Arbitration – Laws and Flaws


Arbitration is a system of adjudication of a dispute by a judge appointed by the choice of the parties. In rural India it was the only prevalent and widely accepted mode of dispute settlement for several centuries. It was simple, inexpensive and revered as a decision given by Almighty through a human agency. The immortal story of Munshi Premchand “Panch Parmeshwar” lucidly illustrates this and takes us to a traditional Indian village.

Algu Choudhary and Jumman Shaikh are intimate friends. Jumman gets property from his aunt in gift on condition that proper maintenance would be provided to her till death. Jumman enjoys the land but neglects his obligation to maintain the aunt. She calls panchayat and appoints Algu as Panch, much to the pleasure of Jumman. After hearing both parties Algu decides the dispute in favor of the aunt. Their friendship suffers a setback and is reduced to a formality. After some time Algu has a genuine claim against another villager Samjhu who purchased a calf on credit from Algu and did not pay the price. Algu calls panchayat. Samjhu with confidence of victory appoints Jumman as Panch. After hearing both parties much to the surprise of all Jumman decides in favour of Algu and directs payment by Samjhu. Now the intimate bond of friendship gets restored and Algu and Jumman hug each other crying loudly that it is God who speaks through Panchas. The story presents a model of quick, simple, fair, just and final adjudication at no costs.

The arbitration contemplated by the laws in force present day is totally different. It is highly expensive and inaccessible for most of the people and affordable only by corporate giants. It is time consuming. It is lacking in finality and is in effect litigation before litigation. If the arbitral award is eventually set aside, parties are relegated back to the starting point after colossal waste of time and money both.

The first legislation on this subject was Indian Arbitration Act, 1899 limited in its application to Presidency Towns only. In 1908, Civil Procedure Code was enacted. In second schedule thereof provisions regarding arbitration, conduct of arbitral proceedings and enforcement of arbitral awards were made. Subsequently, a consolidated legislation on the subject was brought as the Arbitration Act, 1940. It was applicable throughout the country and repealed the Act of 1899 as also the Second schedule of C.P.C. It was based on English Arbitration Act of 1934. It dealt with domestic arbitrations only. For enforcement of foreign awards, a separate enactment The Arbitration (Protocol and Convention) Act, 1937 was in force. Both these enactments were repealed on 25.01.1996 by The Arbitration and Conciliation Ordinance.

The working and operation of 1940 Act was far from satisfactory. It provided for appointment as also removal of arbitrator. It also provided for filing of arbitral award in court and passing of a decree in terms thereof before it could be enforced or executed through court proceedings. It empowered the court to set aside the arbitral award on the grounds of an error apparent, misconduct of the arbitrator himself or of the proceedings or the award being otherwise invalid. These expressions are very wide and gave rise to a challenge in court to arbitral award in almost every contested matter up to the last court of appeal postponing the resolution of dispute for long with total uncertainty of outcome. Instead of being an alternative convenient mode of dispute resolution it proved to be an additional avenue of litigation with inevitable delay in place of expedition and uncertainty in place of finality. The Apex Court expressed its anguish in the case of Guru Nanak Foundation (1981)4 S.C.C. 634 thus :

“Interminable, time consuming, complex and expensive court procedures impelled jurists to search for an alternative forum, less formal, more effective and speedy for resolution of disputes avoiding procedural claptrap and this led them to Arbitration Act, 1940 (‘Act’ for short). However, 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 reports bear ample 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. Informal forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the Courts been clothed with ‘legalese’ of unforeseeable complexity.”              

        The current Arbitration and Conciliation Act of 1996 was first promulgated as an ordinance on 25.01.1996. Just before expiry it was again promulgated. It was later passed by parliament without much discussion and came in to force with publication of presidential assent on 22.08.1996. It is based on UNCITRAL Model law on international commercial arbitration. The language and phraseology of this Act is unfamiliar and much different from that used in other Indian statutes. Soon after its enforcement, problems arose in interpretation of its provisions. There was diversity and cleavage of judicial opinion not only amongst the different High Courts, but also in the judgments of the Apex Court itself.  Konkan Railways (2002) 2 SCC 388 was overruled by a seven judge Bench in S.B.P. & CO. (2005) 8 SCC 618 and it was held that power to appoint arbitrators under Section 11(5) was not an administrative power but a judicial power and proceedings for its exercise to be judicial. In Bharat Aluminum Company (2012) 9 SCC 552 the Apex Court overruled Bhatia International (2002) 4 SCC 105 and Venture Global Engineering (2008) 4 SCC 190 and held that entire part 1 of the Arbitration Act (Sections 2 to 43) are applicable only to all the arbitrations which take place within the territory of India and in a foreign seated international commercial arbitration no application for interim relief would be maintainable under Section 9 of the Act. The conflicting views of various High Courts on this issue are noticed in para 35 of the judgment in Bhatia International with the observation that the Act does not appear to be well drafted legislation.

