“I can imagine no society which does not embody some method of arbitration”

-Herbert Read

Prologue:

Arbitration is a method of settlement of disputes as an alternative to the judicial method of settlement. The Great Britain and The United States of America were pioneers in the use of arbitration to resolve their differences. It was first used in the Jay Treaty of 1975, and played a major role in the Alabama Case of 1872, whereby major tensions regarding British support for the Confederacy during the American Civil War were resolved. The importance of arbitration lies in the fact that almost every commercial contract carries a clause of arbitration. Over the years, the law under the Act has expanded. The importance of Alternative Dispute Resolution mechanism is highlighted in the fact that it assists parties to avoid direct confrontation, provides broad leeway of neutrality, speedy settlement, confidentiality, proficiency and lesser cost.

History of Indian Arbitration Law:

Until the Arbitration and Conciliation Act, 1996 (“Act”), the law governing arbitration in India consisted mainly of three statutes:

  1. The Arbitration (Protocol and Convention) Act, 1937 (“1937 Act”)
  2. The Indian Arbitration Act, 1940 (“1940 Act”) and
  • The Foreign Awards (Recognition and Enforcement) Act, 1961 (“1961 Act”) The 1940 Act was the general law governing arbitration in India and resembled the English Arbitration Act of 1934.

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Background to the Arbitration and Conciliation Act, 1996:

The law relating to arbitration in India is contained in the Arbitration and Conciliation Act, 1996. It came into force on the 25th day of January, 1996. It provides for domestic arbitration, international commercial arbitration and also for the enforcement of foreign arbitral awards. It proceeds on the basis of the UN Model Law so as to make our law accord with the law adopted by the United Nations Commission on International Trade Law (UNCITRAL). The preamble to the Arbitration and Conciliation Act provides that it is:

”An Act 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.”

To address raising concerns and with a primary purpose to encourage arbitration as a cost-effective and time-efficient mechanism for the settlement of commercial disputes in a national and international sphere, India in 1996, adopted a new legislation modelled on the “Model Law” in the form of the Arbitration and Conciliation Act, 1996 (“Act”). The Act was also aimed to provide a speedy and efficacious dispute resolution mechanism in the existing judicial system which was marred with inordinate delays and backlog of cases.

 Scheme of the act:

The Act has three significant parts. Part I of the Act deals with domestic arbitrations and ICA when the arbitration is seated in India. Thus, an arbitration seated in India between one foreign party and an Indian party, though defined as ICA is treated akin to a domestic arbitration.

Part II of the Act deals only with foreign awards[1] and enforcement under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”) and Convention on the Execution of Foreign Arbitral Awards, 1927 (“Geneva Convention”). Part III of the Act is a statutory embodiment of conciliation provisions.

In Part I, Section 8 regulates the commencement of arbitration in India, Sections 3, 4, 5, 6, 10 to 26, and 28 to 33 regulate the conduct of arbitration, Section 34 regulates the challenge to the award and Sections 35 and 36 regulate the recognition and enforcement of the award. Sections 1, 2, 7, 9, 27, 37 and 38 to 43 are ancillary provisions that either support the arbitral process or are structurally necessary[2].

The courts have found that Chapters III to VI, specifically, Section 10 to 33 of Part 1 of the Act contain curial or procedural laws which parties would have autonomy to opt out from. The other Chapters of Part I of the Act form part of the proper law[3], thus making those provisions non-derogatory by parties subjected to Part I, even by contract.

Part II, on the other hand regulates arbitration only in respect to the commencement and recognition / enforcement of a foreign award and no provisions under the same can be derogated by a contract between two parties[4].

The objective of the Act is to provide a speedy and cost-effective dispute resolution mechanism which would give parties finality in their disputes. In 1996, the Act was passed with a view to bring in winds of change, but fell into a chasm of its own. A number of decisions from the courts slowly but surely ensured that the preferred seat in any cross-border contract was always a heavily negotiated point and, more often than not, ended up being either Singapore, New York, or London (the established global arbitration centres). Foreign investors and corporate doing business in India were just not ready to risk with the Indian legal system

Arbitration and Conciliation Amendment Act, 2015:

The modifications introduced by the Amendment Act have made significant changes to the Act and are in the right direction to clarify several issues with regard to the objectives of the Act. The Amendment Act provides with strict timelines for completion of the arbitral proceedings along with the scope for resolving disputes by a fast track mechanism. The Amendment Act has introduced insertion of new provisions in addition to amendments to the existing provisions governing the process of appointment of an arbitrator. It also clarified the grounds to challenge an arbitrator for the lack of independence and impartiality. As a welcome move, the Amendment Act provides for assistance from Indian courts, even in foreign-seated arbitrations in the form of interim relief before the commencement of the arbitration. Further, the introduction ‘cost follow the event’ regime in the Act has been inserted to bring the Act in line with international standards. The process of enforcement and execution under the Act has also been streamlined so that challenge petitions do not operate as an automatic stay on the execution The modifications introduced by the Amendment Act have made significant changes to the Act and are in the right direction to clarify several issues with regard to the objectives of the Act. The Amendment Act provides with strict timelines for completion of the arbitral proceedings along with the scope for resolving disputes by a fast track mechanism.

