INDIA’S AMENDED ARBITRATION LAW – A CRITIQUE
On October 23, 2015, when the Indian Parliament was in recess, the President of India promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015 (the “Arbitration Ordinance”). The Arbitration Ordinance temporarily amended the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) as regards certain key provisions. However, upon the Parliament resuming business, the Government of India introduced the Arbitration and Conciliation (Amendment) Bill, 2015 (the “Arbitration Amendment Bill”), which mirrored the provisions of the Arbitration Ordinance and was designed to permanently bring into law the provisions of the Arbitration Ordinance. The Arbitration Amendment Bill passed muster in both Houses of Parliament and was enacted as the Arbitration and Conciliation (Amendment) Act, 2015 (the “Arbitration Amendment Act”). On December 31, 2015, the Arbitration Amendment Act received the President’s assent and is now a statute. This update discusses the crucial changes originally introduced by the Arbitration Ordinance and subsequently endorsed by the Arbitration Amendment Act.
Section 8 (reference to arbitration)
Now, the Arbitration Amendment Act not only permits a party (in dispute) to the arbitration agreement to apply to the judicial authority to refer the matter to arbitration, but also any person claiming through or under such a party (in dispute). This essentially means that the right to make an application to refer the matter to arbitration stands extended to a party deriving its claim from a party (in dispute) who is the actual signatory to the arbitration agreement.
Further, the Arbitration Amendment Act has clarified that the scope of the judicial authority in an application under Section 8 of the Arbitration Act will only be to examine whether, prima facie, a valid arbitration agreement exists. In other words, if the finding of the judicial authority is that an arbitration agreement exists, it shall be bound to refer the parties (in dispute) to arbitration, without any further examination of the matter on merits or otherwise.
This is an important change as, many a times, judicial authorities would go beyond their remit and pass orders on the merits of the case.
Furthermore, the Arbitration Amendment Act amends Section 37 of the Arbitration Act and provides for an appeal in case the judicial authority fails to refer the matter to arbitration under Section 8. Previously, there was no such provision to prefer an appeal if a judicial authority under Section 8 failed to refer the parties (in dispute) to arbitration.
Section 9 (interim relief)
Section 9 of the Arbitration Act enables a party to an arbitration agreement to obtain interim relief from a court. The parties to an arbitration agreement can obtain interim relief either before commencing arbitral proceedings, during the pendency of arbitral proceedings, or at any time after an award has been passed by the arbitral tribunal, but before executing on the award. Section 9 applications have often been made frivolously by parties to arbitration agreements to delay the arbitral process, and thereby increasing the intervention of the courts. The Arbitration Amendment Act attempts to address this issue by providing that a court shall not grant interim relief under Section 9 of the Arbitration Act during the pendency of arbitration proceedings, unless the court is satisfied that there exist circumstances which make granting of such relief by the arbitral tribunal inefficacious. The main intention is to minimize unnecessary intervention of the courts as also to ensure that parties do not abuse the process by conveniently and routinely knocking the doors of the courts and obstructing the arbitral process. The provision, although laudable, may, in practice, increase the burden of the courts, because the courts will now have to assess two (2) issues: (a) whether or not it will be efficacious for the arbitral tribunal to grant the relief sought; and (b) whether the relief sought should be granted. Interestingly, earlier, the courts only had to decide on issue (b).
Besides this, the Arbitration Amendment Act alters Section 9 of the Arbitration Act and provides that if an interim relief under Section 9 of the Arbitration Act is obtained by any party before the commencement of arbitration proceedings, the parties should commence arbitration within ninety (90) days from the date of obtaining the interim relief or within such time as directed by the court at the time of granting the interim relief.
Further, it is imperative to note that, previously, provisions of Section 9 (being under Part I) of the Arbitration Act applied only to domestic arbitrations, i.e., arbitrations seated in India. However, now, the Arbitration Amendment Act extends the application of Section 9 to arbitrations seated outside India as well, provided, that, the award obtained in such an arbitration will ultimately be enforced in India. This change will ensure that the interests of a successful party are not defeated due to the lack of adequate measures to restrain the unsuccessful party from disposing off or dealing with its assets in India, which may ultimately render the award unenforceable. The Arbitration Amendment Act aims to provide parties with an effective option to safeguard their interests, which is, in fact, the international practice prevalent in jurisdictions like Singapore and the United Kingdom. However, invocation of this extraterritorial application of Section 9 of the Arbitration Act can be excluded by the parties by an express agreement to that effect.
Section 17 of the Arbitration Act empowers the arbitral tribunal to grant interim relief like a court can. Further, interim relief can be granted under Section 17 not only during the arbitral proceedings but also after the award has been passed (but before the award is enforced).
