[This article is being re-republished since the previous article was inadvertently published on May 5, 2016, without footnotes and providing appropriate credits to authors where required. There are few other additions made to the previous article]
After much clamour, the Arbitration and Conciliation Act, 1996 ("Arbitration Act") finally stands amended. The Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act"), which received the assent of the President of India on December 31, 2015 and deemed to have come into force on October 23, 2015, has proposed sweeping changes to the Arbitration Act. The route to the Amendment Act has been a rather arduous. The Arbitration Act was enacted in the year 1996, with the intention of providing speedy and effective resolution of disputes through arbitration or conciliation and reduce the burden on courts. However, the arbitration experience in India has been subject to intense scrutiny over the years, leaving the parties to ponder whether or not to incorporate arbitration clauses. Taking note of the criticisms in the earlier arbitration regime, the Law Commission of India ("Law Commission") had submitted its Report No.246 in August 2014 ("Law Commission Report") recommending several changes to the Arbitration Act. On 23 October, 2015, the President of India promulgated an ordinance ("Arbitration Ordinance") to bring into force number of these amendments to the Arbitration Act.1 Since the amendments were brought through an ordinance, confusion and uncertainty still prevailed, and there was also no clarity on whether such amendments would be prospective or retrospective in operation. The Amendment Act is most certainly a welcome move and has been hailed for providing the much needed impetus to the growth of the Indian arbitration regime. Despite some deviations, the Amendment Act is largely in consonance with the Law Commission Report and the Arbitration Ordinance. However, there have been lapses in drafting the new law, and some more steps could have been taken by the law makers to ensure that India does indeed become the next arbitration hub. This article aims to provide insights and critically analyse the Amendment Act with suggestions to make the Arbitration Act more effective.
A. INTERIM RELIEF
1. FROM COURT
After the judgment of the Supreme Court in Bharat Aluminium and Co. v. Kaiser Aluminium and Co.2 ("BALCO") the Indian courts had no jurisdiction to intervene in arbitrations which were seated outside India. Post BALCO, if the assets of a party was located in India, and there was a likelihood of the dissipation of the assets, the other party could not approach the Indian courts for interim orders. Since the interim orders made by arbitral tribunals outside India could not be enforced in India, it created major hurdles for parties who had chosen to arbitrate outside India. This anomaly has been addressed in the Amendment Act with the insertion of Section 2(2), which makes the provision for interim relief(s) also applicable in cases where the place of arbitration is outside India, subject to an agreement to the contrary. However, there are few concerns. This option is only applicable to parties to an "international commercial arbitration" with a seat outside India. This means that the protection will not be available to two Indian parties who choose to arbitrate outside India.
The Amendment Act provides that in case the court passes an interim order, arbitration proceedings must commence within a period of 90 (ninety) days from the date of such order or within such time as prescribed by the court. This amendment was brought in to ensure that the practice of the parties of misusing this provision, by strategically obtaining exparte or ad interim orders and not proceeding with arbitration, is checked.
However, there is no clarity on whether the 90 (ninety) day period would commence from the date of the exparte or ad interim order or the final order in the proceedings under Section 9. This aspect should have been clarified. The better approach perhaps would have been to specify that the 90 (ninety) day period commences from the date of filing of the petition, in order to drive the parties to arbitration.3
2. ARBITRAL TRIBUNAL
The amendments to Section 17 empowers the arbitral tribunal with the same powers as that of a court under Section 9. In order to facilitate the parties to approach the arbitral tribunal and reduce the intervention of courts, the Amendment Act provides that once the arbitral tribunal has been constituted, courts cannot entertain application for interim measures, unless there are circumstances which may not render the remedy of obtaining interim orders from the arbitral tribunal efficacious. The Amendment Act also clarifies that such interim measures granted by the arbitral tribunal would have the same effect as that of a civil court order under the Civil Procedure Code, 1908 ("CPC"). This is a significant development as the interim orders of the arbitral tribunal under the earlier arbitration regime could not be statutorily enforced, virtually rendering them meaningless. However, in a recent judgment passed by the Kerala High Court on March 16, 2016 in Writ Petition (Civil) No. 38725 of 2015, the Single Judge has taken a view that under the Amendment Act, the arbitral tribunal cannot pass an order to enforce its own orders and the parties will have to approach the courts for seeking such enforcement, thereby making the enforcement of arbitral awards cumbersome. It will be interesting to see how the other courts interpret this judgment and if this stands the test of further judicial scrutiny.
Under the new regime, the arbitral tribunal has the power to order interim measures even after the making of the arbitral award, but before it is enforced. However, this is inconsistent with Section 32, which provides that the mandate of an arbitral tribunal shall be terminated after the making of the final award. If the arbitral tribunal ceases to have jurisdiction after passing the final award, it is inconceivable as to how it would have the power to order interim measures after the making of the final award. This anomaly ought to have rectified by appropriate amendments to Section 32.
