Legislative Flaws in Arbitration Law

India recognised resolving disputes by way of mediation and reconciliation from Vedic era. However, codified law on settlement of disputes was first enacted in the year 1899, known as Arbitration Act. Application of this law, however, was confined to presidency towns of Madras, Bombay and Calcutta. Within less than two decades the law on arbitration was further codified and brought within the ambit of Code of Civil Procedure, 1908¹ by way of Section 89² and Schedule 2³, thereby law on arbitration was made applicable throughout India. To some extent, analogy of mutual settlement of disputes can also be traced from Order 23⁴ CPC, which recognises passing of compromise decrees. Even Order 27 Rule 5-B CPC⁵ also mandates the courts to assist in arriving at a settlement in the suits involving government and public officers. Order 32⁶ was also amended in the year 1976 by way of inserting Order 32-A, concerning family disputes. Order 32-A Rule 3⁷ stipulates that endeavour shall be made by the courts at first instance to assist the parties in arriving at a settlement, in consonance with the nature and circumstances of the case.

Realising the need for a dedicated law a special and comprehensive legislation on the subject was enacted, namely, the Arbitration Act, 1940⁸. After adoption of UNCITRAL Model Law on International Commercial Arbitration in the year 1985⁹ by the United Nations the Government of India also revised their existing law and enacted a more comprehensive law, being the Arbitration and Conciliation Act, 1996¹⁰. The primary object of the 1996 Act was to consolidate and amend the laws relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and matters connected therewith.

The arbitration law is one of the four recognised ways of settlement of disputes, viz. arbitration, conciliation, settlement through lok adalat and mediation. Cumulatively, all these forums of settlement of disputes without direct intervention of judicial courts re known as “alternative disputes resolution” (briefly ADR) forums. In view of the statutory back-up almost all methodologies of ADR have taken its root in the Indian populace, albeit much more have to be done to achieve the motto of ADR.

The Preamble of the Constitution of India¹¹ also resolves to secure justice, liberty, equality and fraternity. With this ideology the Constitution was amended in the year 1976 and Article 39-A was inserted by way of 42nd Amendment¹² to secure equal justice to all in conformity to Article 14¹³. To promote equal and easy access to justice both the Central as well as State Legislature has enacted laws and have adopted various policies for the advancement of these constitutional aspirations. The prominent law in this regard is Legal Services Authority Act, 1987¹⁴. Very recently the Government of India has also enacted a special legislation to streamline the procedure for resolving disputes by way of mediation, namely, the Mediation Act, 2023¹⁵. This reflects the commitment of the Government to encourage resolution of disputes through various forums of ADR.

It is said that a law is effective if the statute conforms to the rule of law, the degree of acceptance by the people, the degree to which people feel protected under the laws and its processes, the way people feel the law is in their interest and not against them and if the law is cost and time effective. People’s confidence also depends on the flawless enactment of the law. People lose their confidence in the law more if there are frequent amendments. Precisely, this is the story of 1996 Act.

In this small piece of article, I will confine myself only to certain provisions of the Arbitration and Conciliation Act, 1996 pertaining to domestic arbitrations. The original Act has undergone major reforms three times within a short period of less than two decades. This is not a good sign to keep the confidence of its stakeholders, though the amendments must have been made to make the law more effective.

Drafting of legislations is not only an art, but it is also a science. The persons, who are responsible for drafting legislations, should not only possess the skills of drafting but they should also have mastery over the subject. In appropriate cases opinions and views of experts in the field should also be taken and considered. A perfect and well-crafted legislation is likely to bring results and achieve the objectives for which it is enacted whereas a defective legislation not only shatters the hope of legislators but also leads to chaos, miscarriage of justice and injustice to the victims of such law. The Arbitration and Conciliation Act, 1996 is one such defective law.

