INTERNATIONAL

COMMERCIAL
ARBITRATION AS A
METHOD OF DISPUTE
SETTLEMENT
Guided By: Prof. Dr. Qazi Usman

SUBMITTED BY:
MD. ABID HUSSAIN ANSARI
B.A. LL.B. (HONS.) 5TH SEMESTER
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 Acknowledgement
Firstly, I would like to express my profound sense of gratitude towards
the almighty “ALLAH” for providing me with the authentic circumstances
which were mandatory for the completion of my project.

Secondly, I am highly indebted to Prof. Qazi Usman at Faculty of Law,

Jamia Millia Islamia University, New Delhi for providing me with constant
encouragement and guidance throughout the preparation of this project.

Thirdly, I thank the Law library staff who liaised with us in searching
material relating to the project.

My cardinal thanks are also for my parents, friends and all teachers of
law department in our college who have always been the source of my
inspiration and motivation without which I would have never been able
to unabridged my project.

My father, a professor with large access to books of value has been of

great help to me.

Without the contribution of the above said people I could have never
completed this project.

Mohd. Abid Hussain Ansari

B.A.LL.B (Hons) 5th Semester

3rd Year

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 Table of Contents
1. International Trade and Finance- An Introduction………………………………………………………………………3
2. History of International Commercial Arbitration…………………………………………………………………………6
3. The growth of international commercial arbitration 1920 to 1950…………………………………………………7
4. 1927 Convention………………………………………………………………………………………………………………….8
5. ICC Arbitration commenced……………………………………………………………………………………………………8
6. Arbitral procedure……………………………………………………………………………………………………………….9
7. The growth of international commercial arbitration 1950 to the present………………………………………10
8. 1961 European Convention…………………………………………………………………………………………………..11
9. Rules of procedure……………………………………………………………………………………………………………..12
10. UNCITRAL Arbitration Rules………………………………………………………………………………………………….12
11. Model Law………………………………………………………………………………………………………………………..13
12. Arbitration as a dispute settlement mechanism………………………………………………………………..………14
13. Definition of arbitration………………………………………………………………………………………………………14
14. Elements of definition…………………………………………………………………………………………………………14
15. Arbitration is a mechanism for the settlement of disputes………………………………………………………….15
16. Settlement………………………………………………………………………………………………………………………..15
17. Arbitration rules………………………………………………………………………………………………………………..20
18. Ad hoc arbitration rules………………………………………………………………………………………………………20
19. The Rise of Commercial Arbitration in India…………………………………………………………………………….23
20. Conclusion………………………………………………………………………………………………………………………..32

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 Introduction to International Trade and Finance
International trade law includes the appropriate rules and customs for handling trade between
countries. However, it is also used in legal writings as trade between private sectors, which is
not right. This branch of law is now an independent field of study as most governments have
become part of the world trade, as members of the World Trade Organization (WTO). Since
the transaction between private sectors of different countries is an important part of the WTO
activities, this latter branch of law is now a very important part of the academic works and is
under study in many universities across the world.
International trade is a complicated area of law to research because there are numerous levels
of trade organizations and interactions. There are bilateral trade agreements, regional trade
agreements and multinational trade agreements. Each of these agreements has its own history,
policies and dispute settlement procedures. Trade organizations established under the
agreements have separate resources that can be searched. Furthermore, individual countries
have their own policies and laws relating to international trade. As an example, the United
States Congress must pass legislation enacting international trade agreements before the
United States can officially become a party. The national policies have to be researched
individually and frequently separately from the resources relating to the international
organizations.
International trade law regulates the global exchange of goods and services. For a long time,
most trade agreements were bilateral, meaning between two nations). However, with the
growth of global trade, countries have increasingly used multilateral treaties, such as when
nations within a particular region sign an international trade agreement. Current examples
include the North America Free Trade Agreement (NAFTA) and the South Asia Free Trade
Agreement (SAFTA).
The multilateral trade agreement with the most members (signatories) is the General
Agreement on Tariffs and Trade (GATT). The GATT comprises several rules on
international trade, and is now part of the World Trade Organization (WTO), which is not
just an agreement, but is also an international organization.
International trade law should be distinguished from the broader field of international
economic law. The latter could be said to encompass not only WTO law, but also law
governing the international monetary system and currency regulation, as well as the law of
international development.

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International trade is the exchange of capital, goods, and services across international borders
or territories. In most countries, such trade represents a significant share of gross domestic
product (GDP). While international trade has been present throughout much of history (see
Silk Road, Amber Road), it’s economic, social, and political importance has been on the rise
in recent centuries.
Industrialization, advanced in technology transportation, globalization, multinational
corporations, and outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. Without
international trade, nations would be limited to the goods and services produced within their
own borders.
International trade is, in principle, not different from domestic trade as the motivation and the
behavior of parties involved in a trade do not change fundamentally regardless of whether
trade is across a border or not. The main difference is that international trade is typically
more costly than domestic trade. The reason is that a border typically imposes additional
costs such as tariffs, time costs due to border delays and costs associated with country
differences such as language, the legal system or culture.
Another difference between domestic and international trade is that factors of production
such as capital and labor are typically more mobile within a country than across countries.
Thus international trade is mostly restricted to trade in goods and services, and only to a
lesser extent to trade in capital, labor or other factors of production. Trade in goods and
services can serve as a substitute for trade in factors of production.
Instead of importing a factor of production, a country can import goods that make intensive
use of that factor of production and thus embody it. An example is the import of labor-
intensive goods by the United States from China. Instead of importing Chinese labor, the
United States imports goods that were produced with Chinese labor. One report in 2010
suggested that international trade was increased when a country hosted a network of
immigrants, but the trade effect was weakened when the immigrants became assimilated into
their new country.
International trade is also a branch of economics, which, together with international finance,
forms the larger branch of international economics. For more, see The Observatory of
Economic Complexity. Trading is a value added function of the economic process of a
product finding its market, where specific risks are to be borne by the trader, affecting the
assets being traded which will be mitigated by performing specific functions.

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The body of rules for transnational trade in the 21st century derives from medieval
commercial laws called the lex mercatoria and lex maritima — respectively, "the law for
merchants on land" and "the law for merchants on sea." Modern trade law (extending
beyond bilateral treaties) began shortly after the Second World War, with the negotiation of a
multilateral treaty to deal with trade in goods: the General Agreement on Tariffs and Trade
(GATT).
International trade law is based on theories of economic liberalism developed in Europe and
later the United States from the 18th century onwards.
International Trade Law is an aggregate of legal rules of “international legislation” and new
lex mercatoria, regulating relations in international trade.
“International legislation”– international treaties and acts of international intergovernmental
organizations regulating relations in international trade. Lex mercatoria - "the law for
merchants on land". Alok Narayan defines "lex mercatoria" as "any law relating to
businesses" which was criticised by Professor Julius Stone and lex maritima - "the law for
merchants on sea.

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 HISTORY OF INTERNATIONAL COMMERCIAL
ARBITRATION

International commercial arbitration is a work in progress. The first events took place some
eighty years ago, in 1923. There are negotiations currently going in the United Nations
Commission on International Trade Law (UNCITRAL) that may lead to new developments.1
The developments that take place at the international level are implemented by States at
different times, some sooner, and some not at all. The growth of investment arbitration as a
form of international commercial arbitration promises to have a significant impact on the
entire field, but the nature of that impact is not yet clear.

