on the Arbitration and Conciliation Act, 1996. The Court concluded that the Act should be interpreted to incorporate the intent of the Indian Parliament. The BALCO judgement reversed the 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). The Court clarified that the absence of the word ‘only’ did not mean that the Indian legislature intended Part I of the 1996 Act to apply 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:

• The Indian Arbitration Act has acknowledged the territoriality principle which is part of the UNCITRAL Model Law. Part I of the 1996 Act applies to arbitrations held in India, whether they are between Indian parties or between Indian and foreign parties. However, Part I does not apply to arbitrations held outside of India, regardless of whether the parties choose to apply the Indian Arbitration Act. 
• In the case of domestic awards, Indian laws prevail if there is a conflict with substantive law. Foreign awards must follow the ‘conflict of law’ rules of the country in which the arbitration takes place.
• These findings of the Supreme Court only apply to arbitration agreements executed after September 6, 2012. All disputes arising from an arbitration agreement entered into up to that date shall be decided as per the old precedents. The Supreme Court determined that such rulings were incorrect and have since been reversed.

M/S Cinevistaas Ltd. vs. M/S Prasar Bharti (2018)

Facts of the case

Cinevistaas Ltd. produced a game show called “Knock Out,” which Prasar Bharti initially agreed to air for 52 episodes. Promotions were broadcast, and advertisements were published. However, three weeks before the show was scheduled to air, Prasar Bharti raised some concerns and decided not to air it. Upset by this decision, Cinevistaas took the matter to the Delhi High Court, which appointed an independent arbitrator to resolve the issue. Cinevistaas invoked the arbitration clause on October 31, 2003, and submitted their claims on August 31, 2004. Initially, they quantified their claim for concept development, research, and scripting at Rs. 64,25,000, but later in the claim petition, they revised it to Rs. 8,40,000. Similarly, their claim for technicians was initially Rs. 34,47,000 but later changed to Rs. 15,50,000.

During the arbitration process, Cinevistaas requested to correct these claim amounts on May 25, 2008, aiming to increase the total claim from Rs. 75,88,29,654 to Rs. 77,01,97,260. The arbitrator rejected this request on August 8, 2009, citing that it was made after the three-year limitation period had expired and considered it as adding new claims rather than correcting errors. Cinevistaas challenged this decision, arguing that they only sought to correct errors in their original claim petition and that the arbitrator wrongly interpreted these corrections as new claims. Prasar Bharti argued that the changes were not mere corrections but attempts to increase the claim amounts and that the rejection of the amendment did not constitute an award and thus couldn’t be challenged under Section 34 of the Arbitration Act.

Issues raised

• Whether these were inadvertent errors that were left out in the Statement of Claims or were they additional claims?
• Whether the order of the Ld. Arbitrator constitutes an Award?

Judgement

In this case, the Delhi High Court clarified the issue regarding amendments to the Statement of Claim following the initial submission to the arbitral tribunal. The Court held that the letter invoking arbitration had quantified the claim at a higher amount and that the quantification of the claims in the application for the appointment of an arbitrator under Section 11 of the Act was identical to that of the letter invoking arbitration. Therefore, the claims, as raised, invoked, and referred to arbitration could not be considered barred by limitation. Thus, the arbitrator’s finding that these were additional claims was not tenable.

The Court further held that the arbitrator’s order rejecting the application had a clear finality in respect of the additional claims and thus constituted an award. Consequently, a Section 34 petition can be filed against it.

Vidya Drolia vs. Durga Trading Corporation (2019)

Facts of the case

In this case, Vidya Drolia (and others) were tenants in a property owned by Durga Trading Corporation. A dispute arose regarding the tenancy, potentially involving issues like rent amount, repairs, or lease renewal. The lease agreement between the parties included a clause mandating arbitration for resolving disputes, leading Durga Trading Corporation to initiate arbitration proceedings. Vidya Drolia challenged the arbitrability of the tenancy dispute under the Arbitration and Conciliation Act, 1996. Their argument centred on the idea that disputes governed by the Transfer of Property Act, 1882, which likely formed the basis of the tenancy agreement, could not be settled through arbitration.

Issues raised

• Whether landlord-tenant disputes governed by the Transfer of Property Act, 1882 are arbitrable?
• Who decides the question of arbitrability—the court at the referral stage or the arbitral tribunal?

