India: Arbitration Newsletter | August 2019

Last Updated: 6 September 2019
Article by Abhishek Sharma

THE FUTURE OF INSTITUTIONAL ARBITRATION IN INDIA

The Past

India is not new to the world of arbitration. Ancient India recognized arbitration as an efficacious means of dispute resolution. Disputes were often decided with the intervention of Kulas (members concerned with the social matters of a community), Shrenis (people engaged in the same business or profession) and Pugas (local courts), which were collectively called Panchayats. This form of arbitration of disputes was substantially institutional in nature and was quite similar to certain forms of institutional arbitration prevalent today. For instance, resolution of disputes between two professionals or tradesmen done through Shrenis was the modern-day equivalent of arbitration under the aegis of a trade body or a chamber of commerce. Consolidation of arbitration laws into enactments was first brought about by way of the Bengal Regulations of 1772, 1780 and 1781. These regulations, while ahead of their time, did not envisage institutional arbitration. The Indian Arbitration Act, 1899 (based on the English Arbitration Act of 1889) too only recognized ad-hoc arbitration. The Arbitration Act of 1940, which remained the comprehensive law on arbitration in India till 1996 also did not accord recognition to institutional arbitration as a means of dispute resolution.

The Indian Government's first effort at recognizing as well as encouraging institutional arbitration was the setting up of the International Centre for Alternative Dispute Resolution ("ICADR") in 1995. The ICADR was setup with the objective of promoting and developing Alternative Dispute Resolution ("ADR") facilities and techniques and its setting up was timed to coincide with the enactment of the Arbitration and Conciliation Act of 1996 ("1996 Act"). The 1996 Act which is based on the UNCITRAL Model Law on International Commercial Arbitration finally recognized institutional arbitration and it was hoped that the ICADR will act as a launchpad for institutional arbitration in India.

The Present

At present, India has more than 35 arbitral institutions. Some of the prominent Indian arbitral institutions are the Indian Council of Arbitration ("ICA"), the Delhi International Arbitration Centre ("DIAC"), the Mumbai Centre for International Arbitration ("MCIA") and the ICADR. While ICADR was envisaged as a model arbitral institution, it failed miserably at achieving its objectives, which included promotion of ADR, providing administrative and logistical support for ADR, appointment of arbitrators and providing training in ADR. Not only did ICADR fail in keeping pace with the developments in arbitration law worldwide, it was also unable to market itself as a credible alternative to ad-hoc arbitration. Plagued by inefficiency, the ICADR had a large and ineffective governing council. However, the biggest cause for ICADR's eventual demise was its failure to address and market itself to prospective parties at the stage of contract formation. Further, not just private sector entities, but even public sector bodies (including public sector undertakings) were reluctant to submit to ICADR managed arbitrations. The death knell for the (stillborn) ICADR finally sounded after more than 23 years of its birth with the passing of the New Delhi International Arbitration Centre Act, 2019 (the "NDIAC Act, 2019"). The NDIAC Act, 2019 replaces the ICADR with a modern arbitral institution which shall be called the New Delhi International Arbitration Centre ("NDIAC").

While the ICADR is a case in point on how not to run an arbitration institution, there have been other arbitral institutions which have tasted moderate success and are gradually emerging as trusted alternatives to ad-hoc arbitration. The DIAC (located within the Delhi High Court complex) has emerged as a strong institution and has administered more than 900 cases since its inception. The MCIA, while still in its infancy, is taking giant steps and was recently in the news for being chosen as one of the authorized institutions for arbitration by the Maharashtra Government which has made institutional arbitration mandatory for all contracts valued at more than Rupees Five Crores. The ICA and other arbitral institutions are handling a low volume of cases with value ranging from medium to low. Insofar as international arbitral institutions are concerned, Singapore International Arbitration Centre ("SIAC") maintains an Indian office in Mumbai since 2013 for the limited purpose of promoting activities of SIAC. The London Court of International Arbitration ("LCIA") closed down its operations in India due to insufficient case load after operating from 2009 till 2016.

