Arbitration Act of India

This article on the Arbitration Act of India is written by Sheryl Ann Abraham.

HISTORICAL BACKGROUND:

India has been an arbitration friendly country right from the beginning. Arbitration was in practices even before the codified law came into force. Settling a dispute by referring to a third party was well known in ancient and medieval India. If any party was not satisfied with the decision, he could go on appeal to the court of law and ultimately the king itself. In the pre-court period the leaders of the communities and the leaders of the families used to act as arbitrators and people used to obey the decisions of those arbitrators. Later, Panchayats were formed in villages to settle disputes between the parties.
The first arbitration law in India was the Arbitration Act of 1899 based on the English Arbitration Act 1899 which was extended to other parts of British India through Section 89, Schedule II of the Code of Civil Procedure 1908.
Later, based on the English Arbitration Act of 1934, the Arbitration Act 1940 was enacted in India to consolidate and amend the law relating to arbitration.
In 1937 India became a signatory to the Geneva Protocol on Arbitration Clauses 1923 & Geneva Convention of 1927 and the Arbitration (Protocol and Convention) Act 1937 was enacted in India to give effect to the said conventions. India then became a signatory to the New York Convention in 1960 on account of which the Foreign Awards (recognition and Enforcement) Act of 1961 was enacted.
According to Black’s Law Dictionary, “Arbitration in practice is the investigation and determination of a matter or matters of difference between contending parties, by one or more unofficial persons, chosen by the parties.
Compulsory arbitration is that which takes place when the consent of one of the parties is enforced by statutory provision. Voluntary arbitration is that which takes place by mutual and free consent of the parties.”

NEED FOR ARBITRATION:

1. The Indian judiciary foremost has failed to deliver justice expeditiously. The delay in delivery of justice is the greatest challenge before the Indian judicial system. The problem has escalated to such an alarming proportion that unless it is solved speedily and effectively, it will, in the near future, crush completely the whole edifice of our judicial system.

2. In addition, the number of judges in India to population ratio is profoundly law compared to other countries.

3. There was no fixed period for disposal of cases as set forth by any Act or Code.

4. The complex nature of the laws and rigidity of courts further amplify the need for an alternate mechanism to settle disputes. Lack of formality and absence of procedure makes arbitration easy and hassle free.

THE ARBITRATION ACT OF 1940:

1. The Arbitration Act 1940 was enacted in India to consolidate and amend the law relating to arbitration and is made effective from 1 July 1940. The Act repealed the Arbitration Act of 1899 and relevant provisions of CPC, 1908.

2. This Act empowered the Indian courts to modify the award, remit award to arbitrators for reconsideration and to set aside the award on specific grounds.

3. The Act laid down the framework within which domestic arbitration was concluded in India.

4. The scheme of the Act is:
-to deal with arbitration without the intervention of the Court (Chapter II)
-to deal with arbitration with the intervention of the court where there is no suit pending (Chapter III)
-to cover arbitration in suits (Chapter IV).
Provisions common to all three kinds of arbitration constitute the remaining proportion of the Act (Chapters V to VII and the Schedules).

5. The Act extended to whole of India except the states of J&K.

PRINCIPLE SHORTCOMINGS OF THE ARBITRATION ACT OF 1940:

1. Though the Act was a big step forward in bringing a comprehensive law covering all important aspects of arbitration, the need for its replacement started being felt with increasing urgency in view of the liberalization programme of the Government of India.
The law lacked statutory recognition of conciliation as a means of settling the disputes.

2. The Act allowed courts to interfere at every stage of the arbitration proceeding; starting from the appointment of the arbitrator through the interim stage till the passing of the award.*
This developed the culture of the court overseeing the arbitration proceedings and not giving arbitration the status of an alternate resolution mechanism. This was coupled with the fact that the Indian courts had enormous backlog of cases which delayed the resolution of the issues that went to the court;

3. Any party interested in delaying the proceedings would resort to the court during any stage of the proceedings taking advantage of the backlog of the cases;

4. The Act did not prohibit the parties from raising disputes relating to the proceeding or validity of the arbitration agreement or the constitution of arbitration even after passing the award, while they have participated in the arbitration without demur;

5. The Act allowed the award to be challenged on a large number of grounds, including the merits of the award.

6. Foreign investors were reluctant to invest in India as they required for a stable business environment and a strong commitment to the rule of law.

