JKJ 2006 (3) J-8

Problems With Enforcing Arbitration Awards

By:- Pavit Singh and Preeti Bishnoi (Law Students, Law College, Banglore)

Arbitration serves as an alternative mechanism of dispute resolution, as opposed to “conventional” methods such as submitting a dispute to an international or national court or seeking a negotiated agreement. The purpose of arbitration is to ensure effective, quick and consensual decision making process avoiding the arduous process of courts. The need for such a procedure is greater in a country like India where delay has ingrained itself as part of the system of administration of justice. While arbitration is indeed a quick procedure, the interference by court in the process acts as a clog to its development. This fact can be attributed to a lack of established enforcement mechanisms for enforcing arbitral awards.

The United Nations Commission of International Trade law (UNCITRAL) adopted in 1985, a Model Law on International Commercial Arbitration. The model law gave vent to the modern movement towards finality of arbitration awards. The awards passed by the Arbitral Awards ought to be accepted by the parties without intervention by the Courts or else it was felt that arbitration would merely become first step in the process that may lead by way of successive appeals to the highest court at the place of arbitration. The Government of India felt that instead of tinkering with the Arbitration Act of 1940 by the way of amendments thereto, it was desirable to make a comprehensive law being a compendium of all the aforesaid Indian Statutes modeled on UNCITRAL and hence the Arbitration and Conciliation Act 1996 was passed. The purpose or scope of this article is to examine the law in India insofar as the enforcement of arbitral awards is concerned and obstacles therein.

Arbitral Award - Decision of Arbitral Tribunal is termed as ‘Arbitral Award’. Arbitrator can decide the dispute ex aequo et bono (In justice and in good faith) if both the parties expressly authorise him to do so. [Section 28(2)]. The decision of Arbitral Tribunal will be by majority. The arbitral award shall be in writing and signed by the members of the tribunal. [Section 29]. The award must be in writing and signed by the members of Arbitral Tribunal. [Section 31(1)]. It must state the reasons for the award unless the parties have agreed that no reason for the award is to be given. [Section 31(3)]. The award should be dated and place where it is made should be mentioned. Copy of award should be given to each party.

Effect of Award under Arbitration Act of 1996: Sections 34, 35 and 36 deal with these matters. Section 34 deal with the applications for setting aside the arbitral award. It provides that an application for setting aside the award may not be made after three months have lapsed from the date on which the party making that application has received an award on ground specified in the clause. Section 35 provides that an arbitral award shall be final and binding on the parties and persons claiming under them. Section 36 provides that where the time for making the application to set aside an arbitral award has expired, or where such application has been refused by the court, the award shall be enforced as if it were the decree of the court.

Problems with the enforcement of Domestic Arbitral Awards:

The object of the Arbitration is the resolution of the dispute in its entirety, which implies the enforcement of the award as well. The success of the arbitration process wholly depends upon the enforceability of its awards. If the arbitration award is not enforceable then the whole process of arbitration is rendered ineffective. Following are the main issues which need to be addressed in order to improve the efficacy of national arbitral awards and make the arbitration process more effective:

I. Statutory Stay:

A perusal of Section 36 of the Act makes it clear that the award cannot be executed or enforced till -

(i) the period for filling an application to set aside the award expires, and

(ii) in case any application for setting aside the award is filed under section 34, till the same is rejected on merits.

The implication of Section 36 (read with Section 34) is that for a period of 4 months after the award is passed, the award is inexecutable. Further the moment an application is filed for setting aside the award, the statutory stay of the execution or enforcement of the award gets extended till the application is rejected. The Supreme Court of India in the case of National Aluminium Co. Ltd. Vs. Pressteel & Fabrication (P) Ltd, and another 2004 (1) SCC 540 and National Buildings Construction Corp. Ltd. Vs. Lloyds Insulation India Ltd. 2005 (2) SCC 367 has held that once an application is filed under Section 34 of the Act challenging the award, the Court cannot execute the award.

A decree of a court does not get automatically stayed by the mere filing of an appeal. It is only when a stay order is specifically granted by the Appellate Court, that there would be a stay of the decree. The normal rules which apply to the decrees of the courts are not made applicable to the awards by virtue of Section 36. This is contrary to the very objects and reasons of the Arbitration Act, 1996.

Suggestion: Section 36 as it stands today is a impediment for realization of the above mentioned objectives and therefore a need has arisen for amending Section 36 of the Act. This could be done by passing of a suitable amendment deleting the first part of Section 36 which makes the award inexecutable during the pendency of the application and make the award subject to procedures which are generally applicable to decrees by trial courts.

II. Stamp Duty:

Section 10-A provides for payment of stamp duty by cash etc., which is nowadays normally done by obtaining a document sheet. But this facility is avail able only for a period of two months from the date of the execution of the document. Problem may arise if the Award is silent as to who is to pay the stamp duty. An arbitrator does not like to collect money and undergo the inconvenience of obtaining a document sheet. If no stamp is paid, award cannot be executed unless penalty etc., is paid as per Chapter IV of the stamp Act. Further the rate of stamp duty is quite high as compared to other states. As per Article 11 of the Schedule to the Karnataka Stamp Act, the stamp duty is Rs. 5/- per thousand after the initial Rs. 40. This means it will be Rs. 50,000/- per crore. This acts as a hindrance in proper implementation of the Arbitral Awards. Suggestion: My suggestion is that, in case both parties accept the award, there should not be any high amount of stamp duty. It is preferable not to have any stamp duty on it, to encourage the acceptance of the award. Further, whoever seeks execution of the award in a Court or challenges the award under Sec. 34 should be charged with the responsibility to pay an appropriate duty at that time. Also, it should be clarified in the Stamp Act that the responsibility to pay the stamp duty is of the parties to the award and not that of the arbitrator who signs the award.