The Arbitration and Conciliation Act was enacted in the year 1996 with the primary objective to render easy, affordable and speedy justice in the realm of commercial disputes. This adjudicatory system is parallel to scores of tribunals and similar other authorities. Whether these alternative adjudicatory systems are fulfilling the aspirations of the legislators and the litigants is seriously debated. Very recently, the Ministry of Finance, Department of Expenditure, Government of India has issued certain guidelines vide Office Memorandum dated 3-6-2024¹⁶, whereby the government departments/PSUs and its agencies have been advised to refrain from incorporating the arbitration clause in the tenders/contract agreements in a routine manner. These guidelines have made a somersault of the avowed objectives of ADR and it should be an eye-opener for the Government about serious malaise existing in the arbitration law.

Commencement of the proceeding

Section 21¹⁷ of the Act reads as follows:

21. Commencement of arbitral proceedings.—Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.

Section 21 has to be read and understood in juxtaposition to Sections 23(4)¹⁸ and 29-A¹⁹ of the Act. Relevant provisions are also reproduced below for ready reference:

23. Statements of claim and defence.—

(1) *               *               *

(2) *               *               *

(3) *               *               *

(4) The Statement of Claim and Defence under this section shall be completed within a period of six months from the date the arbitrator or all the arbitrators, as the case may be, received notice, in writing, of their appointment.

29-A. Time limit for arbitral award.— (1) The award in matters other than international commercial arbitration shall be made by the Arbitral Tribunal within a period of twelve months from the date of completion of pleadings under sub-section (4) of Section 23:

Provided that the award in the matter of international commercial arbitration may be made as expeditiously as possible and endeavour may be made to dispose of the matter within a period of twelve months from the date of completion of pleadings under sub-section (4) of Section 23.

The purpose of fixing 12 months period for passing an award from the date of completion of pleadings as provided under Section 23(4) can be understood. However, the date of commencement of arbitral proceeding and the date of completion of pleading, as contemplated in Sections 21 and 23(4) of the Act are misleading. The date of passing of award under Section 23(4) has relevance for the purpose of filing an application under Section 34²⁰ for setting aside the award. However, the significance of the commencement of the proceedings, as provided in Section 21, is misleading and confusing. Section 21 speaks about notice by one party to the other but the basis for this notice is missing. It should have been clearly spelled out that this notice is for referring the dispute for arbitration. Strangely, Section 11²¹ that deals with the issue of appointment of arbitrators nowhere has a reference of Section 21. Since Sections 29-A and 23(4) take care of the period of completion of the proceedings Section 21 is practically an otiose, without specifying the motive of request to the respondent.

Date of reference

Section 2²² of the Act describes the definitions of various terms. However, the legislators deliberately or inadvertently omitted to define the “date of reference”. Since the entire law is focused on time-bound resolution of the disputes, it would have been prudent to prescribe a specific date of reference to the Tribunal to compute the subsequent steps. However, the tribunals are falling upon Sections 23(4) and 29-A for this purpose. Section 29-A says that the award should be passed within 12 months of completion of pleading, as provided in Section 23(4). However, Section 23(4) is essentially for completing the pleadings within a period of 6 (six) months from the date the arbitrator(s) receive notice of his appointment. It is not clear as to how the parties will come to know about the date receipt of notice of appointment by the arbitrator, in case the appointment is made by the High Court.

The period of completing the arbitral proceedings within 18 months of reference also needs to be revisited. In the civil suits under Code of Civil Procedure, 1908 the ordinary date of commencement of the hearing is the date of framing of issues. Similarly, in criminal cases the date of beginning of trial connotes the date of framing of charges. Very recently, an issue has been raised before the Supreme Court that the commencement of hearing of civil suits should be regarded from the date of filing of evidence on affidavits and cross-examination of witnesses.

Practically, on receipt of the letter of appointment the arbitrator issue notices for appearance of parties. Sometime, notices are either not served on time or sometime the parties do not appear for very many bona fide reasons. Hence, the date of commencement of the hearing of arbitration proceedings from the date of receiving notice by the arbitrator(s) is redundant. Hence, I suggest that the first date of filing of Statement of Claims should be the ideal date for reckoning the date of commencement of arbitral proceeding.

