Arbitration In India

ARBITRATION IN INDIA A Brief History of Arbitration Law in India Arbitration has a long history in India. In ancient times, people often voluntarily submitted their disputes to a group of wise men of a community called the Panchayat for a binding resolution. Modern arbitration law in India was created by the Bengal Regulations in 1772, during the British rule. The Bengal Regulations provided for reference by a court to arbitration, with the consent of the parties, in lawsuits for accounts, partnership deeds, and breach of contract, amongst others. Until 1996, the law governing arbitration in India consisted mainly of three statutes: 1. The Arbitration (Protocol and Convention) Act, 1937. 2. The Indian Arbitration Act, 1940 and 3. The Foreign Awards (Recognition and Enforcement) Act, 1961 The 1940 Act was the general law governing arbitration in India along the lines of the English Arbitration Act of 1934, and both the 1937 and the 1961 Acts were designed to enforce foreign arbitral awards (the 1961 Act implemented the New York Convention of 1958).1 The government enacted the Arbitration and Conciliation Act, 1996 in an effort to modernize the out-dated 1940 Act. The Arbitration and Conciliation Act, 1996 is a comprehensive piece of legislation modelled on the lines of the UNCITRAL Model Law. This Act repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940 Act). 2 Its primary purpose was to encourage arbitration as a cost-effective and quick mechanism for the settlement of commercial disputes.3 The 1996 Act covers both domestic arbitration and international commercial arbitration.

THE ARBITRATION ACT, 1940:

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The New York Convention of 1958, i.e. the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, is one of the most widely used conventions for recognition and enforcement of foreign awards. It sets forth the procedures to be used by all signatories to the Convention. This Convention was first in the series of major steps taken by the United Nation since its inception, to aid the development of international commercial arbitration. The Convention became effective on June 7, 1959. 2 The Arbitration and Conciliation Act, 1996; Section 85. 3 Justice Ashok Bhan in his inaugural speech delivered at the conference on ‘Dispute Prevention and Dispute Resolution’ held at Ludhiana, India, October 8, 2005.

The Arbitration Act, 1940, dealt with only domestic arbitration. Under the 1940 Act, intervention of the court was required in all the three stages of arbitration, i.e. prior to the reference of the dispute to the arbitral tribunal, in the duration of the proceedings before the arbitral tribunal, and after the award was passed by the arbitral tribunal. Before an arbitral tribunal took cognizance of a dispute, court intervention was required to set the arbitration proceedings in motion. The existence of an agreement and of a dispute was required to be proved. During the course of the proceedings, the intervention of the court was necessary for the extension of time for making an award. Finally, before the award could be enforced, it was required to be made the rule of the court. While the 1940 Act was perceived to be a good piece of legislation in its actual operation and implementation by all concerned - the parties, arbitrators, lawyers and the courts, it proved to be ineffective and was widely felt to have become out-dated.4

The Arbitration and Conciliation Act, 1996: The 1996 Act, which repealed the 1940 Act, was enacted to provide an effective and expeditious dispute resolution framework, which would inspire confidence in the Indian dispute resolution system, attract foreign investments and reassure international investors in the reliability of the Indian legal system to provide an expeditious dispute resolution mechanism. The 1996 Act has two significant parts - Part I provides for any arbitration conducted in India and enforcement of awards thereunder. Part II provides for enforcement of foreign awards. Any arbitration conducted in India or enforcement of award thereunder (whether domestic or international) is governed by Part I, while enforcement of any foreign award to which the New York Convention or the Geneva Convention applies, is governed by Part II of the 1996 Act. The 1996 Act contains two unusual features that differed from the UNCITRAL Model Law. First, while the UNICITRAL Model Law was designed to apply only to international commercial arbitrations,5 the 1996 Act applies both to international and domestic arbitrations. Second, the 1996 Act goes beyond the UNICITRAL Model Law in the area of minimizing judicial intervention.6

