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Decoding the scope of Arbitration and analysis of Section 7 of the Arbitration and Conciliation Act,

In business, you don’t get what you deserve, you get what you negotiate.

The law of Arbitration in India is governed by the Arbitration and Conciliation Act, 1996 (the Act). The act has its origins based on the UNCITRAL Model Law, 1985 on International Commercial Arbitration and the UNCITRAL Conciliation Rules, 1980. It is of utmost significance to note that the legislative intervention in Arbitration and Conciliation was to align the National dispute resolution process with that of the international practices. India had seen its first legislation on arbitration which was promulgated in the year 1899 based up entirely upon the British Arbitration Act. The Indian Arbitration Act, 1899 was constricted to the then presidency towns of Calcutta, Bombay and Madras. The Indian Arbitration Act, 1899 had by then casted a sense of uncertainty due to the absence of various provisions and procedures to deal with cases arising on arbitration.
  • It was stated by the Bombay High Court in the case of Dinkarrai Lakshmiprasad vs. Yeshwantrai Hariprasad (1929) that It is high time that those responsible for legislation in this country should seriously consider the advisability of taking early steps to revise the law of arbitration. On March 11, 1940, a specific act for Arbitration was enacted under the British Regime termed as The Arbitration Act, 1940. But such act heaped lot of criticism due to absence of important provisions to govern arbitration and giving an unclear picture of dealing with such cases in the real sense.

  • The Supreme Court of India in the case of Guru Nanak Foundation vs. Rattan Singh & Sons (1981) has emphasized that the way in which the proceedings under The Arbitration Act, 1940 are conducted and without an exception challenged in Courts, has made lawyers laugh and legal philosophers weep.

This paved way to the Arbitration and Conciliation Act, 1996 (herein referred to as the Act) that was enforced on 22nd August, 1996. The act aimed for quicker solutions to the disputes to the parties which miserably failed by the enactment of the erstwhile Arbitration Act, 1940. Thus the law relating to Arbitration was introduced to the Indian landscape as the replica of the British enactment in an incomplete manner in 1899 with the omission of various governing principles to deal with cases of Arbitration in India.

Meaning of Arbitration:

Black’s Law Dictionary defines Arbitration as The investigation and determination of a matter or matters of difference between contending parties, by one or more unofficial persons, chosen by the parties, and called arbitrators, or referees. The Supreme Court of India in the case of Bhatia International vs. Bulk Trading S A. & Anr (2002) held that Section 2(a) Arbitration and Conciliation Act, 1996 defines "arbitration" as meaning any arbitration whether or not administered by a permanent arbitral institution.

Significance of Enactment of The Arbitration And Conciliation Act,1996:

The enactment of the Act was seen as a measure to reduce Judicial Intervention. On deciphering Section 5, we can find that the Act itself restrains judicial intervention in the proceedings of arbitration.
  • It was held by the Delhi High Court in the case of M/S Shyam Telecom Ltd. vs. Icomm Ltd (2010) that there should not be unnecessary judicial intervention in the arbitration proceedings which must be allowed to proceed and progress of which should not be allowed to be scuttled by the parties.
  • It was also held in the case of McDermott International Inc. v. Burn Standards Co. Ltd that Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc.

Thus it was clearly contemplated that the Arbitration and Conciliation Act, 1996 could reduce the pendency of cases in arbitration and to stimulate the ease of settlement of cases outside the court room. It would be pertinent for us to note that the new born act of 1996 also gave formal recognition to the Arbitral Institutions.

Scope of Arbitration:

The Act does not make provisions for the matters of inclusiveness within the purview of Arbitration nor does it enlist cases that would exclude from the focal point of Arbitration.
  • The Supreme Court in the case of Booz-Allen & Hamilton Inc vs. Sbi Home Finance Ltd. & Ors that The Arbitration and Conciliation Act, 1996 does not specifically exclude any category of disputes as being not arbitrable.

    Going back to time, we can neither infer nor find any provisions from either the Indian Arbitration Act, 1899 or The Arbitration Act, 1940 with respect to the matters to be under the blanket of Arbitration. This postulates that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. However certain cases are under the jurisdiction of the concerned judicial courts.
  • This can be evidenced in the case of Haryana Telecom limited vs. Sterlite Industries India Limited where the Supreme Court of India has held:
    Where a petition is filed for the purpose where the company is commercially insolvent is bound to wind up under the Companies Act. The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company.
  • In a distinctive case under Insolvency and Bankruptcy Code, 2016, the Income tax Appellate Tribunal (Delhi) in the case of Shamken Multifab Ltd., New Delhi vs. Dcit (2019) cited the judgement delivered by the Supreme Court of India in the case of Alchemist Asset Reconstruction Pvt. Ltd & Anr vs. M/S Hotel Gaudavan Pvt. Ltd. & Anr (2016) that even arbitration proceedings cannot be initiated after imposition of the moratorium u/s 14 (1) (a) of the Code.