Imbroglio about Schedule 4

I must acknowledge the foresightedness of the legislature in bringing a model chart regarding fee of the arbitrators by the way of introducing Schedule 4²³ in the 1996 Act. This chart has greatly removed the disparity of fee charged by the arbitrators. Though private parties had no difficulty in negotiating the fee of the arbitrator(s) the government departments and their agencies were facing hindrances in finalising the fee of the arbitrator(s). The process of settling the fee of the arbitrator(s) consumed valuable time of the arbitral proceedings.

While speaking on the usefulness of Schedule 4 in the Arbitration Act I am reminded with the chart of compensation brought out by the legislators while enacting Motor Vehicles Act, 1988²⁴ in the Second Schedule²⁵ under the nomenclature of “Schedule for compensation for third part fatal accident/injury cases claims”. Though the intention of the legislators was quite appreciable the courts found gross infirmities in the formulae of compensation during the course of scrutiny of the compensation table. However, with the intervention of judiciary the defects in the table have been largely rectified by way of judicial pronouncements. Similar is the case with Schedule 4 of the Arbitration Act.

The Supreme Court made all efforts to rectify the defects in Schedule 4 in ONGC Ltd. v. Afcons Gunanusa JV²⁶. However, despite extensive research and deliberations the Supreme Court could resolve only a couple of ambiguities. In the said case, the Supreme Court primarily concentrated to define what is “sum in dispute”, arbitrators fee qua Schedule 4 and arbitrators fee in case of multi-member tribunal and that counterclaim shall be treated as an independent “sum in dispute”. However, many more questions were neither raised nor decided by the Supreme Court with reference to Schedule 4.

To my understanding Schedule 4 is still confusing. The “sum in dispute” in ordinary parlance reflects the amount of claims and counterclaims. However, there are many instances where the parties seek only declaratory awards without consequential reliefs in terms of money. What would be the “sum in dispute” in such a scenario.

Though the 1996 Act was amended in 2015²⁷, 2019²⁸ and 2021²⁹ there was no attempt to revise the fee schedule prescribed under the Act. The legislators were prompt enough (quite justified) to prescribe the time-limit for completing the pleadings and also passing the award. However, they were oblivious of revising the fee schedule beyond the statutory period of 18 months to complete the arbitral reference, price escalation apart. To put it differently, the fee prescribed in Schedule 4 would mean the fee is for a period of 18 months. There is no clarity in the law, precisely Schedule 4, as to whether the arbitrator(s) shall be entitled to extra remuneration beyond the original period of 18 months.

Though the Supreme Court, in Afcons case³⁰, has held that Fourth Schedule is not mandatory and party autonomy will prevail over the schedule practical difficulties will still arise until and unless Schedule 4 is revised in the context of high-stake claims. Despite giving autonomy to the parties to negotiate the fee of arbitrator(s) it will still be difficult for the officers, representing various government departments, to agree for any amount of fee instantaneously over the counter. Invariably, the officers have to forward the proposal to the higher authorities for approval and this period will overlap the statutory period of 18 months. Hence, it is desirable that Schedule 4 should be updated keeping open the scope of further negotiation.

Presently, Schedule 4 contemplates average “sum in dispute” to be that of 20 crores, whereas in reality majority of the arbitration disputes overshoots the claim amount of Rs 20 crores. In Afcons Ltd.³¹ itself the “sum in dispute” ran above 1000 crores and case also involved complexity of issues with voluminous documents. These were the compelling circumstances that forced few arbitrators to withdraw from the Tribunal. If Schedule 4 is revised pragmatically and a more sound, scientific and pragmatic formula is devised it would be easier to settle the arbitrators’ fee and this will certainly save the time of the Tribunal in deciding the dispute.