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Arbitration and Conciliation Act, 1996, Statement of Objects and Reasons. Article 1 of the UNICITRAL Model Law. 6 S.K. Dholakia, ‘Analytical Appraisal of the Arbitration and Conciliation (Amendment) Bill, 2003’, ICA’s Arbitration Quarterly, ICA, New Delhi, 2005 vol. XXXIX/No. 4 at p. 3. 5

The changes brought about by the 1996 Act were so drastic that the entire case law built up over the previous fifty-six years on arbitration was rendered superfluous. 7 Unfortunately, there was no widespread debate and understanding of the changes before such an important legislative change was enacted. The Government of India enacted the 1996 Act by an ordinance, and then extended its life by another ordinance, before Parliament eventually passed it without reference to a Parliamentary Committee—a standard practice for important enactments. In the absence of case laws and general understanding of the Act in the context of international commercial arbitration, several provisions of the 1996 Act were brought before the courts, which interpreted the provisions in the usual manner. The Law Commission of India prepared a report on the experience of the 1996 Act and suggested a number of amendments.8 Based on the recommendations of the Commission, the Government of India introduced the Arbitration and Conciliation (Amendment) Bill, 2003, in Parliament for amending the 1996 Act. It has not been taken up for consideration. In the meantime, Government of India, the Ministry of Law and Justice, constituted 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.

The Scheme of The Arbitration And Conciliation Act, 1996: The Act is a composite piece of legislation. It provides for domestic arbitration, international commercial arbitration, enforcement of foreign award and conciliation (the latter being based on the UNCITRAL Conciliation Rules of 1980). The more significant provisions of the Act are to be found in Parts I and II thereof. Part I contains the provisions for domestic and international commercial arbitration. Any arbitration to be conducted in India would be governed by Part I, irrespective of the nationalities of the parties. Part II provides for enforcement of foreign awards. Part I is more comprehensive and contains extensive provisions based on the Model Law. It provides, inter alia, for arbitrability of disputes, non-intervention by courts, 7

Sundaram Finance v. NEPC Ltd., (1999) 2 SCC 479; The Supreme Court held at p. 484 thus: ‘The provisions of this Act (the 1996 Act) have, therefore, to be interpreted and construed independently and in fact reference to the 1940 Act may actually lead to misconstruction.’ 8 Law Commission of India, One Hundred and Seventy Sixth Report on The Arbitration and Conciliation (Amendment) Bill, 2001; viewed on 19th April, 2018; Available at:

composition of the arbitral tribunal, jurisdiction of the arbitral tribunal, conduct of the arbitration proceedings, recourse against arbitral awards and enforcement. Part II, on the other hand, is largely restricted to enforcement of foreign awards governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards16 or the Convention on the Execution of Foreign Arbitral Awards.17 Part II is thus, (by its very nature) not a complete code. This led to judicial innovation by the Supreme Court in the case of Bhatia International vs. Bulk Trading.9 Here the Indian court‘s jurisdiction was invoked by a party seeking interim measures of protection in relation to arbitration under the Rules of Arbitration of the International Chamber of Commerce International Court of Arbitration19 to be conducted in Paris. The provision for interim measure (section 9) was to be found in Part I alone (which applies only to domestic arbitration). Hence, the court was faced with a situation where there was no proprio vigore legal provision under which it could grant interim measures of protection. Creatively interpreting the Act, the Supreme Court held that the „general provisions‟ of Part I would apply also to offshore arbitrations, unless the parties expressly or impliedly exclude applicability of the same. Hence, by judicial innovation, the Supreme Court extended the general provisions of Part I to foreign arbitrations as well. It may be stated that this was premised on the assumption that the Indian courts would otherwise have jurisdiction in relation to the matter (in the international sense). This became clear in a subsequent decision of the Supreme Court in Shreejee Traco (I) Pvt Ltd. vs. Paperline International Inc.10 Here the court‘s assistance was sought for appointing an arbitrator in a foreign arbitration. The power of appointment by the court exists under section 11 of Part I of the Act (which applies to domestic arbitration alone). The court declined to exercise jurisdiction. It found that the arbitration was to be conducted in New York and that the law governing the arbitration proceedings would be the law of seat of the arbitration. Hence, the extension of Part I provisions to foreign arbitrations sanctified by Bhatia International case would not be resorted to in every case. The Indian courts would have to first determine if it has jurisdiction, in the international sense.

