Arbitration

I. Pre-British Period

Arbitration and conciliation have been the preferred system of resolution of disputes in India from times immemorial. In the ancient times in India, there existed a system of arbitration in the form of Panchayats. According to Sir Henry Maine:

 

 

“It was always considered a representative body and whatever was its real number, it always bore the name which recalled its constitution of five persons or ‘Panchayat’. Traces of this method of settling disputes can still be found in certain communities in the country.

 

The Panches were ordinarily elected according to their wealth, social standing and influence in the community. They could decide matters which were referred and also matters which were not referred. The binding authority behind their decisions was the fear of excommunication from the community and also from the religious services, as Panchayats were incomplete without religious preachers.

 

So prevalent was the system of arbitration in India that Marten, CJ., was compelled to state:

 

“It (arbitration) 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.”

 

Ancient Indian Jurisprudence recognized two methods by which disputes between citizens could be decided — one way was by judicial process in the courts established by the King, and the other by the different categories of arbitration institutions. The puga courts comprised of persons dwelling in the same place, irres­pective of their caste or employment and were competent to decide cases in which the local public were interested. The streins (guilds) were associations of persons engaged in similar pursuits of which the merchant’s guilds were the most important. They were competent to decide matters relating to their special calling for traders. Social matters concerning the members of a particular community could be investigated and decided at the level of the kulas, which comprised of village elders.

 

II. Regulations

After the advent of the British in India, attempts were made to regulate the judicial system in the country. Various Regulations and Acts were passed to formu­late a system of arbitration in India which would be in consonance with British Jurisprudence. The Orissa High Court in State of Orissa and Ors. v. Gangaram Chhapolia, traced the sequence of legal developments leading to the formal codification of arbitration laws in the following words:

 

“The first attempt at codifying the law was made by the Bengal Regula­tions of 1772 and 1780 where provision was made for submission of disputed accounts to decision by arbitration. In 1781, Sir Elijah Impey’s Regulation included a provision that “the Judge do recommend, and so far as he can, with­out compulsion, prevail upon the parties to submit to the arbitration of one person, to be mutually agreed upon by parties.” In 1787, regulation for the Administration of Justice was passed and it contained rules for referring suits to arbitration with consent of parties. There was no detailed provision, how­ever, to regulate the arbitration proceedings. In 1793 Regulation XVI was enac­ted with a view to promoting reference of disputes of certain categories to arbi­tra­tion and to “encourage people of credit and character to act as arbitrators”. Regulation VI of 1813 made some improve­ment to the Regulation of 1793 and arbitration was available in cases of disputes in regard to land. Bengal Regulation VII of 1822 authorised the Revenue Officers to refer rent and revenue disputes to arbitrators and the Collectors were enjoined to induce parties to agree to such arbitration. Bengal Regulation IX of 1883 authorised the Settlement Officers to refer disputes to arbitration.”

 

The various Regulations framed by the East India Company touching upon arbitration were:

 

(a) Bengal Regulations of 1772 and 1780 — A clause in this regulation provided that “in all cases of disputed accounts, it shall be recommended to the parties to submit the decision of their cause to arbitration, the award of which shall become a decree of the court”.

 

Sir Elijah Impey’s regulation of 1781 — It provided that “the judges do recommend and as so far as he can, without compulsion, prevail upon the parties to submit to the arbitration of one person to be mutually agreed upon by the parties”. Another provision of this regulation provided that, “no award of any arbitrator, or arbitrators be set aside except upon full proof, made by oath of two credible witnesses, that the arbitrators had been guilty of gross corruption or partiality in the cause in which they had made their award”.

 

Regulation of 1787 — This regulation laid down rules for referring suits to arbitration with the consent of the parties. There was, however, no detailed provision to regulate the arbitration proceedings, nor were there any provisions for the consequences of the award not being made in time, or for the situation when arbitrators differed in their opinions.

