India

This article aims to provide a brief overview of the arbitration scene in India. The efforts taken by the Indian judiciary, executive and legislature in promoting arbitration as an effective means of dispute resolution has helped India in modelling its pro-arbitration attitude.

History of arbitration in India

The existence of the law of arbitration in India can be traced back to the eighteenth century. The very first attempt at codifying the arbitration law was also made during the British rule, by enacting the Bengal Regulation in 1772 (the Regulation), which was applicable only to the Presidency Towns. Vide the Regulation, disputes in relation to accounts could be arbitrated. Subsequently, numerous regulations were enacted which extended the scope of matters that could be arbitrated which included disputes in relation to land, rent and revenue.

It was only in 1859 when the first Code of Civil Procedure (the CPC) was enacted for India that contained express provisions relating to arbitration. CPC was revised in 1877 and further in 1882, however, the provisions relating to arbitration remained unchanged. The arbitration provisions provided for arbitration of disputes after they had arisen; there was no provision for reference to arbitration of future disputes. To remedy this, the Indian Arbitration Act, 1899 (1889 Act) was enacted based on the English Arbitration Act, 1889. However, the application of this 1889 Act was limited to Presidency Towns and was subsequently extended to a few more commercial towns. Consequently, the Civil Procedure Code of 1908 (the Code) was enacted which contained the provisions relating to arbitration in Schedule II. Considering the drawbacks in the existing provisions, a need for consolidation and amendment of the law and its codification in a separate enactment was sensed. This resulted in the enactment of the Indian Arbitration Act, 1940 (the 1940 Act) which repealed Schedule II of the Code.1

Prior to the enactment of the 1940 Act, in 1937, Indian legislature had enacted the Arbitration (Protocol and Convention) Act, 1937 (the 1937 Act) to give effect to the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Awards of 1927, as India was a signatory to these international agreements. Thereafter in 1961, Foreign Awards (Recognition and Enforcement) Act 1961 (the 1961 Act) was enacted to give effect to the New York Convention of 1958.

As a result, until 1996, the law governing arbitration in India consisted mainly of three statutes: the 1937 Act; the 1940 Act; and the 1961 Act. While the 1940 Act was the general law governing arbitration in India; the 1937 Act and the 1961 Acts were designed to enforce foreign arbitral awards.

The 1940 Act gave room to the parties to access courts at almost every stage of arbitration, defeating the very purpose of arbitration. The courts in India had therefore taken an interventionist approach rather than the intended supervisory approach. Therefore, in an effort to modernise the outdated 1940 Act, the legislature enacted the Arbitration and Conciliation Act, 1996 (the Act).

Overview of the Act

The Act is a comprehensive piece of legislation modelled on the lines of the UNCITRAL Model Law on International Commercial Arbitration, 1985. This Act repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940 Act). The primary object of the Act was to encourage arbitration as a cost-effective measure and to act as a quick mechanism for the settlement of commercial disputes. The main objectives of the Act are as follows:

  • to comprehensively cover both international and domestic and commercial arbitration and conciliation;
  • to minimise the supervisory role of courts in the arbitral process; and
  • to provide that every final arbitral award is enforced in the same manner as if it were a decree of the court.

The Act is divided into four parts. The more significant provisions of the Act are to be found in Part I and Part II. Part I contains composite provisions for domestic and international commercial arbitration in India. Arbitrations conducted in India are governed by Part I, irrespective of the nationalities of the parties. Part I inter alia provides for arbitrability of disputes; non-intervention by courts; composition of the arbitral tribunal; jurisdiction of arbitral tribunal; conduct of the arbitration proceedings; recourse against arbitral awards and enforcement. Part II on the other hand, provides for enforcement of foreign awards and is largely restricted to enforcement of foreign awards governed by the New York Convention or the Geneva Convention. Part III deals with the conciliatory machinery, while Part IV contains supplemental provisions of the Act.

Most of the judicial decisions on arbitration in India are centred on the important provisions contained in Part I and Part II of the Act. A brief overview of the important features of the Act is discussed below.

Scope of the subject matter of arbitration

Any commercial matter including an action in tort if it arises out of or relates to a contract can be referred to arbitration. However, matrimonial matters, criminal matters, insolvency matters, anti-

competition matters, (or matters related to disputes involving rights in rem) cannot be referred to arbitration. Likewise, employment contracts and matters covered by statutory reliefs through statutory tribunals are also non-arbitrable.

