Evolution of Arbitral Law in India: An Overview

This article on ‘Evolution of Arbitral Law in India: An Overview’ traces the history of arbitration and its advent and development in India.

I. Introduction: Evolution of Arbitral Law in India

“At all events, arbitration is more rational, just, and humane than the resort to the sword”. – Richard Cobden

The fast-paced globalisation led to a massive surge in the number of disputes – commercial or otherwise. Cross-border transactions and bilateral trade relations played a significant role in increasing the legal intricacies. The Indian courts have traditionally been deemed slow in their swiftness and efficiency. Further, the endemic delays and lengthy adjudications in the Indian legal system prompted the parties to realise the necessity of simpler and more expeditious ways of resolving disputes.

Consequently, ADR mechanisms such as Arbitration, Mediation and Conciliation gained traction and went on to become an integral component of commercial contracts. Parties chose to opt for arbitration to stay outside the ambit of the courts.

Still, there is a growing concern amongst investors regarding the efficacy of arbitration in India and whether it should be a preferred mode of dispute resolution, as is in other jurisdictions. Fundamentally, arbitration is a dispute settlement mechanism through which the litigants get their disputes resolved through a third person, known as the “arbitrator”, without having to go by the conventional way of the court of law. On recognising the effectiveness of ADR, the government facilitated the process, which improved its rank by 23 positions in the ‘ease of doing business' index. The Indian Arbitration laws have evolved with time to keep up with the global trend.

The earliest instance of arbitration can be traced back to the era of King Solomon, who settled an issue between two mothers on the lines of biblical theory. The issue was regarding the rightful claim on the baby boy and who the real mother was. Subsequently, other rulers resorted to arbitration while settling territorial disputes. There are historical references which prove that arbitration has been in practice even before the times of Christ. In Arabic, the terms “arbitration” and “arbitrator” are known as “Tahkeem” and “Hakim” respectively. The first law for arbitration came into force in England in 1697.

II. Glimpse of Ancient Arbitration

A. Hindu Law

The concept of arbitration is not novel in India. The earliest known work is ‘Brhadaranayaka Upanishad’, authored by sage Yajnavalkya testifies to the prevalence of arbitration in the Vedic era. The treatise throws light on the three primary arbitral bodies, namely:

1. The Puga (the local courts comprising persons from different sects and tribes but residing in the same locality),
2. The Sreni (an assembly of tradesmen and artisans belonging to different tribes but connected through business/ profession),
3. The Kula (members bound by family ties and concerned with the social matters of a certain community).

These three bodies were collectively referred to as “Panchayat” and comprised of erstwhile arbitrators called “Panchas”. Proceedings before such courts were informal and free from cumbersome technicalities. The disputes dealt with by them were along the lines of arbitration principles, governed by legislation presently.

The decisions of these bodies were binding in nature and had credence attached to them, as observed in the case of Vytla Sitanna v. Marivada Viranna[i]. However, the aggrieved party was free to appeal against the decision of Kula to the Sreni, from Sreni to the Puga and finally to Pradvivaka. Some variants of such arbitral bodies still hold prevalence in rural and tribal India now.

B. Muslim Law

‘Hadiya’ is the commentary on Muslim Law written by Abu Hanifa, wherein Islamic law was systematically compiled. Hadiya lays down provisions for arbitration between parties. An arbitrator was required to possess the qualities essential for a Qazi, who is an official judge presiding over the proceedings of the court. In case both parties to the dispute are Muslims, the Shariah law governs the procedure, both procedurally and substantively. Such a court has all powers to enforce the awards; however, the issue or reasoning cannot be reviewed on its merits.

C. British Rule

The modern Arbitral Law in India was enacted through The Bengal Regulation Act of 1772, which evolved because of the successful dispute resolution between parties by a tribunal of choice. Later, Bombay Regulations Act, 1799 and Madras Regulations Act, 1802 put into effect the same laws in the Bombay and Madras presidencies, respectively.

III. Civil Procedure Code & The Genesis of Legislative Council

The first Legislative Council of India was formed in 1834, followed by the Civil Procedure Code Act 1859 for the purpose of codifying the procedure to be observed in Civil Courts, except in the ones established by the Royal Charter (Bombay, Madras, Calcutta). Arbitration in suits was dealt with by Sections 312 to 325, whereas arbitration without court intervention was covered in Section 326 and 327. This Act was revised by the Act of 1877, which was further repealed by the Act of 1882. Sections 506 to 526 stated the arbitration provisions mutatis mutantis.

