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Arbitration Law In India Through The Years

Arbitration is sometimes portrayed as only a procedural tool for resolving contract disputes.

Procedural benefits include the fact that:
  1. Arbitrators can be chosen for their expertise in matters relevant to a dispute, reducing the potential for judicial error as well as the time costs and expenditures on dispute resolution when compared to litigation;
  2. Arbitration is more likely to sustain repeat-dealing relationships because it is a less adverbial procedure than litigation.
The main idea of this research paper is to figure out the role and importance of arbitration and what's the people's idea/viewpoint on arbitration.

The paper brings into light the advantages of solving a dispute through arbitration rather than going to a court because most of the people in India or around the world aren't aware of arbitration and perks involved along with it. A deep analysis is carried out to find out the reason for the low popularity or success rate of arbitration in India.

Introduction
When two individuals meet together for the sake of a transaction or commerce, it has been observed that misunderstanding and conflict are prevalent. Such misunderstandings and conflicts must be resolved quickly and effectively. Aside from litigation, there are various alternative dispute resolution procedures that are both rapid and successful. Arbitration is one of these procedures.

Fundamentally, arbitration is a method of conflict settlement in which the disputants settle their differences with the help of a neutral third party known as an arbitrator.
Arbitration may be traced back to King Solomon's time, when he utilized biblical doctrine to settle a disagreement between two women who were both claiming the right to a newborn boy, and the question was who was the genuine mother of a baby boy[1].

All monarchs utilized arbitration to settle economic and territorial conflicts after then. Arbitration is not a new concept in India; it has been practiced since the Vedic era. Throughout our country's history, the law of arbitration has been changing and developing.

During the Industrial Revolution, global industry and trade grew at a breakneck pace. Arbitration is considered as the ideal conflict resolution process to keep up with fast economic progress and avoid stretched litigation. Currently, the court system is still dealing with a significant backlog of pending cases, making a quick resolution a pipe dream for litigants who are afraid of losing their case due to a delay in resolving the matter.

When laws pertaining to arbitration are passed, various gaps are discovered, leading to the passage of the current Arbitration and Conciliation Act, 1996, which is based on the UNCITRAL model. This act was amended again in 2003, 2015, and 2019.

Since its establishment in 1940, India's arbitration law has been on the rise. The current arbitration legislation is a compilation of numerous proclamations and ordinances issued by the Indian government in response to the country's ongoing economic changes. The Act of 1996 is the major source of Indian arbitration law.

Arbitration is the buzz word in the present-day business contracts. The law bestows a choice upon the parties to enter into commercial transactions knowing well that in case, of a dispute, they will refer their dispute to this simple, quick, convenient and cost-effective process saving them from tedious and complicated procedures of a court. The Act covers both Domestic and International Arbitration. This article deals primary with domestic elements which also govern key elements of International Arbitration.

Evolution And Development of Law of Arbitration in India

Hindu Law

Arbitration is not a new practice; it has been practiced since the Vedic era, as evidenced by the Pradvivaca Upanishad. The Brhadaranayaka Upanishad, authored by sage Yajnavalkya, was the first book to discuss the frequent usage of arbitration in the Vedic era.

There were also three separate arbitral bodies mentioned:

  1. The Puga were a collection of individuals who belonged to different tribes and sects but lived together in the same area.
  2. The Sreni, a council of artisans and tradesmen who came from many tribes and sects but were linked by their common vocation.
  3. The Kula is a group of individuals who are members of the same family and are linked by family connections. These entities were collectively known as panchayats, and the members of these panchayats were known as Panchas.

These panchayats had hearings that were more casual in character and lacked the formalities of a municipal court. These panchayats' rulings and judgements were final and irrevocable for both sides. A party who is dissatisfied with the kula's judgment can appeal to the sreni, and if the sreni's decision is unsatisfactory, it can appeal to the puga.

