Source: http://lexforti.com/2019/10/arbitration-in-india-a-study-of-issues-and-challenges/?utm_source=rss&utm_medium=rss&utm_campaign=arbitration-in-india-a-study-of-issues-and-challenges
Timestamp: 2020-03-28 14:45:38
Document Index: 281135462

Matched Legal Cases: ['§11', '§11', '§11', '§ 11', '§11', '§11', '§11', '§34', '§34', '§34', '§34', '§34', '§75', '§81', '§ 30', '§34', '§34', '§34', '§31', '§31', '§ 30', '§ 35']

Arbitration in India: A study of issues and challenges | LexForti
Charu Singhal | Bharati Vidyapeeth University | 26th October 2019
The economic reforms of the year 1991 changed the trade climate all over the country by opening gates to foreign investments and facilitating trade relations worldwide. With growing commercial relations, grew the chance of disputes. Indian courts since then were undergoing immense pressure due to pendency and backlog of cases and any further addition would over burden the system. Foreign investors who wished to resolve their disputes either by litigation or by alternative means under India’s infamously grid locked court system could not afford to wait decades for a dispute to reach finality.[1] To overcome such encumbrances, India was in need of an Alternate Dispute Resolution Mechanism which could prove to be speedy, inexpensive and functioned on separate lines than the traditional litigation. One significant measure taken in pursuit of this goal was the adoption of the Arbitration and Conciliation Act, 1996 (hereinafter ‘The Act’) replacing it’s outdated legislations, The Arbitration Act, 1940 and The Foreign Awards Act, 1961. The objective behind the act was to make the Arbitration procedure quick and efficient with minimizing the judicial intervention. The act is a comprehensive piece of legislation modeled on the lines of the UNCITRAL Model Law on International Commercial Arbitration. The aim of the legislation to serve arbitration as a cost-effective and a quick mechanism for settlement of commercial disputes is plagued by unnecessary ‘Judicial Intervention’ making it painfully slow and cumbersome. Arbitration in India is anything, but definitely not ‘non litigious’ and is incurring the same problems of delayed justice and pendency. Further the enforceability of arbitral awards is another challenge to look up to. ‘Public policy’, being a malleable concept, will always be open to varied judicial interpretations. The concept, as it relates to arbitration, needs to be balanced with the associated principles of minimal judicial intervention and court supervision.[2] The gross misinterpretation of the act by the Indian courts has made it impossible to achieve timely results. Such inability on the court’s end has setup a negative trend, possibly discouraging the parties from opting Alternate dispute resolution mechanisms. Cost effectiveness is another reason for favoring arbitration over litigation and arbitration has proved to be fancily expensive itself. It must be remembered that these shortcomings are capable of hindering the progress of international trade and commercial arbitration and with the constant inflow of business this might in effect hamper our economy.
Types of Alternate Dispute Resolution mechanisms in India
The term Alternate Dispute Resolution takes in its fold, various modes of dispute settlement including, Arbitration, Conciliation, Mediation, Negotiation and Lok Adalats. These mechanisms are used by many countries for effective dispute resolution. With the growing burden of pending cases the administration of judicial institutions through traditional processes had become very difficult and called for the implementation of such practices. Moreover, The Malimath Committee recommended making it obligatory for the court to refer the dispute for settlement by way of Arbitration, Conciliation, Mediation, judicial settlement through Lok Adalats and Negotiations. Arbitration is the most widely used form of ADR. It is the form of alternate dispute resolution where the parties to a dispute refer it to one or more persons known as the ‘arbitrators’. The arbitral tribunal (which consists of arbitrators) is appointed through a proper procedure. In arbitration a third party reviews the evidence and documentation of the case and imposes a decision that is legally binding and enforceable on both the parties. There are limited rights of review and appeal for arbitral awards. Conciliation is another very widely used form of Alternate dispute resolution mechanism in which the parties to a dispute use a conciliator who separately meets the parties to resolve their differences by improving communications and exploring potential solutions. The conciliation proceedings are flexible and allow the parties to define the time, structure and content. Various types of disputes such as labor disputes, service matter, taxation and excise are usually settled by conciliation. Conciliation proceedings often tend to resolve commercial, financial, family, real estate and insolvency matters. Arbitration and Conciliation are the most commonly used forms of Alternate Dispute Resolution mechanisms in India. Other forms include mediation, negotiation and judicial settlement through Under Lok Adalats. Unlike arbitration, mediation and negotiation are non- binding over parties and parties are under no strict obligation to follow the outcomes of these procedures. Moreover the parties to a negotiation retain control over the outcome and procedure. Mediation is a simple and structured negotiation process where a neutral third party assists the parties in amicably resolving the disputes. The essence of these mechanisms lies in their procedural neutrality. Lok Adalat is a forum where the disputes at pre-litigation stage are settled amicably. NALSA along with other Legal service institutions conducts Lok Adalats. Lok Adalats have been given statutory status under the Legal Service Authority Act, 1987. Under the said Act, the award (decision) made by the Lok Adalats is deemed to be a decree of a civil court and is final and binding on all parties and no appeal against such an award lies before any court of law.[3]
Issues and challenges of Alternate Dispute Resolution in India
Appointment of arbitral tribunal: administrative or judicial?
