Nishith Desai Associates© 1

Paper 6

Conciliation and ADR in India

- Murali Neelakantan

Synopsis :

A. Introduction : ADR in India

History of ADR in India
ADR in Modern India
B. Litigation in India - the need for ADR
C. Judicial approach to ADR in India
D. Arbitration and Conciliation Act, 1996.
E. Conciliation
F. Conciliation v. Arbitration
G. Conclusion

* Nishith Desai Associates, International Legal & Tax Counsellors, Mumbai, India . Tel.# : 91 + 22 + 282
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Introduction : ADR in India

History of ADR in India

India has had a long history of ADR; the earliest recorded instances date back to several
centuries before Christ. Many of these forms exist with little change in the interiors and rural
India. Bodies such as the panchayat, a group of elders and influential persons in a village
deciding the dispute between villagers are not uncommon even today. There are also
instances of disputes between persons of two different villages being settled by a body of
individuals drawn from the disputants’villages, a third village or a combination of the two. The
disputants are required to present their cases before the panchayat which will attempt to
resolve the dispute. The working of the panchayat is such that it would be difficult to classify
it as a mediator, a conciliator, an arbitral tribunal or a judicial body. While all disputes are
heard by the panchayat it dons different forms, depending on the circumstances and the
situation. If the facts disclose a clear legal obligation, it would act as a ‘judicial’ body to
decide the rights of the parties and enforce the decision by sanction. On the other hand, it
may persuade one of the parties to act in a particular manner in a situation where the
petitioner has no real claim in law but appeals to the righteousness of action to seek relief.
This may be seen as the first indication of the process of conciliation in India. The disputants
would ordinarily accept the decision of the panchayat and hence a settlement arrived
consequent to conciliation by the panchayat would be as binding as the decision that was on
clear legal obligations. One ought to understand that the decision of the panchayat was
always to be followed, irrespective of the source of the decision. The panchayat has, in the
recent past, also been involved in caste disputes. One may compare some activities of the
panchayat to that of the 18th. century English guilds since the caste system began with a
classification based on the profession of its members.

The Muslim rule in India saw the incorporation of the principles of Muslim law in the Indian
culture. The Kazi was the designated judicial officer who decided disputes between
individuals. There are many recorded instances where the kazi has decided a case beyond
the law by getting the disputants to agree to a solution that has been arrived at by
conciliation, without actually giving that colour to the decision. Thus the decision from the
authority of the kazi would be binding on the parties before him, it may just be that the
decision is more acceptable and the disputants go back with the feeling that the decision was
just and neither lost.

ADR in modern India

In the not so distant past too, conciliation has been effectively used in dispute resolution. The
most prominent and effective use of conciliation has been in the Industrial Disputes Act, 1947
(the I.D. Act). Conciliation has been statutorily recognised as an effective method of dispute
resolution in relation to disputes between workmen and the management of the industry. The
I.D. Act makes it attractive for disputing parties to settle disputes by negotiation, failing which
by conciliation by an officer of the Government before resorting to litigation. Several
provisions set the scene for conciliation to be successful:

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1. The conciliation is by an officer of the Labour Department in the Government.1

2. The parties may not go on strike or declare a lock-out during the period of conciliation.
3. The conciliation officer shall make all efforts to settle the disputes by conciliation2.
4. The agreement reached in the process of conciliation shall be certified by the conciliation
officer as a fair settlement3.
5. Such a settlement shall bind all the other trade unions that are party to the dispute and are
invited to participate in the conciliation but prefer to stay away from the conciliation process.4
6. The settlement is a self-executing document and the breach of the settlement by the
management is a ground for recovery of dues under a simplified summary process.5

All parties in an industrial dispute that has had the misfortune of being litigated know that it is a
tedious process that could go well beyond the lifetime of some of the beneficiaries. It is this
factor that has contributed greatly to the success of conciliation in industrial relations. There
are however certain abuses of the process and the benefits of the agreement arrived in the
course of conciliation that are used to supress the trade unions which do not ‘cooperate’ with
the management. This however does not diminish the effectiveness of the process.