Domestic arbitration
Most societies developed at an early date systems of “arbitration” for the settlement of
disputes. Disputes between private parties that are settled by arbitration might be of a family
nature, concern labor relations or be between two commercial enterprises. In the past such
disputes were almost exclusively domestic and the systems of arbitration that developed
reflected the nature of the particular society. It is no surprise, therefore, to find vast
differences between domestic arbitration in Continental Europe, Latin America, Islamic
countries, the United States and China. In some countries, particularly in Latin America and
in England, arbitration was traditionally seen as an extension of the State system of litigation.
In such an atmosphere the procedure followed in arbitration was necessarily closely modeled
on the procedure followed in litigation in the courts. Even where arbitration was not seen as
an extension of the State system of litigation, and the law did not require the local court
procedure to be followed in arbitration, the habits developed by lawyers in the courts were
carried over into arbitration.
Yet another compelling influence on domestic arbitration in the commercial/ economic
sphere was to be found in countries with a State-trading system. Economic enterprises were
by their nature part of the governmental administration. While the dispute settlement
mechanisms established to handle disputes between such enterprises were often called
arbitration, they were in fact usually a form of administrative adjudication with a high level
of political and administrative control over the entities created to settle those disputes.

1
The most current report as of the time of writing is Report of Working Group II (Arbitration and Conciliation)
on the work of its forty-second session, A/CN.9/573 (New York, 10-14 January 2005).

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In this atmosphere there was very little of what could be called international commercial
arbitration. It did not matter that the dispute happened to include a foreigner as one of the
parties; the arbitration remained a domestic arbitration.
Domestic law was applied, both as to the procedure and, more importantly, to the substance
of the dispute as well. That was most striking in the case of England until the 1979
Arbitration Act. There was considerable arbitration in London involving international trade,
shipping and insurance. The parties were often non-English. In fact, it often happened that
neither party was English. Nevertheless, the arbitration proceeded as a strictly national
arbitration with English procedural and substantive law applied. While that was the most
striking example because of the importance of English arbitration to international trade, it has
not been unique.

The growth of international commercial arbitration 1920 to 1950

Major difficulties in 1920
International commercial arbitration as we know it today began in Continental Europe in the
1920s. There were two major difficulties in the then current situation.
The first difficulty was that in many countries an agreement to arbitrate could be validly
entered into only in regard to an existing dispute by a so-called compromise. (The terms of
reference in International Chamber of Commerce arbitration arose out of that history, though
the current justification for terms of reference lies elsewhere.)2 In those countries an
agreement to arbitrate all disputes that might arise in the future in connection with a contract
was not valid. It was also common that, even in countries in which the agreement to arbitrate
was valid, it often did not effectively prohibit a court from taking jurisdiction over the
dispute. If one of the parties commenced an action in court in spite of the agreement to
arbitrate, there might later be an action for damages for breach of the agreement to submit the
dispute to arbitration, but that tended to be an empty remedy. The difficulties described were
not directed at agreements to arbitrate where one of the parties was foreign. Those rules
existed in regard to domestic arbitration agreements as well. However, it was only when one
or both of the parties were foreign that it was of international concern.

2
Craig, Park & Paulsson, International Chamber of Commerce Arbitration (3rd ed.), Oceana Publications, Inc.,
Dobbs Ferry, 2000, pp. 273-274.

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1923 Protocol
The difficulties in regard to the agreement to arbitrate were effectively eliminated for non-
domestic arbitration agreements by the 1923 Geneva Protocol on Arbitration Clauses adopted
by the League of Nations. The Protocol was an outstanding success both in terms of the
number of States that became party to it and in regard to its contents. Its essential provision
was that:
“Each of the Contracting States recognises the validity of an agreement whether
relating to existing or future differences between parties subject respectively to the
jurisdiction of different Contracting States by which the parties to a contract agree to
submit to arbitration all or any differences that may arise in connection with such
contract relating to commercial matters or to any other matter capable of settlement
by arbitration, whether or not the arbitration is to take place in a country to whose
jurisdiction none of the parties is subject.”
The Protocol also provided that the procedure, including the constitution of the arbitral
tribunal, was to be governed by the will of the parties and by the law of the country in whose
territory the arbitration took place. The content of the Protocol is today incorporated into
Articles II and V (d) of the 1958 New York Convention with only minor changes.

1927 Convention

The second widely recognized difficulty was in regard to the recognition and enforcement of
foreign arbitral awards. Therefore, four years after the adoption of the Protocol on Arbitral
Clauses, in 1927 the League of Nations adopted the Geneva Convention for the Execution of
Foreign Arbitral Awards.

Contracting States agreed to enforce arbitral awards made in conformity with the 1923
Protocol in the territory of another contracting State. The Convention was, like the Protocol,
adopted by a large number of States and was generally a success in regard to its substance

ICC Arbitration commenced

At the same time a need was felt for an arbitration organization that would be “international”.
Consequently, in 1922 the International Chamber of Commerce (ICC) adopted its first rules
of arbitration and in 1923 established the Court of Arbitration. Although the headquarters of
the ICC are in Paris, there has never been any suggestion that the ICC Court of International
Arbitration (as it is now known) was a French arbitral organization.

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Arbitral procedure

In addition to what had been achieved by the adoption of the Protocol and Convention and
the creation of the ICC Court of Arbitration there was a perceived need for agreement on the
procedural rules applicable in arbitration.

One consequence was that the International Law Association adopted the Amsterdam Rules
in its 1938 session, which contained “provisions concerning the constitution of the arbitral
tribunal, the power of arbitrators, the role of the Chairman of the Committee on Commercial
Arbitration of the International law Association, procedures for the transmission of
documentation between parties, administration of evidence, the hearings …, content of the
award, fixing of costs, and so forth.”3 While important historically, the Amsterdam Rules had
no practical effect.

Furthermore, the International Institute for the Unification of Private Law (UNIDROIT)
prepared a draft uniform law on arbitration, but the outbreak of the Second World War in
Europe in 1939 brought those efforts to a halt.

Throughout the two decades from 1920 to the outbreak of the Second World War there was a
steady development in Europe of arbitration as a recognized means of dispute settlement in
international commercial matters. However, in quantitative terms the amount of arbitration
between commercial firms from different countries was still rather small, except for certain
commodity trades where arbitration took place within the relevant trade association.
Moreover, the development of arbitration for international commercial disputes that existed
in Europe did not generally extend to the rest of the world.

3
Problems concerning the application and interpretation of existing multilateral conventions on international
commercial arbitrations and related matters: report [to UNCITRAL] by Mr. Ion Nestor, Special Rapporteur,
A/CN.9/64, para. 29, UNCITRAL Yearbook (1972), p.193 et seq

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 The growth of international commercial arbitration 1950 to the
present
New York Convention
It turned out that there was a significant problem with the 1927 Convention in the
requirement that the party seeking enforcement of the award had to prove that the conditions
for recognition had been fulfilled. The only way to satisfy the requirement was to have the
award recognized in the country where the arbitration had taken place. The requirement of
“double exequateur” reduced considerably the usefulness of the Convention. The ICC
undertook the preparation of a draft revision of the 1927 Convention and submitted it to the
United Nations as the successor organization to the League of Nations, which had prepared
both the 1923 Protocol and the 1927 Convention. At the ensuing diplomatic conference it was
found to be advantageous to combine the provisions of the 1923 Protocol and the 1927
Convention into a single convention. The result was the 1958 Convention on the Recognition
and Enforcement of Foreign Arbitral Awards (New York Convention). Aside from
combining the two previous instruments into a single text, the principal change was that the
award itself, in the form required by the Convention, accompanied by the arbitration
agreement must be considered as prima facie worthy of credit. The court (or other authority)
must enforce it unless the party resisting enforcement proves that there exists one of the
limited numbers of exceptions in Article V of the Convention. The exceptions to enforcement
in Article V (1) are limited to violations of the rules of a procedural nature governing the
arbitration and are designed to protect the parties and the integrity of the arbitral process. The
enforcing court is thereby restricted from considering whether the award is correct on the
merits. Article V (2) is designed to protect the integrity of the law of the enforcing country. It
permits the enforcing court to refuse to enforce the award if the “subject matter of the
difference is not capable of settlement by arbitration under the law of that country” or if
“[t]he recognition or enforcement of the award would be contrary to the public policy of that
country.” This latter provision was probably necessary, but it was dangerous. It could easily
have been seen as an invitation to a court to find that the enforcement of an award against a
party from the State where enforcement is sought would be in some way against the public
policy of the State. Fortunately, it has seldom been used to refuse to enforce an award.
The obligations the New York Convention places upon the courts are extraordinary. In almost
every case in which the court is requested to enforce an award, the party against whom
enforcement is sought is local while the party seeking enforcement is a foreigner. It is

