This article will summarize in brief the Amendment Act, 2019 and also give a quick recap of the few key judicial pronouncements passed by courts in 2019 in relation to arbitration.
Indian legislature over the past few years has taken steps to make India a more robust market for foreign investors and a preferred seat for arbitration. The Arbitration and Conciliation (Amendment) Act, 2015 ("the Amendment Act") in the year 2015 was the initial step taken to amend the Arbitration and Conciliation Act, 1996 ("the Act"). Now in 2019 to further strengthen and make the arbitration process user friendly, cost-effective and time bound, the Government has introduced the Arbitration and Conciliation (Amendment) Act, 2019 ("the Amendment Act 2019").
Amendment Act 2019
The Amendment Act 2019 was introduced to bring in key changes in the existing arbitration regime and also eliminate some challenges which were faced under the Amendment Act. The key changes to the Amendment Act 2019 are as follows:-
- Earlier, in the absence of a procedure and/or non-adherence of a prescribed procedure under an arbitration agreement, the courts use to nominate arbitrators for adjudication of disputes between parties. However, the Amendment Act 2019 has reduced the judicial intervention, whereby the Supreme Court in the case of an international commercial arbitration and the High Court in cases other than international commercial arbitration will designate Arbitral Institutions for the purpose of appointment of arbitrators. However, the said amendment is yet to be notified. This is an attempt by the Government to bring the arbitration law in consonance with many international jurisdictions.
- The Amendment Act 2019 has introduced Arbitration Council of India, (ACI). The ACI inter alia, will be empowered to grade arbitral institutions, promote institutional arbitrations, frame, and review and update norms to ensure satisfactory level of arbitration. In absence of the regulations being formed only time will tell as to how successful the ACI will be.
- Prior to Amendment Act 2019, there was an overlap between the arbitral tribunal and court, as both forums could be approached for interim measures once the final award had been made and was awaiting enforcement. The Amendment Act 2019 now clarifies that for seeking interim reliefs post the arbitral award the parties can only approach the courts.
- Another welcome change brought by the Amendment Act 2019, is that parties are now required to complete their pleadings within six months from the date of service of written notice to the arbitrator. This is to ensure that no parties make an attempt to prolong the arbitration process. It also remains to be seen, if arbitrators will allow parties to file pleadings post the expiry of six months in view of natural justice.
- The Amendment Act, 2019 clarifies that parties challenging the award must rely only on the record of the arbitral tribunal. This move may be a step forward in expediting the arbitration process as, lesser time may be spent by courts in scrutinizing the challenge to the award.
- Under the Amendment Act 2019, Section 87 was inserted in the Act to clarify that the Amendment Act will only have prospective effect i.e. it will only apply to arbitral proceedings initiated after the effective date of the Amendment Act and court proceedings initiated arising out of such arbitral proceedings. This overruled the position laid down by the Supreme Court in BCCI v. Kochi Cricket Private Limited ("BCCI Judgment") as more detailed in the later part of the article.
- The Amendment Act, 2019 has also introduced some other amendments such as the need to maintain confidentiality, time limit in passing the award by the arbitrator and privileges to the arbitrator with respect to acts done in good faith.
We will now summarise some of the key judicial pronouncements passed by various courts in the year 2019.
Group of Companies Doctrine
Under Indian judicial pronouncements, arbitration agreements have been extended to non-signatories on certain occasions. Courts in India have started recognizing the group company's doctrine wherein, a non-signatory gets impleaded, depending on intention of parties, role and performance of the contract of such non-signatory. The Apex Court in the case of Mahanagar Telephone Nigam Ltd. vs. Canara Bank roped in non-signatories to the arbitration agreement by applying "group of companies doctrine" as laid down in Chloro Controls India Private Limited versus Severn Trent Water Purification Inc. and Others. By this one may say that non-signatory affiliates can also be roped in arbitration, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates.
The evolution of the doctrine of group companies is a step towards making India more arbitration friendly and is a need of the hour in light of the complex corporate structures.
