DIFFERENCE BETWEEN THE ARBITRATION ACT, 1940 AND THE ARBITRATION ACT OF 1996 (Difference Between New and Old Arbitration Acts)

 

INTRODUCTION 

"Differences we shall always have but we must settle them all, whether religious or other, by arbitration." - Mahatma Gandhi

The industrial revolution has led to rapid escalation in global trade and commerce. To correspond with the economic growth and avoid prolonged litigation, the parties resort to arbitration as the preferred dispute resolution mechanism. Not only in India but cohesive global growth strategies and economies have realized that arbitration happens to be a favourable way out for all. Cross border transactions and bilateral trade relations have fostered affiliations between countries thereby increasing legal intricacies. Needless to say, disputes have also become inevitable and there is a demand for methodology to expedite legal remedies.

The earliest evolution of arbitration can be traced back to the era when King Solomon during his rule followed the biblical theory when he settled the issue between two mothers where each one was claiming the right on the baby boy and the issue was who the true mother of a baby boy was. Thereafter, arbitration was used by the rulers to settle territorial disputes and also for commercial disputes. According to historical references, arbitration has been in place even before the times of Christ. There have been references that prove the same. For instance, the Arabic word for arbitration is Tahkeem and arbitrator is Hakam. Similarly, in the case of Persian language, an arbitrator is called as Salis and the party to the same is known as Salisee. Moreover, the first law for arbitration came into force in England in the year 1697.

The Modern Arbitration Law was enacted in India as early as 1772 by Bengal Regulation Act of 1772. This was a result of successful resolution of disputes amongst parties by choosing a tribunal. Thereafter, the same was promulgated to other presidency towns namely Bombay and Madras through Bombay Regulations Act of 1799 and Madras Regulation Act of 1802.

Birth of India’s 1st Legislative Council

The 1st Legislative Council for India was formed in 1834, followed by the First Indian Arbitration Act on 1st July, 1899. It came into force and said the act was fundamentally based on British Arbitration Act, 1889 but the application of the Indian Arbitration Act was confined only to the presidency towns' i.e Calcutta, Bombay and Madras. A unique feature in the Act was that the names of the arbitrators were to be mentioned in the agreement, the arbitrator at that point can also be a sitting judge, as was in Nusserwanjee Pestonjee and Ors. v. Meer Mynoodeen Khan Wullud Meer Sudroodeen Khan Bahadoor.

In the case of Gajendra Singh vs. Durga Kunwar  it was observed that the Award as passed in an arbitration is nothing but a compromise between the parties. In Dinkarrai Lakshmiprasad vs. Yeshwantrai Hariprasad, the Hon'ble High Court observed that the said Indian Arbitration Act, 1889 was very complex, bulky and needed reforms.

ARBITRATION ACT 1940

Under the British Regime a more specific arbitration act was enacted on 11th March 1940, which came into force on 1st July 1940. termed as 'The Arbitration Act, 1940'. It was applied to the whole of India (including Pakistan, Balochistan). The same was modified via an ordinance, post Independence.

The Act of 1940, was referred to many disputes but the same was also under many criticisms. In some of the cases, it was observed that the Arbitration Act, 1940, distinguishes between an application for setting aside an award and one for a decision that the award is a nullity. This implies that it does not legally exist and contemplates that an application for setting aside an award may be made under Section 30 and an application of that award is a nullity under Section 33. Further, it was also observed that the said act fails in recognizing that the arbitration will fail in-case of non-existence and invalidity of an arbitration agreement.

The Act was silent about the shortcomings inherent in individual private contracts. The rules providing for filing awards differed from one High Court to another. The lack of provisions prohibiting an arbitrator or umpire from resigning at any time in the course of the arbitration proceedings, exposed the parties to heavy losses particularly where the arbitrators or umpire acted mala fide. It was also seen that if an arbitrator appointed by the Court dies during the arbitration proceedings, there was no other provision in the said act for appointment of a new arbitrator, which was also seen as a major flaw in the 1940 Act. Another concern in the act was that the Marginal Notes were not regarded as part of an Act.