Salient Features of The Arbitration and Conciliation Act, 1996: The Arbitration and Conciliation Act, 1996 lay considerable stress on the party autonomy. The party to the dispute can decide the number of arbitrators, the rules of

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2002 (4) SCC 105. 2003 (9) SCC 79.

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procedure, and the rules governing the substance of the dispute, the place of arbitration and the language of the arbitrators. The major advantage of the new law is that, it facilitates quick resolution of the commercial disputes and speeds up arbitration procedure by minimizing intervention by the Court. Under the new law, a Court may provide certain interim measures of protection at a party‘s request and may offer assistance in taking evidence or recovering documents at the request of the arbitral tribunal or a party to the reference. The award of an arbitrator is itself enforceable as a decree of Court and is not required to be made a “Rule of Court”. The arbitrator has to give reasons for his award. However, no reasons need to be given if the disputant parties agree beforehand to such a thing. In case of Babar Ali vs. Union of India11 case it was held by Supreme Court that, The Arbitration and Conciliation Act, 1996 is neither unconstitutional nor in any way offends the basic structure of the Constitution of India, as Judicial review is available for challenging the award in accordance with the procedure laid down therein. The time and manner of the judicial scrutiny can be legitimately laid down by the Act passed by the parliament. The Indian Arbitration Act sought to achieve the following main objectives: 

to comprehensively cover international and domestic arbitration and conciliation;

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to make provision for an arbitral process which is fair, efficient and capable of meeting the needs of each arbitral proceeding;

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to ensure that the arbitral tribunal gives reasons for its award;

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to ensure that the arbitral tribunal remains within the limits of its jurisdiction;

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to minimise the supervisory role of the Indian courts in the arbitral process;

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to permit an arbitral tribunal to use mediation, conciliation or other procedures during the arbitral proceedings to encourage settlement of disputes;

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to provide that every final award is enforced in the same manner as if it were a decree of the court;

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to provide that a settlement agreement reached by the parties as a result of conciliation proceedings will have the same status and effect as an award rendered by an arbitral tribunal; and

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to provide that every award made in a country that is party to an international convention to which India is also a signatory will be enforceable as a foreign award.

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(2000) 2 SCC 178.

The objectives mentioned above clearly indicate the legislative intent to make arbitral proceedings more efficient and result-oriented. To achieve those objectives, and to encourage the use of arbitration in all civil disputes at family, commercial, domestic and international law levels, Section 89 was inserted into the Civil Procedure Code 1908 by the Civil Procedure Code (Amendment) Act 1999. Its aim is to promote alternative methods of dispute resolution by requiring the courts to consider the possibility of settlement through such methods at any stage of legal proceedings.

Scope of Application and General Provisions of The Arbitration and Conciliation Act, 1996: The Arbitration and Conciliation Act, 1996 covers both domestic and international arbitrations (i.e., where at least one party is not an Indian national), as well as mediation and conciliation. The Indian Arbitration Act comprises four parts and three schedules, as follows: Part I: General Provisions on Arbitration (General Provisions); Part II: Enforcement of certain Foreign Awards (Chapter I of Part II of the Indian Arbitration Act deals with New York Convention awards and Chapter II covers awards under the Geneva Convention, 1927); Part III: Conciliation; Part IV: Supplementary Provisions; First Schedule: New York Convention; Second Schedule: Geneva Convention, 1923; and Third Schedule: Geneva Convention, 1927 Accordingly, the Indian Arbitration Act puts domestic awards and foreign awards in two different and distinct compartments, subject to certain overlapping provisions. The General Provisions apply to all other parts and chapters of the Indian Arbitration Act, unless it is expressly stated otherwise. For example, Part II provides a separate definition of “arbitral award” and contains separate provisions for the enforcement of foreign awards. In addition, if the arbitral proceedings are seated outside of India, all or some of the General Provisions may be excluded by the express or implied agreement of the parties. However, if no such exclusion is agreed, the General Provisions will apply to the arbitration and it will not be open for the

