It has been observed that whenever two people get together for the purpose of transaction of business, misunderstanding, and conflict are very common between them. Such conflict needs resolution, especially the kind that is quick and effective.
Knowing the nature of dispute resolution through litigation, it is time to look at alternative means of settling disputes. In this context, it is essential to look towards arbitration as one of the effective means of dispute settlement.
Arbitration is one of the largest forms of ADR (Alternative Dispute Resolution) process internationally, fundamentally refers to the settlement of disputes outside the court by a third party.
The arbitration process takes place as: While entering into a contract, parties agree that in case of a conflict the matter would be sought to be resolved by an arbitrator. Generally seen that the name of the potential arbitrator, agreed upon by both the parties, is mentioned in the contract itself. In case a dispute arises, the first step is issuing an arbitration notice by either of the parties. Later this is followed by a response by the other party and subsequent appointment of an arbitrator, the decision on rules and procedures, place of arbitration, and language.
The arbitrator, if the matter so requires may issue interim reliefs followed by a final award which is observed to binding on both parties. However, if either of the parties, unhappy with the award, challenges before the appellate court or the Supreme Court depending upon the matter.
But to understand the need for arbitration in India, it becomes important to look for the development of arbitration through various stages. The text below talks about the history and development of arbitration law in India.
HISTORY AND DEVELOPMENT OF ARBITRATION LAW IN INDIA
Arbitration is not a new concept in India, it's been a part of India’s long tradition and has developed through the pages of history within the due course of your time.
In ancient India, the settlement of disputes by tribunals was themselves chosen by the parties. Ancient texts of Yajnavalka and Narada ask for three sorts of popular courts (Puga, Sreni, Kula). Besides at the village level, Panchayats have also been a prevalent sort of alternate dispute resolution. At different stages of arbitration with provisions for appeals in certain cases from the award of a lower grade of arbitrators to arbitrators of the upper grade.
In the British era: the Bengal Regulation of 1772, 1780, 1781, and therefore the Cornwallis Regulation of 1787 recognized and encouraged arbitration. Thereafter, the Bengal Regulation of 1793, the Madras Regulation of 1816, and therefore the Bombay Regulation of 1827 provided for arbitration.
Finally, in 1859 the Civil Code of the courts was codified with provisions for arbitration. Later this was followed by Codes for Civil Procedure of 1877 and 1882. However, there was no notable change in the law concerning arbitration in these amendments.
Next came the Indian Arbitration Act of 1899. This didn't apply to disputes which were topics of suits. It addressed arbitration by agreement without the intervention of the court which too only in Presidency towns. Further, it didn't permit arbitration in disputes which were being adjudicated through a suit.
In 1908 the Civil Procedure Code was amended, removed the limit of arbitration to only Presidency Towns. In the mid-1920s, the Civil Justice Committee was appointed to report on the machinery of civil justice within the country and also made suggestions for modification of arbitration laws.
However, owing to the anticipation of taking cues from British Arbitration Laws which was expected, it had been finally in 1938 that the government of India appointed officers to revise the Arbitration Law.
FORMER ARBITRATION LAWS
1. The Arbitration Act of 1940
The very first Arbitration Act of the country was enacted in 1940. The 1940 Act, however, affect domestic awards. Under the 1940 Act, each interim award might be appealed to successively higher courts in order that arbitration might be entangled within the Indian courts for several years. Further, the 1940 Act permitted an Indian court to switch, remit or put aside a domestic award for anybody of ten reasons.
Also under Section 35 of the Act, simply having an arbitration agreement didn't deduct the jurisdiction of the court to entertain a suit or a proceeding concerning the subject matter of the arbitration between the parties. Once the notice of a suit was given to the arbitrator, any longer action within the arbitration became invalid because the proceeding during a court of law prevailed over the proceedings before the arbitrator, as seen results of which the courts often showed a willingness to scrutinize arbitral awards on their merits.
2. The Foreign Awards (Recognition and Enforcement) Act, 1961
The 1940 Act governed domestic awards while the Foreign Act governed foreign awards. Foreign awards are those awards that are decided by a tribunal outside India.