ENFORCEMENT OF THE ARBITRATION ACT, 1996

The Arbitration Act of 1940 had been facing a lot of criticisms and lacked in quite a lot of areas when it came to implementation in the real sense. Although it brought uniformity in law across the nation, it needed to be replaced by The Arbitration and Conciliation Act 1996, which came into force from 22nd August 1996. The basic intent of the legislation was to provide for a speedy solution to disputes between the parties and also to limit the judicial intervention. The main intention of the Legislation was primarily to cover the international and domestic commercial arbitration and conciliation. It was also to make the arbitral tribunal fail, provide them reasons to pass awards, minimize the role of courts, enforce the arbitral award as the decree of the court.

In certain cases, there arose a dispute between the parties and applications were filed before the enactment of the 1996 Act but the arbitrators were appointed after the enactment. In such a given scenario, the arbitrators and the parties also agreed that the proceedings for the said dispute will be governed by the New Law.

The Act of 1996 consolidated and amended laws relating to Arbitration, International Commercial Arbitration and also for enforcement of the Foreign Arbitral Awards. Initially, in the Act of 1996, it was held that the Court can pass interim orders under Section 9 of the Act, where Section 9 contemplates two stages, firstly, court can pass order during arbitral proceedings and secondly, that court can pass order before commencement of arbitral proceedings.

THE ARBITRATION ACT, 1940 VS. ARBITRATION ACT, 1996

• The basic difference in 1940 and 1996 Act was that in the former one a party could commence proceedings in court by moving an application under Section 20 for appointment of an arbitrator and simultaneously could also move an application for interim relief under the Schedule read with Section 41(b) of the 1940 Act. The later one does not contain any provision similar to Section 20 of the 1940 Act but the court can pass orders even before the commencement of the arbitration proceedings. Another difference was that in the former act, there was no requirement to give reasons for an award until and unless agreed by the parties to arbitration. However, in the later Act, the award has to be given with reasons, which minimized the Court's interpretation on its own. There were changes with respect to the award passed by the arbitral tribunal in the 1940 and 1996 Act.

• The 1996 Act since its enactment faced many challenges and the Courts brought out what was actually intended by the Legislation, the Courts clarified the said Act and the intention by various landmark judgments. In particular, the landmark case of Bharat Aluminium Co., saw at least three phases before the Hon'ble Supreme Court of India since the year 2001 till now i.e 2016 carrying from two Hon'ble Judges to the Constitution Bench.

• In the first case, the Hon'ble Supreme Court was of the view that Part I is to apply also to international commercial arbitrations which take place out of India, unless the parties by agreement, express or implied exclude it or any of its provisions, it was also held that the Arbitration Act of 1996 was not a well drafted act and had some lacunas.

AMENDMENTS OF 2005

The second round started around 2005, when there was a difference of opinion between the two Hon'ble Judges of the Hon'ble Supreme Court of India and the said matter was thereafter, placed before a three Judge Bench, which by its order directed the matters to be placed before the Constitution Bench. The Constitution Bench was of the view that Section 2(2) makes it clear that Part I is limited in its application to arbitrations which take place in India and that the Parliament by limiting the applicability of Part I to arbitrations which take place in India has expressed a legislative declaration.

The Bench further went ahead with a distinction between the arbitration in India and outside India. It held that Section 2(2) merely reinforces the limits of operation of the Arbitration Act, 1996 to India and it was further held that if Part I of the Act were applicable to arbitrations seated in foreign countries, certain words would have to be added to Section 2(2). The section would have to provide that "this part shall apply where the place of arbitration is in India and to arbitrations having its place out of India."

Another interesting question which was considered was whether Section 2(2) is in conflict with Sections 2(4) and 2(5). It was held that the language as used by the legislature in Sections 2(4) and 2(5) of the 1996 Act, means the arbitration that takes place in India. It was further clarified that the provision does not admit an interpretation that any of the provisions of Part I, would have any application to arbitration which takes place outside India.

The 1996 Act, was basically designed to give different treatments to the awards made in India and those made outside India. The distinction is necessarily to be made between the terms "domestic awards" and "foreign awards". It was also clarified that Part I and Part II are exclusive of each other and the same is also evident from the definitions. The issues relating to the interim reliefs in an Inter-Parte Suit filed by the parties pending arbitration was held to be non-maintainable, as the pendency of the arbitration proceedings outside India would not provide any cause of action for a suit where the main prayer is for injunction.