parties to argue that Part I of the Indian Arbitration Act is not applicable to the arbitration.12 PREAMBLE Preamble to the 1996 Act is an introductory, prefatory and an explanatory note about the sections namely that of the Arbitration and Conciliation Act, 1996. United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Model Law on International Commercial Arbitration in 1985. Thereby, the General Assembly of the United Nations recommended that all countries give due consideration to the said Model Law, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international commercial arbitration practice. The United Nations Commission on International Trade Law has adopted the UNCITRAL Conciliation Rules in 1980. Thereby, the General Assembly of the United Nations recommended the use of the said Rules in cases where a dispute arises in the context of international commercial relations and the parties seek an amicable settlement of that dispute by recourse to conciliation. The said Model Law and Rules has a significant contribution to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations. Based on the above facts the Parliament of India considered that it was expedient to make law with respect to arbitration and conciliation, taking into account the aforesaid Model Law and Rules in the forty seventh year of the Republic. The Arbitration and Conciliation Act, 1996 repealed the Arbitration Act of 1940, the Arbitration (Protocol and Convention) Act of 1937 and the Foreign Awards (Recognition and Enforcement) Act of 1961. Supreme Court in Fuerst Day Lawson Ltd vs. Jindal Exports Ltd.13 held that the provisions of the Arbitration and Conciliation Act, 1996 have to be interpreted and construed independent to that the Arbitration and Conciliation Act, 1940. In order to get any further help in construing the provisions, it is more relevant to refer to the United Nations Commission on International Trade Law. The Arbitration and Conciliation Act, 1996 is divided into following parts, Part I deals with the “Domestic arbitration”. Part II deals with the “Enforcement of foreign awards”. Part III deals with the “Conciliation procedures” and Part IV of the Act deals with the “Supplementary provisions”. Act has three Schedules namely, The First Schedule on the Convention on recognition and 12

Bhatia International Case Supra, n. 9; Venture Global Engineering vs. Satyam Computers Services, [2002] AIR SC 1432. 13 A.I.R. 2001 S.C. 2293; Sundaram Finance Ltd. vs. NEPC India Ltd. AIR 1999 S.C. 565.

enforcement of foreign arbitral award as per New York convention, the Second Schedule on the Protocol on Arbitration clauses and Third Schedule on the convention on the execution of foreign arbitral awards as per Geneva Convention. In Konkan Railways Corp. Ltd. vs. Mehul Construction Co.14 case, Supreme Court of India stated that the Arbitration and Conciliation Act, 1996 was introduced in order to attract the ‘international mercantile community’ and at the time of interpretation, regard must be had to the objectives behind the enactment of the Act.

Arbitration: Arbitration is one of the oldest methods of settling civil disputes between two or more persons by reference of the dispute to an independent and impartial third person, called arbitrator, instead of litigating the matter in the usual way through the courts. It saves time and expense. It also avoids unnecessary technicalities and at the same time ensures “substantial justice within limits of the law”. In Union of India v. D.P. Wadia & Sons,15 it was observed that arbitration is a domestic forum. It is a forum other than a court of law for determination of disputes and differences, after hearing both the sides, in a judicial manner. The Arbitration and Conciliation Act, 1996 governs the “arbitration procedures” in India. Part-I of the Arbitration and Conciliation Act, 1996 comprises of 43 sections spread over ten chapters, making detailed provisions relating to domestic arbitration and International commercial arbitration held in India under this Act. ‘Arbitration' means, a process of dispute resolution in which a neutral third party called arbitrator, renders a decision after a hearing at which both parties have an opportunity to be heard.16 Arbitration is a consensual process. It is not a matter of coercion. No arbitration statute can require parties to arbitrate when they have not agreed to do so. Nor can it prevent them from excluding certain claims from the scope of arbitration agreement in any manner they choose. It requires Courts just to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.17