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understandable that many judges in the local courts, who might rarely see a foreign arbitral
award, do not appreciate the value of enriching the foreign party at the expense of the local
party just because one or three private persons sitting as an arbitral tribunal in another
country so decided. They may not see or care that the Convention permits parties from their
country to have awards in their favor enforced in other Convention countries. To overcome
the problem many States provide that Convention awards are to be enforced in higher level
courts that are more likely to be free from local favouritism and to have a broader view of the
policy behind their country’s adoption of the Convention.4
There is one noteworthy aspect to this short history of the New York Convention that bears
mention. The draft prepared by the ICC envisioned an “international” award that would not
be subject to the control of any national court. It is easily understood that the source of such
an “international” award would have been the ICC itself, though the draft obviously did not
say so. During the process of revision of the draft in the United Nations the text returned to
the more familiar and acceptable formula of recognition and enforcement of “foreign” arbitral
awards. The role of the nation-State in determining the rules to govern arbitration of
international commercial matters was affirmed and has not been questioned since.
However, while the internationalists may have lost the battle, they had not lost the war. As
becomes obvious when one considers the subsequent developments, the perception that there
is such a phenomenon as “international commercial arbitration” with a tendency towards
uniform rules has continued to grow. Following the 1958 diplomatic conference, interest in
arbitration continued to develop. Ratification of the New York Convention progressed at a
steady pace, averaging two to three ratifications per year, and that pace has not changed
radically over the years since its adoption. To date 135 countries have ratified the
Convention.

1961 European Convention

In 1961, three years after the adoption of the New York Convention, the European
Convention on International Commercial Arbitration was adopted. The Convention is
noteworthy as being the first international instrument to have the words “international
commercial arbitration” in its title. This was more than a curiosity. It signalled a change in
the attitude towards arbitration of international commercial disputes. The nation-State would

4
For example, in Egypt in regard to all matters having to do with “international commercial arbitration,
whether conducted in Egypt or abroad, jurisdiction lies with the Cairo Court of Appeal ….” Law Concerning
Arbitration in Civil and Commercial Matters, Article 9. Article 56

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be in charge of the rules, but those rules should recognize the special requirements of an
arbitration which involves international economic matters and in which one or both parties
may be foreign.

Rules of procedure
There was also progress in regard to the rules of procedure that governed the arbitration. In
1966 the Arbitration Rules for ad hoc arbitrations were adopted by both the United Nations
Economic Commission for Europe (ECE) and the United Nations Economic Commission for
Asia and the Far East (ECAFE). The same year the European Convention Providing a
Uniform Law on Arbitration was adopted by the Council of Europe. These three texts are
significant primarily because they demonstrated the strong desire in the 1960s for uniform
internationally acceptable rules of procedure. Only the ECE Rules could be said to have been
a success. They have been widely used in Continental Europe for ad hoc arbitrations, but they
were considered to be unsuitable for arbitrations between common law and civil law
countries. The ECAFE Rules on the other hand seem to have been used rarely, if at all, and
the Uniform Law has never come into force, the Convention having been ratified only by
Belgium.

UNCITRAL Arbitration Rules

The strength of the desire for internationally acceptable rules of procedure was demonstrated
by the rapid and overwhelming reception of the UNCITRAL Arbitration Rules after they
were adopted by the United Nations Commission on International Trade Law in April 1976.
The Rules, which were specifically designed for use in ad hoc common law/civil law
arbitrations, received the endorsement of the Asian-African Legal Consultative Committee
(AALCC) in July of that year.5 Six months later an agreement was reached to recommend
that trade contracts between the Soviet Union and the United States should call for arbitration
of any disputes that might arise with the arbitrations to take place in Stockholm under the
UNCITRAL Arbitration Rules.6 The endorsement of the Rules by the AALCC, representing a
large number of developing countries, the Soviet Union and the United States meant that the

5
The resolution of the AALCC (now known as the Asian-African Legal Consultative Organization) is reproduced
by UNCITRAL in A/CN.9/127.
6
Agreement between the American Arbitration Association, the USSR Chamber of Commerce and Industry and
the Stockholm Chamber of Commerce concerning the optional arbitration clause for use in contracts in USSR-
USA Trade - 1977. January 12, 1977.

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Rules were politically acceptable in a large segment of the world. Although prepared for use
in ad hoc arbitrations, they were increasingly used as well by arbitral organizations as their
institutional rules with suitable changes. By 1982 UNCITRAL found it desirable to issue its
Guidelines for Administering Arbitrations under the UNCITRAL Arbitration Rules, which
included a description of the changes that might be made in the Rules when adapting them for
use as institutional rules.7
Because the UNCITRAL Arbitration Rules were written for ad hoc arbitrations, they
necessarily allowed the parties complete freedom as to how to proceed with the arbitration.
Nevertheless, the Rules recognized that the law governing the arbitration might contain a
“provision of law from which the parties cannot derogate”, in which case that provision
would prevail.8

Model Law
The UNCITRAL Arbitration Rules were followed in the Model Law in 1985. What is
striking about the Model Law is the extent to which it not only gives support to the arbitral
process, but the extent to which it permits the parties to conduct the arbitration as they wish.
The arbitration may be institutional or it may be ad hoc. Subject to the binding rule in Article
18 that “[t]he parties shall be treated with equality and each party shall be given a full
opportunity of presenting his case”, “the parties are free to agree on the procedure to be
followed by the arbitral tribunal in conducting the proceedings.”9 It was thought by many that
the Model Law would be useful for developing countries that did not already have a modern
law of arbitration, and it has been widely used by them. However, the first country to adopt
the Model Law was Canada. To date the Model Law has been adopted by 39 countries,
several of the individual States in the United States, Hong Kong and Macau.
In addition to Canada, developed countries that have adopted the Model Law are Australia,
Germany, Japan, New Zealand, Singapore and Spain. It is important to note that the Model
Law was drafted to govern only international commercial arbitration with the expectation that
a State that enacted it might have a separate law governing domestic arbitrations. Even if a
State wished to limit the freedom of the parties, arbitral institutions and arbitral tribunals in
respect of domestic arbitrations, adoption of the Model Law would permit the State to offer a

7
Recommendations to assist arbitral institutions and other interested bodies with regard to arbitrations under
the UNCITRAL Arbitration Rules adopted at the fifteenth session of the Commission, UNCITRAL Yearbook
(1982), p. 420
8
Article 1(2)
9
Model Law, Article 19(1)

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law of arbitration that met the prevailing consensus on the procedures that should govern
international commercial arbitration.
The Model Law is not complete. It must be supplemented by additional provisions at the time
of enactment and it has by most States that have adopted it. That was anticipated at the time
the Model Law was adopted by UNCITRAL in 1985. The Commission is currently
considering several measures that are expected to enhance its effectiveness.10

Arbitration as a dispute settlement mechanism

Definition of “arbitration”
It is often of great importance to know whether a given procedure amounts to “arbitration”.
For example, Article II, paragraph 1 of the Convention on the Recognition and Enforcement
of Foreign Arbitral Awards, generally known as the New York Convention, provides “Each
Contracting State shall recognize an agreement in writing under which the parties undertake
to submit to arbitration ….” Nevertheless, the Convention does not define what an arbitration
is. The term is rarely defined in national laws on arbitration as well. It is not defined in the
UNCITRAL Model Law on International Commercial Arbitration (hereinafter the Model
Law) as being “unnecessary”, although a definition had been proposed by the Secretariat.1 It
is not so clear that the UNCITRAL Working Group really believed that a definition of
arbitration was unnecessary so much as that it would have been difficult to formulate. For
example, if a tribunal were given the authority to adapt or supplement a contract in the light
of changed circumstances, would that procedure be “arbitration”? By leaving the term
undefined, just as it was undefined in the New York Convention, the borders could adjust
over time to changed perspectives as to what was the proper domain of arbitration.