One of the major reasons why the act of 1940 was replaced by the act of 1996 was the limited judicial intervention it promised. With the 1996 act coming into force it was observed that the legislation is failing to deliver what it promised. §11 of the 1996 act (before the 2015 amendments) empowered the Chief Justice of the jurisdictional High Court or his nominee or the Chief Justice of India or as the case maybe for the appointment of arbitral tribunal. Orders passed under §11 have always been opposed of being administrative against judicial. The question whether orders under §11 of the act are administrative or judicial came up before the Supreme Court in Sundaram Finance Ltd v. N.E.P.C India ltd[4] and the court issued directives that the orders under § 11 shall be deemed to be administrative and won’t be subject to challenge under Article 136 of the Constitution of India. In Konkan Railway Corporation ltd v. Mehul Construction[5]the apex court reaffirmed the decision in Ador Samia case [6]and subsequently in Konkan Railway Company V. Rani Construction Pvt. Ltd[7], it was observed that no adjudicatory function is required to be performed by the Chief Justice or his designation thereby stating that the appointment orders passed under §11 of the act are purely administrative and not judicial, thereby invoking Article 141[8]of the Indian constitution.
Contrary to the former decrees passed by the court, it was constructed in Agio Counter Trade v. Punjab Iron and Steel company Ltd and Wellington Associates case that the functions of the Chief Justice is judicial in nature and appealable under Article 136[9] of the constitution of India. It was after the 7 judge bench judgment given in SBP and Co. v. Patel Engineering Co [10] which held that the functions of the Chief Justice or his designation are judicial in nature thereby increasing the judicial intervention beyond the scope and negating the principles of quick redressal and least court intervention. Moreover the judgment implied denial to the importance of the arbitral tribunals.
The judgment is diametrically against the principle of minimal judicial interpretation as highlighted in UNCITRAL Model Law and the Preamble to the act, 1996 and also the explicit provisions in the Act since the act declares that no judicial authority shall intervene except where so provided in the act[11]
However after the recommendations of the 246th Law Commission Report, the 2015 amendment of the act witnessed some major changes. The power of appointment of the arbitral tribunal now vests with the Supreme court, or as the case maybe the High court or any institution designated by such court in case of failure of appointment of the tribunal by parties through procedure specified under §§11(2) and 11(3) of the act. The parties get enough opportunities to agree on common grounds and appoint an arbitral tribunal of their choice. A failure of such agreement results in the intervention of the courts and hence the delays. The court in the best faith of the parties to arbitration and for securing the principals of the act has set deadlines for appointment of the arbitral tribunal stated under §11(4)(b) and 11(5). A total of 30 days has been provided to the party from the date of receipt of request to appoint an arbitrator from the other party by the court. On the lapse of such time period the court holds the responsibility of the appointment of the arbitral tribunal. Such ambitious deadlines may act as deterrents for people opting arbitration and actually back fire and contradict the purpose of introducing these amendments.
Enforceability of arbitral awards: When procedure supersedes scope.
Contrary to the belief that an arbitral suit would come to an end when the award is announced, the real litigation starts when the award is to be enforced post announcement. For reasons best known to them, the legislators choose to make arbitral awards subject to challenge before the trial courts. The awards passed by a panel of three retired Supreme Court Chief Justices are subject to scrutiny by a Trial Judge. The arbitration experience, particularly for the successful claimant can rather prove to be painful, prolonged and lopsided, conveniently negating the idea of quick and effective justice. One can only imagine the plight of a successful claimant who cannot enjoy the arbitral award until such procedural challenges come to an end.
