In the modern era of dispute resolution, the term ‘arbitration’ needs no introduction. It has become synonymous with dispute resolution for commercial contracts and has been successful in dethroning litigation as the preferred mode of dispute resolution for commercial disputes. The success of arbitration is based on the pillars of speed, party autonomy and flexibility of proceedings which are the paramount considerations for 21st century dispute resolution.
The key contributor to the success of arbitration is the ever evolving jurisprudence, specifically the development the law has witnessed since the turn of the millennium. In this article we look at the brief history of arbitration and its development in the Indian legal system retracing its steps from being ‘another dispute resolution mechanism’ to being the ‘preferred dispute resolution mechanism’
II. What is Arbitration?
The term arbitration has not been defined in any statute. Thus, the meaning of arbitration has to be ascertained from legal dictionaries, works of eminent jurists and judicial pronouncements under different jurisprudence. One of the earliest definitions of the term ‘arbitration’ can be found in the judgement of Collins V/s. Collins where Justice John Romilly defined arbitration as “a reference to the decision of one or more persons, either with or without an umpire, of some matter or matters in difference between the parties”. Halsbury’s Law of England defines ‘arbitration’ as “reference of a dispute or difference between not less than two parties for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction”. Similarly in Black’s Law Dictionary, ‘arbitration’ is defined as “An arrangement for taking and abiding by the judgment of selected persons in some disputed matter, instead of carrying to established tribunals of justice, and is intended to avoid the formalities, the delay, the expense and vexation of ordinary litigation”
To sum up, ‘arbitration’ is an alternate mode of dispute resolution, decided by a private adjudicator where party autonomy is paramount and the decisions of such private adjudicators are final.
III. Brief History of the Law in India
Arbitration is an ancient concept and its origin can be traced all the way back to Greek and Roman City States. As early as sixth century B.C., Greek city states were resolving disputes like ownership of properties, assessment of damages etc. through arbitration. Even the works of eminent historians like Herodotus and Thucydides refer to arbitration. Under the Roman law, the term ‘compropmissum’ or compromise was a well-known and oft chosen mode of dispute resolution and is considered to be a precursor of arbitration.
India also has a long tradition of arbitration and the concept of non-judicial dispute resolution was prevalent in the Indian society, prior to any codified law. The works of Yajnavalka refers to certain special arbitration courts in ancient India. Even the panchayat system in India is considered as one of the earliest forms of arbitration. While describing the concept of arbitration, Chief Justice A. Marten observed as “It is indeed a striking feature of ordinary Indian life. And I would go further and say that it prevails in all ranks of life to a much greater extent than is the case in England. To refer matters to a panch is one of the natural ways of deciding many a dispute in India. It may be that in some cases the panch more resembles a judicial Court because the panch may intervene on the complaint of one party and not necessarily on the agreement of both, e.g., in a caste matter. But there are many cases where the decision is given by agreement between the parties”
Arbitration in ancient India is a vast subject and merits its own article. The present article shall deal with the development of codified laws in India governing arbitration. The development of arbitration regime in India can be broadly classified under 3 distinct phases:- (i) The Pre-1940 phase; (ii) The 1940-1996 Phase; and (iii) The Post 1996 phase.
a)The Pre 1940 phase – An era of scattered laws
The first enactment devoted solely to arbitration in India was the Indian Arbitration Act, 1899. However, its application was limited only to the Presidency Towns of Calcutta, Bombay and Madras. The other dedicated law for arbitration was the Second Schedule of Civil Procedure Code, 1908. Reference of arbitration was also found in the Indian Contract Act, 1872 (Sections 10 and 28) and Specific Relief Act, 1877 (Section 21).
As evident from above, the law related to arbitration was scattered in multiple statutes and there was no consolidated law governing arbitration. The lack of a consolidated law was a major concern for the legislators and therefore several committees were set up to revise the existing law and create a more robust framework for arbitration.
bI The 1940-1996 Phase – The Arbitration Act of 1940
In the year 1940, a consolidated law related to arbitration was enacted which repealed the existing laws related to arbitration. The Arbitration Act, 1940 was based on the English Arbitration Act, 1934 and was a complete code for domestic arbitrations. However, the Act did not contain any provisions related to enforcement of foreign awards. Foreign awards were enforced in India through two separate legislations viz. (i) the Arbitration (Protocol and Convention) Act, 1937 (for Geneva Convention Awards) and (ii) the Foreign Awards (Recognition and Enforcement) Act, 1961 (for New York Convention Awards).