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(2000) 7 SCC 201. AIR (1977) Bom 10. 16 Black's Law Dictionary, 6th edn. (1990), West Publishing Co., p. 105. 17 Volt Information Sciences, Inc. vs. Leland Stanford University 489 US 468(1989) 15

As defined under Section 2(1) (a) of Arbitration and Conciliation Act, 1996 it covers any arbitration whether it is administered by any permanent arbitral institution or not. It also covers arbitration relied on voluntary agreement by the private parties or by operation of law. The Arbitration and Conciliation Act, 1996 does not provide definition of the word "Arbitration". Arbitration, in law, is a form of Alternative Dispute Resolution specifically, a legal alternative to litigation, whereby the parties to a dispute agree to submit their respective positions (through agreement or hearing) to a neutral third party called the Arbitrator for resolution of the dispute between them. The literal meaning is that "settlement" of differences or disputes by mutual understanding or agreement by the parties where the rights and liabilities of the parties are determined in judicial point of view which are binding to them, such settlement may be before the arbitral tribunal but not by the Court of law. In Jivaji Raja Vs Khimiji Poonja & Company18, Bombay High Court observed that, arbitration is the reference of dispute or difference between two or more parties to a person chosen by the parties or appointed under statutory authority, for determination of the same. In a broad sense, it is substitution of ordinary judicial machinery by a mutually chosen tribunal i.e., an Arbitrator or an Arbitral Institution.

Arbitration Agreement: The first stage in arbitration is the formulation of the arbitration agreement whereby the parties agree to submit their present or future differences to arbitration. Section 2 (1)(b) does not give a definition of the term, but states that “Arbitration Agreement” means an agreement referred to in Section 7. As per Section 7, the arbitration agreement is defined as, an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. Thus, the provision of arbitration can be made at the time of entering the contract itself, so that if any dispute arises in future, the dispute can be referred to arbitrator as per the agreement. It is also possible to refer a dispute to arbitration after the dispute has arisen. It was held by the Supreme Court in the Wellington Association Ltd Vs Kirti Mehta19 case that, the word in the Section 7(1) “means an agreement by

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AIR 1934 Bom 476. AIR 2000 SC 1379.

the parties to submit to arbitration”, postulates an agreement which necessarily or rather mandatory requires the appointment of an arbitrator or arbitrators. Section 7 does not cover a case where the parties agree that they ‘may’ go to a suit or that they ‘may’ also go to arbitration. Arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. Section 7(3) of the Act requires that the arbitration agreement must be in writing. Section 7(2) provides that it may be in the form of an arbitration clause in a contract or it may be in the form of a separate agreement. Under Section 7(4), an arbitration agreement is in writing, if it is contained in: 1. a document signed by the parties, 2. an exchange of letters, telex, telegrams or other means of telecommunication, providing a record of agreement, 3. or an exchange of claims and defense in which the existence of the agreement is alleged by one party and not denied by the other. Sec.7 (5) of the Act expressly provides that reference to a document containing an arbitration clause would constitute an arbitration agreement.

In Jayant N.Seth Vs Gyaneshwar Apartment Cooperative Housing Society Ltd.20, case the Court laid down the essential ingredients of an arbitration agreement as defined in Clause 2(1) (b) read with Section 7 as, there should be a valid and binding agreement between the parties. Such an agreement may be contained as a clause in a contract or in the form of a separate agreement. Such an agreement is deemed to be in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement or an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other. Reference in a contract to a document containing an arbitration clause also constitutes an arbitration agreement, provided the contract is in writing and the reference is such as to make that arbitration clause part of the contract. Parties intend to refer present or future disputes to arbitration. The dispute to be referred to an arbitrator is in respect of a defined legal relationship, whether contractual or not. In Motilal vs. Kedarmal Jainarayan Bharadiya21 case, it is held that, arbitration is an alternate dispute resolution system of quasi-judicial nature and if no judicial 20 21

2000(1) RAJ 117 (Bom). 2002(3) RAJ 403 (Bom).

