A REPORT

ON

Arbitration & Conciliation:

Issues and Challenges

BY

ANUSHEEL SHARMA

10FLUHH010102

FACULTY OF LAW (IFHE)

ORGANIZATION

RAO & CO LAWYERS

1
 A REPORT

ON

Arbitration & Conciliation:

Issues and Challenges

BY

ANUSHEEL SHARMA

10FLUHH010102

FACULTY OF LAW (IFHE)

A report submitted in partial fulfillment of the

requirements of Law Program of Faculty of Law,
IFHE- Hyderabad.

Project guide: Mr. Mohan Rao

Faculty guide: Ms. Veena

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 ACKNOWLEDGEMENT

I am thankful to Icfai Foundation for Higher Education (IFHE), faculty

of law for providing summer internship program in the legal firm “Rao
& Co. Lawyers, Hyderabad”.

I am honored to have been deputed to one of the most prestigious law

firm in Hyderabad i.e. the RAO & CO LAWYERS. My sincere gratitude
towards Advocate Mr. Mohan Rao and his employees who were kind
enough to track and monitor the project progress from time to time; and
always made us feel like a part of their Firm.

I shall take the opportunity to express my gratefulness to my faculty

guide Ms. Veena who was there to steer us all this while and for the
encouragement which made the entire internship experience worth while.

I express my sincere thanks to one and all helped me in completion of

the project.

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 TABLE OF CONTENTS

Chapters Content Page No.

Abstract 5

I Introduction 6

II Arbitration – Pre & Post Independence 11

III Important Provisions of Arbitration & Conciliation Act 1996 17

IV Critical Study of Arbitration & Conciliation Act, 1996 21

V Need of Arbitration & Conciliation Act, 1996 36

VI Relevant Landmark Case Laws 39

VII Conclusion 45

References 46

ABSTRACT

The concept of Arbitration and conciliation play a prominent role in resolving the
disputes between the parties. The process does not involve intervention of the courts

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except in some circumstances. This process was in some other form in olden days
such as Ratchabanda, panchayat and other institutions. The Arbitration &
Conciliation Act, 1996 is a natural outgrowth of the process of economic
liberalization that began in the year 1991. As a result of the economic reform process,
there was tremendous grow in Foreign investment and trade in early 1990’s But, it
soon became clear that the Indian Arbitration Act, 1940 did not provide a speedy,
effective and transparent mechanism to address disputes arising out of foreign trade
and investment transactions. The 1996 Act which is based on “UNCITRAL” model
law on international commercial arbitration was passed to fill this emerging need.

Prior to 1996 enactment, there were lengthy procedures existing. To overcome such
lengthy procedures, it was felt necessary to re-design and re-frame the system and the
present enactment is a born baby in that process. The 1996 enactment brought about
sea-saw changes in the arbitration system and provides transparency in the
proceedings.

In the project, an attempt is made to analyze and study the issues in relation to the
importance of Arbitration and conciliation, Arbitration-pre-independence, post-
independence, Need and the problems arising under the Arbitration & Conciliation
Act, 1996, deficiencies in 1940 Act, need of 1996 Act and their related issues.

CHAPTER – I
INTRODUCTION

With the advent of 1996 Act, the legislature has brought a tremendous change
in relation to the laws emerging out of the arbitration process. The old Act 1940

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confined itself to a limited scope whereas the 1996 Act embraced the real issues in
controversy arising out of the arbitration. For example, under the old Act, once the
award was passed, it was mandatory on the part of the party to approach civil court to
file an application to pass a decree in terms of the arbitral award. Then only, the party
had a right to enforce the award. But, with the advent of the 1996 Act, such narrow
scope has been widened and under Sec. 36 of the 1996 Act, the award can straight
away be executed without making it rule of law.

The Arbitration Act, 1979 of England has brought about number of changes in
the law of Arbitration. English courts have been deprived of the power to compel the
arbitrator to state a special case which is also the position according to the Indian
law. The Courts in England have also been deprived off the power of judicial review
of an award on the ground of error of law on the face of it and to set aside or remit
the same for such error, excepting in special cases. The power of the English courts
to set aside an award on the ground of mis-conduct of the arbitrator or the empire still
remains intact. Unlike Sec. 69 of the Arbitration Act, 1940, the corresponding
Section in the English Act does not specify any ground upon which the award can be
remitted. To the corresponding changes in the 1996 Act, the legislature has also
brought certain amendments to the Code of Civil Procedure, 1908.

In the case of M/s. Sundaram Finance Vs. NEPC (India) Limited, reported in
AIR 1999 SC 565, the Hon’ble Apex Court observed that the interpretation of the
1996 Act should not be based upon the provisions of the old Act, but on
“UNCITRAL” reports, explanatory notes and analysis of the model law.
Subsequently, plethora of decisions which have been rendered from time to time by
the Hon’ble Apex Court as well as various High Courts, have endorsed such view.

The Arbitration & Conciliation Act, 1996 does not render judicial decisions
on the 1940 Act completely irrelevant. From the stand point of a practicing lawyer,
these decisions remain important for two reasons. First, Arbitration proceedings that
were commenced prior to introduction of 1996 Act continued to be governed by the

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1940 Act. Secondly, some of the provisions of the 1996 Act are based on concepts
that are also found in the 1940 Act.

The Arbitration & Conciliation Act, 1996 has provided considerable leverage
in the process of arbitration and there is no need to follow the procedures as required
before the courts. It is left to the choice of the parties to choose an Arbitrator in
consultation with each other. The Arbitrator is empowered to look into the disputes
between the parties, in various angles and has adjudicate upon the issues involved.
The Arbitrator has vital role to play in the process of Arbitration. The award passed
by the Arbitrator is binding on both the parties. The award of the Arbitrator attains
the status of a decree passed by the regular courts. Either of the aggrieved parties can
prefer appeal against the award.

CONCILIATION:

Conciliation plays a prominent role in settling disputes. It avoids procedural

wrangles. Conciliation is more informal in nature. There cannot be Arbitration
during conciliation. There is a bar under section 77 of the Arbitration and
Conciliation Act, 1996. The act further says the conciliator cannot be the Arbitrator.
Conciliator formulate certain terms for settlement and if they are not agreed,
reformulate them to bring the issue to a logical conclusion. To arrive at the same, the
capability to settle the dispute through the process of Conciliation depends more
upon the Strength, power and determination of the Conciliator. Part III of the
Arbitration & Conciliation Act, 1996 relates to conciliation which is an alternative
mechanism for settlement of disputes. The law relating to conciliation process has
been codified for the first time in part III, following the footsteps of UNCITRAL
conciliation rules.

Conciliation is not defined in the Act. Article I of UNCITRAL conciliation rules

corresponding to Section 61 (1) refers to “The parties seeking an amicable settlement
of their disputes”. Section 67 of the Act relating to role of conciliator requires the

7
conciliator to assist the parties in an independent and impartial manner in an attempt
to reach an amicable settlement of the disputes. Conciliation is defined “as a method
used by parties to a dispute to reach an amicable settlement with the assistance of an
independent third person or institute”, as according to the report of Secretary General
of Committee of draft, UNCITRAL conciliation rules. Parties may wish to reach a
settlement in the spirit of conciliation i.e. a settlement which is not necessarily based
on strict legal grounds, but more on what they perceive as a just and reasonable
settlement based on mutual concessions.

The procedure laid down in part III (Sections 61 to 81) reflects certain broad
principles.

a) Non-adversory nature of conciliation proceedings which means there is no

claimant or plaintiff in conciliation procedure.
b) The voluntary nature of proceedings which means any party can
commence and discontinue the proceedings and further avoid expenses in
this regard.
c) Flexible procedures which, means the discretion of the conciliator as to
the adoption of procedural laws so as to ensure speedy and inexpensive
conduct of the proceedings.
d) Decisions are recommendatory which means dispute is to be settled by
mutual agreement and not by any imposed decisions.
From the above observations, it can be inferred that parties may workout their
remedies through negotiations, conciliation and other discussions prior to
commencement of arbitration.

In HOOPER BAILEE ASSOCIATED LIMITED Vs NATION GROUP PTY.