IN NATIONAL THERMAL POWER CORPORATION vs. SINGER COMPANY

The legal hindrance in resorting to foreign arbitrations was observed as the parties would invariable be India (the foreign investor would invest through the Indian arm) and awards of such arbitrations could be treated as domestic awards and not foreign awards.
This meant that award be subjected to the 1940 Act and hence, susceptible to the shortcomings mentioned above

 IN GURU NANAK FOUNDATIONS vs. RATTAN SINGH
the SC while referring to the 1940 Act, observed that “the way in which proceeding under the Act are conducted and without an exception challenged, has made lawyers laugh and legal philosophers weep” in view of “unending prolixity, at every stage providing a legal trap to the unwary.”

 IN FOOD CORPORATION OF INDIA vs. JOGINDERPAL
the SC observed that the law of arbitration must be ‘simple, less technical and more responsible to the actual reality of the situations’, ‘responsive to the canons of justice and fair play’.

THE ARBITRATION and CONCILIATION ACT OF 1996:

The Arbitration and Conciliation Act, 1996 is an Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and to define the law relating to conciliation and for matters connected therewith or incidental thereto.
In order to meet the various shortcomings expressed in the 76th report of the Law Commission the Act of 1996 came into force on 22.08.1996. The Act is based on the UNCITRAL Model Law on Internal Commercial Arbitration, 1985 and UNCITRAL Conciliation Rules, 1980

OBJECT OF THE ACT:

1. To comprehensively cover international commercial arbitration and conciliation as also domestic arbitration and conciliation;

2. To minimize the supervisory role of courts in the arbitral process;

3. To provide that every final arbitral award is enforced in the same manner as if it was a decree of court.

4. To make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of specific arbitration

5. To provide that arbitral tribunal gives reasons for its arbitral award,

6. To ensure that the arbitral tribunal remains within the limits of its jurisdiction.

7. To permit arbitral tribunal to use mediation, conciliation or other procedures during arbitral proceedings to encourage settlement of disputes.

CRITICAL COMPARISON OF THE 1996 ACT WITH THE 1940 ACT:

1. Under the old Act, an Arbitrator was not a conciliator. He was only to adjudicate the disputes referred to him by the parties.
However, the 1996 Act has recognized the Arbitrator as a Conciliator as well.

2. Under the old Act, an aggrieved party to get an Arbitrator appointed has to approach the jurisdictional Civil+ Court either under sec 8 or sec 20 of the 1940 Act. This was a time consuming ordeal.
Under the new Act, the Chief Justice of the HC has been named under schedule II for the purpose of appointment of Arbitrator.

3. Under the Act of 1940, court was defined as Civil Court having jurisdiction to decide the question forming the subject matter of reference if the same had been the subject matter of the suit but did not include small causes court except for the purposes of arbitration proceedings.
Act of 1960 provides that the Principle Civil Court of Original Jurisdiction in a district which includes the HC in exercise of its Original Jurisdiction but does not include any Civil Court of a grade inferior to such Principal Civil Court or any court of small causes.

4. Under the Act of 1940, if a specific question of law was referred to the Arbitrator by the parties, the decision thereon was final and binding on the parties. Similarly the decision of the arbitrator regarding jurisdiction was also deemed to be final.
Under Act of 1996 the arbitral tribunal shall decide on its own jurisdiction, but this by no means is an un referred power. If Arbitrator has wrongly decided the issue of jurisdiction and has made the award by virtue of sec 34(b) of the new Act the decision can be challenged before the court of law.
Thus jurisdiction assumed by arbitral tribunal is not final and is subject to judicial security.

PRINCIPLE SHORTCOMINGS OF THE 1996 ACT:

1. No power to Arbitrator to issue summons, examine witnesses, taking evidence etc.

2. Chances of bias of arbitrator are high as the arbitrator is appointed by the parties themselves. One of the parties who is in dictator position may force the arbitrator of his choice.

3. Enforcement of Arbitration award can be only through Court.

4. Dispute resolution outside court continued to be slow and ineffective

5. Foreign investors preferred to adopt foreign arbitration despite the dispute arising in India.

THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT 2015:

The Arbitration and Conciliation (Amendment) Act 2015 came into force on 23rd October, 2015 with a view to facilitate quick enforcement of contracts, easy recovery of monetary claims, reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration, so as to encourage foreign investment by projecting India as an investor friendly country having a sound legal framework and ease doing business in India.

KEY CHANGED BROUGHT BY THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2015:

The Act amends:
1. sec 12 – grounds for challenging the appointment of an arbitrator:
It sets out list of circumstances which “ give rise to justifiable doubts as to the independence or impartiality of arbitrators” and require written disclosure from a prospective arbitrator, along with a list of circumstances which render a person ineligible to appoint an arbitrator.