AMENDMENTS OF  2015

The question as to whether part I of the Arbitration and Conciliation Act, 1996 would apply to foreign arbitrations was first examined by the Hon'ble Supreme Court of India in a celebrated judgment by a three Judge bench in the year 2002 titled Bhatia International vs. Bulk Trading SA1 ("Bhatia International"). The core issue before Hon'ble Supreme Court was the interpretation of Section 2(2) of the un-amended Act which stated that, "This Part shall apply where the place of arbitration is in India." The Hon'ble Apex Court had compared the said provision with the UNCITRAL Model Law, which clearly stated in its preamble that, "the provisions of this Law... apply only if the place of arbitration is in the territory of this State."

The Hon'ble Supreme Court of India in the case of Bharat Aluminum and Co. vs. Kaiser Aluminium and Co. (BALCO) had reconsidered the law laid down in Bhatia International and overruled the same. In the landmark judgment pronounced by the Constitution Bench of Hon'ble Supreme Court of India on September 06, 2012 it was concluded that "Part I of the Arbitration & Conciliation Act, 1996 is applicable only to the arbitrations which take place within the territory of India".

The Hon'ble Apex Court had observed as under:

"In our opinion, the provision contained in Section 2 (2) of the Arbitration & Conciliation Act, 1996 is not in conflict with any of the provisions either in Part I or in Part II of the Arbitration Act, 1996. In a foreign seated international commercial arbitration, no application for interim relief would be maintainable under Section 9 or any other provision, as applicability of Part I of the Arbitration & Conciliation Act, 1996 is limited to all arbitrations which take place in India".

Only those cases in which agreements stipulate that the seat of the arbitration is in India or on whose facts a judgment cannot be reached on the seat of the arbitration as being outside India would continue to be governed by the said principle.

Even the world's two most prominent countries (India and Pakistan) also agreed to refer the dispute to Arbitration and had referred the dispute relating to the Indus Water Treaty 196015 to The Permanent Court of Arbitration. This move clarified and supported the importance of arbitration globally.

With the economic growth of the nation, the foreign entities started business through their 100% subsidiaries. Eventually, an exciting question of law came for consideration before the Hon'ble Apex Court which was whether it is permissible under the Arbitration Act, 1996 for two Indian Companies to agree to refer their commercial disputes to a place of arbitration outside India with governing law being English law. It was observed that as one of the entities indirectly involved in the matter is a foreign entity, therefore, there is some foreign element and secondly, as Section 28(1)(b) of the 1996 Act expressly recognizes such autonomy to choose the governing law, therefore the said clause is valid.

The 2015 Act can be looked as a boon for the party who succeeded before the arbitral tribunal, as in the earlier act of 1996 if the award passed by the arbitral tribunal was challenged before the court, even on issuance of notice by the court would tantamount as a stay but by virtue of the amendment in the 2015 Act, a specific stay has to be granted.

It is to be noted that not all matters/disputes can be referred to arbitration even if the agreement/contracts etc. contain an arbitration clause, its being noted that the disputes relating to Trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by the arbitrator.

Focus on the 'Public Policy of India'

The interpretation of the word "Public Policy of India" was sought to be narrowed by the said Amendment with the intention to give importance to the award of the arbitral tribunal and accord finality to the same, which was the avowed intention of the 1996 Act. It was also recommended and accepted that the arbitration proceedings have to start within a period of maximum 90 days by the party obtaining any interim order from the court. The amendment also restricted the courts' interference in any arbitration proceedings. By virtue of the said amendments, no application was allowed or would be entertained by any court in a matter where arbitration proceedings had already commenced.

The amendment also confirmed that any interim orders passed by the arbitral tribunal are enforced effectively, as the said interim orders which were passed at the time of 1996 Act were not effectively enforced since the provisions of Civil Procedure Code were not made specifically applicable to them.