Elements of definition
Nevertheless, some content must be given to the term. Its principal characteristics are:

 arbitration is a mechanism for the settlement of disputes;

 arbitration is consensual;
 arbitration is a private procedure;

10
The most recent developments are to be found in Report of the Working Group on Arbitration and
Conciliation on the work of its forty-second session (New York, 10-14 January 2005), A/CN.9/573.

14 | P a g e
  Arbitration leads to a final and binding determination of the rights and obligations of
the parties.

Arbitration is a mechanism for the settlement of disputes

If there is no dispute, there can be no arbitration. The issue arises most often when one party
fails to pay a sum of money owed to the other, perhaps in the form of a negotiable instrument,
and the debtor does not dispute the obligation. If there is an existing arbitration clause, the
question arises whether the creditor can or must invoke the arbitration clause or, there being
no dispute as to the existence of the obligation, the creditor can or must seek enforcement of
the obligation by court action. This theoretical question can be of great practical importance
if the debtor wishes to impede enforcement of the obligation and contests the appointment of
the arbitral tribunal, if that is the route chosen by the claimant, or insists upon the arbitration
clause, if the creditor chooses to enforce the obligation directly in the courts. The question
might also arise if it appears that the parties agreed to arbitration in order to secure an
enforceable award that would permit payment in the face of exchange controls that would not
have permitted payment of the amount in question, absent the award.

Settlement

While neither of the two examples cited above are such a problem as to have given rise to any
general agreement as to how they should be handled, there is one common situation that has
led to a generally agreed solution. In arbitration as in litigation it is common for the parties to
settle their dispute after the arbitration has commenced. Once the parties have reached an
agreement to settle the dispute, there is no longer any dispute for the arbitral tribunal to
consider. Nevertheless, as provided in Article 30 of the Model Law,

“(1)If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal
shall terminate the proceedings and, if requested by the parties and not objected to by
the arbitral tribunal, record the settlement in the form of an arbitral award on agreed
terms.

(2)An award on agreed terms shall be made in accordance with the provisions of
article 31 and shall state that it is an award. Such an award has the same status and
effect as any other award on the merits of the case.”

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It will be noted that the arbitral tribunal may object to recording the settlement as an award.
That is a form of protection to the tribunal and to the arbitral process if the tribunal believes
that an award would be improper under the circumstances. Some arbitration laws do not
specifically permit the tribunal to object to recording the settlement of the parties in the form
of an award, though there may be other tools available to the tribunal in an appropriate case.11

Arbitration is consensual

Arbitration must be founded on the agreement of the parties. Not only does this mean that
they must have consented to arbitrate the dispute that has arisen between them, it also means
that the authority of the arbitral tribunal is limited to that which the parties have agreed.
Consequently, the award rendered by the tribunal must settle the dispute that was submitted
to it and must not pronounce on any issues or other disputes that may have arisen between the
parties. As provided in Article V of the New York Convention,

“1. Recognition and enforcement of the award may be refused, at the request of the
party against whom it is invoked . . . if that party furnishes to the competent authority
where the recognition and enforcement is sought, proof that :...

(c) The award deals with a difference not contemplated by or not falling within the
terms of the submission to arbitration, or it contains decisions on matters beyond the
scope of the submission to arbitration…”

Semi-consensual

In most cases arbitration is only semi-consensual. Most arbitration agreements are in the form
of an arbitral clause in the principal contract. The arbitral clause will provide for the
settlement of disputes that may arise in the future. If a dispute does arise, the parties may no
longer be in agreement that the dispute should be submitted to arbitration. Two consequences
follow.

 The claimant in the dispute may wish to turn to the courts. However, it can be precluded
by the respondent from doing so and forced to proceed in arbitration. As stated in Article
II of the New York Convention

11
For example, Bolivia, Law No. 1770, Art. 51 (enacted 11 March 1997).

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 “3. The court of a Contracting State, when seized of an action in a matter in respect of
which the parties have made an agreement within the meaning of this article, shall, at the
request of one of the parties, refer the parties to arbitration, unless it finds that the said
agreement is null and void, inoperative or incapable of being performed.”

 Conversely, the claimant may commence the arbitration in accord with the arbitration
agreement, but the respondent may refuse to participate.

Nevertheless, “the arbitral tribunal may continue the proceedings and make the award on the
evidence before it.”12

Compulsory arbitration

When the New York Convention was negotiated in 1958 the Soviet Union and other
countries with a State-trading system had a system of compulsory arbitration. It was a serious
question as to whether this was really arbitration or whether it was a special system of State
adjudication. In order to encourage their adherence to the New York Convention the term
“arbitral award” was defined in Article 1(2) to include “not only awards made by arbitrators
appointed for each case but also those made by permanent arbitral bodies to which the parties
have submitted.” This is now a historical relic, but the law of arbitration in a few of the
affected countries continues to show signs of the administrative nature out of which the
current arbitral regimes developed.13

Arbitration is a private procedure

Arbitration is not part of the State system of courts. As already noted, it is a consensual
procedure based on the agreement of the parties. Nevertheless, it fulfills the same function as
litigation in the State court system. The end result is an award that is enforceable by the
courts, usually following the same or similar procedure as the enforcement of a court
judgment. Consequently, the State has an interest in the conduct of arbitration beyond the
interest it has in the settlement of disputes by other procedures that are also alternatives to
litigation. In the past this led some countries to exercise strict control over arbitration. In

12
Model Law, Article 25(c).
13
One source of confusion in regard to the law in Russia and a number of other Slavic-speaking countries is
that the commercial courts are referred to as “Arbitrazh” tribunals. It is not helped by the fact that the Code of
Arbitrazh Procedure of the Russian Federation, No. 95-FZ, July 24, 2002, governs judicial proceedings in respect
of arbitration. See, for example, Chapter 30 (articles 230 to 240), Procedure in Case to Challenge Arbitral
Award or Obtain Writ of Execution of Arbitral Award, and Chapter 31 (articles 241 to 246), Procedure in Case
for Enforcement of Foreign Judgment or Foreign Arbitral Award

17 | P a g e
many countries the close connection between arbitration and litigation is illustrated by the
fact that the law of arbitration is found in the Code of Civil Procedure. 14 The current trend is
to allow the parties and the arbitral tribunal full autonomy in the conduct of the proceedings
subject only to the obligation found in Article 18 of the Model Law that:

“The parties shall be treated with equality and each party shall be given a full
opportunity of presenting his case.”

The courts are able to assure that the proper procedure has been followed in the arbitration by
their power to set aside an award or to refuse to recognize or enforce it.15

Since international commercial arbitration was traditionally between two commercial

companies that could have settled their dispute by negotiation or other private and
confidential means, it became something of an article of faith that the private nature of
arbitration also led to confidentiality. It was understood that neither the parties, arbitrators,
witnesses, experts nor any supporting personnel would reveal anything about the arbitration,
including its existence. There was an obvious exception if one of the parties had to invoke the
aid of a court in regard to the arbitration or to set aside or enforce an arbitral award. An
example of this understanding is found in Article 30 of the LCIA Arbitration Rules.

