INTRODUCTION

The significant increase in the economic development of nations over the

last few decades has been accompanied by a considerable increase in the

number of commercial disputes as well. In India too, rapid globalization

of the economy and the resulting increase in competition has led to an

increase in commercial disputes. At the same time, however, the rate of

industrial growth, modernization, and improvement of socio-economic

circumstances has, in many instances, outpaced the rate of growth of

dispute resolution mechanisms. In many parts of India, rapid development

has meant increased caseloads for already overburdened courts, further

leading to notoriously slow adjudication of commercial disputes.1 As a

result, alternative dispute resolution mechanisms, including arbitration,

have become more crucial for businesses operating in India as well as

those doing businesses with Indian firms.

1
30 million cases pending in courts, www.rtiindia.org, last visited on 20th November 2014

1
Keeping in mind the broader goal of exploring links between the quality

of legal performance and economic growth, this research paper is an

attempt to critically evaluate arbitration in India as a legal institution. To

this end, this paper presents an empirical inquiry into the state of

arbitration, as well as a more theoretical examination of the political

economy and arbitration as developed and practiced in India. In sum,

although the huge influx of overseas commercial transactions spurred by

the growth of the Indian economy has resulted in a significant increase of

commercial disputes, arbitration practice has lagged behind.

In this paper, the evolution of arbitration law and practice in India has

been explored, including how the present arbitration system in India is

still plagued with many loopholes and shortcomings, and the quality of

arbitration has not adequately developed as a quick and cost-effective

mechanism for resolution of commercial disputes.

2
 ARBITRATION IN INDIA

a) A brief history of Arbitration law in India

Arbitration has a long history in India. In ancient times, people often

voluntarily submitted their disputes to a group of wise men of a

community, called the panchayat, for a binding resolution.2

Modern arbitration law in India was created by the Bengal Regulations in

1772, during the British rule. The Bengal Regulations provided for

reference by a court to arbitration, with the consent of the parties, in

2
K Ravi Kumar, ‘Alternative Dispute Resolution in Construction Industry’, International Council of Consultants
(ICC) papers, www.iccindia.org. at p 2.

3
lawsuits for accounts, partnership deeds, and breach of contract, amongst

others.3

Until 1996, the law governing arbitration in India consisted mainly of

three statutes: (i) the 1937 Arbitration (Protocol and Convention) Act, (ii)

the 1940 Indian Arbitration Act, and (iii) the 1961 Foreign Awards

(Recognition and Enforcement) Act.4 The 1940 Act was the general law

governing arbitration in India along the lines of the English Arbitration

Act of 1934, and both the 1937 and the 1961 Acts were designed to

enforce foreign arbitral awards (the 1961 Act implemented the New York

Convention of 1958).5

The government enacted the Arbitration and Conciliation Act, 1996 (the

1996 Act) in an effort to modernize the outdated 1940 Act. The 1996 Act

is a comprehensive piece of legislation modeled on the lines of the

UNCITRAL Model Law. This Act repealed all the three previous statutes

(the 1937 Act, the 1961 Act and the 1940 Act).6 Its primary purpose was

3
Ibid.
4
Ibid.
5
The New York Convention of 1958.
6
The 1996 Act, Section 85.

4
to encourage arbitration as a cost-effective and quick mechanism for the

settlement of commercial disputes. The 1996 Act covers both domestic

arbitration and international commercial arbitration.

b) The Arbitration Act, 1940

The Arbitration Act, 1940, dealt with only domestic arbitration. Under the

1940 Act, intervention of the court was required in all the three stages of

arbitration, i.e. prior to the reference of the dispute to the arbitral tribunal,

in the duration of the proceedings before the arbitral tribunal, and after the

award was passed by the arbitral tribunal. Before an arbitral tribunal took

cognizance of a dispute, court intervention was required to set the

arbitration proceedings in motion. The existence of an agreement and of

a dispute was required to be proved. During the course of the proceedings,

the intervention of the court was necessary for the extension of time for

making an award. Finally, before the award could be enforced, it was

required to be made the rule of the court.

While the 1940 Act was perceived to be a good piece of legislation in its

actual operation and implementation by all concerned - the parties,

5
arbitrators, lawyers and the courts, it proved to be ineffective and was

widely felt to have become outdated.7

c) The Arbitration and Conciliation Act, 1996

The 1996 Act, which repealed the 1940 Act, was enacted to provide an

effective and expeditious dispute resolution framework, which would

inspire confidence in the Indian dispute resolution system, attract foreign

investments and reassure international investors in the reliability of the

Indian legal system to provide an expeditious dispute resolution

mechanism.

The 1996 Act contains two unusual features that differed from the

UNCITRAL Model Law. First, while the UNICITRAL Model Law was

designed to apply only to international commercial arbitrations,8 the 1996

Act applies both to international and domestic arbitrations. Second, the

1996 Act goes beyond the UNICITRAL Model Law in the area of

7
Arbitration and Conciliation Act, 1996, Statement of Objects and Reasons
8
Article 1 of the UNICITRAL Model Law

6
minimizing judicial intervention.9 The Statement of Objects and Reasons

of the Act recognizes that India’s economic reforms will become effective

only if the nation’s dispute resolution provisions are in tune with

international regime.10

Further, the 1996 Act has two significant parts - Part I provides for any

arbitration conducted in India and enforcement of awards there under.

Part II provides for enforcement of foreign awards. Any arbitration

conducted in India or enforcement of award there under (whether

domestic or international) is governed by Part I, while enforcement of any

foreign award to which the New York Convention or the Geneva

Convention applies, is governed by Part II of the 1996 Act. Part II is thus,

by its very nature not a complete code.

