India: Amendments To The Law On Arbitration In India

The Arbitration and Conciliation Act, 1996 ('the Act') has been amended by way of the Arbitration and Conciliation (Amendment) Ordinance, 2015 ('Ordinance') which came into force on 23rd October 2015. The Ordinance substantially changes the existing law and paves for arbitration proceedings to be more effective, transparent and speedy.

Ordinances are temporary laws which can be issued by the President when the Parliament is not in session. Ordinances are issued by the President based on the advice of the Union Cabinet with the purpose being to allow governments to take immediate legislative action if circumstances make it necessary to do so at a time when Parliament is not in session. The fact that the present Ordinance has been promulgated with immediate effect, without waiting for the winter session of the parliament, clearly reflects the seriousness and the sense of urgency that is felt by the present government to drastically overhaul the arbitration regime in India and bring it at par with that prevalent in developed economies. It may also be noted that although the Ordinance is valid only for a period of six weeks from the date when the parliament is in session, it is widely expected that once the parliament is in session, the Arbitration and Conciliation Bill, 2015, which contains identical provisions, would be passed with few or no changes.

Background to the Amendments to the Act

Although the Arbitration Act, 1940 was repealed and replaced by the Act with a view to expedite arbitration proceedings, there were still a number of issues that plagued arbitrations in India. Typically, these issues included accountability of arbitrators, non-transparent fee structures, a no-cost regime and scope for excessive judicial interference by the Indian Courts resulting in delayed rendering and enforcement of arbitral awards. This was the case even in respect of foreign seated arbitrations on account of certain judgements of the Indian Courts which held that even foreign awards were liable to be subject to the same level of scrutiny as domestic awards in case the parties had not impliedly or expressly excluded the application of Indian Law.

Over the past decade however, with an increase in foreign trade and investment, Indian courts had been increasingly conscious of the need to restrict the scope of judicial interference in matters of arbitration, and more so, in case of an international commercial arbitration where one of the parties is a non-Indian party. This led to various judgements which dramatically restricted the scope for Indian courts to exercise jurisdiction in matters involving foreign seated arbitrations. In particular, reference may be made to judgments of Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (BALCO) (2012) 9 SCC 552 wherein the Indian Supreme Court has held that once an arbitration was seated outside India, the Indian Courts would only be able to exercise jurisdiction at the time of enforcement of awards and therefore would not be able to exercise jurisdiction in matters such as appointment of arbitrators or grant of interim relief etc. Another important judgment which was welcomed by foreign investors was the judgment in the case of Shri Lal Mahal Ltd. V. Progetto Granpo Spa; (2014) 2 SCC 433) which overruled the earlier judgment passed in the case of Phulchand Exports Limited v. OOO Patriot (2011) 10 SCC 300 to hold that the expression "public policy of India", when used in context of Section 48(2)(b) of the Act, which section sets out the grounds on which the enforcement of foreign awards may be refused, cannot be given a wider meaning to include patent illegality in an award, as is done in context of the same expression used in Section 34 of the Act relating to enforcement of domestic awards.

Aside from the arbitration-friendly judgements pronounced by the Indian courts, another significant reason for the Ordinance to be in its current form was the White Industries Award pronounced against Republic of India for a dispute arising under the bilateral investment treaty entered between the India and Australia. The White Industries award contained various observations of the Arbitral Tribunal to the effect that the expansive interpretation of the Indian judiciary of the Arbitration and Conciliation Act, 1996 essentially made foreign awards extremely vulnerable to challenge and difficult to enforce and hence established the Indian judicial system's inability in providing to the foreign investors an effective means of asserting claims and enforcing their rights.

Lastly, it would be pertinent to mention that the 246th Report of the Indian Law Commission chaired by Justice A.P. Shah (Retd.) had also focused on carrying out various amendments to the Act with the object of setting up a predictable and efficient system of arbitration which would provide confidence to foreign investors and also mitigate the risk faced by the Government of India from claims by foreign investors under the relevant investors treaties negotiated by the Government of India with the other countries. Various recommendations of Law Commission have been accepted and incorporated into the Ordinance and these amendments are undoubtedly such which would allay concerns of foreign investors as regards factors such as delay in arbitration proceedings and the uncertainty of arbitration related litigation in India.

