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Courts in India are overburdened with a large number of cases and their disposal takes long time. Therefore a need was felt for a faster dispute resolving mechanism in commercial disputes. Thus Arbitration Act, 1940 was enacted with a view to provide speedy justice to the people and also to avoid unnecessary litigation expenses. However the past reveal that the procedure under the old Act was cumbersome and dilatory. The Courts intervention put a road block on the pace of arbitral proceedings. This paved way for the new Act” The  Arbitration and Conciliation Act1996.

Scope of New Act:

New Act, “The Arbitration and Conciliation Act1996” repealed the Arbitration Act,1940 and also acts of 1937 and 1980 and consolidated the and amended the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. The new act covers international arbitration and also incorporated law relating to conciliation. With this new act, public had high expectation that commercial disputes will be resolved in a speedy manner as the new act envisaged minimum intervention of the courts. It is quite common to find in commercial agreements an arbitration clause as the parties wanted to resolve any disputes arising out of the contract without going to courts. If amicable settlement is not arrived at, then parties will invoke arbitration through arbitrators appointed by their choice. Before we proceed deep into the topic, it is necessary to touch the frame work of New Act briefly for better understanding of the issues that are considered as road blocks.

Legal frame work:

Arbitration can be invoked only, if there is an agreement in writing between the parties (Section7).  Arbitration can be domestic or international arbitration. In a domestic arbitration both the parties generally are from India. If one of the parties to the arbitration is a resident outside India or a body corporate incorporated outside India, then disputes will be resolved through international arbitration. Even though one of the parties is a foreign party, still parties can agree for a domestic arbitration and subject themselves to Indian laws.

Parties have freedom to agree on the procedure for appointment of arbitrators. Arbitrator is sometimes named in the agreement itself or parties may agree to go with a sole arbitrator. If arbitration is not by a sole Arbitrator, it shall be by an uneven number of members. In the case of appointment of arbitrator by each party, the nominated arbitrators appoint third arbitrator known as Presiding arbitrator. If any one of the party fails to appoint arbitrator within 30 days, the other party can approach the court under section 11 to seek appointment of arbitrator.

Section 6 and Section 2(8) permit the parties to seek assistance of Arbitral Institutions for conduct of arbitration. Institutional arbitration is conducted by arbitrator selected from its panel of arbitrators and procedure is followed as per the Bye laws of that institution. In India we have institutions such as Indian council of Arbitration, Federation of Indian chamber of commerce, Bengal chamber of commerce and Industry who render service for conduct of arbitration both international and domestic. It may please be noted that almost all the Sections in the New Act contain the wordings” unless otherwise agreed by the parties”. Therefore drafting of arbitration clause assumes significance and parties can express their intention in the contract itself for preventing litigation in courts.

Why New Act gave hope?

In the old Arbitration Act, it is observed that considerable delay is caused by dragging the issues to court. In the new act, judicial intervention is restricted to a large extent and limited to the extent it is provided in the Act. Let us see what those provisions are.

- Section 4 provided for waiver of right which means that if any one of the parties does not raise objection about its rights under the act or any requirement under the agreement, he will be deemed to have forfeited such right. 

- Section 5 states that no judicial authority shall intervene except as provided in the Act

-  Section 8 of new Act, provides that if the agreement provides for an arbitration clause for resolving disputes, the courts before whom an action is brought, shall direct the parties to resort to arbitration. But the party must bring to the notice of the court about the existence of arbitration clause and that too before submission of its first statement on the dispute.

- Arbitral award shall be made in writing and be a reasoned one Section 31

-  Section 34 limits the grounds on which award can be challenged. What are these grounds? These are, invalidity of agreement, challenging jurisdiction of arbitrator, improper procedure followed during arbitration, award being  in conflict with public policy.

-  Section 35 and 36 provide that the award is binding on both the parties  and is equivalent a decree which can be executed under Civil procedure code,1908.

-  The most important of all is that Arbitral tribunal is not bound by Civil Procedure code, 1908 or the Indian Evidence Act,1872 (Section 19). Evidence can be taken on affidavits and certain cumbersome procedures can be avoided in small claims.

Reality: The following points reflect the reality.

Time limit: There is no time limit prescribed under the New Act for completing the arbitration proceedings. In most of the cases, the arbitrators fail to pronounce award within a reasonable time which defeats the very purpose of arbitration. Even in small claims, parties end up spending more time and money towards costs of arbitration for obtaining award.

Interim measures by Court u/s 9

The power given to the court under Section 9 of the new Act is very wide. The court, may on application by a party, grant interim relief “before or during the arbitral proceedings or at any time after making of the arbitral award but before it is enforced u/s 36.” The power contemplated under section 9 is not intended to frustrate the arbitration proceedings. But in reality litigation starts even before an arbitration proceedings commence.

Bias: It is quite common to find arbitration clauses in almost all public sector enterprises and they name their own officer as arbitrator. It has been found that the arbitrators do not act impartially and sometimes awards are delivered under the influence of power or money and justice is denied. This leads to extended litigation.

Claims against Third party:

Many times the litigating party takes a plea that relief is claimed against a third party who is not a party to the arbitration. Although the Supreme Court has consistently held that the language of Section 8 is peremptory and it is obligatory for the courts to refer the parties to arbitration in terms of their arbitration agreement, it is quite common to file suits in court and it would contribute to the delay and exposes  the parties to costs of litigation despite the existence of arbitration clause.

Appointment of arbitrators: Arbitration is supposed to decide disputes, expeditiously and economically but sometimes it becomes the root cause for delay in settlement of disputes. Although the arbitration clause provides for appointment of sole arbitrator, many times lack of trust drives the parties to appoint their own arbitrator which invariably leads to constitution of Arbitral Tribunal with 3 arbitrators. Sometimes the matter is dragged to courts when one of the parities fail to appoint its arbitrator as per agreement. Similarly issues such as venue, interim relief etc also consume good amount of time to get them resolved.

Execution of award: Because of inordinate delay in passing of award or challenge to award, the expenses often dilute the claim amounts. Especially when a foreign party is involved, execution becomes more difficult and expensive.

Conduct of arbitrators:

Arbitrators also take their own sweet time to complete arbitration the proceedings and generally tend to extend the number of sittings for their own self interest. Many times arbitration proceedings end but the arbitrators find themselves busy in new arbitrations and lose focus on arbitration of which hearings were completed and delay the pronouncement of award. Some arbitrators, mostly retired judges charge heavy fees and insist for holding in venues to suit their status thereby increase costs of arbitration. Recently Supreme court has come heavily on the fees charged by arbitrators. Sometimes death, incapacity, also come in the way of smooth arbitration proceedings. The courts’ intervention u/s 14 would be inevitable which again can be a cause for delay.

Conclusion:  The speedy disposal of disputes or effectiveness of arbitration depends on the correct choice of the arbitrator. If good arbitrators are chosen, they could conduct the proceedings following the principles of natural justice, cutting down cumbersome and time consuming procedural aspects in taking evidence, limiting the adjournments. In disputes involving small claims, institutional arbitration may be preferred as they strictly adhere to time limit / Rules framed by them. Lastly it must be ensured that while drafting Arbitration clause, time limit, reference to institutional arbitration, venue and jurisdiction are incorporated to minimize courts intervention.

G S Rao

D.G.M.(Legal),OCL India Ltd

Tags: Arbitration

Reference: The Arbitration and Conciliation Act 1996


Published by

G S Rao
(Deputy General Manager)
Category Corporate Law   Report

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