Litigation in India - the need for ADR

Like every developed legal system, India too has a reputation for long winding procedures
and an elaborate system of revisions and appeals from the order of the court of first
instance. While the rationale is to ensure that the plaintiff has the satisfaction of the
knowledge and erudition of the best legal minds, the price for this is the delay in finality of
proceedings. There have been attempts to simplify the appeals’ procedure but the sheer
number of cases seems to overwhelm the system. In the background of this and the fact that
India is presently at a critical stage of its development, one needs to rethink the dispute
resolution mechanisms of the past so that those contemplating investment in India are
satisfied that they will get the benefit of international dispute resolution procedures in India. In
the absence of this, those looking to investing in India may evaluate the legal risk and
conclude that exit is dependent on the outcome of laborious litigation. One may be led to
believe that a legal system that is slow is a risk to be considered while deciding to invest
since it affects the investment in such a way that the investor may not only lose control of the
investment but also finds the exit from the difficult situation closed. An example of a limitation
on the investor imposed by the government while granting approvals for investment in India
is that the governing law of the contract be Indian law. Unless Indian law is as effective as
some of the legal systems of other nations, investors would not be comfortable investing in
India. The restriction on the choice of law is also a restriction on ADR techniques and choice
of forum for ADR. Consequently, unless India provides a good system of dispute resolution,
it would be difficult to attract and retain investment. It is expected that the investor would look

1
Section 2(d).
2
Section 12(2).
3
Section 12(3).
4
Section 18(3).
5
Section 33-C.

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to ADR rather than litigation to settle disputes in Indian since it is not certain if the judiciary is
competent to deal with complex investment disputes and if the laws are sufficiently
comprehensive to deal with them. The advantages of a developed system of ADR in India
include:

1. Choice of judges/experts who understand international business, commercial transactions

and are not lost in the language of the law. In addition, the parties are sure that the chosen
person(s) will have the expertise to resolve the dispute to the satisfaction of the parties. At
the very least, one is sure that the dispute will not be decided by a person who is totally
ignorant of the relevant laws, business practices and commercial aspects of the transaction.

2. One expects that the chosen person(s) will not only understand the transaction better and
more easily but also appreciate the underlying motivations and expectations that led the
parties to enter into the transaction and act the way they did.

3. Most transactions are founded on timing. Once the timing is lost, the transaction makes little
or no sense to the parties. In this situation, the remedy also has to be considered in the same
tone. A remedy that would be acceptable to the parties at a certain point in time may be
unacceptable at another. The expert who applies ADR is expected to understand these
positions of the parties and guide the procedure to the solution accordingly. It is not expected
that the judge, a generalist would understand such considerations of the parties.

Judicial approach to ADR in India

The judiciary, in its zeal to ensure justice for all has been extremely protective about its
supervisory role in the ADR process. Since the only ADR that the judiciary has known so far
has been arbitration, its approach to arbitration is relevant for the present enquiry.
Conciliation has had a very limited application in India.6 The higher judiciary has looked upon
the arbitral tribunal as a subordinate court and treated it as such. It appears that the judiciary
believes that the judicial power of the State is vested exclusively in the judiciary and
therefore it is necessary for it to exercise supervision over the functioning of the arbitral
tribunal.7 It has, on occasions, been extremely protective about the freedom to the arbitral
tribunal. For example, the court would not leave it to the arbitrators to finally decide on their
jurisdiction8, whereas a subordinate court is empowered to decide on its jurisdiction. This
has been reversed by the Arbitration and Conciliation Act, 1996 which specifically empowers
the arbitral tribunal to decide on its jurisdiction.9 Therefore, while on the one hand the
judiciary is happy to let the arbitrators decide matters at the first instance, it would not allow
the arbitrators to be beyond the supervision of the courts. It is to be seen if the new
legislation which limits the scope of judicial review changes the position.

6
India’s experience with conciliation is dealt with later in this paper.
7
See for example, F.C.I. v. Joginderpal Mohinderpal, (1989) 2 SCC 347.
8
See, Union of India v. G.S. Atwal & Co., (1996) 3 SCC 568.
9
Section 16.

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Arbitration and Conciliation Act, 1996.

