May 1st, 2021

Introduction 

Before delving into the legal connotation of the word ‘arbitration’, knowing the general meaning of the word is vital. As per the Oxford dictionary, it means, “the official process of settling an argument or a disagreement by somebody who is not involved (in the dispute)”. The use of arbitration as a way of settling disputes is not new to humans, and has possibly existed ever since we stopped treating each other as enemy bands and started living in harmony. In fact, watch closely and you will see the process of arbitration in practice all around you.

Remember when you were a child and had a tussle with your sister over who deserves to devour the last piece of cake? Both of you decided to approach your mom to settle the tussle. Then your mom would remind you that you had an extra piece of cake the last time she baked a cake and it would be only fair for your sister to have the last piece this time. This is arbitration in a nutshell. But isn’t this exactly what mediation and conciliation also stand for? From a laymen’s perspective, arbitration, conciliation and mediation, all three appear to be somewhat similar concepts. However, in legal sense, arbitration is a process where an arbitral tribunal (comprising of independent sole / multiple arbitrators) is called upon to hear the two parties and adjudicate the disputes between them. The decision of an arbitrator is final and placed at par with an adjudication by a court of law. Mediation and conciliation^[1] on the other hand have been held to be synonymous^[2] and depend on mutual settlement between the parties by way of facilitation instead of adjudication by a third party (mediator / conciliator). In this article, we will confine ourselves to arbitration.

Brief History of the Arbitration and Conciliation Act, 1996

Prior to the enactment of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “1996 Act”), arbitrations in India were governed through an interplay of the Arbitration Act, 1940, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. In 1985, the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Commercial Arbitration and the General Assembly of UN requested member nations to adopt the model law with a view of bringing uniformity in the global arbitration practices. UNCITRAL had also adopted the Conciliation Rules in 1980. The Indian legislature finally enacted the 1996 Act on the basis of UNCITRAL’s model law and conciliation rules. The 1996 Act repealed the previous three legislations and consolidated all the arbitration related law in India. This Act has seen major amendments in 2015 and 2019.^[3]

Present Times: The Three Key Factors that make Arbitration attractive 

1. Time

It is widely known that the civil proceedings before courts in India go on forever due to the large number of cases and dearth of judicial officers. This has led to the emergence of a society where people intuitively avoid going to the courts and face losses instead of facing long drawn legal battles which drain enormous time and money. Arbitration on the other hand is a comparatively shorter affair and thus a lucrative avenue for dispute resolution by many litigants. Section 29A of the Act provides a time limit of 12 months for the arbitrators to declare a final award from the date of their entering into reference. Parties can mutually agree to extend this time by a further period of 6 months. Any further extension (after 12 + 6 months) of time can be granted only by the court on application from any of the parties, failing which the mandate of the arbitral tribunal stands terminated. Though almost never used, there is also a provision which allows the court, while granting further extension of time, to order reduction in the arbitrators’ fees if the delay in the proceedings is attributable to them. Costs can also be imposed on the parties as well.

All of these factors combined with the fact that arbitrations take place at venues other than court, arbitral tribunals formulate dedicated timelines for the adjudication of each dispute in advance. This accelerates the process of dispute resolution and ultimately benefits the parties.

2. Procedure

A significant amount of time and energy, in courts, is taken up in adhering to the procedural formalities under laws such as the C.P.C., Cr.P.C., Indian Evidence Act, court rules etc. Rightly so, these laws aim at bringing about uniformity in the proceedings for the benefit of courts which have to deal with a bevy of cases, all at once. Contrastingly, in arbitration, one case is dealt exclusively at a time and therefore the need for unnecessary procedural compliances for the sake of uniformity is not required. Section 19 of the Act states that the arbitral tribunal is not bound by the Code of Civil Procedure and the Indian Evidence Act. Parties are free to agree to their own procedure and in absence of any such agreement, the tribunal can formulate its own procedure.

This liberation from strict procedural formalities is a factor that makes arbitrations swifter than court proceedings. That being said, it doesn’t mean that the parties or arbitrators are free to choose any outrageously impractical kind of procedure by disregarding the basic tenets of justice. Due regard to the principles of natural justice has to be ensured.

3. Finality

A civil dispute adjudicated in a regular civil court is subject to a long chain of appeals before it is finally settled for all times to come. This long and tedious process often dissuades people from approaching courts and causes undue inconvenience to those who approach courts. Arbitration has an advantage in the sense that an arbitral award is not subject to any sort of appeal. The only interference with an arbitral award is that of setting aside of the award on a few limited grounds enumerated in Section 34 of the Act. Section 34 (2) (a) enumerates few technical grounds such as incapacity of parties, lack of proper notice to a party or its disability to present its case, formation of tribunal against terms of the arbitration agreement, adjudication of disputes not covered by the arbitration agreement, etc. Section 34 (2) (b) enumerates two quasi-merit based grounds. First ground is that of non-arbitrability of the subject-matter of the dispute and the second ground is that of the award being in conflict with the public policy of India. Further, the Act specifies that an award is against the ‘public policy of India’ only if the award was made under influence of fraud or corruption or if it is in contravention of the fundamental policy of the Indian law or if it is in conflict with the most basic notions of morality and justice.