The thin line of distinction between a foreign and domestic arbitral award has been drawn as a result of multiple judicial interpretations in some landmark judgments like Bhatia International v. Bulk Trading[12], Venture Global Engineering v. Satyam Computer ltd[13]and Bharat Aluminum Co v. Kaiser Aluminum Technical Service[14]. The court in Bharat Aluminum observed that Part I of the act exclusively lays down the procedures and guidelines for domestic arbitrations whereas Part II of the act in accord with the UNCITRAL Model Law, New York Convention and Geneva Convention applies to foreign seated arbitrations. It should be noted that arbitrations under Part I include both, arbitration in India between two Indian parties and international commercial arbitration held in India. International commercial arbitrations held outside India would be governed under procedures mentioned under Part II of the act.
The excessive court intervention in the form of judicial review has retarded the dispute resolution mechanism and frustrated the purpose of the act. The act under §34 lays down a list of reasons on which an application can be moved to the court challenging the arbitral award. The §34 of the act is brain child of Article 34 of the UNCITRAL Model Law 1985 and its ambit in the 1996 act is much wider than the repealed act of 1940. §34(2)(A) mentions five sub provisions under which a party is required to furnish concrete proof in support of its petition to the court to set aside the arbitral award. The point of concern here is §34(2)(B) which refers to two grounds of examining the arbitral award. Firstly if the subject matter of the dispute is not capable of settlement by arbitration in India and secondly if the award is in conflict with the ‘Public Policy of India’. In O.N.G.C v. Saw Pipes ltd[15], the Supreme Court interpreted ‘public policy’ in light of principles underlying 1996 act, Indian Contract Act, 1872 and Constitutional provisions. Saw Pipes broadened the scope of public policy by enhancing the possibility of a near limitless judicial review, defeating the Act’s objective of minimal court interference. Therefore, the Saw Pipes decision is a significant blemish on India’s arbitration jurisprudence.
An explanation next to §34(2)(b) briefly clarifying what is to be understood with public policy of India includes fraud, corruption and violation of §75 or §81 but fails to serve its purpose. As the expression ‘public policy’ has not been supplied with a definitive meaning under the 1996 act or any other statute, over the years through judicial craftsmanship, the width of this expression gradually increased giving vast discretion to courts to interpret it accordingly. Lately in the international commercial arbitration and investment arbitration, this has caused a lot of difficulties to litigants as the courts have whimsically rejected and accepted claims on this ground[16]. The amendment act 2015 however clarifies that an award will not be set aside by the court merely on erroneous application of law or by re-appreciation of evidence. The court will not review the merits of the dispute in deciding whether the award is in contravention with the fundamental policy of Indian law. After the Saw Pipes judgment the question that needs to be answered is what exactly the court meant by the term ‘Patent Illegality’. One can infer multiple meanings of the word ‘illegality’ in the arbitration context. The illegal nature of the underlying contract, the object of the contract or the circumstances surrounding the arbitration agreement are some suggestions but the Apex Court in the Saw Pipes judgment gave a whole new dimension to the term ‘illegality’ by equating it to mean ‘Error of Law’. Upon that observation one can deduce that, if the courts are conferred with the power to review on the ground of error of law then it automatically defeat the objective of the Act and make arbitration the beginning of successive appeals to the highest court of the land, making it no different than litigation.
It is the same as retaining the grounds for challenge that were already available under § 30 of the 1940 act[17]. In addition, a careful analysis of the 1996 Act shows that the two conditions for setting aside the award, contrary to the express provisions of the contract or substantive law, are already arguably available under sub §§34(2)(a)(iv) and 34(2)(a)(v) respectively[18] .
Under §34(3), a three month time period has been specified within which an application for setting aside an arbitral award has to be made. Such time period begins with the day when the applicant received the order. A further extension of thirty days can be given to the applicant incase he can furnish substantial proof that he was hindered by a sufficient cause for making the application within three months. The above procedure needs to be reconsidered. The act was framed for quick and effective redressal to the litigants but while doing so one should not lose the sight of possibilities that may prevent an honest litigant from seeking his right to be heard. The provision of §34(3) shuts down such persons from seeking justice. Procedural law should not overlap the rights provided by substantive law. Undoubtedly the objective of the act should receive paramount importance but while doing so, the aim of providing justice should not be ignored. Hence the provisions of the act require interpretation in a manner that retains the goals and values of our legal system.