The power of appointment of arbitrator under Section 11(6) was held to be available only to the Chief Justice or his designate of the Supreme Court or of the High Court. In exercise of this power in most of the cases the retired judges of the Supreme Court or the High Court were appointed as Arbitrators with authority to fix their own remuneration. A study 0f all 55 orders (available on net) passed by the High Court of Madhya Pradesh Bench at Indore from the year 2010 to 2017 discloses a disquieting pattern. In four cases a retired judge of the apex court was appointed arbitrator. In 33 cases different former judges of M.P. High Court and in 16 cases former District Judges were appointed arbitrators. Only two out of fifty five were outside the judicial fraternity. All these appointments were made without taking into consideration the expertise of the appointee and almost in each case leaving the arbitrator free to fix his own remuneration.  In all other High Courts the pattern is more or less the same. This made the arbitration far more expensive than what it was under the earlier Act. The observations made by the Apex court in the case of Union of India v Singh Builders (2009)4 S.C.C. 523 in paras 21to23 are pertinent:

There is no doubt a prevalent opinion that the cost of arbitration becomes very high in many cases where retired Judge/s are Arbitrators. The large number of sittings and charging of very high fees per sitting, with several add-ons, without any ceiling, have many a time resulted in the cost of arbitration approaching or even exceeding the amount involved in the dispute or the amount of the award. When an arbitrator is appointed by a court without indicating fees, either both parties or at least one party is at a disadvantage. Firstly, the parties feel constrained to agree to whatever fees is suggested by the Arbitrator, even if it is high or beyond their capacity. Secondly, if a high fee is claimed by the Arbitrator and one party agrees to pay such fee, the other party, who is unable to afford such fee or reluctant to pay such high fee, is put to an embarrassing position. He will not be in a position to express his reservation or objection to the high fee, owing to an apprehension that refusal by him to agree for the fee suggested by the arbitrator, may prejudice his case or create a bias in favour of the other party who readily agreed to pay the high fee…………. What is found to be objectionable is parties being forced to go to an arbitrator appointed by the court and then being forced to agree for a fee fixed by such Arbitrator. It is unfortunate that delays, high cost, frequent and sometimes unwarranted judicial interruptions at different stages are seriously hampering the growth of arbitration as an effective dispute resolution process.

The legendary late Justice V. R. Krishna Iyer in an article “Of justice, justices and justicing” published in THE HINDU on12-9-2008 has said :

“It is alarming to note that arbitration, meant to simplify matters, is now the victim of a terrorism syndrome. For instance, the longevity of arbitration is anfractuous. Moreover, unpardonable cupidity, phenomenal prolixity and expenses have been woven into the innocent arbitration process. And what an outrage it is that judicial arbitrators supplement their incomes by means of reading fee, writing fee, conference fee and other such obnoxious money-making inventions in every dimension of arbitration. This horror of procedure must suffer seppuku. It is the opium of arbitral justice, indeed.”

The general perception about arbitral assignments is that of a lucrative terminal benefit conferred by sitting judges on former judges of their choice.

Any challenge to the arbitral award (made usually by a retired Judge or Chief Justice of the High Court or of the Supreme Court) under Section 34(1) of the Act could be made only before the District Judge which is the Principal civil court of original  jurisdiction with no pecuniary limits. In effect this remedy is a farce. As a ground reality, no District Judge would gather courage to uphold any challenge against the award made by a retired Judge of the Supreme Court or of the High Court. No relief could be expected at that stage even in cases where objections to the validity of the award are well founded. Appeal does lie to the High Court against the order of the District Judge but it takes years for disposal and involves serious difficulties in obtaining interim relief against the execution of the award.