LTD., (1992) 28 NSWLR 194, it was observed that “an agreement to conciliate or
mediate is not to be likened … to an agreement to agree nor is it an agreement to
negotiate or negotiate in good faith, perhaps necessarily lacking certainty and
obliging a party to act contrary to its interest. Depending upon its express terms and

8
any terms to be implied, it may require of the parties participation in the process by
conduct of sufficient certainty for legal recognition of the agreement”. Unlike the
case of arbitration, a written conciliation agreement is not necessary. This reflects the
voluntary and non-binding nature of conciliation. This may also encourage parties for
conciliation by oral agreement. However, Arbitration & Conciliation Act, 1996
require that the invitation to conciliate and acceptance thereof should be in writing.
On receipt of the invitation to conciliate, the other party can accept the invitation or
reject the invitation. The acceptance or rejection has to be conveyed to initiating
party in writing within 30 days of the date of invitation. The invitation itself may
specify a time limit (a shorter or longer period than 30 days) for acceptance or
rejection of the invitation.

Section 64 lays down the manner of appointment of conciliation and reflects

the principle of party autonomy in this regard. Alternatively, the parties can agree for
appointment of conciliators, directly by the institution or the third person. There is
nothing in Section 64 which prohibits enlistment of assistance even if there was no
prior agreement. For instance, if the parties had agreed for conciliation by a sole
arbitrator but had failed to agree on the name of the conciliator, Section 64 (2) can be
invoked by mutual consent. Conciliators are not bound by code of civil procedure,
1908 or Indian Evidence Act. This is only to provide flexibility and discretion to
them in a conduct of conciliation proceedings. Conciliators may conduct the
proceedings in a manner they consider appropriate in the circumstances of the case.
The cost of the administrative assistance to the conciliator so provided will be
included in cost of the conciliation proceedings which are to be borne equally by
both parties, unless a different apportionment has been agreed upon. A successful
conciliation proceedings culminates in settlement agreement which reflects the
agreed terms of settlement of dispute. Section 73 of 1996 Act which deals with
settlement agreement is based on Article 13 of UNCITRAL Conciliation Rules.

If conciliator feels that the continuation of the conciliatory proceedings is

nothing but a futile exercise, he can forthwith terminate the conciliatory proceedings

9
and has to be intimated to both parties. The proceedings can be terminated by one of
the parties or jointly by the parties under intimation to the other party or to the
conciliator. The termination is effective from the date of declaration. The termination
of the proceedings under Clause (b) to (d) of Section 76 of 1996 Act enable the
parties to take recourse to arbitral or judicial proceedings for settlement of their
disputes. Conciliator is precluded from acting as an arbitrator or as a representative
or counsel of a party in any subsequent arbitral or judicial proceedings relating to the
dispute that was subject matter of the conciliation proceedings, nor could he be
represented as a witness in any proceedings. However, it is left to the parties
concerned to decide between themselves whether the conciliators can so act.

From the above, it can be observed that the conciliation proceedings prior to
commencement of arbitration play a significant role in settling the disputes. The
process of conciliation avoids the journey of arbitration if it is materialized. It has to
be mandated to go through the process of conciliation before the process of
arbitration so that there is every possibility of settling the disputes at threshold.
Conciliation in the midst of arbitration proceedings is also a positive step for
effective settlement of disputes amongst the parties.

CHAPTER - II

ARBITRATION – PRE & POST INDEPENDENCE

The concept of arbitration was unknown in ancient India. Hindus recognize

decisions of the panchayaths or bodies consisting of wealthy, influential and elderly
men of the community and entrusted them with the power of management of their
religion and social functions. The sanction against disobedience to their decision was

10
ex-communication and exclusion from all religious and social functions of the
community. When power came to East India Company, the company framed
regulations in exercise of the power vested in it by the British Parliament. Bengal
regulations empowered the courts to submit the matters in dispute in a suit, to the
decision of the Arbitrator mutually agreed to, by the parties. If the parties did not
consent, the case was not to be referred to Arbitration, but was to be tried by the
courts. Subsequent legislation, viz. Sec. 312 and 314 of Code of Civil Procedure,
1859 and Arbitration Act, 1899 prescribes the mode of appointment of Arbitrator as
agreed upon by the parties. The court had no power to refer the decision of any issue
raised in the suit to the arbitrators nominated by the courts against the protests of the
parties. Such observation was made in Sheonath Vs. Ramnath (1905) (a decision
under code of civil procedure, 1859).

Shortly before the middle of 18th century, it was a conception that “an
Arbitrator is a private extraordinary judge between party and party chosen by their
mutual consent to determine controversies between them and Arbitrators are so called
because they have an arbitrary power. SIR ROBERT RAYMOND, CJ had stated
about the same and the same has been reported in “Evidence and procedure in
Arbitration” written by WILLIAM H GILL. Until 1822, regulations permitted
references by civil courts only. Bengal regulation empowered revenue officials to
refer rent and revenue cases to the Arbitrators. The dichotomy regarding arbitration
in civil and revenue courts is still recognized. Rent and revenue matters are
peculiarly amenable to state legislation and the power of the civil and revenue courts
respectively to refer revenue cases to the Arbitration, to file awards and to deal with
objections to awards in such cases were largely regulated by the State Legislation.

The actual operation of the Arbitration Act, 1899 was confined to the
Presidency terms and was later extended to several other important commercial
terms. Section 21 of Specific Relief Act barred the Specific Performance of a
Contract to refer to Arbitration and at the same time, provided that the existence of

11
such a contract would bar a suit in respect of any subject agreed to be referred to.
This provision was repealed except with regard to the scheduled districts.

Arbitration is not a suit or judicial proceedings, in a technical sense, between

the parties, begun by judicial process. Though a judge of the court is selected by the
parties to determine the matters in controversy between them, the parties can not, by
such an agreement, confer upon the judge, in relation to jurisdiction to hear, as a
court, matters outside the statutory jurisdiction. Arbitration is submitting of a
disputed matter to the judgement of one or more persons, called Arbitrators. In its
broadest sense, arbitration is the substitution by consent of the parties, of another
tribunal for the tribunals, provided by the ordinary process of law.

ELDERS:

In olden days, the issues which cropped up used to be resolved by the elders
without authority in law. However, such process was not recognized by the courts of
law. Several adverse presumptions were drawn to that effect. In fact, the elders were
assumed as mediators/arbitrators and the partiers to a dispute had to obey the
decision rendered by the elders. The venue of the discussion/negotiation was
considered to be ratcha Banda.

OBJECTS:
The Arbitration & Conciliation Act, 1996 takes into account the UNCITRAL
model law which was adopted by the United Nations Commission on International
Trade Law in 1985 for the purpose of International Commercial Arbitration and the
conciliation Rules adopted in the year 1980. The UNCITRAL model law and rules
have hormonized concept of Arbitration & Conciliation of different legal systems of
the world. The main objectives of the enactment of the act are :

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i) to cover comprehensively international and commercial arbitration and
conciliation as also domestic arbitration and conciliation.
ii) to make provision for an arbitral procedure which is fair, efficient and capable
of meeting the needs of the specific arbitration.
iii) to provide that the arbitral tribunal gives reasons for its arbitral award.
iv) to ensure that the arbitral tribunal remains within the limits of its jurisdiction.
v) to minimize the supervisory role of courts in the arbitral process.
vi) to permit an arbitral tribunal to use mediation, conciliation or other
procedures during the arbitral proceedings to encourage settlement of disputes.
vii) to provide that every final arbitral award is enforced in the same manner as if
it were a decree of the court.
viii) to provide that a settlement agreement reached by the parties as a result of
conciliation proceedings will have the same status and effect as an arbitral award on
agreed terms on the substance of the dispute rendered by an arbitral tribunal.
ix) to provide that, for purposes of enforcement of foreign awards, every arbitral
award made in a country to which one of the two international conventions relating
to foreign arbitral awards to which India is a party applies, will be treated as a foreign
award.

