Section 34 Arbitration And Conciliation Act, 1996- Time For A Rethink

  • Section 34 Arbitration And Conciliation Act, 1996- Time For A Rethink

    The concept of arbitration/alternative dispute resolution has been prevalent in the Indian subcontinent right from ancient times. The panchayat system of resolving disputes was a unique form prevalent in the subcontinent on lines of personalised resolution of disputes at the lowest level. With the advent of British rule in India, a more codified form of judicial system came into...

    The concept of arbitration/alternative dispute resolution has been prevalent in the Indian subcontinent right from ancient times. The panchayat system of resolving disputes was a unique form prevalent in the subcontinent on lines of personalised resolution of disputes at the lowest level.

    With the advent of British rule in India, a more codified form of judicial system came into being. This also included arbitration as an alternative to the usual civil remedies to provide for a less time-consuming, less acrimonious and more efficacious mode of resolving disputes (which was more towards the nature of mediation).

    After numerous regulations introduced by the British East India Company to provide for arbitration- as the first serious attempt for encouraging arbitration in the Indian sub-continent, Act IX of 1840 was promulgated. This was followed by multiple acts culminating finally in the Arbitration Act of 1940 (primarily based on the English Arbitration Act of 1934).

    The failure of the Act of 1940 to prove itself as an effective alternative to the ordinary court proceedings were with consternation and dismay noted as far back as in 1982 in a judgement by the Hon'ble Supreme Court of India. In Guru Nanak Foundation vs Rattan Singh & Sons,[1] the Court stated:

    "Interminable, time consuming, complex and expensive court procedures impelled jurists to search for an alternative forum, less expensive, less formal, more effective and speedy resolution of disputes avoiding procedural claptrap and this led them to Arbitration Act of 1940. 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".

    Despite such criticisms, no improvement in the law was made for nearly half a century domestically, even though internationally, the (UNICITRAL) Model Law on International Commercial Arbitration, 1985, was adopted by the United Nation Commission on International Trade law and had in turn been adopted by numerous countries across the globe too. It was finally, post liberalisation in 1991, that India, taking a cue from the Britain, adopted the UNICITRAL model Law and enacted the "Arbitration and Conciliation, Act, 1996 (hereinafter "1996 Act"). As opposed to the Arbitration Act of 1940 which only covered domestic awards, the 1996 Act covered both domestic and international arbitration and was essentially aimed at curbing delays and court interference in the arbitration process. However, despite the best efforts of the legislature to make India a robust hub of arbitration, the 1996 Act suffered from various problems including high costs and too much intervention of Courts which in turn led to excessive delays on account of incorrect judicial interpretations and legislative lacunas. While most of these problems have been addressed by way of subsequent judicial pronouncements and legislative amendments, several inconsistencies in India's arbitration framework still remain unaddressed and invariably perpetuate the problem of excessive court interference and delays, specifically in relation to enforcement of awards.

    The Problem

    Court interference in arbitration process usually arises after the proceedings are over. While it is true that even during the pendency of arbitration proceedings, court interference is highly prevalent due to Section 9 applications, we will be restricting our analysis to the problem of court interference while enforcing awards, which means, our analysis is restricted to Section 34 to 38 of the Arbitration Act.

    Section 34 of the 1996 Act is in consonance with Article 34 of the UNCITRAL Model Law and also with Section 30 of the Arbitration Act, 1940. While the basis on which an Award can be challenged under Section 34 are limited, the term "Public Policy of India" has been a subject of widespread debate and incorrect judicial interpretations have often led to unwarranted court intervention. Decisions such as ONGC Limited v Sawpipes[2] and other judgments, including Associate Builders v. Delhi Development Authority[3] and ONGC v. Western Geco International Ltd.[4] led to an expansive definition of public policy which virtually enabled courts to entertain any and every challenge based on 'public policy'.

    Accompanied with this, the Arbitration Act,1996 suffered from the automatic stay of awards if a challenge had been filed for the same under Section 34. As a result, virtually all awards were challenged before the court and any requisite payments to be made as per the award were consequently stayed even on merely the issuance of notice by the court and deprived the award holder of the payment due.

