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Arbitration Law in India: From regressive to progressive

Halsbury Laws of England1 defines Arbitration as reference of a dispute or difference between


not less than two parties for determination after hearing both parties in a judicial manner by a
person or persons other than court of competent jurisdiction. As defined by Michael Mcllwrath 2,
arbitration is a process by which parties agree to the binding resolution of their disputes by
adjudicators, known as arbitrators, who are selected by the parties, either directly or indirectly
via a mechanism chosen by the parties.
Arbitration law in India has undergone a paradigm shift in its approach and India has witnessed
momentous developments in law and economic policy reforms. The history of arbitration in
India can be traced back to pre-colonial times when India enacted the Bengal regulation Act,
1772 (and 1981), which provided an option to the parties to submit their dispute to an arbitrator.
Then came the Indian Arbitration Act, 1899 (hereinafter, referred to as the 1899 Act) which
provided that courts could only interfere in arbitral awards on grounds of the arbitrators
misconduct and improper procurement of award. Under the 1899 Act, the courts emphasized
judicial restraint and were reluctant to interfere except for cases of fraud, corruption or law
arising on the face of award was shown3.
In the recent past, statutory provisions on arbitration can be found in the Arbitration Act, 1940
(hereinafter, referred to as the 1940 Act), The Arbitration (Protocol and Convention) Act, 1937
and The Foreign Awards (recognition and Enforcement) Act, 1961. The 1940 Act dealt only with
domestic arbitrations and required judicial intervention of the courts in all three stages of
arbitration. The 1940 Act, in addition to grounds mentioned under the 1899 Act provided that
court could set aside an arbitral award if it was otherwise invalid. There were endless delays,
effectively defeating the purpose of having disputes resolved through arbitration. However, as
explain hereafter, arbitration legislation in India has evolved in an attempt to strengthen
arbitration practice with minimal judicial intervention.
To overcome, inter alia, this problem, in the year 1996, based on the UNCITRAL Model Law,
the Indian legislature enacted the Arbitration and Conciliation Act, 1996 (hereinafter, referred to
as 1996 Act). The 1996 Act attempted to narrow down the scope of challenge to arbitral
awards and remove the invalidity of award as a ground of challenge. Instead it permitted a
challenge to awards shown to be against the public policy of India. The 1996 Act suffered
from several lacunae and had various drawbacks. For example, it did not provide any provision
for expediting either (i) awards or (ii) for the subsequent proceedings to set aside awards. There
is no provision to enable Indian parties to obtain interim measures from Indian courts before a
foreign arbitration could commence outside India.
1

4th edition, (2), Butterworths 1991


International Arbitration and Mediation: A Practical Guide
3
Champsey Bhara and Co. v Jivraj Balloo Spg. And Wvg. Co. Ltd. (1922-23) 50 IA 324
2

The legislative framework of the 1996 Act has often been misinterpreted by courts. The 1996 Act
is divided into two parts, part I applies to domestic arbitrations and part II applies to international
arbitrations4. Section 48, in part II of the 1996 Act lays down the conditions for enforcement of
foreign awards. However, in direct contradiction to the well defined spheres of the 1996 Act, the
Supreme Court in Bhatia International v Bulk Trading SA 5 held that part I of the 1996 Act is
applicable to foreign seated arbitrations.
Further, in Venture Global Engineering v Satyam Computer Services Ltd 6. The Supreme Court
held that section 34 of the 1996 Act (in part I of the 1996 Act) was applicable to enforcement of
foreign awards. Such an interpretation by the judiciary blurred the distinction between the two
parts of the 1996 Act, defeating the main objective behind the 1996 Act, i.e. speedy resolution of
disputes with minimal court interference7.
However, in 2012, the judgment of the Supreme Court in Bharat Aluminium Co. v Kaiser
Aluminium Technical Services Inc8 (hereinafter, referred to as BALCO) ushered a new era for
arbitration in India. It has often been heralded as a new dawn for arbitration in India and has
served as a precedent for progressive judgments in the field ion international commercial
arbitrations.
The Supreme Court has indicated its pro arbitration stance through its various decisions, such as
Escorts Ltd. v Universal Tractor Holding9 and Govind Rubber v Louids Dreyfus Commodities
Asia P Ltd10. In the Escorts case, the execution of a US award was challenged on the basis that
the award had not been confirmed as per the provisions of the arbitration agreement and the
Federal Arbitration Act of the United States of America. The Apex court adopted the proenforcement bias of the New York Convention as is adopted by courts in New York Convention
jurisdictions and restrictively applied the grounds for refusing recognition and enforcement of
arbitral awards11. The Apex court held that section 48 of the 1996 Act is based on Article V of the
New York Convention and the doctrine of double exequatur which requires that the award be
confirmed by the court of the country where it is passed, before its enforcement can be sought in
another jurisdiction, is inapplicable in India.
As elaborated above, the 1996 Act permitted challenge to awards shown to be against the public
policy of India. This has been a topic of much debate since the term is too vague and has little to
do with the law of arbitration.
4

Sections 1 to 34 fall in Part I and Sections 44 to 60 fall in part II of the 1996 Act.
(2002) 4 SCC 105
6
(2008) 4 SCC 190
7
Ministry of Law and Justice, government of India, Proposed Amendments to the Arbitration and Conciliation Act, 1997: A
Consultation Paper (2010)
8
(2012) 9 SCC 552
9
(2013) 10 SCC 717
10
Insert citation
11
Alan Redfern & Hunter, The Law & Practice of International Commercial Arbitration (4 th edition, Sweet & Maxwell, London,
2006) 445
5