Minimal judicial intervention

One of the key features of the Act is that the role of the court has been minimised. Accordingly, section 8 of the Act provides that any matter before a judicial authority containing an arbitration agreement shall be referred to arbitration. Moreover, section 5 makes it clear that no judicial authority shall interfere, except as provided for under the Act. Parties can approach courts only for seeking any interim measure of protection or injunction or for any appointment of receiver, etc; or for the appointment of an arbitrator in the event a party fails to appoint an arbitrator or if two appointed arbitrators fail to agree upon the third arbitrator; for terminating the mandate of the arbitrator; for seeking court's assistance in taking evidence.

Interim measures by court and arbitral tribunal

Section 9 of the Act empowers the parties to seek interim measures by a court before or during the arbitral proceedings or at any time after making the arbitral award but before it is enforced. Interim measures sought can be in the nature of appointment of a guardian for a minor; preservation of any property or any goods which are the subject-matter of arbitration; securing the amount in dispute in the arbitration; interim injunction or appointment of a receiver, etc.

Under the Act, unlike the predecessor 1940 Act, the arbitral tribunal is empowered by section 17 to make orders amounting to interim measures as necessary in respect of the subject-matter of the dispute. The need for section 9, inspite of section 17 having been enacted, is that section 17 would operate only during the existence of the arbitral tribunal and it being functional. During that period, the power conferred on the arbitral tribunal and the court may overlap to some extent, but so far as the period pre and post arbitral proceedings is concerned, the party requiring an interim measure of protection would have to approach only the court.2

Appointment and jurisdiction of the arbitral tribunal

Section 11 of the Act prescribes the procedure for appointment of arbitrators. Parties are free to agree on a procedure for appointing arbitrator or arbitrators. For appointing an arbitral tribunal consisting of three arbitrators, each party appoints one arbitrator and the two arbitrators appoint the third arbitrator. However, if a party fails to appoint an arbitrator or the two arbitrators fail to appoint the third arbitrator; the appointment, upon a request of a party, is made by the chief justice of the High Court or his designate. Further, in case of an international commercial arbitration, the appointment of sole or third arbitrator is made by the chief justice of India or his designate.

As far as the jurisdiction of the arbitral tribunal is concerned, the kompetenz kompetenz principle holds good in India and the arbitral tribunal is empowered to rule on its own jurisdiction. However, owing to the decision of the seven-judge bench of the Supreme Court of India (the Supreme Court) in SBP & Company v Patel Engineering Limited,3 the principle of the kompetenz kompetenz was diluted as the Supreme Court declared that the power of the chief justice to appoint an arbitrator is judicial and not administrative in nature. Effectively, when an application is made before the chief justice for the appointment of an arbitrator and the chief justice pronounces that it has jurisdiction to appoint an arbitrator or that there is an arbitration agreement between the parties or that there is a live and subsisting dispute to be referred to arbitration, this would be binding and cannot be re-agitated by the parties before the arbitral tribunal. Therefore, when the arbitral tribunal is appointed by the parties, the arbitral tribunal can rule on its own jurisdiction; unlike when the appointment is made by the chief justice, as discussed above.

Conduct of the arbitral proceedings

The parties are free to agree on the procedure to be followed by the arbitral tribunal. If the parties do not agree to the procedure, the procedure will be as determined by the arbitral tribunal. Section 19 explicitly states that the arbitral tribunal is not bound by the Code or the Indian Evidence Act, 1872. Also the Act makes it amply clear that the arbitral tribunal should give equal treatment to the parties and that each party should be given full opportunity to present its case.

Setting aside of awards

The grounds for setting aside an award rendered in India as provided in section 34 of the Act are substantially the same as contained in article 34 of the UNCITRAL Model Law for challenging an enforcement application. An award can be set aside if:

  • a party was under some incapacity;
  • the arbitration agreement was not valid under the governing law;
  • a party was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings;
  • the award deals with a dispute not contemplated by or not falling within the terms of submissions to arbitration or it contains decisions beyond the scope of the submissions;
  • the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
  • the subject matter of the dispute is not capable of settlement by arbitration; or
  • the arbitral award is in conflict with the public policy of India.