The scope of judicial interference with arbitral awards under the new Act remained the same or rather widened despite change in phraseology. Arbitral award can now be set aside on the ground of its being in conflict with public policy of India, an expression traditionally described as an unruly horse. In (2003)5 SCC 705 ONGC Ltd. v/s Saw Pipes Ltd. the Apex Court on 23.04.2003 construed this expression in its widest amplitude holding that an award could also be set aside if it is patently illegal or perverse or irrational on the touchstone of Wednesbury principle of reasonableness. This decision invited instant criticism from various corners. Senior Advocate Shri Fali S. Nariman in a speech delivered on 02.05.2003 said that this judgment:

“….… virtually sets at naught the entire Arbitration and Conciliation Act of 1996. If Courts continue to hold that they have the last word on facts and on law – notwithstanding consensual agreements to refer matters necessarily involving facts and law to adjudication by arbitration – the 1996 Act might as well be scrapped. …….… The Division bench decision of the two Judges of the Court has altered the entire road-map of Arbitration Law and put the clock back to where we started under the old 1940 Act.”

It is ironical to note that on 25.11.2014 the Apex Court speaking through Justice R.F. Nariman in the case of Associate Builders (2015) 3 SCC 49 upheld the judgment in the case of ONGC Ltd. and declared it to be law of the land.

Soon after the commencement of the new Act criticisms and objections to its working were raised by several commercial, social and legal organizations. On a reference made by the government Law Commission of India submitted an exhaustive report no. 246 on 05.08.2014. A supplementary report was also submitted by the Law Commission on 06.02.2015. Thereafter the new Act has been extensively amended by The Arbitration and Conciliation (Amendment) Act, 2015 with effect from 23.10.2015 after it was first promulgated as an ordinance. The amendments however do not apply to arbitrations commenced before this date.

The changes made by these amendments are only cosmetic. They do not solve the basic problems of the arbitral proceedings namely enormous expense and wide scope for judicial interference denuding the arbitral award of its finality. Fixing time limits for making the award and for disposal of objections under Section 34 do not solve the problem because the appeal against the order passed by the District Judge on such objections takes years in its disposal by the High Court and then Supreme Court. There are some basic problems like payment of stamp duty, registration and custody of award and of arbitral proceedings to which no solution is available even after the amendment.

The stamp duty chargeable on the arbitral award is provided in Article 12 of Schedule to the Stamp Act and varies substantially from State to State. In Maharashtra it is only Rs five hundred. In Delhi and Tamil Nadu it is ad valorem one rupee per thousand on value of the subject matter in dispute. In Karnataka it is ad-valorem five rupees per thousand. In West Bengal and Rajasthan the maximum stamp duty payable on arbitral award is Rs. one hundred only. In Punjab and Haryana both this maximum is auspicious Rs. 112=50. In Madhya Pradesh the incidence of the stamp duty is two percent ad valorem on the amount of the award without any upper limit, highest in the country and higher than even the incidence of court fees (maximum Rs 1,50000/-) if the award is for a sum exceeding Rs seventy five lakhs. This illogical and unreasonable disparity should be removed immediately by prescribing a uniform stamp duty of Rs one thousand on all arbitral awards throughout the country. It would present no difficulty if the arbitral tribunal collects this amount in equal shares from both parties in the beginning and then the award in original is inscribed on stamp papers worth Rs one thousand. The loss to the revenue can be compensated by prescribing ad valorem court fees on applications under Section 34 of the Act challenging arbitral awards and on appeals arising there from. This would encourage arbitrations and would discourage challenges to awards.

The registration of awards dealing with immovable property is yet another complexity. An award falling within the purview of Section 17(1) Registration Act was held to be compulsorily registrable by the Apex Court in AIR 1970 SC 833 (Satish). .It is unnecessary at the stage when the award is open to challenge before the Court. It would be appropriate that by an amendment in Section 17(2) of the Registration Act an arbitral award is exempted from registration till it attains finality. This simplification in the laws relating to stamp duty and registration regarding arbitral awards is the urgent need of the day.

There is neither provision nor appropriate infrastructure for the custody of the original award and the record of arbitral proceedings. It is problematic for the arbitrator and parties both. For how long and where the record containing the award proceedings and documents should be kept after the arbitrator becomes functus officio the Act and the rules are silent.

Recourse to arbitration is on decline over the years. Now every cautious advocate takes care to omit the arbitration clause whenever he is consulted for settling the draft of any agreement, deed or settlement. Over the years, arbitration has proved to be a bobby trap for unwary litigants on account of its longevity, complexity, uncertainty and ruinous costs.

About B.L. Pavecha

B.L. PavechaShri B.L. Pavecha is a Senior Advocate in the Madhya Pradesh High Court Bench at Indore. He is in practice since 1962 and was designated as a Senior Advocate in 1995.

Facebook Comments

[Note: For a free legal question with your Facebook login, click here.]