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HISTORY AND DEVELOPMENT OF LAW OF ARBITRATION IN INDIA
1. Introduction
The system of dispute resolution is not a new origin since it trace back to the ancient period.
The Panchayat system was existed from time immemorial where the head of the village was to control
the dispute resolution mechanism. The decision of the head had been accepted and obeyed by the
people. There was no recourse against the decision of the Panchayat.
2. The History of Arbitration in India
2.1. Hindu Laws in Ancient India
The study of the ancient Hindu law on arbitration and ancient literary works of India such as Vedas,
Sutras, Epics and Dharmashastras gives us very useful information about the dispute resolution institutions
prevailed in the ancient time. The Smritis tells us the existence of 3 types of courts like Puga a board of persons
belonging to different sects and tribes but residing in the same locality. The Sreni was an assembly of tradesmen
and artisans. The Kula an assembly of same caste group, and King was acted as an appellate court.
During Early Vedic Age(1500 BC to 1000 BC) the period was known as Rigveda the oldest literary
work. The Sabha was a house of elders or an assembly of village, Samiti was an assembly of whole people,
Vidhata Assembly was to look after the civil, military and religious functions, The Madhyamasi was a mediator
of disputes.
During later Vedic Age (1000 BC to 600 BC)This period was known as the period of
Samaveda,Yajurveda,Atharvaveda.The king took more active part in the administration of justice. The civil
cases were decided by the king with the help of assessors. Sometimes the king used to delegate his powers to
Adhyaksha who was a chief justice. The existence of town councils and village Panchayats also found during
later vedic period. Sabha was a popular courts acted as arbitrator in certain cases. Sabhapathi considered as
judge to settle the boundaries of property.
During Sutras Age(600 BC to 200 BC), Sutras were the manuals of instruction in a brief but in a
definite language. Dharma sutras were the customary law and practice. The Parishads was consisted of the
learned men of law. The decision on the interpretation of the vedic texts were found in important places.
The Epic Age(500 to 200 BC)Ramayana and Mahabharata were the sources of the dispute resolution in
India. King was respected the laws of Pugas or village communities. Sreni was the guilds of particular
occupation, kula an assembly of caste members, Sabhas continued the decision of the sabhas was upheld by the
king.
During the period of Dharmashastras( 9th century A D) this period was popularly known as the era of
Manusmriti, Yajnavalkya Smriti, Vishnusmriti, and Narada Smriti. Dr. Priyanath Sen in his book, ‘the general
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principles of hindu jurisprudence’ also given an exposition of the dispute resolution institutions prevalent during
the period of Dharmashastras. The body of Panchas consisted of five members of panchayats, Parishads was an
autonomous body, king acted as a appellate court.
2.2. In Medieval Period
The medieval period was popularly known as the muslim rule in India governed by Islamic law and
non- muslims were governed by their personal law. The Hedaya was a tahkeem(arbitration) between the parties.
Hakam was an arbitrator, Kazee an official judge of the court of law. The award passed by the arbitrator was
binding on the parties. The court language was Persian. Salis a Persian word for arbitrator, Salisnama was an
arbitration agreement and any award passed in favour of a parent, child or wife was void ab initio.
During Sultans the judicial administration was highly centralised. King was the fountain head of
justice and decided the most important cases personally. Chief Sardar and Chief Qazi were to assist the sultan
in judicial administration. Panchayats were found at village level.
During Marathas rule in India more emphasis was on amicable settlement of disputes. Hazr Mazlis
the highest court of the king, Nyayadish was a chief juctice to decide both civil and criminal cases. The Village
Panchayat was to look after day to day administration of justice. Panchayat was the main instrument of civil
justice. The Mamlatdar was a representative of Peshwas in the district to assemble a Panchayat outside the
village of the disputants. Peshwa the prime minister and an appellat court to hera the appeal against the
Panchayat decision.