    2015 Amendment

    These issues were finally addressed in the Law Commission of India's 246th Report which was published on 05.08.2014. The Commission noted that several modifications were needed to Section 34 to 38 of the Act to help speed up the process and accordingly suggested a slew of amendments- including for the provision of stay under Section 34 by doing away with the regime of automatic stays. Moreover, the Commission suggested the introduction of timelines within which arbitration proceedings were to be concluded. However, before the Report could be acted upon, the Commission was constrained to prepare a supplementary Report to its 246th Report in view of the judgement of the Supreme Court in Western Geco. The Supplementary Report noted with consternation that the Western Geco judgment was in a way undermining the Commission's attempts of bringing the Act in line with the international practices. In its opinion, it would discourage the possibility of international arbitration coming to, and domestic arbitration staying in India, owing to the overly expansive interpretation of the term 'public policy of India' but concluded that a narrower meaning of the term 'public policy' would sub serve the very purpose for which the Act had been enacted.

    Following their proposals, and after receiving three draft proposals for amendment, India's arbitration law was amended two decades later, with the Arbitration and Conciliation (Amendment) Act, 2015 (the 2015 Amendments) being enacted. The 2015 Amendments came into effect from October 23, 2015 and demonstrated a marked preference for institutionalising the process of arbitration by making special allowances for the same. The 2015 Amendments included provisions, such as introduction of different and shortened timelines to speed up the arbitral process, and some clarifications with respect to the oft used and much abused public policy challenge to arbitral awards. Pointer to expeditious disposal and the concept of lesser delays can be found from the introduced Section 29A, 29B and Section 34(6).

    With regards to the issue of automatic stay, 2015 Amendments provided that an automatic stay shall not be granted on the award merely upon the filing of a Section 34 challenge. While the 2015 Amendments were introduced with the best of intentions, it was unclear if the amended provisions were applicable to arbitrations and court proceedings which commenced after 23 October 2015. Several High Courts delivered contradictory interpretations of Section 26 of the 2015 Amendments. The ambiguity around interpretations of Section 26 of the 2015 Amendment Act was finally settled by the Supreme Court in BCCI v Kochi Cricket Pvt. Ltd.,[5] The Apex Court distinguished (i) arbitral proceedings from (ii) proceedings in relation to arbitral proceedings, that is, arbitration related court proceedings.

    It was held that amendments are applicable to all arbitral proceedings initiated after the Amendment Act 2015 came into force. Likewise, it was equally applicable to court proceedings initiated after the commencement of the Act, regardless of the fact that they might stem-out of arbitrations initiated before the commencement date, thereby giving the amendment retrospective effect. The instant judgment coupled with the Hon'ble Supreme Court's judgment in State of Bihar & Ors. v Bihar Rajya Bhoomi Vikas Bank Samiti[6], is a pointer to the fact that the Hon'ble Supreme Court's primary concern has been to curtail frivolous challenges to arbitral awards, thereby minimising court interference and the associated delays.

    Soon thereafter, the Parliament passed the Arbitration and Conciliation (Amendment) Act, 2019. In order to settle the issue of applicability of the 2015 Amendments, the 2019 Amendments introduced a new Section 87 to the Arbitration Act. Contrary to the Supreme Court's observations in BCCI, Section 87 provided that the 2015 Amendments will be applicable only to the court proceedings which relate to arbitrations commenced after the commencement of Amendment Act 2015 and not arbitration proceedings which were initiated prior to the commencement of the Act, thereby taking away the retrospective application of the act. However, Section 87 has been subsequently struck down by the Apex Court in Hindustan Construction Company v. Union of India[7] and the position of law has been reverted back to what it was in BCCI v Kochi Cricket.

