ALTERNATIVE DISPUTE

RESOLUTION: SCOPE OF
ARBITRATION IN INDIA

Paridhi Jain (19010700) and Raj Shah (19010666)

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Paridhi Jain (19010700) and Raj Shah (19010666)
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Table of Contents

INTRODUCTION ..................................................................................................................... 2

HISTORY OF ARBITRATION IN INDIA .............................................................................. 4

ESSENTIALS OF ARBITRATION .......................................................................................... 4

CASE: BIHAR STATE MINERAL DEVELOPMENT CORPN VS ENCON BUILDERS ......................... 4

ARBITRATION AND CONCILIATION ACT, 1996 .............................................................. 6

CASE 1: BHATIA INTERNATIONAL V. BULK TRADING ............................................................. 6

CASE 2: BHARAT ALUMINUM CO. (BALCO) V. KAISER ALUMINUM TECHNICAL SERVICES

INC. ......................................................................................................................................... 7

INTERNATIONAL COMMERCIAL ARBITRATION ........................................................... 9

CASE: TDM INFRASTRUCTURE (P) LTD. V. UE DEVELOPMENT INDIA (P) LTD. .................... 10

CONCLUSION ........................................................................................................................ 10

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Paridhi Jain (19010700) and Raj Shah (19010666)
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INTRODUCTION

The Indian legal system is often criticised for the delay in the resolution of disputes and

for the number of pending cases in the Indian courts at every level.

As shown in the data above, there are over 3 crore cases pending in the Supreme Court,

the High Courts and the subordinate courts (including district courts) as of April 2018. This

data shows that the subordinate courts have over 86% pendency of cases, the High Courts have

about 13.8% pendency of cases and the remaining 0.2% pendency of cases remains with the

Supreme Court. There is an 8.6% increase in the pendency of cases across all courts, between

2006 and 2018 (up to April). Individually, the increase in the pendency of cases in the Supreme

Court was 36%, in the High Courts was 17% and in the Subordinate Courts was 7%.1

These statistics reiterate the need for speeding up the process of dispute resolution.

Moreover, these statistics also reiterate the need for alternate methods for dispute resolution

which work outside or independently of the courts. Alternative Dispute Resolution (ADR)

refers to the methods of resolving a dispute, which are often used as alternatives for litigation

in the courts. Unlike the courts which use adversarial processes, ADR focuses on effective

1
Sinha, Roshni. Pendency of Cases in the Judiciary. No. id: 12884. 2018.

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Paridhi Jain (19010700) and Raj Shah (19010666)
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communication and negotiation. Throughout the world, the dispute resolution approach of

judges, lawyers and parties is moving towards the adoption of ADR methods instead of court-

based litigation. Along with a variety of options to resolve the disputes, ADR also promotes

communication between the parties. Furthermore, ADR helps the parties to work together in

order to solve the real concerns underlying the conflict by focusing on the real interests of the

parties instead of their claims. ADR methods include arbitration, conciliation, negotiation,

mediation, etc.2

The main focus of this paper lies on the largest method of ADR, that is arbitration and

its scope in India. In the method of arbitration, the arbitrator collects all the evidence and then

makes a decision. Arbitration works in somewhat the same manner as do the courts. Just as a

trial in the court, in the process of arbitration, the parties provide their testimonies and give

evidence. However, the procedure of arbitration is usually less formal than that of the courts.

There are two main types of arbitration – institutional and ad hoc. An institutional arbitration

is one in which a formally recognised institution assumes the role of administering the

arbitration process. Each institution follows its own rules, provides its pre-determined

arbitration framework and has its own method of administration to facilitate the process. An

Ad Hoc arbitration is one which is not administered. The parties are therefore responsible for

determining all aspects of the arbitration - such as, the number of arbitrators, their appointment,

the laws applicable d the procedures for overseeing the arbitration. 3

2
Karjee, Kshitiz. "Alternative dispute resolution." Available at SSRN 1533355 (2010).
3
Raghavan, Vikram. "New Horizons for Alternative Dispute Resolution in India-The New Arbitration
Law of 1996." J. Int'l Arb. 13 (1996): 5.

