History and development of Arbitration Law in India

The article traces the history of arbitration and its advent and development in India.
 Tariq Khan, Muneeb Rashid Malik
Tariq Khan, Muneeb Rashid Malik

The only female founder of the American Arbitration Association Frances Kellor in her book, ‘American Arbitration: Its History, Functions and Achievements’ has put it pithily when she said “Of all mankind’s adventures in search of peace and justice, arbitration is amongst the earliest. Long before laws were established, or courts were organized, or judges formulated principles of law, men had resorted to arbitration for the resolving of discord, the adjustment of differences, and the settlement of disputes.

Frances Kellor, ‘American Arbitration: Its History, Functions and Achievements
Frances Kellor, ‘American Arbitration: Its History, Functions and AchievementsWikipedia

As per the biblical theory, King Solomon was the first arbitrator when he settled the issue between two women who were claiming to be the mother of a baby boy. Some authors have also asserted that the procedure used by King Solomon was similar to that used in arbitrations today. Arbitration was also used by Philip the Second, the father of Alexander the Great, for settlement of territorial disputes in Greece as far back as 337 B.C. Incidentally, around 600 B.C., in a dispute between Athens and Megara, for the possession of island of Salamis, the matter was referred to five Spartan judges who eventually allotted the island to Athens. Thus, International Arbitration can readily be traced back to the ancient world.

The course of arbitration flourished in India since the end of nineteenth century. Arbitration in India was statutorily recognized as form of dispute resolution for the first time when Indian Arbitration Act, 1899 was enacted however, it was confined to the three presidency towns only i.e. Madras, Bombay and Calcutta. It was further codified in Section 89 and Schedule II of the Code of Civil Procedure, 1908, where provisions of arbitration got extended to different regions of British India to which the Act of 1899 was not extended. The Act of 1899 and the provisions of the Code of Civil Procedure, 1908 were found to be inexpedient and more technical and thus, Arbitration Act, 1940 came into existence and repealed the Act of 1899 along with the relevant provisions of the Code of Civil Procedure, 1908. The Act of 1940 was a reflection of the English Arbitration Act, 1934 and was a comprehensive legislation on the subject but it had no provisions to deal with enforcement of foreign awards and hence, dealt only with domestic arbitrations. The Act of 1940 could not achieve its purpose as its working was far from satisfactory. Justice D.A. Desai voiced the malaise of the Indian courts and the ineffective working of the 1940 Act in Guru Nanak Foundation v Rattan Singh, (1981) 4 SCC 634, wherein he succinctly stated:

"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 Arbitration Act, 1940. However, 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."
Guru Nanak Foundation v Rattan Singh

Though, the 1940 Act attracted severe criticism and adverse remarks from the Courts however, no amendments were brought in to improve the working of the 1940 Act. After the economic liberalisation in the year 1991, steps were taken to attract foreign investment which required a comfortable business environment and ease of doing business. For the said reason, Arbitration and Conciliation Act, 1996 came into force and repealed the Act of 1940. Interestingly, the Act of 1996 was based on UNCITRAL Model Law on International Commercial Arbitration, 1985 and covered both domestic and international arbitration. The main reason for introducing the Act of 1996 was to curb delays in arbitration.

In the working of the 1996 Act, a controversy arose when the Supreme Court of India in the case of Bhatia International v. Bulk Trading S.A. and Another (2002) 4 SCC 105, held that Part I of the 1996 Act will apply even to arbitrations seated outside India unless it was expressly or impliedly excluded. In a similar vein, the Supreme Court gave the judgment in Venture Global Engineering v Satyam Computer Services td (2008) 4 SCC 190. These decisions were widely criticized for adopting a regressive approach. This issue was thereafter, settled in Bharat Aluminium and Co. v. Kaiser Aluminium and Co., (2012) 9 SCC 552, in which the Supreme Court held that Part I of the Act does not apply to Part II of the Act. As per the judgement in BALCO, the Courts in India could not entertain interim applications under Section 9 of the Act in foreign seated arbitrations which were governed by Part II of the Act.

Despite the best efforts of the legislature to make India a robust hub of arbitration, the 1996 Act suffered from various problems including high costs and too much intervention of Courts. Under the 1996 Act, a challenge to an Award under Section 34 would make an Award inexecutable as there was a practice of granting an Automatic Stay on the execution of Award the moment Section 34 was filed. Further, there was no time limit for making an arbitral award due to which, arbitral proceedings continued for years. Another issue with 1996 Act was that some of the Arbitrators charged exorbitant fee which was against the ethos of the Act of 1996.

