Arbitration in India

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The rapid increase in trade, commerce and investment along with growing demand of asserting legal claims has led to streamlining of dispute resolution system in developing countries throughout the world. Litigation in many developing countries are confronted with numerous defects which have resulted in the evolution of the concept of alternative dispute resolution mechanism. With the march of time, the alternative forum of dispute resolution has gained importance and prominence in the world by empowering the ordinary litigants with promptness, affordability, impartial decision making, reasonable solutions and efficiency. Arbitration is one of such being one such speedy and efficacious system of alternative dispute resolution for doing appropriate justice to the parties who are in need of the same[1]. In developing countries due to high population, the litigative nature of the individual and backwardness of technology and infrastructure has made judiciary collapse under the pressure of large number of cases pending for disposal. The high cost, un-necessary delays, lack of brevity and privacy in the process of litigation have compelled nations and individual’s to search for alternative dispute resolution mechanism[2]. One of the solutions for the increase clogging of the judiciary is to develop alternative dispute resolution mechanism which can be done through the development of Arbitration which is known as private litigation. So Arbitration may be defined “ A reference of a dispute or difference between not less than two parties for determination after hearing both sides in a judicial manner by a persons or person other than court of competent jurisdiction”[3]. The principle of Arbitration includes a fair resolution of disputes by an impartial body without unnecessary delay or expense and without interference by the courts. Therefore, arbitration which was similar to litigation in the private sector seemed conducive to provide a support system to the overburdened and inefficient system of adjudication. India is not new to Arbitration process. Start of Arbitration process is lost in the mist of time with no record indicating how Arbitration process started in India. Nevertheless, the law and practice of private and transactional commercial dispute without the court intervention can found in the haze of Indian history. The Arbitration model in India is mainly based around the role of panchayat at grass root level. The panchayat were known since time immemorial that made introduction to Arbitration and acceptance much easier. The panchayat were group of five elderly people who would guide the villagers to settle their dispute. In some cases, the panch more resembled a judicial court; they could intervene on the complaint of one party and not necessarily on the agreement of both, for example in the case of caste matter. However, in most cases, the arbitral award was made by an agreement between the parties[4]. In the absence of serious flaws or misconduct, by and large, the courts have given recognition to the awards of the panchayat. For instance, Sitanna v Viranna, the Privy Council affirmed an award of the panchayat in a family dispute challenged after 42 years. These arbitral bodies dealt with a variety of disputes, such as disputes of contractual, matrimonial and even of a criminal nature. The Raja was the ultimate arbitrator of all disputes. However, with change in socio-economic conditions of the people with the changing times, the role of such conventional arbitral bodies appeared to be inadequate and out-dated[5]. During Muslim rule, all Muslims were governed by the Islamic laws- The Sharia is contained in Hedaya. The non- Muslims continued to be governed by their own personal law which has been compendiously collected as Hindu law. However, for transactions between Muslims and Non-Muslims a hybrid system of arbitration law developed. The Hedaya contains the provisions for Arbitration between parties. The practice of recourse to arbitration which evolved up to the end of Mughal Empire, continued even during the British period in different parts of the country. Under the British rule the East India Company did not change the law relating to arbitration prevalent in the country at the time, they came into power. But between the years 1772 and 1827 the government enacted legislation to enact law relating to arbitration by making regulations in three Presidency towns- Calcutta[6], Bombay[7] and Madras[8], in exercise of the powers given to them by British parliament. These regulation lacked clarity and detail. The law governing arbitration in a formal sense was first introduced by the British with the creation of the Bengal Regulations in 1772. Bengal Regulation 1772 and 1781 made a provision that parties can refer the dispute to the arbitrator and