The Arbitration and Conciliation Act, 199610 is an attempt by Parliament to take a holistic
approach to alternative dispute resolution in India. In the past, domestic and international
arbitrations were dealt with separately under different legislations; the Arbitration Act, 1940
dealt only with domestic arbitrations. Foreign arbitral awards were further classified on the
basis of the New York and Geneva Conventions and governed by the Foreign Awards
(Recognition and Enforcement) Act, 1961 and the Arbitration (Protocol and Convention) Act,
1937 respectively. The Act is cast in terms of the UNCITRAL Model Law on International
Commercial Arbitration11 and seeks to break away from the regulated and supervised forms
of ADR as have been in existence in India. The need to provide flexibility to the parties in a
legal relationship to decide for themselves the mode of settlement of their differences has
finally been recognized. While the major changes have been in the area of arbitration, it is
noteworthy that conciliation has received recognition. The Act seems to have been a reaction
to the response of the judiciary to ADR in the past. There are several provisions that clearly
seek to settle certain issues that have been the subject of great contention before the
Supreme Court of India. The salient provisions of this Act in the matter of arbitration are:

1. Limited judicial intervention.12

2. Duty of the court where a suit is filed, upon application in this behalf, to refer the parties to
arbitration in accordance with the arbitration agreement between the parties.13

3. Power of the arbitrators to award interest from the date of the cause of action till the date of
the satisfaction of the award.14

4. Empowering the arbitrators to order interim measures for the protection of the subject matter
or to ensure satisfaction of the award.15

5. Empowering the arbitrators to decide on their jurisdiction.16

6. Equating the arbitral award to a decree of a court.17

7. Limiting the number of statutory appeals from the award to one.18

10
Hereinafter the Act.
11
United Nations Commission on International Trade Law, 1966.
12
Section 5.
13
Section 8.
14
Section 31(7)
15
Section 17.
16
Section 16.
17
Section 36.
18
Section 37(3).

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Since the basic premise for the courts to strike down certain actions of the arbitrators was
that they were not empowered to act in a certain manner to decide on certain matters, the
Act specifically empowers the arbitrators in these areas and consequently, certain decisions
of the court may be nullified to the extent to which they differ from the provisions of the Act.
While granting the arbitrators more powers, the Act also imposes on them the duty to give
reasons for their award, unless the parties specifically agree that no reasons need be
given.19 This would make the arbitrators open to criticism from the courts who had, until now,
refused to interfere in most cases of non-speaking awards since they had little material to go
by.

Conciliation

The Act, for the first time in India, provides for recognition of conciliation in commercial
disputes20. Part III of the Act provides for “...conciliation of disputes arising out of legal
relationships, whether contractual or not and to all proceedings relating thereto.”21 This
provision similar to that relating to arbitration, is arguably, the most important issue and
needs careful attention.

The choice of the method of ADR is a function of the kind of relationship and the nature of the
dispute between the parties.22 The Act clearly applies only to commercial arbitrations and
conciliations. From the description of the scope and application in section 61 one needs to
understand if only legal obligations may be the subject of conciliation. Can differences of
opinions that have an impact on the relationship between the parties be the subject matter of
the conciliation? If the subject matter of the dispute is the legal obligation of the parties then
a choice of the ADR mechanism is clearly available: the parties may choose either arbitration
or conciliation. To equate conciliation to arbitration on so simplistic an analysis is to grossly
understate the relevance of conciliation. While it is no doubt true that conciliation could be
used in place of arbitration and parties may be happier with a settlement than an award, it
must be recognised that conciliation has one special characteristic, i.e., it can go to the root
of the difference, the real problem between the parties that had led them to disagree with
each other. This is best explained with an illustration:

In a joint venture agreement between an Indian and an American company, each holding
50% of the shares in the Indian joint venture company, certain matters are “reserved” i.e,
decisions on these matters may be taken only if the directors nominated by both the parties
vote in favour of the resolution in a meeting of the Board of Directors. Typically these would

19
Section 31(3).
20
Order XXXII-A of the Code of Civil Procedure, 1908 provides for a judge, in certain matters relating to
the family, to make efforts to settle the dispute amicably and adjourn the proceedings to enable the
parties to reach a settlement.
21
Section 61.
22
See further, Tania Sourdin, “Matching Disputes to Dispute Resolution Processes - The Australian
Context”, and Frank E.A.Sander, “Dispute Resolution within and Outside the Courts - An overview of
the US Experience” in P.C. Rao and William Sheffield (eds.) Alternative Dispute Resolution: What it
is and How it Works”, ICADR, New Delhi, 1996.