This led to judicial innovation by the Supreme Court in the case of Bhatia

International v. Bulk Trading.11 Here the Indian court’s jurisdiction was

9
S K Dholakia, ‘Analytical Appraisal of the Arbitration and Conciliation (Amendment) Bill, 2003’, at page 3,
ICA’s Arbitration Quarterly, ICA, New Delhi, 2005 vol. XXXIX/No.4.
10
Sumeet Kachwaha and Dharmendra Rautray, Kachwaha & Partners, Arbitration in India (April 9, 2010)
https://ipba.org/media/fck/files/ArbitrationinIndia.pdf last visited on 20th November 2014.
11
(2002) 4 SCC 105

7
invoked by a party seeking interim measures of protection in relation to

arbitration under the ICC Rules to be conducted in Paris. The provision

for interim measure (section 9) was to be found in Part I alone (which

applies only to domestic arbitration). Hence the Court was faced with a

situation that there was no proprio vigore legal provision under which it

could grant interim measure of protection. Creatively interpreting the Act,

the Supreme Court held that the “general provisions” of Part I would apply

also to offshore arbitrations, unless the parties expressly or impliedly

exclude applicability of the same. Hence by judicial innovation, the

Supreme Court extended applicability of the general provisions of Part I

to off-shore arbitrations as well.12

The changes brought about by the 1996 Act were so drastic that the entire

case law built up over the previous fifty-six years on arbitration was

rendered superfluous.13 Unfortunately, there was no widespread debate

and understanding of the changes before such an important legislative

12
Ibid.
13
Sundaram Finance v. NEPC Ltd (1999) 2 SCC 479. The Supreme Court held at p 484 thus: ‘The provisions of this
Act (the 1996 Act) have, therefore, to be interpreted and construed independently and in fact reference to the 1940
Act may actually lead to misconstruction.’

8
change was enacted.14 The Government of India enacted the 1996 Act by

an ordinance, and then extended its life by another ordinance, before

Parliament eventually passed it without reference to a Parliamentary

Committee, a standard practice for important enactments.15 In the absence

of case laws and general understanding of the Act in the context of

international commercial arbitration, several provisions of the 1996 Act

were brought before the courts, which interpreted the provisions in the

usual manner.16

The Law Commission of India prepared a report on the experience of the

1996 Act and suggested a number of amendments. 17 Based on the

recommendations of the Commission; the Government of India

introduced the Arbitration and Conciliation (Amendment) Bill, 2003, in

Parliament for amending the 1996 Act 18 which was subsequently

withdrawn.

14
Id at 6
15
Id at 6
16
Id at 6
17
176th Report of the Law Commission of India
18
The Arbitration and Conciliation (Amendment) Bill, 2003 was introduced in Parliament on December 22, 2003. It
is available on the website www.lawmin.nic.in.

9
 WORKING OF ARBITRATION IN INDIA

Arbitration in India is still evolving. One of the objectives of the 1996 Act

was to achieve the twin goals of cheap and quick resolution of disputes,

but current ground realities indicate that these goals are yet to be achieved.

The ground realities can be ascertained from the study and analysis of the

various aspects in conducting arbitration, which are discussed in the

following paragraphs.

a) Types of Arbitration Practice - Institutional Arbitration and

Ad Hoc Arbitration

Arbitrations conducted in India are mostly ad hoc. The concept of

institutional arbitration, though gradually creeping in the arbitration

system in India, has yet to make an impact. There are a number of

advantages of institutional arbitration over ad hoc arbitration in India,

some of which are discussed below:

 In ad hoc arbitration, the procedures have to be agreed upon by the

parties and the arbitrator. This requires co-operation between the

10
 parties and involves a lot of time. When a dispute is in existence, it

is difficult to expect cooperation among the parties. In institutional

arbitration, on the other hand, the procedural rules are already

established by the institution. Formulating rules is therefore no

cause for concern. The fees are also fixed and regulated under rules

of the institution.

 In ad hoc arbitration, infrastructure facilities for conducting

arbitration pose a problem and parties are often compelled to resort

to hiring facilities of expensive hotels, which increase the cost of

arbitration. Other problems include getting trained staff and library

facilities for ready reference. In contrast, in institutional arbitration,

the institution will have ready facilities to conduct arbitration,

trained secretarial/administrative staff, as well as library facilities.

There will be professionalism in conducting arbitration.

 In institutional arbitration, the arbitral institutions maintain a panel

of arbitrators along with their profile. The parties can choose the

arbitrators from the panel. Such arbitral institutions also provide for

11
 specialized arbitrators. These advantages are not available to the

parties in ad hoc arbitration.

 In institutional arbitration, many arbitral institutions such as the

International Chamber of Commerce (ICC) have an experienced

committee to scrutinize the arbitral awards. Before the award is

finalized and given to the parties, the experienced panel scrutinizes

it. As a result, the possibilities of the court setting aside the award is

minimal, because the scrutiny removes possible legal/technical

flaws and defects in the award. This facility is not available in ad

hoc arbitration, where the likelihood of court interference is higher.

 In institutional arbitration, the arbitrators are governed by the rules

of the institution, and they may be removed from the panel for not

conducting the arbitration properly. In ad hoc arbitration, the

arbitrators are not subject to such institutional removal sanctions.

 In the event the arbitrator becomes incapable of continuing as

arbitrator in an institutional arbitration, substitutes can be easily

located and the procedure for arbitration remains the same. This

12
 advantage is not available in an ad hoc arbitration, where one party

(whose nominee arbitrator is incapacitated) has to re-appoint the

new arbitrator. This requires co-operation of the parties and can be

time consuming.

 In institutional arbitration, as the secretarial and administrative

staffs are subject to the discipline of the institution, it is easy to

maintain confidentiality of the proceedings. In ad hoc arbitration, it

is difficult to expect professionalism from the secretarial staff.

