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INDIA AMENDS ARBITRATION LAW: SOME GREAT, SOME ABSURD CHANGES

In this post, Sumit Rai, provides his first reaction as a brief critique of the most important changes introduced through an ordinance on 23 October 2015 to the Arbitration & Conciliation Act, 1996

Introduction

The 1996 statute which has been subject of much criticism, sometimes unfairly overstated, has finally been amended through an ordinance which was promulgated on Friday, 23 October. The ordinance is available here.

An amendment has been in the pipeline for longer than one might think, with the first law commission recommendation to amend the 1996 Act coming way back in 2001.

The second attempt began in 2010, eventually leading to another law commission report and recommendation for a new set of amendments proposed about a year ago. The intervening 15 years had seen a complete change in how arbitration was viewed by the courts and by the policy makers in India, and that is reflected in the approach the two law commissions took – one in 2001 and the other in 2015. The 2001 recommendations were focussed on controlling the outcome of arbitrations, by finding more role for the courts to play. The 2015 recommendations took a full U-turn, consistent with the popular opinion, of not only limiting court intervention, but attempting to fast-track both the arbitration process per-se and the litigations that are likely to originate in relation to arbitration.

The 2015 ordinance implements most of law commission’s recommendations published last year, but modifies some and adds one very far-reaching provision not recommended by the law commission. In fact, if media reports are to be believed, the law commission Chairman and the Attorney General were at loggerheads on this new provision that has now found way to the 1996 Act.

A Brief Critique of Most Important Changes

High Court to be the court of first instance for international arbitration: The definition of ‘Court’ has been amended so as to ensure that no court lower than the High Court can have any jurisdiction to entertain any applications arising out of an arbitration seated in India but involving at least one foreign party. This should be a welcome provision. The experience in the past has been that given the size of India, on the basis of earlier definition, foreign parties could find themselves in remote corners of the country to seek or defend interim measures, or when awards were challenged. The only potential downside of the change is that all Indian High Courts have a humungous amount of cases to deal with, which contributes to long pendency. Making these courts the court of first instance for matters arising out of arbitration will be a challenge for the judges to manage their dockets.

Incorporation the only criteria to define nationality of companies: The definition of “international commercial arbitration” has been amended such that whether or not an Indian incorporated company has its central management and control outside, it will be considered an Indian party. This is in line with the TDM Infrastructure decision of the Supreme Court. While this change is welcome as it implements a judicial interpretation which has received consistent application, an opportunity has been missed to introduce another criteria, i.e. subject matter of the contract, as relevant to determine whether an arbitration should be considered ‘international’. The 1996 Act had omitted that criteria while adopting the definition from the Model Law. In light of the amount of international work that Indian companies have been doing in recent times – and particularly in light of the default position under private international law which considers ‘subject matter’ relevant – two Indian parties should be allowed to choose a foreign law and seat if the subject matter of the contract is not Indian. In absence of such provision, it is possible a much wider and unhealthy interpretation will find its way in on the issue of two Indian parties’ freedom to choose a seat outside India – as has recently happened in the Sassan Power case.

Interim measures and court assistance in evidence even for foreign seated arbitration: The Bhatia International ratio had held that the 1996 Act could apply even to arbitration seated outside India, unless parties had expressly or by implication excluded it. This was overruled in 2012 by the constitutional bench decision in BALCO, albeit prospectively. The effect of BALCO was, given the way S.2(2) read, that no assistance of Indian court could be sought in foreign seated arbitrations. The amendment now introduces a proviso to the provision allowing parties to seek interim measures and assistance of court in taking evidence – even if the seat of arbitration is not India. What was also expected and is missing in the amendment is the introduction of the word “only” in S.2(2) – the root cause that had led to the Bhatia problem in the first place. It seems that it was thought not to disturb the fine balance that has been achieved through judicial pronouncements on this issue.

Opening doors to adding non-signatories to arbitration seated in India: A three judge bench of the Supreme Court, in 2012, had allowed non-signatories to be added as parties, holding that in given circumstances, it would be permissible (Chloro Controls). However, in coming to that conclusion, the court relied heavily on the words “or any person claiming through or under him” in S. 45 of the Act. These words were missing from S. 8 – which is the analogous provision applicable to arbitration seated in India. Some courts had since held that the Chloro Controls ratio could therefore not be applied to arbitration seated in India. The amendment now introduces these words to S. 8 allowing courts to refer parties to arbitration, including non-signatories, if the situation so demands.