If a party is dissatisfied with the puga's judgment, it may file an appeal with the Pradvivaca. Despite the fact that these panchayats were non-governmental, municipal courts had the authority to review their judgments. These panchayats used to deal with a variety of problems, including marital and commercial disputes, as well as criminal disputes. The King used to be the final judge of all disagreements.

However, as the social, cultural, and economic context of the country evolved, the operation of such arbitral organizations became outdated and insufficient in certain ways, although these arbitral bodies remain widespread in rural India.

Muslim Law

In the commentary known as the Hedaya, Imam Abu Hanifa and his students Abu Yusuf and Imam Mohammad methodically codified the Muslim law. The Islamic regulations included in the Hedaya regulated all Muslims in India at the time. The Hedaya[2] had a framework for arbitration, among other things. Arbitration is referred to as Tahkeem in Arabic, while an arbitrator is referred to as Hakam in Arabic.

An arbitrator was needed by Muslim law to possess the fundamental qualifications of a Kazee, an official judge who presided over a court of law. When both parties to a dispute are Muslims, shariah law governs both the substantive and procedural aspects of the arbitration procedure.

When just one side is Muslim, however, the non-Muslim party has the option of addressing the issue using shariah laws or not. Even if it meets most of the shariah law's requirements, an award made under any other law is deemed a foreign award under shariah law. The courts might enforce such awards, albeit they wouldn't be able to evaluate the arbitrator's rationale or the dispute's merits. The court does, however, have the authority to evaluate formal circumstances such as the arbitration agreement's legality and existence, whether the award covers all of the case's aspects, and if the award was determined by all of the arbitrators.

Laws During British Rule

Between 1772 and 1827, the East India Company gave the law of arbitration in India a legislative framework by establishing new laws and regulations in the three presidential capitals of Bombay, Calcutta, and Madras. These laws and regulations lacked uniformity and clarity in specifics, but they significantly altered the existing panchayat structure. The Bengal Regulations of 1787, 1793, and 1795 made substantial modifications to the system by allowing courts to submit matters to arbitration with both parties' permission, as well as disputes involving debts, contested bargains, partnership account, and breach of contract.

The method for conducting arbitration was spelled forth in these regulations. By adopting procedural amendments, the Bengal Regulations of 1802, 1814, and 1883 expanded the scope of arbitration's authority. Civil issues were to be settled at the Presidency town of Bombay by Regulation VII of 1827. These restrictions were in effect until 1862, when the Civil Procedure Code of 1859 was expanded to include the Presidency towns[3].

The Code of Civil Procedure Act 1859

The Code of Civil Procedure Act 1859 was enacted after the Indian legislative council was founded in 1834. The purpose of establishing such legislation was to codify the processes that would be followed by civil courts[4]. Sections 312 through 325 of the code dealt with arbitration in lawsuits, whereas sections 326 and 327 dealt with arbitration without the participation of a court.

However, this law was not in effect in the presidential towns of Calcutta, Bombay, and Madras at the time. As a result, the above-mentioned provisions were not in effect in presidential towns until 1862, when the code was enacted. The Code of Civil Procedure Act of 1859 was replaced by the Code of Civil Procedure Act of 1877, which was amended again in 1882. Sections 506 to 526 of the new Act, on the other hand, duplicated the arbitration provisions mutatis mutandis.

Indian Arbitration Act 1899

The Legislative Council of India passed the Indian Arbitration Act in 1899. This act was India's first comprehensive piece of law dealing with arbitration. It was only valid in presidential towns like Calcutta, Bombay, and Madras, though. This legislation expanded the scope of arbitration by defining "submission" as "a written agreement to submit current and future disagreements to arbitration, whether or not an arbitrator is designated therein."

Previously, the term 'submission' was exclusively used to refer to 'existing conflicts'. A contract to send disputed topics to arbitration fell under three statutes prior to the enactment of this act:
  1. The Code of Civil Procedure;
  2. the India Contract Act; and
  3. the Specific Relief Act.

