This post has been written by Hon’ble Justice A.K. Sikri (Sitting Judge, Supreme Court of India). This is the first in a series of posts written by Justice Sikri for TBL on arbitration in India.
It was Mahatma Gandhi who once famously remarked:
“Differences we shall always have but we must settle them all, whether religious or other, by arbitration.” He, like many others, had recognised the innumerable benefits of Arbitration as a dispute resolution mechanism.
Today, arbitration as a mechanism to resolve the commercial disputes, is the most sought after Alternate Dispute Resolution (ADR) Mechanism. With the increasing commercial activities across the world, more so, in the wake of globalisation, the settlement of disputes by arbitration has increased significantly.
The reasons for this trend are not far to seek. Increasing international trade and investment has led to growth in cross-border commercial disputes. Given the need for an efficient dispute resolution mechanism, international arbitration has emerged as the preferred option for resolving cross-border commercial disputes and preserving business relationships. It offers a timely, private, less formal and cost effective approach for the binding determination of disputes and accords the parties with greater control over the process than a court hearing. The arbitration process is administered by a panel of arbitrators who are agreed upon by both parties, thereby signifying ‘party autonomy’. These arbitrators may have specialised competence in the relevant field. Arbitral awards are usually final and binding, which avoids a drawn-out appeals process. In addition, the confidentiality of the arbitration process may appeal to those who do not wish the terms of a settlement to be known publicly.
Spirit and Objective Behind the Arbitration Act, 1996
There are some significant advantages of arbitration, which have contributed to its development as a viable and effective means of Alternative Disputes Resolution (ADR). These are (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimal court intervention.
Notwithstanding the same, the experience of the working of the Arbitration Act, 1940 was far from satisfactory. The Arbitration Act, 1940 allowed courts to interfere at every stage of the arbitration proceeding: starting from the appointment of the arbitrator through the interim stage till the passing of the award. This developed a culture wherein the courts oversee the arbitration proceedings, thereby delaying the resolution of the issues in an arbitration even further. Any party interested in delaying the proceedings would resort to the court during any stage of the proceedings, taking advantage of the backlog of the cases already confronting the courts.
The Act did not prohibit the parties from raising disputes relating to the proceedings or validity of the arbitration agreement or the constitution of the arbitration even after the passing of the award. The Act also allowed the award to be challenged on large number of grounds and the manner in which those provisions were interpreted, led to the judicial scrutiny on merits as well. Such a wide scope of court interference led to adverse consequences and defeated the function of the Act, of creating an effective speedy alternative dispute resolution mechanism. There was continuous pressure from the foreign and Indian investor community on the Indian Government to modernise arbitration law and to bring about expeditious finality to the awards. In other words, the need was for the law to give greater immunity to arbitration awards, from challenges and frequent interference by the courts.
It is in this context that the Arbitration and Conciliation Act, 1996 was passed. The Preamble of the Act states that the Act adopts the UNCITRAL Model Law on International Commercial Arbitration 1985 passed by the United Nations Commission on International Trade Law, following the recommendation of the General Assembly of the United Nations. The difference between the 1940 Act and the 1996 Act is aptly summarised by Justice Kirpal in Sundaram Finance Ltd. v. NEPC India Ltd., where he observed the following:
“The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this Act have, therefore, to be interpreted and construed independently and in fact, reference to 1940 Act may actually lead to misconstruction. In other words, the provisions of 1996 Act have to be interpreted being uninfluenced by the principles underlying the 1940 Act. In order to get help in construing these provisions it is more relevant to refer to the UNCITRAL Model Law rather than the 1940 Act.”
The Court further elaborated on the difference between the two Acts and the limits of judicial interference in the 1996 Act. The 1996 Act aimed at transforming the process of arbitration and introducing globally accepted and practiced principles of arbitration, such as minimal judicial interference, into the Indian law. Such an Act, which provided for a strong and effective alternative dispute mechanism was necessary in India.
