Evolution of Arbitration & Conciliation Act in India

SYNOPSIS:

The Arbitration & Conciliation Act has passed through various evolutionary stages of development in line with UNCITRAL recommendation in coherence with international standards for faster resolution of disputes and still there is a long way to go. The traditional courts are still taking time to decide cases under Section 34 and Section 37 of A & C Act thus frustrating the spirit of fast and efficient process envisaged by the legislation. 

Basic Differences between Arbitration & Conciliation Act, 1940 and 1996:

The Arbitration and Conciliation Act of 1940 was the primary legislation governing the law of arbitration and conciliation in India before the enactment of the Arbitration and Conciliation Act, 1996. The two Acts differ in terms of the procedural and substantive requirements for resolving disputes.

The following are some of the key differences between the two Acts:

1. Scope and Coverage: The 1940 Act only covers arbitrations and conciliations that occur within the borders of India. Whereas, the 1996 Act applies to all international commercial arbitrations that have a seat in India, as well as domestic arbitrations.

2. Power of Court: The 1940 Act provides for an extensive power of the court to interfere in arbitral proceedings. On the other hand, the 1996 Act strictly limits the court's powers, providing for very limited court intervention in the arbitration process.

3. Appointment of Arbitrators: The 1940 Act provides for the appointment of arbitrators by the court. However, under the 1996 Act, the appointment of arbitrators is typically done by the parties, with the involvement of the court being limited only to certain specified situations.

4. Time Limit: The 1996 Act has strict time limits for the completion of arbitration proceedings. It requires the arbitrator to make an award within 12 months, which may be extended by six months with the parties' consent. On the other hand, the 1940 Act lacks such time limits.

5. Enforcement of Awards: The 1996 Act provides for the enforcement of foreign arbitral awards, whereas the 1940 Act does not provide for such enforcement.

In conclusion, there are several significant differences between the Arbitration and Conciliation Act of 1940 and 1996. The latter provides a more streamlined and efficient dispute resolution process as compared to the former.

Differences in Setting Aside of Arbitral Awards between A&C Act 1940 and 1996:

The setting aside of arbitral awards refers to the annulment of an arbitral award by a court of law. The procedure for setting aside arbitrations under the 1940 and 1996 Acts is different. 

1. Under the Arbitration and Conciliation Act, 1940, Section 30 provides that an award can be set aside if it is affected by any legal infirmity such as the incompetence of an arbitrator, the corruption of an arbitrator, the award being procured by fraud or corruption, or if there is an error of law apparent on the face of the award. A court of law can further set aside an award under this act if the arbitrator has committed any misconduct.The 1940 Act, had grounds like "misconduct of arbitrator", "invalidity of arbitration proceedings" and "award otherwise invalid" which were very wide, sweeping and open ended which used to give an extensive power to the courts to set aside an award. 

2. On the other hand, under the Arbitration and Conciliation Act, 1996, Section 34 in conformance to UNCITRAL model law provides for the limited grounds on which an arbitral award can be set aside. An award can be set aside by a court of law if the party making the application to set aside the award proves that there was a lack of proper notice or opportunity to be heard, that the subject matter of the dispute was not capable of settlement by arbitration, that the award was against public policy where award was obtained by fraud or corruption, or that the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.

3. One of the significant differences is that the scope of the grounds for setting aside the award under the 1996 Act is much narrower as compared to that under the 1940 Act. Another significant difference is that the 1996 Act provides for the time limit of three months for setting aside applications, whereas there was no such specific time limit under the 1940 Act.

4. It is important to note that the courts in India have held that the grounds to set aside an award under the 1996 Act have to be interpreted narrowly.

5. Section 34 introduces itself by saying that the grounds mentioned thereunder are the "only" grounds on which an arbitral award may be set aside. However, apart from the grounds mentioned under S.34, the Act also provides for other grounds as under S.13, S.16, S.75 and S.81 on the basis of which the award can be set aside.

6. The grounds given under S.34(2)(a) are crisp and precise and lay the law as it is without the inclusion of any open-ended expression which otherwise would have given the courts an opportunity to widen their scope of interference with the arbitral awards. The only open-ended expression which can be and has been of concern is the ground of public policy of India. It has been under many cases defined as an unruly horse thus giving the interpretation that it can never be defined or be a certain thing. However, for the purpose of achieving the aim of the new Act, the Act  55 of 1996 - the legislature while drafting the Act limited the scope of public policy in its explanation restricted it to:-  

 a) Fraud 

 b) Corruption 

 c) S.75 or S.81 (confidentiality breach or admissibility of evidence) 

 The scope of public policy was, however, widened after the Supreme Court in its decision of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. , (2003 (5) SCC 705) (also referred to as : "Saw Pipes Case") interpreted it to include "patent illegality" in its definition.