A survey carried out by PWC on Corporate Attitudes and Practices towards Arbitration in India shows that 61% of the companies surveyed, had a dispute resolution policy and confirmed inclusion of a dispute resolution clause in their contracts. 91% of the companies which had a dispute resolution policy, included arbitration for resolution of disputes. The survey also reveals that institutional arbitration is yet to be widely used by companies in India. Majority of the companies that experienced arbitration preferred ad-hoc arbitration (47%) over institutional arbitration (40%) while 12% indicated a neutral approach. The participants in the survey, when asked to identify the top three factors which make arbitration the preferred dispute resolution mechanism listed speed, flexibility and confidentiality.

Why is it that despite the growing number of credible arbitral institutions, Indian entities still prefer ad-hoc arbitration over institutional arbitration particularly in respect of domestic disputes? One possible answer is the perception amongst Indian consumers that institutional arbitration costs more than ad-hoc arbitration. While there is no credible study on arbitration costs in the Indian context, most lawyers practicing in the arbitration space have experienced that in the long run, ad-hoc arbitrations cost more. The absence of a fee structure and the lack of overall supervision of the arbitral process often leads to a long drawn out proceeding with arbitrators assuming little accountability. Another misconception about institutional arbitration is that arbitral institutions are rigid, and their rules take away from party autonomy. This couldn't be further from the truth. Pick up the rules of (almost) any arbitral institution and one can find sufficient flexibility to mould the arbitration process according to the nature of the dispute whilst respecting party autonomy. The need for leading evidence, the extent to which and the issues on which parties shall lead evidence, the techniques to be used for recording of such evidence, whether or not oral submissions are required et al. are all left open to the parties and the tribunal to decide.

However, the picture is not all rosy. A limited pool of trained and specialized arbitrators on the panel of arbitral institutions is indeed a worrying sign that not all is in order. Bodies providing training to arbitrators are virtually non-existent and one seldom finds arbitrators who have specialized arbitration training (which is substantially different from judicial experience of adjudicating disputes in courts). Further, despite their gradually growing numbers, there are still very few arbitral institutions in India that are seen to be truly credible and trustworthy. Perhaps, India could learn a lesson or two from some of its Asian neighbours who have successfully setup world class arbitral institutions in a relatively short span of time. The SIAC (setup in 1991) and the Hong Kong International Arbitration Centre ("HKIAC") (setup in 1985) are cases in point. The SIAC benefits enormously from the Singapore Government's pro-arbitration stance and Singapore's arbitration friendly judiciary and has emerged as one of the most preferred arbitral institution worldwide (handling more than 400 cases in each of the past two years). HKIAC too has an impressive growth story and it has emerged as a leader in adoption of innovative rules including rules on costs, joinder of parties, consolidation of arbitrations and emergency arbitrations etc.

The Future

The report of the committee setup by the Central Government under the Chairmanship of Justice B.N. Srikrishna to review the institutionalization of arbitration in India was the raison d'etre for two major developments in Indian arbitration viz. the Arbitration and Conciliation (Amendment) Act, 2019 (the "Amendment Act, 2019")and the NDIAC Act, 2019. The Amendment Act, 2019, inter alia, seeks to setup the Arbitration Council of India for grading arbitral institutions. It also seeks to introduce a system where arbitrators shall be appointed by the arbitral institutions designated by the Supreme Court or the High Court instead of the Court appointing such arbitrators. The Amendment Act, 2019 also seeks to address a much desired feature which is missing in the existing framework i.e. the need of utmost confidentiality in arbitration proceedings.

The NDIAC Act, 2019 aims to establish the NDIAC (and replace ICADR) as a hub for institutional arbitrations. The centre aspires to be a breeding ground for talent and dispensation of knowledge. Instead of working in isolation, the NDIAC lists as its objectives - promotion of partnerships, collaborations and relationships with other arbitral institutions.