Ministry of Law and Justice
Ministry of Law and Justice

To address these concerns, on April 8, 2010, the Ministry of Law and Justice invited suggestions from eminent lawyers, jurists and legal experts of the country regarding the functioning of the Act of 1996. Thereafter, the Arbitration and Conciliation (Amendment) Act, 2015 was passed and certain amendments were made in the 1996 Act. Interestingly, a proviso to Section 2(2) was added which provided that subject to an agreement to the contrary, the provisions of Sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of Section 37 shall also apply to international commercial arbitrations. Moreover, Section 9 was also amended to state that once the arbitral tribunal is constituted, the Court shall not entertain an application unless circumstances demand so, thereby, minimizing the intervention of the Court. Additionally, Section 17 was also amended and teeth were given to the Order passed by the Arbitral Tribunal. The amendment gave the arbitral tribunal all powers of the Court under Section 9. Incidentally, the time limit for making an arbitral award was fixed to be twelve months after the arbitral tribunal was constituted and this was inserted in the Act of 1996 by virtue of Section 29A (2015 amendment). Section 34 of the Act of 1996 was also amended and the scope of interference by Courts was reduced. As per the amended Section 34, an award will be against public policy of India only if it was affected by fraud or corruption, it is in contravention with the fundamental policy of Indian law; or it is in conflict with the most basic notions of morality or justice.

A major issue which was brought about by the 2015 amendment was whether Section 36(2) applied to pending arbitral proceedings under Section 34 of the Act. This issue was dealt in the case of Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (2018) 6 SCC 287, wherein the Supreme Court held that Amended Section 36 applies even to pending Section 34 applications on the date of commencement of the Arbitration Amendment Act, 2015. Although, the Court specifically opined in the BCCI judgment that Section 87 of the proposed Arbitration and Conciliation (Amendment) Bill, 2018 would put all the amendments on a back-burner and would be contrary to the objective of the Amendment Act, 2015, Section 87 was still introduced by Amendment Act of 2019. Section 87 was subsequently challenged in the case of Hindustan Construction Company Limited v. Union of India, (2019) SCC OnLine SC 1520, the Supreme Court struck down the insertion of Section 87 to Arbitration Act by 2019 Amendment as Manifestly Arbitrary.

Another issue which was going on for long in the country was Seat v. Venue. The Supreme Court has addressed the issue in the case of Bgs Sgs Soma Jv vs Nhpc Ltd. Civil Appeal No. 9307 of 2019 decided on 10.12.2019, and held that designation of a seat confers exclusive jurisdiction on the Courts of the said seat; and a place of arbitration, regardless of its designation as a seat, venue or place, is the juridical seat of arbitration unless there is an indication to the contrary. The Supreme Court observed that the judgment in Hardy Exploration and Production (India) Civil Appeal no. 4628 of 2018 decided on 25.09.2018 is incorrect as it does not correctly follow the five-judge bench decision in BALCO.

A long controversy with regard to unilateral appointments has also been put to rest by the Supreme Court recently. In the case of Perkins Eastman Architects DPC & Anr. V. HSCC (India) Ltd Arbitration Application No. 32 of 2019 decided on 26.11.2019, the Court held that a person who has an interest in the outcome or decision of the disputes must not have the power to appoint a sole arbitrator.

The Amendments of 2015 addressed a large number of issues however, certain issues were still prevailing in the arbitral process, one such issue being lack of institutional arbitration culture in the country as most of the arbitrations were ad hoc. On 13th January, 2017 a High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India, headed by Justice B.N. Srikrishna, Retired Judge, Supreme Court of India, was constituted.

Considering the suggestions of the Committee, on 9th August, 2019, the Arbitration and Conciliation (Amendment) Act, 2019 was passed and Arbitration Council of India (ACI) was introduced. As per the Amendment Act of 2019, the main tasks of ACI are to promote and encourage ADR in the country, grade the arbitral institutions and arbitrators in the country, and help in boosting the institutional arbitration in the country. Under the Arbitration Act, there was no provision of second appeal but losing party started filing second appeals under the Commercial Courts Act which created a lot of problems, therefore, by virtue of the 2019 Amendment, in Section 37(1) of the Act, the words “An appeal”, were substituted by the words “Notwithstanding anything contained in any other law for the time being in force, an appeal”. The most controversial amendment of 2019 was the insertion of 8th schedule which specifies that a person shall not be qualified to be an arbitrator unless he is an advocate within the meaning of the Advocates Act, 1961 having ten years of practice experience as an advocate. The same was criticised profusely as there was a confusion that whether this applies to foreign arbitrators or not. Recently, the Hon’ble Law Minister clarified that 8th schedule does not apply to international commercial arbitrations.

The 2019 Amendment Act has taken a progressive approach and given more clarity to the 2015 Amendment Act. Interestingly, certain provisions of the 2019 Amendment Act have not yet been notified and we have to see how these amendments will be implemented and a lot will depend on the functioning of Arbitration Council of India. We can only hope that the arbitrations in India are conducted as per the views expressed by Justice Sabyasachi Mukharji in the case of F.C.I. V. Joginderpal Mohinderpal (1989) 2 SCC 347, wherein he lucidly elucidated that:

“We should make the law of arbitration simple, less technical and more responsible to the actual realities of the situation, but must be responsive to the canons of justice and fair play and make the arbitrator adhere to such process and norms which will create confidence, not only by doing justice between the parties, but by creating a sense that justice appears to have been done.”

The authors are Tariq Khan, Principal Associate at Advani & Co. and Muneeb Rashid Malik, 4th year student at Lloyd Law College.

Bar and Bench - Indian Legal news