At this juncture, it may be emphasised that arbitration, by nature, is a hybrid method of dispute resolution and by the very scheme of things, the court often has to step in. It is important to question the role of the courts and the kind of relationship that needs to be established between these courts and the arbitral tribunals. An Arbitral Tribunal under the Act is legally mandated to carry out dispute resolution in an independent manner, based on the principle of fairness. However, in the limited cases of its inability to carry out the arbitration proceedings in line with principles of a fair hearing or party autonomy, the role of the Courts kicks in. A court plays a supporting role to ensure that the arbitration adheres to the principles laid down in the Arbitration law of the specific country.
Arbitration is thus a hybrid system where the assistance of courts is required at difference stages. It may be for the appointment of an arbitrator, for passing interim measures and for securing witnesses to appear before an arbitral tribunal. After an award is rendered by arbitral tribunals, courts assume the important role of recognising and enforcing the awards.
‘Judicial Policy’ in dealing with arbitration matters is of paramount importance as a system cannot be treated as arbitration friendly, if the judicial involvement does not work in the aid of arbitration. The principle of minimal interference of courts into arbitral proceedings has been elaborated upon by Lord Mustill, the outstanding British barrister and judge:
“Ideally, the handling of arbitral disputes should resemble a relay race. In the initial stages, before the arbitrators are seized of the dispute, the baton is in the grasp of the court; for at that stage there is no other organisation which could take steps to prevent the arbitration agreement from being ineffectual. When the arbitrators take charge they take over the baton and retain it until they have made an award. At this point, having no longer a function to fulfil, the arbitrators hand back the baton so that the court can, in case of need, lend its coercive powers to the enforcement of the award.”
Again in his foreword to Mr. O. P. Malhotra’sBook on `The Law and Practice of Arbitration and Conciliation’, he emphasised the balancing of court’s function and arbitration process:
“There is the central importance of a harmonious relation between the courts and the arbitral process. This has always involved a delicate balance, since the urge of any judge is to see justice done, and to put right injustice wherever he or she finds it; and if it is found in an arbitration, the judge feels the need to intervene. On the other side, those active in the world of arbitration stress its voluntary nature, and urge that it is wrong in principle for the courts to concern themselves with disputes which the parties have formally chosen to withdraw from them, quite apart from the waste of time and expense caused by gratuitous judicial interference. To a degree both views were right, and remain so; the problem has been to give proper weight to each of them.”
He stressed on how the court’s judicial powers are conferred only to support, not supplant, the extra-judicial process which the parties have chosen to adopt. The judicial impulse to change decisions of arbitral tribunals must, at all costs, be resisted. The parties have chosen arbitration, and (directly or indirectly the arbitrator) as the medium for resolving their disputes. The court must respect this choice, and if the outcome proves unsatisfactory this is the price which must be paid, however painful it may be for the court to stand by and do nothing.
In fact, that was the spirit behind this Act which is reflected in various provisions thereof.
Section 5 of the Act lays down the principle of minimum judicial intervention. It reads:
“Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”
This provision is derived from Art 5 of the UNCITRAL Model Law, which brings reduced judicial involvement in the arbitral process and a consequential increase in the powers of the arbitral tribunal. However, notwithstanding the reduced role of the Courts and the enhanced powers accorded to the arbitral tribunal in the Act, it is necessary to carefully calibrate the balance between judicial intervention and judicial restraint. As early as 1989, the Supreme Court in F.C.I. v. Joginderpal Mohinderpal, observed:
“We should make the law of arbitration simple, less technical and more responsible to the actual realities of the situation, but it must be responsive to the canons of justice and fair play. The arbitrator must adhere to such process and norms which will create confidence, not only by doing justice between the parties, but by creating a sense that justice appears to have been done.”
