Can States Amend the Arbitration Act? Examining Their Legislative Powers

Introduction

Arbitration has emerged as a preferred method for resolving disputes efficiently and privately. In India, arbitration is primarily governed by the Arbitration and Conciliation Act, 1996, which aligns with international standards, including the UNCITRAL Model Law.

The UNCITRAL Model Law on International Commercial Arbitration is a framework created by the United Nations Commission on International Trade Law (UNCITRAL) to provide a standardized legal structure for arbitration across different countries. It serves as a guideline for nations to develop their own arbitration laws while maintaining international consistency.

 However, a critical question arises: Can individual states amend or modify this Act? This article explores the legislative powers of states concerning arbitration laws and the constitutional framework governing such modifications.

Understanding the Constitutional Framework

India follows a quasi-federal structure where legislative powers are divided between the Union (Central Government) and States through three lists in the Seventh Schedule of the Constitution:

1.    Union List (List I) – Matters under exclusive jurisdiction of the Central Government.

2.    State List (List II) – Subjects under the control of State Governments.

3.    Concurrent List (List III) – Subjects where both the Union and State Governments can legislate.

Arbitration Under the Legislative Lists

The Arbitration and Conciliation Act, 1996, is enacted under Entry 13 of the Concurrent List, which covers "Civil Procedure, including arbitration." This means both the Parliament and State Legislatures have the power to legislate on arbitration. However, the Constitution provides specific limitations on how states can amend a central law in the Concurrent List.

Can States Amend the Arbitration Act?

While states have legislative power over arbitration, their ability to amend the Arbitration and Conciliation Act, 1996 is limited due to the following reasons:

1. Requirement of Presidential Assent

• Article 254(2) of the Indian Constitution states that if a state law conflicts with a central law on a subject in the Concurrent List, the state law will prevail in that state only if it receives Presidential assent.
• However, if Parliament later amends the central law, it will override the state law unless the state again secures Presidential assent.

2. Supreme Court’s View on Arbitration as a Unified Legal Framework

• In cases like Gujarat Urja Vikas Nigam Ltd. v. Essar Power Ltd. (2008), the Supreme Court has emphasized the importance of a uniform arbitration regime in India.
• Fragmenting arbitration laws across states may undermine India's attractiveness as an arbitration-friendly nation and create inconsistencies in dispute resolution.

3. The Example of West Bengal’s Attempt

• West Bengal, in the past, sought to enact a state-specific arbitration law to regulate disputes arising within the state. However, the need for uniformity and the potential conflict with the central law led to legal complexities, discouraging such amendments.

What Can States Do?

Despite the restrictions, states can take indirect measures to influence arbitration, such as:

1.    Establishing State Arbitration Councils – States can create their own arbitration institutions and promote alternative dispute resolution (ADR) mechanisms within their jurisdiction.

2.    Framing Rules for Institutional Arbitration – States can encourage the use of arbitration in public sector contracts and commercial transactions.

3.    Providing Financial and Infrastructure Support – States can support arbitration centers to boost arbitration culture.

CASE LAW:

Amazon v. Future Retail (2021)

Key Issue: Whether an Emergency Arbitrator’s award is enforceable under Indian law.

Judgment:

• The Supreme Court upheld the validity of Emergency Arbitrators' awards under the Arbitration Act.
• Ruled that parties must comply with arbitration agreements, including interim orders.

Impact: Strengthened institutional arbitration and ensured compliance with contractual arbitration clauses.

Conclusion

While states do have some legislative powers over arbitration, amending the Arbitration and Conciliation Act, 1996, is not straightforward. Any such amendment requires Presidential assent and must align with the national policy of maintaining uniform arbitration laws. Instead of modifying the central law, states can enhance arbitration practices by promoting institutional arbitration and supporting ADR mechanisms. A harmonized arbitration framework is crucial for India's global competitiveness as an arbitration hub.