The Arbitration & Conciliation Act, 1996 contains 4 parts in which part I
contains 10 chapters and part II contains 2 chapters. The Act contains 86 sections and
deals with general provisions, arbitration agreements, composition of Arbitral
Tribunal, jurisdiction of Arbitral Tribunals, conduct of Arbitral proceedings, making
of arbitral awards, termination of proceedings, recourse against arbitral awards,
penalty and enforcement of arbitral awards, appeals, miscellaneous, enforcement of
certain foreign awards, New York convention awards, Geneva convention Awards,
conciliation awards and supplementary provisions.

PANCHAYATHS, NYAYA PANCHAYATHS:

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 Hindus recognize decisions of the panchayaths or bodies consisting of
wealthy, influential and elderly men of the community and entrusted them with the
power of management of their religion and social functions. Panchayath literally
means a body of five persons and a pancha means a member of that body.
Nowadays, a panchayath has come to denote an arbitration tribunal constituted by the
consent of the parties and the pancha denotes an arbitrator. Sarpanch means, a head
pancha who may be an empire with the parties so intend.

ARBITRARY TRIBUNAL :

Arbitrary tribunal has been defined to mean a sole arbitrator or a panel of

Arbitrators i.e. the Arbitration by a sole arbitrator or by a body consisting of three or
more arbitrators. The term, Arbitrator used in the Act denotes an individual arbitrator
as opposed to the body of arbitrators. Thus, there can be either a one man tribunal or
a tribunal of three or more arbitrators. The composition of Arbitral tribunal is well
explained in Sections 10 and 11 of the Arbitration & Conciliation Act.

DEVELOPMENTOF ARBITRATION–POST INDEPENDENCE

Foreign Investment and Trade grew rapidly during the early 1990’s as a result
of the economic reforms process. The old Act 1940 could not address some areas
arising out of foreign trade which resulted in bringing the 1996 Act in force which is
based upon on United Nations Commission on International Trade Law
(UNCITRAL). There has been exciting developments in the law and procedure of
Arbitration in India after 1947.

UNCITRAL MODEL LAW – ARBITRATION & CONCILIATION ACT, 1996

The Arbitration & Conciliation Act, 1996 drew its strength from UNCITRAL
model law which has elaborately dealt with international commercial arbitration. The

14
definition of international commercial arbitration in Sec. 2 (1) (f) has two elements.
One is physical and the other conceptual. The physical element is that one party
should be foreigner viz. either foreign national or resident or a foreign body
corporate or a company, an association or body of individual whose central
management or control is in foreign hands or government of some foreign country.

The conceptual element is that the legal relationship between the parties,
contractual or otherwise, must be such, as is considered commercial under Indian
Laws.

Article I of the UNCITRAL model law deals with the scope of application of
law to International Commercial Arbitration. This law applies to International
Arbitration, subject to any multilateral or bilateral agreement which has effect in the
state. The model law lays down the substantive field of application which is in
accordance with the commission/s mandate to the working group, as according to the
official records of the General Assembly, 34th Session, Supplement No.17 para
No.81. The Supreme Court, in RN Investments case reported in 1994 (1) Company
Law Journal 416, has observed that while construing the expression of commercial
relationship, guidance can also be taken from UNCITRAL model law. Further, in
1961, the Supreme Court, in ATIA BARI TEA COMPANY LIMITED Vs STATE OF
ASSAM held that the Trade and Commerce merely do not mean merely traffic in
goods i.e. exchange of commodities for money or other commodities. Article 302 to
305 of UNCITRAL model law make it abundantly clear that the freedom
contemplated was freedom of Trade, commerce and intercourse in all their varied
aspects inclusive of all activities which constitute commercial intercourse, which is
reported in AIR 1961 SC 232.

DEFICIENCIES IN ARBITRATION ACT, 1940:

Indian Arbitration Act, 1940 did not provide a speedy, effective and
transparent mechanism to address disputes arising out of foreign trade and

15
investment transactions because foreign investment and trade grew rapidly during
1990’s as a result of several economic reforms. As there has been exciting
developments in the law and procedure of Arbitration in India, it requires
appropriate legal enactments to concern with the developments. In so far as Section
17 of the 1940 Act is concerned, a judgment had to be passed in accordance with the
terms of the award. It has caused much delay in executing the award passed by the
Arbitrary tribunal. To that effect, parties had to approach the court again seeking a
judgement which enabled them to execute it. The other deficiency is in relation to
Section 30 of the old Act which dealt with grounds for setting aside the award. There
were only three grounds upon which the award could be set aside. Therefore, the
scope of Section 30 under the old Act was confined to a limited extent. Though the
parties aggrieved by the award passed by the Arbitrator, the parties had no chance to
seek for setting aside the same, other than the grounds which are enshrined under
Sec. 30 of the Old Act. In a sense, the Section itself had curtailed the rights of the
parties to work out their remedies.

CHAPTER - III

IMPORTANT PROVISIONS OF ARBITRATION &

CONCILIATION ACT 1996

a) ARBITRATION AGREEMENT :

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 An arbitration agreement means an agreement by the parties to submit to
arbitration, all or certain disputes which have arisen or which may arise between
them in respect of a defined legal relationship, whether contractual or not. The
Arbitration agreement was well interpreted by the Hon’ble Supreme Court in AIR
1963 SC 1685 and AIR 1993 SC 2268 in (i) Union of India Vs AL Rallia Ram and
(ii) N. Dayananda Reddy Vs Andhra Pradesh Industrial Infrastrure Corpopration
Limited. The relevant sections to that effect are Section 2 (1) (d), 7 (1) under the
1996 Act and Sec. 2 (8) of 1940 Act.

Under the Indian Contract Act, 1872, a contract means, an agreement

enforceable by law under Sec. 2 (h). An agreement means a promise or set of
promises forming consideration for each other, under Sec. 2 (e). Therefore, the 1996
Act has got much relevance and has got binding effect on the Indian Contract Act,
1872. It is always safe to read both acts hormoneously.

b) ARBITRATION CLAUSE IN CONTRACTS:

An Arbitration clause which forms part of a contract is by statute to be treated

as an agreement, independent of the other terms of the contract. The Arbitrary
tribunal is empowered to rule on its own jurisdiction including any ruling or any
objections with respect to existence of arbitration agreement. Unlike other process
which can not in general be specifically enforceable, under the Arbitration Act, 1940,
an arbitration clause is generally and specifically enforceable by the machinery of the
act. The performance of the Arbitration clause can be dispensed with by courts at
their discretion, which discretion can not be exercised by the courts in respect of
other clauses of the contract. The same has been observed in AIR 1993 SC 2268.
Even if the performance of the contract is not possible, the arbitration clause will still
be in existence for the purpose of resolution of the dispute, as is observed by the
Hon’ble Apex Court in AIR 1993 SC 998 and AIR 1968 SC 522. Where a contract

17
itself is illegal, the arbitration clause contained therein is illegal. Similarly, if the
main agreement is held not to exist, then the arbitration clause also will not exist.

c) STAMP DUTY & REGISTRATION OF ARBITRATION AGREEMENT

An agreement to refer a dispute to Arbitration is required to be stamped.

Arbitration agreements contained in a series of letters do not require to be stamped.
An award can not be questioned on the ground that the arbitration agreement is
unstamped. An agreement in writing, substituting the name of one arbitrator for
another already appointed by a duly stamped reference, does not require any stamp
duty. An Arbitration agreement which purports or operates to create, declare, assign,
limit or extinguish a right, title or interest in immovable property worth Rs.100/- or
more will not be admissible in evidence, if un-registered, as according to Sec. 32 of
Arbitration Act, 1940.

d) PROCEDURAL ASPECTS:

A challenge to the validity of an arbitration agreement is inadmissible without

an application to the court. The application, however, does not mean to be in any
particular form. The court can take further evidence when contrary to the affidavits
are filed in a dispute about the validity of the agreement.

e) VOID AGREEMENTS:

An arbitration agreement is void if a party is a minor or is of not sound mind

or is disqualified from contracting by any law to which he is subject under Sec. 10 of
Indian Contract Act. Section 34 of 1996 Act makes it a ground for setting aside an
award, if a party was under some incapacity. If the parties to the agreement are under
a mis-apprehension as to their legal position and rights, an award based on such
agreement would be void. Reference: 1998 (9) SLT 380.

