Libertatem Magazine

Law Relating to Arbitration as a Mode of Alternative Dispute Resolution

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Arbitration as an institution for the settlement of disputes has been known and practised in all civilized societies from times immemorial.

“Of all mankind’s adventures in search of peace and justice, arbitration is among the earliest. Long before law was established or courts were organized, or judges had formulated principles of law, man had resorted to arbitration for resolving disputes”.[1]

Arbitration was popular in ancient medieval India as a medium of referring disputes to a person of their choice and accepting them as binding. Traces of the ancient system can, however, still be found in institutions of Pancha and Panchayat practised, many village communities and tribal areas in India.

With the advent of British Rule, the institution of the hierarchical court system, elaborate court procedure, the emergence of professional lawyers, the doctrine of precedents and pre-eminence being given to statute law vis-à-vis customary law came into existence. These factors contributed to the gradual disappearance of the system of Arbitration in India.

However, attempts have always been made by the governments, i.e., British as well as Indian, to keep arbitration as a viable option to the court procedure. The British did this by different enactments dating as back as the Bengal Regulation Act, 1772 and then by the Indian government by enacting the Arbitration Act, 1940 (“Old Act”). This Act contained the substantive law of arbitration in India. But experience shows that the Arbitration Act, 1940 has become increasingly outmoded and discredited.

In Guru Nanak Foundation v. Rattan Singh & Sons,[2] the Supreme Court observed that “Interminable, time consuming, complex and expensive court procedures impelled jurists to search for an alternative forum, less formal, more effective and speedy for resolution of disputes, avoiding procedural claptrap and this led them to the Arbitration Act. However, the way in which the proceedings under the Act are conducted and without an exception challenged in courts has made lawyers laugh and legal philosophers weep. Experience shows and law reports bear ample testimony that the proceedings under the Act have become highly technical, accompanied by an unending prolixity at every stage, providing a legal trap to the unwary. Informal forum chosen by the parties for expeditious disposal of their disputes has by the decision of the court been clothed with the legalese of an unenforceable complexity”.

Further, the Kerala High Court in the case of State of Kerala v. Joseph Anchilose[3] held that “Our experience has been that abused of arbitral process is rampant and it is essential that effective safeguards are evolved to arrest such abuses. Even in the United Kingdom, the Arbitration Act was amended recently providing that in all cases where the parties seek a statement of reasons for his award, the arbitrator shall be obliged to give the same. That amendment was occasioned because, at least in some cases, it was found that the sphinx-like stance of the arbitrator conceals possible abuses. An obligation that the arbitrator shall state reasons in his award is a far greater necessity in our country rather than elsewhere”.

Thus, it can be inferred that arbitration proceedings under the Old Act have degenerated into a legal quagmire which left the parties, irrespective of whether they win or lose, impoverished in terms of time and money. In most of the cases, arbitration proceedings merely meant the first stage of several rounds of further litigation with no holds barred, leaving the parties at the mercy of a system that encouraged wastage of productive resources both in human and material terms.

This resulted in the enactment of a new Act, which could cater to contemporary needs. The Arbitration and Conciliation Act, 1996 (“New Act”) came to be passed on 16th August 1996, taking into account UNCITRAL Model Law and Rules and also vastly making amendments in the law relating to domestic arbitration contained in the 1940 Act. The 1996 Act repealed the Arbitration Act 1940, the Arbitration (Protocol and Convention) Act 1937, and the Foreign Awards (Recognition and Enforcement) Act 1961.[4] It also repealed the Arbitration and Conciliation (Third) Ordinance 1996, which was in promulgation before the Act came into force. The New Act seeks to consolidate and amend the law relating to domestic arbitration, international commercial arbitration, and enforcement of foreign arbitral awards, as also to define the law relating to conciliation and for matters connected therewith or incidental thereto.[5]

Salient features of the Arbitration and Conciliation Act, 1996 may be listed as follows:

(i) As the title of the New Act itself indicates in addition to arbitration, conciliation has also been recognized as a means of settling commercial disputes.[6] Prior to the enactment of this Act, conciliation was not recognized as an instrument of a settlement of commercial disputes. But under the New Act, it has been accorded the same status as the arbitration award and can be enforced as a decree of a court under the Code of Civil Procedure. Now both, domestic well as international commercial disputes can be resolved through conciliation.