Cost & time: the directly proportional relationship
‘The costs are awarded, not as a punishment to the defeated party, nor as a bonus to the party which receives them, but as a recompense to the successful party in order to indemnify him, though not completely, for legal expenses to which he has been subjected in prosecuting his suit or his defense[19]. In the past few years the scope of the arbitration costs has become wider. Arbitration costs now involve the fee payable to the arbitrators towards ‘reading charges’, ‘sitting fees’, ‘award writing fee’ and other expenses, coupled with the cost involved in arranging sittings (often at luxury hotels), travel charges for the parties, witnesses, counsel and arbitrator. The overall expense can sometimes run into crores which, for a developing country like India is outrageous. The absence of ad-valorem court fees payable on an arbitral claim is believed to make the process affordable and convenient[20]. The parties are under the impression that the court fee is saved but end up paying more or less the same amount by paying for the arbitrator’s fee, counsel fee, administrative expenses and stamp duty on arbitral award. No doubt the costs, could (and should) be factored into the award to be passed but the fact remains that the arbitral proceedings are costly, and not inexpensive by any standards. In a very recent judgment of Union of India v. Singh Builders Syndicate[21] the Supreme Court pointed out that ‘It is unfortunate that delays, high cost, frequent and sometimes unwarranted judicial interruptions at different stages are seriously hampering the growth of arbitration as an effective dispute resolution process.’ The court also observed that it is necessary to find an urgent solution for the problem to save arbitration from the arbitration costs and opined that ‘Institutional Arbitration’ has come close to providing a solution.
It must be noted that the process of arbitration proves to be cost efficient only when the number of the arbitration proceedings is limited. However the delays caused by the judicial intervention drains the finances of the parties because arbitration becomes litigation in disguise. Ironically the speed and cost efficiency are hallmarks of the procedure and the reasons why arbitration is preferred over litigation as a viable option for dispute resolution especially in commercial disputes. To make India arbitration friendly destination cost effectiveness is a hurdle yet to be crossed. As per the recommendations of the 246th Law Commission Report the legislature has added §31(A) to the Act. It empowers the Court or Arbitral Tribunal to have discretion to determine (A) Whether costs are payable by one party to another (B) Amount of such costs and (C) When such costs are to be paid. An explanation next to §31(A) interprets ‘cost’ in reference to the section. The Fourth Schedule has also been added to the Act that lays down a fixed model fee depending upon the sum in dispute along with the percentage share based on the claim amount. It also furnishes that an additional amount of twenty five percent on the fee payable (as per the provisions of the ‘Fourth Schedule’) will be added where arbitral tribunal is only a sole arbitrator. The model fee mention arbitration as well as arbitrations where parties have agreed for the determination of fee as per the rules of arbitral institution under which arbitral proceedings are to be conducted. Such shortcomings are capable of hindering the progress of international trade and commercial arbitration. Strengthening international arbitration and providing for a more stable process that is cost-effective and time saving can help India attract foreign investors and commercial entities which is the goal of the government[22].
Remedies: Scope for improvement
Alternate dispute resolution, especially Arbitration holds the position of becoming the future of dispute resolution throughout the world. Few countries like USA and Singapore have already emerged as the most favorable arbitration destinations due to their independent and privatized arbitration institutions. India has the favored amount of resource and potential to help it emerge as one of the most lucrative arbitration destinations in the world. However, there are a few loopholes in the current system that is yet to be taken care of.
The judiciary needs to recheck its amount of intervention and understand that arbitration has to be treated as another dispute resolution procedure which works independently. Moreover, it should play an assisting role in the arbitration process. With adequate assistance, judiciary can play a very impactful role but by unnecessary intervention, it defeats the whole purpose of the procedure.