B. LIMITED SCOPE TO REFUSE ARBITRATION REQUEST
The amended Section 8 empowers the judicial authority to refer the parties to arbitration when there is an arbitration agreement, unless it finds prima facie that no valid arbitration agreement exists. While Section 8(1) refers to "judicial authority", inexplicably, in Section 8(2) the word "Court" has been used instead of "judicial authority" which appears to be an oversight.4
While the scope under amended Section 11 is limited to the examination of the existence of an arbitration agreement; scope under amended Section 8 appears to be broader in as much as the judicial authority can also examine the validity of the arbitration clause. There appears to be different standards set for examination of an arbitration agreement under Sections 8 and 11, which ought to have been avoided. The standards consistent with the proposals made in the Law Commission Report ought to have been made uniformly applicable to both provisions.
C. AMENDMENTS TO GROUNDS FOR CHALLENGING ARBITRAL AWARD
The scope of "public policy" in Section 34 has been narrowed and the award can be set aside only if the arbitral award (i) was induced or affected by fraud or corruption; or (ii) is in contravention with the fundamental policy of India; or (iii) conflicts with the most basic notions of morality or justice. In order to counter the judgment of the Supreme Court in ONGC Limited v. Western Geco International Limited,5 (which expanded the scope of "public policy" to include Wednesbury principle of reasonableness which would necessarily entail a review on merits of the arbitral award), the Law Commission had submitted its Supplementary Report in February 2015, which recommendations have been accepted and incorporated through insertion of Section 2A. In terms of this amended provision, an award cannot be set aside merely on the ground of erroneous application of the law or by re-appreciation of evidence. However, interestingly, the test of "patent illegality appearing on the face of the award" has not been made applicable to international commercial arbitrations. This provision may be subjected to challenge by Indian parties, who may contend that different standards ought not to be set for international commercial arbitrations. The test of "patent illegality" could perhaps have been deleted all together to avoid this anomaly.
D. NO AUTOMATIC STAY OF ARBITRAL AWARD UPON FILING OF A CHALLENGE TO THE ARBITRAL AWARD
Prior to the Amendment Act, mere filing of a challenge petition to the arbitral award would result in an automatic stay of the arbitral award. The court would take several years to decide the petition, making the process of arbitration time consuming and ineffective. In a welcome move, the Amendment Act provides that there would be no automatic stay of the arbitral award and a separate application will have to be filed seeking stay of the arbitral award. The court is now required to record reasons for grant of stay and the provisions of the CPC for grant of stay of a money decree have been made applicable, meaning thereby that the losing party will necessarily be required to either deposit some part or the entire sum awarded in the arbitral award, or furnish security, as the court deems fit.
E. TIME BOUND PROCEEDINGS
The Amended Act provides for faster timelines to make the arbitration process more effective. Proviso to Section 24 has been added providing for the arbitral tribunal to hold oral hearings for evidence and oral argument on day-to-day basis and not grant any adjournments unless sufficient cause is made out. The arbitral tribunal has been vested with the power to impose heavy costs for adjournments without sufficient cause. Every arbitral award must be made within 12 (twelve) months from the date the arbitrator(s) receives a written notice of appointment. The parties may mutually decide to extend the time limit by not more than 6 (six) months. If the award is not made within 18 (eighteen) months, the mandate of the arbitrator(s) will terminate unless the court extends the period upon an application filed by any of the parties. However, there is no time period fixed for approaching the court seeking extension of time which may again contribute to delays.
Further, while extending the time for making the award, if the court finds that the delay was attributable to the arbitral tribunal, it may order reduction in the arbitrator's fee by not exceeding 5% (five percent) for each month of such delay. The court while extending the time limit would also have the right to change the arbitrator(s) as it may deem fit. An application to the court, as stated above would be endeavoured to be disposed by the court within 60 (sixty) days from the date the opposite party receives the notice. A challenge to an arbitral award should be disposed expeditiously and in any event within a period of one year from the date on which notice is served upon the other party. Section 11 will now have to be decided within a period of 60 (sixty) days from the date of service of notice to the opposite party.
In an arbitration regime that was plagued with delays and costs, this is a good development. However, the parties would be forced to go court to seek extensions of time to complete the arbitrations, which is an undesirable situation in a court system burdened with huge pendency of cases.