 

(d) Regulation XVI of 1793 — In this, provisions were made for referring suits to arbitration and submitting them to the decision of the Nizam. Further changes were made by Regulation XV of 1795 and Regulation XXI of 1793. In these regulations, an effort was made to promote refe­rences of disputes of certain description (disputed accounts, partnerships, debts, doubtful or contested bargains, non-performance of contracts etc.) to arbitration. Procedure for reference, award and setting aside was also laid down. Certain criterion for appointment of arbitrators was also recommended.

 

(e) Regulation VI of 1813 — Arbitration in suits, with respect to rights in land and disputes regarding forcible disposition of land, was allowed.

 

(f) Regulation XXVII of 1814 — By this regulation Vakils were allowed to act as arbitrators, removing an age old bar on their acting as such.

 

(g) Bengal Regulation VII of 1822 — This enjoined upon Revenue Officers to refer rent and revenue disputes to arbitrators and called upon Collectors to do the same. This dichotomy regarding arbitration in civil and revenue courts is still recognised. In this regard, reference may be made to Section 5 of the Code of Civil Procedure. Reference of rent and revenue matters is largely regulated by State Legislations even till date.

 

(h) Bengal Regulation IX of 1883 — This empowered Settlement Officers to refer disputes to arbitrators and exercise control over them.

 

(i) Regulations for Madras — In the Madras Presidency Regulation, VII of 1816 authorised the District Munsifs to assemble District Panchayats for administration of civil suits for real or personal property.

 

(j) Regulation for Bombay — The Bombay Presidency Regulation VII of 1827 governed arbitration. It facilitated amicable adjustments of disputes of civil nature by means of arbitration. This regulation allowed reference of present as well as future disputes to arbitration by means of an agreement. It, however, enjoined upon the parties to name the arbitrator in the agree­ment itself. All cases which were cognizable by a civil court could be referred to arbitration. This Regulation also provided for making the award a rule of the court and also provided that a breach of this would amount to contempt of court. A time limit was also fixed for the decision by the arbitrators. Thereafter, Act 8 of 1859 codified the procedure of civil courts. Sections 312 to 325 of the said enactment provided for settlement of disputes through arbitration.

 

These Regulations introduced compulsory arbitration, prescribed the limits of judicial intervention, provided safeguards to ensure fairness and laid down the procedure for attendance and examination of witnesses. A dual system of having indigenous arbitrations for exclusively native disputes and Courts for the rest was prevalent under the aforesaid Regulations. Unfortunately, this system led to large scale corruption. It, therefore, became essential to dispose of disputes through well-qualified arbitrators or arbitrators chosen by the parties, to whose “award” the judges should give the force of a decree” The establishment of the Supreme Courts in Bengal and Madras and the Recorder’s Court in Bombay through reforms intro­duced subsequently changed the entire landscape of the Indian judicial system, including the conduct of arbitrations, for the better.

 

III. Acts

The British introduced the following legislations to regulate the conduct of arbitrations in India:

 

(a) Act IX of 1840 Under the Charter Act of 1833 the Legislative Council for India was established in 1834. It passed Act IX of 1840, which amended the law with reference to Arbitration, Damages and Interested Witnesses.

 

(b) Act VIII of 1859, CPC Sections 312 to 327 of this Act related to arbitra­tions. Section 312 permitted references to arbitration in pending suits and Sections 313-325 laid down the procedure for the arbitration. Sections 326 and 327 allowed arbitration without intervention of courts. This Act, however, was not made applicable to the Supreme Court, or the Presi­dency Small Cause courts or non-regulation provinces

 

(c) Act X of 1877 and Act XIV of 1882 The Code of Civil Procedure was revised in the year 1882 and the provisions relating to arbitration were reproduced verbatim in sections 506 to 526. No change in the law of arbitration was effected by the said acts of 1877 and 1882.

 

(d) Act I of 1872 Indian Contract Act Section 28 of this Act recognized two exceptions as to the agreement in restraint of legal proceedings. The first exception related to agreements to refer to arbitration any disputes which may arise between the parties. If any party to such an agreement in contravention of the terms thereof, filed a suit, the other party was given the right to plead the existence of such a contract as a bar to the suit. The second exception relates to agreements to refer to arbitration any dispute which has already arisen between the parties. This Act, therefore, recognized for the first time, agreements to refer to arbitration present as well as future disputes.