In spite of the numerous advantages of institutional arbitration over ad

hoc arbitration, there is currently an overwhelming tendency in India to

resort to ad hoc arbitration mechanisms. This tendency is

counterproductive, since there is considerable scope for parties to be

aggrieved by the functioning of ad hoc tribunals. An empirical survey will

reveal that a considerable extent of litigation in the lower courts deals with

challenges to awards given by ad hoc arbitration tribunals.19

19
Inaugural address by Justice K G Balakrishnan, Chief Justice of India, on International Conference on
‘Institutional Arbitration in Infrastructure and Construction’, New Delhi, October 16, 2008.

13
Some of the arbitral institutions in India are the Chambers of Commerce

(organized by either region or trade), the Indian Council of Arbitration

(ICA), the Federation of Indian Chamber of Commerce and Industry

(FICCI), and the International Centre for Alternate Dispute Resolution

(ICADR).

b) Fast Track Arbitrations

Establishment of fast track arbitrations is a recent trend aimed at achieving

timely results, thereby lowering the costs and difficulties associated with

traditional arbitration. Fast track arbitration is a time-bound arbitration,

with stricter rules of procedure, which do not allow any laxity or scope

for extensions of time and the resultant delays, and the reduced span of

time makes it more cost-effective.20

Fast track arbitration is required in a number of disputes such as

infringement of patents/trademarks, destruction of evidence, marketing of

products in violation of patent/trademark laws, construction disputes in

20
Fast track arbitrations are best suited in those cases in which oral hearings and witnesses are necessary.

14
time-bound projects, licensing contracts, and franchises where urgent

decisions are required.

The 1996 Act has built-in provisions for fast track arbitration. Section

11(2) of the 1996 Act provides that the parties are free to agree on a

procedure for appointing an arbitrator. Theoretically, under Section 11(6)

of the 1996 Act,21 a party does not have to approach a court for

appointment of an arbitrator, if the agreement provides for a mechanism

to deal with the failure of the other party to appoint the arbitrator. Thus,

the parties are given complete autonomy in choosing the fastest possible

method of appointing an arbitrator, and constituting a valid arbitral

tribunal. Section 13(1) confers the freedom on parties to choose the fastest

way to challenge an arbitral award. Section 13(4) expedites arbitral

proceedings by providing that if a challenge to an arbitral proceeding is

not successful, the arbitral tribunal shall continue proceedings and pass an

award. Section 23(3) of the 1996 Act enables parties to fix time limits for

filing of claims, replies and counter claims. Section 24(1) also permits the

21
Section 11(6) of the Arbitration and Conciliation Act, 1996, provides for appointment of an arbitrator by the
parties in case of failure by the parties to appoint the arbitrators.

15
parties to do away with the requirement of an oral hearing, if they so

desire. More importantly, Section 25 authorizes an arbitral tribunal to

proceed ex parte in the event of default of a party. Section 29 even

empowers the presiding arbitrator to decide questions of procedure.22

A CRITICAL ANALYSIS OF THE SUCCESS OF

ARBITRATION UNDER THE 1996 ACT

The 1996 Act was brought on the statute book as the earlier law, the 1940

Act, did not live up to the aspirations of the people of India in general,

and the business community in particular.23 Even though the 1996 Act

was enacted to plug the loopholes of 1940 Act, the arbitral system that

evolved under it led to its failure. The main purpose of the Act was to

provide a speedy and efficacious dispute resolution mechanism to the

existing judicial system, marred with inordinate delays and backlog of

22
Indu Malhotra, ‘Fast Track Arbitration’ at p.8, ICA’s Arbitration Quarterly, ICA, 2006, vol. XLI/No.1
23
Professor Anurag Agarwal, ‘Resolving Business Disputes in India by Arbitration: Problems due to the Definition
of ‘Court’, at p.10 Indian Institute of Management, Ahmadabad, 2008,
http://vslir.iimahd.ernet.in:8080/xmlui/handle/123456789/86 last visited on 17th November 2014.

16
cases. But an analysis of the arbitration system, as practiced under the

1996 Act, reveals that it failed to achieve its desired objectives.

a) Speedy Justice

Arbitration in India is rampant with delays that hamper the efficient

dispensation of dispute resolution. Though the 1996 Act confers greater

autonomy on arbitrators and insulates them from judicial interference, it

does not fix any time period for completion of proceedings. This is a

departure from the 1940 Act, which fixed the time period for completion

of arbitration proceedings. The time frame for completion of the

arbitration proceedings was done away with, on the presumption that the

root cause of delays in arbitration is judicial interference, and that granting

greater autonomy to the arbitrators would solve the problem. However,

the reality is quite different. Arbitrators, who are mostly retired judges,

usually treat the arbitration proceedings in the same manner as traditional

litigations, and are willing to give long and frequent adjournments, as and

when sought by the parties.24

24
Id at 22.

17
Although the scope of judicial intervention under the 1996 Act has been

curtailed to a great extent, courts through judicial interpretation have

widened the scope of judicial review, resulting in the admission of large

number of cases that ought to be dismissed at the first instance. Moreover,

the parties usually approach arbitration with a similar mindset as for

litigation, with the result that awards invariably end up in courts,

increasing the timeframe for resolution of the disputes. Parties also abuse

the existing provision that allows ‘automatic stay’ of the execution of the

awards on mere filing of an application for challenge of the awards. So,

the objective of arbitration as a mechanism for speedy resolution of

disputes gets obstructed due to obtrusive delays.

b) Cost-Effectiveness

Arbitration is generally considered cheaper over traditional litigation, and

is one of the reasons for parties to resort to it. However, the ground

realities show that arbitration in India, particularly ad hoc arbitration, is

becoming quite expensive vis-à-vis traditional litigation. A cost analysis

18
on arbitration vis-à-vis litigation will throw light on the higher cost of

arbitration over litigation. However, the ground realities show that

arbitration in India, particularly ad hoc arbitration, is becoming quite

expensive vis-à-vis traditional litigation. A cost analysis on arbitration

vis-à-vis litigation will throw light on the higher cost of arbitration over

litigation.

i) Cost of Arbitration vis-à-vis Cost of Litigation

Although arbitration is considered to be a cheaper mechanism for the

settlement of disputes, there is a growing concern in India that arbitration

has become a costly affair due to the high fee of the arbitrators and liberal

adjournments.33 This is particularly true for ad hoc arbitrations.

