Arbitration and Conciliation Act, 1996 | Law Optional Notes for UPSC PDF Download

Introduction

ADR, or Alternative Dispute Resolution, encompasses various methods for resolving disputes outside the formal court system. It involves parties attempting to privately resolve their conflicts with the assistance of a qualified third party. The outcomes of ADR procedures are binding, similar to court decisions. ADR methods include arbitration, mediation, conciliation, and negotiation, all rooted in principles of justice, legal assistance, and expeditious trials, as enshrined in Article 39A of the Indian Constitution. Section 89 of the Code of Civil Procedure, 1908, also promotes dispute resolution through ADR. ADR proceedings are known for their flexibility and creativity, offering cost-effective and time-efficient solutions. This has led to the emergence of ADR as a significant field in the legal domain. Recognizing the need for ADR legislation, the Indian Parliament enacted the Arbitration and Conciliation Act, 1996. This article will discuss the objectives, scope, applicability, and key provisions of this Act.

Applicability of the Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation Act, 1996, is applicable throughout India. However, its various parts, namely Part I, Part II, Part III, and Part IV, extend to Jammu and Kashmir only when they pertain to international commercial arbitration or conciliation. The Act came into force on August 22, 1996, following the promulgation of an ordinance by the President on January 16, 1996. Two additional ordinances related to arbitration and conciliation were passed on March 26 and June 21, 1996, respectively.

Objectives of the Arbitration and Conciliation Act, 1996

Prior to this Act, the law on arbitration was governed by three outdated acts. Recognizing the need for reform, trade and industry bodies, along with arbitration experts, advocated for amendments to align the Act with the evolving needs of society. It was acknowledged that the country's economic reforms could only progress if domestic and international commercial disputes and their resolution were brought within the ambit of these reforms. In 1985, the United Nations adopted the Model Law on International Arbitration and Conciliation, urging all nations to give it due importance. This led to the enactment of the Arbitration and Conciliation Act, 1996, with the following key objectives:

• Comprehensive coverage of international and domestic commercial arbitration and conciliation.
• Establishment of a fair, efficient procedure capable of meeting the societal demand for arbitration and conciliation.
• Mandating the tribunal to provide reasons for any arbitral award granted.
• Ensuring that the tribunal does not exceed its jurisdiction.
• Reducing the role of courts and alleviating the burden on the judiciary.
• Allowing the tribunal to choose arbitration and conciliation as methods of dispute resolution.
• Ensuring that every award is enforced in the same manner as a court decree.
• Equating the conciliation agreement reached by the parties with an award issued by an arbitral tribunal.
• Addressing the enforcement of foreign awards.

Structure of the Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation Act, 1996, is organized into four distinct parts and contains three schedules:

• Part I (Sections 2-43): This part pertains to the place of arbitration in India. Any award issued under this part is considered a domestic award.
• Part II (Sections 44-60): Part II focuses on the enforcement of foreign awards, addressing the recognition and enforcement of awards made in other countries.
• Part III (Sections 61-81): This part deals with the process of conciliation, providing a framework for the amicable resolution of disputes through conciliation.
• Part IV (Sections 82-86): Part IV comprises supplementary provisions that complement and support the procedures outlined in the previous parts.

Schedules: The Act also incorporates three schedules:

• Schedule I: This schedule contains the Convention on the recognition of foreign awards of arbitration, offering a framework for the recognition of foreign arbitral awards.
• Schedule II: Schedule II outlines the protocol to be followed regarding arbitration clauses.
• Schedule III: Schedule III includes the Convention for the execution of foreign arbitral awards, which pertains to the enforcement of foreign awards in India.