The basic difference between con­ciliation and arbitration lies in the fact that the role of conciliator is to assist the parties in their attempt to reach an amicable settlement of their dispute[7] whereas an arbitrator does not merely assist in the resolution of a dispute but also arbitrates by making an award. In case of arbitration, the parties are required to make a prior agreement in writing that they shall submit to arbitration the disputes which have arisen or which may arise between them but conciliation may be initiated without such prior agreement as it generally relates to disputes which already exist. The assistance of a suitable institution such as the Indian Council of Arbitration or indi­viduals may be sought for the appointment conciliator at the choice of the parties.

(ii) The New Act is more comprehensive than the Old Act. It consists of 86 Sections spread over four parts. Part I relates to arbitration in India while Part II relates to enforcement of foreign awards under the New York and Geneva Conventions. Part III contains provi­sions relating to conciliation and Part IV is devoted to supplementary provisions empowering the High Court to make Rules regarding arbitration which are consis­tent with the New Act.

Besides, the New Act also contains three Schedules. The first dealing with the convention on the recognition and enforcement of foreign Arbitral Awards; the second containing the Geneva Protocol on Arbitration Clauses and the third em­bodying the provisions relating to the convention on the execution of foreign Arbitral Awards. Thus, the Act has sought to make the arbitration and conciliation law in consonance with the recommendations of the United Nations and the model law adopted by the United Nations Commission of International Trade Law, i.e., UNCITRAL.

(iii) The New Act specifically defines the term ‘international commercial arbitra­tion’, to mean an arbitration relating to disputes arising out of legal relationship whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties whether an individual, body corporate or a company is having a business or residing abroad and in case of Government, the Government is of a foreign country.[8]

(iv) One of the redeeming features of the New Act is regarding the qualifica­tion of the arbitrator. No qualifications for appointment as an arbitrator were pre­scribed in the Old Act. It has now been realized that quite a large number of disputes arising between the parties are of a technical nature whether relating to science, technology, mining, industry, or other similar special fields of knowledge, etc. Therefore, the rival contentions can be appreciated and decided only by the arbitrators who really compete it and well versed in such matters.

(v) Another significant feature of the New Act is the abolition of the Umpire system.[9] The Old Act provided that where an even number of arbitrators was appointed and such arbitrators failed to make an award within the specified time, the umpire should enter in the reference in lieu of arbitrators. The number of arbitrators to determine the dispute has now been left to the parties, the only limitation being that an even number of arbitrators shall not be appointed. The arbitra­tors so appointed shall appoint a third arbitrator called the Presiding Arbitrator, who was referred to as Umpire under the Old Act. Where the parties fail to appoint the arbitrator, the Chief Justice of the concerned High Court shall have the power to appoint an arbitrator or Presiding Arbitrator, as the case may be, and in disputes involving international commercial arbitration, the Chief Justice of India shall have such power.

(vi) Another notable feature of the New Act is that the arbitral award and the settlement arrived at during conciliation proceedings have been treated at par with the decree of the court. That is to say, the arbitral award is enforceable in the same manner as a decree of a law-court. This change has enabled the reduction of liti­gation in some areas of arbitration proceedings. Earlier, an award could not be ex­ecuted in its own right unless the court ordered that award be filed and a decree issued in terms thereof.

(vii) Powers of the court under the New Act have been considerable cur­tailed[10] as compared to the Old Act. Under the New Act, the arbitrator has been endowed with unfettered and plenary powers and he is com­pletely immune from the court’s control during the arbitration proceedings. He can even decide his own jurisdiction. Perhaps the mitigation of the Court’s interference in arbitrator’s power is intended to confer him greater autonomy as also to enable him to work more independently and impartially with an added sense of responsibility. However, he can be held accountable for the acts and omissions on his part which have caused the award to be set aside. In such cases, he may also be held liable for damages that may be contractual or tortuous or both in nature.

(viii) Making a departure from the Old Act, the present Arbitration and Conciliation Act, 1996 contains a salutary provision making it mandatory for the arbitrator[11] to give reasons for the award. However, where the parties them­selves have agreed in writing that no reasons are to be given or where the award is in terms of a settlement arrived at between the parties, the requirement of a reasoned award may be waived off. Under the Old Act, the arbitrator was under no obligation to give reasons in support of his conclusions or decisions reached by him.[12]

There is no provision for appeal against an arbitral award and it is final and binding between the parties. However, an aggrieved party may take recourse to a law court for setting aside the arbitration award on certain grounds specified in Section 34 of the New Act.