Currently ad-hoc and institutional arbitration co-exist in the country but opting for institutional arbitration would speed up the process. Therefore, reforms in institutional arbitration are suggested. India suffers from a lack of arbitral institutions. Although institutions like The Delhi High Court International Arbitration Center, Nani Palkhiwala Arbitration Center, International Center for Alternate Dispute Resolution and Indian Council for Arbitration are doing noteworthy work but considering the amount of backlogs and pendency of cases there is a need for arbitration institutes to come up and increase the overall efficiency. Further, there should be a symbiotic relationship between the arbitration institutes and the judiciary which can be established with, courts referring certain cases to arbitration and the institutes ensuring that the cases do not have to go back to the courts. With the growing trend of Alternate Dispute Resolution in the country it has now become a necessity to make procedural arbitration a part of legal curriculum. Colleges and Universities should set up Alternate Dispute Resolution Cells to give the students an insight of the procedure and create awareness among people in general. Institutions should be willing to accept arbitration as a form of dispute resolution and equip students with the required skills. Lawyers need to be trained and made familiar with procedures involved in the arbitration process. The aim of these reforms is to make institutional arbitration a common practice in domestic disputes.
Alternate Dispute Resolution as a concept is still evolving in India. With everyday development of world economy and the impact of globalization it has become very difficult to keep up with the pace and fulfill the ever changing needs of current times. Arbitration, Mediation and other dispute resolution mechanism have succeeded in breaking the monotony of traditional adversarial method of dispute resolution but have however failed to achieve the larger purpose. Beyond all these fallacies arbitration has still managed to prove its juggernaut by sufficing the needs of the people by fueling their belief to engage in any kind of transaction.
[1]Rohit Bafna & Rhea Srivastava, Arbitration & Alternative Dispute Resolution in India: Issues & Challenges in International Commercial Arbitration (August 9, 2012).
[2]Garima Budhairaja Arya & Tania Sebastian, Critical Appraisal of ‘Patent Illegality’ as a Ground for Setting Aside an Arbitral Award in India, 24(2) B.L.R., 168-172.
[3]National Legal Services Authority, http://nalsa.gov.in/lok-adalat (last visited Aug 28, 2017)
[4]Sundaram Finance Ltd. v. N.E.P.C India Ltd., (1999) 2 S.C.C. 479.
[5]Konkan Railway Corpn. Ltd. v. Mehul Constructions., (2000) 7 S.C.C. 201.
[6]Ador Samia (P) Ltd. v. Peekay Holdings Ltd and Ors., (1999) 8 S.C.C. 572.
[7]Konkan Railway Corpn. Ltd. v. Rani Construction Pvt. Ltd., (2002) 2 S.C.C. 388.
[8]Article 141 of the constitution reads as, ‘ Law declared by (the) Supreme Court to be binding on all courts- The law declared by the Supreme Court shall be binding on all courts within the territory of India’
[9] Article 136 reads as, ‘Special leave to appeal by the Supreme Court’.
[10] SBP & Co. v. Patel Engineering Ltd. (2005) 8 S.C.C. 618.
[11]Ankur Khandelwal, The Three “Battlegrounds” of the Arbitration Law of India: The trilogy of grounds for unwarranted Judicial Intervention, 3 contemp. Asia Arb. J. 165 (2010).
[12]Bhatia International v. Bulk trading S.A, (2002) 4 S.C.C. 105.
[13] Venture Global Engineering v. Satyam Computers Services Ltd., (2008) 4 S.C.C. 190.
[14]Bharat Aluminum Co. v. Kaiser Aluminum Technical Services Inc., (2012) 9 S.C.C. 552.
[15] O.N.G.C. Ltd. v. Saw Pipes Ltd., (2003) 5 S.C.C. 705.
[16] Nimit Saxena Public Policy under Indian Arbitration Law
[17]1940 Act § 30 enumerates the grounds for setting aside the award. An award shall not be set aside except on one or more following grounds, namely: (a) that an arbitrator or umpire has misconducted himself or the proceedings; (b) that an award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under § 35; (c) that an award has been improperly procured or is otherwise invalid.
[18]Viplay Sharma, Enforceability of Arbitral Awards in India: Public Policy as Ground for Setting Aside the Award, 1(1) Gujarat Law Review (2008).
[19]Anandji Haridas v. State of Gujarat, (1977) 0 G.L.R. 271.
[20] Aditya Sondhi, Arbitration in India: Some Myths Dispelled, 19(2) Student Bar Review (2007)
[21]Union of India v. Singh Builders Syndicate, (2009) 4 S.C.C. 523.
[22]Global Times, Indian PM vows to attract more foreign investment, (http://www.globaltimes.cn/content/727225.shtml.)
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