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f) MATRIMONIAL MATTERS:

Matrimonial matters can not be made subject matters of arbitration

proceedings. A dispute of civil nature between a man and his wife or between the
family members may be referable. Reference: AIR 1992 KERALA 9.

g) DOMESTIC TRIBUNAL:

Although the jurisdiction of a domestic tribunal is founded on a contract,

express or implied, nevertheless, the parties are not free to make any contract they
like. There are important limitations imposed by the public policy. The tribunal must
observe the principles of natural justice. They must give the man notice of the charge
and reasonable opportunity of meeting it. Any stipulation to the contrary would be
invalid. Another limitation arises out of the well known principle that parties can
not by contract oust the courts of their jurisdiction (1909 CH at page No.625 in
between Lee Vs Showmen’s guild of Great Britain).

If parties seek by agreement to take the law out of the hands of the courts and
place it in the hand of private tribunal without any recourse at all to the courts even in
case of error of law, then the agreement to that extent is contrary to the public policy.
The trade union rules can not by implication or express provision make the
interpreter of the rules free from the court’s interference.

The court will not interfere with the decision of the members of the club
unless it be shown that the rules are contrary to natural justice or that what has been
done is contrary to the rules. The doctrine of audi alteram partem is of universal
application and the same was discussed in Wood Vs Wood reported in 1871 LR 9
Exch. 190. A domestic tribunal authorized by the rules of the society to expel a
member must give him an opportunity of being heard and give him notice of the

19
charge against him. An arbitrator must also give the parties an opportunity of being
heard and inform them of the claims and defense which are being put forward.

A member of a club is entitled to no less information about the exact

complaint against him than an accused in a criminal prosecution. Knowledge that
would lead that no more than surmise and speculation is wholly insufficient. If there
is lacuna in the rules, the rules must be supplemented by rules of natural justice.

Where the contract provided that the dispute, if any, would be referred to the
person under whose supervision the work was to be carried out and who was also to
issue the final certificate, the court said that this final certificate could not be
regarded as an award because up to that stage, there was no dispute.

CHAPTER - IV

CRITICAL STUDY OF PROVISIONS OF ARBITRATION

& CONCILIATION ACT, 1996

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 As the project is in relation to critical study of Arbitration & Conciliation Act,
1996, I have embarked upon my journey with reference to various issues that have
cropped up in implementation of the new Act while interpreting the following
provisions. The Act applies to the whole of India except the state of Jammu &
Kashmir. The Act was deemed to have commenced from January, 25, 1996. If the
request for referring the dispute for arbitration was made prior to 26.01.1996, the old
act is to apply. Where such request was made on or after 26.01.1996, the 1996 would
apply.

a) SCOPE OF SECTION 2:

Section 2 of the Act deals with the terms such as Arbitration, Arbitration
agreement, arbitral awards, arbitral tribunal, court, international commercial
arbitration, legal representative and party.

JURISDICTION:

The court, having jurisdiction under the Act, is the court having jurisdiction to
determine the questions forming the subject matter of reference, if the question had
arisen in a suit. There is no reference in the section to the place where the parties
reside, dwell or carry on business. The jurisdiction of the court is made dependent not
on any of these factors but solely on the subject matter. The omission of any
reference to residence is presumably because in filing the award, there was no
plaintiff and defendant. It is only when the subject matter of dispute itself makes the
jurisdiction to depend on residence that the place of residence becomes relevant. For
instance, when there is a dispute whether a person has been adopted or not, the
question as to which court would have jurisdiction would depend upon where the
parties reside. The emphasis is not on residence but on subject matter of reference
and the same has been observed by various courts in Guardian Assurance Company
Limited Vs Thakur Shiva ILR 1937 ALL 234, AIR 1970 Delhi 14 in the matter
between Veerendra Saigal Vs Sumathilal Jamnalal.

21
 Section 20 of the 1940 Act and its application (dropped subsequently from
1996 Act) could be filed in a court having jurisdiction in the matter to which the
agreement related, which meant the relief claimed. The value of the relief determines
jurisdiction, jurisdiction has to be decided on the basis of the amounts and not on the
amount awarded, as observed in Fort William Company Ltd., Vs Union of India
reported in 1986 Vol. II Arbitration Law Reporter 43 (Delhi). One has to look at the
substance of the reliefs claimed and not the mere form in which it is couched. When
the jurisdiction of the court depends on the extent of the amount due to the applicants
from the respondent and the amount is not mentioned in the application, the
application can not be rejected under Order VII Rule 11 CPC without giving an
opportunity to the applicant to amend the application, as reported in AIR 1979
Jammu & Kashmir 87 in between Amarnath Vs Union of India. Where the claim
contained in the petition was more than the pecuniary jurisdiction of the court, the
order of the court appointing the arbitrator and making the award a rule of the court
was held to be without jurisdiction and liable to be set aside. The real fact that the
amount awarded was within the pecuniary limit would not confer jurisdiction on the
court.

Parties can not, by consent confer upon a court, a jurisdiction, it does not
otherwise possess. Reference – AIR 1971 SC 740 in between Hukum Singh Vs
Gammon (India) Limited. They could not agree that the award be filed in a court
which had no jurisdiction to decide the subject matter of the reference if the same had
been the subject matter of the suit. The requirement of the filing is not applicable
under the 1996 Act. An agreement by which the parties are restricted absolutely from
enforcing the rights or in respect of a contract by the usual legal proceedings in the
ordinary tribunals or which limits the time within which a party may enforce his
rights is void. In otherwords, the parties can not, by contract, oust the courts of their
jurisdiction.

22
 In the light of the above discussion, I am of the opinion that the parties are
facing several legal impediments in implementation of referring matters to
arbitration, jurisdictional issues and enforcement of award. There is no ambiguity in
Section 2 (1) (e) of the 1996 Act and therefore the section requires elaborate
elucidation, explanation and interpretation.

SCOPE OF SECTION 5 OF THE 1996 ACT:

The expression “Judicial authority” explained under Section 5 of the 1996 Act
denotes a court or any judicial authority other than a court. Where the judicial
authority is a court, the definition of “Court” in Section 2 (1)(e) of the 1996 Act can
not be applied for the purpose of sections wherein the expression “Judicial
Authority” occurs. Section 5 enunciates “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 whereso provided in this part”. This section is based
upon Article 5 of the UNCITRAL MODEL LAW which says that no court shall
intervene except whereso provided in this law. This article relates to the crucial and
complex issue of the role of courts with regard to arbitration. Divergent views were
expressed as to the appropriateness of Section 5. The discussion was focused on two
objections. The first objection was that the provision which addressed an issue of
fundamental practical importance did not give a clear answer to the question whether
in a given situation court intervention was available or excluded. The second
objection was that the provision, read together with the few provisions of the Model
Law which provided for court intervention, presented an unacceptably restrictive
scope of judicial control and assistance. In response to the second objection, it was
emphasized that Article 5 of UNCITRAL MODEL LAW and Section 5 of 196 Act
expressed an excessively restrictive view as to the desirability and appropriateness of
court intervention during an arbitration. It was the advantage of the business men
who engaged himself in international commercial arbitration to have access to the
courts while arbitration was still in process in order to have access to the courts while
the arbitration was still in process in order to stop an abuse of the arbitral procedure.

23
Further more, a limitation of the authority of the courts to intervene in the arbitral
proceedings might constitute an unwarranted interference in the prerogatives of the
judicial power and might even be contrary to the constitution in some states. Finally,
even if the authority of the court to intervene in the supervision of an arbitration
might have to be limited, the court should have broader power to act in aid of the
arbitration. It was suggested, as a possible means of softening and extremely rigid
character of Section 5, to give the parties to an arbitration, the authority to agree on
more extensive degree of the court supervision and assistance in their arbitration.

