India: Arbitration In India – The Way Forward

BACKGROUND

With an increase in cross border transactions and open economic policies acting as a catalyst, commercial disputes have been steadily rising. The Indian judiciary has been criticized for an interventionist approach in arbitration, particularly when it involves a foreign party. Some recent judgments of the Indian courts have created some controversy and confusion on the law governing arbitration. Arbitration in India is plagued inter-alia by unreasonable delays, high costs, and delay in enforcement of the award. Some have even questioned that the very purpose behind enacting the Arbitration and Conciliation Act, 1996 (the "Act"), which was to provide for quick and effective alternative dispute resolution, stands frustrated. The confidence, trust and faith of the parties to resolve disputes through arbitration has eroded significantly over a period of time. Taking note of these developments, the Law Commission of India, led by its Chairman Justice A.P. Shah has submitted its 246th report to the Ministry of Law and Justice (the "Law Commission Report") in August 2014, suggesting sweeping changes to the Act that will have a significant impact on arbitration in India.

HIGHLIGHTS OF THE LAW COMMISSION REPORT

Encourages Institutional Arbitration

The Law Commission Report has: (a) suggested the promotion and encouragement of the culture of institutional arbitration in India, which the Commission recognizes as the way forward; (b) recommended that the High Court and the Supreme Court while acting in exercise of jurisdiction under Section 11 of the Act take steps to refer disputes to institutionalized arbitration; and (c) recommended legal sanction to "emergency arbitrator", which is a popular and effective remedy provided for by leading international arbitration institutions.

Expeditious Proceedings

The Law Commission Report has recommended that: (a) an application for appointment of an arbitrator be disposed of within 60 (sixty) days from the date of service of notice on the opposite party; (b) arbitration proceedings shall be commenced within 60 (sixty) days from the day of grant of interim measures failing which the interim measure of protection shall cease to operate; (c) challenges to arbitral awards shall be decided expeditiously and in any event within a period of 1 (one) year from the date of notice to the respondent; (d) arbitrator shall disclose whether he is in a position to finish the arbitration with 24 (twenty four) months and render award within 3 (three) months; and (e) the arbitral tribunal should hold proceedings on continuous days and no adjournments shall be granted unless sufficient cause if made out and costs may be imposed on the party seeking adjournment.

Setting Aside Of Domestic Award & Recognition/Enforcement Of Foreign Awards

The Law Commission Report has recommended that in cases of foreign awards and awards passed arising out of international commercial arbitration in India, a narrower construct be given to "public policy", as so to include only: (i) the fundamental policy of Indian law; and (ii) the most basic notions of justice or morality. With a view to do away with the unintended uncertainties caused by the Supreme Court's judgment in ONGC v. Saw Pipes, (2003) 5 SCC 705, the Law Commission Report has proposed specific provisions dealing with setting aside of the domestic award on grounds of patent illegality. The test of "patent illegality on the face of the award" has been restricted only to domestic awards not resulting from an international commercial arbitration.

Judicial Intervention In Foreign Seated Arbitration

The Law Commission Report has reinforced the judgment of the Supreme Court in Bharat Aluminum and Co. v. Kaiser Aluminum and Co., (2012) 9 SCC 552. The Law Commission Report has recommended that: (a) the Indian courts will have jurisdiction under Part I of the Act, only when the seat of arbitration is within India; (b) certain provisions in Part I of the Act, such as Section 9 (interim relief), Section 27 (court assistance for taking evidence), Section 37(1)(a) and 37(3) (appealable orders), will remain available to parties in a foreign seated arbitration; and (c) legal recognition be accorded to the terms "seat" and "venue", consistent with international usage. The proposed changes will not affect applications pending before any judicial authority, relying upon the law set out by Bhatia International v. Interbulk Trading SA, (2002) 4 SCC 105.

Interim Measures

The Law Commission Report has: (a) recommended that once the arbitral tribunal has been constituted, the Court shall not entertain an application under Section 9 of the Act for interim measures unless circumstances exist making the remedy under Section 17 not efficacious; (b) clarified the wide range of powers of the arbitral tribunal to grant interim measures; and (c) provided teeth to interim orders of the arbitral tribunal in as much as they can be enforced like court orders.

Challenge To An Arbitral Award

The Law Commission Report recommends that in cases of international commercial arbitration the challenge to an arbitral award shall be decided by the High Court even if such High Court does not exercise civil jurisdiction. The challenge to an arbitral award on grounds of patent illegality appearing on the face of the award is restricted to only domestic arbitration and not international commercial arbitration.