The Supreme Court in its decision in Renusgar power Co. Ltd v General Electric Co 12. held,
albeit in the context of the (now repealed) Foreign Awards (Recognition and Enforcement) Act,
1961, that an award would be contrary to the public policy of India only if it was contrary to the
fundamental policy of Indian law, interests of India or justice or morality. The Supreme Court
followed it up with another decision in ONGC Ltd. v Saw Pipes Ltd 13 to enlarge the scope of
interference in arbitral awards and held that an arbitral award suffering from patent illegality
would be contrary to the public policy of India.
In a more recent decision of ONGC Ltd. v Western Geco International Ltd 14, the Supreme Court
has opened the floodgates and has interpreted the phrase fundamental policy of Indian law
expansively. The judgment has reduced arbitral tribunals to administrative authorities and has left
it open to challenge arbitral awards on innumerous grounds.
Consequently, to the need to change the law has been felt strongly and the Law Commissions
246th Report on Amendment to the Arbitration and Conciliation Act, 1996 (hereinafter, referred to
as the Report) recommended several far reaching and welcome changes to the existing law to
restrict court interference in arbitral awards.
The Report provides for patent illegality appearing on the face of the award as a ground to
challenge purely domestic arbitration awards, but not where challenge is to international
commercial arbitration awards (i.e. awards rendered in India where at least one of the parties is
not Indian). A proviso is, however, introduced stating that domestic awards shall not be set aside
merely on the ground of an erroneous application of the law or by reappreciating evidence. In
addition, the Report provides that an award, whether domestic or international, may be
challenged on the ground that it is in conflict with the public policy of India, but such public
policy is restricted to fundamental policy of Indian law, the most basic notions of morality or
justice, and fraud and corruption. The Law Commission had thought that it had thus
restricted the grounds to challenge arbitral awards.
Based on the Report, the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter, the
Amendment Act) was passed by the Indian legislature to amended the 1996 Act. The
Amendment Act substituted the explanations to section 34 to read that an award is in conflict
with the public policy of India, only if, (i) the making of the award was induced or affected by
fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention
with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of
morality or justice. Explanation 2 states that the test as to whether there is a contravention with
the fundamental policy of Indian law shall not entail a review on the merits of the dispute. The
amendment act also inserted another sub-section (2A) to read that an arbitral award arising out of
arbitrations other than international commercial arbitrations, may also be set aside by the court, if
12

1994 Supp (1) SCC 644


(2003) 5 SCC 705
14
(2014) 9 SCC 263
13

the court finds that the award is vitiated by patent illegality appearing on the face of the award,
provided that an award shall not be set aside merely on the ground of an erroneous application of
the law or by re-appreciation of evidence.
Despite the fact that substantial changes have been brought about by way of the Amendment Act,
the boundaries that must be considered by court while considering challenged to arbitral awards
is not clear.
First, the Amendment Act fails to explain what entails in the fundamental policy of Indian law or
in the most basic notions of morality or justice.
Second, it is not clear what has been has been gained by way of the Amendment Act since it does
not curtail the detailed examination of validity of arbitral awards. It has always been the law that
in deciding challenges to arbitration awards, courts should not enter into the merits of the
dispute, re-appreciate evidence, or substitute their own interpretation in place of another
plausible, but contrary, interpretation of terms of contract adopted by arbitrators 15. Yet, this has
not dissuaded courts from finding a way, by expansive interpretation to embark on a detailed
examination of the validity of awards.
Third, the amendment only tells us what examination of fundamental policy of Indian law does
not entail. It fails to explain what it does. This may lead to uncertainty as to when, and in what
circumstances, if not on a review of the merits, could an award be said to be in violation of
fundamental policy of Indian law.
Fourth, the amendment does not provide any restriction on review of merits of a case when
applying the patent illegality standard. This may tempt courts to hold that Parliament did not
intend to prohibit courts from reviewing the merits when applying the patent illegality standard
in domestic arbitration cases.
Arbitration is gaining popularity and is expanding exponentially in India due to several factors,
inter alia, speedy resolution of disputes, cost effectiveness, confidentiality etc. It would be
pointless to remove public policy as a ground to challenge awards rendered in India, when it
cannot be removed as a ground to refuse recognition and enforcement of foreign awards, as
provided in Section 48(2)(b) of the Act. This is because public policy is a ground introduced as
required by the New York Convention on Recognition and Enforcement of Foreign Awards,
1958, to which India is a signatory. However, an amendment to section 48 expressly enumerating
the components of public policy would further help curtail the time taken to enforce awards in
India since a dynamic business environment demands that efficiency of its functions are not
disrupted by protracted legal disputes. Consistent with this approach, the Law Commission
should not make the mistake of leaving the language of the statute vague enough to enable courts
to find jurisdiction where none exists.
15

(2001) 6 SCC 347 , (2009) 5 SCC 678

The growth of international arbitration has helped in reducing transaction costs of business
through quick resolution of disputes. This has been possible because of minimal court
interference, especially at the stage of enforcement of arbitral awards. Thankfully, there is some
recognition and understanding of this aspect by the Supreme Court as evident from recent
decision in Associate Builders v. DDA16, wherein it held that an award would not be contrary to
justice and hence contrary to the public policy of India, unless such award shocks the conscience
of the court, which is arguably a very high threshold.

16

(2015) 3 SCC 49

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