Definitions under the Arbitration and Conciliation Act, 1996

Section 2 of the Act provides definitions for essential terms used throughout the legislation:

• Arbitration: Section 2(1)(a) defines arbitration as any arbitration, whether administered by a permanent arbitral institution or not.
• Arbitration agreement: Section 2(1)(b) references Section 7 of the Act for the definition of an arbitration agreement.
• Arbitral award: Although not explicitly defined in Section 2(1)(c), it encompasses interim awards as well.
• Arbitral tribunal: Section 2(1)(d) specifies that an arbitral tribunal may consist of a sole arbitrator or a panel of arbitrators responsible for overseeing the arbitration.
• Courts: Section 2(1)(e) outlines the scope of courts, encompassing civil courts with original jurisdiction within a district and High Courts with jurisdiction over matters related to the subject of arbitration.
• International commercial arbitration: Section 2(1)(f) provides a comprehensive definition of international commercial arbitration, covering disputes arising from legal relationships, whether contractual or not, where one party has ties to a foreign nation, a foreign corporate entity, a company controlled by a foreign government, or a foreign government itself.

Legal analysis of the Arbitration and Conciliation Act, 1996

Arbitration (Part I)

It is defined under Section 2 (1)(a) of the Act. It is an alternative to litigation in courts and is advantageous as it provides flexibility and confidentiality. According to Black Law Dictionary, it means a method of resolving disputes which includes two parties and a neutral third party whose decision is binding on both parties. 

Section 8 of the Act talks about the powers of any judicial authority to refer a case to arbitration. It must be followed by an arbitration agreement. The Hon’ble Supreme Court in the case of P. Anand Gajapati Raju v. P.V.G Raju (2000) gave certain requirements necessary for referring parties to arbitration:

• An arbitration agreement must be there. 
• A party must bring an action in court against others.
• The subject matter must be the same as in arbitration.
• One party demands arbitration in court. 

In another case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. (2011), it was held that there is no time limit to file an application but it should be filed before submission of the first statement related to the dispute. Further, Section 9 provides that the parties to arbitration may at any time refer to the court for interim measures. 

Types of Arbitration

• Domestic arbitration: It means that the proceedings of arbitration will take place as per Indian laws and be subject to Indian jurisdiction. 
• International and commercial arbitration: This is done in cases involving disputes out of a legal relationship where one of the parties is a foreign national, body corporated in some other country, a company or group which is under the control of some other country and government of a foreign country. 
• Institutional arbitration: It is administered by arbitration institutions like the Indian Council of Arbitration, the International Centre for Alternative Dispute Resolution (ICADR) etc. 
• Statutory arbitration: some acts provide for the resolution of disputes by arbitration. In case there is any inconsistency between any Act and Part I of the Arbitration Act then the provisions given in that Act will prevail. 
• Ad hoc arbitration: It means an arbitration where parties agree without any assistance from the Arbitral tribunal. 
• Fast track arbitration: It is also called documentary arbitration. The arbitration proceedings are very fast and time-saving. It is solely based on the claim statement by one party and its written reply by another. 
• Look–sniff arbitration: It is a combination of an arbitral process and the opinion of an expert. There are no formal submissions and hearings under this. 
• Flip–flop arbitration: It is also called pendulum arbitration. The parties in this type of arbitration create the cases before and then invite the arbitrator to decide any one of the two options. 

Advantages of arbitration 

• A person appointed as arbitrator is based on the whims of the parties.
• If parties agree only then an arbitral tribunal is taken into matter. 
• It is inexpensive and saves time. 
• It ensures a fair trial. 
• Gives freedom to the parties from judicial intervention. 
• Parties choose the place of arbitration themselves (Section 20).
• The proceedings are kept private and confidentiality is maintained. 
• The arbitral award is enforced in the same way a decree of the court is enforced. 

Disadvantages of arbitration

• It does not always guarantee an expeditious resolution. 
• The procedure is at times uncertain. 
• It cannot give remedies like punishment, imprisonment, injunction, etc. which are given in courts. 
• Due to flexibility, it is ineffective. 
• The method cannot be easily used in disputes involving multiple parties. 

