Indian Arbitration Law - new look

The Arbitration Act, 1940 ( "1940 Act") governed all arbitrations that were held in India, whether between international entities or national entities for a long time until 1996 when it was replaced by the Arbitration and Conciliation Act, 1996 (the "1996 Act"). This article examines the need for the change, the principle changes made and whether the changes made have removed the shortcomings under the Arbitration Act, 1940 .

The Arbitration Act, 1940 and principal shortcomings

The need for its replacement started being felt with increasing urgency in view of the recent liberalisation programme introduced by the Indian government. The primary reason for this was:

• the 1940 Act allowed the 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 courts 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;
• any party that would be interested in delaying the proceedings would resort to the court during any stage of the proceedings taking advantage of the backlog of the cases;
• the Act did not prohibit the parties from raising disputes relating to the proceedings or validity of the arbitration agreement or the constitution of the arbitration even after the passing of the award, while they have participated in the arbitration without demur; and
• it allowed the award to be challenged on large number of grounds, including the merits of the award.

Due to the above reasons the Indian law was never the favourite of foreign parties. They would obtain awards in foreign state which were members of the New York Convention Enforcement of Foreign Awards, and seek their enforcement in India. India recognised the foreign awards passed in such countries and provided for their enforcement under the Foreign Awards (Recognition and Enforcement) Act, 1961. It also recognised awards made pursuant to an arbitration agreement to which the Geneva Protocol on Arbitration Clauses applied as well as awards made in countries which were parties to the Geneva Convention of the Execution of Foreign Arbitral Awards under the Arbitration (Protocol and Convention ) Act, 1937. Enforcement under these legislations was not as time consuming as in respect of the domestic award, due to limited grounds of challenge, though the arrears of cases did impede their expeditious enforcement.

The need for new law

With the liberalisation, substantial number of foreign investors started coming in. Initially, the shortcomings of the old law were sought to be overcome by foreign investors by avoiding domestic arbitrations and insisting on foreign arbitrations. There was, however, a legal hindrance in resorting to foreign arbitrations because the parties would invariably be Indian (the foreign investor would invest through its Indian arm) and awards of such arbitrations could be treated as domestic awards and not foreign awards (footnote 1). This meant that the award be subjected to the 1940 Act and, hence, susceptible to the shortcomings mentioned above. Even otherwise, to provide an efficient arbitration system was a sine qua non for attracting foreign investments.

There was continuous pressure from the foreign and Indian investor community on the Indian Government to modernise the arbitration law and to bring about expeditious finality to the awards. In other words, the need was for the law to give greater immunity from challenge to the arbitration awards and prevent frequent interference by the courts.

The other important reason was that the law was lacking the statutory recognition of conciliation as a means of settling the disputes.

Principal features of the new law

The 1996 Act, which repeals the 1940 Act, has modernised the arbitration law and is a consolidated law on arbitrations, both domestic and foreign. It has adopted the UNCITRAL Model law of Arbitration, though with some modifications. It has brought about substantial changes to the law relating to domestic arbitration. For example, it expressly recognises International Commercial Arbitrations to be one not only between Indians and foreigners, but also between two Indian entities, the control of one or both of which may be outside India (footnote 2). It allows the parties to an International Commercial Arbitration to choose the substantive law applicable to them. It has also expressly provided that the courts would not interfere except when expressly authorised by the Act. It has also limited the grounds of challenge to the award. These aspects of the 1996 Act are mentioned in detail below.

Under the scheme of the 1996 Act, domestic arbitrations (whether or not an International Commercial Arbitration) have been dealt with under Part I (footnote 3). In other words, all arbitrations held in India, whether without an international element ( which we shall term as "Indian Commercial Arbitration" for the purpose of the present paper) or with a foreign element (as defined under the International Commercial Arbitration) would be governed by Part I of the 1996 Act. Enforcement of awards resulting from foreign arbitrations under The New York Convention and Geneva Protocol have been dealt with under Part II and conciliation has been dealt with under Part III.