“Unless the parties expressly agree in writing to the contrary, the parties undertake
as a general principle to keep confidential all awards in their arbitration, together
with all materials in the proceedings created for the purpose of the arbitration and all
other documents produced by another party in the proceedings not otherwise in the
public domain - save and to the extent that disclosure may be required of a party by
legal duty, to protect or pursue a legal right or to enforce or challenge an award in
bona fide legal proceedings before a state court or other judicial authority.”

Changing attitudes

This understanding of confidentiality has been brought into question in recent years. The
impetus for change has been largely that an increasing number of arbitrations involve the

14
By way of example, the German arbitration law, based on the Model Law and in force since 1998, is found in
Book 10 of the Code of Civil Procedure (Zivilproze ßordnung).
15
New York Convention, Article V; Model Law, Articles 34 – 36

18 | P a g e
State or a State entity. The issues raised in such arbitrations are often of public interest.16
Although it is particularly true of investment arbitrations, it may also be true of other
arbitrations involving the State. A second impetus for change has been the very popularity of
international commercial arbitration. Even though arbitral awards do not establish precedent
in any conventional sense, there is a strong desire to know the legal determinations of arbitral
tribunals in respect both of arbitral law and procedure and the substantive law governing
international commercial relations.

Arbitration leads to a final and binding determination ofthe rights and

obligations of the parties

Many arbitration rules, such as ICC Arbitration Rule 28(6), specifically provide that:

“Every Award shall be binding on the parties. By submitting the dispute to arbitration under
these Rules, the parties undertake to carry out any Award without delay ….”

It is not necessary for the arbitration rules governing the arbitration to say so. A procedure
that does not lead to a final and binding determination of the rights and obligations of the
parties is not arbitration. One example arose in a case in Austria.

The WIPO Uniform Domain Name Dispute Resolution Policy Article 4 provides that the
institution of procedures under the policy does not preclude a party from submitting the
dispute to a court of competent jurisdiction for resolution. Since the Domain Name Dispute
Resolution Procedure does not lead to a final and binding decision, it is not an arbitral
proceeding and the costs involved could not be recovered from the losing party as
“procedural costs”, as could the costs of arbitration.17

Most importantly, Article III of the New York Convention requires the currently 135
Contracting States to “recognize arbitral awards as binding and enforce them in accordance
with the rules of procedure of the territory where the award is relied upon…” It is upon this
foundation stone that the entire edifice of international commercial arbitration is built.

16
OECD, Transparency and Third Party Participation in Investor-State Dispute Settlement Procedures, Working
Papers on International Investment, Number 2005/1, April 2005, available at http://
www.oecd.org/dataoecd/25/3/34786913.pdf (visited on 9 May 2005).
17
Newsletter der Österreichischen Vereinigen für Schiedsgerichtsbarkeit, January 2005, citing OGH 16.3.2004,
4 Ob 42/04m (Austria, Supreme Court).

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Arbitration rules

Institutional arbitration rules

It was noted above that all modern arbitration laws allow the parties to decide on the
procedure to be followed in the arbitration. In most cases the parties exercise that right by
choosing an arbitration institution in which the arbitration will take place. Any arbitration that
takes place in the context of an institution will be conducted in accordance with the rules of
that organization.18 Therefore, the rules of the various arbitration institutions constitute the
third level of legal rule governing international commercial arbitration. The rules set forth the
procedures for the commencement of the arbitration, the appointment of the arbitrators, the
conduct of the proceedings and the issuance of the award. Although all of these matters may
be in the arbitration law as well, the institutional rules may reflect the particular needs of the
type of arbitrations that take place at that institution. Rules for arbitrations in the commodity
trades need not be, and probably should not be, the same as those in the construction industry.
Most arbitration organizations have only one set of arbitration rules. Differentiation in
procedure arises out of the specialization of the organizations. However, some arbitration
organizations have multiple rules for different types of disputes.19

Ad hoc arbitration rules

Why ad hoc arbitration

Some arbitration takes place without any reference to an arbitration institution. They are
referred to as ad hoc arbitrations. There are many reasons why two parties may decide to
have an ad hoc arbitration rather than one in the context of an arbitration institution. One of
the more prominent is that arbitration involving a limited amount of money and two parties in
agreement that they wish to arbitrate their dispute may be less expensive and cumbersome as
an ad hoc arbitration than one in an institution. The parties may also choose ad hoc arbitration
because they were not able to agree on an institution.

Disadvantage of ad hoc arbitration

18
Many arbitration organizations have indicated that they are willing to administer arbitrations where the
parties have agreed on the use of the UNCITRAL Arbitration Rules. This is an exception to the statement in the
text.
19
The American Arbitration Association lists on its web site 44 different sets of rules for use in particular types
of disputes. http://www.adr.org/RulesProcedures (last visited 1 July 2005). Some of the rules are specific to
particular states within the United States.

20 | P a g e
The major disadvantage of ad hoc arbitration is that, while at the time of concluding the
contract the parties may expect any dispute they might have to be settled in a friendly
manner; at the time the dispute ripens they may be less inclined to cooperate. In particular,
since any particular procedural rule may favour one or the other party in the dispute that now
exists, they are unlikely to be able to settle upon the rules of procedure for their arbitration.
Without the rules of an arbitration institution as well as the impetus that a permanent
structure can give, they may well find it difficult even to commence the arbitration.

ECE and UNCITRAL Rules

The difficulties inherent in an ad hoc arbitration have been largely overcome by the
preparation of two sets of rules for ad hoc arbitrations, the ECE Arbitration Rules and the
UNCITRAL Arbitration Rules. The parties can provide in the arbitration clause in their
contract that any dispute they may have will be settled by arbitration in accordance with the
Rules. If a dispute does arise that must be settled by arbitration, the rules of procedure have
already been agreed upon and the arbitration can commence. While the ECE Arbitration
Rules have been widely used on the continent of Europe, they have been eclipsed by far by
the UNCITRAL Arbitration Rules. The UNCITRAL Arbitration Rules were adopted in 1976
and were quickly accepted throughout the world. It is unknown how much arbitration takes
place using the Rules, since there is no tabulation of ad hoc arbitrations and by the nature of
such arbitrations there cannot be. An ad hoc arbitration under the Rules can take place in two
different ways. One is purely ad hoc, i.e. no institution plays any role in the arbitration. The
other is that an arbitration institution takes on some administrative tasks at the request of the
parties.

Appointing authority

The least involvement of the institution comes from being named as the “appointing
authority”. If the parties are unable to appoint the arbitrator or one or more of the arbitrators
in a three member tribunal, the Rules authorize the appointing authority to do so.20 If a
challenge is made to an arbitrator, the challenge will be heard by the appointing authority.21

Many arbitration organizations have indicated that they are willing to be appointing authority
under the UNCITRAL Arbitration Rules. The parties may also request the arbitration

20
UNCITRAL Arbitration Rules, arts. 6 – 9
21
Ibid. arts. 10 – 12.

21 | P a g e
institution to undertake the secretariat functions that will be necessary during the arbitration
and many arbitration institutions have indicated how they would administer such arbitrations,
if requested. At its 1982 session in recognition that a number of arbitration institutions had
used the Rules as the basis for their own institutional rules, UNCITRAL adopted
“Recommendations to assist arbitral institutions and other interested bodies with regard to
arbitrations under the UNCITRAL Arbitration Rules”.22 UNCITRAL welcomed the
development as one leading towards the desirable unification of arbitral procedure.