The judicial intervention is statutorily allowed in respect of the following

matters to the exclusion of its residual or inherent powers.

a) Power to refer parties to arbitration where there is an arbitration

agreement (Section 8).
b) Power to make interim orders as “measures of protection” (Section 9).
c) Power to appoint arbitrators on parties’ failure to appoint arbitrators as per
agreement or on failure of two appointed arbitrators to appoint the 3 rd
arbitrator (Section 11(4) and 9.
d) Power to decide on the termination of mandate of arbitrator in the event of
his inability to perform his functions or fails to act without undue delay
(Section 14 (2).
e) Power to order on providing evidence to arbitration tribunal (Section 27).
f) Power to set aside the award (Section 34).
g) Power to remit the award to the arbitration tribunal (section 34 (4).
h) Power to hear appeals only on certain specified matters (Section 37).
i) Power of Supreme Court to hear appeal (Section 37 (3).
j) Power to order delivery of award on payment of cost to the court (Section
38 (2).
k) Power to make order on cost of arbitration where no sufficient provision
is made in the award (Sectiion 39(4).

24
 l) Power to direct determination of any question in connection with
insolvency proceedings by arbitration under Section 41(2).
m) Power to extend time for reference to arbitration of time barred future
disputes (Section 43 (3).

Therefore, that the parties resort to intervention by a court during the arbitral
proceedings was often used only as a delay in tactic and was more often a source of
abuse of process of law/arbitral proceedings than it was a protection against abuse.
The purpose of Section 5 was to achieve certainty as the maximum extent of judicial
intervention including assistance or instances of court intervention. Thus, if a need
was felt for adding another such situation, it should be expressed in the model law.
The solution to that effect is to enable parties to agree on a wider scope of court
intervention, the question then rises whether the parties could be expected to draft an
agreement on the point that would adequately deal with the problem. The powers
with reference to the aforesaid sections have to be exercised cautiously as and when
the demand and need arises.

SCOPE OF SECTION 8:

This section is based upon Article 8 of the Model Law. This section is based
on the principle that the right to seek arbitration is a contractual right and the contract
can not be unilaterally abrogated so as to throw the arbitration clause. Failure of
either of the party to exercise his right would lead to an inference of an agreed
conduct of the parties to supersede or abandon the terms of the agreement, thus
vesting the judicial authority with the jurisdiction to decide the dispute which
required arbitration. The judicial authority does not enjoy suo moto power of
reference to arbitration. On an application under Sub-section 1, the judicial authority
is only concerned to see that the matter on which the suit has been instituted is also
the subject matter of the arbitration agreement. The observation was made in ITC
Classic Finance Limited Vs Grapco Mining & Company Limited reported in AIR
1997 CALCUTTA 397. The onus of satisfying the judicial authority that the matter

25
raised before it is covered under the Arbitration agreement is on the defendant; the
plaintiff’s failure to show to the contrary is sufficient to bring about a reference to
arbitration. This section does not employ the expression “stay of proceedings” on the
lines of section 34 of the repealed 1940 Act. Instead, it mandates the judicial
authority before whom an action has been brought in respect of subject matter of an
arbitration, to refer parties to arbitration, if the defendant so requires. If no request is
made, the judicial authority retains its jurisdiction to continue the legal proceedings.
The courts continue to use the expression “stay of proceedings” while referring the
parties to arbitration. This practice may not be out of tune with the scheme of the
section. If, for any reason, the reference to arbitration becomes infructuous or futile,
the legal proceedings can be resumed and revived by the judicial authority. A new
suit may not be necessary.

A judicial authority is empowered to proceed with the suit over a matter

covered under the Arbitration agreement, but only if no one applies for referring the
matter to arbitration before submitting the first statement on the substance of the
dispute. Section 5 does not debar a person from invoking the jurisdiction of a judicial
authority under Section 8. The same is reported in 1998 Vol. III Com.LJ 501 (CLB)
in between Suresh Kumar Jain Vs Hindustan Ferro Industries Limited. The court can
not stay the suit, unless there is a valid arbitration agreement. An order of stay
without determining that there is an arbitration agreement is without jurisdiction.
Where the fact of the contract itself is disputed, the court can hold that the arbitrators
can not decide the point and can in normal course, refuse stay. Section 16 of the 1996
Act specifically empowers the arbitral tribunal to rule upon its own jurisdiction, but
ultimate decision would have to be that of the court because the award can be
challenged before the court on this ground. The section is in the nature of summary
procedure and the matter has to be decided without holding any lengthy or protracted
enquiry. If the contract comes to an end by reason of external interference, the
arbitration clause will also sink with the contract. The issue as to the existence of the
validity of the contract is required to be decided before granting the stay. In the
application for stay, the court is bound to determine, whether or not there is an

26
arbitration agreement and whether or not the contract on its true construction has
been incorporated into the sub-contract. However, a suit challenging the existence or
validity of a contract can not be stayed as reported in JAMA AUTO INDUSTRIES,
YAMUNA NAGAR, HARYANA Vs UNION OF INDIA and OTHERS – AIR 1994
DELHI 235.

In ITC LIMITED Vs GEORGE JOSEPH FERNONDEZ – AIR 1989 SC 839

- there was an application under Section 34 of 1940 ACT and an issue was raised as
to the validity or existence of the contract containing arbitration clause. It was held
that the court had to decide first of all, whether there was a binding arbitration
agreement, even though it involved incidentally, a decision as to the validity or
existence of the parent contract.

If there is no dispute, the parties can not be referred to arbitration. This

becomes apparent from the section itself when it says that an application for an order
of reference should be made before submission of first statement on the substance of
the dispute. Therefore, the existence of a dispute is necessary. What is now required
to be considered by the judicial authority is whether the alleged dispute in fact exists,
and if so, whether it is one which can be resolved by arbitration. If so satisfied, the
judicial authority is mandatorily required to refer the parties to arbitration. Once it is
shown that there is a valid and subsisting agreement, the prima facie duty of the court
is to act upon the agreement and stay the suit.

The mandatory nature of the provisions, no doubt reduces the scope for play
of judicial discretion in the matter. But, the role of judicial discretion can not be
totally ruled out. There are so many things to be considered before the court can
order the parties to refer to arbitration and suspend the proceedings. The position
under the preceding Act and the present Act is basically the same, viz. once the
requirement of the section have been made out, there is no
discretion. The discretion must be exercised judicially according to well established
principles, according to reason and fair play and not according to whim and caprice.

27
Discretion means sound discretion guided by law. It must be governed by rule and
not humour, it must not be arbitrarily vague and fanciful, but legal and regular.

SCOPE OF SECTION 9:

PC Markanda, in his book “Law relating to Arbitration & Conciliation, at

page No.135, has commented on Section 9 of the Act that “the application for
appointment of a receiver stands on the same footing as the application for an
injunction. None of them is taken out for aiding the progress of the suit. These
applications are taken out for the protection of the interest of the parties, pending the
decision on disputes either by the civil courts or in a private forum”.

This provision is consistent with English Law. This section replaces Sec. 41
of the preceding 1940 Act. Subject to certain restrictions, a party to an arbitration
agreement can apply at any time, to the court for a wide range interim measures to
preserve assets and to secure evidence. The scope of the section was examined in a
vast survey of cases and authorities by the Madras High Court in NEPC (India)
Limited Vs Sundaram Finance Limited reported in 1998 Vol. II Arb. LR 446
MADRAS. The Madras High Court noted that RUSSEL ON ARBITRATION (21 st
edition 1997) has dealt with the powers of the court to make orders during
arbitration. Section 44 of the English Arbitration Act, 1996 corresponds to Section 9
of Indian Arbitration & Conciliation Act, 1996.

The Supreme Court expressed its view in Sundaram Finance Limited Vs

NEPC (India) Limited that the court has jurisdiction under Section 9 to pass interim
orders even before the commencement of Arbitration proceedings and appointment
of arbitrator. All that is necessary is that there must be satisfaction on the part of the
court that the application will take effective steps for commencing arbitral
proceedings. While passing such an order and in order to ensure that effective steps
are taken to commence the arbitral proceedings, the court while exercising
jurisdiction under Section 9 can pass conditional order to put the applicant to such

28
terms as it may deem fit with a view to see that the effective steps are taken by the
applicant for commencing arbitral proceedings.