Enforceability of the unstamped Arbitration Agreement
The Apex Court in the case of Garware Wall Ropes versus Coastal Marine Constructions and Engineering Ltd held that an arbitration agreement in an unstamped instrument does not exist in law; and thus, it cannot be acted upon by courts for the appointment of an arbitrator.
Enforceability of an unstamped foreign award
The Delhi High Court in the case of Glencore International AG vs. Indian Potash Limited held that a foreign award is not required to be stamped.
Unilateral Appointment of an Arbitrator.
The Apex Court in Perkins Eastman Architects DPC & Anr. vs. HSCC (India) Ltd followed by Bombay High Court in Lite Bite Foods Pvt Ltd vs Airports Authority of India has broadly held that a person who has an interest in the outcome of the decision of the dispute must not have the power to appoint a sole arbitrator and a clause that confers on one party's employee the sole right to appoint an arbitrator, though that employee is himself not the arbitrator, is also not valid. It may be wise for parties to avoid the incorporation of unilateral option arbitration clauses in order to avoid litigations.
Whether allegations of fraud will vitiate arbitral proceedings?
The Apex Court in the case of Rashid Raza vs. Sadaf Akhtar, held that mere allegations of fraud will not vitiate arbitration agreement. The Apex Court laid down two-pronged test to distinguish between simple allegation and serious allegations of fraud i.e. (i) does the plea of fraud vitiate the entire contract? Or (ii) whether the allegations of fraud relate to internal affairs of the parties inter se having no implication in the public domain?
Venue of arbitration will be seat of the arbitration in the absence of contrary intention of parties.
There is also been a row for some time now over selection of an arbitration venue. At times while drafting arbitration clauses, certain issues like jurisdiction of court coupled with nomenclatures of a seat, or venue being used interchangeably was creating conflicts. The Apex Court in BGS SGS SOMA JV versus NHPC Ltd. held that, if arbitration clause designates a particular place as venue for arbitral proceedings, then in absence of a contrary intention, the said venue will be considered as seat of arbitration and therefore conferring exclusive jurisdiction over such venue.
This is a step forward by the Apex Court to clear ambiguities, vis-à-vis the issue on selection of a seat and/or venue in arbitration clauses.
Striking down of Section 87 of the Act
The Apex Court recently in the case of Hindustan Construction Company Limited versus Union of India ("Hindustan Construction"), taking one step further towards a pro-arbitration approach has held that a challenge to an arbitral award does not automatically stay the execution of the arbitral award. For quick recap of the readers we have below outlined the background leading upto the Hindustan Construction judgement:
Position before the Amendment Act
In the earlier regime, the courts ruled that there was an implied prohibition on the enforcement of the arbitral award, until the application challenging an arbitral award was disposed of. This used to cause a significant hardship to an award holder who would be unable to get fruits under the award.
Position after the Amendment Act
To make India a preferred seat of arbitration, certain amendments by way of the Amendment Act were introduced. It provided that mere filing of an application for setting aside of an award under the Act would not itself render the arbitral award unenforceable.
Soon, there came divergence of opinion amongst the various courts qua, the applicability of the Amendment Act. The said controversy was laid to rest, in BCCI Judgment, wherein the Apex Court held that amended provisions with respect to automatic stay of the award under Amendment Act would apply to all pending court proceedings initiated, irrespective of the date of commencement of the arbitral proceeding.
Thereafter, by Amendment Act 2019 section 87 (as explained above) was introduced, which was in direct contravention of the above BCCI judgment passed by the Apex Court which now has been struck down and has restored the position as laid down in the BCCI judgment.
Legislative and Judicial approach to Arbitration in 2019
While the Amendment Act, 2019 and the judicial pronouncements in past few years instil confidence amongst the international community towards an arbitration friendly India, the real test would lie in executing the vision which has been floated. India is eyeing to reduce judicial intervention in the arbitration proceedings and the Amendment Act 2019 is a step in the same direction however, it will largely depend upon the implementation of the ACI and Arbitral Institutions.
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.