The Rules have also been used extensively outside the ambit of traditional international
commercial arbitration. They were used with some modifications in the highly contentious
Iran – United States arbitrations in The Hague, and were found to work well. It may be on the
basis of that experience that many Bilateral Investment Treaties offer ad hoc arbitration under
the UNCITRAL Arbitration Rules as one of the means of dispute settlement between a
foreign investor and the host State.

Arbitration practice

No set of rules can or should specify every aspect of the procedure that might arise. Much
depends on the background of the parties, their representatives and the arbitrators. This is
particularly true of arbitrations that take place within a particular industry setting or within a
particular trade association. Over time there develop ways of doing things that are known to
all the participants in such arbitrations. Similarly, procedures in domestic arbitrations tend to
be influenced by procedure in the courts of that country. In an international commercial
arbitration that is not within an industry with a specialized arbitration organization, there can
be great difficulties. The parties and their representatives may come from countries with
different ways of conducting litigation and the arbitrators may come from yet other legal
systems. It is not strange that they may have radically different ideas as to how the arbitration
should be conducted. Although consensus is developing among arbitration practitioners about
certain issues,23 significant cultural differences remain. These cultural differences have given
rise to an abundant literature in the specialized periodicals.

22
The Recommendations are available on the UNCITRAL web site, www.uncitral.org.
23
It has been suggested that the 1999 “IBA Rules on the Taking of Evidence in International Commercial
Arbitration” and the 2004 “IBA Guidelines on Conflicts of Interest in International Arbitration”, both products
of the Arbitration Committee of the International Bar Association, represent such a developing consensus in
their respective areas.

22 | P a g e
The Rise of Commercial Arbitration in India

The historical origins of arbitration in India, the economic climate that served, and continues
to serve, as an impetus to India’s evolving arbitration law, and the importance of adopting the
1996 Act as a corrective measure with regards to its previous arbitration regime.

1. Historical Roots:

Although India has only recently experienced a major expansion into the areas of arbitration
and conciliation,24 arbitration has long been recognized as a valid mechanism for dispute
resolution.25 A three-tier structure of dispute resolution existed in ancient India closely
related to modern-day arbitration called Panchayats.26 Historians have suggested that early
Indian law-givers gave more importance to the resolution of disputes by arbitrators than
through judges appointed by the King. The structure of Panchayats essentially survived until
the arrival of the British in India when the traditional legal system underwent considerable
change including codification of arbitration laws with the passage of the first Code of Civil
Procedure of 1859.

The Indian Arbitration Act of 1899 was the first Indian legislation devoted entirely to
arbitration and was built on English common law principles. As the Act of 1899 was largely
unsatisfactory, it was consolidated and amended by the Indian Arbitration Act of 1940 (“1940
Act”)—a code of arbitration that lasted for over fifty-years.

Laws pertaining to international commercial arbitration were initially addressed in the

context of recognition and enforcement of foreign arbitral awards. India had become a party
to the Geneva Protocol on Arbitration Clauses 1923, the Geneva Convention on the
Execution of Foreign Arbitral Awards 1927, and the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards. Recognition of these frameworks
came in three Acts: the 1940 Act, the 1937 Act, and the 1961 Act.

24
Justice K.A. Abdul Gafoor, Arbitration Law - Need for Reforms ICA Quarterly, (Sept 2003)
25
Narayanan, Shri K.R. President of India at the Inauguration of the International Council for Commercial
Arbitration Conference. 17 J. Int’l Arb. 153, 154 (Oct. 2000). (President of India K.R. Narayan stressing in a
speech to the Council for Commercial Arbitration 2000 that two celebrated Indians, Mohan Das Karamchand
Gandhi and Gautama, the Buddha, espoused the values put forth by arbitration in their lifetimes. Gandhi, as
an attorney, was able to say that he had helped settle more cases than those cases won in court: “I lost
nothing thereby, not even money, certainly not my soul.” Narayan noted that the Buddha spoke of the need
for resolution arises when the one’s living is sought through means that bring harm to others.)
26
Raghavan, The structure was comprised of the Puga, the Srenti, and the Kula, each representative of a class
or locality of people.

23 | P a g e
2. India’s New Economic Reality:

A brief look at India’s remarkable economic success gives context and meaning to the
adoption of the 1996 Act.

Much of India’s recent economic success is attributable to the New Industrial Policy of 1991
(NIP)—an economic liberalization strategy that sought to free its economy from the chains of
over-regulation and bureaucracy.27 Following a near economic collapse in 1991,28 India
adopted the NIP which brought its economy to a state of parity with other developed
economies by introducing broad economic initiatives aimed at increasing foreign direct
investment (FDI), privatizing India’s burdensome state-owned enterprises, and removing the
myriad of restrictions on private sector business activity.

The NIP has certainly succeeded in its purpose as India has recently burgeoned into an
economic giant. India has achieved better efficiency and harmony in world trade and
continues to realize its vast economic potential. The numbers give pause even to the most
pessimistic of observers: India’s GDP currently ranks sixth in the world at $3.699 trillion; its
combined markets grew at a robust 7.0% per annum over the last decade; and its productivity
numbers rose to an industrious 4.1%. The economy is also showing signs of diversification as
manufacturing output have risen to 9% per annum, close to catching its services sector at
10% per annum. Some observers predict that India’s economy will surge ahead of China’s
economy within a few decades given its favorable demographics, its vast functioning
democracy, and the eventual benefits of its economic reforms. As India continues to adopt
the economic liberalization strategies of the NIP, India remains poised to become the next
great economic power.

3. In Need of Arbitration Reform:

The increase in FDI and international commercial transactions in India created a distinct
pressure to improve on its mechanisms for dispute resolution system. With economic

27
Work, Tracy, Student Author, India Satisfies Its Jones for Arbitration: New Arbitration Law in India, 10
Transnat'l Law, 217, 220 (1997).
28
Explaining the background to a near economic collapse. India’s economy prior to the NIP consisted of
socialistic goals prescribed in five major industrial policies from 1947 to 1980. These policies were designed to
construct a self-reliant economy which empowered the government to play a heavy regulatory role in directing
and regulating foreign investment. The government applied the regulations scrupulously such that foreign
investment was near impossible for commercial lenders thus driving their investment money away. With
foreign exchange reserves of less than a billion (two weeks’ worth of imports) and a soaring foreign debt
(external debt service payments relative to current receipts was 35.3%) India’s economy was on the brink of
default by the late 1980s

24 | P a g e
liberalization in full swing, the Indian legal system, infamous for its delays and
unpredictability, was ill-equipped to deal with the impending increase of commercial
disputes. Foreign investors who wished to resolve their dispute either by litigation or by
alternative means under India’s infamously gridlocked court system could not afford to wait
decades for a dispute to reach finality.

Arbitration under the previous laws governing arbitration (1940 Act, 1937 Act, and the
various foreign arbitration conventions) provided a poor alternative and little guarantee that
relief would be given quickly and effectively, if at all. Indian courts frequently failed to
enforce arbitral awards, reconsidered arbitral decisions on the merits, and denied enforcement
of awards as contrary to public policy. Arbitration was also painfully slow, often taking a
decade or more to obtain and enforce an award deterring potential foreign investors from
investing in India. Foreign investors who sought an efficient or, at the least, a predictable
dispute resolution system, could take little solace when settling commercial disputes through
arbitration in India. Thus, without the ability to resolve a dispute efficiently, full-scale
investment in India was a risky proposition for international businesses.

4. Adoption of the 1996 Act as a Move Towards Consensus:

The judiciary and business leaders called for arbitration reform as it became apparent that
dispute resolution in India was a deterrent to foreign investment. Indian leaders converged in
1995 to revise the rules on commercial arbitration and to join international consensus on the
issue. Consequently, the Minister of Law introduced the 1996 Act which was substantially
based on UNCITRAL Model Law. The main aims of the 1996 Act were to consolidate and
amend the law relating to domestic arbitration, international commercial arbitration, and the
enforcement of foreign arbitral awards. A further aim was to make provisions for a fair and
efficient arbitral procedure in which arbitrators would need to give reasons for their
conclusions.

