Arbitration Law In India-The Way Forward

In an attempt to revolutionarise dispute resolution in India that was stalled by the burgeoning traditional Indian Court system and to give contracting parties greater flexibility in choosing their dispute resolution mechanism, India updated its arbitration law in 1996. This was done by replacing the Indian Arbitration Act, 1940 (“1940 Act”) with the Arbitration and Conciliation Act, 1996 (“1996 Act”), which largely adopted the UNCITRAL Model Law on International Commercial Arbitration. The 1996 Act made significant improvements to the existing arbitration regime and has been responsible for the growing popularity of arbitration as the default dispute resolution mechanism in most commercial contracts. While the 1996 Act has been a reasonable effort by the legislature, the judicial interpretation of some of its provisions have made this “alternate” dispute resolution mechanism subject to constant (and often time-consuming) interference by the Courts. This has dulled, to some extent, the sheen and attractiveness of arbitration in India.

The two hallmarks of arbitration, at least, from an aspirational point of view, are: (i) the ability of parties to contractually substitute the regular civil courts with a private tribunal comprising of the parties’ chosen adjudicators whose decision has the force of law; (ii) avoidance of the pitfalls and inconvenience of court litigation including cost, delays, lack of subject matter expertise, inflexible venue, etc.

This Article seeks to identify some of the key drawbacks of the arbitration regime in India and the aspirations this author has from the judiciary, suggests solutions to overcome the same, which could possibly help restore the efficacy of arbitration in India over the coming years. By way of disclaimer, I must also acknowledge that this Article does not propose to be an exhaustive critique of arbitration in India but merely seeks to introduce the mostly common issues that are plaguing the Indian arbitration regime.

1. Refusal to uphold the binding nature arbitration agreements

Arbitration, simply put, is the voluntary submission of a present or future dispute by parties to a private tribunal (as opposed to a civil court) consisting of persons chosen either by the parties themselves, or through a procedure agreed upon by the parties, for final and binding adjudication. Once parties have agreed to arbitration as the dispute resolution mechanism for their disputes, they are expected to be bound by such agreement and cannot resort to civil courts for adjudication of such disputes.

This defining character of arbitration, i.e., exclusion of courts by agreement of parties, finds resonance in numerous provisions of the Arbitration Act. For example, section 5 of the 1996 Act declares that once parties have entered into an arbitration agreement for arbitration in India, “no judicial authority shall intervene except where so provided…”

Section 8 goes one step further. It directs every judicial authority before which an action is brought in a matter that is the subject matter of an arbitration agreement to compulsorily refer the parties to arbitration upon the application any of the parties to the arbitration agreement. The Supreme Court too has viewed Section 8 as a legislative mandate on the Courts that leaves Courts with no discretion or choice in matters where parties have already entered into arbitration agreements. In P. Anand Gajapathi Raju & Ors. vs. P. V. G. Raju (Dead) & Ors1. , the Supreme Court has observed that section 8 is “peremptory” in nature and proceeded to hold as follows:

“It is, therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement. Nothing remains to be decided in the original action or the appeal arising therefrom.”

Section 8 further clarifies that “notwithstanding that an application has been made u/s/s. (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made”. This further reaffirms the emphasis on the primacy given to arbitration. So even if one party initiates proceedings in Court despite entering into an arbitration agreement, the other party would remain entitled to commence arbitration and the arbitral tribunal can proceed to hear the matter even before the Court decides an application for reference to arbitration.

It is also worth noting that section 8 does not apply only to Courts. It applies to all “judicial authorities” before whom a dispute covered by an arbitration agreement is brought. Accordingly, all other authorities performing judicial functions, including tribunals such as the Company Law Board, are intended to be bound by the mandatory language of section 8.

The Scheme of the 1996 Act, and sections 5 and 8 in particular, make it clear that once parties have entered into an arbitration agreement, they will be held to their bargain and the courts will do permit either side to circumvent the arbitration agreement by commencing judicial proceedings instead of arbitration. But this legislative scheme has been somewhat diluted by three sets of decisions of Indian courts that have allowed Courts to retain control over certain kinds of the disputes even in the face of an arbitration agreement.

1.1. Multiple parties and multiple causes of action
In Sukanya Holdings (P) Ltd. vs. Jayesh H Pandya and Anr.2 , the Supreme Court held that:

…there is no provision in the Act that when the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators…

…In our view, it would be difficult to give an interpretation to section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act.

By the above ruling, the Supreme Court has created two exceptions to the mandate of section 8. According to the Apex Court, a judicial authority was not required to refer parties to arbitration u/s. 8 when: (i) the claim involves multiple parties, some of whom are not party to the arbitration agreement, or (ii) if only some, but not all of the disputes among the parties are covered by the arbitration agreement.