Furthermore, a contract requiring the referral of current or future conflicts to arbitration could not be explicitly enforced under the Contract Act or the Specific Relief Act. As a result, the arbitration legislation was unsatisfactory. The Bombay High Court remarked in Dinkarrai vs. Yeshwantrai[5] that the Indian Arbitration Act was overly complicated, and that the government needed to make modifications to restore its relevance.

Arbitration (Protocol and Convention) Act 1937

The Geneva Convention from the execution of Foreign Arbitral Awards 1927 and the Geneva Protocol on Arbitration Clauses 1923 were the major goals of the Arbitration (Protocol and Convention) Act 1937. This statute only applied to matters that were classified as "commercial" under Indian law[6]. This act was primarily concerned with the method for filing "foreign awards," as well as the enforcement of such foreign awards and the requirements that had to be met in order for such enforcement to take place, and its functioning was dependent on reciprocal agreements[7]. The Arbitration and Conciliation Legislation of 1996 modified and consolidated the provisions of this act.

The Arbitration Act of 1940

The commercial community's outcry and the judicial reprimand led to the enactment of a consolidating and amending law, the Arbitration Act of 1940. This Act looked to be a self-contained and complete Code.

Its provisions are summarized as follows:
  1. The legislation provided for (a) arbitration with court involvement in instances where no suit had been filed; (b) arbitration without court intervention; and (c) arbitration in suits. Further provisions were made for all 3 types of arbitration.
  2. The legislation defined a "written agreement" as a written agreement to submit current and future conflicts to arbitration, regardless of whether or not an arbitrator is present[8].
  3. In order to incorporate the provisions under the First Schedule, the legislation additionally included deeming provisions.
  4. This statute included a provision to safeguard the arbitration agreement from becoming void due to the presence of a flaw.
  5. The legislation gave the courts the authority to dismiss an arbitrator and an umpire and appoint a replacement in order to guarantee that arbitration did not fail due to misbehavior or a lack of effort.
  6. The statute gave the courts the authority to deal with the awards judicially when they were lodged with them. The courts were then allowed to issue decisions with the option to amend, remit, or set aside the award.
  7. The legislation included general requirements that the courts must accept arbitral decisions by issuing a judgment on the legality, existence, and impact of the awards or the parties' "arbitration agreement." The legislature's goal in establishing these rules was to create a single court where all disputes relating to the "arbitration-agreement" or "award" could be resolved[9].

Drawbacks of the Arbitration Act of 1940

After the country became independent in 1947, commerce and industry grew rapidly, and the industrial and commercial sector began to embrace arbitration as a means of resolving conflicts. This intensified the focus on arbitration procedures, exposing the deficiencies and flaws in the 1940 Arbitration Act. The following were some of the flaws: The regulations governing the arbitrators' authority and responsibilities were insufficient. The statute made no reference to the flaws in private contracts between persons.

Every High Court has its own set of rules and procedures for submitting awards. Because there were no rules prohibiting an arbitrator or umpire from quitting at any point during the proceedings, parties suffered significant damages in cases where the arbitrators or umpires behaved in bad faith. The statute also failed to distinguish between an "arrangement" made in advance to submit future disagreements and a submission made after a disagreement had occurred[10].

The Supreme Court concluded in Guru Nanak Foundation v Rattan Singh and Sons[11]that the processes under the Arbitration Act of 1940 had grown extremely technical, in part due to its never-ending prolixity at every level; this might lead to a legal trap for the unwary.

The Foreign Awards (Recognition and Enforcement) Act, 1961
The New York Convention of 1958 was widely regarded as one of the most effective pieces of international legislation in the history of commercial law. The Foreign Awards (Recognition and Enforcement) Act, 1961, was enacted to give effect to the New York Convention, which India was a signatory to.

In the landmark decision of Renusagar Power Co Ltd v General Electric[12], the Supreme Court of India concluded that the fundamental purpose of the aforementioned legislation was to promote and stimulate international commerce by allowing for the quick resolution of trade disputes through arbitration.