Amendments

The Ordinance carries out the various amendments to the Act. Some of the significant amendments are discussed below:

  • Amendments relating to applicability of Part I of the Act

    Part I of the Act which applies to domestic awards made in India contains various provisions providing for judicial interference such as those relating to grant of interim relief by Courts and enlarged grounds for challenging the award before Courts. By the judgement of the Supreme Court in Bhatia International vs. Interbulk Trading SA, (2002) 4 SCC 105 and Venture Global v Satyam Computer, (2008) 4 SCC 190), Indian Courts subjected foreign awards to the same level of intensive scrutiny as domestic awards if there was no express or implied exclusion of Part I of the Act in the arbitration agreement. Subsequently, in the landmark ruling in September 2012, the Supreme Court, in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (BALCO) (2012) 9 SCC 552 held that in view of the language of Section 2(2) of the Act, Part I of the Act was applicable to only those arbitrations, which are held in India and not applicable, in entirety, to arbitrations held outside India. Further, it was also held that since none of the provisions of Part I of the Act were applicable to arbitrations seated outside India, the provisions such as those for grant of interim relief by the Courts, as provided in Section 9 of the Act, were also not available to parties to such arbitration.

    Although, the ruling in Balco's case was deemed to be arbitration friendly in as much as courts were disabled from exercising their jurisdiction at any stage prior to enforcement of the award thus minimizing the possibility of delay in arbitration proceedings, the ruling also posed significant risks for parties which opted for a foreign seated arbitration in as much as such parties could not approach Indian Courts for grant of interim relief or seeking the courts assistance in taking evidence (provisions for which were provided in Part I of the Act). This problem has however been now taken care of by the Ordinance in accordance with which, provisions in Part I of the Act relating to grant of interim relief (Section 9), seeking assistance of courts in taking evidence (Section 27) and the right to appeal to the Supreme Court against orders passed in the said sections (Section 37(3)) have been made applicable to foreign seated arbitrations also.
  • Amendments relating to grant of interim relief by the courts and arbitral tribunal:

    Prior to the coming into force of the Ordinance although a party could approach the courts for interim relief any time before during or after the making an arbitral award, however, there was no time limit within which a party had to commence arbitration proceedings in case it approached the court prior to the commencement of the arbitration proceedings. This resulted in situations where a party would indefinitely benefit from the grant of an interim relief without actually initiating arbitration proceedings.

    In order to correct this lacuna, the Ordinance mandates that where before commencement of arbitral proceedings, a court passes any interim measure of protection, the arbitral proceedings are commenced within a period of 90 days from the date of such order. Further, once the arbitral tribunal has been constituted, the Courts can now render interim relief only if the arbitral tribunal is disabled from rendering appropriate interim. Further, the power of the arbitral tribunal to grant interim relief has been expanded by an amendment to Section 17of the Act and in accordance with the amendment, the arbitral tribunal is to now have the same power to grant interim relief order as courts. This could potentially imply that orders of the arbitral tribunals could be binding on third parties which are not parties to the arbitration agreement, as is the case with orders passed by courts under Section 9 of the Act.
  • Amendments relating to the disposal of challenge to arbitral award:

    Prior to the Ordinance coming into force, the Act did not prescribe any time limit within which an arbitral tribunal was to pronounce an award. Since arbitral tribunals in India are mostly ad-hoc and arbitrators had the tendency to treat arbitration proceedings as courts proceedings, awards would be often rendered after a lapse of significant time. The Ordinance however mandates that an award be rendered within a period of 12 months from the date the arbitral tribunal entering upon reference and also incentivizes the arbitral tribunal for making an award within a period of six months by providing for additional fees. Under the Ordinance, non-compliance of the aforementioned prescribed time period without reasonable justification could result in the mandate of the arbitrator being terminated or reduction of the fees of the arbitrators. Further, in the event of substitution of arbitrators, the arbitration proceedings are to continue from the stage already reached and not afresh.

    The Ordinance also provides for a "fast track procedure" whereby parties could agree for resolution of a dispute by an arbitral tribunal which would be empowered to decide the dispute on the basis of pleadings only, without conducting any oral hearing and by dispensing with technical formalities, thereby rendering the award within a period of six months from the date on which the arbitral tribunal enters upon the reference.
  • Amendments relating to introducing a regime of costs:

    Prior to the Ordinance coming into force, the Act did not provide for any costs that may be awarded to one party by the other. This contributed significantly to frivolous litigation since unlike the arbitrations conducted in developed economies; imposition of costs did not act as a deterrent factor in instituting misconceived arbitration proceedings. The Ordinance, however, seeks to usher in a regime for costs where the legislature has not only set out the general rule that the unsuccessful party will be ordered to pay the costs of the successful party, but has also elaborated on the circumstances in which the Court/Arbitral tribunal are to take into account while granting such costs. These include factors such as conduct of the parties, merit of counter claims and reasonability of settlement offers made by the unsuccessful party amongst others.
  • Amendments relating to minimizing judicial interference in challenging awards and disposal of applications challenging awards:

    Amongst the grounds on which Indian courts can set aside both foreign and domestic awards, the ground of the award being in conflict with the public policy in India has been considered to be very wide and expansive. The interpretation of the term "public policy" has been even wider in context of domestic awards as Indian Courts have held that an award which is patently illegal would qualify as being in conflict with the public policy of India. This interpretation made even foreign awards vulnerable to challenge in light of the fact that as per the law laid down in the case of Bhatia International, foreign seated arbitral awards could also be subject to the same standard of scrutiny as Indian seated awards. The Ordinance however clearly sets out that patent legality in an award, while being a sufficient clause for setting aside a domestic award, would not be sufficient to set aside an award arising from international commercial arbitration involving a foreign party. Further the Ordinance clarifies that the test as to whether there is contravention of fundamental of policy of Indian law would not entail the review on merits of the dispute even if there is erroneous application of law or re- appreciation of evidence.

    In addition, while previously there was no timeline prescribed for disposing of challenge to arbitration award, the Ordinance mandates that any challenge to the arbitral award is disposed of within a period of one year from the date on which notice of filing of the application is served upon the other party.

    Pertinently prior to the Ordinance coming into force, in the event that a party challenged a domestic award under Section 34 of the Act, it would result in automatic stay of enforcement of the award. However, by virtue of the amendment in the Ordinance, filing of an application to set aside the award under Section 34 of the Act, would not, by itself, stay the enforcement of the Award, unless the court in its discretion grants stay of the operation of the arbitral award.
  • Amendments to procedure for appointment of arbitrators

    Prior to the Ordinance coming into force, there was a tendency on the part to courts to examine various aspects of the disputes such as whether the claims were dead or alive or whether the arbitration agreement was vitiated by fraud etc. even at the stage of appointment of arbitrators. The proceedings in this respect were therefore prolonged and delayed. The Ordinance seeks to restrict judicial examination in matters of appointment for arbitrators by confining the courts' power to only satisfying itself on the existence of the arbitration agreement.

    Further, any appointment of arbitrator by the Courts is now subject to a disclosure in writing from the prospective arbitrator in terms of his qualifications, independence and impartiality. Moreover application for appointment of arbitrators are to be disposed off by the courts as expeditiously as possible with an endeavor to be made by the courts for disposing these matters within sixty days from the date of the service on opposite parties. It may also be mentioned that while all such proceedings for appointment of arbitrators in an international commercial arbitration would lie directly before the Supreme Court, all proceedings for appointment for arbitrators in domestic arbitration, would lie before the competent High Courts, with there being no recourse to letter patent appeals from the judgment of the High Court.
  • Amendments relating to fees of arbitrators

    Since arbitration in India is mostly ad-hoc in nature, there were no fixed criteria or guideline in accordance with which the arbitrators were to charge fees. This made arbitration in India quite expensive, especially when the arbitration proceedings were invariably delayed for one reason or the other. However, by virtue of the Ordinance, the High Courts have been empowered to frame rules for the purposes of determining the fees of the arbitral tribunal and the manner of its payment. In addition a sample schedule has also been provided to serve as a guiding factor. The said schedule determines the fees of the arbitrators taking into account the claim amount and grants an additional 25% of fees in case the arbitral tribunal is a sole arbitrator. It is to be noted that the schedule of fees determined under these provisions is not to apply to international commercial arbitration or where the parties have agreed for determination of fees as per the rules of an arbitral institution.
  • Amendments relating to disclosure to be made by arbitrators:

    Previously, the Act prescribed for disclosure to be made by the arbitrator in connection with his independence and impartiality but there was no guiding material on what circumstances would be deemed sufficient to cast justifiable doubts on his independence and impartiality. However, by an amendment to Section 12 of the Act, the arbitrator is now bound to disclose circumstances which would demonstrate any direct or indirect, past or present relationship with or interest in any of the parties or in relation to the subject matter of dispute, which were likely to give rise to justifiable doubts as to his independence or impartiality. The Ordinance also contains a schedule which would serve a guiding factor in determining whether circumstances exists which would give rights to justifiable doubt on independence or impartiality of arbitrators. Pertinently, the arbitrator is also bound to disclose if there are any circumstances which would affect his ability to devote sufficient time to the arbitrations.

It will thus be seen that the Ordinance makes various desirable changes to the Act and, to a large extent, addresses various concerns and criticisms expressed by various stakeholders on the law governing arbitration in India. However there appears ambiguity in terms of whether and to what extent the provisions of the Ordinance would be applicable to pending arbitration proceedings in India and this issue is likely to give rise to litigation in the near future. Nevertheless, it is clear that a concerted and well-meaning endeavor has been made to make the Act consistent with internationally recognized and accepted rules in arbitration and to make India the hub of arbitration in Asia.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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