Conclusion

It is evident that arbitration has evolved over the years as the ideal tool for resolution of disputes that saves the court's time and largely instrumental in assisting the parties to resort to quick remedial measures. Every arbitration is based on insightful application of law and its evolution is proof of its significance in the actual proceedings. Thus, arbitration has emerged as the most preferred platform for quick resolution of disputes especially in the industrial and the corporate realm

Judgments

1. Bharat Broadband Networks Limited ("BBNL") v. United Telecoms Limited ("UTL"),  (Civil Appeal No. 3972 OF 2019)

Facts:

The Appellant had floated a tender dated 05.08.2013 inviting bids for a turnkey project for supply, installation, commissioning and maintenance of GPON equipment and solar power equipment. The Respondent was the successful L1 bidder for the tender and hence the Appellant issued an Advance Purchase Order dated 30.09.2014. The contractual relationship between the parties was governed by the General (Commercial) Conditions of Contract (hereinafter referred to as GCC) which contained an Arbitration Clause.

Disputes arose between the parties and hence, by a letter dated 03.01.2017, the Respondent invoked the Arbitration Clause in GCC and as per the said clause, called upon the Appellant's Chairman to appoint an independent and impartial arbitrator for adjudication of disputes between the parties. Vide letter dated 17.01.2017, the Chairman and Managing Director of the Appellant, in terms of the Arbitration Clause, nominated one Shri K.H. Khan as the sole arbitrator to adjudicate and determine disputes between the parties.

On 03.07.2017 the Hon'ble Supreme Court in TRF Ltd. v. Energo Engineering Projects Ltd. [(2017) 8 SCC 377] held that since a Managing Director of a company which was one of the parties to the Arbitration proceedings, was himself ineligible to act as the Arbitrator, such ineligible person could not appoint an Arbitrator and any such Appointment would be null and void.

In the light of above judgment, the Appellant, who had itself appointed Shri K.H. Khan as the  sole arbitrator, made a prayer before the sole Arbitrator that since he was de jure unable to perform his function as Arbitrator, he should withdraw from the proceedings and allow the parties to approach the High Court for Appointment of a substitute arbitrator in his place.

Judgment

Further, the Hon'ble Court also referred to the proviso to Section 12(5) of the Act and stated that filing of statement of claim by the Appellant herein amounted to waiver of the applicability of Section 12(5) of the Act. Hence, the Appellant had filed the present Civil Appeal before the Hon'ble Supreme Court of India against the impugned order of the Hon'ble Delhi High Court dated 22.11.2017.

The Supreme Court held that the appointment of arbitrator by a person who is himself ineligible to be an arbitrator as per Section 12 (5) of the Arbitration and Conciliation Act, 1996 ("the Act") is void ab initio.

2. Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors, [(2017) 3 AIR Bom R 68]

In this recent judgment of the Bombay High Court in it was affirmed that a counsel’s acceptance of a brief from an attorney or law firm for a different client or for an unrelated matter does not amount to automatic disqualification or ineligibility to being an arbitrator in arbitration in which the same attorney or law firm is acting. Under the Fifth and Seventh Schedules of the Act, for a connection to cause disqualification, there must be a sufficiently proximate relationship between the arbitrator-counsel and the litigant specifically.

3. Perkins Eastman Architects DPC & Anr. v HSCC (India) Ltd (“Perkins”) [(2019) SCC Online SC 1517]

Supreme Court, while interpreting the provisions of the Arbitration and Conciliation Act, 1996  (“Act”), and juggling between party autonomy and the principles of natural justice, held that a  person who has an interest in outcome or award passed by the arbitrator during arbitration,  cannot be entitled to appoint the sole arbitrator, irrespective of the fact that the parties agreed to it at the time of entering into the contract.

4. HRD Corporation (Marcus Oil and Chemical Division) v GAIL (India) Limited [(2017) SCC OnLine SC 1024]

The Supreme Court dealt with the appointment of former judges as arbitrators, who may be associated in previous disputes involving one or more parties to the arbitration. In this recent decision the Supreme Court set out the legal position regarding challenges to a person's possible appointment as an arbitrator. The position under the act is that a disclosure must be made by a person approached as a possible arbitrator.

If he or she discloses circumstances which fall under any of the categories specified in the Seventh Schedule, then that person cannot be appointed as an arbitrator. Since such a person would lack the inherent jurisdiction to proceed as an arbitrator, the court of appropriate jurisdiction can terminate the mandate of such person under Section 14(2) of the act. The Supreme Court has held that since ineligibility goes to the root of the appointment, Section 12(5), read with the Seventh Schedule, clarifies that if the arbitrator falls under any of the categories specified in the Seventh Schedule, he or she becomes ineligible to act as an arbitrator.