From the practical point of view, it is observed that the parties have been
delaying the issue to work out their remedies before the arbitrator after having
obtained interim orders from the courts. Parties feel comfortable with interim orders
passed under Section 9, without taking recourse to commencement of arbitral
proceedings. This causes further delay in resolving the disputes between the parties.
Therefore, proper guidelines and strict adherence to conditional orders imposed by
the courts to be adopted. In such situation, there is no possibility of seeking
intervention of the courts to the exclusive benefit of either of the parties without
resorting to the process of commencement of arbitral proceedings. The words “just
and convenient” do not mean that the court is to pass orders in respect of interim
measures simply because the court thinks it convenient; they mean that the court
should pass the orders for the protection of the rights or for prevention of the injury
according to legal principles. The order is discretionary and the discretion must be
exercised in accordance with principles on which the judicial discretion is exercised.

SCOPE OF SECTION 11:

Section 11 deals with the appointment of Arbitrators. A person of any

nationality may be an arbitrator, unless otherwise agreed to by the parties. Subject to
Sub-section 6, the parties are free to agree on a procedure for appointing arbitrator or
arbitrators. The scope of the section has been elaborately dealt in SBP Company Vs
Patel Engineering reported in 2005 Vol. VIII SCC 618 by the Constitutional bench of
the Supreme Court of India. The Supreme Court of India has categorically pointed
out that the order under this section is purely an administrative one. The aspect of
appointment of arbitrator comes in to play where the procedure to appoint arbitrator
is agreed, but a party fails to act upon it. While exercising powers under this Section,
the court can not go into the merits of the dispute. The courts are precluded from
exercising powers in that regard to adjudicate the issues on merits. It is suggested that

29
the courts should confine themselves to see whether there is arbitrable dispute
between the parties which can be referred to arbitrator for adjudication. Prima facie,
the courts have to satisfy for themselves that there is existence of valid agreement
and a clause containing the arbitration.

The issues such as limitation, jurisdiction and other related aspects have to be
left open to be adjudicated by the arbitrator and not by the courts by whom the
matters are referred to arbitrators. In full bench decision in Ved Prakash Mittal Vs
Union of India reported in AIR 1984 DELHI 325 – The High Court of Delhi held that
when the designated person refused to make appointment of an arbitrator on the
ground that the request for appointment was made after the expiry of the period as
per arbitration clause, this was a wrong approach. Questions of that kind fell within
the provisions of arbitrator to whom the dispute was to be referred. The court was not
concerned with this question under the provisions for appointment of arbitrator. The
court was only to see whether there was a dispute and that the dispute was to be
referred as per the agreement between the parties.

CONDITIONS FOR APPLICABILITY:

a) There must be an arbitration agreement.

b) The agreement provides that the reference will be to one or more
arbitrators to be appointed by the consent of the parties.
c) Disputes have arisen to which the agreement applies.
d) The parties do not concur in the appointment or appointments.
e) The appointment is not made within 30 days from the service of a written
notice to do so.
f) An application is made to the court by any party to the agreement.

SCOPE OF SECTION 21:

30
 Section 21 deals with the commencement of arbitral proceedings. Section 21
of the 1996 Act adopts Article 21 of Model Law. If there is a named arbitrator, the
request for reference of dispute to the named arbitrator should be sent to the other
party. If a sole arbitrator is to be appointed by one of the parties or by a specified
authority, the request should be sent either to the appointing party or authority as the
case may be. Section 21 provides that where the arbitration agreement is silent about
the date of commencement of arbitral proceedings, the proceedings will be taken to
have commenced on the date of receipt notice requesting reference to arbitration. The
giving of notice is a matter of inter-parties and is a procedural and not a decisive step.

SCOPE OF SECTION 25:

Section 25 deals with default of the parties and corresponds to Article 25 of

UNCITRAL MODEL LAW. In this section, the Arbitral tribunal is clothed with
powers to terminate the proceedings if claimant fails to communicate his statement of
claim or respondent fails to communicate the statement of defense and making the
arbitral award on the evidence before it, if a party fails to appear at an oral hearing or
to produce documentary evidence. The provision which is non-mandatory lays down
the consequences of such failure and thereby ensures the effectiveness of the
agreement between the parties. Article 25 of UNCITRAL MODEL LAW contributes
to the desired harmonization of national arbitration laws in view of the fact that some
existing laws do not give effect to ex-parte awards. In such case, the fundamental
requirements of fairness have not been met. The meaning of “sufficient cause” has
persuasive value. The expression implies presence of legal and adequate reasons.
Sufficient cause should receive a liberal construction so as to advance substantial
justice when no negligence nor inaction nor want of bonafide is imputable to the
defaulting parties.

Section 16 of 1996 Act empowers Arbitrator to rule on his own jurisdiction

and authority. The Arbitrators are at liberty to exercise powers conferred under
Section 25. The remedy to aggrieved person is only by way an application under

31
Section 34 for setting aside the award. Section 25 does not stipulate powers of the
Arbitrator to aside the arbitral awards, if just and sufficient cause is shown.
Aggrieved party has no other option except to approach the court and file an
application under Section 34 of the 1996 Act. This causes further delay. The intention
of the legislature is not clear and proper steps are required to be taken
to cure the defect as embedded in Section 25 of the Act.

SCOPE OF SECTION 34:

The grounds and procedure for setting aside an award are found in Section 34
of 1996 Act. The grounds mentioned under this section are minimal. The application
for setting aside constitutes the exclusive recourse to a court against the award, in the
sense that it is the only means for attacking the award i.e. initiating proceedings for
judicial review. The Hon’ble Apex court, while deciding the case between Guru
Nanak Foundation Vs Rattan Singh & Sons (AIR 1981 SC 2075) observed as
follows:
“The way in which the proceedings under the Act are conducted and without
an exception challenged in courts has made lawyers laugh and legal philosophers
weep. Experience shows and law reporters bear testimony that the proceedings under
the Act have become highly technical, accompanied by unending prolixity at every
stage, providing a legal trap to the unwary. An informal forum chosen by the parties
for expeditious disposal of their disputes, has, by the decisions of the courts been
clothed with “legalese” of unforeseen complexity.

The parties to the reference are necessary and proper parties in proceedings
under this section. An Arbitrator is not normally necessary or proper party to the
proceedings to set aside or remit the award excepting the case of misconduct or in a
case in which he is personally affected by the proceedings. Where certain persons are
appointed to act together as Arbitrators, they are required to reach a decision jointly.
It is misconduct on the part of an arbitrator to sign the award form in blank without
the decision process and for the other arbitrators to endorse his action and

32
accordingly, the whole award is defective. Lord Henning, while deciding the issue
between European grain & Shipping Limited Vs. R. Johnston, observed that once all
arbitrators sign the award, it becomes the final document.

Though the Arbitrators have an over-riding duty to act fairly as between the
parties, in all matters before them, regarding the conduct of the arbitration, basically,
they are the masters of their own discovery. There are various grounds enshrined
under Section 34 such as incapacity of the party, invalidity of the agreement and
award, lack of proper notice of appointing of arbitrators, incomplete award,
composition of arbitration tribunal, misconduct etc. Arbitrators are expected to act
within the scope and ambit of the terms of the agreement between the parties. It is
unfair on the part of the arbitrators to find a new contract for the parties. It is
expected that the arbitrators are confined themselves to a limited point and bound by
rules and regulations made therein. Arbitrators, drawing inferences from various
issues, which have no relevance or proximity to the issues raised by either of the
parties, cause undue delay and brings about an inconsistent award without reference
to the pleadings and documents submitted before him. Such award gives large scope
of the parties to seek the intervention of the courts and becomes an access to remit
the award or set aside the same.

Though it can be appreciated that the intervention of the court while

exercising powers under Section 34 is minimal, there are no mandates in relation to
time period for disposal of the applications. It is apparent and manifest from the
language and terms employed in Section 34 of the Act. Under the guise of
applications filed under Section 34, the parties resort to delay the issue and thereby
deliberately deprive of the other party.