The arbitral regime in India, under the 1940 Act and ancillary enactments, was far from satisfactory and was severely criticized before different fora. It failed to achieve its desired objective of providing a speedy and efficacious dispute resolution mechanism. The working under the regime was slow, complex, expensive, hyper-technical and fraught with judicial interference. The disastrous effect of the 1940 regime was aptly summed up by the Supreme Court in the following judgements:
i) F.C.I. v. Joginderpal Mohinderpal
“We should make the law of arbitration simple, less technical and more responsible to the actual realities of the situation, but must be responsive to the canons of justice and fair play and make the arbitrator adhere to such process and norms which will create confidence, not only by doing justice between the parties, but by creating a sense that justice appears to have been done.”
ii)Guru Nanak Foundation v Rattan Singh
“Interminable, time consuming, complex and expensive Court procedures impelled jurists to search for an alternative Forum, less formal, more effective and speedy for resolution of disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940 (“Act” for short). However, the way in which the proceedings under the Act are conducted and without exception challenged in Courts, has made Lawyers laugh and legal philosophers weep. Experience shows and law reports bear ample testimony that the proceedings under that Act have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary. Informal Forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the Court been clothed with 'legalese' of unforeseeable complexity.”
c)The Post-1996 phase - The current regime
i) The Act of 1996
The 1940 regime was recognized as an antithesis to the growth that India was witnessing post the economic liberalisation. Thus, a new statutory regime was the need of the hour, a statutory regime which would complement such growth and attract foreign investors in the country.
In this backdrop, the watershed moment in the Indian arbitration law was the enactment of Arbitration and Conciliation Act, 1996 (“the Act”). The Act was based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. It was enacted with the following key purposes:
Creating a consolidated legal framework dealing with arbitrations (both domestic and international) and conciliation
Minimising judicial interference and supervision
Creating a speedy and cost-effective dispute resolution mechanism
Providing a robust enforcement system for arbitration awards
However, over time the new law became afflicted with the same malaise it sought to cure. The arbitration process suffered from long delays and was atrociously expensive. These problems were compounded by ever-increasing judicial interference at all stages of arbitration, which led to further delays and defeated the very object of the Act i.e. moving away from the rigmaroles of traditional litigations.
ii) Amendment of 2015
The first attempt to amend the Act was made through the Arbitration and Conciliation (Amendment) Bill 2003. However, several concerns were raised about the proposed amendments which led to the Bill being withdrawn from Parliament.
Finally, under the chairmanship of Hon’ble Justice (Retd.) A.P. Shah, a new committee was formed to look into the Act and suggest amendments. This Committee suggested various changes to the existing Act and most of these changes were accepted by the legislature. This culminated and led to the enactment of the Arbitration and Conciliation (Amendment Act), 2015. This Amendment Act substantially changed the existing regime and ushered in a new era of arbitration which greatly enhanced the public perception towards arbitration. The key changes brought about by the 2015 amendment act can be broadly classified under the following categories:
Restricting Judicial Intervention: Arbitration was conceptualised as a process with minimal court intervention. However, owing to several judicial pronouncements, court intervention became a norm. Thus, a key object of this Amendment Act inter alia was to limit such judicial interference. Pursuant to such objectives, the Amendment Act inserted express provisions which drastically curtailed the powers of the Court and its interference in arbitral proceedings.
Expediting the process of arbitration: Another key object of the 2015 Amendment Act was to eradicate the delays and turn arbitration into a speedier and an effective dispute resolution mechanism. To achieve this objective, specific timeframes were introduced for different stages of arbitral process. A time-frame of 12 months (extendable by further 6 months) was also prescribed for completion of the entire arbitration proceeding, failing which parties had to approach court for extension. The courts were also given liberty to issue appropriate directions while granting such extension, including directions for replacement of arbitrators.
Improving the overall functioning of arbitration: The 2015 Amendment Act also sought to bring various improvements in the overall governance of arbitration and make it a more appealing to the public at large. Such changes included creating a model fee schedule for arbitrators to limit expenses, setting up mechanisms to ensure neutrality and impartiality of arbitrators.
IV) Amendment of 2019
Even though the 2015 Amendment Act, brought a new lease of life to arbitration, it failed to promote institutional arbitration in India and make it a hub for international commercial arbitration. Institutionalised arbitration in India is still lacking and it has led to parties electing foreign seats like Singapore, Hong-Kong for arbitration.
The 2019 Amendment Act was introduced with a specific focus on promoting institutional arbitrations in India. To promote such institutional arbitration, the Act vested the power of appointing arbitrators solely with arbitral institutions designated by the Supreme Court or the High Court. The Amendment Act also created an apex body for arbitration, the Arbitration Promotion Council of India (“APCI”), consisting of different stakeholders, for the purpose of monitoring and promoting arbitration in India.
However, these changes related to institutional arbitration and creation of APCI are yet to be notified.
The arbitration regime in India has witnessed several changes since its inception and continues to evolve constantly. The recent amendments of 2015 and 2019 along with various judicial pronouncements over the last 5 years have contributed significantly to the growth of arbitration as an efficacious alternative to traditional court litigation. Certain areas like institutional arbitration still require some attention, but considering the current trend we can be hopeful that these issues will be resolved sooner than later.