To enforce a far-off award in India under the Foreign Act a decree from an Indian court was necessary. But due to the cumbersome nature of the Indian court system, getting such a decree was time-consuming and thus made the enforcement and collection of foreign awards difficult. Thus, for these reasons, the outlook for doing business in India was bleak.
In 1961 a separate law, Foreign Awards (Recognition and Enforcement) Act applied to the enforcement of awards under the Geneva Convention, 1927, and New York Conventions to which India was a signatory. Over time, the working of this Act was found to be unsatisfactory thanks to an excessive amount of court intervention.
3. The Arbitration and Conciliation Act, 1996
During the late 1970s, the functioning of the 1940 Act was questioned and examined by the Law Commission of India on grounds of delay and hardship caused due to clogs that affect smooth arbitral proceedings.
The Commission recommended the amendment of certain provisions of the Act instead of reworking the whole framework. Due to which the Arbitration and Conciliation Act, 1996, based on the 1985 United Nations International Commission on International Trade Law (UNICTRAL) model law and rules, was enacted.
The UNICTRAL Model Laws and Rules were already being widely used internationally and thus India joined the international consensus on their use. The Ordinance consolidates and amends prior law concerning domestic and foreign arbitration, enforcement of arbitral awards, and also defines the law concerning conciliation and for matters related therewith or incidental thereto.
The constitutional validity of the Act of 1996 has been upheld by the Supreme Court in Babar Ali v Union of India, JT 1999 (10) SC 508, (2000) 2 SCC 178, as "In view of judicial review being available for challenging the award in accordance with the procedure laid down in the Act, the honorable court said that there is no question of the Act being unconstitutional."
The Shortcoming of the Act, 1996
The Arbitration and Conciliation Act, 1996 suffered from various issues including high costs and an excessive amount of intervention of Courts. Under the 1996 Act, if an application under Section 34 was made to set aside an award, it might make the award inexecutable. Because as soon as an under Section 34 application was filed, an automatic stay would be granted on the execution of the award.
Further, there was no deadline within which the arbitrator had to form an award, due to which arbitral proceedings continued for years. Also, sometimes seen that the cost of Arbitration was even more than the cost of litigation or the relief sought, which was thus against the ethos of the Act of 1996.
Considering the problems like costs, delay, judicial intervention the Ministry of Law and Justice invited suggestions from eminent lawyers, jurists, and legal experts of the country regarding the functioning of the Act of 1996.
After which, the Arbitration and Conciliation (Amendment) Act, 2015 was passed, making adequate amendments to the 1996 Act.
4. Arbitration and Conciliation (Amendment Ordinance) 2015
Some important amendments were made within the Arbitration and Conciliation Act, 1996 not only to correct the defects of the sooner law but also to form this arbitration law in line with the opposite foreign arbitration laws thereby that specialize in achieving the target of creating India an arbitration center.
The key changes caused by the 2015 amendment act are often broadly classified under the subsequent categories:
Restricting Judicial Intervention: Arbitration was conceptualized as a process with minimal court intervention. However, due to several judicial pronouncements, court intervention became a norm. Thus, a key objective of this Amendment Act inter alia was to limit such judicial interference. For this objective, the Amendment Act inserted express provisions which drastically curtailed the powers of the Court and its interference in arbitral proceedings.
Expediting the method of arbitration: Another key object of the 2015 Amendment Act was to eradicate the delays and switch arbitration into a quick and efficient dispute resolution mechanism. For this, specific timeframes were introduced for various stages of the arbitral process. A time frame of 12 months (extendable by further 6 months) was also prescribed for completion of the whole arbitration proceeding, failing which parties had to approach the court for an extension. The courts were also given liberty to issue appropriate directions while granting such extension, including directions for the replacement of arbitrators.
Improving the general functioning of arbitration: The 2015 Amendment Act also sought to bring various improvements within the overall governance of arbitration and make it more appealing to the general public at large. Such changes included creating a model fee schedule for arbitrators to limit expenses, fixing mechanisms to make sure neutrality and impartiality of arbitrators.