October 24, 1997, Geneva, Switzerland
Defining the Proper Limits of Judicial Intervention in and Assistance for the Arbitral Process; How A-National Can an International Arbitration Be?
The Honorable Justice Jagdish Sharan Verma
Chief Justice of India, Supreme Court of India
(New Delhi, India)
"International arbitration may be defined as the substitution of many burning questions for a smouldering one."
- Ambrose Bierce
The need is to correct this impression by development of an arbitral process providing for early satisfactory resolution of the international commercial disputes. The autonomy of parties to prescribe the rules of the arbitral process is the justification for reducing the limits of judicial intervention to the absolute minimum, necessary only to ensure that the arbitral process culminates in a just decision according to the agreed rules. The limits of judicial intervention must, therefore, be confined to this exercise, leaving adjudication of the merits by the arbitral process.
1. Need for International Arbitration
The growth of international trade is bound to give rise to international disputes which transcend national frontiers and geographical boundaries. For the resolution of such disputes the preference to international arbitration vis-à-vis litigation in national courts is natural because of arbitration being preferred to litigation in courts and the foreign element being preferred in the international arbitration to the domestic element in the national courts. This is also because there is no international court to deal with international commercial disputes.
In situations of this kind, recourse to international arbitration in a convenient and neutral forum is generally seen as more acceptable than recourse to the courts as a way of solving any dispute which cannot be settled by negotiation (1).
The rationale and purpose of international arbitration should be to provide a convenient, neutral, fair, expeditious and efficacious forum for resolving disputes relating to international commerce.
Basic features which are uniform in the legal framework for resolution of international commercial disputes "can be broken down into three stages: (i) jurisdiction; (ii) choice of law; and (iii) the recognition and enforcement of judgments and awards" (para. 1.1.3) (2).
The trend towards growing judicial intervention which tends to interfere with arbitral autonomy as also finality is a significant factor to be kept in view. The need is to reconcile and harmonize arbitral autonomy and finality with judicial review of the arbitral process. National laws differ on this issue. UNCITRAL Model Law attempts to promote harmony and uniformity in this sphere. The aim is to ensure arbitral autonomy coupled with neutrality or impartiality in the arbitral process by the composition of the arbitral tribunal by competent and impartial members which ensures equality between the parties and full opportunity to them to present their case. Total exclusion of judicial intervention does not match with the current trend but the scope of judicial supervision needs to be reduced to the minimum. The source of authority of the international arbitral tribunal is the agreement of the parties and not the mandate of the State. The choice of the law applicable is also determined by the provision in the arbitration agreement. With the increased arbitral autonomy the requirement of reasons for the award is greater. Apart from transparency in the arbitral process, it also acts as an inherent check on the arbitrators and discloses to the party the basis of the award and the logical process by which the conclusion was reached by the arbitrators. The presence of reasons also regulates the scope of judicial supervision.
Informality of the arbitral process permits relaxation from strict rules of evidence and it reduces costs and delay which are often unavoidable in litigation. However, observance of basic principles of natural justice cannot be dispensed with.
Appropriate provisions for enforcement of award are essential to impart efficacy to international arbitration.
These are some of the significant and basic features of international arbitration and the UNCITRAL Model Law aims at achieving these objectives by incorporating principles of universal application in the field of international commercial arbitration for resolution of such disputes.
2. Historical Background and Development of the Arbitration Law in India
The enforcement of foreign arbitral awards was covered by International Conventions, namely, the Geneva Protocol on Arbitration Clauses, 1923; the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927, to which India became a party on October 23, 1937. India enacted the Arbitration (Protocol and Convention) Act, 1937, for giving effect to the obligations under these instruments. India became a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, on July 13, 1960. For giving effect to the obligation under this Convention India enacted the Foreign Awards (Recognition and Enforcement) Act, 1961.