To give teeth to the orders of the arbitral tribunal under Section 17 of the Arbitration Act, the Arbitration Amendment Act provides that such orders will be deemed to be orders of a court and will be enforceable under the Code of Civil Procedure, 1908. This change is particularly noteworthy. Previously, obtaining interim relief from the arbitral tribunal was thought to be of no use as the order was not directly enforceable, and the parties preferred going to courts under Section 9 of the Arbitration Act. Consequently, the courts were unduly burdened with applications for interim relief in arbitration proceedings.
Section 11 (appointment of the arbitral tribunal)
Section 11 of the Arbitration Act, before being amended by the Arbitration Amendment Act, provided a right to the parties, in certain cases, to seek the intervention of the Chief Justice of the Supreme Court of India (the “Supreme Court”) in case of international commercial arbitrations, and in other cases, the Chief Justice of the appropriate state High Courts or their respective designates for constituting the arbitral tribunal. Now, the Arbitration Amendment Act alters this position and provides that the foregoing power to appoint the arbitral tribunal shall not be exercised by the Chief Justice, but will be exercised by the Supreme Court, the High Courts or their designates, as the case may be.
The Arbitration Amendment Act also clarifies that at the time of making such an appointment, the Supreme Court and the High Court must confine themselves to the examination of the existence of an arbitration agreement without being influenced by the decision of any court and not delve into the merits of the dispute.
In order to make the constitution of arbitral tribunals more time efficient, the Arbitration Amendment Act provides that the Supreme Court and the High Courts must endeavor to dispose of the applications under Section 11 of the Arbitration Act within a period of sixty (60) days. The timeline appears to be aggressive, and in reality, it might prove to be impractical.
Section 12 (arbitrator conflicts)
Section 12 of the Arbitration Act makes it obligatory for a person, when approached in connection with a possible appointment as an arbitrator, to disclose the existence of any circumstance which can give rise to justifiable doubts as to his/her independence or impartiality. However, until now, this provision failed to provide any ascertainable standard to determine such independence or impartiality. The Arbitration Amendment Act attempts to address this lacuna by amending Section 12 of the Arbitration Act and providing that the grounds stated in the newly inserted Fifth Schedule (to the Arbitration Act) will guide in determining such independence or impartiality. An illustrative list of such grounds include: (i) the arbitrator being a representative or advisor or an affiliate of one of the parties; (ii) the arbitrator being a shareholder in one of the parties or an affiliate of one of the parties that is privately held; (iii) the arbitrator’s previous involvement in the case; or (iv) the arbitrator’s appointment, within the past three years, as an arbitrator in another case on two or more occasions by one of the parties or an affiliate of one of the parties.
Further, the Arbitration Amendment Act absolutely bars persons related to the counsel, parties or the subject matter of the dispute in a manner mentioned in the newly inserted Seventh Schedule (to the Arbitration Act) from acting as arbitrators. The Seventh Schedule mirrors many of the provisions of the Fifth Schedule and is, in fact, a sub-set of the grounds mentioned in the Fifth Schedule. For instance, the illustrative grounds mentioned at (i) to (iii) above are also found in the Seventh Schedule. Although the Fifth and Seventh Schedules contain similar provisions, it is to be noted that each exists for a different reason and is intended to operate at different stages.
However, it is still open for the parties to appoint, by mutual consent, a person barred by the Seventh Schedule to act as an arbitrator. Mutual consent can be exercised by the parties only after disputes have arisen between them and not prior thereto.
Furthermore, in addition to a declaration concerning his/her independence, a potential arbitrator will also have to declare the existence of any circumstance which will affect his ability to complete the arbitration within twelve (12) months. This insertion is particularly important, in light of the fact that the arbitration process must now be completed within twelve (12) months of the arbitrator receiving his notice of appointment.
Procedural changes to speed up arbitration
In a bid to accelerate the arbitral process, the Arbitration Amendment Act has introduced many well-meaning reforms. The Arbitration Amendment Act amends Section 24 of the Arbitration Act and directs arbitrators to, as far as possible: (i) hold arbitral hearings for presentation of evidence and oral arguments on a day-to-day basis; (ii) not grant adjournments unless sufficient cause is shown; and (iii) impose exemplary costs on parties seeking an adjournment without sufficient cause.
Further, the Arbitration Amendment Act introduces a new Section 29A, which provides that an award shall be made within twelve (12) months of the arbitral tribunal receiving notice of its appointment. Further, this period of twelve (12) months can be extended by mutual agreement between the parties for a further period of six (6) months. If the award is not made within the stipulated period of twelve (12) months or the extended period, the parties may apply to the court for an extension of the time limit and the court may, for sufficient cause, grant the extension. At the time of granting the extension, the courts will have the discretionary power to reduce the fees of the arbitrator(s) to the extent of five percent (5%) for each month’s delay, in case the delay in the passing of the award is attributable to the arbitrators. Furthermore, the court also has the discretion to substitute one or all of the arbitrators of the arbitral tribunal and direct a newly constituted arbitral tribunal to continue the proceedings. If, however, an application seeking an extension is not made at all or is refused by the court, the mandate of the arbitrator(s) shall terminate.