such arbitrator must be appointed by mutual agreement between the parties and the award of the arbitrator shall amount to decree of a civil court. Madras Regulation IV of 1816 formulated a scheme for working the panchayat system in villages and to encourage village people to solve their problems. Bombay Regulation VII of 1827 made a special provision for arbitration. It provided for arbitration through their intervention of the court with one rider that suit must not be pending. In the year 1859 the Act VII of 1859 was passed and it codified the procedure of civil court. Provision of chapter VI was incorporated in the Act[9]. Prior to 1899 there was no particular law dealing with the arbitration in India. In the year 1899, the British enacted the Indian Arbitration Act 1899 which was modelled upon the British Arbitration Act of 1899. Though this was the first substantive piece on legislation on arbitration, in India, its provision just affirmed to presidency town Bombay, Calcutta and madras In the year 1908 Civil Procedure Code was enacted and it repealed the earlier code of 1859. Section 89 and Second Schedule of the code contained detailed provisions of arbitration in respect of the subject matter of the suit through arbitration without court intervention[10]. The working of Arbitration Act 1899 presented complex and cumbersome problems, ad judicial opinion started voicing its displeasure and dissatisfaction with the prevailing state of the arbitration law. The judicial reprimand as well as clamour of the commercial community led to the enactment of a consolidating and amending legislation. The Arbitration Act 1940 (Act No 10 of 1940), which consolidated and amended as law relating to arbitration as contained in the Indian Arbitration Act, 1899 and the second schedule to the Code of Civil Procedure, 1908. It was to a great extent based on the English Arbitration Act of 1934 and came into force on 1st July, 1940. It extends to whole of India except Jammu and Kashmir. This Act dealt with broadly three kinds of arbitration: (i) arbitration without intervention of a court, (ii) arbitration with intervention of court where no suit is pending before court, and (iii) arbitration in suits. It applied to all arbitrations, including statutory arbitrations as per the Arbitration Act 1940[11]. The Arbitration Act, 1940 which was only applicable to domestic arbitration, required intervention of the court in all the three stages of arbitration, such as, prior to the reference of the dispute to the arbitral tribunal, during the continuance of the proceedings before the arbitral tribunal, and after the award was passed by the arbitral tribunal, for ensuring due compliance with the provisions of Arbitration Act, 1940. While the 1940 Act was thought to be a decent piece of legislation. But in its actual operation and execution by all the concerned parties, arbitrators, lawyers and the courts it proved to be ineffective and was broadly understood to have become out-dated[12]. Arbitration proceedings under the 1940 Act has degenerated into a legal quagmire which left the parties, irrespective of whether they win or lose, impoverished in terms of time and money. The Supreme Court itself lamented over the state of affairs in 1981 by observing: “However, the way in which the proceeding under the Act are conducted and without exception challenged in the courts has made lawyers laugh philosopher weep. Experience shows and law reports bear ample testimony that the proceeding under the act have become technical accompanied by unending prolixity at every stage providing a legal trap to the unwary”[13]. The globalisation of trade and commerce and the necessity for effective implementation of economic reforms necessitated re-drafting of the Indian Arbitration Act of 1940 with a view to ensuring smooth and prompt settlement of domestic as well as international commercial disputes. The law commission of India, in its 76th report in November, 1978 had already recommended for updating the Arbitration Act of 1940 to meet the challenges of a modern developing country like India. Besides, several other representative bodies of trade and commerce including legal experts had also given valuable proposals for significant changes in the body of existing arbitration law of India which were beset with several deficiencies and lacunas. As a result of these demands, the Arbitration and Conciliation Bill, 1996 was promulgated through ordinance by the President of India and as the parliament could not pass the said Bill within the stipulated time, the ordinance had to be promulgated twice until it was passed and it got final assent of the President of India on 16th August, 1996. The Act came to be known as the Arbitration and Conciliation Act of 1996 and was effective from 25th January, 1996[14]. THE ARBITRATION AND CONCILIATION ACT, 1996:- Before the enactment of the