Principal differences between an Indian Commercial Arbitration and International Commercial Arbitration

As noticed above the new law is applicable to both Indian Commercial Arbitration (with no foreign element involved) and International Commercial Arbitration that are held in India3. The principal differences between the two are:

• in case of failure of the parties or the nominated entity to appoint an arbitrator of an International Commercial Arbitration, the appointment is to be made by the Chief Justice of India (or an authority nominated by him) (footnote 4), whereas in case of an Indian Commercial Arbitration, the appointment is to be made by the Chief Justice of the High Court which has jurisdiction over the subject-matter of arbitration (footnote 5).

It may be worth mentioning that the Chief Justice of India has framed a scheme for appointment of arbitrators (footnote 6) and one can be reasonably sure that there would be no delay in appointing arbitrators pursuant thereto. The Chief Justices of the High Courts ought also have framed a scheme for this purpose. It is difficult to say whether all have or not, given the large number of High Courts.

• in an International Commercial Arbitration the parties are free to choose the substantive law that may be applicable to the substance of the dispute (which may be done by reference to law or legal system of a given country and in the absence of any such specification to be decided by the arbitrators in light of all the circumstances surrounding the dispute) (footnote 7). On the other hand, the dispute in an Indian Commercial Arbitration has to be decided in accordance with the Indian law.

Improvements by 1996 Act over the 1940 Act visa-vis domestic awards

In order to make arbitrations held in India (whether Indian Commercial Arbitration or International Commercial Arbitration) equally efficacious as in developed jurisdictions, the new law has made significant positive changes:

• it expressly recognises the various modes in which a written arbitration agreement could be brought about, leaving no scope of judicial interpretation; for example, arbitration agreements established in correspondence would be enforceable (footnote 8);
• the courts can interfere with the arbitration proceedings and the awards only where the Act expressly authorises them to do (footnote 9);
• objections to arbitration agreements and arbitration proceedings should be taken at the earliest available opportunity (footnote 10) or else they are deemed to be waived (footnote 11). This has expressly resolved the issue whether objections which went to the very root of the arbitration proceedings should be allowed to be raised even though the person had participated in the arbitrations proceedings without demur, which had been subject matter of many judicial pronouncements;
• the arbitration tribunal is empowered to rule on its own jurisdiction and validity of its constitution (footnote 12) and any plea in this regard has to be raised at the stage of filing a defence (though, the appointment by the party of its arbitrator would not preclude it from raising such a plea), unless the delay in raising such a plea was a justified delay. In the absence of an agreement between the parties, the arbitration tribunal has also been given the power to deal with the complaints about the likelihood of partiality by one of the arbitrators (footnote 13);
• the arbitration panel has been given the power to issue interim directions, except where such a power is expressly barred by agreement of the parties (footnote 14);
• the arbitration tribunal is now required to give reasons for the award, unless the parties have agreed otherwise or it is an agreed award (footnote 15). Under the 1940 Act, the position was the opposite; no reasons were required to be given except where the parties required them to be stated (footnote 16);
• the arbitration tribunal has been expressly authorised to award interest on any money claim that may be the subject matter of dispute from the date of cause of action until the date of payment. Further, from the date of the award till the date of payment, the statutory rate of interest prescribed is 18% p.a., unless the award directs otherwise (footnote 17) There was no express provision in the 1940 Act conferring power on the arbitrator to award interest. The issue of power of the arbitrator to award interest was subject matter of a number of judicial ponouncements (footnote 18). It was held that the arbitrator had power to award interest for all periods except in respect of the pre-reference periods for references made prior to Interest Act, 1978 coming into force (19.8.81) without the intervention of the court. The 1996 Act confers power on the arbitration tribunal to award interest for the pre-reference period as well; and
• finally and most importantly, the grounds for challenging the award have been drastically curtailed to grounds which do not touch the merits of the award. Some of the grounds are : (i) a party was under some incapacity, (ii) arbitration agreement not being valid in accordance with the law of the country specified, (iii) award dealing with disputes beyond the scope of submission to arbitration, (iv) the award is induced or effected by corruption or fraud or (v) the award is not capable of settlement under the arbitration law of India as it is then in force (footnote 19). In short, the grounds are the same as specified under the Convention of the Recognition and Enforcement of Foreign Arbitral Awards for opposing the enforcement of the foreign award.