Cases not referred to arbitration

Generally, cases of civil rights where the remedy is the damages are referred to arbitration but Section 2(3) of the Act gives the list of such cases which cannot be submitted to arbitration. These are:

• Winding up proceedings of any company. (Haryana Telecom Ltd. v. Sterlite Industries (1999);
• Disputes that have to be determined by any particular tribunal as the law may provide;
• Proceedings related to insolvency; 
• Probate proceedings;
• Question of will and genuineness;
• Guardianship matters;
• Succession disputes;
• Disputes related to immovable property; 
• Illegal transaction cases;
• Proceeding under Section 145 of the Code of Criminal Procedure; and 
• A criminal case cannot be referred to arbitration;

Arbitral tribunals

Composition of tribunals

It is the creation of an agreement which conforms with the law. Section 10 of the Act enables the parties to determine freely the number of arbitrators to settle their dispute. The only restriction is that the number of such arbitrators must not be even. If the parties are not able to decide then there will be only 1 arbitrator. But if there are even number of arbitrators then the agreement cannot be held invalid merely on this ground. (Narayan Prasad Lohia v. Nikunj Kumar Lohia, 2002) 

Procedure for appointment of arbitrators

Further, Section 11 of the Act provides the procedure for the appointment of arbitrators. The valid requirements for any such appointment are:

• Party must give proper notice of appointment to the other party. If it does not do so, the appointment is held invalid. 
• A person appointed as an arbitrator must be duly informed and his consent must be taken. 
• The consent must be obtained before finalising his appointment. 

It also says that if the parties fail to appoint an arbitrator within 30 days of the request or if two arbitrators are appointed and not the third one, then the appointment will be made by Chief Justice or any person on his behalf designated by him but with the prior request of the parties. 

Termination of arbitrator

The grounds for termination are given under Section 14 and Section 15 of the Act. These are:

• If he is not able to perform his functions without undue delay (whether de jure or de facto),
• If he  withdraws or is terminated by the parties,
• He shall be terminated where he withdraws himself or by agreement of the parties. 
• On his termination, a substitute arbitrator will be appointed as per Section 15. 

Jurisdiction 

Section 16 of the Act provides that the tribunal will act in its jurisdiction. If the arbitral tribunal has no jurisdiction then a plea will be raised but not later than when the statement of defence is submitted. It also provides that in case a party is not satisfied with the arbitral award, it can make an application to set it aside according to Section 34 of the Act. The Supreme Court in the case of Centrotrade Minerals and Metals v. Hindustan Copper Ltd. (2006), held that any issue related to the jurisdiction can be raised by people in the proceedings or anyone from outside. But if it is made by the party then it must be done during the proceedings or at the initial stage.  

Arbitral award 

It is a final determination of a claim or a part of it or a counter-claim awarded by the arbitral tribunal. It must be written and duly signed by the members of the arbitral tribunal as given under Section 31 of the Act. The Section further gives the power to the tribunal to make interim awards for any matter. In case of payment of money, it can award the interest which seems reasonable, just and fair to the tribunal. 

Section 32 of the Act empowers the arbitral tribunal to terminate the proceedings by making a final arbitral award. The procedure for any correction in the award or its interpretation is given under Section 33 of the Act. It also gives the power to the tribunal or the arbitrator to amend, correct or remove any errors of any kind within 30 days but is silent on judicial review. The tribunals cannot exercise their jurisdiction beyond whatever has been mentioned in this section. 

Types of arbitral awards

• Interim award: It is the determination of any issue arising out of the main dispute. It is a temporary arrangement to satisfy a party and is subject to the final award. 
• Additional award: According to Section 33 of the Act, if the parties find that certain claims have been missed out by the arbitral tribunal and they were present in the proceedings then it can after notifying other parties, make a request to the arbitral tribunal to make an additional award and cover the claims which have been left. 
• Settlement awards: It is made if the parties agree on certain terms of the settlement. As per Section 30 of the Act, the arbitral tribunal may use any method of dispute resolution like mediation, conciliation or negotiation to bring a settlement between the parties. 
• Final award: It is an award which finally determines all the issues in a dispute. It is conclusive unless set aside by courts and binding on the parties. 