Section 16 (which enables the Tribunal to rule on its own jurisdiction) and 17 (provision for interim reliefs by Tribunals) give procedural autonomy to the arbitration process. In terms of substantive autonomy, the courts have allowed a wide range of disputes on various subject matters to be settled by arbitral tribunal. Unless the disputes deal with rights in rem, i.e., they are disputes affecting the public at large, they have been allowed to be arbitrated by the Indian courts.
The Arbitration Act allows a party to approach the court during all three stages of the arbitration i.e. before the arbitral proceedings have begun, during the proceedings and after they have concluded. But the relief that the courts are empowered to grant are limited by the Act in pursuance of the principle of minimum judicial interference. In the pre-arbitral stages, the parties can move to the court under Sections 8 and 11 of the Act relating to “reference to arbitration” and “appointment of the tribunal”.
Similarly, the Act grants limited scope of intervention to courts during the continuation of the arbitration process. These include interim reliefs under Section 9 of the Act, or challenge to the neutrality of arbitrator under Section 12, amongst other reliefs. Post the completion of arbitration, the parties can approach a court to set aside the arbitration on limited procedural grounds under Section 34. The court is not allowed to undertake a merit analysis in such cases. Section 36 provides for enforcement of the award and Section 37 enables appeal to court action setting aside the award or granting interim injunctions.
In case of foreign awards, the Act allows minimal court interference. For example, when a court is seized with a matter which falls within the ambit of a foreign arbitration agreement, the court is mandated to refer parties to arbitration barring the instances of the agreement being null and void, inoperative or incapable of being performed. Enforcement of foreign award is also mandatory except in limited circumstances, one of them being that the award is contrary to public policy.
Initial Working of the 1996 Act
The main purpose of passing the 1996 Act was to achieve harmony between arbitration and the courts. Due to certain reasons, however, the working of the 1996 Act witnessed some unpleasant developments and a need was felt to smoothen out the rough edges encountered thereby. With passing years, courts started making ingress into the independence of the arbitration proceedings. Reference to these judgments would be made at the appropriate stage. At this juncture, it is pointed out that there was a general feeling, not only in India but internationally (and not without basis) that the purpose of 1996 Act was getting defeated. There was a general perception that India is not an arbitration friendly nation. This led the Government to make a reference to the Law Commission for suggesting remedial measures.
The Law Commission examined various shortcomings in the working of the Act and in its first Report, i.e., the 176th Report, which made various suggestions for amending certain provisions of the Act. This exercise was undertaken again by the Law Commission of India in its Report No. 246 in August, 2014 suggesting sweeping amendments. The Arbitration Amendment Act of 2015 was passed soon after, incorporating these amendments which came into effect from October 23, 2015.
Amongst other things, it updated the Arbitration Act to facilitate arbitration and make it an expeditious, efficacious and a cost-effective remedy. It sought to curb the practices leading to wastage of time and making the arbitration process a prohibitively costly affair. The new law also made the declaration by the arbitrator about his independence and impartiality more realistic as compared to a bare formality under the previous regime. Making the arbitrator responsible for delay in the arbitration proceedings, for reasons attributable to him, would ensure that the arbitrators do not take up arbitrations, which are beyond their capacities. Most importantly, the amendment reiterated the principle of minimum interference by courts. With respect to the court’s power to test whether there is a contravention with the fundamental policy of Indian Law, the amendment prohibited the courts from engaging in a review on merits of the dispute. This took care of the earlier decisions of the Supreme Court enabling the expansion of courts power of judicial scrutiny.
In the last 4-5 years, and especially after the Arbitration Amendment Act, the focus of the legislature and national courts has been on upholding party autonomy and limiting the role of courts in the arbitral process. In today’s new era of arbitration in India, the guiding principle is maximum arbitral autonomy and minimum judicial interference. The scheme of the Act, especially post the latest amendment in 2015, reiterates this principle. The doctrines of minimum interference and party autonomy in all stages of the arbitration have been given additional strength through judicial interpretation.