 

(e) Specific Relief Act, 1878 Section 21 of this Act provided that though future disputes could not be referred as per Code of Civil Procedure, but if a person entered into a contract to refer future disputes and later tried to wriggle out of it, by going to the courts on the same matter, he would not be allowed to do so.

 

(f) Act IX of 1899 Indian Arbitration Act The Indian Arbitration Act of 1899 was based on the English Arbitration Act of 1889. It was the first direct law on the subject of arbitration but its application was limited to the Presidency towns of Calcutta, Bombay and Madras. The Act allow­ed reference of present as well as future disputes to arbitration. It recog­nized arbitration agreements, whether or not an arbitrator was named therein or not.

 

(g) Code of Civil Procedure, 1908 In this Code, the Second Schedule was devoted completely to arbitrations. This Act contained (a) provisions for arbitration in respect of the subject-matter of suits, (b) provisions where under parties to a dispute might file their arbitration agreements before the court, which would then refer the matter to arbitration, and (c) provisions for arbitration without the intervention of court.

 

(h) Indian Arbitration Act, 1940 This Act repealed the Arbitration Act of 1899 and Sections 89 and 104(1), clauses (a) to (f) and the Second Schedule of the Code of Civil Procedure and continued to govern the law of arbitration in India till 1996. This Act was based upon the (English) Arbitration Act of 1934.

 

(i) The Arbitration and Conciliation Act, 1996 To consolidate and to amend the law relating to arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for mattes connected therewith or incidental thereto, the Arbitration and Conciliation Bill, 1995 was introduced in the Parliament. Initially the President of India promulgated the Arbitration and Conciliation Ordinance, 1996. Since the Parliament could not delibe­rate upon the Ordinance within the time allowed under the Constitution, the Ordinance had to be re-promulgated twice. The Bill was passed after due discussions in both Houses of Parliament and received the assent of the President of India on 16th August, 1996. Though the Arbitration and Conciliation Act, 1996 came into force on 22nd day of August, 1996 but it was made effective to cases where the arbitral pro­ceed­ings commenced as on 25th January, 1996. The Act is based on the UNCITRAL Model law of Arbitration and Rules of Conciliation.

 

The President of India on 2nd March, 2000 while delivering the inaugural address of International Council for Commercial Arbitration at Delhi said:

 

“… It may be observed that Gandhi made his breakthrough, as a barrister, not in a conventional courtroom success in South Africa, but by arbitrating a settlement between the firm of Dada Abdulla in Durban, and its rival firm of Tyebji Seth based in Pretoria. Facts are the ingredients of any lawsuit. If facts are adhered to and convincingly demonstrated before the court, it is reasonable to assume that law will come to the aid of the factually correct side. But Gandhi was aware of the ‘the fatal futility of Fact’ to use the words of Henry James. He knew that there is a truth that lies above factual truth, above literalism. This is the truth that a just concord is higher even than facts in their one sidedness; the truth that the letter of the fact can kill, while the spirit of concord can give life. Pyarelal, Gandhi’s biographer, has written as follows about the case taken up by Gandhi:

 

‘He had never any doubt as to Dada Abdulla’s success. The facts were on Dada’s side. So also was the law bound to be on his side. But he clearly saw that if the case dragged on, no matter who won, both parties would ultimately be financially ruined. The lawyer’s fees were steadily mounting up. Under the law, the winning could never fully recover the costs. He felt disgusted with his profession. Why could not the parties be brought together to settle the suit out of court by arbitration? After all Tyebji Seth and Dada Abdulla both came from the same town and were kin. He succeeded in persuading the parties concerned to agree to arbitration.

 

‘The arbitrator gave a verdict in Dada Abdulla’s favour. Now if Dada Abdulla had insisted on immediate execution of the arbitrator’s award, Tyebji Seth could have gone bankrupt, as he could not have paid all at once the entire amount, about 37000 pounds and costs. And this would have been a tragedy. For among the Indian merchants death was deemed preferable to the ignominy of bankruptcy. There was only one way. Dada Abdulla should be generous and agree to payment being made in easy instalments spread over a long period. To get him to do this proved even harder than getting him to agree to arbitration. But Gandhiji’s persistence won the day, and both the parties were happy over the result.