It is submitted that this case creates an unnecessary exception to the mandate of compulsory arbitration u/s. 8. First, the decision proceeds on the basis that when multiple claims are involved among the same parties, they must necessarily be pursued by way of a single composite legal proceeding. This, however, is not mandated by the either the 1996 Act or the Code of Civil Procedure (CPC). In fact, Order I, Rule 3 of the CPC only permits (but does not require) a plaintiff to join several disputes or causes of action or sue several defendants in the same Suit. Moreover, Order I, Rule 6 of the CPC actually permits the Court to split up a composite suit if the joinder of the multiple causes of action would “embarrass or delay the trial” or “is otherwise inconvenient”.

Secondly, the decision is prone to misuse by parties  that wish to back out of an arbitration agreement. For instance, two contracting parties having several transactions with each other may very often have several disputes and claims against each other, only some of which are covered by an arbitration agreement. A party who is keen on escaping the rigors of arbitration can do so quite easily by merely raising claims that are not covered by the arbitration agreement. Since the Court will not examine the merits of the substantive dispute at the initial stage of determining whether or not the matter should be referred to arbitration, a party can escape arbitration by raising even a frivolous claim that falls outside the scope of the arbitration agreement. Similarly, a person can also avoid an arbitration agreement by cheekily raising claims against other persons who are not party to the arbitration agreement. In fact, a person need not even raise an actual claim against such third parties. He can implead them in the Suit as “proper” parties so long as they have some reasonable connection with the subject matter of the Suit.

1.2.    Matters covered by special laws
It is reasonably well settled across most jurisdictions that a dispute affecting rights in rem (i.e., matters affecting the world at large) cannot be the subject matter of arbitration. So matters involving criminal offences, winding-up of companies or suits for foreclosure of a mortgage are generally considered as matters in which the public at large has an interest and are therefore non-arbitrable. The Supreme Court, however, has extended this logic to certain cases that involve nothing more than the personal rights of the disputing parties and has allowed Courts to interfere even when parties have consensually submitted certain disputes to arbitration.

In Natraj Studios (P) Ltd. vs. Navrang Studios3 and Mansukhlal Dhanraj Jain vs. Eknath Vithal Ogale4, the Supreme Court held that all matters falling within the ju- risdiction of the Small Causes Courts, including disputes between a landlord and tenant and matters between a licensor and licensee relating to recovery of possession, could not be the subject matter of arbitration. The Su- preme Court reasoned that in so far as landlord-tenant and licensor-licensee disputes are concerned, the Small Causes Court was vested with the exclusive jurisdiction to try such cases under the Presidency Small Cause Courts Act, 1882.

Although the above two cases were decided before the 1996 Act came into force, their dicta continues to be followed by the Bombay High Court5. As a result, even when a landlord-tenant or a licensor-licensee enter into  a written agreement to refer all disputes between themselves, including disputes relating to recovery of possession, to arbitration, either party can avoid the arbitration agreement by claiming that the Small Causes Court has exclusive jurisdiction to try such matters.

Presumably, this reasoning can be extended to all matters where designated courts and tribunals have been vested with jurisdiction try certain specific type of cases. In fact, in several cases, the Company Law Board has also taken a similar view and assumed jurisdiction over shareholder disputes even when there was an arbitration clause between the shareholders. For instance, in the case of Rajendra Kumar Tekriwal vs. Unique Construction Pvt. Ltd.6, the Company Law Board held as follows:

“…the test to determine as to whether the matter in a petition u/s. 397 & 398 is to be relegated to arbitration or not, one has to examine whether the allegations  of oppression/mismanagement contained therein can be adjudicated without reference to the terms of the arbitration agreement. In the present case, this Board can examine the allegations purely on the basis of the Articles. If it can be, then the question of referring the matter to arbitration does not arise even if assuming that there is an arbitration agreement and the agreement covers the same matter. In the present case though there is arbitration agreement, the matter relates to oppression and mismanagement directly relating to the rights of or benefit to shareholders in their capacity as members of the company arising out of the provisions of the Act, Articles or on equitable grounds. Assuming that the matters are covered under the arbitration agreement yet, since the same is covered under the Articles also, this Board can determine the allegations only with reference to the Articles and without recourse to the arbitration agreement.”

This line of reasoning, it submitted, not only dilutes one of the objectives of the 1996 Act, viz. to reduce the burden on the judicial system, but also flies in the face of the plain language of section 8. There is nothing in the 1996 Act which suggests that merely because a dispute falls within the exclusive jurisdiction of a special Court or Tribunal, such dispute is incapable of being determined by arbitration. On the contrary, section 8 deliberately uses the words “judicial authority” instead of “civil court”. A reasonable interpretation of section 8, especially in light of the object of the 1996 Act, would suggest that the legislature deliberately used the wider term “judicial authority” to ensure that the section 8 covers all judicial bodies, including special Courts and Tribunals such as Small Causes Court and Company Law Board.

1.3.    Fraud and other complicated matters
The third set of cases, which has further diluted the sanctity of a binding arbitration agreement between the parties, are the decisions where the Court has held that an arbitral tribunal is not equipped to deal with matters involving complicated questions of fact or law or disputes where an allegation of fraud is has been made.