2. Sec 11 of the Act- judicial appointment of arbitrators :
Changes brought in this regard include clarifying that delegation of power of appointment is not delegation of judicial power, thereby permitting delegation; providing that appointment decisions are final and are not subject to appeal; restricting the scope of judicial scrutiny at this stage of determining the existence of an arbitration agreement; and requiring court to attempt to dispose of such applications within 60 days.

3. sec 29B- Fast track arbitration procedure:
The Act introduces Sec 29B requires arbitral tribunals to render award within 12months, subject to a six months extension with the agreement of the parties, and upon showing sufficient cause a further extension by the court.

4. Sec 34- challenges to the arbitral award:
The amended act provides that for challenges to arbitral award to be disposed of by courts within a year.

5. Sec 9 and Sec 17- interim measures:
Under the Act of 2015, arbitral tribunals have the same power as courts with regard to interim measures, both in relation to their scope and their effect; courts cannot entertain application for interim measure once the tribunals has been constituted.
The Act also clarifies the powers to grant interim relief under Part I of the Act. This is particularly valuable clarification in the light of the BALCO decision which held that Part I of the Act would not apply to international arbitration. Though this decision was welcome insofar as it reduced the scope for judicial interference in international arbitration connected to India, it also ruled out any possibility for judicial relief in such cases. This clarification closes that loophole.
6. Sec 31A-a comprehensive cost regime,
The Act introduced comprehensive cost regime, including factors to be considering in awarding and calculating the cost.
The Act also amended the provisions of sec 36- which permitted the stay of execution of arbitral awards upon any application to set aside the award. The amended provisions only allows for execution to be stayed if the court has passed a specific order and that the stay of arbitral award is not automatic consequence of an application to set aside the same.
CRITICAL ANALYSIS OF THE AMENDED ACT OF 2015:
(1)INTERIM RELIEF:
a) FROM COURT:
-After the judgment of the SC in Bharat Aluminium and Co vs. Kaiser Aluminium and Co, (‘BALCO”)
the Indian courts had no jurisdiction to intervene in arbitrations which were seated outside India. Post BALCO if the assets of the party were located in India, and there was the likelihood of dissipation of the assets, the other party could not approach the Indian courts for interim order. This created major hurdles for parties who chosen to arbitrate outside India.
This anomaly has been in addressed in sec 2(2) of the amendment Act, which provides for interim relief in cases where place of arbitration is outside India, subject to an agreement to the contrary.
However, this option is only applicable to parties to an “international commercial arbitration”. Thus protection will not be available to two Indian parties who chose to arbitrate outside India
-The Amendment Act provides that in case the court passes an interim order, arbitration proceedings must commence within 90 days from the date of such order or within such time as prescribed by the court.
However there is no clarity on whether the 90 day period would commence from the date of exparte or ad interim order or the final order in the proceedings under sec 9. The better approach would be perhaps to specify that the 90 day period commences from the date of filing of the petition, in order to drive the parties to arbitration.
b) ARBITRAL TRIBUNAL:
-The amended Act empowers the arbitral tribunal with the same powers as that of a court under sec 9.
The Act also provides that once arbitral tribunal has been constituted, courts cannot entertain application for interim relief. The Act further clarifies that such interim measure granted by the arbitral tribunal shall have same effect as that of a civil court under the Code of Civil Procedure.
However, in a recent judgment passed by the Kerala HC on March 16, 2016, the Single Judge has taken a view that under the Amendment Act, the arbitral tribunal cannot pass an order to enforce its own orders and parties will have to approach the courts for such enforcement, thereby making the enforcement of arbitral awards cumbersome.
-Under the new regime, the arbitral tribunal has the power to order interim measures even after the making of the arbitral award, but before it is enforced.
However, this is inconsistent with sec 32, which provides that the mandate of the arbitral tribunal shall be terminated after the making of the final award. If the tribunal ceases to have jurisdiction after passing the final award, it is inconceivable as to how it would have the power to order interim measures after making the final award. This anomaly ought to have been rectified by appropriate amendments to Sec 32.
2. LIMITED SCOPE TO REFUSE ARBITRATION REQUEST:
The amended sec 8 empowers the judicial authority to refer the parties to arbitration when there is an arbitration agreement unless it finds prima facie that no valid arbitration agreement exists. While sec 8(1) refers to ”judicial authority”, inexplicably, in sec 8(2) the word “Court” has been used instead of judicial authority which appears to be an oversight.
While the scope under amended sec 11 is limited to the examination of the existence of an arbitration agreement; scope under amended se 8 appears to be broader in as much as the judicial authtority can also examine the validity of the arbitration clause. There appears to be different standards set for examination of an arbitration agreement under sec 8 and 11, which ought to have been avoided
The standards consistent with the proposals made in the Law commission Report ought to have been made uniformly applicable to both the provisions.
3. AMENDMENTS TO GROUNDS FOR CHALLENGING ARBITRAL AWARD:
The scope of “public policy” in sec 34 has been narrowed and the award can be set aside only if the arbitral award
(i)was induced or affected by fraud or corruption; or
(ii)is in contravention with the fundamental policy of India; or
(iii)conflicts with the most basic notions of morality or justice.

