The missing elements in Arbitration and Conciliation Act 1996

Act 26 of 1996, is celebrating its eighteenth birthday on 16^th August 2014.  An Act intended to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and also to define the law relating to conciliation and for matter connected therewith and incidental thereto. Let us lead in wishing this statute all our best wishes, for the service it has rendered to ‘India’, as a Country.  Did this law live up to the expectation?  Opinions are likely to be divided.

A young widow, living in a rustic village in Kerala recently received a notice from a sole arbitrator, appointed under the Act.  It is the first time that she heard the word ‘arbitrator’.  The sole arbitrator is seated in Mumbai and is entertaining a corporate claim for Rs. 2, 00,000/- and costs. She is a guarantor and her deceased husband, the principal debtor of a vehicle loan purchased for his self employment.  She has documents, to show that the claim is inflated.  It is beyond her wildest comprehension to appear before an arbitrator, located thousands of kilometers away in a short notice. The result of the proceedings is predictable; an expate award, which would become final in the next two months and a possible execution of the award, back in Kerala.  The limited information that she could gather, suggested that even an appearance may not yield much results, for much depends on the impartiality of the arbitrator. It is for sure that this notice is going to break the back born of her family’s finance.

This story may not be read in isolation, it applies to most standard form contracts and arbitration clauses, contained therein.  Such contracts would be mostly consumer contracts, where an individual purchases goods and services from large business houses. Arbitration would be the only mode of dispute resolution.  Necessarily, the seat of arbitration would be convenient to the corporate entity and inconvenient to the individual consumer.  Arbitrator would be appointed by the corporate entity, and most of such appointments may fail the test of ‘Nemo iudex in causa sua’, meaning ‘no one shall be judge in his own cause’.  Little does the young widow know that the Act that celebrates the 18^th birthday is to be blamed, largely, for her worries.

The Act, as can be read from the preamble, was made taking into account the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration in 1985 and the UNCITRAL Conciliation Rules in 1980.  The intended purpose is to provide quick redressal of commercial dispute by private arbitration.  The arbitrator appointed under the Act is not bound by any technical formalities of a court in evidential and procedural matters.  It is an effective alternative to regular judicial system.  The uniformity of the arbitral procedures in tune with the Model law, would boast the international trade and commerce.  At the end of the day, the business world too, may not cherish the same expectation today that they had when the Act came into force.  Instances are not few, when domestic business houses prefer to have their disputes arbitrated in England or other Asian locations, either applying the Indian law or the foreign law where the seat of arbitration is placed.  Such contracting out of the jurisdictions of the Courts in India may have to be viewed seriously.  But the ground reality remains that the Act did not achieve its desired results.

In 2001, the fifth birth year of the Act, Shri. Arun Jaitley, the then Minister for Law, Justice and Company Affairs, requested the Law Commission of India to review the Act, and to propose amendments to it. The Law Commission, in its 176^th report recommended various amendments to the Act, and proposed The Arbitration and Conciliation (Amendment) Bill 2003.   The Bill was introduced in Rajya Sabha in 2003.  The Bill was then referred to the Departmental Related Standing Committee on Personnel, Public Grievances, Law and Justice for examination and report.  The said Committee submitted its Report to Parliament in 2005.  The Committee was of the view that the provisions of the Bill gave room for excessive intervention by the Courts in the arbitration proceedings.  The Bill was latter withdrawn from the Rajya Sabha.  The end result is that the Act, even on its eighteenth birth year, is suffering from several ailments.  It requires immediate remedies, for this Act may have a direct bearing on our economy itself.

A reading of the Act would give an impression, that it was a half hearted attempt to copy the UNCITRAL Model Law.  It failed to touch the ground realities of this Country or to incorporate the Indian experiences, in the making of the law.  The inevitable consequence being that it is unable to satisfy the business world as well as the common man.   The statute failed in more than one area.  Most important among them is that the statute neglected India; its people, their values, its vastness and the innumerable problems it faces every day.