5. Kadimi International Pvt. Ltd. v Emaar MGF Land Ltd. [Arb. P. 485/2019]

The Court held that the independence and impartiality provisions of the Arbitration and Conciliation (Amendment) Act, 2015 do not take away the right of a party to make a unilateral appointment of the arbitrator(s) if the agreement between the parties so permits. What is proscribed is only the appointment of a person who is otherwise ineligible to act as an arbitrator in the context of the independence and impartiality provisions under the Act.

6. Unipack Industries Vs Subhash Chand Jain [(2002) (1) RAJ 151 (Del)]

The stage and scope of challenge to appointment of arbitrator was discussed in this case. It was held that although an arbitrator is under a duty to disclose in writing the circumstances likely to give doubts as to his independence or impartiality, in case such doubts still arise, the arbitrator can be challenged if circumstances arise as to produce doubts about his independence or impartiality or he does not possess the qualification agreed to between the parties. Section 13 provides the procedure in this regard, subject to what is agreed between the parties. U/s 13(1), if a party intends to challenge the arbitrator, then he may send a written statement giving reasons for challenging the arbitral tribunal, within 15 days of becoming aware of the constitution of the tribunal. The tribunal is competent to look into the controversy however, Section 13 (4) clearly prescribes that the tribunal shall continue with the proceedings. Subsequently when the award is made, the party can challenge the award and it can be the said ground which he had taken at the initial stage.

7. RK Agarwal Vs BPK Johri [(2003)(4) RAJ 561 (Kar)]

There was a plea that absence of appellate remedy before the award is made by the arbitral tribunal renders the statute arbitrary and opposed to Article 14 of the Constitution.It was held that it is wrong to say that no appeal is provided against the order. An appeal may be filed [vide section 12(5)] wherein the adverse order u/s 13(4) can be challenged. The only difference is that the stage of appeal is postponed. The legislature has, in its wisdom, chosen the appropriate stage to provide the right of appeal. There is no vested right of appeal and as such the demarcating of the stage of appeal cannot be described as an arbitrary exercise of statute making power.

The legislature felt that frequent recourse to appellate remedy destroys the essence behind the enactment of the Arbitration Act. As there is no inherent right of appeal except as conferred by statute, it is difficult for the court to hold that it amounts to arbitrariness violating the protective cover of Article 14 of the Constitution.

8. Harike Rice Mills v State of Punjab [1998 (1) RAJ 223 (P&H)]

This case explored the basis of the provision for challenge to appointment of an arbitrator. It was held that the Parliament had enacted the 1996 Act on the lines of UNCITRAL Model Law, as approved by the General Assembly of the United Nations subject to slight modifications suiting local conditions in our country. Under the Model Law, a party has been given a right to challenge the appointment of an arbitrator before the arbitrator himself and if the party is unsuccessful, Article 12(3) of the Model Law grants a last resort to the party to approach the Court to challenge the appointment at that stage itself without waiting for the arbitrator to make the award.

However, section 13 (4) an (5) make a distinct departure in this regard, with a view to prevent dilatory tactics. For this reason, the Parliament has not allowed the unsuccessful party to challenge the appointment immediately when its challenge had been unsuccessful before the arbitrator. The section requires the party to wait and challenge the same only after the arbitral award has been made.

9. Rail India Technical and Economic Services Ltd v Ravi Construction, Bangalore [2003(4) RAJ 394 (Kar)]

This case helped in the determination of what constituted a waiver to the objection to appointment of the arbitrator. According to section 4, if a party, who knows that any requirement under the 1996 has not been complied with and yet proceeds with the arbitration without stating his objections to such non compliance without undue delay or within the fixed time frame, shall be deemed to have waived his right to object. According to section 13, a party who intends to challenge an arbitrator has to send a written statement of reasons within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in section 12(3). However, the appellant failed to object to the appointment of the arbitrator within the time frame.

It was held that reading all these sections together, it is clear that if the Claimant wanted to challenge the appointment of the arbitrator, it ought to have raised it before the arbitrator.