In order to counter the judgement of the SC in ONGC LTD vs. Western Geco International Ltd. (which had expanded the scope of public policy to include Wednesbury principles of reasonableness which would necessarily entail a review on merits of the arbitral award) the Law Commission had submitted a Supplementary Report on February 2015 which recommendations have been accepted and incorporated in sec 2A. According to the section, award cannot be set aside merely on the ground f erroneous application of law or re-appreciation of evidence.
However, the test of “patent illegality appearing on the face of the award” has not been made applicable to international commercial arbitrations. The provisions may be subjected to challenge by Indian parties, who may contend that different standards ought not be set for international commercial arbitrations. The test of “patent illegality” perhaps could have been deleted altogether in order to avoid anomaly.
4. NO AUTONOMOUS STAY OF ARBITRAL AWARD UPON FILING OF A CHALLENGE TO THE ARBITRAL AWARD:
Prior to the Amendment Act, mere filing of a challenge petition to the arbitral award would result in automatic stay of the arbitral award thereby making the process of arbitration time consuming and ineffective. The Amendment Act provides that there would be no automatic stay of arbitral award and a separate application will have to be filed seeking the same. Thus the Court is now required to record reasons for grant of stay and the provisions of CPC have been made applicable. This implies that the losing party will now be required to deposit party or whole amount in the arbitral award as the court deems fit.
5. TIME BOUND PROCEEDINGS:
The Amendment Act provides for faster timelines to make arbitration more effective. Provisions have been made for arbitral tribunal to hold oral hearing and not grant any adjournment unless sufficient cause arises. Every arbitral award must be time bound up to 12 months from the date arbitrator receives notices with an extension of 6 months on mutual agreement by parties. If award not made within the 18 month period, the mandate of the arbitrator shall be terminated unless Court permits its extension.
However there is no time period fixed for approaching the court in this regard. This is an undesirable situation in a court system burdened with huge pendency of cases. Further the proposed 12 months to pass award is very ambitious, even by international standard, providing such ambitious timelines may backfire and destroy the whole purpose of the Amendment. Even the Law Commission Report had recommended a time period of 24 months to complete arbitration proceedings.
6. FAST TRACK PROCEDURE:
The Act of 2015 has provide option to parties to agree on a fast track mechanism under which award must be made within 6 months of notice to the arbitrator.
However, there may not be too many occasions where the parties to an ongoing dispute agree on anything, let alone agree on fast track procedure.
7. NEW EXPANSIVE COST REGIME INTRODUCED:
The Act gives wide powers to the tribunal to award costs based on rational and realistic criterion rule, as recommended by the Law Commission Report. The tribunal can decide whether costs are payable, amount and date on which it is to be paid. Cost may include legal expenses, expenses of the arbitrator or in relation to court proceedings and the arbitral award. The conduct of the parties has been made a determining factor in awarding costs.
8. CAP ON FEES TO ARBITRATOR:
The Act provides model fees in case of arbitrations other than international commercial arbitrations and in cases where parties have agreed to the rules of an arbitral institution, with a view to ensure that the arbitration process does not become too expensive. Sec 11A(2) has been introduced which details the procedure for Central Government to amend the Fourth Schedule.
However, since the HC of each State is required to frame rules after taking into consideration the rates mentioned in the Schedule, this may lead to disharmonized fee regime across the country.
9. OTHER MISSES:
a) The Act does not clarify in Indian parties can choose foreign law to resolves disputes through arbitration. While some argue that such a choice is available, the more conservative argument is that this amount to contracting out of Indian law and hence opposed too public policy.
The Bombay HC in Addhar Mercantile Pvt Ltd vs. Sri Jagdama Agrico Exports Pvt Ltd,
while deciding on this issue relied on the observations of the SC in
TDM Infrastructure Pvt Ltd vs. UE Development India Pvt Ltd, and held that since both parties are Indian, they cannot derogate from Indian Law.
However, the MP HC in Sasan Power Ltd vs. North American Coal Corporation Ltd.
has taken a contrary view. This issue is currently pending adjudication before the SC.
b)The concept of “emergency arbitrator “ has been recognized by most international arbitration rules and has gained popularity for its effectiveness. However , he same recommendation made by the Law Commission Report to include the term under sec 2 (d) has not been accepted and this is a significant omission that is likely to impact arbitrations in India.
c) No time limit to challenge a domestic arbitral award has been provided despite recommendation. There cannot be any rationale for this considering that the amendment has been made to make India more arbitration-friendly.
d) The Law Commission Report recommended changes to sec 16 of the Act to empower the tribunal to decide disputes that involve serious questions of law or fact, allegation of fraud, corruption etc. While the provisions of sec 8 and 11 have been amended to the effect that they be referred to arbitration, the recommendation under sec 6 was not accepted.
As a result of which, a two judge bench of SC in Radhakrishnan vs. Maestro Engineers
held that the issues of fraud are not arbitral. However, the single judge of SC while deciding a petition under sec 11 in Swiss Timings Ltd vs. Organizing Committee , held that the Radhakrishnan judgement is per incuriam and therefore not a good law.
Therefore in situations where parties are before the tribunal in manner other than sec 8 or 11and the arbitrator’s jurisdiction is questioned alleging that there are questions of fraud involved, the tribunal may be bound to follow the Radhakrishnan judgement, and consequently rule that it does not have the jurisdiction to deal with question of law.
e) The Act has created confusion as to whether it shall have retrospective or prospective effect.
Sec 26 provides,
“ Nothing contained in this Act shall apply to the arbitral proceedings commenced in accordance with the provisions of sec 21 of the principal Act, before the commencement of the Act unless the parties otherwise agree but his Act shall apply in relation in arbitral proceedings commenced on or after the date of commencement of this Act”
The Madras HC in New Tripur Area Development Corporation Ltd vs. M/s Hindustan Construction Company Ltd & Ors.
Has ruled that Sec 26 of the Act is not applicable to post-arbitral proceedings including court proceedings, since the words ‘in relation to’ has been deleted. Therefore Court hed that a separate application has to be filed in respect of arbitral award passed prior to October 23, 2015.
However, Calcutta HC in
Electrosteel Casting Ltd vs. Reacon Engineers Pvt Ltd,
has held that the enforcement of arbitral award, borne out of arbitration proceedings commenced before October 23, 2015 would be stayed automatically upon filing of application to set aside the same.
This has resulted in inconsistency and uncertainty about law, within just a few months of the introduction of new regime.
10. POSITION OF INDIA WITH THAT OF SINGAPORE:
India is the country with the most number of cases at the Singapore International Arbitration Center. This is on account of the fact that Singapore apart from having a strong legal framework, offers hefty tax breaks to law firms on income from arbitration cases and has eased the restrictions to enable foreign law firms to practice in Singapore.
This is a standing reproach to our failure to deliver an effective arbitration mechanism in India. We cannot urge businessmen to “Make in India” without encouraging them to “Arbitrate in India”.
11. FAILED TO RECOGNISE THE ROLE OF MODERN TECHNOLOGY:
The objective of law is supposed to be to put in place an updated and modern practice of ADR. Despite the mere recognition of electronic document, there is no other provision to encourage the use of technology during arbitration proceedings such as teleconferencing or video conferencing which would save time and aid in smooth and efficient conduct of proceedings.
12. The Act lastly, does not address the issue of confidentiality in arbitration.