Arbitration and Conciliation Act, 1996:

The Arbitration and Conciliation Act, which included the legislation pertaining to arbitration, went into effect on January 25, 1996. The act is a consolidating and amending act rather than a comprehensive one. The Arbitration and Conciliation Act governs domestic and international business arbitration, as well as the execution of foreign arbitral decisions. It also introduces new conciliation rules and regulations. This legislation is based on the UN Model Law, and it aims to align India's arbitration provisions with those approved by the United Nations Commission on International Trade Law (UNCITRAL).

Constitutional validity of the Act

In the case of Babar Ali v Union of India[13], Supreme Court upheld the constitutional validity of the Arbitration and Conciliation Act. In this instance, the court determined that the Act is not unconstitutional since judicial review is available for contesting the award in line with the Act's procedures.

Drawbacks Of the Arbitration and Conciliation Act, 1996

  1. The parties may abuse Section 9 of the act by failing to take the necessary steps to form the arbitral tribunal after obtaining temporary measures, causing the procedure to be delayed.
  2. Section 14 of the legislation states that the arbitrator's mandate will expire, but it does not specify which party will pay the arbitrator for his services or the amount of costs that will be charged.
  3. Section 15 of the act provides for the appointment of a substitute arbitrator following the termination of the original arbitrator's mandate, but there is no time limit for the replacement arbitrator's appointment.
  4. The Arbitration and Conciliation Act was created with the primary purpose of providing a rapid and swift resolution of disputes, yet the act contains no provision allowing the arbitrator to issue an award promptly. As a result, the Act's purpose has yet to be realized.
  5. If the aggrieved party wishes to appeal the award, he or she must begin the process all over again in district court V.

Amendments Made to Arbitration and Conciliation Act, 1996

The 1996 Arbitration and Conciliation Act was amended for the first time in 2003. The 246th Law Commission Report proposed additional modifications to the act later in 2014-15, and the legislation was amended again in 2015. The 2015 Amendment was a boon for parties who had prevailed in their dispute before the arbitral tribunal, because in the unamended version of the act, if an arbitral award was challenged in court, even issuance of notice by the court was sufficient to grant a stay, whereas now, a specific stay must be granted. This amendment also attempted to limit the interpretation of the term "Indian public policy," with the goal of giving weight to the arbitral tribunal's decision and granting it finality[14].

This modification also attempted to speed up the process by establishing a 90-day timeframe within which the arbitration procedures must be initiated by the party that obtains any temporary injunction from the court. This amendment also limited the ability of courts to intervene in arbitration procedures. It also barred courts from hearing any applications in cases where arbitration processes had already begun.

This modification also clarified that when an arbitral tribunal issues interim orders, they must be executed successfully, since interim orders were not enforced effectively previous to this amendment because the requirements of the Civil Procedure Code were not made expressly relevant to them. In 2017, a committee was established, with Justice Sri Krishna as its chairperson. The Arbitration and Conciliation Statute (Amendment), Act, 2019 was created as a consequence of this committee's recommendations to make further modifications to the act and to encourage institutional arbitration.

Following amendments were made by the 2019 amendment act:
  1. Section 2(ca) was added to give a definition of "arbitral institution," which is defined as an institution nominated by the Supreme Court or a High Court under the Act.
  2. The Supreme Court and the High Court had the authority to choose arbitrators by designating arbitral institutions. These institutes will also be rated by the Indian Arbitration Council. When such institutions are unavailable, the Chief Justice of the High Court will establish a panel of arbitrators to fulfil their obligations.
  3. This amendment also formulates the Arbitration Council of India, which will be established by the central government and would be chaired by a Supreme Court or High Court judge or a distinguished person with specialized understanding of arbitration processes. The council's principal goal is to support and promote alternative conflict resolution processes by establishing regulations and guidelines for the functioning of arbitration and the upkeep of professional standards.
  4. The legislation was also amended to stipulate that the pleadings procedure (statement of claims and defense) must be completed within six months of the arbitrator's appointment. In addition, awards must be rendered by the tribunals within 12 months of the pleadings being completed.
  5. The amendment also established specific criteria and pre-requisites for someone to be eligible to serve as an arbitrator. In addition, the amendment established some broad guidelines for the arbitrator to follow.

