Amendments to The Arbitration and Conciliation Act, 1996

In Depth

Amendments to The Arbitration and Conciliation Act, 1996

Sandeep Mahapatra, Arunav Roy | July 2015

A Step in The Right Direction?

Even as the Attorney General proposed complete repeal of the current Arbitration and Csonciliation Act and the difference between the Law Commission and the Attorney General continues, this article finds out if the proposed amendments to Arbitration and Conciliation Act, 1996 are a step in the right direction. Read on to the get the details.

In 1996, India enacted the Arbitration and Conciliation Act (“the Act”) with the avowed objective to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and define the law relating to conciliation. However, the developments in the last two decades have time and again demonstrated the shortcomings of this legislation with many contradictory judicial pronouncements highlighting the same and leading to many rounds of consultations, confabulations and recommendation to remedy such lacuna. The latest in this long list is the 246th Report of the Law Commission of India (“the Commission”)

recommending far reaching changes to the Act and a supplementary report thereafter. With the submission of this report, the events have moved full circle that started in 2001 when the Commission was requested to make a comprehensive review of the enactment, followed by introduction of a Bill in 2003 (only to be withdrawn) and referred to an expert Committee culminating in consultation process initiated by the Law Ministry in 2010 and the Commission once again being requested to compile all such recommendations and submit a report. This write up is divided into two parts: Part I deals with recommendation of the Commission in regard to international arbitration; and Part II deals with recommendations in relation to domestic arbitration.

RECOMMENDATIONS FOR THE FOREIGN ARBITRATION REGIME: MAKING INDIA HUB FOR INTERNATIONAL ARBITRATION

In so far as international commercial arbitration is concerned, the Act was seen more as an impediment rather than an instrument for providing an effective alternative dispute resolution mechanism, as was the avowed objective. The loopholes present in the Act led to the anomalous situation where the enforcement of awards in India, passed by foreign arbitral tribunals, became next to impossible due to the power granted to the Indian Courts to set aside any such award if the same is against the ‘public policy of India’. The broad interpretation given to the doctrine of public policy by the Indian Courts and the penchant of the Courts to broaden their ability to scrutinize over and interfere with the arbitration regime of both domestic and foreign arbitration has resulted in scuttling the objectives of the Act. This is further evidenced by the Supreme Court of India’s decision in Bhatia International [(2002) 4 SCC 105)] wherein it was held that the applicability of Part I of the Act, dealing with domestic arbitration, would extend to Part II of the Act (dealing with international arbitration), thereby making the enforcement process arduous. However in recent years a more pragmatic and harmonious view is being taken by the Indian courts and efforts are being made to distance itself from the arbitration regime and make right its previous wrongs. Recently, the Apex Court in the BALCO [(2012) (9 SCC 552)] judgment clarified the position by restricting applicability of Part I only to domestic arbitration. However, this judgment also does not completely act in aid of international arbitration for two reasons (a) a cut off date of 6th September,2012 was prescribed meaning thereby that all agreements prior to the said date will still be governed by Bhatia; and (ii) in all agreements entered into after this cut off date; recourse could not be sought from Indian courts for seeking interim protection which in turn would act to the advantage of unscrupulous Indian parties who will fritter away with their assets so that by the time an award comes to be passed there would be nothing left for enforcing the same. These are some of the issues that have drawn attention of the Commission and appropriate measures have been suggested to provide succour in this regard.

Only High Courts to deal with matters related to international arbitration–

To begin, it has been proposed that matters related to international commercial arbitration be dealt with by the competent High Court thereby ensuring that matters related thereto do not end up before a district court, as has been the experience so far, which more often than not may not be sufficiently equipped to adjudicate such disputes. Furthermore, while recommending that Part I of the Act shall apply only to Indian seated arbitration, the report carves out an exception by providing that parties by agreement may choose the applicability of provisions of Part I dealing with interim measures and the assistance of the courts in taking evidence in case of international commercial arbitration seated outside India. In recommending this provision, the Commission is seeking to further set right the post BALCO scenario and if accepted would be a step in the right direction and would help enhance the credibility of India as a pro-arbitration destination. The Commission also aims to bring the Act in conformity with international norms by replacing ‘place’ of arbitration with the more commonly used phrases ‘seat’ and ‘venue’. The amendment defines seat as the legal seat of arbitration as opposed to venue which is merely the physical location of the proceedings.
The principle of “costs follow the event”-

Another welcome recommendation made by the Commission is introduction of “costs follow the event” regime whereby the court or arbitral tribunal can impose costs for frivolous arbitrations or arbitration related court litigation. The objective of this recommendation is to discourage frivolous and motivated challenges to enforcement of foreign awards thereby putting the objector on notice that in case of failure it would be liable to compensate the successful party. This is a significant recommendation and would act as a deterrent from challenging the enforcement of foreign awards. The current avatar of the legislation does not penalise an objector in the event of an unsuccessful challenge and is one of the prime reasons emboldening such objectors to mount objections in a routine manner.

