Dispute Resolution in India- Arbitration Primer

A. Introduction

Alternate dispute resolution methods have lured many away from litigation. Arbitration, being one among them, is cost-effective, flexible and less time-consuming compared to the long procedure one has to go through in the regular court proceedings. It has changed the approach to legal practice in India. A number of amendments have been made to the existing laws to improve the efficiency of the arbitration tribunal and to ensure expeditious justice is imparted to the parties. This article aims to be a brief comprehensive guide to arbitration in India. This article, with the help of various judicial pronouncements and legislations, discusses the procedure and certain other aspects with respect to domestic arbitration in India.

B. History & Evolution of Arbitration in India

Arbitration in its essence can be found in systems as ancient as a Panchayat. Hindu Law mentions arbitration in its well-known treatise “Brihadaranyaka Upanishad”. Mahatma Gandhi also believed in the settlement of industrial disputes through arbitration rather than litigation. His famous movement of Satyagraha can be related to our topic at hand. The reason for starting the Satyagraha movement was because of an industrial dispute raised between the workers and management of a textile mill in Ahmedabad. The movement, in the end, led to settlement through arbitration. 

In 1772, by the Bengal Regulation Act, modern arbitration law was first introduced in India. It proved to be a success for the resolution of disputes for parties by choosing a tribunal. As a result, it was also introduced in Bombay & Madras in the years 1799 & 1802, respectively. By the end of the 19^th century, the Indian Arbitration Act, 1899 was enacted in the precedential towns of Madras, Bombay and Calcutta. The Act laid its foundation in the British Arbitration Act, 1899. The Act was, however, ambiguous in nature. The Bombay High Court, while deciding the issue in Dinkarrai Lakshmiprasad v. Yeshwantrai Hariprasad, observed, “This case is one more illustration of the state of doubt and uncertainty in which the law of arbitration undoubtedly lies.” It further advised the Legislature to bring in proper reforms in the Act of 1899. 

Under the British regime, another Act, which repealed the Act of 1899, was passed to settle disputes through arbitration in 1940. The Arbitration Act, 1940 was made applicable to the whole of India. The Act of 1940, which was based on the British Arbitration Act, 1934, did solve a few complexities but had many shortcomings. For instance, it was only limited to domestic arbitration and did not include any provisions regarding the foreign awards. The Supreme Court of India in Guru Nanak Foundation v. Rattan Singh observed that “…the proceedings under the Act have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary.”

These convolutions were resolved with the enactment of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as “ACA” / “Act of 1996”). The Act of 1996 is based on the UNCITRAL Model Law of International Commercial Arbitration, 1985. Various other problems arose with the implementation of the Act. The 176th report by the Law Commission of India in 2001, and a committee headed by retired Supreme Court judge Justice B. N. Srikrishna in 2017, pointed out several such issues and recommended amendments. Subsequently, amendments took place in 2015 and 2019.

C. Arbitration Agreement

The ACA, in a concise form, under Section 7, provides the essentials of an arbitration agreement. The agreement between parties having a legal relationship to submit to arbitration if any dispute arises between them is an arbitration agreement. This either may be a separate agreement or part of a larger contract. A valid agreement for arbitration is only formed when the agreement to refer differences to arbitration is either expressly or impliedly present in a contract. The Hon’ble Supreme Court of India laid down certain principles in respect to what construes an arbitration agreement:

1. The intent of the parties to refer disputes to arbitration must be gathered from the agreement. The agreement must illustrate the willingness of the parties to submit to a private tribunal and the willingness to be bound by its decision. 
2. The intention may be implied. It is not necessary for terms like ‘arbitration’ or ‘arbitration tribunal’ to be present. 
3. It is important to be noted that the mere use of the word ‘arbitration’ or ‘arbitration tribunal’ will not make an agreement an arbitration agreement. For instance, if it states that “the parties in case a dispute arises should consider arbitration” will not construe to be an arbitration agreement. The reason for this is because such statements imply only a desire to opt for arbitration but do not show any intention on the part of the parties.
4. Where an agreement contains provisions that allow the private tribunal or the adjudicating authority to settle the dispute without hearing or to act in favour of only one of the parties or contains a provision which states that the decision of the tribunal will not be final or binding on the parties, cannot be termed as a valid arbitration agreement.

The reason for assessing the intention of the parties is because they cannot be forced to arbitrate if they have not validly consented. Therefore, their fundamental right to approach the court is being violated. In M/s Delhi Iron & Steel Co. Pvt. Ltd. v. UP Electricity Board, the court observed that any counter-offers at the pre-conclusion stage become irrelevant once the contract is signed. However, where a contract (containing an arbitration clause) is assigned to a third party to perform liabilities and enjoy benefits arising out of such contract, no obligation arises on such third party to settle disputes via arbitration. The reason for this is, such a contract contains two independent entities:

1. the main terms and conditions of a contract, and
2. arbitration agreement.