Judgement

The Supreme Court, in a 3-judge bench, overruled the decision in Himangni Enterprises vs. Kamaljeet Singh Ahluwalia (2016), which concluded that landlord-tenant conflicts under the Transfer of Property Act are non-arbitrable.

1. The Court established a four-fold test to evaluate whether the subject matter of a dispute is arbitrable:
2. When the dispute’s cause of action and subject matter are actions in rem, i.e. against the world at large;
3. When the dispute’s cause of action and subject matter affect the rights of third parties;
4. When the dispute’s subject matter cannot be adjudicated and settled through arbitration;
5. When the relief sought in the subject matter of the dispute cannot be granted by the arbitrator.

The Court held that landlord-tenant disputes are arbitrable as they relate to subordinate rights in personam arising from the contract.

On the question of who decides arbitrability, the Court ruled that at the referral stage under Sections 8 and 11 of the Arbitration Act, the court can prima facie examine the existence of a valid arbitration agreement. However, the tribunal has the jurisdiction to finally determine the issue of arbitrability.

The Supreme Court clarified that allegations of fraud alone are not adequate grounds for courts to deny 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 or if the allegations are made against the state or state institutions, thereby requiring public inquiry. 

The Supreme Court further held that intra-company conflicts are not arbitrable. This would most certainly include shareholder disputes involving oppression and mismanagement accusations, on which some courts have previously adopted differing positions.

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. These continual legal reforms have kept India at par with legal regimes regarding commercial law in other parts of the world. However, despite all the constant amendments to promote arbitration and other forms of ADR, arbitration in India faces major challenges, especially when it comes to professionalism and efficiency.

International scenario

Although amendments to existing laws have made arbitration and other forms of ADR popular alternatives to litigation, most arbitration in India remains ad hoc. Institutional arbitration constitutes only a minor proportion of all arbitrations conducted. There are various arbitral institutions in India, however, parties prefer ad hoc arbitration and frequently approach the courts to appoint arbitral tribunals under the relevant provisions of the Arbitration and Conciliation Act of 1996. 

There are about 35 arbitration centres in India, but there is a lack of institutions that can be compared to organisations of international repute, like the International Court of Arbitration, the London Court of International Arbitration, the Singapore International Arbitration Centre, etc. As a result, foreign companies entering into business contracts with Indian companies often prefer arbitration centres outside India because they feel that there is a lack of expertise, inadequate networking, commensurate remuneration to arbitrators, and a lack of professionalism even in secretarial services. 

There are not enough dependable arbitral institutions in India, and still, a lot of misconceptions about institutional arbitration persist. Moreover, there is insufficient governmental support and enthusiasm for institutional arbitration. To remedy this, there needs to be compulsory compliance with accepted international practices, making it the norm and not just an exception to the rule.

Another reason why foreign business houses are shy in choosing India as the seat of arbitration is to avoid Indian courts. This can be attributed to the image of the Indian judiciary as regards time taken for the disposal of matters is not encouraging.

Domestic scenario

There is a cap on the time limit for the decisions of arbitration proceedings but it is hardly adhered to. The timeline for completion of pleadings by the concerned parties is also seldom complied with, and there is a notable lack of expertise in drafting arbitration petitions. Delays in arbitral proceedings often occur because there are occasions when the parties file an application for interim relief, which is not taken into account in the agreed timelines between all concerned. Moreover, delays are also caused by witnesses who don’t turn up on the agreed-upon date of the hearing.

Professionalism among attending lawyers and arbitrators is sometimes lacking, maybe owing to their busy schedules or slackness. This results in prolonged periods for framing the issues and then there are further delays in producing evidence, despite multiple dates being set. Furthermore, the practice by some institutions and government bodies of appointing their own officers as arbitrators undermines the fairness of the arbitration proceedings. There is also a lack of expertise in drafting arbitration petitions.

Arbitration in India has not developed as expected. A fundamental requirement for any arbitration proceeding is the independence and impartiality of the arbitrator. An arbitrator must rise above the prejudiced interest of the parties and act in a manner to not further the particular interests of either party. Contrary to the belief, arbitration does not come to an end when the award is made; rather the real litigation typically begins when the award has to be enforced after the announcement. Legislature, for some reason, chose to make arbitral awards subject to challenges before the trial courts. As a result, the plight and dilemma of a successful claimant, who cannot enjoy the arbitral award until such procedural challenges are resolved, can well be imagined.