Under the old arbitration law7, the Court was not bound to refer parties to arbitration even when parties had entered into an arbitration agreement. The Court could, for “sufficient reason”, refuse to relegate parties to arbitration and instead decide the dispute itself. But the language of section 8 of the 1996 Act, as explained above, is mandatory and leaves the Court with no discretion.

Despite the clear difference between the provisions of the two legislations, the Madras High Court, in the case of Oomor Sait HG vs. Asiam Sait8, has taken the view that even under the 1996 Act, the Court continues to retain the “time-tested” power of deciding whether or not to refer the dispute before the Arbitrator.

The Supreme Court, in the case of N. Radhakrishnan vs. Maestro Engineers & Ors.9 has upheld this view and held that when there are serious allegations of fraud or malpractices or manipulation of finances such matters cannot be properly dealt with by an Arbitrator. Such issues should, “for the furtherance of justice”, be tried in a court of law which would be “more competent and have the means to decide such a complicated matter…”. This reasoning has been followed in several subsequent cases.

It is submitted that this is an artificial exception that has been carved out despite there being no legislative backing for it under the 1996 Act. In fact, it appears to be a hangover from the early days of judicial mistrust of arbitration when the Courts felt that arbitration, as a means of adjudication, was rife with short-comings10. But this exception creates to the rule that an arbitration agreement is binding on the parties and the Court, creates a virtual black-hole. A party who does not wish to submit to arbitration can  do so by merely raising an allegation of fraud and claiming that such an issue cannot be adjudicated upon by an arbitrator. Unless the Supreme Court changes its view, it would be difficult for any civil Court or High Court take a different view and they would find themselves compelled to ignore the arbitration agreement in every matter where there is an allegation, howsoever far-fetched of fraud.

2.    Pre-arbitration litigation
The other problem plaguing the arbitration regime in India is the lengthy and expensive pre-arbitration litigation that is required when one party (usually the party disputing the claim) refuses to participate in the arbitration process. U/s. 11 of the 1996 Act, if parties to an arbitration are unable to agree on the arbitrators or if one party refuses to participate in the appointment of an arbitrator, then the Chief Justice of the relevant High Court (or his designate) is empowered to appoint the arbitrator.

A plain reading of the section suggests an innocuous procedure whereby designated Judge will perform a routine task of merely naming an arbitrator and relegate the parties to the arbitration by such a court appointed arbitrator. The Supreme Court, however, in the landmark case of SBP has held that the Chief Justice’s power u/s. 11 is not an administrative task that can be carried out summarily but is matter far more exhaustive. The Court has defined the role of the Chief Justice u/s. 11 as follows:

“Obviously, he has to decide his own jurisdiction in the sense, whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause. It will be appro- priate to leave that question to be decided by the arbitral tribunal on taking evidence, along with the mer- its of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act. For the purpose of taking a decision on these aspects, the Chief Justice can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary.”

As a result of the above interpretation given by the Supreme Court, appointment of an arbitrator is by no means a straightforward process. A person who seeks appointment of an arbitrator, is first required to prove through affidavits and detailed arguments the following: (i) existence of a validly executed arbitration agreement; (ii) that the claim is a long dead one; (iii) that there has been no accord or satisfaction. This entails filing of detailed pleadings and exhaustive oral arguments and it could be several months before the High Court makes a decision and appoints an arbitrator. Even if the High Court chooses to exercise its power in favour of arbitration and appoints an arbitrator, this appointment can be challenged by way of a Special Leave Petition before the Supreme Court under Article 136 of the Constitution.

CONCLUSION
The 1996 Act, as it stands today, is a reasonable effort at promoting arbitration. But the manner in which several of its provisions, especially section 8 and section 11, have come to be interpreted by the Courts, somewhat takes away from this effort. It is submitted that as a result of the colour given to these provisions if the 1996 Act by the various rulings of the Supreme Court, the hallmarks of arbitration, viz. mutual agreement to avoid courts, and expeditious decision making, continue to remain aspirational and serious re-thinking is required, preferably judicially, to correct this dichotomy.

The Supreme Court has in the past two years started taking a more liberal view of arbitration and has been less eager to assume control of matters when parties have agreed to exclude the jurisdiction of Indian courts. In the case of BALCO vs. Kaiser Aluminium12 the Supreme Court boldly overruled its long criticised decision in Bhatia International13 and held that Indian Courts have no role to play when the seat of arbitration is outside of India, even if parties or the property in dispute is in India. Furthermore, in World Sport Group vs. MSM Satellite (Singapore) Pte. Ltd.14, the Supreme Court has rejected the contention that an arbitral tribunal is incompetent to deal with allegations of fraud. But since this was a matter relating to an arbitration taking place outside of India, it does not apply to arbitrations held in India, which continue to be governed by the law laid down by the Supreme Court in N. Radhakrishnan’s15 case.

Both these decisions suggest that the Supreme Court has recognised that a strong push is required from the judiciary to correct the gap that exists between the legislative intent and judicial interpretation of Indian arbitration law. It is hoped that the Court continues this trend over the next few years and smoothens out the remaining creases, including the ones highlighted in this Article, by relooking at the law laid down in some of its previous decisions. !