A challenge to an award is to be made within three months from the date of receipt of the award. The courts may, however, condone a delay of maximum 30 days on evidence of sufficient cause. Subject to any challenge to an award, the same is final and binding on the parties and enforceable as a decree of the court.

Enforcement of foreign awards

This is covered by Part II of the Act. As discussed earlier, a 'foreign award' is an award emanating from a country that is a signatory to the New York Convention or the Geneva Convention and notified by the government of India. Till date, the government of India has notified around 40 countries for the purposes enforcement of foreign award. A party in whose favour such a foreign award is passed can directly file an execution petition in India for its enforcement and the court on being satisfied that the award is enforceable shall deem the award as the decree of that court and proceed with its execution. Enforcement of a foreign award may be refused only at the request of the party against whom it is invoked, provided the party satisfies the grounds enumerated in section 48 of the Act which are more or less the same as that in section 34 for setting aside awards.

Role of the Indian judiciary in shaping arbitration

Until recently, the Indian judiciary was known to have adopted an interventionist approach in arbitration matters due to which most of the judicial decisions are not in tune with the spirit of the Act. Initially, the conduct of the judiciary was nowhere nearing the primary objective of the Act and this can be gauged by the decisions of the various Indian courts.

While the Supreme Court in Bhatia International v Bulk Trading SA,4 extended Part I of the Act to international commercial arbitration held outside India; in Venture Global Engineering v Satyam Engineering,5 which heavily relied on Bhatia International, the Supreme Court largely rendered superfluous the statutorily envisaged mechanism for enforcement of foreign awards by applying domestic arbitration law to foreign awards and consequently setting aside the foreign award (under Part I of the Act as against merely refusing to enforce the foreign award under Part II of the Act).

Thereafter, the Supreme Court, vide the ONGC v Saw Pipes6 judgment, widened the scope of 'public policy', by including 'patent illegality' within the ambit of 'public policy', which is one of the grounds available for setting aside an arbitral award. Till then, the concept of 'public policy' was interpreted in a narrower sense, in line with the court's previous decisions which insisted that no new heads of 'public policy' should be easily created.

A further blow came by way of the Supreme Court's decision in SBP & Co v Patel Engineering Ltd,7 wherein the power of the chief justice in appointing an arbitrator was held to a judicial power and not an administrative power. This meant that Indian courts had to actually look into the validity of the arbitration agreement before proceeding to appoint arbitrators. Subsequently, there have been a number of instances where the Supreme Court and also various High Courts have assumed jurisdiction in arbitration matters both onshore and offshore.

However, in recent years, there has been a shift in this trend by the Indian courts. As regards the applicability of Part I to arbitrations held outside India, amongst other decisions of various High Courts in India, the decision of the Supreme Court in Dozco India P Ltd v Doosan Infracore Co Ltd,8 has more or less settled this position by holding that even if the parties to a foreign arbitration have not expressly excluded Part I, it would be deemed to have been excluded, if the parties have agreed to a foreign governing law of contract, and a foreign seat of arbitration.

This position was further confirmed by another decision of the Supreme Court in Videocon Industries v Union of India,9 wherein the Court went a step ahead and held that even if the law governing the contract is Indian law; Part I would be impliedly excluded if the parties have agreed to a foreign law governing arbitration and a foreign seat of arbitration. Likewise, recently in Yograj Infrastructure Limited v Ssang Yong Engineering and Construction Company Limited,10 the Supreme Court refused to entertain an appeal against an interim order passed by an arbitral tribunal seated outside India and concluded that the seat of arbitration being outside India and the law governing the arbitration proceedings being foreign law, Part I of the Act is impliedly excluded. Thus, these decisions have helped blur the requirement of 'express exclusion' of Part I of the Act which initiated by the Bhatia International. Also, a five-judge Constitution Bench of the Supreme Court in Bharat Aluminium v Kaiser Aluminium11 is reconsidering the decision in Bhatia International (supra) and will hopefully end this controversy.

Similarly, in matters dealing with domestic awards, one of the best examples of non-interference can be seen in Sumitomo Heavy Industires v ONGC,12 wherein the Supreme Court demonstrated that if the award by the arbitrator is a well-reasoned one then courts should not interfere.

As far as directing the parties to arbitration is concerned, the Bombay High Court in Parcel Carriers Ltd v Union of India,13 while dealing with severability of arbitration clause, made it amply clear that if the dispute is covered by prerequisites contained in section 8 of the Act (power of the court to refer the parties to arbitration), the judicial authority has no option but to refer the dispute to arbitration.