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HISTORY OF ARBITRATION IN INDIA

The formulation of Arbitration in India has undergone a long process with the

establishment of various bills, amendments and schedules. The law of Arbitration was first

directed under the Indian Arbitration Act, 1899 which was essentially limited only to the

Presidency towns. The period of 1908-1995 saw various flaws in the act, which paved way for

the establishment of the Arbitration and Conciliation Act, 1996. The act was based on the

United Nations International commissions on International Trade Law, 1985 (UNICTRAL).

The latter wasn’t very effective as it failed to incorporate domestic disputes, and the act was

questioned on the grounds of delay and hardships due to its slow and unsmooth proceedings.

Several reviews were provided for the bill, and amendments were made. The 176th report of

the law commission, the B.P. Saraf committee, and the 246th report of the law commission,

managed to ensure certainty to the act and brought imperative changes to the act. The amended

Arbitration and Conciliation act, 1996 was introduced in the parliament in 2015.4

ESSENTIALS OF ARBITRATION

Case: Bihar State Mineral Development Corpn vs Encon Builders

The Bihar State Mineral Corporation invited tender for removal of soil, sandstone, stale

conglomerates/ Coal etc. Encon Builders submitted their quotation of tender which was

accepted by the Corporation. The contracting parties entered into an agreement. Clause 60 of

the agreement stated, “if there is any dispute arising out of the agreement, the matter shall be

referred to the MD, BSMC, Ranchi, whose decision shall be final and binding.” Encon Builders

made some omissions on the completion of the work assigned to them, however those

4
Raghavan, Vikram. "New Horizons for Alternative Dispute Resolution in India-The New Arbitration
Law of 1996." J. Int'l Arb. 13 (1996): 5.

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omissions resulted in a huge loss for the Bihar state mineral corporation. In order to resolve the

disputes between both parties, Encon Builders invoked clause 60 of the agreement and

questioned the validation of the clause. “District Court and High Court decided in favour of

Encon Builders, ordering that MD of BSMC is restrained from acting as an arbitrator on

grounds of bias. S.C. in this case considered the whether the lower courts committed an

illegality in refusing to refer the matter to arbitration?”5

Essential elements of arbitration can be derived from the judgement of this case. They

are as follows:

i. There must be a present or a future difference in connection with some contemplated

affair.

ii. There must be the intention of the parties to settle such difference by a private tribunal.

iii. The parties must agree in writing to be bound by the decisions of such tribunal.

iv. The parties must be ad idem.

v. The arbitral tribunal must be impartial. It is a well-settled principle of law that a person

cannot be a judge of his own cause. Also, justice should not only be done but manifestly

seen to be done.

vi. Bias in any form – actual or apparent; pecuniary or impartiality - would lead to an

automatic disqualification.

vii. The fact that Encon entered into the agreement with his eyes wide open or not takes a

back seat. An order which lacks inherent jurisdiction would be a nullity and, thus, the

procedural law of waiver or estoppel would have no application in such a situation.

viii. Therefore, clause 60 does not constitute an arbitration agreement.

5
Bihar State Mineral Development Corpn vs Encon Builders, (1) P Ltd., (2003) 7 SCC 418

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ARBITRATION AND CONCILIATION ACT, 1996

Indian implemented the Arbitration and Conciliation Act of 1996 for various purposes