In the field of international commercial arbitration the stay of proceedings in respect of the matters to be referred to the arbitration was governed by Section 3 of the Foreign Awards Act, 1961, as amended by Act 47 of 1973. This question has arisen very often and the conditions for invoking Section 3 have been laid down by the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co. (3), as under:
i) there must be an agreement to which Article II of the Convention set forth in the Schedule applies;
ii) a party to that agreement must commence legal proceedings against another party thereto;
iii) the legal proceedings must be "in respect of any matter agreed to be referred to arbitration" in such agreement;
iv) the application for stay must be made before filing the written statement or taking any other step in the legal proceedings;
v) the Court has to be satisfied that the agreement is valid, operative and capable of being performed; this relates to the satisfaction about the existence and validity of the arbitration agreement;
vi) the Court has to be satisfied that there are disputes between the parties with regard to the matters agreed to be referred; this relates to effect (scope) of the arbitration agreement touching the issue of arbitrability of the claims.
This position was reiterated in Svenska Handelsbanken v. Indian Charge Chrome Ltd (4).
3. Need for the New Arbitration Law
The Government of India recognizing the need for reform in the law relating to arbitration decided to act on the basis of the UNCITRAL Model Law on International Commercial Arbitration and the ICC Rules for Conciliation and Arbitration by enacting a new law based on the Model Law which was designed for universal application. The law enacted in India in 1996 based on UNCITRAL Model Law provides for the resolution of domestic disputes also. A significant feature of the new Indian law is that the role of courts therein is even more limited than that envisaged under the Model Law. It is significant that the Model Law on which it is based was envisaged in the context of international commercial arbitration but the new Indian law treats the Model as equally appropriate for domestic arbitration. This scheme eliminates a dichotomy in the new Indian law between the law applicable to domestic arbitration and that applicable to international commercial arbitration.
4. New Law
The Arbitration and Conciliation Act, 1996
The Arbitration and Conciliation Act, 1996, is effective from 25th January 1996.
The main objectives of the Bill as stated in the Statement of Objects and Reasons are as under:
i) to comprehensively cover international and commercial arbitration and conciliation as also domestic arbitration and conciliation;
ii) to make provision for an arbitral procedure which is fair, efficient, and capable of meeting the needs of the specific arbitration;
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iii) to minimize the supervisory role of courts in the arbitral process;
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The provisions enacted in the new law aim to achieve these objectives. The Act is divided into four parts. Part I contains certain foreign awards. Part III deals with conciliation. Part IV contains supplementary provisions.
Salient Features of the Act
Some of the significant provisions made in the Act are as follows:
1. Clear provisions to indicate commencement of the arbitral proceedings [Section 21];
2. The requirement of giving reasons in the arbitral award to provide for transparency in the decision making, unless parties have agreed that no reasons are to be given [Section 31(3)];
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4. The supervisory role of the Court is reduced to a minimum under the Act and intervention by the Court can be only after the award is made [Sections 5 and 16(6)]. The grounds for challenging the award are precise and specific [Section 34(2)];
5. The Act enables the arbitrator to decide the objection to his continuance as the arbitrator as also on the extent of his jurisdiction and the existence and validity of the arbitration agreement. This prevents delay and litigation in courts on these issues;
6. The Act enables the arbitral tribunal to order interim measures in respect of the subject-matter of the dispute (Section 17). This lends efficacy to the arbitral process;
7. Section 28 of the Act deals with the applicable law. Under Section 28(1)(b), the arbitrator decides the dispute in an international commercial arbitration, in accordance with the rules of law designated by the parties as applicable to the substance of the dispute. In the absence of such designation, the arbitrator is to apply the rules of law which he considers to be appropriate, "given all the circumstances surrounding the dispute." Section 28(3) requires the arbitrator to take into account the usages of the trade applicable to the transaction;
8. Section 36 provides that where an award is not challenged within the prescribed period, or the challenge has been rejected, the award shall be enforced as if it were a decree of the Court;
9. The Act makes it clear that all awards given within India are domestic awards and all awards given in foreign countries are foreign awards [Section 2(7)]. This sets at rest the controversy as to what constitutes a foreign award within the meaning of Indian law and eliminates the potential of litigation on that ground.