The term ‘fundamental policy of Indian law’ has been the subject matter of a plethora of judgments and has taken a long time to develop a concrete meaning today. Starting from Renusagar Power Co. Ltd. v. General Electric Company Ltd.^[4] in 1993 to Ssangyong Engineering and Construction Co. Ltd. v. National Highways Authority of India^[5] in 2019 and after navigating its way through various judgments and two amendments, the term ‘fundamental policy of Indian law’ today implies the following:

1. An award against a statute enacted for safeguarding the national economic interest. Though this condition was rendered as a wide one in Renusagar (supra) where even an insignificant breach would make the award liable to be set-aside, the Supreme Court in Vijay Karia and Ors. v. Prysmian Cavi E Sistemi SRL and Ors.^[6] narrowed down its scope and held that in order for a court to interfere with an award on the ground of it being against the fundamental policy of Indian law, the award must be in breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. The core-values, and the time honoured and harrowed principles should have been violated.
2. An award passed in disregard to orders of the superior courts. This condition was also incorporated by Renusagar (supra).
3. An award which is patently illegal. This condition was initially read into Section 34 by the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd.^[7] and further fortified by its judgment in Associate Builders v. Delhi Development Authority.^[8] Subsequently, the legislature by way of the Arbitration and Conciliation (Amendment) Act, 2015 made patent illegality a statutory ground under Section 34 (2A). However, while doing so, its applicability has been consciously limited only to domestic commercial arbitrations and not to international commercial arbitrations. In Ssangyong (supra), the Supreme Court restricted the meaning of ‘patent illegality’ to mean three things, namely, (i) the decision of the arbitrator is found to be perverse or so irrational that no reasonable person would have arrived at the same; (ii) the construction of the contract is such that no fair or reasonable person would have construed it as such; or (iii) the view adopted by the arbitrator is an impossible view.

To keep the scope of judicial interference narrow, a court under Section 34 cannot entail a review on merits of the dispute while examining its conformity with the fundamental policy of Indian law. This also means that there cannot be any re-appreciation of evidence at this stage.

Another important point to be noted is that an application for setting aside of an arbitral award can be presented only within three months of receipt of the arbitral award by the party making the application. A further condonable period of thirty days is provided if sufficient cause, for not making application within three months, is shown to the court. The Supreme Court in Union of India v. Popular Construction Company^[9] has held that no application under Section 34 can be admitted after the expiry of 120 days.

Though an appeal against setting aside or refusal to set aside an arbitral award by a court under Section 34 is provided under Section 37 (1) (c), the appellate court is naturally bound by the same grounds as the original court under Section 34. All these factors together lend an early finality to an arbitral award as compared to a decree of a regular civil court.

Arbitrability: What Disputes can be admitted to Arbitration?

The word ‘arbitrability’ has three connotations. The first one is general and deals with the capability of a dispute to be adjudicated and settled by an arbitral tribunal. This is based entirely on the nature of dispute. The second and third connotations are more local to the parties and concern whether the disputes are covered by the arbitration agreement and whether the parties have referred these disputes to arbitration. We shall confine ourselves to arbitrability based on the nature of disputes.

Recently, the Supreme Court in Vidya Drolia and Ors. v. Durga Trading Corporation^[10] dealt with the issue of arbitrability at length. While overruling various judgments^[11] and dealing with many others, the Court affirmed its judgment in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors.^[12] and held that the arbitrability of a dispute depends on whether the dispute arises from a right in rem or a right in personam. Disputes arising from rights in personam are considered to be amenable to arbitration and disputes arising from rights in rem are required to be adjudicated by the courts and public tribunals. In Booz Allen (supra), the Supreme Court referred to certain examples of non-arbitrable disputes such as those arising from criminal offences; matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; guardianship matters; insolvency and winding-up matters; testamentary matters (grant of probate, letters of administration and succession certificate); and eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes. After a long list of exclusions, in practice, arbitration is generally adopted for commercial contractual disputes only.

The Way Forward: Big Changes Ahead

Currently, most of the arbitrations in India are conducted via the ‘ad-hoc’ route where the parties mutually appoint their arbitrators. While the significance of arbitration kept expanding all these years, at the same time, the costs and time required in settlement of disputes via arbitration kept expanding as well. To overcome these issues and make India a commercial arbitration hub in line with Singapore and UK, major amendments have been made in direction of institutionalisation of arbitration by way of the Arbitration and Conciliation (Amendment) Act, 2019. This amendment traces its genesis to the recommendations made by a high-level Committee under the chairmanship of Justice B.N. Srikrishna. Though these provisions have not been entirely brought into force as for now, they provide for establishment of the Arbitration Council of India that will frame policies, provide grading of arbitral institutions, and oversee the timely and cost-effective disposal of arbitration matters in India. Other major feature of the amendment is that it provides for appointment of arbitrators through designated arbitral institutions by the Supreme Court of India or the High Courts. Therefore, as and when these provisions will be brought into force, India will see a colossal shift from the system of ‘ad-hoc arbitration’ to ‘institutionalised arbitration’. What ultimately transpires for India in the global arbitration space remains to be seen.