SCOPE OF SECTION 62:

33
 The Arbitration is not like mediation or conciliation. The aim of the
conciliation is to persuade the parties to come to a settlement of the dispute. On the
appointment of conciliators, each party submit a brief written statement describing
the general nature of the dispute and points at issue. The proceedings commenced
only when the other party accepts the invitation. At the stage of invitation, there is no
certainty that the conciliation procedure will take place at all. The conciliation
proceedings can be properly implemented if the area of disputes are properly
identified.

SCOPE OF SECTION 67:

Section 67 explains about the role of conciliator. The main function of the
conciliator is to assist the parties to reach an amicable settlement of their disputes.
For achieving their purpose, they are obliged to act in an independent and impartial
manner and to abide by the principles of objectivity, fairness and justice. The purpose
of conciliation proceedings being settlement of dispute by mutual agreement of the
parties, in contrast to adversary proceedings, a general reference is made to the rights
and obligations of the parties in addition to more practice oriented considerations
such as usages of trade concerned and previous business practices of the parties.

SCOPE OF SECTION 76:

Where an amicable settlement is reached and settlement agreement is signed

by the parties, the proceedings stand terminated from the date of signing of the
settlement agreement, by both the parties. The other three ways under which the
proceedings can be terminated, cover the situation where either the conciliator or one
or more of the parties feel that continuation of the proceedings will be infructuous.
The conciliator can declare in writing that the proceedings are terminated, but only if,
after consultation with the parties he finds that further efforts at conciliation are no
longer justified. The termination is effective from the date of declaration. The

34
proceedings can be terminated by one of the parties or jointly by the parties under
intimation to the other party and/or to the conciliator.

Conciliation plays significant role and is a process of encouraging settlement

between the parties. For effective implementation of conciliation proceedings, there
should be a consensus ad idem between the parties and the conciliator. Conciliators
are expected to behave impartially. It is observed that the parties are not resorting to
the conciliation proceedings to the reasons best known to them. However, there is a
possibility of taking recourse to settlement/conciliation, during arbitration. It is
necessary to make an endeavour to enlighten the parties in relation to the rights that
are available in their hands.

35
 CHAPTER-V

NEED OF ARBITRATION AND CONCILIATION ACT,

1996

In order to bring uniformity through out the world, the Act has come into
force. 1996 Act has embraced the issues in relation to Foreign Awards. Foreign
investment and trade developed subsequent to the year 1990 and in order to meet the
contingency, 1996 Act has come in to force as the old Act, 1940 could not achieve or
meet the objectives. Earlier, Foreign issues had to be dealt and governed by the
Foreign Awards Recognition and Enforcement) Act, 1961. Now the issues pertaining
to the same are elaborately covered in Part II of the Arbitration and Conciliation Act,
1996. Thus, 1996 Act came into being to consolidate and amend the law relating to
domestic arbitration, international commercial arbitration and enforcement of foreign
awards as also to define the law relating to conciliation and for matters connected
therewith or incidental thereto.

PROBLEMS OF ARBITRATION AND CONCILIATION ACT, 1996

Though the Act has come into force to meet the contingency, it is not used to
achieve the real issues in controversy. It envisages certain grounds under Sec. 34 of
Arbitration & Conciliation Act, 1996 in dealing with the issues to set aside the
arbitral award. The grounds mentioned therein are limited and section itself is
confined to a limited extent. The parties who are aggrieved by the award passed by
the Arbitrator may not be able to enlarge the scope of enquiry other than the grounds
mentioned in Sec. 34. Though the Hon’ble Apex court has laid down certain
guidelines in that regard, no useful purpose is served to that effect.

36
 In so far as Section 9 and 17 of Arbitration & Conciliation Act, 1996 are
concerned, both are overlapping. The powers of the Arbitrator in relation to
exercising powers under Section 17 is limited. Arbitrators are also required to be
given powers in relation to interim protection of the parties are concerned. The words
which are employed in Sec. 17 of the Act are also unambiguous. The intention of the
legislature in that regard is not clear. There is a difficulty of giving power to the court
during the arbitral proceedings to pass ad-interim orders. There may not be any
consistency in the proceedings before the arbitrator and the court.

The other problem is in relation to the jurisdiction. The concept of jurisdiction

is not well defined under the 1996 Act and it is open to several interpretations which
is going to cause further rift between the parties. However, it is appreciable that the
case laws are evolving to throw more light on that aspect.

There is no uniformity in relation to the adoption of procedural laws during

Arbitration or conciliation proceedings. It is desirable to make the laws applicable
such as Code of Civil Procedure, Evidence Act, Civil Rules of Practice and other
laws which govern the arbitration. Otherwise, there is every possibility of traversing
the issue beyond the point.

There are no specific guidelines with reference to fees and cost of the
arbitration, both in regard to administrative expenses and fees of the arbitrator. The
option is open to the arbitrators to fix their remuneration at their liberty which causes
heavy burden on the parties concerned. No scheme or strict adherence to guidelines
is prescribed in that regard. The same will give a large scope to the arbitrator to claim
higher amounts which may not commensurate with works and costs.

The main objective such as reduction in cost is not achieved through the
persistent intervention by the courts.

37
 Through some clauses in the agreements, the parties are confining themselves
to make a reference to named Arbitrator, whether an officer of the department or an
outsider, as the case may be. In the cause of Departmental Officer acting as
Arbitrator, the parties are facing natural bias from them.

The powers of the arbitrators are very limited as they are not conferred with
the powers of setting aside ex-party award. It becomes a long drawn process for the
parties to approach the higher courts and seek to set aside or remand the matter to the
arbitrator. It amounts to putting the clock back.

38
 CHAPTER-VI
RELEVANT LANDMARK CASE LAWS

1) AIR 1999 SC 565 (NEPC (India) Limited Vs Sundaram Finance Limited.

In the above decision, the scope of Section 9 of Arbitration & Conciliation

Act was examined in a vast survey of cases and authorities laid down by
the Madras High Court. The said case arose out of a hire purchase
transaction which as usual carried an arbitration clause. The buyer
defaulted with an installment. The owner moved the court and obtained an
order under Sec. 9 without resorting to Arbitration Clause and sought for a
direction in relation to the seizure of machinery with the help of police.
The order was set aside in an appeal against it. The Madras High Court
was of the view that a request for arbitration for substantive relief should
be there before section 9 could be used for interim relief, whether or not
an arbitrator has been appointed or proceedings commenced and not
before with the power of court to make orders during arbitration. Section
9 of Arbitration & Conciliation Act, 1996 has replaced Section 41 of the
proceeding Arbitration Act, 1940.

2) AIR 2005 SC 4430 (State of Rajasthan Vs. Navbharath Construction

Company)

This decision was rendered by Hon’ble Justice S.N. Variava and Tharun
Chatterjee. The Hon’ble Apex court, while interpreting Section 13, 14 and
30 of the old Act, 1940, observed the following:

“The arbitration can not make award contrary to the terms of contract.
The court further went to the extent of attributing misconduct on the part

39
 of the arbitrator, if he does so. However, unless term of contract is clear
and unambiguous, arbitrator has power to interpret terms of contract and
his interpretation must be accepted unless it is one which could not be
reasonably possible. In this case, the Hon’ble Supreme Court referred the
matter to an independent umpire to deal with the allowed claims which
were passed against the terms of the contract.”

3) AIR 2006 SC 2488 (Harishankar Singhania Vs Gaur Hari Singhania)

This decision was rendered by Hon’ble Justice H.K. Sama and Dr. A.R.
Lakshmanan. In this case, the Supreme Court dealt with the aspect of
limitation in relation to reference of disputes to arbitration. While passing
the judgement, the Supreme Court pointed out that the arbitration
application has to be filed within a period of 3 years when the right to
apply accrues. The court elaborately dealt with Sec. 20 of the old Act,
1940 and 43 of Arbitration & Conciliation Act, 1996, with a background
of Article 137 of Limitation Act, 1963.

4) 2006 (11) SCC 245 (Centro Trade Minerals and Metals Inc. Vs
Hindusthan Copper Limited)

The Hon’ble Supreme Court categorically pointed out that the 1996 Act
has introduced several changes of which three are worth taking note of.

a) Fair resolution of a dispute by an impartial tribunal without any un-

necessary delay or expenses.
b) Party autonomy is paramount subject only to such safeguards as are
necessary in public interest and
c) The arbitrary tribunal is enjoined with a duty to act fairly and
impartially.