Arbitration is more cost-effective than litigation only if the number of

arbitration proceedings is limited. The prevalent procedure before the

arbitrators is as follows - at the first hearing, the claimant is directed to

file his claim statement and documents in support thereof; at the second

hearing, the opposing parties are directed to file their reply and

documents; at the third hearing, the claimant files his rejoinder. At each

19
of these stages, there are usually at least two or three adjournments.

Sometimes, applications for interim directions are also filed by either

party, which increases the number of arbitration sittings for deciding such

interim applications. The first occasion for considering any question of

jurisdiction does not normally arise until the arbitral tribunal has issued at

least six adjournments.25

If the respondent is the State or a public sector undertaking, the number

of adjournments is higher as it takes more time for these parties in

internally finalizing pleadings and documents that are to be filed before

the arbitral tribunal. Parties pay a fee to the arbitrators for each hearing

and thus spend a substantial amount of money.26 This is in addition to the

other costs involved.

In contrast, law suits, if admitted, are certainly cheaper, even though they

take substantial amounts of time to resolve. This is because lawyers’ fees

25
Law Commission of India, 176th Report on Arbitration and Conciliation (Amendment) Bill, 2001 at p 68.
26
Ibid.

20
are the only major expenditure in litigation, and lawyers usually charge

the same, if not more, as per litigation hearing.

Litigation may be more costly in certain cases, because procedural delays

add to the cost of settling disputes. That is, the costs associated with

management of time and money resources - not to mention keeping plants

or production offline - can outweigh the costs of arbitration.

Issues of speed and cost-efficiency are the hallmarks of the arbitration

procedure, and are often identified as the core reasons why arbitration

very clearly surpasses litigation as a suitable choice for dispute resolution,

especially with respect to commercial disputes. However, the prevalent

high cost of arbitration in India, as discussed above is a factor that

prevents arbitration from being an effective mechanism for resolution of

commercial disputes. For this reason, arbitration is not progressing in the

manner it should in order to keep pace with the increase in commercial

disputes due to the inflow of international as well as commercial

transactions.

21
 c) Extent of Judicial Intervention under the 1996 Act

One of the main objectives of the 1996 Act was to give more powers to

the arbitrators and reduce the supervisory role of the court in the arbitral

process.27 In effect, judicial intervention is common under the 1996 Act.

Such intervention takes the form of determination in case of challenge of

awards. Such a propensity to exercise their authority to intervene may be

attributable to their skepticism that arbitration is not effective at resolving

disputes or the judges’ vested concern that their jurisdiction will be

adversely eroded.28

i) Public Policy

"Public Policy is an unruly horse, and when you get astride it you never

know where it will carry you."29

The term ‘public policy’ has been used twice in the 1996 Act. An award

can be set aside under Section 34 of the 1996 Act (Part I) if the award

27
Arbitration and Conciliation Act, 1996, Statement of Objects and Reasons.
28
Pramod Nair, ‘Quo vadis arbitration in India?’ Business Line, October 19, 2006. Pramod Nair is a Visiting Fellow
at the Lauterpatch Research Centre for International Law, University of Cambridge.
29
Mr Justice Burrough noted "Public Policy is an unruly horse, and when you get astride it you never know where it
will carry you. It may lead you from sound law. It is never argued at all but when other points fail” Richardson v.
Mellish (1824) 2 Bing 228.

22
 is in conflict with the public policy of India. Further, a foreign award

may be refused enforcement under Section 48 of the 1996 Act (Part II

of the 1996 Act) if the award is contrary to the public policy of India.

The first time the question of public policy arose as an exception for

enforcement of a foreign arbitral award was in the case of Renusagar

Power Electric co v. General Electric Co (“Renusagar”)30, which

involved enforcement of an ICC Award. This was the pre-1996 Act

case and the award was being enforced under the 1961 Act.

The Supreme Court held that the expression "public policy" in Section

7(1)(b)(ii) of the 1961 Act meant the public policy as applied by the

Indian courts. It recognized that:

"Public policy connotes some matter which concerns the public good

and the public interest. The concept of what is for the public good or

the public interest or what is injurious or harmful to the public good

or public interest has varied from time to time."

30
AIR 1994 SC 860

23
 The Supreme Court held that the expression "public policy" could be

construed widely or narrowly and adopted a narrow view in reference

to the enforcement of a foreign award. The Court stated that the term

"public policy" "has been used in a narrower sense and in order to

attract to the bar of public policy the enforcement of the award must

invoke something more than the violation of the law of India. Applying

the said criteria it must be held that the enforcement of a foreign award

would be refused on the ground that it is contrary to public policy if

such enforcement would be contrary to:

 Fundamental policy of Indian law; or

 The interests of India; or

 Justice or morality.”

The defence of public policy to set aside an award under Section 34 of

the 1996 Act then arose in the case of Oil and Natural Gas

Corporation v. Saw Pipes Ltd31 case ("Saw Pipes case"). The issue

was whether an award made in India could be set aside on the ground

31
(2003) 5 SCC 705

24
of public policy; that the arbitral tribunal had incorrectly applied the

law of liquidated damages.