    The Hon'ble Supreme Court has consistently expressed dismay over the delays in arbitration cases, mostly at the post award stage and therefore, struck down Section 87, as introduced by the Amendment Act of 2019 as manifestly arbitrary. The extent of delay becomes wholly apparent when one looks at the case NAFED v. Alimenta,[8] which the Supreme Court finally decided in 2020, nearly after 37 years since its inception.

    The Un-addressed Problem

    While both Courts and the legislatures have undertaken painstaking efforts to curb the problem of delays through minimising court interference, a pivotal point has often been ignored which stems from Section 37(1)(b) of the Arbitration Act. Section 37 provides for appealable orders which inter-alia also includes appeal against setting aside or refusing to set aside an arbitral award under Section 34 and the appellate court is be the one authorised by law to hear appeals from original decree of the Court (emphasis supplied). As a result, an arbitral award keeps getting entangled in litigations which acts as an impediment. In general, an arbitral award stays tied up in litigation processes for almost 5-6 years at the bare minimum, owing to the challenges against any order under Section 34 and the subsequent statutory appeal under Section 37 against Order 34. In such a situation, the author(s) strongly feel that the jurisdiction of Courts need to be further curtailed in relation to Section 37(1)(b) in order to free an award of unnecessary statutory challenges which can very well be avoided.

    Arbitral awards are to be treated as a decree for execution purposes under the Code of Civil Procedure, 1908 by way of deeming fiction.[9] The author(s) feel that the legislature would be well advised to treat the challenge to an arbitral award under Section 34 to be one akin to the challenge under Section 96 read with Order XLI of the Civil Procedure Code, 1908, as if the same were an appeal from a decree of court, but within the parameters of Section 34 as they have come to exist subsequent to the aforementioned legislative and judicial decisions. This would afford any decision rendered under Section 34 more legitimacy as an 'appeal' and also restrict the scope for the 'second appeal', as opposed to Section 34 being treated as an original application. In fact, these appeals can be treated similar to the first appeals under Section 104 of the Civil Procedure Code, 1908 read with Order XLIII of the same.

    It is also imperative to restrict the appealability of a Section 34 order, under Section 37 (1)(c) of the Arbitration and Conciliation Act, 1996, to merely pure questions of law, as can be found under Section 69 of the English Arbitration Act of 1996, which can be admitted only upon seeking leave of the court. Section 69 of the English Act permits a limited right to appeal on points of law and statistics of the Departmental Advisory Committee highlight that the provision is able to meet its policy aims well.

    As per the authors' humble opinion, Section 34 should provide for an appeal against an arbitral award, in line with Order XLI of Civil Procedure Code, 1908, while keeping Section 34(6) intact and without any further recourse to a statutory 'Second Appeal' under Section 37 of the Arbitration Act, 1996. However, for such a process to work efficaciously, the legal system must ensure better training of the judiciary for arbitration law specifically so as to ensure that the Section 34 order so rendered doesn't suffer from infirmities which would render it susceptible to further judicial challenges.

    The author(s) strongly feel that the aforementioned would hasten the culmination of arbitration proceedings within a designed timeframe thereby restricting and limiting court interference post award, in line with the concept of arbitration as an effective and efficacious alternate dispute resolution mechanism.

    Mr. Rana Mukherjee is Senior Advocate at the Supreme Court of India, Mr. Shantanu Singh is Advocate at Delhi High Court and Aakanksha Bhardwaj is Final Year student at NLU Delhi. The author's views are personal.

    [1] Guru Nanak Foundation vs Rattan Singh & Sons (1981) SCC (4) 634.

    [2] 2003 (5) SCC 705.

    [3] 2015 (3) SCC 49.

    [4] 2014 (9) SCC 263.

    [5] Kochi Cricket Pvt. Ltd. v. Board of Control for Cricket in India (2018) 6 SCC 287.

    [6] 2018 (9) SCC 472.

    [7] 2019 SCCOnLine SC 1520.

    [8]2020SCCOnline SC 381

    [9] Cheran Properties Limited v. Kasturi & Sons Ltd. (2018) 16 SCC 413; Sundaram Finance Ltd. Abdul Samad (2018) 3 SCC 622.

    Next Story