40
 The Hon’ble Apex court also pointed out shortcomings that are very much
apparent from a bear reading of Arbitration & Conciliation Act such as no
provision is made for expediting awards or the subsequent proceedings in
the court, where the applications are filed for setting aside the award. The
another shortcoming is that an aggrieved party has to start again from the
District court for challenging the award. This decision was rendered by
Hon’ble Justice S.B. Sinha and Tharun Chatterjee on 09.05.06.

5) AIR 2006 SC 963 (Shin Satellite Public Company Limited Vs Jain

Studios Limited)

In this case, the Hon’ble Apex court interpreted Section 7 and 11 of the
new Act in relation to validity of Arbitration Agreement, application of
doctrine of severability. In the said case, the Supreme Court observed as
follows:

“Objectionable part expressly making arbitrator’s determination – final

and binding between the parties – and declaring that parties had waived
the rights of appeal or objection in any jurisdiction, the Supreme Court
held that on facts, the said objectionable part is clearly severable as it is
independent of the dispute being referred to and resolved by the arbitrator
and court does not need to re-write contract or do something that is not
contemplated by the parties – to that extent the agreement is legal and
offending part can be separated and severed using a blue pencil. Further
more, on facts, another clause in the agreement explicitly provided for
severability and hence arbitrator appointed severing invalid part of
arbitration clause. While interpreting the aforesaid section, the Hon’ble
Supreme Court dealt with Section 28 of Indian Contract Act which deals
with agreements in restraint of legal proceedings are void.

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6) While placing reliance upon SBP & Company Vs Patel Engineering
Limited reported in 2005 (8) SCC 618, the Hon’ble Apex Court held in
AIR 2006 SC 2686 that an order passed by the Chief Justice of India or
his nominee under Sec. 11 (6) of the new Act is indeed an order within the
meaning of Article 137 of the Constitution of India and the same is
subject to review.

7) Reference under section 9 of the new Act - The Hon’ble High Court of
A.P. while interpreting Section 9 of the new Act, observed that aggrieved
party may seek interim reliefs before or during arbitral proceedings or at
any time after making arbitral award but before it is enforced. The same
has been reported in 2006 (2) ALT 70 – The decision was rendered by
Hon’ble Mr. Justice DSR Varma and B. Seshasayana Reddy while
deciding the issue between Sai Priya Construction Company Vs K.
Anantha Kumari.

8) As the issue in relation to the nature of order to be passed by the Chief

Justice was not discussed in the earlier decisions rendered by various
courts including Sundaram Finance Case, the said issue was raked up in
Konkan Railway Corporation Vs Rani Constructions Pvt. Limited (2002
Vol. II SCC 388) and again in Konkan Railway Corporation Vs Mehul
Construction Company (2000 Vol. VII SCC 201). In relation to the same,
the Constitution Bench of the Supreme Court of India, while deciding
such issue in between SBP & Company Vs Patel Engineering Limited and
another, discussed the scope of Section 11 (6) of the new Act and thereby
over-ruled the judgement rendered in 2002 Vo. II SCC 388. The Supreme
Court in that regard came to a conclusion that the function which is
exercised under Sec. 11 (6) is administrative, pure and simple, neither
judicial nor quasi judicial. On the basis of various findings, the Hon’ble
Apex court came to the following conclusions.

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(i) The function performed by the Chief Justice of the High Court or Chief
Justice of India under Sec. 11 (6) of the new Act is administrative, pure
and simple and neither judicial nor quasi judicial.
(ii) The function to be performed by the Chief Justice under Sec. 11 (6) of the
Act may be performed by him or by “any person or institution designated
by him.
(iii) While performing the function under Sec. 11 (6), the Chief Justice should
be prima facie satisfied that the conditions laid down in Sec. 11 are
satisfied.
(iv) The arbitrary tribunal has power and jurisdiction to rule “on its own
jurisdiction” under Sec. 16 (1) of the Act.
(v) Where the arbitrary tribunal holds that it has jurisdiction, it shall continue
with the arbitral proceedings and make an arbitral award.
(vi) A remedy available to the party aggrieved is to challenge the award in
accordance with Sec. 34 or Sec. 37 of the Act.

(vii) Since the order passed by the Chief justice under Sec. 11 (6) of the Act is
administrative, a writ petition under Article 226 of the Constitution of
India is maintainable. A letter of patent appeal/intra court appeal is
competent. A special leave petition under Article 136 of the Constitution
also lies to this court.

(viii) While exercising extra-ordinary jurisdiction under Article 226 of the

Constitution, however, the High Court will be conscious and mindful of
the relevant provisions of the Act including Sections 5, 16, 34 to 37 as
also the object of the legislation and exercise its power with utmost care,
caution and circumspection.

(ix) The decision of the constitution bench in Konkan Railway Corporation

reported in 2002 Vol. II SCC 388 to the extent that it held the function of
Chief Justice under Sec. 11 (6) of the Act as administrative in consonance
with settled legal position and lays down correct law on the point.

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(x) The decision of the constitution bench in Konkan Railway Corporation as
stated above to the extent it held clause No.7 of “the appointment of
Arbitrators by the Chief Justice of India scheme 1996” providing for
issuance of notice to affected parties as “beyond the term of Sec. 11” and
bad on that ground is not in accordance with law and doers not state the
legal position correctly.

(xi) Since the Chief Justice is performing administrative functions in

appointing an Arbitral tribunal, there is no “duty to act judicially” on his
part. The doctrine of “duty to act fairly” however, applies and the Chief
Justice must issue notice to the person or persons likely to be affected by
the decision under Sec. 11 (6).

(xii) All appointments of arbitrary tribunals so far made without issuing notice
to the parties affected are held legal and valid. Henceforth, however,
every appointment will be made after issuing notice to such person or
persons. In otherwords, the judgement will have prospective operation
and it will not affect past appointments or concluded proceedings.

The above decision was rendered by their lordships, Hon’ble Justice

R.C. Lahoti, Chief Justice of India, B.N. Agarwal, Arun Kumar, J.P.
Madhur, A.K. Madhur, P.K. Balasubramanian and C.K. Thakker and the
same is reported in 2005 (8) SCC 618.

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 CHAPTER –VII

CONCLUSION

Arbitration & Conciliation play a significant role in resolving the issues which
crop up between the parties and thereby the parties can avoid the process of long
drawn proceedings before the courts. Though there are shortcomings in 1996 Act,
the Act is rendering justice to the general public to their utmost satisfaction.

It is suggested that Indian Council of Arbitration should formulate a scheme in

relation to the process of arbitration, appointment of arbitrators, panel of
arbitrators and guidelines thereon. The awareness in relation to the process of
arbitration and taking recourse to conciliation has been low among the general
public.

Therefore, it is mandatory and obligatory on the part of the legislature and

judiciary to spread the awareness among them so as to enable them to embark
upon their journey to work out their remedies without intervention of the court.
The courts at various levels shall also make an endeavour to put an end to
litigation arising out of issues in relation to arbitration so that there is every
possibility of reposing confidence about the arbitration among the general public.

It is desirable that the Chief Justice of Supreme Court of India may formulate
certain guidelines in relation to fixing cost and expenses of arbitration which
includes fee of arbitrator, time limit for disposal of application filed under
Section 34 of Arbitration and Conciliation Act of 1996.

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 REFERENCES
BOOKS
1. JUSTICE R.S. Bachawat’s law of Arbitration & Conciliation :
2. Law relating to Arbitration & Conciliation – by PC Markanda
3. Law of Arbitration & Conciliation – by ND Basu
4. Commentary on Arbitration & Conciliation Act – by Johari

REPORTS/JOURNALS

1. All India reporter

2. Law animated world
3. Andhra Law Times
4. Arbitration Law Reporter
5. Company Law Journal
6. Supreme Court Cases

ARTICLES

1. Justice V.R. Krishna Iyyer’s Article on Arbitration

WEBSITES

1. www.google.co.in
2. www.legalserviceindia.com
3. www.adr.org
4. www.mediate.com
5. www.mondaq.com

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