Despite the Renusagar precedent, the Supreme Court held that any

arbitral award which violates Indian statutory provisions is "patently

illegal" and contrary to public policy. The court in Saw Pipes

differentiated the case from that of Renusagar on the ground that the

question in the latter case was related to an execution of an award

which had attained finality under the 1961 Act. By contrast, in Saw

Pipes, the validity of the award was in question. The argument accepted

by the court was that the foreign award could be set aside under the

relevant law by the competent authority where it was being enforced.

Thus, in the Saw Pipes case the domestic award would be supervised

by Indian courts as they were the primary courts. Further, it held that if

a narrow meaning was given to the term "public policy," some of the

provisions under the 1996 Act would become inapplicable. Therefore,

the Supreme Court interpreted Section 34 (2)(b)(ii) of the 1996 Act to

25
 include the additional ground of "patent illegality" 32. The illegality

must go to the "root of the matter" and must not be of a trivial nature.

In another case, the Supreme Court held that an award that is contrary

to the specific terms of the contract is patently illegal and can be thus

set aside on public policy grounds.33

ii) Abuse of the doctrine of Public Policy in India after Bhatia

International Case

The Supreme Court of India gave a narrow interpretation to ‘public

policy’ in Renusagar and a broader interpretation in the Saw Pipes case.

In effect, this means that there existed different interpretations to the

term ‘public policy’ for refusing to set aside an arbitral award due to

public policy on one hand and for refusing to enforce a foreign award

due to public policy on the other hand. This however changed after the

ruling of the Supreme Court in Bhatia International Vs Bulk

Trading.34

32
Ibid.
33
Hindustan Zinc Ltd v Friends Coal Carbonization, [2006] 4 SCC 445 (India)
34
2002 (4) SCC 105 (‘Bhatia’)

26
 In Bhatia International, the court categorically erased the distinction

between Part I & Part II of the Act, stating that provisions of Part I

would apply to all arbitrations and all related proceedings. For

arbitrations held in India, the provisions would be compulsorily

applicable and only the derogable provisions of Part I could be deviated

from. In international commercial arbitrations, held outside India, the

provisions of Part I would apply by default unless the parties expressly

or impliedly, excluded all or any of its provisions.35

On the basis of the Bhatia decision, the Indian courts went on to set

aside a foreign arbitration award36 and appointed an arbitrator in

proceedings seated outside of India.37

The effect of these and other judgments was to prompt many parties to

commercial contracts to draft arbitration clauses explicitly excluding

the application of Part I of the Act. At the same time, in response to

growing professional and academic criticism of the arbitration

35
Sherina Petit and Matthew Townsend with Sneha Janakiraman, International Arbitration in India at p.16
International arbitration report – issue 1
36
Venture Global Engineering Vs Satyam Computer Services Limited (2008) 4 SCC 190.
37
Intel Technical Services Pvt Ltd Vs WS Atkins Plc (2008) 10 SCC 308

27
 “unfriendliness” of the Bhatia principle, the Indian lower courts started

to take a narrow view of the Indian court’s right to intervene in foreign

arbitrations.38

These judgments were widely criticized and they led to a situation

where as soon as a foreign award was issued, parties often strategically

challenged the arbitration award in Indian courts on the grounds of

public policy. This went against the basic principle of mutual

recognition and enforcement of arbitral awards expressed in the New

York Convention. Recognition of an international arbitration award is

of paramount importance. Unless parties can be sure that at the end of

the arbitration proceedings, if not complied with voluntarily, they will

be able to enforce the award, an award in their favor will only be a

pyrrhic victory.39 The only practical solution was that the parties

routinely agreed in their arbitration clauses that Part I of the Act was

not applicable.40

38
Ibid.
39
Julian D Lew, Loukas Mistelis And Stefan Kroll, Comparative International Commercial Arbitration 688 (2003).
40
Following Bhatia International v. Bulk Trading (2002) 4 SCC 105 (India).

28
 In early 2012, the Supreme Court began hearing a number of

consolidated appeals on the Bhatia issue. The court also heard

interventions by interested organizations, including the SIAC and

LCIA41 India.

iii) A Change in the Interventionist Approach towards

Foreign Awards

On September 6, 2012, a five-member constitutional bench in Bharat

Aluminium Company v. Kaiser Aluminium Technical Services

(BALCO)42, overturned the Bhatia principle and held that Part I of the

Act applies only to arbitrations seated in India.

In supporting its judgment, the court made clear that in its view it was

the parties’ choice of seat, as opposed to the law governing the contract

or arbitration agreement, which determined whether the Indian courts

had jurisdiction. This was welcome clarification of a point which had

been a source of confusion in previous Supreme Court judgments.

41
Singapore International Arbitration Centre (SIAC) and London Court of International Arbitration (LCIA).
42
2012 (8) SCALE 333 (India)

29
In the Supreme Court’s words:

“…the choice of another country as the seat of arbitration inevitably

imports an acceptance that the law of that country relating to the

conduct and supervision of arbitrations will apply to the proceedings.”

Therefore, “…the choice of another country as the seat of arbitration

inevitably imports an acceptance that the law of that country relating

to the conduct and supervision of arbitrations will apply to the

proceedings.”

The court further clarified that, due to the territoriality principle

adopted by the Act, Part I and Part II of the Act are mutually exclusive.

Accordingly, the power to set aside an arbitration award under section

34 of Part I of the Act does not apply to arbitrations seated outside

India. Such power applies only to arbitrations seated in India.