Interestingly, it would appear that even the arbitration institutions would be required to make an application for extension of time if the award is not rendered within the specified period. It is indeed an undesirable situation to have parties including the institutional arbitrations with their own set of rules, to be forced to come to court seeking extension of time to complete the arbitration proceedings.6
Further, the proposed time line of 12 (twelve) months to pass the arbitral award is very ambitious, even by international standards. There are some complex disputes, the resolution of which may not be possible within this time frame. Even the Law Commission Report had recommended a time period of 24 (twenty four) months to complete the arbitration proceedings. Such ambitious time lines may act as a deterrent for foreign parties to choose India as the seat of arbitration, particularly in complex disputes. Providing ambitious timelines may actually backfire and go contrary to the very purpose of introducing these amendments.
F. FAST TRACK PROCEDURE
Section 29B has been introduced which gives an option to the parties to agree on a fast track mechanism under which the award will have to be made within a period of 6 (six) months from the date the arbitrator(s) receiving written notice of appointment. The dispute would be decided based on written pleadings, documents and submissions filed by the parties without any oral hearing. Oral hearing can be held only if all the parties request or the arbitral tribunal considers it necessary for clarifying certain issues. There may not be too many occasions where the parties to an on-going dispute agree on anything, let alone agree on a fast track procedure.
G. A NEW EXPANSIVE COST REGIME INTRODUCED
Section 31A has been introduced which gives wide powers to the arbitral tribunal to award costs. The expansive regime to award costs based on rational and realistic criterion rule, as recommended in the Law Commission Report, has been accepted. The arbitral tribunal can decide whether the costs are payable, the amount of costs to be paid and when they need to be paid. The provision further provides that generally the unsuccessful party will be ordered to pay the costs to the successful party. The costs may include fees and expenses of the arbitrators, courts and witnesses, legal fees and expenses, administrative costs of the institution and any other costs incurred in relation to the arbitral or court proceedings and the arbitral award. The conduct of parties is 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.
H. DISCLOSURE REQUIREMENTS OF ARBITRATOR
The Amendment Act has borrowed the disclosure requirements from the IBA Guidelines on Conflict of Interest in International Arbitration. The Fifth and Seventh Schedule has been inserted which provides a guide in determining circumstances for ineligibility of the arbitrator.
I. CAP ON FEES TO ARBITRATOR
The Fourth Schedule has been introduced which provides the model fees in case of arbitrations other than international commercial arbitrations and in cases where parties have agreed to the rules of an arbitral institution, with a view to ensure that the arbitration process does not become very expensive. Section 11A (2) has been introduced which details the procedure for Central Government to amend the Fourth Schedule. However, since the High Court of each State is required to frame rules after taking into consideration the rates mentioned in the Fourth Schedule, this may lead to a disharmonised fee regime7 across the country.
J. OTHER MISSES
1. The Amendment Act also does not clarify if Indian parties can choose foreign law to resolve disputes through arbitration. While some argue that this is possible since the choice of the party to determine the choice of law must be recognised; the more conservative argument has been that Indian parties cannot agree to resolve disputes choosing a foreign law, as that would mean contracting out of Indian Law, and therefore opposed to public policy.8 The Bombay High Court in the case of Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Private Limited9while dealing with this issue, relied on some observations of the Supreme Court in TDM Infrastructure Private Limited v. UE Development India Private Limited10 and held that since both the parties are Indian, they cannot derogate from Indian Law and the choice of two Indian parties to choose foreign law in a foreign seated arbitration was not recognised. However, the Madhya Pradesh High Court in Sasan Power Limited v. North American Coal Corporation Limited11 has taken a contrary view. This issue is currently pending adjudication by the Supreme Court.
2. In order to provide statutory recognition to the "emergency arbitrator" as provided under some institutional rules, the Law Commission Report had recommended the addition of "emergency arbitrator" to the definition of "arbitral tribunal" under Section 2(d) of the Arbitration Act. The concept of "emergency arbitrator" has been recognised by most international arbitration rules and has gained popularity for its effectiveness. The recommendations made by the Law Commission Report in this regard have not been accepted and this is a significant omission that is likely to impact arbitrations in India.
3. Though the Law Commission Report suggested using the expressions "seat" and "venue" instead of "place" of arbitration keeping it consistent with international usage of a "seat of arbitration" to denote the legal home of the arbitration, the proposal has not been accepted.
4. While, a time limit has been fixed for challenge to a domestic arbitral award, no such time limit is prescribed for the enforcement of foreign arbitral awards, despite the recommendations in the Law Commission Report. There cannot be any rationale for this considering the amendments have been made to make India more arbitration friendly.