 

CONCLUSION

The amendment to the Act, though laudable, is only a step towards making arbitration the preferred mode of dispute resolution in India. Increased efficiency in arbitration is unlikely to come solely from the imposition of legislative change, especially one that is incomplete as this one.
A change in the very culture of the Indian Arbitration is required. There needs to be a change in the perspective wit which arbitration is viewed. The pool of legal practitioners who specialize in the practice of arbitration has to grow, with arbitration viewed as the priority rather than playing second fiddle to Indian court litigation work.
The pool of arbitrators needs to grow as well. Unfortunately, the tendency to appoint retired Indian judges as Arbitrators is also stifling the growth of arbitration as a dispute resolution mechanism in India. What is needed is the growth of a community of arbitrators unfettered by the traditions of Indian Courts and focused on growing arbitration in its own right.
The final and most important, change needed is the minimization of judicial interference.
ONGC vs. Saw pipes has demonstrated how judicial interference in the arbitration process can take root when there is even the slightest ambiguity in arbitration law, with the interference being of such magnitude that legislative change is necessary to remedy it. Unfortunately, as shown above, even the recent amendments to the Act are riddled with many such ambiguities thereby providing the opportunity for further judicial interference. It is only when the Indian arbitration culture has changed and these persisting problems have been addressed that arbitration will finally become the preferred mode of dispute resolution in India.

 

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