Ambiguity and dispensable Section 34

In this chapter I would like to visit the most contentious provision of Section 34 that enables the parties to challenge an award in two parts. In the first part I will confine to the ambiguity of the law and in the 2nd part I will briefly discuss the necessity of this provision in the Act at all.

A. Contours of Section 34

Chapter VII of the Act deals with procedure as to how an award can be challenged. It consists of only Section 34 with its sub-sections. The marginal heading of Section 34 stipulates that an application in this regard should be filed in the “court”, without specifying which court. For this purpose, the definition of “court” has to be borrowed from Section. 2(1)(e). The grounds to challenge the award have been elaborated in sub-section (2). Under Section 34 such an application has to be filed in the civil court of original jurisdiction in case of domestic awards and the awards arising out of international commercial disputes have to be filed in the High Court.

A cursory look to this provision makes it clear that the court of District Judge is the competent forum to challenge domestic awards. The contours of this court have been shackled with the limitations provided in sub-section (2). The grounds to challenge the award under Section 34(2)(a) are intrinsically technical in nature. If an award is challenged on any of the grounds laid down there in the court need not re-evaluate the merit of the case and award. Only a leeway has been given to the court to scrutinise the justiciability of the award is under Sections 34(2)(b)(ii) and (iii), which provides that an award can be set aside if it is in conflict with the fundamental policy of Indian law or if the award is in conflict with most basic notions of morality or justice. “Public policy” for this purpose has been explained in the “Exception” thereto that brings into picture the scope to interfere with the award on the ground of fraud or corruption and morality.

There are umpteen numbers of judicial authorities where it has been held that the Arbitral Tribunal is the master of facts and the courts cannot interfere with the award on merit. In NHAI v. M. Hakeem³² the Supreme Court further went to opine that the new Act was brought into being with the express parliamentary objective of curtailing judicial intervention. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd.³³ also the Supreme Court has candidly and categorically repeated that Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. Their Lordships further observed that if the courts were to interfere with the arbitral awards in the usual course then the commercial wisdom behind opting for ADR would stand frustrated. In a recent judgment in S.V. Samudram v. State of Karnataka³⁴, the Supreme Court has reiterated that the courts under Section 34 have no jurisdiction to modify arbitral awards and any attempt to modify an award assuming its power under Sections 34 and 37³⁵ would amount to crossing “Lakshman Rekha”.

However, a different line of approach was taken by the Supreme Court in a series of judgments, viz. Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd.³⁶, Oriental Structural Engineers (P) Ltd. v. State of Kerala³⁷ and M.P. Power Generation Co. Ltd. v. Ansaldo Energia Spa³⁸ and three Judges in J.C. Budhraja v. Orissa Mining Corpn. Ltd.³⁹, Tata Hydroelectric Power Supply Co. Ltd. v. Union of India⁴⁰ and Shakti Nath v. Alpha Tiger Cyprus Investment No. 3 Ltd.⁴¹ In view of these conflicting approaches to Sections 34 and 37 the Supreme Court has referred the issue of scope of courts under Sections 34 and 37 to a larger Bench vide order dated 20-2-2024 in Gayatri Balasamy v. ISG Novasoft Technologies Ltd.⁴² with the following terms of reference:

3.1. Whether the powers of the Court under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, will include the power to modify an arbitral award?

2. If the power to modify the award is available, whether such power can be exercised only where the award is severable and a part thereof can be modified?

3. Whether the power to set aside an award under Section 34 of the Act, being a larger power, will include the power to modify an arbitral award and if so, to what extent?

4. Whether the power to modify an award can be read into the power to set aside an award under Section 34 of the Act?

5. Whether the judgment of this Court in NHAI v. M. Hakeem⁴³, followed in Larsen Air Conditioning and Refrigeration Co. v. Union of India⁴⁴ and S.V. Samudram v. State of Karnataka⁴⁵ lay down the correct law, as other Benches … have either modified or accepted modification of the arbitral awards under consideration?