Traditionally, India is a duty oriented society, while the west considers rights as primary.  Hindu mythology speaks of ‘dharma’, vociferously, meaning ‘duty’.  Examples of ‘dharma’ are innumerable; there is ‘rajadharma’ - duty of the King, ‘powradharma’ - duty of the citizen, ‘putradharma’ - duty of the son, and so on.  When a duty is not performed, civil consequences among others would follow.  During Mahabharata, Arjuna is exhorted by Lord Kṛiṣhṇa, to stop hesitating and fulfill his Kṣatriya duty as a warrior, and to kill, even his blood relatives.  ‘Dharma’ is therefore part of the value system of this country.  Too often, the law-makers forget this important legal and moral element, while legislating.  It took a full twenty six years to bring in ‘Fundamental Duties’ into the Constitution, incorporating Part IVA. When it was introduced, it did not create the necessary impact, as no constitutional consequences were suggested for its violations. The very same calamity appears to have happened to this Act also.  But interestingly when Great Britain attempted to make the new law on arbitration, they incorporated duty and its consequences into the English Arbitration Act of 1996.

It is significant to notice that the English Arbitration Act did not follow the UNCITRAL Model Law, when it decided to revise the arbitration law in the country.  On the other hand the Department of Advisory Committee chaired by Mustill L.J., was formed to look into the UNCITRAL Model Law.  The committee rejected the model law on certain grounds, one of which was that some provisions of the UNCITRAL Model Law were not compatible with established principles of English Law.

The English Arbitration Act introduced three important provisions,

(1) The General Principles set out in section 1,

(2) The duties of the tribunal in section 33, and

(3) The duties of the parties in section 40.

These three sections have been described in the 2001 Companion Volume to Commercial Arbitration by Mustill and Boyd as “three pillars” of the Act.  Out of the three pillars, the provision imposing duties on the tribunal and duties on the parties can be claimed to have an Indian origin, given the strong reliance of the Hindu mythology on ‘dharma’. Naturally, the second and third pillars are the concern of this discussion.  The duties prescribed in Section 33 where that the tribunal is duty bound:

(a) to act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and

(b) to adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.

The failure by the tribunal to comply with general duty of tribunal under section 33 would be considered as a serious irregularity, under section 68(2).  The result being that a party to arbitral proceedings may apply to the court challenging an award, on the ground of such a serious irregularity.

It is the general duty of the parties under Section 40 to do all things necessary for the proper and expeditious conduct of the arbitral proceedings. It includes the duty to comply without delay, any determination of the tribunal as to procedural or evidential matters, or with any order or directions of the tribunal, and where appropriate, taking without delay any necessary steps to obtain a decision of the court on a preliminary question of jurisdiction or law.  Sanction for failure to comply with the general duties are prescribed under Section 41, which include the power of the tribunal to make a peremptory order, prescribing such time for compliance with it as the tribunal considers appropriate.  If the party fails to comply with a peremptory order, then, without prejudice to the provision for enforcement by court of the tribunal’s peremptory orders, the tribunal may do any of the following –

(a) direct that the party in default shall not be entitled to rely upon any allegation or material which was the subject matter of the order;

(b) draw such adverse inference from the act of non-compliance as the circumstances justify;

(c) proceed to an award on the basis of such materials as have been properly provided to it;

(d) make such order as it thinks fit as to the payment of costs of the arbitration incurred in consequence of the non-compliance.

Duties and rights are correlatives and therefore when duties are performed promptly, corresponding rights are protected.  Likewise, when the arbitrator performs his duties cast under the Act, efficiently the corresponding rights of the parties are effectively ensured, without any requirement for any monitoring.  When the parties perform their duties, the result would be that the resolution of disputes through arbitration could be finalized without incurring unnecessary delay and expenses.  In short, for successfully ensuring protection of the rights of a party, insistence for performance of the duty of the other would be sufficient.  It is rather sad that these and several other elements are conspicuously missing in the Arbitration and Conciliation Act 1996.

The other missing elements may include answers to the grievances of the young widow referred above.  Given the vastness of this country, and its perennial problems, suitable provisions could have been made to protecting the interest of the marginalized sections of the society and petty consumers, however without infringing the spirit of Model Law.  In the given situation, what appears to be suitable is that the Act require a thorough overhauling, to make it more Indian in this design and features.  English Arbitration Act 1996, which is more Indian than the Arbitration and Conciliation Act 1996, could be used as a model along with the other materials, without compromising the spirit of Model Law, in executing the overhaul.

Johnson Gomez is an Advocate practising in the High Court of Kerala and Member, Chartered Institute of Arbitrators, London