Report No. 246
History of Arbitration Law in India
2. Regulation of the conduct of arbitration has a long history in India. The first direct law on the subject of arbitration was the Indian Arbitration Act, 1899; but, its application was limited to the Presidency towns of Calcutta, Bombay and Madras. This was followed by the Code of Civil Procedure, 1908 where the Second Schedule was completely devoted to arbitration.
3. The first major consolidated legislation to govern the conduct of arbitrations across the country was the Arbitration Act, 1940 which was based on the (English) Arbitration Act, 1934. The Act repealed the Arbitration Act, 1899 and the relevant provisions in the Code of Civil Procedure, 1908, including the Second Schedule thereof.
The 1940 Act however, did not deal with enforcement of foreign awards, and for which purpose, the legislature had passed the Arbitration (Protocol and Convention) Act, 1937 to deal with Geneva Convention Awards and the Foreign Awards (Recognition and Enforcement) Act, 1961 to deal with New York Convention Awards. The working of the 1940 Act, which dealt with domestic arbitrations, was far from satisfactory. The arbitral regime at that point of time was premised largely on a mistrust of the arbitral process, and the same was the subject of much adverse comment by the courts.
4. The Supreme Court in F.C.I. v. Joginderpal Mohinderpal, (1989) 2 SCC 347, at para 7 observed -
"We should make the law of arbitration simple, less technical and more responsible to the actual realities of the situation, but must be responsive to the canons of justice and fair play and make the arbitrator adhere to such process and norms which will create confidence, not only by doing justice between the parties, but by creating a sense that justice appears to have been done."
5. Several other cases adversely commented upon the working of the 1940 Act. The anguish of the Supreme Court is evident from the observations of D.A. Desai J. in Guru Nanak Foundation v. Rattan Singh, (1981) 4 SCC 634:
"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 exception challenged in Courts, has made Lawyers laugh and legal philosophers weep.
Experience shows and law reports bear ample testimony that the proceedings under that 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 Court been clothed with 'legalese' of unforeseeable complexity."
6. The working of the 1940 Act was also the subject of the 210th Report of the Public Accounts Committee of the Fifth Lok Sabha. The Law Commission of India also examined the working of the 1940 Act in its 76th Report.
7. The problem became more acute and pronounced after the liberalisation of the economy in 1991. Foreign investors required a stable business environment and a strong commitment to the rule of law, based on a predictable and efficient system of resolution of disputes. Thus, alternative systems like arbitration, were seen as a prerequisite to attract and sustain foreign investment.
8. In order to address these problems, the earlier regime was sought to be replaced by the Arbitration and Conciliation Bill, 1995 which was introduced in Parliament. Since the requisite legislative sanction could not be accorded to the 1995 Bill, the President of India promulgated the Arbitration and Conciliation Ordinance, 1996 on the same lines as the 1995 Bill. Interestingly, the Ordinance had to be promulgated twice because Parliament could not enact the law in the required time period.
Finally, Parliament passed the Bill in terms of the Arbitration and Conciliation Act, 1996 (hereinafter "the Act") which received the assent of the President of India on 16.08.1996 and came into force on 22.08.1996. However, it was made applicable to cases where the arbitral proceedings commenced as of 25.01.1996. The 1996 Act is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980.
The 1996 Act repealed all three earlier laws (the 1937 Act, the 1940 Act and the 1967 Act as set out above) and applied to (i) domestic arbitrations; (ii) enforcement of foreign awards; and (iii) conciliations. Although the UNCITRAL Model Law was intended to provide a model law to deal with international commercial arbitrations; in the 1996 Act, the UNCITRAL Model Law provisions, with some minor modifications, are made applicable to both domestic and international commercial arbitrations.
9. The Act is based on the UNCITRAL Model Law (a set of 36 Articles) which was drafted to govern all international arbitrations by a working group of the United Nations and finally adopted by the U.N. Commission on International Trade Law (UNCITRAL) on June 21st, 1985.
The Resolution of the UN General Assembly envisages that all countries should give due consideration to the Model Law, in view of the desirability of uniformity of the law on arbitral procedures and the specific needs of international commercial practice. This is also duly reflected in the Preamble of the Act of 1996 saying that: "it is expedient to make law respecting arbitration and conciliation, taking into account the aforesaid Model Law...".