Full Contents List

• International Overviews
  1. Designating the Administrator for International Commercial Arbitrations
  2. International Arbitration in Asia
• Country Overviews
  1. Australia
  2. Canada
  3. China
  4. Hong Kong
  5. India
  6. Malaysia
  7. Singapore

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The Arbitration Act, 1940 (the 1940 Act) governed the law relating to arbitration until it was replaced by the Arbitration and Conciliation Act, 1996 (the 1996 Act).

The 1940 Act had a number of drawbacks, including provisions for court intervention at a number of stages in the proceedings, which resulted in delays. The 1996 Act remedied these procedural defects. It was enacted to cover comprehensively international commercial arbitration and conciliation as well as domestic arbitration and conciliation. It aimed to make the arbitral process fair, efficient and capable of meeting the needs of arbitrations. The 1996 Act introduced, among others, the following changes:

• the arbitral tribunal must give reasons for passing an award and must remain within the limits of its jurisdiction;
• an arbitral award must be enforced in the same manner as if it were a decree of a court;
• the arbitral tribunal is permitted to use conciliation during arbitral proceedings to encourage settlement of disputes (with a view to minimising the supervisory role of the courts in the arbitral process);
• a settlement agreement reached by the parties as a result of conciliation proceedings will have the same status and effect as an arbitral award on agreed terms on the substance of the dispute rendered by the arbitral tribunal;
• for purposes of enforcement of foreign awards, every arbitral award made in a country to which one of the two international conventions relating to foreign arbitral awards to which India is a party applies, will be treated as a foreign award.

The 1996 Act consolidated the various laws prevalent in India relating to arbitration and enforcement of foreign awards into one single statute. It also introduced a new chapter on conciliation in order to promote conciliation and mediation as alternative modes of dispute resolution in India.

The 1996 Act is divided into four parts: part I deals with domestic arbitrations, where the seat of arbitration is in India; part II deals with provisions relating to enforcement of New York Convention awards and Geneva Convention awards in India; part III deals with disputes that can be settled by conciliation; and part IV deals with certain supplementary provisions.

The 1996 Act is based on the UNCITRAL Model Law and is largely a reproduction of the latter's provisions. This has resulted in some problems, particularly on the domestic side.

Part I of the 1996 Act

An 'arbitration agreement' has been defined to mean an agreement by the parties to submit to arbitration all or certain disputes that have arisen or may arise between them in respect of defined legal relationships, whether contractual or not.

Section 8 is the reference provision and enables a judicial authority before which an action has been brought relating to the subject matter of the arbitration agreement to refer the parties to arbitration.

Section 9 empowers the court to take certain interim measures of protection including granting of interim injunctions, preservation, interim custody, sale of goods, appointment of receivers, etc. The Supreme Court of India in the case of Bhatia International v Bulk Trading SA concluded that provisions such as section 9 of the 1996 Act relating to interim measures of protection by the court were: 'general provisions which are applicable to international commercial arbitrations held outside India, unless excluded either expressly by a statute or by an agreement between parties, or by implication'.

Thus it is open for parties in an international arbitration with the seat of arbitration outside India to apply for interim measures of protection within India where the assets relating to the dispute are located in India. In a recent case, Arvind Construction Co v Kalinga Mining Corporation, the Supreme Court applied the provisions of the Specific Relief Act, 1963 while granting injunctions under the 1996 Act.

Under the provisions of the 1996 Act, the arbitral tribunal can consist of either a sole arbitrator or an odd number of arbitrators. If the arbitral tribunal is to consist of more than one arbitrator, then the 1996 Act provides that either party can appoint their nominee arbitrator and the appointed nominee would further appoint a third arbitrator who would be the presiding arbitrator. This is different from the 1940 Act, wherein it was permissible to appoint an even number of arbitrators and an umpire to whom the disputes were to be referred to in the event of a deadlock. Section 10 of the 1996 Act provides that the number of arbitrators cannot be an even number. In Narayan Prasad Lohia, the Supreme Court held that parties would be entitled to derogate from the provisions of section 10 of the 1996 Act and an award by two arbitrators would not be void. If either of the parties fails to make an appointment under the agreed appointment procedure then the other party may make a request to the chief justice or a person or institution designated by him to take the necessary measure. The arbitration agreement entered into by the parties can provide for other means of securing the appointment, for example by delegating the appointing function to an institution.