The delays caused by the intervention of the courts drain the finances of the parties because arbitration then becomes litigation in disguise. Consequently, the arbitration process in India faces significant challenges that hinder its growth and effectiveness.

The Supreme Court of India highlighted similar concerns in Union of India vs. M/S Singh Builders Syndicate (2009). The Court observed that it was unfortunate that delays, high costs, and frequent and sometimes unnecessary judicial interruptions at various stages seriously hinder the development of arbitration as an efficient alternative dispute resolution mechanism. The Apex Court emphasised the importance of finding an immediate solution to the problem of excessive arbitration costs, and it concluded that institutional arbitration came close to offering one. 

High costs remain a significant hurdle, yet to be crossed, to make India an arbitration-friendly destination. These issues are among the primary reasons why arbitration in India is not growing as quickly as expected and why there is a desperate need to inject professionalism into our arbitration proceedings.

Conclusion

Arbitration in India has historical roots, tracing back to the ancient times. However, it can be said that despite its longstanding history, arbitration is still in its development phase and is not yet 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 for both domestic and international commercial arbitration. Arbitration is correctly described as a part of ADR, which means it is a settlement of disputes outside of courts. Yet we can see a lot of intervention by the courts in the arbitration process, defeating the very meaning of ADR.

Although the recent amendments to the Arbitration and Conciliation Act of 1996 are praiseworthy, they are still a few steps away from making arbitration the preferred mode of dispute resolution in India. Efficiency and professionalism in arbitration are unlikely to develop merely from the imposition of legislative change. There is a need for more legal practitioners, specialising in arbitration, and for arbitration to be viewed as a priority rather than playing second fiddle to the traditional system of litigation.

The case of ONGC vs. Saw Pipes Ltd. (2003), is an example of how judicial interference in the arbitration process can take foundation due to 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 further advocated for changes in the legal framework of the process of arbitration and highlighted how the judiciary is supportive of ADR mechanisms like arbitration to alleviate the burden of the vast number of pending cases in courts.

Overall, for arbitration to become the preferred mode of dispute resolution in India, it is important to reduce interference by the courts, enhance the professionalism of arbitrators, and make the necessary legal reforms.

Frequently Asked Questions (FAQs)

What is arbitration? 

When the parties decide to resolve their disputes through an independent third party outside the court, this mechanism to resolve the dispute is called arbitration and the independent third party is called an arbitrator. Arbitration is an alternative to filing a lawsuit and going to court to resolve legal disputes. 

How is arbitration different from filing a lawsuit before a court?

Arbitration is different from filing a lawsuit before a court in the following ways:

1. Arbitration is conducted privately where the parties sign a mutual agreement of arbitration and submit their dispute to an independent third party known as the arbitrator. The arbitrator adjudicates and renders its arbitral award to the parties’ dispute and this award is binding on the involved parties. 
2. The pleadings and other relevant documents are filed privately before an arbitrator or arbitral tribunal in arbitration proceedings. Therefore, arbitration is confidential in nature. On the other hand, in case of a lawsuit before a court, the dispute is decided by the concerned judge. The judge gives the decision in an open court. The pleadings and other relevant documents placed as evidence in a lawsuit before a court become public records.
3. Arbitration provides a speedier resolution as the arbitrator/arbitral tribunal deals with that particular proceeding, unlike court proceedings that may take several months or even years due to numerous cases and lengthy procedures.
4. In arbitration, the procedure to be followed by the arbitral tribunal for conducting the arbitration proceeding is mutually agreed upon by the parties through an arbitration agreement, whereas court proceedings are governed by statutory and procedural rules.

What happens in a situation where there exists a valid arbitration agreement between the disputing parties, yet the aggrieved party moves the court to file a lawsuit?

If the disputing parties had made a valid arbitration agreement and the aggrieved party moved the court to file a lawsuit, the responding party may, by way of an application, submit that the parties have a valid arbitration agreement that the dispute in question should be resolved by way of arbitration, not a lawsuit. Such an application should be filed by the responding party before it submits its first statement in the court. The court will check the arbitration agreement’s validity and then refer the case to arbitration.

When does a court appoint an arbitrator/arbitral tribunal?

The court may appoint the arbitrator in the following situations:

1. Where the arbitration agreement does not specify a procedure for the arbitrator’s appointment and the parties fail to appoint an arbitrator based on their mutual agreement; or
2. If a party fails to appoint an arbitrator within 30 days of receiving a request from the other party to do the same; or
3. If the two appointed arbitrators cannot agree on a third arbitrator within 30 days of their appointment.