While BALCO limited the scope for the Indian courts to interfere in

the conduct of foreign seated arbitrations, it nonetheless left untouched

other controversial pronouncements of the Supreme Court as to the

public policy grounds for challenge to an award including the scope of

30
 such challenge. As discussed earlier, in ONGC Vs Saw Pipes43 the

Supreme Court had held that an award that conflicted with Indian law

would be contrary to public policy and therefore unenforceable. The

obvious concern for parties was that the Saw Pipes case opened the

door at the enforcement stage to the substantive review of the merits of

any award rendered outside of India. Parties to offshore arbitration

proceedings, having evaded the interference of the Indian courts at the

procedural stage, may have nonetheless had to encounter it at

enforcement. However, in Shri Lal Mahal Ltd Vs Progetto Grano44

Spa, the Supreme Court addressed this concern. The Supreme Court

held that the expression “public policy of India” should be given a

narrow meaning and that the enforcement of a foreign award would be

refused on this ground only if it is contrary to the fundamental policy

of Indian law; interests of India; and justice or morality. The Supreme

Court reinforced its decision in Renusagar Power Company Ltd Vs

General Electric Company and overruled the expansive interpretation

43
Id at 33 p.18
44
(Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012).

31
 of public policy as laid down in Phulchand Exports.45 This has

provided welcome relief to parties involved in foreign seated

arbitrations.

iv)The aftermath of BALCO judgment

The BALCO decision was a positive development for India’s

investment and business climate, as it reduced the scope of

interference by the Indian courts in offshore arbitration. This judgment

means that India has reverted to the position prior to Bhatia

International.46

Nonetheless, there remain at least two elements of the post-BALCO

arbitral regime which may have a negative impact on the certainty of

the arbitral process.

 Parties with arbitration agreements executed before September 6,

2012 are still subject to the pre-BALCO system. This is because

the judgment is phrased only to “…apply prospectively, to all

45
Phulchand Exports Ltd v. OOO Patriot (2011) 10 SCC 300
46
Ashurst international arbitration group, The renewal of arbitration in India: BALCO v. Kaiser Aluminium
publishes on Sept 2012 at https://www.ashurst.com/doc.aspx?id_Content=8246, last visited on 25th November 2014

32
 arbitration agreements executed hereafter”. Parties with

arbitration agreements executed before September 6, 2012

therefore remain subject to the Bhatia regime. The reason given

is "to do complete justice", but this is a curious restriction: why

should the previous case law, which the Supreme Court

concluded is wrong, continue to apply to agreements which will

undoubtedly generate arbitrations for years to come?

 For parties entering into new arbitral agreements, to which the

BALCO judgment applies, a substantial benefit of “offshore”

arbitration – the ability to apply to the Indian courts for interim

measures in support of such proceedings - is no longer available.

In its judgment, the Supreme Court held that there is “complete

segregation” between Part I and Part II of the Act, meaning that

“…any of the provisions contained in Part I cannot be made

applicable to Foreign Awards…”. Unfortunately, Part I contains

not only powers which can be used to derail offshore arbitration

proceedings but also those which can assist them, principally the

33
 power laid out in section 9 of Part I of the Act to order interim

measures in support of arbitration proceedings.

While the Supreme Court acknowledged that the segregation

doctrine would prohibit Indian courts granting interim measures

in support of foreign arbitrations, they observed that this issue

could not be resolved by the Supreme Court but instead was “a

matter to be redressed by the legislature”. Until such reforms are

implemented, parties to arbitration proceedings seated outside of

India will be unable to apply to the Indian courts to preserve

assets or evidence, compel attendance of a witness or obtain an

order for security for costs in India.47

d) Comparative Study of 1940 Act and 1996 Act.

The 1940 and the 1996 Acts differ in some important ways in terms of the

Arbitration system they establish and the processes that they require. First,

the role of judges is more limited in the 1996 Act. Under the 1940 Act,

courts played a substantial role in the arbitration process. Perhaps more

47
Id at 37 p.20

34
importantly, the 1940 Act required that an arbitral award be filed in a court

before it could become binding upon the parties. 48 Furthermore, the

grounds for challenging an award before the courts were broad and quite

liberal. In the 1996 Act, however, there is limited scope for interference

by courts. The award is no longer required to be filed before the court to

make it a rule of law, and the grounds on which an award can be

challenged are very limited.

Second, the authority of the arbitral tribunal varies. The old Arbitration

Act of 1940 did not give any express authority to the arbitral tribunal.

However, the situation has changed with the 1996 Act. Under the 1996

Act, the arbitral tribunal has the power to decide its own jurisdiction,

which was initially determined by the courts under the 1940 Act. In

addition, the arbitral tribunal does not have any power to grant any interim

relief in arbitration proceedings under the 1940 Act, and such power is

traditionally enjoyed by the courts. However, under the 1996 Act, an

48
Under Section 31 of the Arbitration Act, 1940, an award has to be filed before any court having jurisdiction, to
make an award the rule of the court.

35
arbitral tribunal has powers to give interim relief in arbitration seated in

India (Part 1).49

Despite these differences, there are still some notable arbitration practices

of the 1940 Act, which continue even under the new 1996 Act. These

include the following:

 The tendency for parties to ask for - and for arbitral tribunals to grant

- frequent adjournments, although technically constrained by the

1996 Act, continues unabated. The intervention of the courts, though

statutorily restricted, has not subsided, and the courts have been very

liberal in entertaining petitions, revisions, and appeals at an

interlocutory stage, because of which the fruits of an existing

Alternate Dispute Resolution (ADR) mechanism is neither timely

nor effective.