Arbitration and Conciliation Act, 1996 the law on arbitration in India was substantially contained in three enactments, namely the Arbitration Act, 1940, the Arbitration (protocol and convention) Act, 1937 and the Foreign Awards Act 1961. In the statement of objects and reasons appended to the Bill it was stated that the Arbitration Act, 1940 which contained the general law on Arbitration, had become out-dated. The said objects and reason’s stated that the United Nations Commission on International Trade Law (UNCITRAL) adopted in 1985 Model Law on International Commercial Arbitration. The General Assembly recommended that all the countries should give due consideration to the said Model Law which along with the rules, was stated to have harmonized concepts on Arbitration and Conciliation of different legal systems of the world and contained provision’s which had universal application’s. The above statement of objects and reasons also states that though the said UNCITRAL Model Law and Rules are intended to deal with international commercial arbitration and conciliation they could with appropriate modifications serve as a Model Law for enactments relating to domestic arbitration and conciliation. The present bill seeks to consolidate and amend the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign awards and to define law relating to conciliation, taking into account the said UNCITRAL Model Law and Rules[15]. Salient Features of the Arbitration and Conciliation Act, 1996[16]:
  • A Comprehensive Statute- The Arbitration and Conciliation Act, 1996 which is mainly based on the UNCITRAL Model Law relating to international commercial arbitrations is a comprehensive statue relating to arbitration law in India, since it covers all the relevant provisions relating to domestic, international and interstate arbitration’s as per the said UNITRAL Model Law. The act also recognises Conciliation as a means of settlement of commercial disputes along with Arbitration. The act is more comprehensive that the Arbitration Act, 1940 because the Arbitration Act, 1996 contains provisions relating to both domestic and international Arbitration, while the Arbitration Act, 1940 contains provisions only to domestic arbitrations.
  • An Explanatory Code- The Arbitration Act, 1996 is an explanatory and complete code in itself, as it contains necessary provisions relating to both domestic and international arbitration and also for the first time confers the status of tribunal to the arbitrators, which is a significant over the old Arbitration Act, 1940.
  • Curtailment of the Court Powers- The Act of 1940 allowed the Civil Courts to intervene in the arbitral proceedings matter. As a result of such interference the arbitral tribunal could not function effectively. The Act of 1996 has limited the powers of the court and restricted the exercise of judicial power. As provided under Sec 5 of Act, “Notwithstanding anything contained in any law for the time being in force, in matters governed by this part, no judicial authority shall intervene except where so provided in this part.” Further, Sec 35 of the Act states that subject to this part, the arbitral award will be final and binding upon the parties. Sec 36 provides for enforcement of award without intervention of the court.
  • Procedure for conduct of Arbitration and Awards in detail- Chapter V of the Arbitration and Conciliation Act, 1996 provides for detailed procedure and practice for conduct of arbitration and rendering of Arbitration awards.
  • Précised power of the court- The Act of 1996 has curtailed the powers of the court by taking assistance only in particular matters. The Court’s support could be looked in taking evidence only with prior approval of the arbitration tribunal, as per Section 27(1) of the Act. In matter of jurisdiction as per Section 42 of the 1996 Act states that “where with respect to an arbitration agreement any application has been presented in a court, that particular court will alone have jurisdiction over arbitral proceedings”.
  • Power of arbitrators Enhanced- A comparison of the provision of the Arbitration Act, 1996 with that of the Arbitration Act, 1940 goes to indicate that the new Act has increased the powers of arbitrators in respect of jurisdiction of Arbitration Tribunals and also competency of the arbitrators to rule.
  • A new form of Conciliation- Part III of the 1996 Act deals with internationalised conciliation approach and clarifies the application and scope of conciliation for effective resolution of commercial dispute. Section 63 of the Act specifies the number of conciliators to be appointed by the parties to the agreement.
  • International Applicability- The old Arbitration Act of 1940, had no provision for interim awards to be made by a foreign tribunal, but the new Act of 1996, has provision for applicability of Foreign Arbitral Tribunals Awards.