5. The Amendment Act does not address the issue of confidentiality in arbitrations.
6. The Law Commission Report had recommended changes to Section 16 of the Arbitration Act, to empower the arbitral tribunal to decide disputes that involve serious questions of law, complicated questions of fact or allegations of fraud, corruption etc. While the provisions of Sections 8 and 11 have been amended to the effect that the parties will be referred to arbitration "... Notwithstanding any judgment, decree, or order of the Supreme Court..." perhaps to overcome the conflicting judgments of the Supreme Court on whether or not questions of fraud are arbitrable; the recommended changes to Section 16 of the Arbitration Act ought to have been accepted, to make this position clear and provide more teeth to the powers of the arbitral tribunal. A two judge bench of the Supreme Court in Radhakrishna v. Maestro Engineers12 ("Radhakrishna judgment"), held that issues of fraud are not arbitrable. However, the Single Judge of the Supreme Court, while deciding a petition under Section 11 of the Arbitration Act, in Swiss Timing Ltd. v. Organising Committee13, held that judgment in Radhakrishna judgment is per incuriam and therefore not good law. In a situation, where the parties are before an arbitral tribunal in a manner other than Sections 8 or 11 of the Arbitration Act, and the arbitrator's jurisdiction is questioned by a party alleging that there are questions of fraud involved in the dispute, it would appear that the arbitral tribunal may be bound to follow the Radhakrishna judgment, and consequently rule that it does not have the jurisdiction to deal with questions of fraud. The better approach could have been to amend Section 16 consistent with the recommendations made in the Law Commission Report.
7. Section 44(b) requires that the foreign award not only be made in a reciprocating territory, but also that the reciprocating territory be notified by the Central Government in Official Gazette. With only about 50 (fifty) countries having been notified as reciprocating territory, the scope of enforcing foreign arbitral awards is significantly reduced. The Government should either notify most countries in the Official Gazette, or do away with the requirement of Section 44(b) that provides for notifying reciprocating territories in the Official Gazette.14
8. Though the Law Commission Report recommended inserting clauses 3A and 3B to Section 7 to provide greater clarity and meaning to the definition of "arbitration agreement", the same has not been accepted. The Law Commission Report had further recommended adding an explanation to define "electronic means" which has also not been accepted.
9. The Arbitration Amendment has created confusion as to whether the amendments will have a retrospective or prospective effect for court actions concerning arbitration and the arbitration proceedings. Section 26 of the Amended Act provides that "Nothing contained in this Act shall apply to the arbitral proceedings commenced in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act". The Madras High Court in New Tripur Area Development Corporation Limited v. M/s Hindustan Construction Company Limited & Ors., has ruled that Section 26 of the Amended Act is not applicable to post arbitral proceedings including court proceedings, since the words "in relation to" has been deleted. Therefore, the court held that a separate application under the amended law had to be filed for seeking a stay on the arbitral award even in respect of arbitral awards passed prior to October 23, 2015. However, the Calcutta High Court in Electrosteel Casting Limited v. Reacon Engineers (India) Private Limited, has taken a contrary view and held that the enforcement of arbitral award, borne out of arbitration proceedings commenced before October 23, 2015, would be stayed automatically upon the filing of application for setting aside the same. This is a critical issue and needs to be decided by the Supreme Court at the earliest since the courts are unsure about which law to follow. This has resulted in inconsistencies in practice and uncertainty about the law, within just a few months of the introduction of the new arbitration regime.
The Arbitration Amendment is a significant step forward in overcoming the systemic malaise of delays, high costs and ineffective resolution of disputes, which had plagued the arbitration regime in India. Most of these amendments are welcome, since many would agree that the earlier arbitration regime was a failure, and did not result in cultivating the culture of arbitration in India. These amendments will also have to withstand the scrutiny of Indian courts that have often been criticised for their interventionist approach. The recent judgments of Indian courts which have had an occasion to interpret the provisions of the Amendment Act, is an early indication that these amendments will be subject to further judicial scrutiny. It will be interesting to see how the courts interpret the new amendments in future. Further amendments are needed to iron out the flaws in the Amendment Act to make it more effective. The new arbitration regime promises to herald a new era for resolution of disputes in India. But, only time will tell whether or not India becomes the next arbitration hub, as aspired.
1 Please see our article on the Arbitration Ordinance: (http://www.mondaq.com/india/x/452076/Arbitration+Dispute+Resolution/Amendments+To+Indias+Arbitration+Act+An+Analysis)
2 (2012) 9 SCC 552
3 Please see article by Mr. Promod Nair on the Arbitration Ordinance: (http://barandbench.com/when-good-intentions-are-not-good-enough-the-arbitration-ordinance-in-india/)
4 Supra Note 3
5 (2014) 9 SCC 263
6 Supra Note 3
7 Supra Note 3
9 Arbitration Application No. 197 of 2014 along with Arbitration Petition No. 910 of 2013
10 (2008) 14 SCC 271
11 First Appeal No. 310/2015
12 (2010) 1 SCC 72
13 (2014) 6 SCC 677
14 Supra Note 3
The views expressed in this article are those of the author and does not necessarily reflect the views of the Firm.