 Section 34 of the 1996 Act makes a mere challenge to an award

operate as an automatic stay even without an order of the court,

49
Sharma, Krishna Development and Practice of Arbitration in India –Has it Evolved as an Effective Legal
Institution, p.21, Published on Oct 2009

36
 thereby encouraging many parties to file petitions under that

provision to delay the execution proceedings. However, under the

1940 Act, there was no such automatic stay.

 The 1996 Act narrows down the scope of grounds available for

challenging awards as compared to the earlier 1940 Act. However,

with gradual judicial interpretation, the scope of appeal against an

award under the 1996 Act has become broader particularly after the

decision of the ONGC case,50 which has widened the ambit of

‘public policy.’ Violation of public policy of India is one of the

grounds for challenge of an award under the 1996 Act.51 The ONGC

case, undoubtedly, invited substantial criticism from the legal circles

and fraternity.

e) Enforcement of Awards

One of the factors for determining arbitration as an effective legal

institution is the efficiency and efficacy of its award enforcement

regime. Under Section 36 of the 1996 Act, an arbitral award is

50
(2003) 5 SCC 705
51
Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996.

37
enforceable as a decree of the court, and could be executed like a decree

in a suit under the provisions of the Civil Procedure Code, 1908.52

An award resulting from an international commercial arbitration is

enforced according to the international treaties and conventions, which

stipulate the recognition and enforcement of arbitral awards.53

Enforcement of foreign awards in India is governed by the 1958 New

York Convention and the 1927 Geneva Convention, which are

incorporated in Chapter II, Part I and Part II, respectively, in the 1996

Act.54 The provisions of enforcement are same under the 1940 Act and

the 1996 Act. Any party interested in foreign awards must apply in writing

to a court having jurisdiction over the subject matter of the award. The

decree holder must file the award, the agreement on which it is based and

52
2 Section 36 of the Arbitration and Conciliation Act, 1996 – Enforcement - Where the time for making an
application to set aside the award under Section 34 has expired, or such application having been made, it has been
refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it
were a decree of the court.
53
Sunil Malhotra, ‘Enforcement of Arbitral Awards’, at p 20, ICA’s Arbitration Quarterly, ICA, 2006, vol.
XL/No.4.
54
Chapter I, Part II of the Arbitration and Conciliation Act, 1996, deals with enforcement of foreign awards
pursuant to New York Convention, while Chapter II, Part II of the said Act deals with foreign awards pursuant to the
Geneva Convention.

38
evidence to establish that the award comes under the category of foreign

award under the 1996 Act.55

246TH REPORT OF THE LAW COMMISSION OF INDIA

The 246th Law Commission of India Report titled, ‘Amendment to the

Arbitration and Conciliation Act, 1996’ suggests some major changes to

the Arbitration and Conciliation Act. The report seeks to find an

appropriate path and balance between judicial intervention and judicial

restraint.

1. Tackling Delay in Courts

The appointment of arbitrator under Section 11 has been changed from

the Chief Justice to the High Court(HC) and Supreme Court (SC), and

it has been particularly clarified that delegation of power of

appointment shall not be regarded as a judicial act.

55
Sections 37 and 56 of the Arbitration and Conciliation Act, 1996, contain provisions relating to the documents to
be produced before a Court executing a foreign award.

39
 An amendment has been proposed to make the decision of a HC non-

appealable where an arbitrator has been appointed. Another proposed

amendment in the same context requires the court to make an endeavor

to dispose of the matter within sixty days from the service of notice.56

2. Enforcement of Foreign Awards; Restrain in Setting Aside of

Domestic Awards

Under the proposal, while an award between two Indian parties may be

set aside on the basis of Patent Illegality, “an award shall not be set

aside merely on the ground of an erroneous application of the law or

by re-appreciating evidence.” Restriction has also been given to the

meaning of “public policy”.57

3. Reinforcing BALCO Minus the Maladies

While the celebrated BALCO case58 was a revolutionary judgment

which set the stage for positive sentiments in favor of India

56
Ray, Ashutosh, Law Commission’s Report to Revamp the Indian Arbitration Experience, published on 23rd August
2014 on Kluwer Arbitration Blog. Ashutosh Ray is the Law Assistant to Justice A.M. Ahmadi, Former Chief Justice
of India
57
Ibid.
58
[(2012) 9 SCC 552]

40
internationally, it gave rise to few glaring concerns. These concerns

have been addressed by the Commission. The issue that a party in a

foreign seated arbitration could not apply to the court for interim

measures under Section 9 to secure the assets or for assistance in taking

evidence has now been redressed as the parties may make express

agreement to incorporate the relevant sections to avail of the benefits.

The Commission’s proposal also addresses the concern of BALCO’s

application only to future signed agreements.

4. Encouraging Institutional Arbitration

The Commission has suggested promotion of institutional arbitration

by recommending appropriate proposals which it hopes will be used by

the SC and HCs to promote institutional arbitration.

It has also discussed a novel idea of having an Arbitral Commission of

India which would encourage the spreading of institutional arbitration

in India.

5. Better Conduct of Arbitral Proceedings

41
 In the Report, the Commission has condemned the culture of frequent

adjournments in arbitrations and has called for a cultural revolution

within the arbitration community. It has recommended conscious use

of technology to aid the process of arbitration.

To further bolster this objective, the Commission has also proposed

appropriate addition to the preamble of the Act to re-affirm the Act’s

focus on achieving the objectives of fairness, speed and economy in

resolution of disputes through arbitration.59

6. No Automatic Stay of Enforcement of the Award upon

Admission of Challenge

The proposed amendment in this regard provides that an award will not

become unenforceable merely upon filing an application under section

34.

7. Fraud Issues: Now Arbitrable

59
Amendments to the Arbitration and Conciliation Act 1996, 246th Report of the Law Commission of India
Chapter III, p.37

42
 The Commission has categorically recommended that issues of fraud

be made Arbitrable.

8. Definition of “Party” Enlarged

The Commission has proposed a change in the definition of “party” to

recognize the right of a “person claiming through or under [a party]”

to apply to a judicial authority to refer the parties to arbitration.