The Arbitration and Conciliation Act, 1996 which replaced the old 1940 Act, was passed with a view to provide an efficient and expeditious dispute resolution system, which would instil confidence in the minds of the foreign investors in the reliability and effectiveness of the Indian dispute resolution system, as well as for attracting foreign investments in India. The Arbitration Act, 1996 which has been enacted as per the UNCITRAL Model Law, has even surpassed the scope and limits of the said Model Law in certain respects. First, while the UNICITRAL Model Law only applies to international Commercial arbitrations[17], the Arbitration Act, 1996 applies both to international and domestic arbitrations. Secondly, the 1996 Act goes beyond the UNICITRAL Model Law in the area of minimizing judicial intervention[18]. The changes which were brought by the Arbitration and Conciliation Act, 1996 in the Indian arbitration system which were prevalent under the 1940 arbitration act, was done in a very hasty and quick fashion, without recourse to a judicious debate regarding the changes to be brought by the 1996 act as well as without any appropriate understanding of the legislative changes enunciated by the said act[19]. The Law Commission of India in its 176th report submitted to the government of India had given a number of useful recommendations for bringing desired changes in the Arbitration Act, 1996, so as to do away with the deficiencies and lacunas of the Arbitration and Conciliation Act, 1996, which has been experienced during the working of the said Act. In response to the recommendations of the Law Commission, the Government of India introduced the Arbitration and Conciliation (Amendment) Bill, 2003, in Parliament for amending the 1996 Act. The said Bill has not yet matured into legislation, as during the said period the government of India, the Ministry of Law and Justice, appointed a Committee popularly known as the ‘Justice Saraf Committee on Arbitration’, to study in depth the implications of the recommendations of the Law Commission of India contained in its 176th Report and the Arbitration and Conciliation (Amendment) Bill, 2003. The Committee submitted its report in January 2005. 1 | Page
[1]Namrata Shah, Niyati Gandhi, Arbitration: One Size Does Not Fit All: Necessity of Developing Institutional Arbitration in Developing Countries, 6 J. Int'l Com. L. & Tech. 4, 232-234 (2011). [2]Id. [3] OP Malhotra & Indu Malhotra, THE LAW AND PRACTICES OF ARBITRATION AND CONCILIATION 4, (LexisNexis Butterworth’s, New Delhi, 2d ed. 2012). [4] Id. [5]AIR 1934 PC 105, 107. [6]Bengal Regulation I of 1772. [7]Bombay Regulations I of 1799, IV and VI of 1827. [8]Madras Regulation I of 1802 and Regulations IV, VI and VII of 1822. [9] Sukumar Ray, ALTERNATIVE DISPUTE RESOLUTION 12-14 (Eastern Law House, Calcutta, 2012). [10] Id. [11]P.C Rao and William Sheffield, ALTERNATIVE DISPUTE RESOLUTION 34 (Universal Law Publishing Co.Pvt.Ltd, New Delhi, 2002). [12] Krishna Sarma, MomotaOinam, AngshumanKaushik, Development and Practice of Arbitration in India –Has it Evolved as an Effective Legal Institution, CDDRL WORKING PAPERS 103, 3 ( 2009). [13]Guru Nanak Foundation v. Rattan Singh & Ors, (1981)4 SCC 634. [14] Dr. N. V. Paranjape, LAW RELATING TO ARBITRATION AND CONCILIATION IN INDIA 4-5, ( Central Law Agency, Allahabad, 4th ed, 2011). [15] Dr. S. C. Tripathi, ARBITRATION, CONCILIATION AND ALTERNATIVE DISPUTE RESOLUTION SYSTEM 6-7, (Central Law Publications, Allahabad, 2nd Ed, 2002). [16]Id. [17] UNCITRAL Model Law, Article 1. [18] S.K Dholakia, Analytical Appraisal of the Arbitration and Conciliation (Amendment) Bill 2003, ICA’s Arbitration Quarterly, ICA, New Delhi, vol. XXXIX/ NO.4, pg.3 (2005). [19] Sundaram Finanace vs. NEPC Ltd, (1999) 2 SCC 479.
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