No Automatic Stay Of The Arbitral Award

The Law Commission Report recommends amendments to do away with the present regime where the mere filing of a challenge petition to the arbitral award under Section 34 of the Act acts as an automatic stay of the award. It has been recommended that an application has to be filed seeking to stay the operation of the award and the court is required to record reasons in writing for grant of such stay. While considering the grant of stay, the provisions for stay of money decree under the provisions of Code of Civil Procedure, 1908 would apply.

Reduces Scope For Objections At The Time Of Appointing Arbitrators Or Referring The Dispute To Arbitration

It has been recommended that questions regarding the existence of an arbitration agreement (that are raised in proceedings under Section 8 and 11 of the Act) shall be referred to arbitration and the arbitral tribunal shall decide such issues.

Parties To Arbitration

In consonance with the judgment of the Supreme Court in Chloro Control India Private Limited v. Severn Trent Water Purification Inc and others, (2013) 1 SCC 641, the definition of the word "party" to an arbitration agreement has been expanded to also include persons claiming through or under such party. Therefore, even non-signatories to the arbitration agreement may be covered in cases involving inter-related contracts or, group companies.

Arbitrability Of Fraud And Complicated Issues Of Fact

The Law Commission Report recommends that questions of fraud, serious questions of fact and law are expressly arbitrable, putting a rest to the confusion created by recent judgments of the Supreme Court.

Disclosure By The Arbitrator

Recognizing that independence and neutrality of the arbitrator is critical to the entire arbitration process, the Law Commission Report has recommended that the Fourth and Fifth Schedule be inserted that set out grounds that give rise to justifiable doubts as to the independence or impartiality of arbitrator, and the conflict of standards based on the IBA guidelines. The arbitrator is required to make certain disclosures to ensure that independence and neutrality standards are met. The arbitrator is also required to disclose if there exist circumstances that are likely to affect his ability to devote sufficient time and to complete the arbitration within 24 (twenty four) months and pass the award within 3 (three) months thereafter. The disclosures also require the arbitrator to disclose his ongoing arbitrations.

Costs

The Law Commission Report recommends the loser-pays rule to act as a deterrent to frivolous litigation. It has been recommended that an arbitral tribunal has the discretion to determine the amount of costs including the reasonable costs towards the fees and expenses of the arbitrators, legal fees, and expenses towards conducting arbitration. It has also been recommended that the conduct of parties will be a determining factor in awarding costs including the refusal of a party to unreasonably refuse a reasonable offer of settlement made by the other party.

Cap On The Fees Of The Arbitrator

The Law Commission Report has recommended addition of the Sixth Schedule suggesting model fees in case of domestic ad-hoc arbitration other than international commercial arbitration with a view to ensure that the arbitration process does not become very expensive.

Power Of The Arbitral Tribunal To Award Interest

The Law Commission Report has recommended amendments to Section 31 of the Act to clarify the powers of the arbitral tribunal to grant compound interest as well as to rationalize the rate at which default interest ought to be awarded and move away from the statutory 18% (eighteen percent) interest in the present regime to a market based determination in line with commercial realities.

CONCLUSION

The Law Commission Report is a step in the right direction to overhaul the system of arbitration in India. If the recommendations are accepted, the systemic malaise and the problems that arbitration faces in India is likely to be redressed and this will go a long way in making India an arbitration hub. However, some concerns still remain. After the Law Commission Report was submitted to the Government, the Supreme Court recently passed a judgment in ONGC v. Western Geco, 2014 (9) SCC 263 ("Western Geco") which has broadened the scope of "fundamental policy of Indian Law" to include the requirement of arbitral tribunals to follow a "judicial approach" and the "wednesbury principle of reasonableness". This would open floodgates for challenge to an arbitral award as review of the award on merits would be permitted. This is not a good development. Keeping this in mind, the Law Commission of India has submitted a Supplementary Report on February 6, 2015 (the "Supplementary Report"), to the Ministry of Law and Justice, seeking to nullify the effect of the Western Geco judgment. However, the Supplementary Report may not be adequate to curtail the applicability of Western Geco. While these events are being watched closely and are being widely perceived as a sign of good things to come, it will be interesting to see to what extent the Government will accept the Law Commission Report and how soon these changes are introduced, and if the amendments stand the scrutiny of the judiciary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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