The adoption of the 1996 Act was significant for two reasons. First, the 1996 Act unified
three separate bodies of arbitration law by consolidating, repealing, and amending the
previous law relating to domestic arbitration, international commercial arbitration, and the
enforcement of foreign arbitral awards.

Second, adoption of the UNCITRAL Model Law brought efficiency and predictability where
little existed before. The Model Law, already widely in use internationally, ensured India

25 | P a g e
would be consonance with international standards of arbitration practice. Thus, in adopting
the UNCITRAL Model Law, India’s arbitration system moved a step closer to gaining
international acceptance.

India’s international commercial arbitration system has undergone substantial changes over
the past decade with India’s sudden emergence as a global economic power. The Arbitration
and Conciliation Act of 1996 was enacted in response to address extreme latency in the court
system, attract foreign direct investment, and to establish India as a viable forum for
international commercial arbitration. While the enactment of the 1996 Act has proven largely
successful on these fronts, significant problems remain in providing interim measures of
protection, enforcing and challenging arbitral awards, defining arbitral subject-matter,
challenging and removing biased arbitrators. Not coincidentally, tensions remain greatest in
areas which depart from United Nations Commission on International Trade Law
(UNCITRAL) Model Law. An underlying issue throughout arbitration reform is the extent of
the involvement of the Indian judiciary which threatens the very autonomy that the 1996 Act
sought to usher forward. The author concludes that the Indian arbitration movement should
adhere as closely as possible to the mandates of UNCITRAL Model Law in order to establish
predictability into a system that has long been without it.

India’s adoption of the Arbitration and Conciliation Act of 1996 (“1996 Act”), has greatly
enhanced its reputation in the eyes of the international business community as a viable forum
for commercial arbitration disputes. Prior to the adoption of the 1996 Act, Indian rules of
arbitration were contained in three different enactments, namely, the Arbitration Act of 1940,
Arbitration Act of 1937, and the Foreign Awards Act of 1961. Arbitration under these
measures was widely considered to be archaic, unpredictable, untimely, and expensive,
thereby discouraging foreign investment. In response, India adopted the 1996 Act, based on
the United Nations Commission on International Trade Law’s (UNCITRAL’s) Model Law
on International Commercial Arbitration and Conciliation Rules (“Model Law”). The 1996
Act ushered in a vital new era in the Indian arbitration movement.

Now a decade after its adoption, the majority response to the 1996 Act among legal
commentators and the international business community has been overwhelmingly positive.
The 1996 Act has admirably achieved two goals. First, it has unified the legal regime
surrounding arbitration for both domestic and international arbitration conducted in India.
Second, it has improved arbitral efficiency by reducing the need for judicial intervention,

26 | P a g e
enforcing awards as judicial decrees, and granting greater autonomy to arbitral tribunal
decisions. The result has been a fairer, efficient, and predictable procedure that is better
equipped to handle India’s unprecedented rise in international commercial transactions.

Nevertheless, there remain a few chinks in the armor of the 1996 Act. Tensions continue in
areas that depart from Model Law such as the court’s role in granting of interim measures,
enforcement and challenge of foreign arbitral awards, arbitrability of disputes, and challenge
of biased arbitrators are areas that either depart from or remain in significant tension with the
Model Law. This has raised concerns that India’s transformation into a dependable forum for
international commercial arbitration may still fall short of international standards.
Underlying these problems is the courts’ ongoing struggle with relinquishing control and
giving primacy to the arbitral process pursuant to international standards (i.e. Model Law or
institutional arbitral bodies).

The purpose of this comment is to provide a general picture of international commercial

arbitration and the rules it abides by, to offer a context of the forces underlying India’s
adoption of the 1996 Act, and to explore the contemporary problems under the 1996 Act,
while providing suggestions where possible for resolving those problems. Part II explains
why arbitration has become the de facto choice for parties seeking international commercial
dispute resolution, provides a short overview of the UNCITRAL Model Law framework from
which the 1996 Act substantially borrows, and offers a historical perspective of the rise of
commercial arbitration in India and the economic pressures driving system reform. Part III
examines the contemporary issues in international commercial arbitration under the 1996 Act
and explores possible solutions.

Arbitrability of Disputes

Arbitrability refers to “whether a dispute is capable of settlement by arbitration under the

applicable law.” Usually, where the subject matter of the dispute has to do with everyday
business transactions, the state will not be concerned. However, where a dispute concerns
public claims, states reserve a right to intervene in such disputes.29 Examples of public claims
include constitutional issues, welfare of individuals, insolvency rights, anti- trust issues,
banking and finance regulations, regulatory functions of government, natural resource

29
Reddy & Nagaraj, at 124-125 (stating that the following areas have generally been found to be non-
arbitrable in India: 1) constitutional issues; 2) matrimonial matters; 3) insolvency; 4) welfare legislation; 5)
mandatory non-private arbitration provided by statute; 6) taxation or foreign currency matters; 7) tortious
claims; 8) public policy based on illegal activity; and 9) criminal matters).

27 | P a g e
development, or criminal matters. Accordingly, awards made pursuant to disputes which are
considered non-arbitrable by the state of enforcement, will not be enforceable.

The problem of arbitrability arises often in international arbitration because there may be
more than one system of law involved in the proceeding as to whether the subject matter of
the dispute is arbitrable. To illustrate, in a contract between trading partners from Pakistan
and India, the contract provisions may be governed under Canadian law and substantive
disputes be governed under US law. Here, after taking into account each party’s native
country’s laws, an arbitrator potentially has to address four different legal systems.

Diversity of national rules further complicates the picture because developed countries such
as the US, Australia and Canada, have adopted more liberal approach to arbitrability than
developing countries which are wary of ceding state control for fear that arbitrators will
under-enforce important state development objectives. As a result, an award made according
to a jurisdiction where the dispute is arbitrable may not be enforceable in a country where the
dispute is not deemed an arbitrable matter.

1. Defining “Commercial” under the 1996 Act

The meaning of “commercial” is important as it determines the extent to which the scope of
international arbitration would be covered under the 1996 Act. International disputes that fall
outside the definition of “commercial” would not be arbitrable. Too narrow a definition
would lead to many foreign awards not being enforced. Too broad a definition wrests from
state control important state objectives.

But what is “commercial?” Both the Model Law and 1996 Act take similar approaches but
differ slightly in practice. Model Law Art. I apply to “international commercial arbitration.”
Interestingly, the Model Law provides a working definition but does so only in a footnote to
Article 1. The footnote to Article 1 states:

The term commercial should be given a wide interpretation so as to cover matter arising from
all relationships of a commercial nature, whether contractual or not. Relationships of a
commercial nature, include, but are not limited to the following transactions: any trade
transactions for the supply or exchange of goods and services; distribution agreement;
commercial representation or agency; factoring, leasing; construction of works;
constructions; engineering; licensing; investment; financing; banking; exploitation agreement

28 | P a g e
of concession; joint venture and other forms of industrial or business cooperation; carriage of
goods or passengers by air, sea, rail, or road.

The 1996 Act § 2(1)(f) defines “commercial” as “disputes arising out of a legal relationship,
whether contractual or not, considered as commercial under the law in force in India.” No
mention is made of the Model Law Article 1 footnote stated above. This is significant
considering that the 1996 Act is substantially based on Model Law. The omission may have
been the Indian legislature’s attempt at giving courts discretion to decide the definition of
“commercial.” This would allow the courts to narrow or broaden their definition according to
their needs.