Principle of “Public Policy” narrowed down–

Added to this, the recommendations have also proposed to narrow down the “public policy” ground for objecting to enforcement of a foreign award by specifying the grounds which would constitute the same thereby reducing the scope of ambiguous interpretation attributed to the said term (public policy). The Commission suggests that a foreign award would be against the public policy of India “only if” (i) the award was induced by fraud or corruption, or (ii) the award contravenes the fundamental policy of Indian law, or (iii)is in conflict with India’s most basic notion of morality or justice. In addition, it has been recommended that such objections cannot be filed after three months of receipt of notice from the court where the successful party has instituted the proceeding seeking enforcement. In recommending this time-bound manner of filing objection, the Commission seeks to ensure that the unsuccessful party does not delay the enforcement process by taking time to file objections. Another significant feature relates to the recommendation of the Commission for disposal of such objections within a year’s time from the date when the unsuccessful party was served with a notice of enforcement. This, if accepted would make the entire process of enforcement proceeding time bound and do away with the uncertainties that prevail today in this regard.

RECOMMENDATIONS FOR DOMESTIC ARBITRATION REGIME: PUTTING THE HOUSE IN ORDER.

The recommendations of the Commission in the field of domestic arbitration are equally significant and seek to dispel the misgivings of the Act. Ad-hoc arbitration has been a bane in the development of arbitration as an effective alternate dispute resolution mechanism. In order to address this issue, the Commission has laid emphasis on institutional arbitration by making provisions under the appointment process by imploring the High Courts to encourage parties to opt for an institution. Provision for an “emergency arbitrator” has also been recommended to give statutory recognition to the rules of international arbitration institutions and provide relief to a party prior to constitution of an arbitration tribunal.

Rationalizing costs for arbitration–
An area of concern that has deterred parties from opting for arbitration is high costs involved in ad-hoc arbitrations as the Act does not prescribe for any fee schedule. Resultantly arbitrators charge exorbitant fees and coupled with the fact that the entire process takes years to culminate, it becomes a financial burden for the parties. To address this issue, the Commission has proposed a fee schedule to be made part of the Act that could be made the basis for fees chargeable under arbitration proceedings with the same being regularly updated by the High Courts. The “independence and impartiality” of an arbitrator has also received the attention of the Commission and it has recommendedthat disclosures, in a particular format, which would be required to be made by a person approached to act as an arbitrator, be made part of the enactment. Such disclosure would contain his experience, any pastor present relationship with any of the parties to the dispute or any third party related to the disputing parties etc. Along with the acknowledgment that such person would be able to devote sufficient time to the arbitration and in particular his ability to finish the arbitration within 24 months. In making this recommendation, the Commission seeks to fix a statutory time frame for conclusion of an arbitration proceeding to avoid long drawn out proceedings.
Inclusion of electronic communication to constitute an arbitration agreement–
What constitutes an arbitration agreement has been a matter of much judicial scrutiny and in today’s technology driven world; electronic communication has been accorded legal sanctity in India but the Act as it stands has no provision to recognise such communication while construing an arbitration agreement. To overcome this, the recommendation mandates recognition of electronic communication as a means to arrive at finding out if parties have agreed to arbitration for dispute settlement. The definition of the term “party” has been extended to include any person claiming through or under the parties who is a party to the arbitration agreement. This is in line with the judgment of the Supreme Court in Chloro Controls [( 2013) 1 SCC 641)] case. Additionally, the Commission has gone into the issue of arbitrability of disputes by proposing that only those disputes be referred to arbitration where the subject matter of the dispute can be settled by arbitration. However, it has also recommended that the arbitral tribunal have powers to make awards regarding disputes involving serious questions of law and complicated questions of fact or allegations of fraud, etc. This amendment seems to have been proposed to put an end to conflict arisen due to contrary judgments given by the Apex Court in Maestro Engineers [(2010) 1 SCC 72] which appeared to have reduced the powers of the tribunal to decide on issues of fraud, etc. and Swiss Timing Ltd. [(2014)6 SCC 677] wherein it was held that the judgment of Maestro Engineers is per incuriam and therefore, not good law.
Impact of necessary and proper parties to a dispute clarified–
The Commission has made recommendations regarding referral of parties to arbitration (governed under Section 8 of the Act). The Commission has proposed that in cases where all the parties to the dispute are not parties to the arbitration agreement, the reference is to be rejected only where such parties are necessary parties and not if they are merely proper parties. This is in line with the Apex Court’s decision in Sukanya Holdings [(2003) 5 SCC 531]. Furthermore, the amendment contemplates a two-step process to be adopted by a court while deciding on an application seeking reference to arbitration. If the court is of the opinion that prima facie the arbitration agreement exists, then it would refer the matter to arbitration and leave the question regarding the existence or validity of the arbitration agreement to be determined by the arbitral tribunal. However, if the court concludes that the agreement does not exist, then such a conclusion would be final and not prima facie. The amendment also suggests that there would be a conclusive determination as to whether the arbitration agreement is null or void.
Applications for interim relief to be disposed by the Courts in a timebound manner
The Act allows parties to approach a competent court for seeking interim relief prior to initiation of arbitration proceedings but many a times, the successful party delays the process of initiating arbitration proceedings leading to substantial delay. In order to address this prevalent practice, the recommendation prescribes a time period of 60 days for initiation arbitration proceedings from the date of grant of such interim measure. Furthermore, so as to minimise court intervention in seeking interim relief, post the initiation of arbitration proceedings, it has been recommended that the arbitral tribunal would be sufficiently empowered to grant such relief. A time limit of 60 days has been prescribed for High Courts and the Supreme Court for disposal of application seeking appointment of arbitrator so as to ensure that the arbitral tribunal is constituted at the earliest and the present practice of unlimited time frame is done away with. The Commission has additionally recommended that once arbitration proceedings have commenced; the court would ordinarily not entertain an application for interim relief. This would also be in line with the UNCITRAL Model Law.
De-clogging the mechanism of Award enforcement and supplementary recommendations