    So there came the question pertaining to the presence of specific condition or rather provisions in different enactments to refer the matter under the purview of Arbitration.
  • A distinct perspective was seen in the case of Olympus Superstructures Pvt Ltd vs. Meena Vijay Khetan and others (1999) involving the case whether the arbitrator has the power and jurisdiction to grant specific performance of contracts relating to immovable property falling under the Specific Relief Act, 1963 wherein the Supreme Court of India held that There is no prohibition in the Specific Relief Act, 1963 that issues relating to specific performance of contract relating to immovable property cannot be referred to arbitration as contrasted with Section 15 of the English Arbitration Act, 1950 or Section 48(5)(b) of the English Arbitration Act, 1996 which contained a prohibition relating to specific performance of contracts concerning immoveable property.
  • The Significant judgement by the Calcutta High Court can be inferred to chalk out the scope of Arbitration. The Calcutta High Court in the case of Keventer Agro Ltd vs. Seegram Comp. Ltd (1998) opined that matters like criminal offences and matrimonial disputes may not be subject matter of resolution by arbitration, matters incidental thereto may be referred to arbitration. Reference is made there to certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, which cannot be referred to arbitration. It has, however, been held that if in respect of facts relating to a criminal matter, (say) physical injury, if there is a right to damages for personal injury, then such a dispute can be referred to arbitration.
It can be hence brought out that unless any act specifically brings out the jurisdiction of a specific autonomy of the Court then such cases would not come under the ambit of Arbitration. It was conventional to be decided by the courts of law what kind of disputes would come under arbitration and what would not. Judiciary had in a conservative manner dealt with the magnitude of the case and reiterated the cases to be settled under arbitration to avoid time expanding litigation.

Arbitration Agreement – Section 7:

The Arbitration Act, 1996 has made it clear that an Arbitration proceeding or reference would not subsist unless an arbitration agreement exists. Section 7 elucidates that arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The most important ingredient to be present to constitute a valid arbitration agreement is Consensus ad idem i.e. agreeing to the same thing in the same sense by the parties.

  • The Supreme Court in the case of Visa International Ltd. vs. Continental Resources (USA) Ltd. (2009) observed that In circumstances where the parties mutually consent to resolve the disputes through Arbitration and Conciliation, what is required to be gathered is the intention of the parties from the surrounding circumstances including the conduct of the parties and the evidence such as exchange of correspondence between the parties.

    Carefully tracing back history to find the evolution of arbitration agreement, it is to be noted that the words ‘Arbitration Agreement’ was not used since the inception of The Indian Arbitration Act, 1899 till the Introduction of Arbitration (Protocol and Convention) Act, 1937 which was later amended and known to be as The Arbitration Act, 1940 which first introduced the definition of Arbitration Agreement. This was done as the Government wanted to meet the widely expressed desire of the commercial world that arbitration agreements should be ensured effective recognition and protection. Prior to the enactment of the said Act, the word submission was used in place of Arbitration agreement.

    The word Submission was defined under Section 4(b) read along with Section 27 of The Indian Arbitration Act, 1899 as Submission means a written agreement to submit present or future difference to arbitration whether an arbitrator is named therein or not.

  • The Supreme Court of India in the case of V/O Tractor Export, Moscow vs. M/S. Tarapore & Company & Anr (1969) has opined that The word "submission" must be regarded as synonymous with the term "arbitration agreement".

    Arbitration agreement is most common in the form of a clause forming part of the parent contract. On interpretation, subject to different contracts it could be noticed that the Arbitration clauses are very generic in nature and not specific on the nature of dispute to be taken to arbitration. The Act mandates that arbitration agreement if executed shall be in writing. Thus oral arbitration agreements are not enforceable and are void.

  • The Delhi High court in the case of Aspire Investments Private Limited vs. M/S Nexgen Edusolutions Private Limited (2009) had elucidated that a valid arbitration agreement is one whereby parties agree to submit their disputes to arbitration whether arising out of a contract or otherwise, and this agreement is reflected in a writing.

    Wherein the Arbitration condition is drafted as a clause forming a part of contract, its independency has been tested over time. Time after time it was a question of whether the arbitration agreement would be independent or governed by the principal terms of the main contract wherein other modes of dispute settlement had also been recognized.

  • The Supreme court in a substantive manner in the case of Enercon (India) Ltd. vs. Enercon Gmbh & Anr. (2014) held that The Arbitration clause forming part of a contract shall be treated as an agreement independent of such a contract. The concept of separability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract.

    The Act on the other hand has not made distinction on the form of the Arbitration agreement or the manner in which the Arbitration clause shall be drafted to form a part of contract. The arbitration agreement shall disclose the moral imperative act of the parties to go for dispute settlement through the means of arbitration. The clause or agreement shall not just be a postulate of possibility to go for arbitration but should reflect the will of the parties to choose Arbitration as a means of dispute settlement mechanism.

  • The Supreme Court of India in the case of Jagdish Chander vs. Ramesh Chander & Ors (2007) held that While there is no specific form of an arbitration agreement, the words used should disclose a determination and obligation to go to arbitration and not merely contemplate the possibility of going for arbitration.

    Therefore Arbitration agreements empower parties to settle disputes in a flexible manner by setting out the salient terms also thereby acting as a legal resort to save parties from cumbersome dispute settlement mechanism.

Ending Remarks:
The invocation of Arbitration and Conciliation Act, 1996 has been seen a birth of a new legislation and has reduced the time of disposal of cases along with creating a win-win situation in cases. History had shown that the earlier enactments in the area of Arbitration had needed reforms, but the employing legislative amendments are also bringing in fresh influx of procedures to deal with dispute settlement mechanism outside the court.

The reforms are also aimed at strengthening the Institutional Arbitration by the establishment of an Independent body to lay down the standards in the practice of Arbitration, make the process more cost-effective and to ensure timely disposal of cases.

Undoubtedly the practice of Arbitration itself provides a new dimension and also plays a pivotal role to streamline the settlement of corporate disputes. The parties in an arbitration are usually encouraged to participate fully and sometimes even to help structure the resolution, they are often more likely to work together peaceably rather than escalate their hostility toward one another thereby serving as a non-judicial mechanism for solving contractual or legal disputes.

While history had shown the gradual evolution from the enactment of an incomplete legislation in 1899 to the enactment of a substantive regulation in 1996, India is on the rise to increase the corporate literacy and removing every barrier to being a successful organization in today’s world.

Written by: Vignesh Kumar. G, Licentiate Company Secretary
Email: [email protected] 

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