2.3. In Modern Period
Regulations: In the 1770s and 1780s, India enacted the Bengal Regulation Act 1772 and 1781, which
provided the disputing parties with an option to submit the dispute to an arbitrator. The arbitrator would be
chosen after the parties mutually agreed, a procedure still used in arbitration around the world today. Further,
the arbitration awards would be binding on both parties. This pre-colonial arbitration legislation illustrates that
arbitration in India has been prevalent and a legal option for more than a hundred years. The Bengal Regulation
of 1882 was permitted the references of disputes to civil courts only. It empowered the revenue officer to refer
the rent and revenue cases to arbitration and enjoined on the collectors to use every proper means for inducing
the parties to refer their disputes to arbitration.
The Madras Regulations of 1816 empowered the Panchayats to settle certain disputes. Section 312 to
327 of the Code of Civil Procedure 1859 dealt with reference to arbitration without the intervention of the court.
Section- 28 of the Indian Contract Act, 1872 recognises the arbitration agreement as an exception to the
agreement in restraint of legal proceedings. The Arbitration Act, 1899 was confined to arbitration by agreement
without the intervention of court.
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In 1940, India enacted the Arbitration Act of 1940, which only dealt with domestic arbitration. Under the
1940 Act, judicial intervention was required in all three stages of arbitration: before referring the dispute to the
arbitral tribunal, during the proceedings, and after the award was passed. The judicial court was required to
determine whether a dispute existed and whether it could be resolved through arbitration. Further, before the
arbitral award could be enforced, it was required to be made the rule of court.
2.4 After Independence
The Arrears committee known as, Justice Malimath Committee constituted by the government of India
on the recommendation of the chief justice conference. The committee has submitted its report in 1990. The
committee made recommendation for having alternative modes for dispute resolution such as Arbitration,
Conciliation and Mediation. They made the proposal for enacting the new Act.
In 1996 India’s legislature enacted the Arbitration and Conciliation Act of 1996. The 1996 Act was
modelled after the UNCITRAL Model Law. As Ashok Bhan stated in his inaugural speech during the “Dispute
Prevention and Dispute Resolution” conference in India in 2005, the 1996 Acts’ “primary purpose was to
encourage arbitration as a cost-effective and quick mechanism for the settlement of commercial disputes.” The
Act is broken down into two parts: Part I of the Act governs domestic and international commercial arbitration
that takes place in India and Part II governs foreign arbitration that is conducted outside of India. The
enforcement of foreign arbitral awards in India is highly influenced and guided by the New York
Convention. The 1996 Act, Section 5 particularly, refuses judicial intervention in arbitration proceedings,
diametrically opposed to the 1940 Act.
Section 89 and 104 and Schedule II inserted to Code of Civil Procedure 1908 by the amendment Act
of 2002. Section 89 of the Code of Civil procedure was introduced with a purpose of amicable, peaceful and
mutual settlement between parties without intervention of the court. In countries all of the world, especially the
developed few, most of the cases (over 90 per cent) are settled out of court. The case/ dispute between parties
shall go to trial only when there is a failure to reach a resolution. Section 89 of the Code of Civil Procedure
States that:
(1) Where it appears to the court that there exist elements of a settlement which may be acceptable to the parties,
the court shall formulate the terms of settlement and give them to the parties for their observations and after
receiving the observation of the parties, the court may reformulate the terms of a possible settlement and refer
the same for
(a) arbitration;
(b) conciliation
(c) judicial settlement including settlement through Lok Adalat; or
(d) mediation.
(2) Where a dispute had been referred-
(a) for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 shall apply
as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of
that Act.
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(b) to Lok Adalat, the court shall refer the same to the Lok Adalat in accordance with the provisions of
sub-section (1) of section 20 of the Legal Services Authority Act, 1987 and all other provisions of that
Act shall apply in respect of the dispute so referred to the Lok Adalat;
(c) for judicial settlement, the court shall refer the same to a suitable institution or person and such
institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services
Authority Act, 1987 shall apply as if the dispute were referred to a Lok Adalat under the provisions of
that Act;
(d) for mediation, the court shall effect a compromise between the parties and shall follow such procedure
as may be prescribed.
If the dispute referred to arbitration and conciliation the provisions of the Arbitration and Conciliation Act
of 1996 is made applicable. If the dispute referred to Lok Adalat then section 20(1) of the Legal Services Act of
1987 shall be applicable.