 

10. Jayesh H Pandya & Anr. v. Subhtex India & Ors [Civil Appeal No. (s) 6300 of 2009]

The Supreme Court held that the essential element of waiver is that there must be a voluntary and intentional relinquishment of a right. The voluntary choice is the essence of waiver. There should exist an opportunity for choice between the relinquishment and an enforcement of the right in question. It cannot be held that there has been a waiver of valuable rights where the circumstances show that what was done was involuntary. The arbitration proceedings are supposed to be governed and run by the terms as agreed by the parties. The Arbitrator, therefore, cannot go beyond the clause of the arbitration agreement. It was held that the Arbitrator became de jure unable to perform his functions after the expiry of four months.

11. Jai Singh Vs Delhi Development Authority [2002(1) RAJ 281 (Del)]

The petitioner filed an application for revocation of the arbitrator's authority after participation in the proceedings which were now at the last stage. The arbitrator was designated by post and there was frequent change in the arbitrator due to transfers however, after the appointment of the present arbitrator, there had been no change.

It was held that in the present case, the petitioner had participated in the arbitration proceedings, all his claims had been agitated before the arbitrator, records had been perused by the arbitrator in support of the claims, written arguments had been submitted therefore it was too late for the petitioner to approach this court for termination of the authority of the arbitrator. There was no justification or merit in the petitioner's application.

12. Kifayatullah Haji Gulam Rasool Vs Bilkish Ismail Mehsania [2001(1) RAJ 133 (Bom]

The circumstances of this case were that there was a mandate given to the arbitrator that he should complete the arbitration proceedings till 9.1.1999, in the consent order dated 9.11.1998, subject to the agreement between the parties. The consent order contained an agreement between the parties that the authority of the arbitrator shall come to an end on 9.1.1999. Subsequently, there was failure on the part of the arbitrator to act without undue delay and there was expiry of the time period. It was held that the mandate of the arbitral tribunal had stood terminated on 9.1.1999 by efflux of time.

13. Union of India Vs Girdhari Lal [1999(2) RAJ 269 (Raj)]

This case discussed what happens to the mandate of the arbitrator when he withdraws from the office. It was held that an appointed arbitrator, on his withdrawal from the office, ceases to be an arbitrator and his mandate terminates. The powers of the court as regards extension of time period of the arbitrator could be exercised by the court when an arbitrator is appointed by it and where the arbitrator is appointed under the contract and it is provided that he can act as an arbitrator so long as he is in service then it cannot be said that his period can be extended as the mandate itself has come to an end u/s 15 and something which got exhausted cannot be saved unless a power is vested in the court by some legislation to extend the time.

The power to extend time in the Act is not available and since the power is not available, the same cannot be extended and therefore, in this background the plea of the respondent that the arbitrator should be permitted to pronounce the award is also devoid of any merit.

14. McDermott International Inc. v. Burn Standard Co. Ltd. [(2006) 11 SCC 181]

The Supreme Court held that ‘the jurisdictional challenge is required to be determined as a preliminary ground’. However, the Court in this case did not provide the reasoning for referring the challenge as a preliminary issue.

15. Maharishi Dayanand University v. Anand Coop. L/C Society Ltd [(2007) 5 SCC]

The Supreme Court held that the jurisdictional issues are not required to be decided as preliminary matters and the arbitrator may provide its  ruling on jurisdictional challenge along with the final award.

16. Kvaerner Cementation India Limited v. Bajranglal Agarwal [(2012) 5 SCC 214]

The Supreme Court while discussing the scope of section 16 of the Arbitration Act, held that the “tribunal would do well in disposing of the jurisdictional challenge as a preliminary issue so that it may not be necessary to go into the entire gamut of Arbitration proceedings”. In this case as well, the Court, without taking into consideration and discussing its previous ratio, passed a contradictory judgement.

17. Steel Authority of India v. Indian Council of Arbitrators. [(2015) SCC ONLINE DEL 13394]

Delhi High Court after deliberating upon the Supreme Court’s precedents adjudicated, the Delhi High Court upheld the position that it shall be the discretion of the arbitral tribunal to decide the issue related to the jurisdictional challenge as preliminary or otherwise.