III “Public Policy” of India as a ground for setting aside the award:

Under Section 34 an aggrieved party may apply to the court within three months of receipt of the award, for setting aside the award. The grounds are set out in Section 34(2)(a) and Section 34(2)(b), one of the grounds is arbitral award being in conflict with public policy.

By the Amendment Bill 2003, an explanation is sought to be added to Section 34 providing therein that “contrary to Public Policy of India” means:

(i) Fundamental policy of India;
(ii) Interest of India; and
(iii) Justice and morality.

Suggestion: In my view, this amendment does not sufficiently clarify the legal position to take away the effect of this judgment of the Supreme Court as indicated in the bill. The “Fundamental Policy of India” is as vague as Public Policy of India. It is therefore necessary to clarify by the amendment that a mere illegality or a wrong application of any substantive law is not per se contrary to the public Policy of India.

IV. Appointment of Arbitrators: working of Section 11:

After exhaustively discussing and reviewing the working of the 1996 Act, the Supreme Court in its decision in SBP & Company v. Patel Engineering Ltd. & Another 2005 (8) SCC 618 held as follows:

1. The power exercised by the Chief Justice of the High Court or the Chief Justice of India under Sec. 11(6) of the Act is not an administrative power. It is a judicial power.

2. Since an order under Sec. 11(6) has been held as a judicial order, an appeal will lie against that order to the Supreme Court only under Article 136 of the Constitution of India.

3. Once the matters reaches the Arbitral Tribunal or the Sole Arbitrator, the High Court would not interfere with the orders passed by the Arbitrator or the Arbitral tribunal during the course of the arbitration proceedings and the parties could approach the court only in terms of Section 34 or Section 37 of the Act.

4. The Chief Justice or his designate will be empowered to decide preliminary aspects such as his own jurisdiction, existence of a valid arbitration agreement, existence or otherwise a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator.

In my opinion, the decision held in the Patel Engineering Case is the correct view. The object of the Act is to consolidate and amend the law relating to domestic arbitration. It is stated that the above decision has clear all the ambiguities regarding the working of Section 11 of the 1996 Act and that would facilitate in achieving the object of the 1996 Act viz., to limit judicial intervention in arbitral process.

V. Revision

In ITI Limited Vs. Siemens Public Communication Networks Ltd. (2002) 5 SCC 510, it was held that Section 37 of the 1996 Act specifies that an appeal shall lie only against specified orders and from no other. Section 37 (3) provides that there shall be no second appeal against the said order but nothing in the section shall affect or take away the right to appeal to Supreme Court. However, the Hon’ble Supreme Court has held that Section 37 (3) does not take away the revisional jurisdiction of the High Court under Section 115 since the Code of Civil Procedure is not specifically excluded in its application to proceedings arising out of the Act in a Civil Court and therefore an inference that Civil Procedure Code is not applicable is not correct.

Suggestion: Clause 29 of the Amendment Bill, 2003 which seeks to amend Section 37 with respect to certain matters does not address this issue. The only exception provided is an appeal to the Supreme Court which obviously cannot be taken away since it is a constitutional right. However, to say that revision under Section 115 of the CPC lies; is to defeat the object of Section 37. An amendment should me made clarifying the position.

VI. Section 9 - Interim Order:

Section 9 of the Act provides that a party may before, during or at anytime after the making of the arbitral award but before it is enforced in accordance with Sec. 36 apply to the Court for interim measure of protection,

The Hon’ble Supreme Court in the case of Sundaram Finance Ltd. Vs. NEPC India Ltd. AIR 1999 SC 565 has noticed the language of Sec. 9 and the power for the Court to grant interim measure. These interim measures, however will not entitle the Court to direct payment of any part of the award if the award is a money claim. In fact, 90% of the arbitration proceedings relate only to money claims. Therefore, Section 9 of the Act might give some relief to the decree holder, the same will not entitle the enforceability or execution of the award, which can be done, only after the time for filing the application for setting aside the award is over, or the application to set the award, if filed, had been rejected or dismissed on merits.

Suggestion: This can be cured by amending the rules pertaining to the trial and disposal of the applications to set aside awards before the court and specify that applications be disposed of by means of affidavit unless the court directs otherwise, as was the case under Section 33 of the 1940 Act and fix a time frame for disposal of such applications.

Conclusion : Both the Arbitration and Conciliation Act of 1996 and Amendment Bill, 2003 are unable to provide for effective arbitration process and proper enforcement of domestic arbitral awards. It highlights the poor drafting of the Arbitration and Conciliation Act, 1996. The 9th Report relating to the Arbitration and Conciliation (Amendment) Bill, 2003* stated that the Bill, would lead not only to greater interference by Courts in the process of arbitration but also end up having arbitration being conducted under the supervision of the Courts; It will have the Courts sitting in judgment over the arbitrators before arbitration, during arbitration and after arbitration. Apart from the suggestions already made, the need for an Arbitration institution in India which would match international standards is also stressed. The 1996 Act has now worked in this country for nearly a decade and within this short span a dire necessity has been felt in all quarters to further amend the provisions of the Act of 1996 with a view to plug the loopholes in the Act, as it presently exists, which has defeated the very purpose of the enactment. Moreover, the Amendment Bill 2003 may not suffice in achieving the desired objectives.

Therefore, there is an urgent need for an Arbitration Institution in India which would match international standards. The Government has to consider bringing in a fresh comprehensive legislation on the subject before Parliament, as expeditiously as possible.






* By committee on Personnel, Public Grievances, Law and Justice. It was presented to the Rajya Sabha and Lok Sabha on 4th Aug, 2005.