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Nishith Desai Associates 7

include expansion of the capital base, diversification of activities, creation of subsidiaries,

mergers and acquisitions, creation of liabilities exceeding a certain amount, etc. If the
American partner wishes to expand the equity base of the joint venture company so that it
may undertake larger projects or expand its activities but the Indian partner is unable to
match the capital contribution required to maintain the ratio of shareholding due to
unavailability of free resources at that point of time, the Indian partner will instruct its
nominee directors to vote against the resolution even though it agrees, in principle, that the
company needs additional funds for the expansion. The Indian partner may wish to increase
the debt exposure of the joint venture company, which the American partner may view as an
ad hoc response, rather than as a long-term solution.

The Indian partner may perceive this action as a threat by the American partner to supress
the Indian partner by forcing the dilution of its control in the joint venture company. This may
be the first sign of insecurity of the Indian company and the beginning of the loss of trust
between the partners. Once the resolution fails, the American partner may not be very
interested in the joint venture as it sees that the company is unlikely to grow in a manner that
it expects. It may also perceive the Indian company as lacking in vision and ambition. This
may be a natural inference by the persons who make the policies and direct the activities of
the American partner. If the American partner is allowed to continue to hold this view, it
would sour the relationship between parties that was based on the understanding of equality.

The difference of perception of the situation could not be the subject of arbitration since there
is no breach of any obligation of the parties under the joint venture agreement. There is no
obligation on the parties to vote in a particular manner on issues that are in the list of
reserved matters. At best the parties could allege that the other did not act in good faith and
in the best interest of the joint venture company. This however, could be a matter that could
be referred to conciliation. The parties could express their concerns and feelings in the
matter to the conciliator who could help them find a solution to the problem after
understanding their concerns. It may be that the parties have not been able to communicate
their understanding of the situation to each other adequately, have failed to understand each
other’s perception of the situation, have a difference of opinion regarding the future of their
relationship or differ in their vision for the joint venture company. In most of these cases,
conciliation will help them communicate their views so that, at the very least, the air may be
cleared for a review of the relationship.

In the present illustration, a possible solution that may be acceptable to both parties could be
an expansion of the capital base of the company by a fresh issue of shares to the American
partner with a right to the Indian partner to purchase half the shares at an agreed price(or
formula) within a fixed period of time in the future. Thus, though the Indian partner may hold
fewer shares for a short while, the American partner may continue to treat the Indian partner
as a full and equal partner thereby putting to rest the fear of the Indian partner that the
increase in the share capital is a ploy to dilute its control in the joint venture.

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Whether the ‘difference of opinion’ in the above illustration qualifies for the benefits under
section 6123 of Part III of the Act is therefore an issue. It would if one takes a view that it is a
proceeding relating to disputes arising out of a legal relationship. The Supreme Court of India
has held that the phrase “arising out of” is of the widest amplitude and should not be read
restrictively.24

Whether the fact situation in the illustration would qualify as a ‘dispute’ would be the next
level of enquiry. While dealing with the issue of the date from which limitation runs in a
matter to be referred to arbitration, the Supreme Court was required to determine the date
when the dispute or difference arose. It held that the “...dispute or difference arises on
unequivocal denial of claim of one party by the other party as a result of which the claimant
acquires the right to refer the dispute to arbitration.”25 If one were to expect that the courts
would interpret the word “dispute” in the context of conciliation in a similar manner, it may be
necessary for the agreement containing the conciliation agreement to confer a right on the
parties to resort to conciliation in situation where the difference of opinion, which may not be
a breach of any legal obligation, is likely to affect their relationship. This would ensure that
the parties have always a course of action to resolve their differences and are not left without
a chance to resolve such differences that could be fatal to the joint venture company (in the
illustration above).

Conciliation v. Arbitration

While one has a choice of ADR techniques in most situations, it may be that some
techniques are better suited for certain situations. A comparison of conciliation and
arbitration is sought to be made to highlight the situations in which conciliation would be
preferred to arbitration, after listing certain characteristics of conciliation that distinguish it
from arbitration.

Conciliation is different from arbitration and hence is better suited in certain

situations:

1. Decisions of parties in a relationship arising out of ‘non-legal obligations’ situations are not
arbitrable.

2. Certain decisions based on the ‘unfettered’, and ‘unrestricted’ rights of the parties affecting
the relationship between them.

3. Minor breaches or breaches of legal obligations that would not normally lead to termination
or large-scale liabilities but cause a loss of faith between the contracting parties are better
dealt with by conciliation than arbitration.

