India: The Proposed Amendments To The Arbitration Act

Last Updated: 19 March 2015
Article by Karan Gandhi and Shweta Vashist

Most Read Contributor in India, September 2016


Noted Indian Jurist and lawyer NA Palkhivala, had expressed his views on the subject of international commercial arbitration in the following words:

"It was several decades ago that the International Chamber of Commerce at Paris started offering the services of its Court of Arbitration, and businessmen in different countries found it convenient to avail themselves of that facility. In course of time that convenience became a preference and that preference has now ripened into a necessity2."

The process of arbitration was devised as an alternative means of dispute resolution to the tedious process of litigation across the world. The advent of Arbitration in India has been to such an extent that, as matter of practice, most of the commercial contracts contain an arbitration clause. In light of the increasing significance and demand of Arbitration in the global economy, the law-makers of the Country devised the Arbitration and Conciliation Act, 1996, which enabled them to regulate the conduct of the arbitral proceedings throughout the country. Even though the Act is a well-drafted legislation, in its application, the act defeats the very purpose for which it was enacted. While it is not a disputed fact that in the past decade, arbitration has been increasingly chosen as a substitute to the conventional process of litigation, the process has been facing various fundamental issues such as extensive time delays and exorbitant costs. In addition to the protracted arbitral proceeding, the defeat of this process of dispute resolution arises when parties to the arbitration choose to approach the Court at any time, during or after the passing of the Arbitral award. Consequently, these arbitrations join the long line of pending matters before the court and the very purpose, for which arbitration was resorted to, stands frustrated.

In the year 2001, the Government made a reference to the Law Commission to undertake a comprehensive review of the Arbitration and Conciliation Act, 1996 in view of the various shortcomings observed in its working and also various representations received by the Government in this regard.

The Commission considered such representations which pointed out that the UNCITRAL Model (on the basis of which the Arbitration and Conciliation Act, 1996 was enacted) was mainly intended to enable various countries to have a common model for 'International Commercial Arbitration' but the 1996 Act had made provisions of such a Model Law applicable also to cases of purely domestic arbitration between Indian nationals. Therefore, this was giving rise to some difficulties in the implementation of the Act.

By its 246th Report, the Law Commission of India, based on its review of the working of the Arbitration and the Conciliation Act 1996 ('the Act'), has proposed certain amendments that aim at removing the various deficiencies noted during the implementation of the Act. These are:


The Law Commission has placed strong emphasis on the promotion and growth of institutional arbitration as an option to the parties to a dispute to amicably resolve their dispute, alongside presently preferred regime of ad hoc arbitration, since it is of the opinion that institutional arbitrations could prove to be a possible solution the systemic and institutional malaise prevalent in the current scenario. In addition to proposing the setting up of an "Arbitral Commission of India", the Commission also aims at legislative sanction to the rules of an institutional arbitrator, which recognize the concept of an "emergency arbitrator".


In order to prevent Counsels from seeking frivolous hearings with extraneous evidence as well as frivolous adjournments, the Commission has proposed the addition of the second proviso to section 2(1) to ensure continuous sittings of the Arbitral Tribunal for the purposes of arguments and recording evidence. The Law Commission has also suggested an addition the preamble of the act to include a basis for the Arbitral Tribunal to function in a manner that ensures justice to the parties.


Keeping in mind the large amount of time spent by parties in appointing an Arbitrator in cases where an application under section 11 of the Act is pending before the court, the Commission has proposed that the power of appointment of arbitrators should be vested in the Supreme Court and the High Court instead of the Chief Justice of such Court and suggested that the process of appointment should be a nonjudicial act, so as to entice the Courts to delegate the power of appointment to specialized institutions and persons. An amendment to section 11(7) is recommended by the Commission, to the effect that the decisions of the High Court, when an arbitrator has been appointed, are non-appealable and final. In addition to this, the Commission proposes that an additional sub-section be added to section 11, placing a mandate on the courts to dispose a matter relating to the appointment of an Arbitrator within 60 days of the date on which the notice was served upon the opposite party.


A challenge to an arbitral award remains pending before the court for a long time and in the light of the same, it has been suggested by the Commission that an appeal challenging an arbitral award be disposed off within one year from the date of the notice. The Commission has proposed a time limit under section 48(3) of the act, ensuring that appeals to the court are made in a diligent manner. In order to curtail the delays in the arbitral process, the Committee suggest that a new Explanation be added to section 23 of the Act, ensuring that counter claims are decided by the arbitrator, without seeking a new or additional or reference.