– to narrow down the basis of challenges of the awards, to ensure the finality of awards to

decrease the judicial supervision and to expediate the process of arbitration.6

The codification of this act is implemented primarily by the UNCITRAL Model Law

on International Commercial Arbitration. The 1996 Act comprises deals with two parts related

to arbitration. The first part deals with the provisions for governing domestic and international

arbitration in India, such as arbitration agreements, composition and jurisdiction of arbitral

tribunals and the parameters for the inventions of courts, The second part deals with provisions

for the recognition and enforcement of foreign awards to which only the New York convention

and the Geneva convention apply.7

Case 1: Bhatia International v. Bulk Trading

On May 9, 2007, Bhatia International entered into a contract with Bulk trading. The

contract essentially contained an arbitration clause which ensured that the Arbitration process

must be as per the rules of the International Chamber of Commerce. October 23, 1997, Bulk

trading filed a request for arbitration with the International Chamber of Commerce. Both

parties held that the arbitration process would be held in Paris, France. An application was filed

by Bulk Trading under section 9 of the Arbitration and Conciliation Act, 1996 in the district

court of Indore seeking an order restraining Bhatia International from selling, transferring

6
Nair, Promod. "Surveying a Decade of the ‘New’ Law of Arbitration in India." Arbitration
International 23.4 (2007): 699-740.
7
Kaur, Harpreet. "The 1996 Arbitration and Conciliation Act: A Step Toward Improving Arbitration
in India." Hastings Bus. LJ 6 (2010): 261.

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and/or alienating their business assets or properties. Bhatia International raised a plea for

maintainability contending that Part 1 of the 1996 Act would not apply to arbitrations where

the place of arbitration is not India.8

It was held that this was a situation where there was no proprio vigore legal provision

under which the Supreme Court could grant interim measure of protection. The Supreme Court

held that the “general provisions” of Part 1 would apply to the offshore arbitrations, unless the

parties expressly or implied exclude the applicability of the same. Hence, by judicial

innovation, the Supreme Court extended the applicability of the “general provisions” of Part 1

of the 1996 Act to offshore arbitration as well.9

Case 2: Bharat Aluminum Co. (BALCO) v. Kaiser Aluminum Technical Services Inc.

There was an agreement between BALCO and Kaiser Aluminium Technical Services

Inc. dated 22th April, 1993, under which Kaiser Aluminium Technical Services Inc had to

supply and install a computer based system for shelter modernization at BALCO’s Korba

shelter. The agreement contained an arbitration clause for resolution of disputes arising out of

the contract. The seat of arbitration was England and the award was given there only. BALCO

filed an application under section 34 of the arbitration and conciliation act for setting aside the

award. District court dismissed the application. High court also dismissed the appeal which

was challenged in the Supreme Court. The issue in this case was whether part 1 of the act would

apply to foreign seated international commercial arbitration.10

8
Bhatia International v. Bulk Trading, (2002) 4 SCC 105
9
Bhatia International v. Bulk Trading, (2002) 4 SCC 105
10
Bharat Aluminum Co. (BALCO) v. Kaiser Aluminum Technical Services Inc., (2016) 10 SCC 813

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International commercial arbitration in India is regulated by Arbitration and

Conciliation Act, 1996. Part I contains rules on Arbitration where the arbitration seat is in India

and which could also involve a third party. Part II contains rules about recognition and

enforcement of foreign awards. Arbitration Act follows the UNICITRAL Model Law on

International Commercial Arbitration which gives a legal framework for international

arbitration, in a way that it respects the party autonomy and limits the extent to which local

courts may interfere in the arbitral process, especially when arbitration is held in jurisdictions

outside India. In the case of Bharat Aluminium, it is found that by accepting the UNICITRAL

Model Law, the Indian legislature has also accepted the territorial principles that are there in

the Model Law. According to the territorial principles, the “seat” that is chosen by the parties

for arbitration, that place governs the law for arbitration. Therefore, in this case, the court held

that Part I applies only to arbitration, either domestic or international, where the seat of

arbitration in India. If it is found that the seat of arbitration is held to be outside India, according

to the agreement, Part I will be inapplicable, even if the arbitration agreement purports to

provide that Arbitration and Conciliation Act, 1996 would govern the arbitration proceedings.11

The judgement in this case was solely based on the Supreme courts intent on proving

that Part 1 and Part 2 of the 1996 Arbitration and Conciliation act are mutually exclusive of

each other. The court was of the opinion that the act was largely territorial in nature and hence

some imperative sections like section 9 and section 34 could only be applicable when the seat

of authority is in India. By virtue of section2(7) of the 1996 act, the order or award for two

