India: Arbitration Ordinance 2015: A Radical Overhaul

Last Updated: 26 October 2015
Article by Neeraj Tuli and Rajat Taimni

The Union Cabinet on 21 October 2015 has approved the Arbitration and Conciliation (Amendment) Ordinance 2015 ('the Ordinance') which was promulgated on 23 October 2015 after having received Presidential assent. The Ordinance introduces several significant changes to the Arbitration & Conciliation Act 1996 ('the A&C Act'). The object of these changes is to expedite the arbitration process and minimalize court intervention in arbitration.

Background

The A&C Act was enacted for ensuring decreased court intervention in arbitration and greater coherence and consistency between domestic arbitration law and international practises. Despite this, arbitration in India continues to be ad hoc, expensive, long drawn and often suffers from excessive court intervention. 

The process of reform was initiated by the report of the 246th Law Commission headed by Retired. Justice AP Shah. The commission in its report recommended wholesale changes to the A&C Act. Pursuant to the law commission report, the Union Cabinet on 26 August 2015, approved a new bill to amend the A&C Act which would be placed in the winter session of parliament for approval.

Many foreign investors have been hesitant to invest in India, due to the various delays associated with the judicial system of the country. The Government with the intention of exhibiting its positive intent in making India an ideal investment destination has decided to immediately effect the desired changes to the A&C Act and therefore has promulgated the present Ordinance.

Proposed amendments

Significant changes contained in the Ordinance are:

  1. Amendment to § 2 (2) extending the applicability of § 9, § 27 and § (37) (1) (a) & (3) contained in Part 1 of the A&C Act to international commercial arbitrations. § 9 deals with interim relief granted by the courts and § 27 deals with court assistance to a tribunal for taking evidence. The Ordinance by clarifying what provisions in Part 1 of the A&C Act, apply to international commercial arbitrations, in effect makes it clear that other provisions of Part 1 of the A&C are not applicable to international commercial arbitration, thereby codifying the Supreme Court decision in Balco v Kaiser Aluminium (2012) 9 SCC 552.
  2. Amendment to § 8 which allows even non-signatories to an arbitration agreement to be joined as parties in a domestic arbitration. The amendment effectively negates the decision of the Supreme Court in Sukanya Holdings v Jayesh H Panda 2003 (5) SCC 531, where it had ruled that joinder of non-signatories to an arbitration agreement was not permissible.
  3. Further amendment to § 8 requires that the judicial authority compulsorily refer parties to arbitration irrespective of any decision by the Supreme Court or any other court, if the judicial authority finds that a valid arbitration clause exists. The amendment essentially nullifies the judgment of the Supreme Court in N. Radhakrishnan v Maestro Engineers 2010 1 SCC 72, where it had ruled that serious allegations of fraud are not arbitrable. The amendment will also have implications for the Supreme Court's decision in Booz Allen Hamilton v SBI Home finance (2011) 5 SCC 53 wherein it had listed disputes that were not arbitrable.
  4. § 9 of the Act is amended to restrain the courts from entertaining an Application for interim relief once arbitration has commenced. The Court is empowered to entertain such an application only if it is convinced that the arbitration tribunal will be unable to provide effective relief.  
  5. The Ordinance requires the appointment of an arbitrator by the courts to be completed expeditiously, preferably within a period of sixty (60) days. Further the scope of the Courts power under § 11 has been restricted to examining the validity of the arbitration clause alone and no further. This is irrespective of any decision of the Supreme Court or any other court.
  6. The Ordinance amends § 12 to include an obligation requiring a potential arbitrator to make an express disclosure on conflicts. The courts at the time of appointing an arbitrator are also empowered to demand a full disclosure on conflicts.  Schedule 5 & 7 to the Ordinance contains an exhaustive list of grounds which will assist in determining all issues of conflict. Parties however are empowered to waive any objections of conflict by consent.
  7. The Ordinance introduces a comprehensive fee structure for arbitrators. The High Courts are empowered to frame necessary rules in this regard keeping in mind Schedule 4 to the Ordinance, which contains a model fee structure. Fees range from Rs 45,000 to Rs 19,87,500 depending upon the quantum of the dispute. This does not apply to international commercial arbitrations and institutional arbitrations.
  8. § 17 of the A&C Act has been amended to ensure that interim relief including that of injunction granted by an arbitrator will be effective and enforceable as an order of the court.
  9. The Ordinance provides for time bound arbitrations. A tribunal is obligated to deliver the final award within a period of twelve (12) months. This period can be extended by the consent of parties for an additional six (6) months. Any further extensions will require court consent. The courts on being approached for an extension are empowered to reduce the fee payable to an arbitrator by up to 5% for each month of delay and can also substitute one or all the arbitrators.
  10. A provision for fast track settlement of disputes is also provided, which requires the tribunal to make its award within a period of six (6) months. To incentivize quick adjudication, in cases where the tribunal decides a matter within a period of 6 months the Ordinance provides for an additional fee payable to the tribunal by the consent of the parties.
  11. The Ordinance through § 31 A also introduces an expansive cost regime. Costs are not compulsory and are at the discretion of the tribunal. The new provision lays down various factors to be considered by the tribunal at the time of determining the quantum of costs these include the result of the case and the conduct of parties.
  12. To ensure court restraint in setting aside domestic awards, the Ordinance restricts the meaning of public policy under the A&C Act.  The scope of public policy is to be limited to instances where:
  1. making of an award was induced by fraud or corruption or;
  2. where an award is in conflict with the fundamental policy of Indian Law or;
  3. an award is in conflict with the most basic notions of morality or justice.
The amendment will neutralize judgments such as ONGC v Saw Pipes (2003) 5 SCC 705 and DDA v R.S. Sharma (2008) 3 SCC 80, which had expanded the scope of Indian public policy under the A&C Act. Similar amendments have also been introduced in § 48 and § 57 making the test of public policy a uniform one for domestic and international awards.
  1. § 34 of the A&C Act has been further amended to ensure that a challenge to the award is disposed of by the courts within a period of one (1) year.
  2. In National Aluminium Co. Ltd v Pressteel & Fabrications, (2004) 1 SCC 540 the Supreme Court had ruled that pending a § 34 challenge, there is an automatic stay on the operation of an arbitration award. The Ordinance amends § 36 to permit operation of an award pending challenge. The court under § 36(3) is empowered to stay the operation of the award on such terms and conditions as it deems fit. This could include taking a money deposit from the losing party.

Conclusion

The law commission in its 246th report had recommended that § 16 of the A&C Act be amended to expand the jurisdiction of the arbitrator to hear all disputes involving serious allegations of fraud and criminality. The Ordinance however does not provide for any amendment to § 16 of the A&C Act. This seems like a major omission and may give Courts the opportunity to restrain arbitrators from hearing cases were serious criminality or fraud is involved.

The Ordinance will be placed before the winter session of parliament and if approved will be converted in to an Act. Ordinarily the ordinance will remain in force for a period of 6 weeks from the day the winter session of parliament begins. If the Ordinance is not approved by the parliament, the Government can re-promulgate it till such time that the consent of the parliament is obtained.

The Ordinance is likely to radically overhaul the arbitration landscape in India. However issues plaguing the current A&C Act are the result of not only a poorly drafted legislation but also creative interpretation given by the courts to various provisions. How the new provisions especially those contained in § 8, § 11 and § 34 are ultimately interpreted and implemented by the courts now remains to be seen.

For further information on this topic please contact Tuli & Co 

Tel +91 11 4593 4000, fax +91 11 4593 4001 or email lawyers@tuli.biz

www.tuli.biz

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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