A close examination of the NDIAC Act, 2019 shows that the NDIAC seeks to succeed where the ICADR failed. Thankfully, it appears that the NDIAC has a much leaner administrative structure and will consequently face far fewer bureaucratic challenges. The Government's decision to declare the NDIAC as an institution of national importance shows its will to establish India as a hub for institutional arbitration.

However, the proof of the pudding is in the eating. While on paper the NDIAC looks poised to change the face of institutional arbitration in India, it is the implementation of the Act which will determine its fate. Considering the fate of the ICADR, this may very well be the last opportunity to put India on the global arbitration map.

* * * * * * *

SC: Courts to determine whether the claims of coercion, undue influence have substantial basis before appointing arbitrator under Section 11
The Supreme Court in United India Insurance Company Limited v Antique Arts Exports Private Limited, Civil Appeal No. 3284 of 2019, dealt with a case wherein pursuant to a fire breaking out the insured claimed insurance. The insured was awarded an amount by the insurance company pursuant to which a Discharge Voucher had been signed by the insured stating that it had received the amount in "full and final settlement of its claims without any subjectivity" from the insurance company. Subsequently, eleven weeks after the signing of the Discharge Voucher, the insured filed a Section 11 under the Arbitration and Conciliation Act, 1996 ('A&C Act') in the High Court for appointment of an arbitrator claiming that the Discharge Voucher had been executed under undue influence and coercion. The High Court held that in view of the 2015 amendment to S.11 of the A&C Act, the court was to only examine the existence of the arbitration agreement and the questions regarding coercion or undue influence had to be examined by the arbitral tribunal constituted under such agreement. The High Court appointed a sole arbitrator to adjudicate the disputes. The insurance company moved the Supreme Court in appeal against the appointment of the arbitrator. The Hon'ble Supreme Court, while reiterating the pre-amendment principles in SBP & Co v Patel Engineering (2005) 8 SCC 618 overturned the High Court's decision and held that merely because the insured has claimed coercion and undue influence, this would not be sufficient ground for appointment of an arbitrator by the court as under Section 11, there is a judicial function to be performed by Courts to determine whether the assertions of coercion and undue influence are substantial or simply baseless. The Supreme Court held that having not provided sufficient evidence regarding the presence of undue influence and coercion in signing of the Discharge Voucher, the appointment of an arbitrator under Section 11 would not be justified in the matter.

SC: Once the arbitrator has passed an order to terminate the proceedings under Section 32(3) of the Arbitration and Conciliation Act, 1996, such an order cannot be recalled.
In Sai Babu v Clariya Steels, a Supreme Court Bench comprising of Justice Rohinton Fali Nariman and Justice Vineet Saran while deciding an appeal filed against the judgment passed by the Karnataka High Court wherein the High Court had dismissed the challenge against 'recall' by the arbitrator of his own order terminating the arbitration proceedings citing lack of practicality in continuing the proceedings.

The order of termination was passed under Section 32(2) (c) titled "Termination of Proceedings". Under Section 32 sub-section (2) clause (c), the arbitral proceedings can be terminated by the Arbitral Tribunal if (i) the Arbitral Tribunal finds that the continuation of the proceedings has for any other reason become unnecessary, or (ii) impossible. The Court compared the provisions of Section 32 (c) with Section 25 (a) which deals with a situation where the Arbitral Tribunal can terminate the proceedings if the Claimant does not file his Statement of Claim before the arbitral tribunal and fails to provide sufficient reasoning for failing to do so. While comparing these two provisions concerning the termination of proceedings the Court, also noted that sub – section (3) of Section 32 provides for the termination of mandate of the arbitrator. However, the same is not the case under Section 25. Applying these principles to the facts of the case the Court opined that an Arbitrator cannot recall its termination order under Section 32 (c) since his mandate as an arbitrator stood terminated as soon as he passed the order terminating the proceedings under Section 32 and not under Section 25.