The first codification of India’s arbitration law was the Arbitration Act of 1899, based substantially on the English Arbitration Act of 1899. The scope of its application was limited to the Presidency towns of Calcutta, Madras and Bombay. This Act only applied to disputes which were not the subject matter of any suit. Moreover, the statute made it compulsory for the names of arbitrators to be stated in the agreement; a sitting judge was eligible to be an arbitrator.

As per the observation of the Court in Gajendra Singh v. Durga Kunwar[ii], an arbitral award is a mere compromise between the parties. The Bombay HC, in Dinkarrai vs. Yeshwantrai[iii] pointed out that the Indian Arbitration Act was unnecessarily complex, and the legislature must bring in reforms to restore its relevance. Arbitration was further codified in Schedule II of the Civil Procedure Code, 1908 through which ADR provisions were extended to the majority of British India. However, this, too, proved to be inexpedient and technical.

IV. Arbitration Act 1940 – Controversies Surrounding It

The judicial reprimands, coupled with an uproar in the commercial sector, led to the enactment of the Arbitration Act, 1940. It was a comprehensive and more discrete piece of legislation as compared to the prior arrangement. The Act was previously extended to the whole of erstwhile India, which included Pakistan and Baluchistan, but had to be amended soon after the independence. Subsequently, the law governing arbitration was fragmented across the following statutes:

• The Arbitration Act, 1940
• The Arbitration (Protocol & Convention Act), 1937
• The Foreign Awards Act, 1961.

The first statute dealt with domestic arbitration, whereas the latter two involved recognition and enforcement of foreign awards under International Instruments. As widely as it was applied, the Arbitration Act of 1940 had several shortcomings. It was silent on the execution of foreign awards and hence, covered only domestic arbitrations. The Act, as observed in certain cases, went on to make a clear distinction between ‘an application for setting aside and an arbitral award’ and one for ‘a decision that the award granted is null’.

An application for the former could be made under Section 30, while the latter was mentioned in Section 33. Further, the Act ceased to acknowledge the relevance of an arbitration agreement. It is an established fact that the procedure is bound to fail if the agreement is invalid or non-existent. The Act made provisions to the effect that a court judgement must approve the validity of an award; this opened the way for undesired judicial intervention. All High Courts had different rules for filing awards which created complexities.

The Arbitration Act, 1940 did not mention the innate flaws in individual private contracts. No provision prohibited the arbitrator from resigning during the arbitration proceedings; this drawback caused huge losses to the parties. Moreover, the Act failed to offer any recourse to the parties in case of the death of the Court-appointed arbitrator. There was no provision for the appointment of another arbitrator. Marginal notes, being a significant internal aid, were not regarded as a part of the Act.

In the case of Guru Nanak Foundation v. Rattan Singh[iv], Justice Desai rightly observed the follows: “The way in which the proceedings under the Act are conducted and without exception challenged in Courts, has made Lawyers laugh and legal philosophers weep”.

The Law Commission of India, in its 1978 report, recommended extensive modifications in the Arbitration Act of 1940, considering the delays, commercial realities and conflicting decisions on various points.

V. Enforcement of Arbitration Act, 1996

The Act of 1940 attracted severe criticism as its work was far from satisfactory. Consequent to the recommendations of the Law Commission, The Arbitration and Conciliation Act, 1996, was enacted to repeal all three earlier statutes. The newly implemented legislation consolidated arbitral law in India and was designed on the UNCITRAL Model Law on International Commercial Arbitration.

The Act was enforced soon after India’s economy was liberalised in 1991. Rapid globalisation called for a speedy and cheaper form of the ADR process. It was responsive to present-day requirements and restricted court intervention, fostering cooperation between the judicial and arbitral processes.

The Act covers domestic and international commercial arbitration and conciliation. In such cases, the parties, along with the arbitrators, through a mutual agreement, decided that it was by the guidelines of the new law that the case was to be governed. Initially, it was held that the Court is empowered to pass interim orders under Section 9 of the Act, which has two stages:

1. court is free to pass orders during arbitral proceedings,
2. court can also pass order before the commencement of arbitral proceedings.

Post the implementation of the Act, CPC, 1908 was amended to add Section 89 which gives an option to the parties to settle their disputes through the various ADR processes.