Section 11(6) of the 1996 Act provides for intervention of the chief justice in appointing arbitrators where there is failure under the appointment procedure agreed upon by the parties. The framers used a language different from the Model Law. The question that arose was whether the chief justice to whom the power was conferred to take the necessary measure of making an appointment was exercising powers in a 'judicial capacity' or in an 'administrative capacity'. The 1996 Act only refers to the power of the chief justice to take the 'necessary measures' for the appointment of arbitrators in case of default by the parties. The UNCITRAL Model Law provided that the 'court' would have the power to make the appointment. The controversy was ultimately resolved by the Supreme Court in the case of SBP & Co v Patel Engineering. A bench consisting of seven judges held that the power conferred by section 11 of the 1996 Act was a judicial power and the chief justice had to act in his judicial capacity and not in an administrative capacity. The chief justice has the power to decide certain preliminary issues such as existence of a valid arbitration agreement, existence of a live claim, existence of conditions for the exercise of power and qualifications of the arbitrator or arbitrators.

While making an appointment of an arbitrator, the chief justice or any institution designated by him is required to give due consideration to the qualifications of the arbitrator by the agreement of parties. The chief justice is also required to have due regard to other considerations as are likely to secure the appointment of an independent and impartial arbitrator. In order to speed up the process in cases of international commercial arbitrations, the application for appointment of an arbitrator has to be made directly to the chief justice of India, namely, to the Supreme Court of India. The decision of the chief justice on the issue of appointment in an international commercial arbitration is final and is not appealable. In an international commercial arbitration, the chief justice of India has the discretion to appoint arbitrators of nationalities other than the nationalities of the parties.

Section 2(1)(f) of the 1996 Act defines an 'international commercial arbitration' as one in which at least one of the parties is a resident of a country other than India, or a body corporate incorporated in any country other than India, or a company or association or a body of individuals whose central management and control is exercised in any country other than India. An arbitration with the government of a foreign country is also considered to be an international commercial arbitration.

A major difference between an international commercial arbitration with its seat in India and a domestic arbitration is that in an international commercial arbitration there exist provisions for expedited appointment of arbitrators by directly approaching the Supreme Court. The other difference is that unlike in a domestic arbitration, in an international commercial arbitration, the parties are free to choose the law applicable to the substance of the dispute for governing the arbitral proceedings.

Section 12 of the 1996 Act provides the grounds on which an arbitrator can be challenged. The appointment of an arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or the arbitrator does not possess the qualifications agreed to by the parties.

The mandate of an appointed arbitrator would terminate if the arbitrator becomes de jure or de facto unable to perform his functions. Unlike the 1940 Act, the 1996 Act does not provide for any time limit within which the arbitral tribunal is to give its award. Thus if the arbitral tribunal fails to act without undue delay in conducting the arbitration proceedings it can create grounds for terminating the mandate of the arbitrators. The arbitral tribunal has the power to rule on its own jurisdiction, including ruling on any objections with respect to the existence and validity of the arbitration agreement. The arbitral tribunal also has the power to order a party to take interim measures of protection in relation to the subject matter of the dispute and to provide appropriate security in relation to a measure ordered by the tribunal.

The arbitral tribunal is not bound by any procedural rules other than those agreed upon by the parties. The arbitral tribunal is not bound to follow the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872 and can decide the dispute in accordance with the terms of the contract and the substantive law in force in India. Decision-making by the arbitral tribunal is by the majority of its members.