5. Gist of New Law
Enactment of the 1996 Act satisfies the need of a comprehensive and effective law responsive to both domestic and international requirements. It also seeks to eliminate the laws delays by limiting the supervisory role of Courts and minimizing its scope by reducing the grounds on which an award can be challenged while ensuring fairness of process and transparency in the arbitral proceedings by enacting suitable measures. Care has been taken to ensure appointment of competent and honest persons as arbitrator.
The new law has brought in a sea change in the law of arbitration and appears to be an improvement on the UNCITRAL Model Law. Its object, inter alia, is to provide "a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations."
6. Proper Limits of Judicial Intervention
Judicial intervention which promotes the aim to ensure arbitral autonomy coupled with neutrality or impartiality in the arbitral process with equality between the parties and full opportunity to them to present their case is needed for a just decision. Minimum judicial intervention to achieve this object is the proper limit. A law providing for judicial intervention within these limits is the Model Law. The New Act enforced in India from January 25, 1996, is an attempt in that direction.
Soon after the enactment of the New Act in India, there was challenge to the validity of the arbitration agreements made prior to January 25, 1996, (the date of commencement of the New Act) providing for an even number of arbitrators on the ground that the provision for appointment of an even number of arbitrators is contrary to Section 10(1) of the New Act (based on Article 10 of the UNCITRAL Model Law) which reads as under:
"10. Number of arbitrators. - (1) The parties are free to determine the number of arbitrators, provided that such number shall not be an even number."
The Supreme Court of India rejected this contention in M.M.T.C. Limited v. Sterlite Industries (India) Ltd (5). Instead of making a literal construction of Section 10(1) and the arbitration agreement, the provision was construed with reference to Section 7 of the New Act, and the provision in the Old Act requiring the appointment of an umpire in the case of disagreement between the arbitrators. The provisions so read require the arbitration agreement to be construed as making provision for reference to a panel of three arbitrators and not an even number because the Old Act required an Umpire to be chosen by the arbitrators. A large number of arbitration agreements made prior to January 25, 1996, were saved by judicial construction. There can be no doubt that judicial creativity of this nature is welcome as it is an assistance for the arbitral process and alternative dispute resolution.
The exercise of enactment of National Laws based on the UNCITRAL Model Law has begun and it is reasonable to expect that similar laws would be enacted in other countries. The arbitration law in the United Kingdom is a similar attempt. The need for uniformity in the approach everywhere is obvious. In the prevailing climate of increasing international trade and commerce, uniform national laws governing international arbitration would be conducive to the growth of international trade and commerce and to the benefit of the international community.
International Commercial Arbitration like every other dispute resolution mechanism has its merits and demerits. It has the merit of being consensual, resolution of disputes by non-governmental decision-makers and it results in a binding award enforceable through National Courts. It is procedurally less formal and rigid than litigation in National Courts. It also has the merits of confidentiality to protect business interest. If judicial intervention is reduced to the minimum necessary for ensuring effective justice, it is also less expensive. However, "arbitration sometimes involves perils that even surpass the perils of the seas."(6) The correct position may be summarized, thus:
"In fact, the truth is less clear-cut and lies somewhere between these extremes: The more enthusiastic of those sponsors have thought of arbitration as a universal panacea. We doubt whether it will cure corns or bring general beatitude. Few panaceas work as well as advertised.(7) At bottom, if generalizations must be made, international arbitration is not much different from democracy; it is nowhere close to ideal, but it is generally better than the alternatives. To those who have experienced it, litigation of complex international disputes in national courts is often distinctly unappealing. Despite the frustrating procedural complexities and other uncertainties, arbitration often offers the least ineffective way to finally settle the contentious disputes that inevitably arise when international transactions go awry."(8)
Let us hope this would prove to be a satisfactory alternative dispute resolution mechanism acceptable to the international community.