 

“Throughout his legal career of some twenty years, thereafter, the future Mahatma declined to use his legal knowledge to score victories, rather to bring parties together on the grounds of equity and justice. He was able to say with satisfaction in the end that he had helped settle more cases out of court than through the suit-route. He was being both frank and wise when he went on to say ‘I lost nothing thereby, not even money, certainly not my soul’.

 

“Today, even in India this old system of arbitration is being overtaken by the review by courts making matters one of endless litigation. It may not be certainly possible today to exempt commercial arbitration from the review in a court of law.

 

UNCITRAL and Arbitration and Conciliation Act, 1996

 

United Nations Commission on International Trade Law (UNCITRAL) is a specialised commission of the United Nations created by the General Assembly in 1966 in order to harmonize and unify international trade law. The General Assembly approved the Model Law described UNCITRAL as “the core legal body within the United Nations system in the field of international trade law with a mandate to co-ordinate legal activities in this field in order to avoid duplication of effort and to promote efficiency, consistency and coherence in the unification and harmonization of international trade law”.

 

Taking into consideration the value of arbitration and its importance in the field of international trade law, UNCITRAL has taken a number of significant projects in the field of commercial dispute resolution. In 1976 it completed the UNCITRAL Arbitration Rules; in 1980 UNCITRAL Conciliation Rules came into force.

 

The advent of the UNCITRAL Model Law on International Commercial Arbi­tration constitutes the most remarkable development and influential accom­plishment in the field of commercial arbitration in the eighties. The UNCITRAL Model Law constitutes the third major contribution of the United Nations to the development of a fair and efficient process of resolving disputes in international commercial transactions, the first being the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the second being the UNCITRAL Arbitration Rules.

 

The General Assembly of the United Nations recognised that the UNCITRAL Model Law serves the goals of modernisation and unification when it recom­men­ded in its resolution 40/72 of 11th December, 1985 that all States give due consideration to the UNCITRAL Model Law, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of the international arbitration practice. The mobile and the truly international arbitral process calls for a wide range of choices as regards the place of arbitration and requires easily obtainable, accurate information about the law of the country in question.

 

The Resolution of the General Assembly of the United Nations begins by recognising “the value of arbitration as a method of settling disputes arising in international commercial relations”. In the second paragraph it had been stated that the General Assembly is “convinced that the establishment of a model law on arbitration that is acceptable to the States with different legal, social and economical system contributes to the development of harmonious international commercial relations”.

 

Recourse to arbitration helps to improve international economic relations by providing a mechanism that reduces the risk of transnational commerce. While entering into business relations, the business houses do hope that there would be no failure disagreements but nevertheless there is always a fear of disputes. This fear gets compounded further when the businessman is not sure of the availability of the reliable procedures for resolution of such disputes not only promptly but also fairly. When the risk factor is high because of non-availability of effective dispute resolution procedure, the businessman would normally (i) refuse to enter into the transaction, or (ii) raise the price to compensate for the additional hazard. Needless to say that in either case, the free flow of trade is greatly hampered. On the other hand if the business knows that effective dispute resolution mechanism is available, the conduct of the trade and investment is facilitated.

 

In view of its relative simplicity, economy, speed and privacy, arbitration has particular attractions in the international sphere. For instance, a party from one country would always have reservations in suing the other party in another country where the procedures are unfamiliar and the approach of the courts may be different because of different legal and cultural perspectives. Even if the party was to sue the other in its own country, the enforceability of award in the foreign country where the other party may be having property would pose multifarious problems. As against this, recourse to arbitration avoids the need to resort to courts. It is always easier to enforce arbitral awards than court judgments because of multilateral conventions.

 

(i) The Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016)

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The strength of the office lies in the fact that it has handled and continues to handle some of the largest claims in the country.

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