The aforesaid divergent views clearly reflect the lacunae in the law and needs to be clarified and resolved at the earliest possible.

Whether Section 34 is dispensable?

The motto to create tribunals and various other ADR authorities is to provide affordable, easy and speedy justice to all. With the same dictum arbitral laws were also introduced globally and given gradual priority in resolving all kinds of disputes. Whether this parliamentary intent has been fulfilled/achieved in the last more than one century of codified laws on arbitration, more particularly the 1996 Act in India.

I have already discussed few aspects relating to the cost of litigation even if the disputes are settled through informal forums. However, the main hurdle to get speedy justice is the availability of multiple forums to challenge arbitral awards despite the fact that such tribunals are reposed with faith by the contending parties in the realm of “party autonomy”.

Though Section 34 has provided very limited scope of interference in the arbitral awards instances are galore that both District and High Courts overstep their jurisdiction and interfere with awards at random. Precisely, this was the reason to refer the matter to a larger Bench by the Supreme Court to examine the contours of Sections 34 and 37 of the Act.

Except four High Courts, no other High Court has the original jurisdiction. As a corollary, all applications under Section 34 have to be necessarily filed and adjudicated by the courts in the rank of District Judges irrespective of value of the award. No limitation has been prescribed either in the Act or in the High Court rules to set any bar for the civil courts as regards their pecuniary limit in the context of Section 34 applications. There are instances where awards have been passed by multi-member tribunal, consisting of retired Supreme Court and High Court Judges and the “sum in dispute” may run in thousand crores even then the applications under Section 34 have to be necessarily filed before innocent District Judges. In such a riddle and conundrum, the District Judges are sandwiched to scrutinise the legality of the award.

As stated above, tribunals have been created to give speedy and quick justice, without rigour of normal judicial courts and also to give succor? to the judiciary who are overburdened with millions of cases and their docks are overcrowded. If the arbitral awards are also to be scrutinised by the same set of judicial courts where is the justification to create arbitration laws. Making statutory provision of application before the court under Section 34 ipso facto is against the concept and principle of “party autonomy”. Even if there is no stipulation in the contractual documents of appeal against the award the losing parties usually invoke Section 34 since the legislation has given this scope. Besides this, appeals in the High Court are also laid on the same set of grounds provided under Section 34 and the awards are scrutinised within the same parameters and arguments. Hence, there does not appear to be any justification for retaining Section 34 in the Act.

Though the Arbitration Act has set time-limit for filing pleadings and rendering awards there is no such time-limit for the courts. Since the District Courts and High Courts are already overburdened the disputes linger for decades and the award-holders are deprived of getting the fruits of decrees in their favour besides burdening them with additional litigation costs. There are instances where District Courts have not been able to decide applications under Section 34 even within a decade’s period. This fact alone is sufficient to remove this provision from the law. Whatever grounds have been provided to the civil courts under Section 34 are available with the High Courts under Section 37 and there is no need of duplication of layer of litigation. Further appeal to the Supreme Court under Article 136⁴⁶ is another forum in the existing hierarchy of courts.

Under normal Code of Civil Procedure, a final decree is challenged by way of an appeal. However, in the case of arbitral awards a miscellaneous case is registered in the civil courts, who are already confused about their authority, power and jurisdiction to interfere with the awards. Since the appellate power has already been vested with the High Courts where is the need of an intermediary judicial authority to examine the correctness and legality of the arbitral awards. This is just a superfluous authority under the garb of Section 34 and it should be done away within the interest of the litigants and society at large. Withdrawing Section 34 from the Act will also fulfil the aspirations of the Parliament to get speedy and affordable justice to the people.

There are many more infirmities, flaws, loopholes and shortcomings in the arbitration law. However, for brevity of this short legal discourse I give a pause to this article with the deliberation on a few issues only.