Allegation of fraud is not an exception to arbitration: Some decisions of the apex court (N Radhakrishnan) had held that allegations of fraud are by their nature not suitable for adjudication through arbitration. Many decisions subsequently distinguished N Radhakrishnan, with the latest one (Swiss Timing) calling it per incuriam a higher bench decision. In any case, there remained some doubt which allowed recalcitrant parties to contend that an arbitration agreement could be avoided simply because the dispute involved allegations of fraud. The amendment that law commission had originally recommended would have clarified this categorically. However, the present amendment is content with simply providing that the if a valid arbitration agreement exists, the judicial authority must refer parties to arbitration – “notwithstanding any judgment, decree, or order of the Supreme Court or any Court”. The intent is clear and hopefully, this amendment should result in courts taking hands-off approach in disputes where the underlying contract has an arbitration clause – no matter what the defence is, including allegations of fraud.

Start the arbitration within 90 days of obtaining interim measures from court: S. 9 has been amended to provide that if a party receives an interim measure from any court prior to initiating an arbitration, it must initiate the arbitration within 90 days of such order. This is welcome as it is not uncommon for many parties to obtain interim reliefs and sit tight without taking any immediate steps towards arbitration.

Arbitrators the default forum for interim measures: S. 9 and 17 have been amended so as to provide that once the arbitration tribunal is in place, any interim measure cannot be sought from court except if court is satisfied that an order from the tribunal would not be sufficient – which addresses any concerns of any measures needed against non-parties to arbitration. S. 17 has also been amended to provide that any interim measure from the tribunal can be enforced in the same manner as if it was an order of a competent court under CPC.

Default provision for appointment of arbitrator rationalised and streamlined: S. 11 of the 1996 Act provides for the appointment of an arbitrator when the parties are unable to appoint as per their agreement. It has been one of the most often invoked provision, and surprisingly, has invited decisions from benches of 7 judges of the apex court on the nature of the role that court plays – finally resting at declaring the role to be judicial as against administrative (Patel Engineering). Through a series of amendments, this provision has now been rationalised. The amendment provides that the court while appointing an arbitrator would “confine itself to the examination of the existence of an arbitration agreement” – which hopefully will put to rest the debate over numerous decisions of the apex court on what should be the scope of court’s enquiry under this provision. It also deletes reference to “Chief Justice”, which recently led to the apex court stating that a decision under this provision is not that of a ‘court’ and therefore not a judicial precedent. Most importantly, it provides for a speedy disposal of appointment requests, providing 60 days as the ideal timeline. It is not unheard of for such applications presently to sometimes languish for months. Another welcome addition is the requirement to obtain a disclosure in writing from the potential appointee to ensure appointment of an independent and impartial arbitrator and someone who is able to devote time.

Independence and Impartiality provisions receive the much-needed boost: The 1996 Act has the same provision for independence and impartiality as the Model Law. However, in order to protect Indian PSUs practice of appointing employee arbitrators, a strange situation had come to be in India, where an existing or ex-employee of one of the parties is often appointed as the arbitrator. The only restriction the apex court put on this was that the said employee should not be involved in the contract in question (Raja Oil). S. 12 has now been amended to provide a list in the schedule of the Act (inspired by the IBA Guidelines) of relationships which are considered too close to disqualify a person from acting as an arbitrator. This includes, as the first item, being an employee of one of the parties. Such persons would be disqualified even if the contract provides this categorically, unless they have been chosen after the dispute has arisen. The amendment also provides that the person to be appointed as an arbitrator must disclose in writing (in the form provided in a new schedule to the Act) all such relationships and the number of arbitrations they are currently acting as an arbitrator in – to ensure their time commitment. The changes to S. 12 are most welcome and should lead to a more robust regime on independence of arbitrators. However, one other phenomenon that has not received attention is that of right of unilateral appointment rights – something which has become a menace in Indian contracts with unequal bargaining powers. In most advanced jurisdictions, such unilateral right of appointment is considered against public policy and not enforced – but Indian law has permitted this. The ordinance was an opportunity to put an end to this, which has now been missed.

Challenge to award to be limited, principle of no merits review categorically outlined: The amendment seeks to dilute the effect of the Saw Pipes decision. However, it retains the patent illegality ground for domestic arbitration (involving only Indian parties). However, in all cases, it has been categorically provided that no merits review is to be conducted and the evidence is not to be re-appreciated.