Enforcement of awards arising from domestic arbitrations

Under the 1996 Act, an award made in India can be challenged by an application to the applicable court by the unsuccessful party within three months of receiving the award. An award which has been unsuccessfully challenged or not challenged is deemed in itself to be a decree (footnote 20) and can be enforced by the procedure prescribed by Indian law for enforcing court decrees. This is a departure from the requirement of the 1940 Act under which the party in whose favour the award had been made was required to apply for the award to be made rule of the court before being enforceable (footnote 21).

Foreign Awards

As far as foreign arbitrations are concerned, any award which has become final and is binding, and is made in a country which is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards or the Geneva Convention of the Execution of Foreign Arbitral Awards, is enforceable under the new law. There is no difference between the new law and the old laws, namely, Foreign Award (Recognition and Enforcement) Act, 1961 and the Arbitration (Protocol and Convention) Act, 1937. The grounds for refusing the enforcement are the same as those set-out in the New York Convention and the Geneva Convention; the only clarification that has been introduced is that fraud and corruption have been set-out as grounds rendering the award being contrary to public policy of India (footnote 22).

Appeals

Both the domestic and foreign awards are treated on the same lines as regards the finality of the court proceedings in relation to them. Only one appeal is provided against the order affirming or setting aside the award or granting or refusing the enforcement, as the case may be (footnote 23). However, the right to seek leave to appeal to the Supreme Court is always there.

Conciliation

The new law makes provisions for the first time in respect of conciliation proceedings. It recognises the need for alternative dispute resolution mechanism, which is gaining importance in India. Conciliation proceedings are based only on consensus. It commences only if both parties have agreed to it. It protects any confidential material that may have been disclosed during the proceedings and this confidentiality overrides the requirement of any other law to the contrary (footnote 24). It also protects any evidence used during the proceedings from being used in any other proceedings (footnote 25). The settlement that is arrived at between the parties is treated as an award.

Conclusion

While the 1996 Act does remove the basic shortcomings of the 1940 Act, the question is whether the objects with which it had been enacted are also achieved. In other words, whether the judicial system supports and promotes the intent behind the change. That would take sometime to reveal, but there are excessive delays by the courts in matters where their jurisdiction still extends, for example, in the matter of appointment of arbitrators and interim reliefs on arbitrable matters. If the courts are not going to respond equally favourably by acting expeditiously in the matter of appointing arbitrators and not otherwise interfering in the arbitration proceedings, it would drive away foreign investors who may want to arbitrate in India, thereby defeating one of the primary objects of the 1996 Act.

Footnotes:

1. National Thermal Power Corporation vs. Singer Company [ (1992)3 SCC 521].

2. Section 2 (f) of the Arbitration and Conciliation Act, 1996 [ the "1996 Act"]. According to this provision, International Commercial Arbitration means "an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is:
(i) an individual who is a national of, or habitually resident in any country other than India;
(ii) a body corporate which is incorporated in any country other than in India;
(iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country.

3. Section 2 (2) of the 1996 Act.

4. Section 11 (12) (a) of the 1996 Act.

5. Section 11 (12) (b) of the 1996 Act.

6. The Appointment of Arbitrators by the Chief Justice of India Scheme, 1996

7. Section 28 (1) (b) of the 1996 Ac.

8. Section 2 (1) of the 1996 Act.

9. Section 5 of the 1996 Act.

10. Sections 4, 16 (2) and 16 (3) of the 1996 Act.

11. Section 4 of the 1996 Act.

12 Section 16 (1) of the 1996 Act.

13. Section 14 (2) of the 1996 Act.

14. Section 17 (1) of the 1996 Act.

15. Section 31 (3) of the 1996 Act.

16. Raipur Development Authority vs. Chokhamal Contractors [ AIR 1990 SC 1426]

17. Section 31 (7) of the 1996 Act.

18. Executive Engineer vs. Abhadutta Jena [ (1988) 1 SCC 418]; State of Orissa vs. B.N. Agarwala [ (1993) 1 SCC 140]

19. Section 34 of the 1996 Act.

20. Sections 35 and 36 of the 1996 Act.

21. Section 14 of the 1940 Act.

22. Explanation to Section 48 (2) (b) of the 1996 Act.

23. Sections 37 (1) (b), 50 (1) (b) and 59 (1) (b) of the 1996 Act.

24. Section 75 of the 1996 Act.

25. Section 81 of the 1996 Act.