Indians or two foreigners, being parties to an arbitration process, would be considered a

11
Bharat Aluminum Co. (BALCO) v. Kaiser Aluminum Technical Services Inc., (2016) 10 SCC 813

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domestic award. The court assumed a difference between a ‘seat and a venue’ and expressed

the importance of the arbitration seat as the ‘centre of gravity’ for arbitration.12

The rules that are adopted for both domestic and international arbitration are similar

but with three exceptions. First, the domestic arbitration can be any type of dispute that is

arbitrable under the law of India; whereas the international arbitration must be for a dispute

arising out of a legal relationship which is “commercial” under the law of India. Second,

although the act allows parties to choose their proper law, domestic cases require the use of

applicable laws under the law of India. Third, the Chief Justice of the High Court intervenes if

there is a deadlock in domestic cases; whereas the Chief Justice of Supreme Court intervenes

in case of any issues in the international cases.13

INTERNATIONAL COMMERCIAL ARBITRATION

Section 2 (f) of the Arbitration and Conciliation Act of 1996 defines international

commercial arbitration as arbitration relating to disputes that arise out of legal relationships,

whether contractual or not. These are considered to be commercial under the law of India and

at least one of the parties needs to be – 1) an individual who is a national of, or habitually

resident in, any country other than in India; 2) a body corporate which is incorporated in any

country than in India; 3) a company or association or a body of individuals whose central

management and control is exercised in any other country than in India.14

12
Singh, Avtar. Law of Arbitration and Conciliation. Eastern Book Company, 2002.
13
Kaur, Harpreet. "The 1996 Arbitration and Conciliation Act: A Step Toward Improving Arbitration
in India." Hastings Bus. LJ 6 (2010): 261.
14
Bansal, Ashwinie Kumar. Arbitration. Lexisnexis Butterworths Wadhwa Nagpur, 2009.

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Case: TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.

It was head irrespective of where the ‘control and management’ is exercised by the

company, companies that are incorporated in India cannot choose a foreign law to govern their

arbitration. “International commercial arbitration” only occurs when at least one of the

companies is incorporated in a country outside India. Where both the companies are

incorporated in India, international commercial arbitration cannot take place (even if the central

management of the companies is exercised in any country outside India).15

CONCLUSION

The biggest challenge for reforms of arbitration in India has been the courts and their

constant intervention. For a lot of years, the courts have been seen neglecting the Model Law

values by intervening the arbitral processes. Arbitrators around the world believe that

institutions are better informed and they adapt to new developments and international practises

faster. Institutional methods of arbitration enforce uniform rules that help in ensuring

transparency, predictability and consistent treatment. However, India has been seen to be using

ad hoc arbitration methods over the institutional ones. Moreover, India also suffers from a

problem of large number of back-logged courts, a weak legal environment and a lack of too

many professional arbitrators.

Fortunately, recent developments in the arbitral processes have given a ray of hope to

the laws of arbitration in India. As shown in the judgment in the case of Bharat Aluminium Co.

(BALCO) v. Kaiser Aluminium Technological Services, judicial attitude has been changing

towards the concept of arbitration. Although, there has been a substantially positive change in

15
TDM Infrastructure Private Limited v UE Development India Private Limited, (2008) 14 SCC 271

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the arbitral laws, India has a long way to go in order to match up to the level of arbitration

globally.

Costs of arbitration are considered to be very high in a country like India. From the fess

of the arbitrator to other clerical and professional expenses, arbitration is perceived as a very

expensive procedure for resolving disputes. The 2015 amendment of the Arbitration and

Conciliation Act has designed several provisions to curb down the costs of arbitration. High

courts have now put caps on the fees for domestic ad hoc arbitration. Other provisions give the

courts essential tools to curb down mismanagement and inefficiency in the process of

arbitration. The 2015 amendment has also given provisions such as “costs follow the event”

default regime which makes the arbitrators to withhold or awards, especially when parties

refuse an offer to settle the dispute.

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