Previously, the court made a distinction between a contract for the transfer of services and a
contract for the sale of goods—of which only the latter was considered “commercial” in
nature. For instance, a contract for technical assistance does not involve the direct
participation of profits between the parties and is therefore not “commercial.” But, the court
took a big step forward in R.M. Investment and Trading Co. v. Boeing Co. Where the court
held that “commercial” must be given a wide interpretation consistent with the purpose of the
New York Convention and to promote international trade and commercial relations.
Significantly, the court also referenced Model Law Article 1 footnote and said that guidance
could be taken from its wording.

However, in that same decision, the court left the question of whether the distinction between
a contract for transfer of services and a contract for sale of goods is valid. It is not yet clear
that a contract for a transfer of services (i.e. technology exchange, technical support, etc.)
would be arbitrable under the 1996 Act. Some have called for inclusion of such services to
the meaning of “commercial” since these services can be traded just like a contract for sale of
goods.

Thus far, the court has maintained a broad definition of “commercial,” in line with
internationally accepted standards of the term and should continue to do so.

2. Defining “International” under the 1996 Act

Another problem related to the concept of arbitrability in international arbitration is defining

what is meant by “international.” This is warrants attention for two reasons. First, whether a
dispute is arbitrable may be defined differently under either domestic or international rules of
arbitration. As a result, a dispute which may be arbitrable under “international” arbitration

29 | P a g e
rules may not be so under domestic rules. Second, in context of the 1996 Act, it follows that
if a dispute was not considered “international,” then enforcement of foreign awards found in
Part II under the 1996 Act and select provisions of Part I would be inapplicable to an arbitral
proceeding. Thus, how arbitration law defines an “international” dispute become important
for parties that seek to take advantage of international commercial arbitration rules.

The Model Law considers an arbitration “international” if

 the place of business of the parties is in different States; or

 the place of arbitration is outside the state of which the parties have their places of
business; or
 the place where a substantial part of the obligations of the commercial relationship is to
be performed is outside the state in which the parties have a business; or
 the place with which the subject matter of the dispute is most closely connected is in a
state other than the one in which the parties have their places of business; or
 The subject matter of the arbitration agreement is related to more than one state. Thus, the
Model Law focuses primarily on the place of the parties, arbitration, or dispute.

The 1996 Act definition of what constitutes “international” is at variance with the Model
Law. Section 2(1)(f) of the 1996 Act provides that an arbitration is international where at
least one of the parties is: (1) an individual who is a national of, or habitually resident in, any
country other than India; or (2) a body corporate which is incorporated in any country other
than in India; or (3) a company or an association or a body of individuals whose central
management and control is exercised in any country other than India; or (4) the government
of a foreign country.

The key distinction is that the 1996 Act focuses more on the status of the parties rather than
the place of performance of the contract—an emphasis on form rather than substance. For
example, under 1996 Act definition, any contract between an Indian national and a foreign
national or a non-resident Indian habitually resident abroad, automatically is considered
“international” and subject to international arbitration standards regardless of whether the
transaction was local in nature. By the same token, a foreign company in India would not be
subject to international arbitration under the 1996 Act whose “management and control” is
exercised within India. By focusing on the status of the parties, the Indian approach seems
to ignore the parties’ actual connections to international trade and commerce and the forum

30 | P a g e
connected to that commerce. As a result, there is a danger that “international” arbitrations
will be categorized arbitrarily potentially aggrieving a party wishing to arbitrate under
international rules.

The Model Law’s approach should be adopted because of its focus on the substance of the
commercial interaction reflects more accurately the commercial reality of the parties and/or
forum. The result would be a more predictable application of the rules to parties seeking to
take advantage of international arbitration rules in India.

3. Challenge and Removal of a Biased Arbitrator

One of the defining features of the Model Law is to offer an international yardstick to satisfy
the needs of a speedy and impartial arbitration. The Model Law states that where bias is
suspected, an arbitrator may be removed by the court if the arbitrator did not act with
timeliness, acted with misconduct during the proceedings, or where the arbitrator is de jure or
de facto incapable of performing their duties. An arbitrator’s mandate also ends where he/she
withdraws from the proceedings or the parties agree on removal.

The 1996 Act departs significantly from Model law in the case of challenging and removing a
biased arbitrator. Both the Model Law (Art. 12) and the 1996 Act (§ 12) place a duty on the
arbitrator to disclose at the earliest “any circumstances likely to give rise to justifiable doubts
as to his independence or impartiality” and also gives the right to the party aggrieved to
challenge the authority of the defaulting arbitrator.

The 1996 Act and Model Law diverge with regards to providing a remedy for a party failing
in its challenge to remove an arbitrator. Under Article 13(3) of the UNCITRAL Model Law,
a party failing in its challenge of an arbitrator may elect the remedy before the court or other
authority specified in Article 6 (i.e. re-selection or appointment of arbitrator by the parties or
an appointing authority). A successful challenge usually mandates substitution by a new
arbitrator.

Unfortunately, the 1996 Act omits this remedy in its effort to expedite the arbitration and
prevent diversionary tactics in the courts. Section 13(4) simply provides that if a challenge
“is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an
arbitral award.” The only recourse is for the challenging party to set aside the entire award
under § 34 (domestic awards) and § 48 (foreign awards) in the post-award stage. This
method requires a re-hearing of the entire case which inevitably wastes precious time and

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money. Complicating matters, under §§ 34 or 48, a charge of “bias” is not enumerated as one
of the circumstances that an award may be set aside under. Thus, the problem of challenging
and removing an arbitrator remains unsolved both at the arbitration stage and at the post-
award stage.

Adherence to the Model Law is preferable here because it supplies a remedy early in the
process before the parties expend time and money on the arbitration. Also, by providing a
judicial remedy, the parties are not left out on a limb waiting for a potentially biased
arbitrator to rule on him/herself. Other countries have dealt with this problem by accepting
not only courts but also institutional arbitration bodies as mechanisms for challenging biased
arbitrators. For instance, the ICC relies on the International Court of Arbitration (ICA) to
decide any challenge to an arbitrator suspected of bias. Likewise, the American Arbitration
Association (AAA) handles a claim of bias under its Rule 20 in which a complaint of
partiality is submitted to AAA for determination of disqualification. However, if the
complaint is denied, the complaining party still has a right to a claim of bias after the award
has been preserved.

India would be well-served to amend the 1996 Act to provide either a judicial remedy or
provide for institutional safeguards to decide on a charge of bias. In a legal system where bias
has been a concern in the past, a provision such as this would go a long way towards holding
biased arbitrators accountable.

CONCLUSION

Before the 1996 Act, the process of settling international commercial disputes in India “made
lawyers laugh, and legal philosophers weep.” Judicial interference, long bureaucratic delays,
and unpredictable decisions by arbitrators marred the arbitration process leaving little to no
alternative for international business to resolve their disputes. But with India’s emergence as
a global economic power following its liberalization scheme under the NIP of 1991, reform
of its domestic and international arbitration system was essential to gaining the trust of the
international business community. By adopting the 1996 Act, India implemented
international standards of commercial arbitration under UNCITRAL Model Law making
arbitral proceedings considerably shorter, more predictable and fair, less formalistic, and
subject to less judicial scrutiny.

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But, old habits die hard. Judicial intervention currently poses the biggest risk to international
commercial arbitration in India. As adjustments to the 1996 Act are underway, the courts and
legislature should adopt a policy against taking too active a role in arbitration proceedings
only to repeat the mistakes of the past. One way to ensure this is by keeping in line with the
mandates of Model Law which give primacy to arbitral autonomy and the parties’ freedom to
contract. In doing so, India can succeed in building its reputation as an international
arbitration-friendly country and complete its transformation into a legitimate forum for
international commercial arbitration.

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