Furthermore, the Arbitration Amendment Act introduces a new Section 29B, which provides for a “fast track procedure” to conduct arbitrations. Parties, by agreement, may opt for this “fast track procedure.” The “fast track procedure” permits the arbitral tribunal to dispense with an oral hearing, and even in cases where an oral hearing is requested for clarifying certain issues, the arbitral tribunal may ignore all technical formalities at such hearings and adopt an appropriate procedure for the expeditious disposal of the matter. In “fast track” arbitration, an award must be passed within six (6) months. However, if an award is not issued within six (6) months, the parties may seek an extension from the court under Section 29A (as above).
Section 34 (challenging an award on public policy grounds)
Section 34 of the Arbitration Act allows parties to challenge the arbitral award in court on various grounds. These grounds if proved by the applicant will normally result in the award being set aside by the court. However, in addition to these grounds, the court can set aside an arbitral award even on the grounds of public policy, namely, if the award is inconsistent with India’s public policy. The interpretation of the term “public policy” has remained a matter of controversy for many years. By amending Section 34 of the Arbitration Act, the Arbitration Amendment Act attempts to clarify and/or restrict the interpretation of the term “public policy” and specifies the conditions under which an award will be considered as being in violation of India’s public policy. As per the amendment, an award can be challenged on the ground of “public policy” only if: (a) the award is induced or affected by fraud or corruption or is in violation of Section 75 (confidentiality obligations in conciliatory proceedings) or Section 81 (admissibility of conciliatory proceedings as evidence in judicial or arbitral proceedings) of the Arbitration Act; or (b) the award is in contravention with the fundamental policy of Indian law; or (c) the award is in conflict with the most basic notions of morality or justice. The Arbitration Amendment Act even clarifies that the test whether an award is in contravention with the fundamental policy of Indian law shall not entail a review of the dispute on merits. This clarification will ensure that the expression “fundamental policy of Indian law” is interpreted in a restrictive sense and is not misused as a tool for interfering with the award by reviewing the merits of the dispute afresh.
It is imperative to note that “public policy” as a ground for setting aside arbitral awards is available even in respect of foreign awards (under Part II of the Arbitration Act). Therefore, the Arbitration Amendment Act makes similar changes in Sections 48 and 57 of the Arbitration Act, which deal with challenging the enforcement of foreign arbitral awards under the New York Convention or the Geneva Convention, respectively. The legislature has made an attempt to prevent foreign awards from suffering the vagaries of interpretation of the term “public policy.”
Moreover, to discourage a party from surreptitiously challenging the award, the Arbitration Amendment Act provides that a challenge under Section 34 of the Arbitration Act can be filed only after issuing a prior notice to the other party. Furthermore, to ensure quicker disposal of challenge applications, the Arbitration Amendment Act provides that a challenge to an award must be disposed off within one (1) year of the date on which the notice is served on the counterparty.
Section 36 (enforcing an award)
Section 36 of the Arbitration Act provides for the manner in which an arbitral award is to be enforced. Prior to being amended by the Arbitration Amendment Act, this section provided that an award, if challenged, could not be enforced unless the application challenging the award was disposed off or the time period for filing such application had lapsed. The Arbitration Amendment Act now addresses this issue and provides that an application for challenging the award under Section 34 of the Arbitration Act will per se not operate as a stay on the enforcement of the award. Rather a stay on the enforcement of the award will operate if, and only if, the aggrieved party challenging the award files a separate application for stay and gets an order to that effect. Ultimately, the courts will have the discretionary power to permit or refuse the grant of stay.
This amendment will definitely discourage parties from challenging an award in an attempt to seek an automatic stay on the enforcement of the award. However, parties may eventually end up burdening the courts by requesting the courts for an urgent hearing of their stay applications.
In addition to the amendments and changes discussed above, the Arbitration Amendment Act has brought in other changes. Section 31(7)(b) of the Arbitration Act pertaining to interest payable on an award has been amended, and the interest rate has been revised to be 2% higher than the rate prevalent in the market on the date of the award instead of the flat 18% rate which existed previously. Further, the Arbitration Amendment Act has brought in a comprehensive regime for determining the manner in which the costs of the arbitration are to be borne. The new cost regime has been introduced through a new Section 31A.
There is no doubt that the Arbitration Amendment Act has significantly altered the law of arbitration in India and has brought it on par with foreign arbitration friendly jurisdictions. The Arbitration Amendment Act is a step in the right direction and will set the stage for India’s emergence as an attractive arbitration hub. An effective alternate dispute resolution mechanism is essential for the “ease of doing business,” and it is hoped that the Arbitration Amendment Act will achieve this.
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