Conclusion
Arbitration can be a real asset to the Indian Judicial System, and can help in the over burden the Courts and the Judiciary has due to less number of Judges. Arbitration is also a more speedy and efficient mode of dispute resolution than the traditional court proceedings, hence is also beneficial for parties to a suit. In civil matters arbitration may just be the best way of dispute resolution if the parties seek a quicker mode of dispute resolution.

Reference:
  1. Lachmi, K. (2018, October 25). Council Post: The Judgment of King Solomon: A Parable for An Entrepreneur Dilemma. Forbes.
  2. Malhotra, O. (2002). The law and practice of Arbitration and Conciliation.
  3. https://en.wikipedia.org/wiki/Code_of_Civil_Procedure_(India)
  4. AIR 1930 Bom 98
  5. Malhotra, O. (2002). The law and practice of Arbitration and Conciliation.
  6. https://www.mondaq.com/advicecentre/content/3100/Enforcement-of-Foreign-Awards-in-India
  7. https://unctad.org/system/files/official-document/edmmisc232add39_en.pdf
  8. Majumdar, A., & Dey, K. (2020, August 25). Significant Judgments on Arbitration and Conciliation Act, 1996
  9. Tractor export v Tarapore Co AIR 1971 SC 1,11
  10. AIR 1981 SC 2075- 76
  11. AIR 1985 SC 1156
  12. Singh, D. (2007). Law of Arbitration and Conciliation.
  13. (2000) 2 SCC 178
  14. The Arbitration and Conciliation (Amendment) Bill, 2019. (2019, July 15). The Arbitration and Conciliation (Amendment) Bill, 2019.
End-Notes:
  1. Lachmi, K. (2018, October 25). Council Post: The Judgment of King Solomon: A Parable for An Entrepreneur Dilemma. Forbes. https://www.forbes.com/sites/forbestechcouncil/2018/10/25/the-judgment-of-king-solomon-a-parable-for-anentrepreneur-dilemma/?sh=6d7653335d74.
  2. Malhotra, O. (2002). The law and practice of Arbitration and Conciliation. Lexis Nexis- Butterworths Publication
  3. Malhotra, O. (2002). The law and practice of Arbitration and Conciliation. Lexis Nexis- Butterworths Publication
  4. https://en.wikipedia.org/wiki/Code_of_Civil_Procedure_(India)
  5. AIR 1930 Bom 98
  6. Malhotra, O. (2002). The law and practice of Arbitration and Conciliation. Lexis Nexis- Butterworths Publication
  7. https://www.mondaq.com/advicecentre/content/3100/Enforcement-of-Foreign-Awards-in-India
  8. https://unctad.org/system/files/official-document/edmmisc232add39_en.pdf
  9. Majumdar, A., & Dey, K. (2020, August 25). Significant Judgments on Arbitration and Conciliation Act, 1996 - May, 2020 to July, 2020. Mondaq https://www.mondaq.com/india/trials-appeals-compensation/978888/significant-judgments-on-arbitrationand-conciliation-act-1996--may-2020-to-july-2020.
  10. Tractor export v Tarapore Co AIR 1971 SC 1,11
  11. AIR 1981 SC 2075- 76
  12. AIR 1985 SC 1156
  13. (2000) 2 SCC 178
  14. The Arbitration and Conciliation (Amendment) Bill, 2019. (2019, July 15). The Arbitration and Conciliation (Amendment) Bill, 2019. https://prsindia.org/billtrack/the-arbitration-and-conciliation-amendment-bill-2019.

Written By: Ishank Bangarwa

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