As regards favouring enforcement of foreign awards, the Delhi High Court in Penn Racquet Sports v Mayor International Ltd,14 refused the challenge to the enforcement of a foreign award by holding that the ground of 'public policy' must be narrowly interpreted when refusing enforcement of foreign awards. Subsequently in Pacific Basin Ihx (UK) Ltd v Ashapura Minechem Ltd,15 the Bombay High Court was faced with the dilemma of being technically forced to stay the proceedings seeking enforcement of a foreign award. The Bombay High Court ordered a stay, however, on the condition that the claim amount awarded should be deposited in full by the party seeking the stay.

Recently, a positive step towards favouring enforcement of a foreign award was taken by the Supreme Court in Fuerst Day Lawson v Jindal Exports,16 wherein it was held that no letters patent appeal will lie against an order enforcing a foreign award. This is because section 50 of the Act provides for an appeal only against an order refusing to enforce a foreign award.

These decisions do indicate that the Indian courts have been less zealous to interfere in arbitration matters, thereby adopting a pro-arbitration approach.

Consultation paper on arbitration: Indian legislature's efforts to introduce a better legislation

As discussed above, persisting judicial interpretation and constant shredding of the Act has by and large resulted in defeating the object of the Act. For instance, the definition of 'public policy' was extended to cover 'patent illegality' in Oil and Natural Gas Company Limited v Saw Pipes17, which was misused for challenging arbitration awards and also saw filing of frivolous applications for objecting the enforcement of foreign awards. Also the absence of contractual exclusion of Part I provisions in an international commercial arbitration held outside India has hampered the growth of international commercial arbitration in India. Taking cognisance of all these pit-falls in the Act, the Indian Ministry of Law and Justice has taken a desired step in addressing the challenges being faced by arbitration in India and released the consultation paper on proposed amendments to the Act in the year 2010. The amendments proposed are as follows.

Part I of the Act applicable only to arbitrations taking place in India. This amendment is proposed to curtail the effect of conflicting decisions of the Indian courts on applicability of Part I of the Act where the seat of arbitration is outside India.

As seen above, Part I of the Act confers broad powers on the Indian courts to order interim measures, appoint and remove arbitrators, and to hear challenges to the arbitral awards. These powers have given rise to criticism and have also been a source of dissatisfaction among parties. Section 2 of the Act provides that Part I of the Act is applicable where the seat of arbitration is in India. Inspite of specifically providing so, the Supreme Court in judgments like Bhatia International and Venture Global (supra), held that Part I of the Act is also applicable to international commercial arbitration held outside India, unless expressly or impliedly excluded. Therefore, to curtail such judicial intervention, the proposed amendment explicitly ousts the applicability of Part I to arbitrations held outside India.

However, the proviso to the proposed amendment states that the provision for grant of interim reliefs by court and the provision for taking assistance of the court in taking evidence which are contained in Part I of the Act would also apply to international commercial arbitration held outside India.

Promoting institutional arbitration

This proposed amendment provides for an 'implied arbitration clause' in every commercial contract worth 50 million rupees and any dispute in relation to these contracts have to compulsory be referred to institutional arbitration. The arbitration in such cases is to be administered by an approved arbitral institution.

Narrower meaning to be assigned to the term 'public policy'

The Consultation Paper proposes to rectify the extended definition given to 'public policy' in Saw Pipes (supra) by removing the ground of 'patent illegality' from the definition of 'public policy' while retaining it as a separate ground in a modified form.

No automatic stay on enforcement of award

This amendment proposes to tackle the loophole of automatic stay on enforcement of an award, stipulated in section 36 of the Act. Section 36 provides that enforcement of an award is stayed when the other party files an application to set aside the award. In order to expedite the enforcement of awards, this amendment provides that filing of an application to set aside an award will not operate as an automatic stay on enforcement of award, unless upon a separate application being made, the court agrees to grant stay of the operation of the award for reasons to be recorded in writing.

Recent trends in arbitration in India

The executive, judiciary and legislature in their own rights have strived hard to bring in efforts to promote arbitration in India. Some of the recent trends in arbitration in India are discussed below.