VI. Arbitration Act 1940 vs Arbitration Act, 1996: A Juxtaposition

ACT OF 1940	ACT OF 1996
1. Based on the English Arbitration Act, 1934.	1. Based on the UNCITRAL Model.
2. Party could commence proceedings in court by filing an application under S.20 for the appointment of an arbitrator and for interim relief through Schedule II and S.41(b).	2. Does not include any provision like S.20 of 1940 Act, but the court is empowered to pass orders even before the arbitral proceedings commence.
3. No requirement to reason the awards unless agreed by parties.	3. Awards must be reasoned, minimising the scope of court interpretation.
4. An arbitrator was not a conciliator.	4. Recognised arbitrator as a conciliator.

Almost twenty years later, India’s reputation continued to deteriorate due to widespread criticism. Indian courts were known for their interventionist approach, as they exercised jurisdiction even over arbitral proceedings seated outside the nation. The ICC tribunal issued an award in the White Industries v. Republic of India[v], wherein the Indian Government was held responsible for not providing “effective means of asserting claims and enforcing rights”.

The practise of granting an automatic stay on the execution of the award as soon as it was challenged under Section 34 made it problematic. The landmark Supreme Court decision in Bharat Aluminium & Company v. Kaiser Aluminium Technical Service[vi] stated that Part I of the Act does not apply to Part II. It was observed that under Section 9, the Indian courts could not entertain interim applications in foreign seat arbitration. Neither could the 1996 Act set a time limit for making an award, nor could it regulate the exorbitant fees charged by the arbitrators. The Act evidently required several amendments, clarifications, and some reforms.

VII. Arbitration and Conciliation (Amendment) Act, 2015

Comprehensive amendments were brought into effect through the Arbitration and Conciliation (Amendment) Act, 2015. The alterations clearly showed their preference for institutional arbitration. Certain key points have been stated below:

• Section 2(e)-The definition of “court” was expanded.
• Section 7- An electronic Arbitration Agreement shall be considered as one in writing.
• Section 8- The judicial authority may refer the case to arbitration in case of no valid agreement.
• Section 9– Arbitral Tribunal was empowered to pass interim orders.
• Section 11– SC and HCs to appoint the arbitrator and frame rules for the regulation of fees.
• Section 12– A person approached to act as an arbitrator must prove his neutrality by disclosing related details.
• Section 29A– Completion of proceedings within 12 months of reference.
• Section 29B– A new provision for fast-track proceedings was introduced.
• Section 36– Mere filing of an application for setting aside an order would not render the award unenforceable unless the Court makes an order to that effect.

VIII. Amendment of 2019

The Arbitration and Conciliation (Amendment) Act, 2019 was based on the recommendations of B.N. Srikrishna Committee which furthered the idea of an arbitration-friendly eco-system. It has effectively addressed the ambiguities of the 2015 Amendment. Some key changes were as follows:

• Section 43B- Establishment of an Arbitration Council of India to promote all ADR mechanisms and act as an agency to secure uniformity of policies in arbitration.
• Section 11- It has been modified to allow SC and HCs to delegate the appointment of an arbitrator to the Council or a panel.
• Section 29A- The provision was altered to fix a timeline for completion of arbitration, which is 18 months from the date of completion of pleadings.
• Section 34- The grounds for setting aside a domestic arbitral award were altered; any party seeking to set aside an award on the grounds of fraud had to furnish proof.
• The Amendments of 2019 clarified that the 2015 Amendment was made applicable prospectively.
• With the change in qualifications of the appointment of arbitrators, certain classes of people have been allowed to be accredited as arbitrators. Such as advocates, officers in public/ private bodies, other technical professionals etc.
• The Amendment Act reinforced that the principle of confidentiality must be observed in all arbitral proceedings.

IX. Conclusion and Road Ahead

India is taking steps in an attempt to establish itself as an arbitration-friendly jurisdiction. There have been several changes in the law through amendments, government impetus and preference for arbitration in the resolution of disputes that are commercial. The interplay of courts and tribunals is crucial as the present amendments aim at strengthening their relationship.

The success of newly incorporated provisions and India’s ability to attract parties as a workable arbitration destination depends largely on the ground reality of implementation and cooperation of parties and court. While India is still trying to keep up with the fast-paced development in the field of arbitration, the current signs of change are reassuring.

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Author: Shreya Shree Singh & Ishaan Tyagi

Amity Law School, Noida

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[i] AIR 1934 PC 105

[ii] (1925) ILR 47 All 637

[iii] AIR 1930 Bom 98

[iv] (1981) 4 SCC 634

[v] Final award, IIC 529 (2011)

[vi] (2012) 9 SCC 552

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