SC: Amendments brought about to section 34 via 2015 Arbitration amendment act shall only be applicable to proceedings initiated after amendment came into force
The Supreme Court in Ssangyong Engineering & Construction Co. Ltd. V NationalHigh ways Authority of India (NHAI), Civil Appeal No. 4779 of 2019, has held that amendments introduced to Section 34 of the Act effective from 23 October 2015 will apply to all applications under Section 34 applications filed after October 23, 2015, even though the arbitration itself may have commenced prior to the amendment. The Supreme Court has thus intended to give the judgment a prospective effect, however, arguably the judgment could have substantial retrospective impact.

SC: Arbitration clause contained an unstamped agreement is invalid.
In Garware Wall Ropes Ltd v. Coastal Marine Constructions and Engineering Ltd.(2019 SCCOnline SC 515), the Supreme Court heard an appeal from the decision of the Bombay High Court dealing with an unstamped agreement in the light of Section 11(6A) of the Arbitration and Conciliation Act, 1996 ('The Act'). Section 11(6A) of the Act was introduced via the amendment of 2015 ('2015 amendment') and confined power of the Court to decide the issue of existence of an Arbitration Agreement without going into the question of validity. The Bombay High Court allowed the Section 11 application for appointment of arbitrator stating that the under Section 11(6A), the issue of stamp duty could be dealt with by the Arbitrator appointed pursuant to the arbitration clause under the agreement. The Supreme Court in its judgment, however, overturned the decision of the High Court, while relying upon its pre-2015 amendment judgment in SMS Tea Estates v. Chandmari Tea Co. P. Ltd wherein it had held that if an arbitration clause is contained in an unstamped agreement, the Judge would be required to impound the agreement and ensure that stamp duty and penalty (if any) are paid before proceeding with the appointment of the arbitrator.

SC:No need to challenge the mandate of an arbitrator ineligible to be appointed as an arbitrator as their mandate shall automatically terminate
In the case of Bharat Broadband Network Limited v. United Telecoms Limited (decided on April 16, 2019),the Supreme Court, while upholding its own decision in TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] ("TRF Ltd.") held that appointment of arbitrator by person ineligible to be appointed as an arbitrator himself/herself is not valid. This judgement was given retrospective effect and shall be applicable to all arbitrations commencing from October 23, 2015.

The disputes in the matter at hand arose out of an agreement between BBNL and UTL, wherein the contractual disputes were referred to arbitration. The agreement provided that the Chairman and Managing Director ('CMD') of BBNL or any person appointed by him shall be the arbitrator to whom disputes arising from the contract should be referred. UTL invoked the arbitration clause and the CMD of BBNL appointed an arbitrator. Thereafter, the judgement in the case of TRF Ltd. v Energy Engineering Projects Ltd (2017) 8 SCC 377 TRF Limited was pronounced which stated that a managing director of a company which was one of the parties to the arbitration, was himself ineligible to act as arbitrator, such ineligible person could not appoint an arbitrator, and any such appointment would have to be held to be null and void. In light of this judgement, the Appellant, despite having appointed the arbitrator itself, on October 7, 2017, made an application before the sole arbitrator to withdraw himself from the proceedings. However, the sole arbitrator rejected such application without giving any reasons.

The Appellants then filed a petition before the Delhi High Court submitting that since the arbitrator had become incapable of acting as such, as per law a substitute arbitrator should be appointed in his place. However, the Delhi High Court too rejected this petition stating that the very person who appointed the arbitrator is estopped from raising a plea that such arbitrator cannot be appointed after participating in the proceedings. The matter was then referred to the Supreme Court.

The Supreme Court through its bench comprising of Justice Nariman and Justice Vineet Saran, overturning the High Court's decision held that if a person is ineligible to be appointed as an arbitrator, there is no need to challenge the mandate of such an arbitrator, since the ineligibility of such an arbitrator is de jure in nature, i.e. he is unable to perform his functions and thus his mandate shall automatically terminate, as laid down in Section 14(1) of the Arbitration and Conciliation Act, 1996.

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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