Under the 1996 Act (unlike the 1940 Act), the arbitral tribunal is required to give reasons in the award, unless the parties agree otherwise. The arbitral tribunal has also been conferred with the power to award costs and apportion costs between the parties. A specified period is also prescribed within which parties can go back to the arbitral tribunal for correction and interpretation of the award or for giving of an additional award, something also not provided under the 1940 Act.

The arbitration award made by the arbitral tribunal is open to challenge on the grounds mentioned in section 34 of the 1996 Act. These grounds include incapacity of a party, invalidity of the arbitration agreement, improper notice of appointment of the arbitrators, dispute not contemplated by or not falling within the terms of the arbitration, composition of the arbitral tribunal not in accordance with the agreement of the parties, dispute incapable of settlement by arbitration under the law for the time being in force and the award being in conflict with the public policy of India.

The grounds of challenge under the 1940 Act were very wide and included grounds such as 'errors of law arising on the face of the award' making them more open to the challenge procedure. The 1996 Act has very limited grounds of challenge based on the UNCITRAL Model Law. Apart from jurisdictional grounds, the arbitral award made by the arbitral tribunal can be set aside if the award is in conflict with the public policy of India.

Recently, in ONGC v Saw Pipes, the Supreme Court interpreted the meaning of 'public policy' in a wide sense in case of a domestic arbitration. It held that an arbitral award could be challenged on the ground that it is:

• contrary to fundamental policy of Indian law; the interest of India; or justice or morality; patently illegal; or
• so unfair and unreasonable that it shocks the conscience of the court.

Illegality of a trivial nature, however, can be ignored. Under the 1996 Act, awards that have become final and binding are enforceable in the domestic courts system in India and are deemed to be decrees of the court.

The 1996 Act provides for appeals against orders granting or refusing to grant interim measures of protection and orders setting aside or refusing to set aside the arbitral award. Orders concerning the jurisdiction or authority of the tribunal or award are also appealable. The appellate court is usually the High Court. No other statutory appeal is provided. Any subsequent appeal can go only to the Supreme Court by way of a special leave.

Part II of the 1996 Act

Part II deals with enforcement of New York Convention awards and Geneva Convention awards and empowers Indian courts to refer matters coming before them to arbitration where the seat of arbitration is outside India.

In Shin Estu Chemicals, the Supreme Court ruled that any objection raised about the agreement being null and void, inoperative or incapable of being performed raised before a judicial authority is required to be decided by the Court by taking a prima-facie view merely for the purpose of making reference and leaving the parties to a full trial before the arbitral tribunal itself or before the Court at the post award stage.

Section 48 of the 1996 Act enumerates the conditions for the refusal to enforce a foreign award in an Indian court. Thus if the subject matter of the dispute or difference is not capable of settlement by arbitration in India or if the enforcement of the award was contrary to public policy of India, the court may refuse to enforce the award. Once, however, the court is satisfied that the award can be enforced in India, then the same is deemed to be decree of the court.

Part III of the 1996 Act

Part III has provisions relating to conciliation and is new. No such provision existed in the 1940 Act.

Under the 1996 Act, a conciliator is required to keep all matters relating to conciliation confidential, except where disclosure is necessary for the purpose of implementation and enforcement.

Even though the number of international commercial arbitrations in India are growing, most arbitration agreements provide for seat of arbitration outside India. The preferred venues of arbitration are usually London and Singapore. In recent times Dubai has also become an attractive arbitration centre, particularly since it acceded to the New York Convention. This is largely on account of the fact that the court process in India is slow and hence the parties do not want to subject themselves to the jurisdiction of the country's courts.

There is also a lack of reputable arbitral institutions in India. An effort is being made by a number of recognised international institutes such as the ICC, LCIA and SICA to increase their exposure in India.

The Indian parliament is proposing to amend the 1996 Act to overcome some of the difficulties being faced. The law, once amended, will pave the way for a much better and speedier arbitration regime in India.

A Y Chitale & Associates

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