Recourse against arbitral awards

Under Section 34 of the Act, a party if not satisfied can make an application to set aside the award granted by an arbitral tribunal. The time limit to make such an application is not more than 3 months from the date the arbitral award was made. The grounds are:

• Incapacity of parties.
• Non-existence of the agreement of arbitration.
• Did not follow the due process. 
• Error on the part of the arbitral tribunal to exercise its jurisdiction. 
• Improper composition of the arbitral tribunal.
• The subject matter is not capable of being referred to arbitration. 
• It is against public policy. 
• Fraud or corruption.

Section 37 of the Act provides that if a person is not satisfied with the order passed by the tribunal, he/she can appeal to the court.  However, there are no provisions for a second appeal once an appeal has been made. In the case of Pandey and Co. Builders Pvt. Ltd. v. State of Bihar (2007), it was held that the appellate authority in any case which is referred to arbitration must be decided from the definition of court given under Section 2 of the Act.  

Foreign awards (Part II)

Foreign awards are given in the disputes arising out of some legal relations which can either be contractual or not and are considered under any commercial law of the country. In simple terms, it means the awards given in International commercial arbitration.  Foreign awards are granted in foreign countries and are enforceable in India under the Act.
It is divided into two chapters:

• The New York Convention (1958) 
• The Geneva Convention (1927)  

The foreign award related to the New York Convention is given under Section 44 of the Act and that related to the Geneva Convention under Section 53 of the Act. The conditions to enforce these awards in the country are given under Section 48 and Section 57 of the Act respectively. 

Conciliation (Part III)

It is a process in which a third party helps the parties in dispute to resolve it by way of agreement. The person authorised to do so is called a Conciliator. He may do it by giving his opinion regarding the dispute to help parties reach a settlement. In other words, it is a compromise settlement between the parties. 

Features of conciliation

• The person assisting the parties to come to a compromise is called a conciliator. 
• Conciliators give their opinion regarding the dispute. 
• The process of conciliation is voluntary. 
• It is a non-binding process.
• The main difference between arbitration and conciliation is that, unlike arbitration, the parties in this process control the whole procedure and the outcome. 
• It is a consensual party and the desired outcome is the final settlement between the parties based on their wishes, terms and conditions. 
• A conciliator can become an arbitrator on the wish of the parties if no compromise could be reached by the process of conciliation. This is known as Hybrid Conciliation. 
• The settlement agreement will have the same importance and status as the arbitration award. (Section 74)

Proceedings of Conciliation under the Act

• Section 62 of the Act provides that in order to initiate the conciliation proceedings one party to the dispute has to invite the other party in writing for conciliation. However, there will be no proceedings if the other to whom notice/invitation is sent, reject it or does not reply. 
• The general rule states that there must be one conciliator but in the case of more than one conciliator they have to function together with each other as per Section 63 of the Act. 
• The appointment of the conciliator like an arbitrator will be done by the parties themselves under Section 64 of the Act. 
• A party according to Section 65 of the Act is under an obligation to submit in writing the nature of the dispute and all the necessary information related to it to the conciliator. 
• The proceeding can be terminated following any of the procedures given under Section 78 of the Act.

Role of conciliator

It is mentioned under Section 67 of the Act:

• He must be independent and impartial. 
• He must assist the parties to come to a settlement.
• He is not bound by the procedure given under the Code of Civil Procedure, 1908.
• He must adhere to the principles of fairness and justice.