9. Tackling Delay in Arbitral Tribunals

In many cases it is seen that there are several arbitrations under the same

arbitration agreement thus creating multiplicity of proceedings and

consequent delay in final adjudication of the dispute. To put an end to this

practice, the Commission has proposed an explanation in the Act to ensure

that counter claims and set off can be adjudicated upon by a tribunal

without seeking a separate or new reference by the respondent, as long as

it falls within the scope of the original arbitration agreement.60

60
Id at 56

43
The Commission has strived to address the various concerns and red flags

in the functioning of the existing Act while being sensitive to the Indian

idiosyncrasy, to prepare this report. The new Government has promised

early introduction of the amendments bill in the parliament. While these

events appear to be omen of good times to come, the international

community can only wait for early incorporation of the Commission’s

recommendations.

CONCLUSION

The 1996 Act was enacted to achieve the purpose of quick and cost-

effective dispute resolution. Arbitration occupies a prime position in

commercial dispute resolution in India. An examination of the working of

arbitration in India reveals that arbitration as an institution is still

evolving, and has not yet reached the stage to effectively fulfill the needs

accentuated with commercial growth.

Viewed in its totality, India does not come across as a jurisdiction which

carries an anti-arbitration bias. Notwithstanding the interventionist

instincts and expanded judicial review, Indian courts do restrain

44
themselves from interfering with arbitral awards. Apart from the proposed

amendments in the Arbitration and Conciliation Act 1996 given in the

246th report of the Law Commission of India, there are still inherent

problems that hinder the working of successful arbitration in India.

In view of the same, following are the recommendations that can be

made:61

1. Universities in India could create a separate faculty or department

for arbitration law to encourage specialized study, incisive research

and practical application of Arbitration law.

2. All arbitrators, judges and lawyers should make efforts to change

general attitude towards arbitration. It is necessary for the players in

arbitration proceedings (i.e. arbitrators, judges and lawyers) to know

and to understand the direction of the new law, respect the will of

the parties set out in arbitration clauses, and observe the dichotomy

between arbitration and litigation. This change in the mindset must

61
Id at 47, p.32

45
 focus on the need to make the system more effective, attractive and

functional.62

3. The government should disseminate knowledge of the benefits of

alternate dispute resolution mechanisms to foster growth of an

international arbitration culture amongst lawyers, judges and

national courts. The real problem in enforcing foreign awards

around the globe despite the enabling provision of the New York

Convention, 1958, is not a legal one; but it is a lack of awareness

particularly, amongst lawyers and judges, of the benefits of

international arbitration and of its true consensual nature.

4. There is an emerging trend to go for settlement of business disputes

by institutional arbitration, provided such institutions maintain

quality standards in conducting proceedings. The standards are

evaluated in terms of professional arbitrators, infrastructure

Excerpt from the article ‘Arbitrating Commercial and Construction Contracts’ published in ICA’s Arbitration
62

Quarterly and webcasted in ICA’s official website.

46
facilities, time and cost saving procedures and uniformity of laws -

standards that will make the ADR system more sound and

acceptable among the business community. Independent institutions

should impart training for nurturing competent professionals who

are trained to delve into the crux of the dispute for its resolution.

47
 BIBLIOGRAPHY

1) Primary Sources

 The Arbitration Act 1940

 Arbitration and Conciliation Act 1996

 The New York Convention of 1958.

 UNICITRAL Model Law

 176th Report of the Law Commission of India

 246th Report of the Law Commission of India

2) Secondary Sources

a) Articles

 K Ravi Kumar, ‘Alternative Dispute Resolution in

Construction Industry’, International Council of Consultants

(ICC)

48
  Sherina Petit and Matthew Townsend with Sneha

Janakiraman, International Arbitration in India International

arbitration report – issue 1

 Sumeet Kachwaha and Dharmendra Rautray, Kachwaha &

Partners, Arbitration in India (April 9, 2010)

b) Books

 Julian D Lew, Loukas Mistelis and Stefan Kroll, Comparative

International Commercial Arbitration.

c) Papers

 Indu Malhotra, ‘Fast Track Arbitration’, ICA’s Arbitration

Quarterly, ICA, 2006, vol. XLI/No.1

 Krishna Kanta Handiqui State Open University, Introduction

to the Arbitration And Concilliation Act.

 Pramod Nair, ‘Quo vadis arbitration in India?’ Business Line,

October 19, 2006, University of Cambridge.

49
 S K Dholakia, ‘Analytical Appraisal of the Arbitration and

Conciliation (Amendment) Bill, 2003’, ICA’s Arbitration

Quarterly, ICA, New Delhi, 2005 vol. XXXIX/No.4.

 Sharma, Krishna Development and Practice of Arbitration in

India –Has it Evolved as an Effective Legal Institution

50
  Sunil Malhotra, ‘Enforcement of Arbitral Awards’, at p 20,

ICA’s Arbitration Quarterly, ICA, 2006, vol. XL/No.4.

d) Websites

 Ashurst international arbitration group, The renewal of

arbitration in India: BALCO v. Kaiser Aluminium publishes

on Sept 2012 at www.ashurst.com

 K Ravi Kumar, ‘Alternative Dispute Resolution in

Construction Industry’ www.iccindia.org

 Mandhani, Apporva, Law Commission recommends major

changes to Arbitration and Conciliation Act published on 8th

August 2014 at www.livelaw.in

 Professor Anurag Agarwal, ‘Resolving Business Disputes in

India by Arbitration: Problems due to the Definition of

‘Court’, Indian Institute of Management, Ahmadabad, 2008.

www.vslir.iimahd.ernet.in

51
 Ray, Ashutosh, Law Commission’s Report to Revamp the

Indian Arbitration Experience, published on 23rd August 2014

on Kluwer Arbitration Blog. www.kluwerarbitrationblog.com

52