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Evolution Of The Arbitration Law In India

History Of Arbitration Law In India

Frances Kellor, the only female founder of the American Arbitration Association, in her book, “American Arbitration: Its History, Functions, and Achievements” has put it briefly about arbitration and 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.”

According to the biblical theory, King Solomon was the first arbitrator who settled the issue between two women who were claiming to be the mother of a baby boy. The assertions made by a few are also 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 the settlement of territorial disputes in Greece as far back as 337 B.C. In later times, arbitration owed its beginnings to commercial disputes as it started with trade disputes being resolved by peers as early as the Babylonian days.

In India, the arbitration was conceived in the system called the Panchayat. Indian civilization encouraged the settlement of differences by tribunals chosen by the parties themselves. The course of arbitration flourished in India since the end of the nineteenth century. Arbitration in India was recognized by more specific legislation, the Indian Arbitration Act, 1899. However, it was confined only to the three presidency towns i.e. Madras, Bombay, and Calcutta.

Further, arbitration was codified in Section 89 and Schedule II of the Code of Civil Procedure, 1908. According to Section 89 and Schedule II of the Code of Civil Procedure, 1908 the provisions of arbitration were extended to apply to different regions of British India to which the Act of 1899 was not extended.


Development Of Arbitration Law In India

After tracing the history of the Arbitration Law in India, it is also important to understand how the Indian Arbitration Law had evolved and developed to align with the foreign arbitration laws. This would help India achieve its long-term dream of becoming an arbitration hub.

The arbitration law has evolved itself with the changing circumstances and therefore, the law has evolved from the Arbitration Act, 1940 to the recent Arbitration and Conciliation (Amendment) Act, 2019 in the following manner:
  1. Arbitration Act, 1940
    However, the Act of 1899 and the provisions of the Code of Civil Procedure, 1908 were injudicious and more technical, and thus, Arbitration Act, 1940 came into existence and repealed the earlier Arbitration Act, 1899 along with the relevant provisions of the Code of Civil Procedure, 1908. The prominent feature of the Arbitration Act, 1940 was that it only dealt with domestic arbitrations but was unsuitable to the enforcement of foreign awards. The Arbitration Act, 1940 failed to serve the purpose as its working was far from satisfactory.

    The arbitral regime then was premised largely on a mistrust of the arbitral process, and the same was the subject of much adverse comment by the courts. The Hon'ble Supreme Court in F.C.I. v. Joginderpal Mohinderpal, had observed that the law of arbitration should be made simple, less technical, and more responsible and should 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.

    Justice D.A. Desai of the Hon'ble Supreme Court in Guru Nanak Foundation v Rattan Singh , voiced the ineffective working of the Arbitration Act, 1940 wherein he laconically 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."

    The Arbitration Act, 1940, did not deal with enforcement of foreign awards and therefore, a separate law, Foreign Awards (Recognition and Enforcement) Act, 1961 was enacted for the enforcement of awards under the Geneva Convention, 1927 and New York Conventions to which India was a signatory.

    However, the working of this legislation was also found to be unsatisfactory due to judicial intervention. In 1977, the functioning of the 1940 Act was questioned and examined by the Law Commission of India on grounds of delay and hardship caused due to clogs that affect smooth arbitral proceedings.

    The Commission recommended amendment of certain provisions of the Act rather than reworking the entire framework. Consequently, the Arbitration and Conciliation Act, 1996, based on the 1985 United Nations International Commission on International Trade Law (UNICTRAL) model law and rules, was enacted.
  2. Arbitration and Conciliation Act, 1996
    Even though the Arbitration Act, 1940 attracted severe criticism from the bar ad the bench, no amendments were brought in to improve the working of the 1940 Act. In 1991, after the major economic reform, steps were taken to attract foreign investment which required a comfortable business environment and ease of doing business. It is for this reason, Arbitration and Conciliation Act, 1996 was brought into force and it 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 and strengthen the confidence of the foreign investors in ease of doing business.

    Conversely, there was a conflict in the working of the Arbitration and Conciliation Act, 1996. The controversy arose because the Hon'ble Supreme Court of India in Bhatia International v. Bulk Trading S.A. and Another held that Part I of the 1996 Act will apply even to arbitrations seated outside India unless it was expressly or impliedly excluded. Yet, on a similar question of law, the Hon'ble Supreme Court of India in:
    • Venture Global Engineering v Satyam Computer Services Ltd.,
    • Indtel Technical Service v. W.S. Atkins,
    • Citation Infowares Ltd. v. Equinox Corporation,
    • Dozco India v. Doosan Infrastructure, and
    • Videocon Industries v. Union of India,

    had held that part I of the 1996 Act would apply to the foreign arbitrations seated outside.