23
Supra n.8.
24
Tarapore & Co. v. Cochin Shipyard, (1984) 2 SCC 680, 715; Renusagar Power Co. Ltd. v. General
Electric Company, (1984) 4 SCC 679.
25
State of Orissa v. Damodar Das, (1996) 2 SCC 216.

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4. Operational issues that are not arbitrable but affect the continuing relationship between the
contracting parties.

5. Operational issues that have become such that lines of difference are drawn and have turned
into unrectractable positions without the other side giving in. Arbitration in such cases would
only make matters worse and only foreclose any possibility of working together.

6. The conciliator may not follow the law strictly; he may persuade the parties to come to a
settlement on principles of ex aeque et bono or amiable compositeur.26

7. Commercial practices giving rise to actions that have in fact happened but are sometimes
not easy to prove as ‘facts’ in accordance with the rules of evidence in court or arbitration.
Parties may not admit these facts in arbitration or litigation since they know that these cannot
be proved by the other. In conciliation however, these may be admitted and justice may be
done, as it should be.

8. All proceedings in conciliation are confidential. Statements, concessions and admissions

made, and documents produced are to be used only for the conciliation. These may not be
used as the basis of claims in subsequent arbitrations or litigation. In addition, the conciliator
may not be the arbitrator in the same matter and hence a party that admits a position in
conciliation may demand proof of the facts alleged from the other party in arbitration or
litigation.

9. The end result in a conciliation is acceptable to both parties since it is not imposed like an
award/decree.

10. Consequently the possibility of better compliance increases tremendously.

11. Conciliation is more easily acceptable since the outcome of arbitration and/or litigation is
both uncertain and imposes an unwarranted additional expense.

12. Conciliation does not close the option of arbitration or litigation until settlement is signed by
the parties.

13. The settlement is treated on par with a decree of a court and consequently, may be executed
as such.

14. Subsequent to the Act, the cause of action, i.e., the matter in conciliation, may be said to
have merged with the settlement becoming final and therefore, neither of the parties may
resort to litigation or arbitration on those matters, as an afterthought. This proposition has
been affirmed by the Supreme Court of India in a matter where the dispute was settled by

26
One may venture to hypothesize that the above six factors may be the reasons for conciliation to be
preferred to arbitration in respect of industrial disputes under the I.D. Act.

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the parties and one of them sought to arbitrate the difference that was settled. The court was
of the view that a party may not seek arbitration on a matter after agreeing to a settlement
since all differences may be said to have been disposed of by the settlement and no dispute
would exist.27 Thus there would be no scope for appeals. Conciliation brings a finality that
arbitration sometimes does not.

Conclusion

Conciliation has been successful in India through a system that has become popular as Lok
Adalat (people’s court). These were initially ad hoc bodies composed of eminent persons,
lawyers, judges, social activists, government officials and para-legals who would endeavour
to help the parties who in the pre-litigation process reach a settlement.28 The Lok Adalats
have also been useful to the judiciary since courts have referred parties to these Lok Adalats
when it is felt that a dispute could be better resolved there. The success of the Lok Adalats is
seen in the number of cases that are settled: upto 31st. March 1996, more than 13,000 Lok
Adalats have been held in India where were 5 million cases have been settled. Of these, 278,
801 cases of motor accident claims accounting for 8,612 million Rupees were paid to the
claimants.29

In a sense, Lok Adalats have achieved the status of ADR. That courts allocate a day in a
fortnight or month to hear matters that the parties have agreed to settle out of court through
the Lok Adalat is sufficient evidence of its popularity. It may also be a statement about the
people’s choice of dispute resolution mechanisms, their discontentment with the judicial
system - its uncertainties and delays. That may be the cue for us to attempt to settle disputes
through conciliation, now that even the judiciary has begun to see merit in it.

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The contents of this paper should not be construed as legal opinion or professional
advice.

27
See, Nathani Steels Ltd. v. Associated Constructions, 1995 Supp(3) SCC 324; P.K. Ramaiah & Co.
v. N.T.P.C., 1994 Supp (3) SCC 126; see also, State of Maharashtra v. Nav Bharat Builders, 1994
Supp(3) SCC 83.
28
These have been institutionalised by the National Legal Services Authority Act, 1985.
29
Source: National Legal Sevcies Authority, New Delhi, 1996.

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