With a view to boost the belief of foreign investors in the arbitration framework of the country and avoid substantial potential liabilities, it has been suggested by the Commission that in the case of international commercial arbitrations, the High Court should be empowered with the competence to adjudicate disputes arising out of the arbitration agreement, whether the High Court exercises ordinary civil jurisdiction in the matter or not.


In order to curtail the judicial intervention in the process of arbitration, the Commission has proposed an amendment to sections 8 and 11 of the Act. This amendment envisages that judicial intervention is limited to circumstances where the arbitration agreement is null and void.


The part of the Arbitration and Conciliation Act, 1996 that has come to scrutiny the most are the powers conferred upon the court to set aside an arbitral award. What brought the attention of many towards this issue was the decision given by the Court in ONGC vs. Saw Pipes, where it was held that "public policy" was a ground to set aside an arbitral award, in case it was found to be "patently illegal". This not only causes an unnecessary delay, but questions the very finality of the Arbitral process, thus shaking the confidence of domestic and foreign investors in the arbitration process of the country. In light of the same, the Commission has suggested restricting the scope of the concept of "patent illegality", not to include the "interests of India", but as a basis to challenge an arbitral award only if it is opposed to the "fundamental policy" or it is in conflict with "most basic notions of morality or justice" 3. The Commission has further suggested that "patent illegality" shall be a ground for setting aside awards in domestic arbitrations seated in India only.


The Supreme Court of India, in the BALCO judgment, declared that Part I and Part II of the Arbitration and Conciliation Act are exclusive of each other and this decision was given a prospective effect. In line with this decision of the Supreme Court, the Commission made a few recommendations in order to reduce the judicial intervention in foreign-seated arbitrations, which include amendments to sections 2(2), 2(2A), 20, 28 and 31 of the Act.

The Supreme Court in the Bharat Aluminum case ruled that a court in India is not empowered to grant interim relief in foreign-seated arbitrations. This creates complications for the parties involved in arbitrations outside the country. In order to redress this situation, the Commission has suggested an amendment to section 17 of the act, to the effect that Indian courts are endowed with the power to grant interim relief in the case of international or foreign seated arbitrations and that the orders passed by an arbitral tribunal should be statutorily enforceable. In addition to this, the Committee also recommends the recognition and enforcement of the interim orders granted by emergency arbitrators.


Another issue that has emerged on various instances is that of the arbitrability of fraud. After a series of judgments giving conflicting views on the matter, the High Courts declared that a mere "allegation of fraud" would be arbitrable, while a serious issues of fraud would not be arbitrable. However, the controversy continues to exist. Hence, in light of the Supreme Court Judgment in the case of n. Radhakrishnan v.Maestro Engineers, (2010) 1 SCC 72, the Committee has suggested an amendment to section 16 of the act, to the effect that the arbitral tribunal shall not have the power to make an award on "a serious question of law, complicated questions of fact or allegations of fraud, corruption etc4."


In the light of the criticism faced by the arbitrations conducted across the country, the Commission has recommended that, anyone who has been an employee, consultant or adviser to a party, or has had business with one of the parties, shall not be allowed to sit as arbitrator in that case.


The Law Commission seeks extensive reforms to the presently prevalent costs regime, by suggesting an addition of section 6-A to the Act, which would enable the arbitral tribunal as well as courts to decide the costs on the basis of rational and realistic criterion. This amendment would ensure that arbitration ceases to be as expensive a proposition as litigation. In addition to this, the Commission has also suggested an amendment to section 31 of the act, so as to provide a clarification as to the scope of the arbitral tribunal to award compound interest as well as to take a step away from the current rate of 18%, to a market based determination, which was in accordance with the reality of the commercial sector.


The Commission has proposed to alter the definition of the term 'international arbitration' to ensure that arbitrations involving a company which has been incorporated outside India will be an international arbitration, regardless of the fact that the control and management of the company lies in India.


It has been suggested by the Law Commission that section 7 of the act be amended to include sections 7(3A) and 7(3B), to bring the Indian law related to arbitration in conformity with the UNCITRAL Model Law.


Lastly, the Law Commission of India suggests an amendment to section 25 (b) of the act, where on the default of the Respondent in communicating his statement of defence, the arbitral tribunal shall also have the discretion to treat the right of such respondents to file a statement of defence as giving been forfeited.

We await the final Ordinance after it receives the assent of the President and how it serves the expectations of making the settlement of contractual disputes easier and cost effective5.


1. Vth Year Student, University School of Law and Legal Studies, GGSIP University

2. Palkhivala, Nani A., 1994 "We, The Nation: The Lost Decades ", USB Publishers'Distributors Ltd., New Delhi, 1994, pp.205, 209.

3. ,



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