Introduction of the National Litigation Policy

The then law minister Veerappa Moily, in 2010, had announced the National Litigation Policy which aims to reduce the average length of proceedings from 15 years to three years. The policy also recommends the use of arbitration as a cost-effective and expeditious way to resolve disputes to the government departments and the public sector undertakings. It points out that cause for delay in arbitration proceedings has been due to poor drafting of arbitration agreements and clauses and urges that these issues must be addressed soon.

Establishment of London Court of International Arbitration - India: a dawn for institutional arbitration in India

Out of the two arbitration procedures of ad hoc and institutional arbitration, India is still in the nascent stage as far as institutional arbitration is concerned as mostly ad hoc arbitration is followed. However, the launching of London Court of International Arbitration - India (the LCIA India) and the introduction of its LCIA India Rules (the Rules) has to some extent reinforced a global appeal to the existing structure of institutional arbitration in India. Although the Rules are largely based on the tried and tested LCIA Rules, they provide a well complemented approach to the ethos of arbitration in India. These provisions include setting forth obligations of the parties and tribunal to ensure fairness and expediency in arbitration and granting greater power to the LCIA Court to ensure an organised and a workable arbitral process.

Development of International Chamber of Commerce - India

Recently, the International Court of Arbitration (the ICA) of the International Chambers of Commerce (the ICC) hired its first Indian lawyer to address the problems of judicial intervention in India as also to expand its increasing visibility in India. Over a couple of years, there has been an increase in the number of arbitrations referred to ICC as opposed to other arbitral institutions in India; and this step of ICA would certainly add to the advancement of ICC India as well as help improve India's reputation as an arbitration destination.

Reconsideration of the Bhatia International judgment

As discussed above, the Supreme Court has recently referred a batch of consolidated appeals to a five-judge Constitution Bench of the Supreme Court, which includes the chief justice of India. The Constitution Bench is hearing the appeals with the intention of reconsidering the correctness of the precedent laid down in the Bhatia International judgment (supra) in which the Supreme Court had deviated from the legislation by holding that the provisions of Part I of the Act would apply in the case of international commercial arbitrations held outside India unless the parties expressly or impliedly exclude all or any of its provisions. The Bhaita International judgment has been criticised as it increased judicial interference from the Indian courts in arbitrations held outside India. The arguments in the appeals have started in January 2012. It is hoped that the forthcoming judgment will put an end to the issue of applicability of Part I of the Act.

Foreign lawyers can visit India for a temporary period on a 'fly in and fly out' basis to advise their clients on foreign law

The Madras High Court in AK Balaji v Government of India & Ors,18 held that foreign law firms/lawyers cannot practice the profession of law in India without enrolling with the Bar Council of India under the Indian Advocates Act, 1961. However, foreign lawyers can visit India for a temporary period on a 'fly in and fly out' basis to advise their clients in on foreign law. Having regard to the aim and object of the international commercial arbitration introduced in the Act, the Madras High Court took this view that foreign lawyers cannot be debarred to come to India and conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration.

By and large, arbitration in India has developed as an effective and effectual institution for settlement of domestic as well as cross border disputes. Also the recent key developments have successfully brought in a long-awaited renaissance in arbitration in India giving an indication that India may well be seen as one of the arbitration-friendly nations.

*The authors would like to thank trainees Shruti Thampi and Neha Samant for their assistance in this chapter.

Notes

1
State of Orissa v Gangaram Chhapolia and Anr. AIR1982 Ori 277
2
Firm Ashok Traders v Gurumukh Das Saluja (2004) 3 SCC 155
3
(2005) 8 SCC 618
4
2002(4) SCC 105
5
(2008) 4 SCC 190
6
(2003) 5 SCC 705
7
Supra at 4
8
(2011) 6 SCC 179
9
2011 (2) Arb. LR 180 (SC)
10
Civil Appeal No. 7562 of 2011, arising out of SLP No. 25624 of 2010, decided on 1st September 2011 by the Supreme Court
11
Civil Appeal No. 7019 of 2005
12
AIR 2010 SC 3400
13
2010 (112) Bom. LR 2258
14
2011 (1) Arb. LR 244 (Delhi)
15
2011 (113) Bom LR 74
16
(2011) 8 SCC 333
17
(2003) 5 SCC 705
18
WP 5614 of 2010 and MP Nos 1, 3 to 5 of 2010, decided by the Madras High Court on 21.02.2012

Get unlimited access to all Global Arbitration Review content