No default bar on enforcement: As the 1996 Act stood prior to the amendment, the moment a challenge was filed, the award could not be enforced. Also, courts had no power to seek any deposit before it admitted a challenge application. The amendment now provides that unless a stay on execution is granted, a challenge application will not prevent execution – and the court can put such condition as it deems fit while admitting whole or part of the challenge petition.

Cost follows the event: Traditionally, Indian courts do not award actual costs. This had permeated arbitration as well, though the more experienced tribunals had in recent times started awarding actual costs. The amendment now categorically enshrines the cost follows event presumption and provides for awarding actual costs not only in arbitration but also in arbitration related litigation. This is going to have far-reaching effect in how parties strategise their dispute and should result in more settlements. Another welcome change.

The Absurd Overreaching Change:  Time Limit for Completing Arbitration

The most far-reaching amendment, and the one that is believed to have been debated for long between the Chairman of the law commission and the Attorney General, is the introduction of a new section (S. 29A) which provides for strict time limits for completion of arbitration. It provides that the arbitration must be completed within 12 months from the time the tribunal entered reference. It then provides that parties by mutual consent can extend this to 18 months. However, after 18 months, even parties have no right to extend and the only option is to approach the court and seek an extension. The court can extend the time with such conditions as it deems fit. If such extension is not granted, the mandate of the tribunal shall terminate and the court can appoint a new tribunal – which will continue from where the previous tribunal left the proceedings. If the court determines that the delay was due to the tribunal, it can order reduction of fees by upto 5% per month.

It is not difficult to see where this suggestion stems from and why the Attorney General of India in his wisdom thought that this is the provision that will take Indian arbitration to glory. It is no surprise that since December of last year, all press releases of the government singularly highlight this provision as the most important aspect of the present amendment.

The entire thought process here is flawed. There is no doubt that purely domestic tribunals in India have been far from efficient and Indian arbitrations with purely domestic tribunal has resulted in long drawn trials, sometimes over 4 years. But the cause of the same has nothing to do with the law, and therefore finding a solution in legislation is flawed.

The problem is that India lacks the discipline of a day-to-day trial, the infrastructure (such as live transcription), and the attitude of balancing the right to be heard with strict timelines that are enforced – legacies that have come from how trials are held in Indian courts. The reason jurisdictions such as the UK and Singapore are more efficient is because trials in their courts are in many ways similar to how trials are conducted in international arbitration.

The solution lies in facilitating infiltration of appropriate infrastructure (most importantly live transcription) and judicial discipline not to second guess arbitrators’ discretion in allowing or disallowing extension of timelines. Arbitrations come in all shapes and sizes and providing a common deadline for it is short-sighted. Infact most international arbitration conducted in extremely efficient fashion takes longer than 12 months. It is ridiculous to terminate mandate of the tribunal and make parties line up before courts to extend such deadlines – this is simply going to create an additional unnecessary hurdle. Given the impossible dockets that courts deal with, causing one more instance of seeking court intervention is retrograde. Additionally, putting the arbitrator on the line is going to ensure that without regard to the nature of dispute and the genuine time that might be required in representing a case, the tribunal will conduct arbitration such that awards can be rendered within 12 months. Why this sounds scary is because majority of most efficient international arbitrations in most respected arbitral seats invariably take over 12 months – even in simple disputes.

It will be interesting to see how this provision pans out in practice, but there is no denying that the legislature has overstepped in the enthusiasm to showcase “ease of doing business in India”.

Conclusion

I am reminded, as I have written before, of Zizek’s concept of Ptolemization and Copernican revolution. Ptolemization is change within an existing framework, while a Copernican revolution seeks to reinvent the framework. In my view, amendment of a legislation should be an act of Ptolemization, except when the entire policy around it requires a change. The 1996 Act implemented Model Law in both its text and spirit. Its failings were due to judicial misunderstanding and misinterpretations and often innovative means invented by recalcitrant opponents. However, it is the statute that has been sought to be blamed and punished. Based on the experiences in the last two decades, some changes were needed – and many of them have been made in the present ordinance. However, introduction of S. 29A has sought to create a Copernican revolution and only time will tell whether it is Quixotic – which in the first blush it seems to be.

In concluding, one must congratulate the law commission and its then Chairman, Justice (Retd) A P Shah in having made an extremely well-studied recommendation. Whatever is good in the ordinance is owed to those recommendations. For the rest, we need to keep our fingers crossed.

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