functions are attributed to the nominated persons, the document cannot be said to be an arbitration agreement. The Supreme Court of India in Firm Ashok Traders vs. Gurumukh Das Saluja22 case held that, under the scheme of the Arbitration and Conciliation Act, 1996, the Arbitration clause is separable from other clause of partnership deed. The arbitration clause constitutes an agreement by itself. In Tamil Nadu Electricity Board vs. Sumathi and Others,23 case there was no arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act, 1996. The dispute relating to the payment of compensation for the death due to electrocution was under the consideration of the High Court under Article 226. The High Court appointed an arbitrator in exercise of its power under the 1996. The Supreme Court quashed the order of the High Court, as the Suo-motu appointment of arbitrator in the absence of agreement to that effect is not provided for under the provisions of the Arbitration and Conciliation Act, 1996. The Section 4 of the Arbitration and Conciliation Act, 1996 is a deeming provision. It lays down that, where a party precedes with the arbitration without stating his objection to non-compliance of any provision of Part I from which the parties may derogate or any requirement under arbitration agreement, it shall be deemed that he has waived his right to so object.24 In Basheshar Nath vs. Commissioner of Income Tax25, the Supreme Court held that, ‗There must be an international relinquishment of a known right or the voluntary relinquishment or abandonment of a known existing legal right , or conduct such as warrants an inference of relinquishment of a known right or privilege‘. In Union of India vs. MAA Agency,26 it was held that, it was open to the petitioner to challenge either the jurisdiction of the arbitral tribunal to adjudicate upon the third claim or to raise the plea that the tribunal was exceeding its scope of authority. However, the petitioner did not raise any such objection and on the contrary, proceeded with a defense to the claim on merits, thereafter, which an award was passed. This being the case, it may be deemed that the petitioner had waived its rights under Section 4, to object on the ground that any requirement of the arbitration agreement had not been complied with.

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2004 (3) SCC 155. 2000(4) SCC 543. 24 Section 4, The Arbitration and Conciliation Act, 1996. 25 AIR 1959 SC 149. 26 2003(3) RAJ 335 (Bom). 23

The Supreme Court of India in P. Anand Gajapathi Raju vs. PVG Raju,27 held that Section 5 of the Arbitration and Conciliation Act, 1996 brings out clearly the object of the Act, namely that of encouraging resolution of disputes expeditiously and less expensively and when there is an arbitration agreement, the Court‘s intervention should be minimal. In BHEL vs. CN Garg & Ors.28 case, it was held that, Section 5 was inserted to discourage judicial intervention. It is seen that a party having grievances against an arbitrator on account of bias or prejudice is not without remedy. It only has to wait till the award is made and then it can challenge the award on various grounds under Section 34 of the Arbitration and Conciliation Act, 1996. Determination on the applicability of Section 2(1)(f) of the Indian Arbitration and Conciliation Act, 1996 the Supreme Court of India in the case of TDM Infrastructure Private Limited vs. UE Development India Private Ltd.29 held that, when both the companies are incorporated in India, and have been domiciled in India, the arbitration agreement entered into by and between them would not be an international commercial arbitration agreement. The MM Acqua Technologies Ltd. vs. Wig Brothers Builders Ltd.,30 case helps in explaining the definition of a binding agreement between parties. In order to be a binding arbitration agreement between the parties, the same must be in writing and the parties should have specifically agreed to settle their disputes by arbitration. An arbitration agreement cannot be inferred by implication.

Essentials Of Arbitration Agreement: 

It must be in writing, though it need not be in formal document. Signatures of the parties to the agreement are not necessary but it must be shown that they have agreed to the settlement of disputes by arbitration.

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It must have all the essentials of a valid contract.

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It must refer to a dispute, present or future, between the parties to arbitration.

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It may be in the form of an arbitration clause in a contract or in the form of separate agreement.

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The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and reference is such as to make that arbitration clause part of the contract.

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AIR 2000 SC 1886. 2001(57) DRJ 154 (DB). 29 (2008) SCC 2263. 30 95 (2002) DLT 818. 28