Merely because the assignee agreed to perform the main terms and conditions of a contract does not mean he agreed to the arbitration clause. When a subsidiary contract is formed with the original contract, the arbitration clause in the original contract cannot be said to be applied to the subsidiary contract as well. 

D. Who can be a party to an arbitration agreement?

Any person (both citizens of India and foreigners) competent to contract is eligible to enter into an arbitration agreement. On behalf of a company, its director or the chairman is eligible to enter into the agreement. Shareholders are not competent to file an application for the appointment of arbitrator under the ACA. In the case of a firm, a partner is competent to enter into an arbitration agreement on behalf of all the partners if he is authorised to do so or if it is written in the partnership agreement. Non-signatory parties to an arbitration agreement may pray or refer their issue to the arbitrator(s) by claiming ‘through or under’ a party. 

As observed before, an assignee can be a party to an arbitration agreement if he only wishes to. Merely because the assignee agreed to perform the main terms and conditions of a contract does not mean he agreed to the arbitration clause. By the same token, a transferee does not become a party to an arbitration agreement.

E. Appointment, Establishment & Jurisdiction of an Arbitration Tribunal

Appointment & Establishment:

Sections 10- 17 of ACA deal with the appointment, establishment and jurisdiction of the arbitration tribunal. The arbitration tribunal may comprise any number of arbitrators as the parties wish to appoint. Section 10(1) further provides for the number of arbitrators appointed in an arbitration tribunal shall not be an even number. However, the Hon’ble Supreme Court of India, on the other hand and against the provision of the ACA, established that the ground that an arbitration tribunal provides an even number of arbitrators cannot be taken into account for rendering such agreement invalid. The Supreme Court of India has also observed that the mentioned is not a ‘mandatory provision’; thus, the parties may also appoint an even number of arbitrators. If the arbitration agreement does not specify the number of arbitrators, the tribunal will compose a sole arbitrator. 

The arbitrator appointed may be of any nation or as agreed by the parties. Party autonomy is provided under the ACA as the parties have the freedom to agree on the procedure for the appointment of the arbitrators. If, in any case, the arbitrator is not appointed, the Supreme Court or High Court or any other person designated by such court shall appoint the arbitrator(s) upon the request of the parties. The mentioned institutions, in cases of international commercial arbitration, may appoint an arbitrator other than the nationalities of the parties.

The appointment of the arbitrator(s) can be challenged on the following ground:

1. doubts arise with respect to his impartiality.
2. where he does not possess the qualifications necessary as agreed by the parties.

The seventh schedule of ACA provides detailed ground governing the challenge. Where the Managing Director of one of the parties was appointed as the sole arbitrator, it was held invalid. Just like the appointment of arbitrators, the challenge to an arbitrator can also be decided by the parties. However, if the parties have not agreed to a procedure, the party challenging may, within 15 days of the formation of the arbitration tribunal, send a written statement containing the grounds for challenge. The arbitration tribunal will decide on the challenge unless the parties agree with the challenge. If the challenge is unsuccessful, the tribunal may pass the award. The party challenging may make an application for setting aside the award. The court may decide if such arbitrator, whose award is set aside and was challenged, is entitled to receive any fees.

Jurisdiction:

An arbitration tribunal derives its jurisdiction from the arbitration agreement. A matter can only be referred by the parties to the arbitrator when a dispute arises in relation to the subject matter of the contract. It can have no application in disputes ultra vires of the contract. Section 16, which provides for the competence of arbitral tribunal to rule on its jurisdiction, reflects the following doctrines:

1. Competence-competence doctrine: The arbitration tribunal has the power to decide on disputes regarding its own jurisdiction except in certain cases.
2. Doctrine of Separability: The arbitration clause is separate from the main contract. Therefore, if the main contract terminates, the arbitration clause still survives. The concept of separability is to ensure that the intention of the parties to resolve the dispute through arbitration does not evaporate into thin air with the challenge to legality, validity, finality or breach of the underlying contract.

The plea challenging the jurisdiction of the arbitration tribunal cannot be raised after the submission of the statement of defence. A party will not be prohibited from raising such a plea merely because they were involved in the appointment of the arbitrator. A plea with regard that the arbitration tribunal is exceeding its authority is to be raised during the arbitration proceedings. However, the arbitration tribunal may admit such pleas in both the above-mentioned matters if the delay is justified. An appeal can be filed against the order of the tribunal regarding its findings on its jurisdiction to a Court. 

In some cases, when a matter is being disputed before a court or any judicial authority in India, they may, with the consent of such parties, refer them to arbitration. A judicial authority cannot refuse to relegate the parties to arbitration unless when prima facie no valid arbitration agreement exists or in cases where a specific or a special remedy is opted by the aggrieved party. 