Supplementary provisions (Part IV)

• Section 82 empowers the High Court to make rules relating to any provision of the Act. 
• The Central Government has the power to remove any kind of difficulties and make rules in the Act as per Section 83 and Section 84 respectively. 
• There were 3 Acts dealing with the arbitration in India which have now been repealed by the Act of 1996. These were:
  • The Indian Arbitration Act, 1940
  • The Arbitration (Protocol and Convention) Act, 1937
  • Foreign Awards (Recognition and Enforcement) Act, 1961

Landmark case laws

Haryana Space Application Centre (HARSAC) v. Pan India Consultants Pvt. Ltd. (2021)

Facts of the case 

In this case, an application was filed under Section 29 A(4) of the Act wherein it was stated that the decision of the arbitral tribunal was ready to be pronounced by the authorities. Also, the required cost was paid to the tribunal. On this, the other party argued that the application must be denied on the ground that it lacks reasons for extension under the Section. However, the argument was rejected and an extension of 3-months was granted. HARSAC in a response filed a revision in the High Court. But it again granted a four-month extension. To this, a special writ application was filed to the Supreme Court. 

Issue involved in the case

Whether the extension be given to the party or not?

Judgement of the Court

It was ruled by the court that the clause given in Section 12 is obligatory when it is dealt together with the Schedule of the Act. It was also held that the Principal Secretary is not qualified to be an arbitrator. If been the one, he would probably influence HARSAC. The court also directed to appoint another arbitrator who will continue the proceedings and help them come to an agreement within 6 months. 

Indus Biotech Pvt. Ltd. v. Kotak India Venture Fund (2021)

Facts of the case
Indus Biotech issued some preference shares which are convertible at the option to funds of Kotak India. A clause was added in the agreement of shareholders but they could not agree on how to convert these shares into paid-up equity shares. As a result, Kotak India filed an application when the other party failed to redeem those shares. 

Issue involved in the case
Whether the subject matter of the dispute falls in those that could be referred to arbitration if the case is pending in NCLT?

Judgement of the Court
The Supreme Court opined that the case cannot be referred to arbitration if the process is in rem. It further stated that if any proceedings are pending before NCLT under Section 7 of IBC, then any application under the Arbitration and Conciliation Act, 1996 will not be entertained. In the instant case, the Supreme Court held that the decision of NCLT was reasonable and the case (Indus Biotech Pvt. Ltd. v. Kotak India Venture Fund, 2021) was successfully referred to an arbitral tribunal. 

Oriental Structural Engineers Pvt. Ltd. v. State of Kerala (2021)

Facts of the case
In this case, there was a contract to upgrade the segments of roads. The contractor demanded extra interest for any late payment. But in the letter, there was no such provision of any interest on late payments. 

Issue involved in the case
Whether the contractor must get such interest even when it is not mentioned in the letter?

Judgement of the Court
The Supreme Court held that if the tribunal wishes, it can grant interest as a compensatory award to the contractor. It also referred to the case of G.C. Roy v. Secretary Irrigation Department (1991). The fact that the payment of interest in such cases was not excluded particularly in the agreement was taken into consideration. But the rate on such payment was missing and not agreed upon by the parties. The High Court in this same asked the parties to fill up the blank details that they left in the appendix. The Supreme Court held that this decision was incorrect and impermissible. It ruled that the tribunal was right in providing compensation as there was no clause in the contract which mentioned exclusion of payment of interest if the payment was delayed.  

Conclusion 

The Act deals with alternate dispute resolution methods which are effective, cost-friendly, and time-saving. Due to the pendency of cases and rigid procedural laws of the courts and to prevent litigation, people nowadays generally prefer settling a dispute outside the courts with the help of ADRs like arbitration, conciliation, mediation etc. The Act provides the procedure to be followed in arbitration proceedings, arbitral tribunal, the conduct of the tribunal along with the arbitral awards to be made in a dispute. The decision is binding on the parties and given in the form of an arbitral award in an arbitration agreement. It also prescribes the procedure of appeal to courts in case of discrepancies.