7. However, interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. It is a settled law that interpretation of the contract and appreciation of the evidence by the arbitral tribunal cannot be reopened by arguing that the award is contrary to the contract. Error in law, error in application of law, error in appreciation of evidence by arbitrator and interpretation of contract cannot be considered under Section 34 by court as arbitrator is considered to be master of appreciating quantity and quality of evidence. Thus an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score.

8. Once it is found that the arbitrator's approach is not arbitrary or capricious it has to be accepted. He is the last word on facts. The  construction of the terms of the contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person would do, of course, the arbitrator cannot wander outside the contract and deals with the matters not forming the subject matter or allotted to him as in that case he would commit jurisdictional error.

9. In Delhi Development Authority v. R.S. Sharma, 2008(13) SCC 80 the Hon'ble Supreme Court summarized the law thus: "From the above decisions, the following principles emerge: 

(a) An Award, which is 

 (i) Contrary to substantive provisions of law; or 

 (ii) The provisions of the Arbitration and Conciliation Act, 1996; or 

 (iii) Against the terms of the respective contract; or 

 (iv) Patently illegal, or 

 (v) Prejudicial to the rights of the parties, is open to interference by the Court under S.34(2) of the Act.  

(b) Award could be set aside if it is contrary to:  

 (i) Fundamental policy of Indian Law; or 

 (ii) The interest of India; or 

 (iii) Justice or morality;  

 (iv) The Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court;  

 (v) It is open to the Court to consider whether the Award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India."

10. Substantive provisions of law refer to the actual rules and principles that outline the rights and duties of individuals or entities related to particular legal matters. These provisions establish the legal framework within which individuals or entities can operate and interact with one another.

For instance, in the context of civil law, the substantive provisions of law would include provisions related to rights and obligations, property law, family law, contract law, tort law, etc. The relevant sources of substantive law provisions in India include various Acts, Codes, and statutes like the Indian Penal Code, the Code of Criminal Procedure, the Civil Procedure Code, the Indian Contract Act, the Indian Sale of Goods Act, the Indian Partnership Act, and so on. 

11. The Supreme Court in McDermott International v. Burn Standard Co. Ltd.; 2006 (11) SCC 181, has commented on the scope of the powers of the arbitrator to interpret terms of the contract, and the permissible interference by the courts on the assessment of the arbitrator. It was held:-  

 " It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement, is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot, be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. The 1996 Act makes the provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the Court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrator, violation of natural justice, etc. The court cannot correct the errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it."

12. The Court will not judge the reasonableness of a particular interpretation accorded by the arbitrator to the terms of the contract. Even  an error in interpretation, unless patently illegal, will only amount to an error within the jurisdiction of the arbitrator.

13. In KV Mohd. Zakir v. Regional Sports Centre AIR 2009 SC (Supp) 2517 it held that the courts should not interfere unless reasons given are outrageous in their defiance of logic or if the arbitrator has acted beyond his/her jurisdiction.

14. In P.R. Shah Shares & Stock Brothers v. M/s. B.H.H. Securities (P) Ltd.; 2012 (1) SCC 594 it states that a court does not sit in appeal over the award of an arbitral tribunal by re-assessing or re- approaching the evidence. An award can be challenged only on the grounds mentioned in S.34(2) of the Act.

Changes introduced in A&C Act, 1996 by 2015 Amendment:

Section 34 of the Arbitration and Conciliation Act, 1996 deals with the grounds for setting aside an arbitral award. The 2015 amendment to the Act introduced several changes to this section. Some of the key changes are as follows:

1. Public Policy as grounds for challenging an award: The Arbitration and Conciliation Act, 1996, permits the court to set aside an arbitral award if it is in conflict with the public policy of India. This includes awards affected by (i) fraud or corruption, and (ii) those in violation of confidentiality and admissibility of evidence provisions in the Act.The Bill modifies this provision to also include those awards that are (i) in contravention with the fundamental policy of Indian Law or (ii) conflict with the notions of morality or justice, in addition to the grounds already specified in the Act.

2. Grounds for setting aside awards: The amendment expanded the grounds for setting aside an arbitral award. The court can now set aside an award if it finds that there is a conflict of interest on the part of the arbitrator, if the award is in conflict with the public policy of India, or if there are any patent errors in the award.

4. Appeals: The amendment introduced provisions on appeals against orders passed by the court while determining an application for setting aside an arbitral award. Appeals against orders passed by the High Court can now only be made to the Supreme Court on a limited number of grounds.

Conclusion

These changes introduced to Section 34 by the 2015 amendment have made the process of setting aside an arbitral award more streamlined, while also providing greater certainty and predictability to parties involved in arbitration proceedings.