In the scheme of the present Act, once a challenge is brought against a domestic award, there is an automatic stay of enforcement thereof incentivizing the unsuccessful party to launch an objection for the sake of it. Additionally, there is no provision for asking for the depositing of any part of the award while challenging the same. Moreover, once a challenge is brought in, it takes a long time for its culmination and while all this goes on the successful party has no option but to bide its time. In order to rectify this situation, the recommendations suggest that no automatic stay on the arbitral proceedings be granted and that a separate application be filed upon which the Court may stay the enforcement subject to conditions of deposit of a part of or the full awarded amount. In suggesting this, the Commission has made the task of challenging an award more stringent and would act in aid of arbitration as a mode of dispute settlement.

The existing grounds for setting aside an arbitral award have also been suggested to be overhauled comprehensively thereby making them more stringent. Public policy as a ground has been streamlined as has the enforcement of foreign awards. However, after the said recommendation were made by the Commission a threejudge bench of the Supreme Court in the case of Western Geco [(2014)9 SCC 263}, further broadened the scope of review of an Award on merits, based on violation of public policy, by including the Wednesbury Principle of Reasonableness as a ground for challenging an award under section 34 of the Act. As such an inclusion of the Wednesbury Principle would result in expanding the scope for intervention of the Courts and would go against the object of the Act to “minimize judicial intervention”, the Commission through a Supplementary Report to the 246th Report has recommended an additional explanation to ensure that the principle of public policy comprising of fundamental policy of Indian law is construed narrowly. Through this explanation the Commission has clarified that any test for whether there is a contravention of the fundamental policy of Indian law should not include a review on the merits of the dispute. Additionally, another ground for setting aside domestic awards i.e. ‘patent illegality on the face of the award’ – based on the patent illegality standard set by the Apex Court in Saw Pipe[(2003) 5 SCC 705] has also been suggested. However, it has provided that an application seeking setting aside of an award can only be made with prior notice to the other side and is to be disposed off within a year of such service of notice. It may be noted that this process does not talk of any notice by the court but notice from one party to the other. By providing this, the recommendations seek to fix a time frame in this regard as well.

CONCLUSION: A STEP IN THE RIGHT DIRECTION

It can be concluded that the recommendations of the Commission seek to address various anomalies of the present Act and if accepted, even if in large measure, would help bring about a change in the manner of conducting arbitration in India. Therefore, the proposed amendments would act not only as a much needed salve to the choked mechanism of dispute resolution throughout the country but also open the way for India to become a prominent and affordable destination for international arbitration in the near future.

About Author

Sandeep Mahapatra

Sandeep Mahapatra is a Partner and Arunav Roy an Associate at Juris Corp, Advocates & Solicitors (Delhi). Mahapatra , LLB from Orissa and MPhil in International Law from Jawaharlal Nehru University, Delhi, has extensive experience in the field of corporate commercial, civil and criminal litigation as well as arbitration. He has practiced at and argued before the Supreme Court of India, High Court of Delhi, Company Law Board, BIFR, AAIFR, DRT, DRAT, TDSAT, National Consumer Disputes Redressal Commission and various district courts of Delhi.

Arunav Roy

Arunav Roy is a law graduate from National Law University, Delhi and his prime area of practice at Juris Corp is dispute resolution and arbitration.