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5/1/1999 ARBITRATION
Logically, arbitration should be the ideal method of dispute resolution. Unfortunately, until early 1996, India used to suffer from a very old and obsolete arbitration statute called the Arbitration Act 1940. Its main weakness was that an unsuccessful party to an arbitration dispute could have recourse to judicial review on the ground that the award was vitiated by an error apparent on its face or in a document attached or referred to in it. Consequently, many litigants to their dismay found that an arbitration award did not put an end to the dispute. Rather, it gave rise to further rounds of litigation and appeals which took a number of years to resolve.
Fortunately, the law has at last caught up with public opinion. On January 16, 1996, the President of India promulgated the Arbitration and Conciliation Ordinance 1996 which was replaced by an Act of Parliament of the same name. This Act repealed the Arbitration Act 1940, the Arbitration (Protocol and Convention) Act 1937 and the Foreign Awards (Recognition and Enforcement) Act 1961. This Act is based on the UNCITRAL Model Law of International Commercial Arbitration and the UNCITRAL Conciliation Rules. The Act recognizes the finality of an arbitration award and severely limits the power of judicial review of an award. The Act includes separate chapters for the enforcement of foreign awards.
India was a party to the Geneva Convention on the Execution of Foreign Arbitral Awards. This was enacted into law by the Arbitration (Protocol and Convention) Act, 1937. The Act applied only to those countries which were parties to the Geneva Convention of 1927. Certain difficulties were experienced in the operation of the Geneva Convention of 1927. On June 10, 1958 at New York, the United Nations adopted a Convention wider than that of the Geneva Convention. The New York Convention has been ratified by India. The contents of this convention were substantially enacted by Parliament in the shape of the Foreign Awards (Recognition and Enforcement) Act, 1961. Article 1 (3) of the New York Convention states that when signing, ratifying or acceding to this Convention, any State may, on the basis of reciprocity, declare that it will apply the Convention to the recognition and enforcement of an award made only in the territory of another contracting state, and that it may also declare that it will apply the Convention only to differences arising out of legal relationships whether contractual or not which are considered as commercial, under the national law of the state making such declaration. India has made such a declaration.
The most controversial section of the Foreign Awards (Recognition and Enforcement) Act, 1961 was Section 9(b) which stated that nothing in it shall apply to any award made on an arbitration agreement governed by the law of India. Prior to its repeal, this section gave rise to a lot of controversy on the legal effect of an arbitration clause contained in a contract that was governed by a law other than India law.
The National Thermal Power Corporation v The Signer Corporation, (1992) (3) SC 198, ("Singer"), the Supreme Court of India held that as the arbitration agreement was governed by the law of India, the award could not be enforced as a foreign award under the Act. Mr. Jan Paulsson in his article, The New York Convention's Misadventures in India, International Arbitration Report, June 1992, Volume 7, # 6, at page 3, has, it is submitted, unfairly, criticized the reasoning of the Supreme Court, which on the facts before it had properly held that the arbitration agreement was governed by the law of india. The Supreme Court then simply applied Section 9 of the Act and came to the only conclusion which was available under the prevailing law and that was that the award could not be enforced under the Act. The criticism of the author should have been directed to the wording of Section 9 of the Act. Before the Act was repealed, it was considered possible to get around section 9 of the Act by having the substantive agreement (except the arbitration clause) governed by the law of India, and by expressly stating in the agreement that the arbitration agreement would be governed by some other law. Singer recognizes such an approach at page 207 of the report in the following words:
"The parties have the freedom to choose the law governing an international commercial arbitration agreement. They may choose the substantive law governing the arbitration agreement as well as the exercised either expressly or by implication. Where there is no express choice of the law governing the contract as a whole, or the arbitration agreement in particular, there is, in the absence of any contrary indication, a presumption that the parties have intended that the proper law of the contract as well as the law governing the arbitration agreement is agreed to be held. On the other hand, where the proper law of the contract is expressly chosen by the parties, as in the present case, such law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement which, though collateral or ancillary to the main contract, is nevertheless a part of such contract."
Section 34 of the new Arbitration and Conciliation Act 1996 has abolished the right of a party to challenge an award except on the following grounds:
(a) the party making the application furnishes proof that-
(i) a party to the arbitration agreement was under some incapacity; or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it, or failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitration proceedings or was otherwise unable to present its case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of Part I of the Act from which the parties cannot derogate, or failing such agreement, was not in accordance with Part I of the Act; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force; or
(ii) the arbitral award is in conflict with the public policy of India.
The Explanation below section 34(b)(ii) of the Act declares that, for the avoidance of doubt, an award is in conflict with the public policy of India if the making of the award is induced or affected by fraud or corruption.
The enactment of the Arbitration and Conciliation Act 1996 will go a long way in redressing the uncertainties and delays that were created when the Arbitration Act 1940 was in force. It will also completely do away with the wholly unrealistic requirement of the now repealed section 9(b) of the Foreign Awards (Recognition and Enforcement) Act 1961 that the arbitration agreement under which a foreign award is made should not be governed by the law of India.
Part II of the Arbitration and Conciliation Act 1976 deals with the enforcement of certain foreign awards. Chapter I of Part II deals with New York Convention Awards and Chapter II of that Part deals with Geneva Convention Awards. Sections 48 and 57 of the Arbitration and Conciliation Act 1996 contain the conditions on which a foreign award to which the New York Convention or, as the case may be, the Geneva Convention, applies. The provisions of these sections are almost identical to those of section 34 of the Act that are set out in detail above except that they include a sub-clause under which the enforcement of a foreign award may be refused if the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.
Assuming that an arbitration agreement is governed by the law of India, the question is whether the parties may lawfully stipulate in it that the arbitration proceedings should be governed by the rules of a particular chamber of commerce, say, the International Chamber of Commerce. The answer to this question depends on whether such rules are consistent with the provisions of the Arbitration and Reconciliation Act, 1996. In Fertilizer Corporation of India v. Chemical Construction Corporation, (1973) 75 Bombay Law Reporter, 335, the Bombay High Court held that the relevant rules of the International Chamber of Commerce which were cited before it, were not inconsistent with the provisions of the Arbitration Act 1940, and that they were therefore valid.
Enough has been said on the Indian legal system. It is now time to turn to the laws and policies that regulate foreign investment in India.
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