    The above decisions of the Hon'ble Supreme Court of India were widely criticized for adopting a regressive approach as it increased judicial intervention even in the foreign seated arbitration. However, after a decade the Hon'ble Supreme Court settled this issue in Bharat Aluminium and Co. v. Kaiser Aluminium and Co., (herein referred to as BALCO) wherein it held that that Part I of the Act does not apply to Part II of the Act as Part I and Part II were mutually exclusive of each other. The effect of BALCO judgment was that the Courts in India could not entertain interim applications under Section 9 of the Act in foreign seated arbitrations that were governed by Part II of the Act.

    However, the Arbitration and Conciliation Act, 1996 suffered from various problems including high costs and too much intervention of Courts. Under the 1996 Act, if an application u/s 34 of the Act was made to set aside an award, it would make an award inexecutable. Because the moment a section 34 application was filed, an automatic stay would be granted on the execution of the award.

    Further, there was no time limit within which the arbitrator had to make an arbitral award, due to which, arbitral proceedings continued for years. Another issue with the 1996 Act was that the cost involved in Arbitration was sometimes even more than the cost of litigation or the relief sought and thus was against the ethos of the Act of 1996.
     
  3. The Arbitration and Conciliation (Amendment) Act, 2015
    To consider the issues such as costs, delay, judicial intervention 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 to the 1996 Act.

    Some important amendments were made in the Arbitration and Conciliation Act, 1996 not only to correct the defects of the earlier law but also to make the present arbitration law in line with the other foreign arbitration laws thereby focusing on achieving the objective of making India an arbitration center.

    Some major amendments which were made are as follows:
    • 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.
    • 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.
    • Section 17 was also amended which gave the arbitral tribunal all powers of the Court under Section 9.
    • The time limit for making an arbitral award was also 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.

      Despite the amendments, a key issue which was brought about by the 2015 amendment was that whether Section 36(2) applied to pending arbitral proceedings under Section 34 of the Act. But the issue was settled by the Hon'ble Supreme Court in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (herein referred to as BCCI) wherein it held that the amended section 36 applied even to pending section 34 applications on the date of commencement of the Arbitration Amendment Act, 2015.

      In BCCI judgment (supra), the Hon'ble Supreme Court had also stated the effect of Section 87 of the proposed Arbitration and Conciliation (Amendment) Bill, 2018 and said that the same would set the clock in an anti-clockwise direction and would be contrary to the objective of the Amendment Act, 2015. Despite the findings of the Hon'ble Supreme Court, the Parliament introduced Section 87 by Arbitration and Conciliation (Amendment) Act of 2019.

      Subsequently, the vires of Section 87 was challenged in Hindustan Construction Company Limited v. Union of India and the Hon'ble Supreme Court struck down the insertion of Section 87 to Arbitration and Conciliation (Amendment) Act, 2019 as manifestly arbitrary and against the ethos of the objective that was sought to be achieved by the principle act.

      A long controversy concerning unilateral appointments was also been put to rest by the Hon'ble Supreme Court in Perkins Eastman Architects DPC & Anr. V. HSCC (India) Ltd wherein the Court held that a person who has an interest in the outcome or decision of the disputes should not have the power to appoint a sole arbitrator.
       
  4. The Arbitration and Conciliation (Amendment) Act, 2019
    The Arbitration and Conciliation (Amendment) Act, 2015 though addressed a large number of issues, certain issues still prevailed in the arbitral process, one such issue being lack of institutional arbitration culture in the country as most of the arbitrations were ad hoc. The intent of the government was to make India a center for domestic and international arbitration and consequent to which a High-Level Committee, headed by Justice B.N. Srikrishna, Retired Judge, Supreme Court of India, was constituted to review the institutionalization of arbitration mechanisms in India.

    Subsequent to which, on 9th August 2019, the Arbitration and Conciliation (Amendment) Act, 2019 was passed. The main objective of this amendment was the implementation of an effective arbitration structure, promote institutional arbitration, and to resolve some uncertainties resulting from the 2015 amendment.

    Some of the most crucial amendments are as follows:
    • Arbitration Council of India (ACI) was introduced for the advancement of various forms of alternative dispute resolution like conciliation, mediation, and arbitration and to promote institutional arbitration in the country.
    • A mandatory grading of the arbitral institutions by the ACI was also introduced.
    • A time period of 30 days for the appointment of an arbitrator, from the date of acceptance of the request, by the arbitral institutions was also made compulsory.
    • The Eighth Schedule was also inserted which provided various norms, qualifications, and experiences for endorsement of arbitrators.
    • Section 29 A was amended to modify the timelines for carrying out the process of arbitration as a step towards a swift resolution.

The 8th Schedule as inserted by the Amendment Act of 2019 specified 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. This clause raised several doubts as to whether this applied even to the foreign arbitrators or not.

The same was answered by the Hon'ble Law Minister in a clarification that the 8th schedule did not apply to international commercial arbitrations. But be that as it may, the Arbitration and Conciliation (Amendment) Act, 2019 is progressive in nature and has given more clarity to the Arbitration and Conciliation (Amendment) Act, 2015.

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