Which court has the jurisdiction to appoint an arbitrator?

In domestic arbitrations, the jurisdiction for the appointment of an arbitrator lies with the respective High Court whereas for international commercial arbitrations, the jurisdiction for the appointment of an arbitrator lies with the Supreme Court of India.

Can disputes be settled between the parties during arbitration proceedings?

Yes, the parties can resolve their disputes during the arbitration proceedings. In that instance, the arbitrator will conclude the proceedings and record the settlement in the form of an arbitral award on the agreed-upon terms. An arbitral award on agreed terms has the same status and effect as any other arbitral award on the subject of the dispute. This is the same as the “consent decree” passed by the courts.

What is an arbitration award?

An ‘arbitral award’ or an ‘arbitration award’ refers to a decision made by an arbitrator or arbitral tribunal pursuant to arbitration proceedings. An arbitration award is similar to a final judgement passed by a court, which is binding on the parties.

What are the grounds under which an arbitral award can be set aside?

An arbitral award can be set aside by submitting an application for setting aside the arbitral award within 3 months from the date on which the party filing the application received the arbitral award extending upon a further period of a maximum of 30 days with the permission of the court.

As per Section 34(2) of the Arbitration and Conciliation Act, an arbitral award can only be challenged based on the following grounds:

1. If the parties to the arbitration agreement were under some incapacity, or
2. If the arbitration agreement was not valid under law; or
3. If there was no proper notice of the appointment of an arbitrator or the arbitral proceedings; or
4. If the arbitral award deals with a dispute not covered by or not falling within the terms of the arbitration agreement; or
5. If the composition of the arbitral tribunal or the arbitral procedure did not follow the terms of the arbitration agreement between the parties; or
6. If the dispute could not be resolved through arbitration under the existing law; or
7. If the arbitral award was in conflict with the country’s public policy. 

Does UNCITRAL offer legal advice in specific disputes, administer arbitrations, or recommend legal practitioners?

No, the UNCITRAL does not participate in either public or private disputes. It does not provide any legal advice in specific disputes nor does it nominate arbitrators, certify arbitral authorities, administer arbitrations, or recommend any legal practitioner for legal aid.

What does “arbitration under the UNCITRAL rules” mean?

The phrase “arbitration under the UNCITRAL rules” refers to the agreement between parties in a dispute to settle any existing or future dispute through arbitration proceedings conducted in accordance with the UNCITRAL Arbitration Rules. These rules provide a comprehensive set of guidelines for conducting arbitration proceedings and are designed to be used in a wide variety of cases related to international commercial arbitration.  

References

• https://www.scconline.com/blog/post/2021/02/17/making-india-a-hub-of-arbitration-bridging-the-gap-between-myth-and-reality/
• https://www.mondaq.com/india/trials-appeals-compensation/802850/law-of-bias-in-arbitrators–certain-interesting-aspects
• https://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf
• https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=7785&context=penn_law_review
• https://uk.practicallaw.thomsonreuters.com/w-016-8614?transitionType=Default&contextData=(sc.Default)&firstPage=true
• https://indiacode.nic.in/handle/123456789/1978
• hhttps://economictimes.indiatimes.com/news/company/corporate-trends/arbitration-now-a-preferred-adr-mechanism-in-india-survey/articleshow/20291689.cms?from=mdr
• https://www.scconline.com/blog/post/2021/02/17/making-india-a-hub-of-arbitration-bridging-the-gap-between-myth-and-reality/
• https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=8707&context=penn_law_review
• https://www.livelaw.in/columns/desperate-need-to-inject-professionalism-into-domestic-arbitrations-158862
• https://www.cyrilshroff.com/wp-content/uploads/2019/06/Arbitration-in-India-%E2%80%93-A-Story-of-Growth-and-Opportunity.pdf 
• https://www.livelaw.in/lawschool/arbitration-and-conciliation-amendment-act-2019-the-arbitration-act-1940-the-arbitration-and-conciliation-act-1996-the-arbitration-and-conciliation-amendment-act-2015-175948 
• https://districts.ecourts.gov.in/sites/default/files/Arbitration%20act%20amendments%20proposed.pdf 
• https://www.barandbench.com/apprentice-lawyer/impact-of-the-arbitration-and-conciliation-amendment-act-2021-on-indias-pro-arbitration-outlook