Recent expansion of the term ‘arbitrability’ under Indian law:

Arbitrability is one of the issues where the contractual and jurisdictional facets of international commercial arbitration meet head on. It involves the simple question of what type of issues can and cannot be submitted to arbitration.

In Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[5] the Supreme Court discussed the concept of arbitrability in detail and held that the term ‘arbitrability’ had different meanings in different contexts: (a) disputes capable of being adjudicated through arbitration, (b) disputes covered by the arbitration agreement, and (c) disputes that parties have referred to arbitration. It stated that in principle, any dispute than can be decided by a civil court can also be resolved through arbitration. However, certain disputes may, by necessary implication, stand excluded from resolution by a private forum. Such non-arbitrable disputes include: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, or child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

Also, the Supreme Court has held in N. Radhakrishnan v. M/S Maestro Engineers[6] that, where fraud and serious malpractices are alleged, the matter can only be settled by the court and such a situation cannot be referred to an arbitrator. The Supreme Court also observed that fraud, financial malpractice and collusion are allegations with criminal repercussions and as an arbitrator is a creature of the contract, he has limited jurisdiction. The courts are more equipped to adjudicate serious and complex allegations and are competent in offering a wider range of reliefs to the parties in dispute.

But the Supreme Court in Swiss Timing Limited v. Organizing Committee, Commonwealth Games 2010, Delhi [7]and World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd.[8] held that allegations of fraud are not a bar to refer parties to a foreign-seated arbitration and that the only exception to refer parties to foreign-seated arbitration are those which are specified in Section 45 of Act. For example in cases where the arbitration agreement is either (i) null and void; or (ii) inoperative; or (iii) incapable of being performed. Thus, it seemed that though allegations of fraud are not arbitrable in ICA’s with a seat in India the same bar would not apply to ICA’s with a foreign seat.

However, the decision of the Supreme Court in A Ayyasamy v. A Paramasivam & Ors[9] has clarified that allegations of fraud are arbitrable as long as it is in relation to simple fraud. In A Ayyasamy , the Supreme Court held that: (a) allegations of fraud are arbitrable unless they are serious and complex in nature; (b) unless fraud is alleged against the arbitration agreement, there is no impediment in arbitrability of fraud; (c) the decision in Swiss Timing did not overrule Radhakrishnan. The judgment differentiates between ‘simplicitor fraud’ and ‘serious fraud’, and concludes while ‘serious fraud’ is best left to be determined by the court, ‘simplicitor fraud’ can be decided by the arbitral tribunal.

Epilogue: 

In spite of India being one of the original signatories of the New York Convention, arbitration in India has not always kept up with international best practices. However, the last five years have seen a significant positive change in approach. Courts and legislators have acted with a view to bringing Indian arbitration law in line with international practice. With the pro-arbitration approach of the courts and the Amendment Act in place, there is cause to look forward to best practices being adopted in Indian arbitration law in the near future. Exciting times are ahead for Indian arbitration jurisprudence and our courts are ready to take on several matters dealing with the interpretation of the Amendment Act.

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Author: Vidhita Rakhe

You can reach author at: vidhitarakhe@gmail.com

She is a law graduate from Department of Legal Studies and Research, Barkatullah University, Bhopal (M.P.). Currently, she is a content writer with TA. 

 

 

Endnotes:-

[1] A foreign award is an award delivered in an arbitration seated outside India.

[2] Bharat Aluminum Co. v. Kaiser Aluminum Technical Service, Inc., 2012(9) SCC 552.

[3] Anita Garg v. M/S Glencore Grain Rotterdam B.V., 2011(4).

[4] Bharat Aluminum Co. v. Kaiser Aluminum Technical Service, Inc., 2012(9) SCC 552.

[5] 2011 (5) SCC 532

[6] 2010 (I) SCC 72

[7] 2014 (6) SCC 677

[8] AIR 2014 SC 968

[9] (2016) 10 SCC 386

 

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