2.5. Alternative Dispute Resolution Rules, 2003 are framed to govern the process of settlement
outside the court system. Rule 2 says about the procedure for directing parties to opt for alternative modes of
settlement. Rule 3 says that the persons authorised to take decision for the Union of India, State Governments
and others shall nominate a person who are authorised to take a final decision as to the ADR. Under rule 5 the
parties within 30 days shall apply to the court their intention to settle the disputes through ADR the court fixes
the procedure for reference to the different modes of settlement.
Rule 7 authorises the courts to conduct training in ADR and preparation of manual. The High Court
shall take steps to have training courses and it shall nominate a committee of judges to prepare manuals. The
High Court and District Court shall conduct seminars and workshops on ADR mechanisms
In Salem Advocates Bar Association, Tamil Nadu vs Union of India, AIR 2003 SC 189 the challenge made
to the constitutional validity of amendments to Code of Civil Procedure. Justice M. Jagannadha Rao Committee
was constituted to recommend for quicker dispensation of justice. The points for consideration were raised by
the committee as follows;
1. The consideration of the various grievances relating to amendments to the code
2. The consideration of various points raised in connection with draft rules for ADR and mediation under
Order X Rule I A,IB and IC
3. A conceptual appraisal of case management it also contains the model rules of case management.
In Renusagar Power Co. v. General Electric Co., the Court held that an arbitral award is contrary to the
public policy of India if it is contrary to: (1) a fundamental policy of Indian law, (2) the interest of India, or (3)
justice or morality. This holding broadens the scope of the term “public policy” and does not help arbitrators and
officials in interpreting the legislation, creating room for unpredictability and inconsistent precedent. The
subjectivity of the term allows for every party to attempt to appeal on the grounds of “public policy,” adding to
the already backlogged court system.
In Bhatia International v. Bulk Trading S.A., “the bench of three judges relied on what they described
as the “spirit” of the 1996 Act when granting an interim measure of protection to the foreign party, invoking
Section 9 in Part I (interim measures of protection by the court in pending arbitrations)—even though Part I did
not apply, and was not intended to apply to foreign arbitrations.” As discussed above, Section 5, restricting
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judicial intervention, has also been highly disregarded. Foreign investors should be aware of this “spirit of the
law” doctrine that the courts use because it provides for unpredictability of the outcome. Further, the
unpredictability of outcome may lead to inconsistent arbitration precedent. Be aware that judicial intervention is
possible and other sections may be read differently according to the “spirit of the law.” This is something
foreign investors should highly consider before entering into an arbitration agreement.
3. Conclusion
Having discussed the history of India’s arbitration practice, ranging from the 1770s to the 1990s, it is
evident that arbitration is a common alternative dispute resolution in India. However, Indian arbitration has
come across major issues stemming from post-colonial fears of foreign imposition, judicial intervention, and the
desperate need for foreign investors during its economic boom in the 1990s. These major hurdles have created
monetary and timely issues for international parties, keeping India from being a preferred international
arbitration destination. Further, unpredictability and inconsistent precedent have undermined the arbitration
process in India.
Nonetheless, India has continuously tried to amend its legislation regarding arbitration to meet the
nations’ needs and its growing market. If India implements these changes to regulate these major issues, it can
be a preferred international arbitration destination. Though such changes are already underway and may take
years to fully develop, they are worth the effort and time. These changes will create more interest in India as a
country, both economically and financially. Further, it will increase India’s legal credibility, something that has
always been under strict scrutiny and criticism.
Foreign investors face heavy risks in investing in the Indian market. But as I have suggested, there are
certain issues that can weigh in the foreign investors favour. Nonetheless, it is important for foreign investors to
remember that India’s arbitration practice is continuously developing based on the developing economy and
market. Foreign investors should look to emerging markets and sectors, giving investors the greatest chance of a
favourable outcome. As for efficiency, investors should look to highly established sectors in India, giving India
the benefit of efficiency and experience. Overall, India’s market will always attract foreign investors. It is this
risk analysis that will help analyze when to invest, why they should invest and how much to invest.