The award has to be decided by the tribunal within the stipulated time limit in the arbitration agreement. When the time limit is not prescribed in the arbitration agreement, the tribunal shall decide the matter with 12 months from the date of completion of pleadings. However, this time limit may be extended up to a period of 6 months. Unless the court mandates the further extension, the arbitration tribunal shall terminate after the completion of 18 months. Such extension may be granted only if sufficient cause is showed, by the parties on application. The court may also impose terms and conditions. The court has the discretion to substitute the arbitrator(s), but the proceedings will continue from the stage as previously achieved. Except in cases where there is an extension of the time limit as prescribed in the arbitration agreement, the arbitrator becomes functus officio to make and publish and award. The Apex court has observed:

“The time fixed for the arbitration and/or schedule of time limit in such arbitration proceedings, as it is recognised by law, there is no reason not to accept the same, basically in the present facts and circumstances where the parties themselves agreed to bind themselves by the time limit. Section 14 read with Section 15 of the Act, 1996 also recognise this mechanism and after the expiry of four months period from the date of first preliminary meeting held on 4th May, 2007, the arbitrator indeed became de jure unable to perform his functions and the mandate to act as an Arbitrator in the arbitral proceedings between the parties as prayed for stood terminated.”

F. Laws governing the arbitration

All contracts which provide for arbitration and contain a foreign element may involve three potentially relevant systems of law: 

1. the law governing the substantive contract; 
2. the law governing the agreement to arbitrate and the performance of that agreement; and, 
3. the law governing the conduct of the arbitration.

Section 28 of ACA states that when the place of arbitration is India (except in the cases of international commercial arbitration), the tribunal shall decide the matter in accordance with substantive law applicable at the time in India.

Law governing the substantive contract:

This law governs the subject matter of the dispute, i.e., rights and obligations arising out of the contract. The words in Section 28 make it clear that if the parties are Indian and the seat of arbitration is in India, then the Indian law will be applicable. The provision is only applicable to substantive law or ‘substance of the dispute’. Any derogation from the mentioned principle would be opposed to public policy. 

Law governing the agreement to arbitrate:

This law concerns itself with issues like enforcement of an award, scope of jurisdiction of the tribunal, etc. Because of the doctrine of separability, the arbitration agreement is considered to be independent of the underlying contract. Therefore, the law governing the arbitration agreement in many cases varies from the law governing the substantive contract. The Supreme court of India in IMAX corporation v. M/s E-City Entertainment (I) Pvt. Ltd. observed that the choice of the seat is important in determining the law governing the arbitration agreement. In cases where the parties have chosen the law governing the substantive contract but fail to mention the law governing the arbitration agreement, the law of the seat of arbitration will be applicable. 

It is important to understand that only the seat of arbitration and the venue of arbitration are not the same. The reason for this is the seat of arbitration determine the law to be applicable to the arbitration agreement, whereas the venue of arbitration only determine the location where the arbitration will take place and may change as per the convenience of the parties. The seat of arbitration is usually determined by looking at the intention of the parties in the arbitration agreement.

Law governing the conduct:

This is also known as lex arbitri or curial law. It concerns itself with the arbitration procedure and jurisdiction of the courts. For example, the duties of the arbitrators, remedies available to the parties, etc. Parties to the arbitration agreement agree on any procedure for conducting the proceedings. However, if no procedure is agreed, then the arbitration will take place according to the Civil Procedure Code, 1908 (hereinafter referred to as “CPC”) and the Indian Evidence Act, 1872. The jurisdiction of Indian courts is automatically activated when this seat of arbitration is in India, especially in the cases of domestic arbitration. The courts further have opined that the applicability of CPC should be adjudicated and with respect to the rights of the parties under the special or local law applicable to the arbitral proceedings. The CPC should be applicable to arbitral proceedings under the provisions of the code that are inconsistent with the arbitration and conciliation act.

G. Enforcement of an Arbitration Award

Once an award is passed by the arbitration tribunal, it has the following effects:

1. It becomes binding on the parties.
2. It renders the tribunal functus officio.
3. Remedies granted by the tribunal become enforceable.

When the award prescribes the time limit for making an application to set aside the order, once such time limit has expired, an application can be made before the civil court for the enforcement of the award according to the provisions of CPC. Similarly, if a party wishes to stay the enforcement of the award, they may make an application to the court. The court, if it deems fit, grant the stay of the award and records its reasons in writing. In addition, the party has to provide certain security which satisfies the award. However, the court may grant an unconditional stay if the arbitration agreement or the award prima facie was made by fraud or corruption. An arbitral award must be registered and adequately stamped. You may find the procedure for enforcement of arbitral award @ https://samistilegal.in/enforcement-of-arbitration-award-and-decrees-in-india-domestic-and-foreign/ 

H. Conclusion

1. It can be concluded that the ACA, with the help of amendments and judicial decisions, has been able to aid the arbitration tribunals to deliver justice without the intervention of courts efficiently. However, there is always room for improvement. It is undebatable that even though arbitration is an ‘alternative dispute resolution’ method, the courts still have an important role to play for equity and justice. This burden on the courts may be reduced if a judicial body is formed to settle minor issues like extension of the time limit, formation of the tribunal, etc. This will remove the burden on courts and also help in imparting justice expeditiously.

Author: Abhishek Gupta, Senior Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at abhishek@samistilegal.in