(ix) Since the New Act no longer requires the parties to make an application to the court to make the award a rule of the court-enforceable by issu­ance of a decree under the Code of Civil Procedure, 1908, this legal formality has been done away with, thus saving considerable time of the litigants in the execution of the arbitral award.[13] However, the usual procedure as prescribed by the Code of Civil Pro­cedure has to be followed in respect of the claims and defences submitted by the parties.[14]

(x) Yet another significant feature of the New Act is the provision relating to the interim measures which empower the arbitrator or arbitral tribunal to pass interim orders[15] in respect of the subject-matter of the dispute at the request of the party. The earlier Arbitration Act, 1940 had no such provision except that it could only make an interim award.

(xi) There is a specific provision in the New Act that an arbitral award that is in conflict with the public policy in India shall not be valid in law being null and void.[16] It may therefore be set aside by the Court. What is ‘public policy’ is undoubtedly a most controversial issue. It is a variable concept changing according to time and place. The doctrine of public policy is invariably invoked in determining the enforceability of contracts and commercial transactions. Corruption, fraud, criminal misconduct, deception, false representa­tions, unjust enrichment, dishonest deals, etc. are some of the instances which are clearly against the public policy not only in India but all over the world.

(xii) The New Act provides for enforcement of certain foreign awards made under the New York Convention[17] and the Geneva Convention[18] respectively. No such provisions existed in the Old Act. India being a party to the New York Convention, 1958, the award is given in the foreign country can be enforced by the Indian Court having jurisdiction upon that specific matter. The enforcement of a foreign award may, however, be refused if the applicant furnishes evidence before the Court that the agreement which was entered into between the parties was suffering from some incapacity or some infirmity regarding non-re­ceipt of a proper notice of appointment of arbitrator or party was liable to present its case properly. The after provisions relating to the enforcement of foreign awards are similar to that of the domestic award and there is no difference as to the enforcement of such awards.

From an analysis of the provisions of the 1996 Act, we may infer that the 1996 Act cuts down the powers of the court and endows the arbitrator with more powers – powers in plenty. Giving more powers to the arbitrator probably would lead to more exploitation and more corruption. It would be too much to accept that the quality of arbitration will improve with more autonomy conferred on arbitrators and arbitrators overnight, with the introduction of the 1996 Act, will turn out to be impartial, uninfluenced, uninfluenceable, ideal arbitrators. Well has it been said that arbitration is as good as the arbitrator. Judicial disappointment rising to warn about the quality of arbitrators conducting arbitration proceedings stare us in the face.

In the case of Afcons Construction,[19] it was laid down that “while exercising power under Section 89 of the Code, Civil Courts are not empowered to refer a suit to arbitration without the consent of both parties”.

[1] P.C.Rao & William Sheffield, Alternative Dispute Resolution, (1996).

[2] AIR 1981 SC 2075.

[3] AIR 1990 Ker. 101.

[4] S.K.Chawla, History of Arbitration in India, (2004) p. 58.

[5] Ibid.

[6] Smt. Rukmini Gupta v. The Collector, Jabalpur, AIR 1981 SC 479.

[7] Section 67 (1) and 73 (2).

[8] Section 2(f).

[9] Part II; Schedule I of the Arbitration Act, 1940. the umpire was to act only when the arbitrators failed to reach a decision and make an award for whatever reasons within the specified time or there were differences of opinion between the two arbitrators.

[10] Section 5 of the Act of 1996.

[11] Section 31(3) of the Act of 1996.

[12] Champsey Bhara Co. v. Jiwaji Balloo Spinning & Weaving Co. Ltd. AIR 1923 PC 66; Raipur Development Authority v. Chokhumal Contractor’s AIR 1990 SC 1426.

[13] Section 36.

[14] Section 23.

[15] Section 18.

[16] Section 34(2)(b)(iii).

[17] Chapter I of Part II of the 1996 Act.

[18] Chapter II of Part II of the 1996 Act.

[19] (2010) 8 SCC 24.

The Authors of this article, Sanjeev Kumar is a Partner and Anshul Sehgal is a Managing Associate in the Litigation & Dispute Resolution Team at L&L Partners Law Offices, New Delhi. They can be reached out at [email protected] and [email protected]. The views expressed are personal. is now on Telegram. Follow us for regular legal updates and judgements from the court. Follow us on Google NewsInstagramLinkedInFacebook Twitter. You can also subscribe for our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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