Legal Briefing

Proposed amendments to arbitration law in India: implications and effect

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Corporate & Commercial | 01 June 2010

Indian Legislature has ostensibly put into place a cohesive structure for alternative dispute resolution (ADR) mechanisms, primarily through the Indian Arbitration and Conciliation Act 1996 (the 1996 Act). The 1996 Act is wide in its scope and within its ambit covers arbitrations, as well as conciliations.

India, however, is still not a preferred destination for the conduct of arbitrations and it is only when one or both parties are based in, or operate out of, India that the country is chosen as a seat of arbitration. This lack of preference expressed by the global business community essentially arises out of sweeping powers that the Indian judiciary has assumed, taking shelter under the garb of seemingly innocuous statutory provisions.

The arbitration process in India has been plagued by delays and inefficiencies, and owes its time-consuming and expensive characteristics to the interventionist nature of the Indian courts, which start from the appointment of the arbitrator and go on until the enforcement of the award. In practice, the conduct of arbitrations held in India, governed by the 1996 Act or where the 1996 Act is applicable, has practically ceased to serve as an ADR mechanism.

Neither the courts in India nor the parties to the arbitration permit the arbitrators to assume the necessary authority. Orders passed by an arbitral tribunal in India have extremely limited enforceability and virtually nil sanctity. Parties may take recourse of the judiciary, even when there is an arbitration clause in the contract. In India, interim measures of protection (pending an award) may be sought from the courts.1 Similarly, an award passed by a tribunal can only be executed by applying to the court of competent jurisdiction. Execution proceedings are governed by cumbersome and time-consuming rules of procedure and may take years.2 There are also provisions for appeal against an arbitral award.3 Courts have, over the years, interpreted these statutory provisions to increase and broaden their scope of interference in an award, and the progress of arbitral proceedings.

In the background of the implementation of ADR mechanisms, this article critically analyses certain amendments that have been recently proposed by the Ministry of Law and Justice in India, by way of a consultation paper. At present, comments from stakeholders have been invited. The practical implications of these proposed amendments to the 1996 Act may be very far reaching and may, in fact, serve to further armour the judiciary with powers of interference.

The scheme of the 1996 Act is such that it is divided into three parts. The former two pertain to arbitration while the latter, ie Part III, relates to conciliation. While Part I of the 1996 Act is specific to domestic arbitrations (ie the seat of arbitration being in India) – and lays out the scheme of the law and procedures relating to appointment and challenge of arbitrators, conduct of arbitration proceedings, challenge, and enforcement of arbitration awards – Part II structures the procedure for the enforcement of foreign awards rendered under the New York and Geneva Conventions. The consultation paper does not propose any amendments in Part III of the 1996 Act. Thus, the scope of this article’s analysis shall remain restricted to arbitrations.

Proposed Amendments

The past few years have seen many important and landmark judgments in the field of arbitration. The Supreme Court of India, which is the apex court of the country, has, through a series of judgments, blurred the laid out distinction between Part I and Part II of the 1996 Act.4 Presently, the judicial opinion holding sway in India is that certain provisions in Part I of the 1996 Act (which apply to domestic arbitrations), would also apply to arbitration proceedings held outside India, so long as Indian law is the governing law of contract and if the parties have not, by express agreement, excluded its applicability.5 These judicial precedents have set the tone and tenor of the attitude that the courts in India are going to have, qua arbitrations. They actually serve to strengthen the widely held global perception that the Indian judiciary has set up colourless boundaries, thereby limiting the freedom available to parties, even in a foreign arbitration.

Even domestic arbitrations have not been spared, and the courts have consistently elaborated and extended the scope of their interference in the conduct of domestic arbitrations. The classic illustration of this is the ever-widening interpretation given to the phrase ‘public policy’ used in s34 of the 1996 Act.6 By this section, the legislature in its wisdom, had granted courts a very restrictive playing field for judicial interference while considering a challenge to an arbitral award. The courts, over the years, have ambiguously interpreted this phrase ‘public policy’ to actually vest themselves with sweeping powers of interference or review of an arbitral award.7

This unnecessary judicial activism has sparked many a debate and has been subjected to deep criticism in various fora.

While the legislative intent in releasing this consultation paper seems to be an attempt to clip the scope of judicial interference in arbitrations, a closer reading of the amendments suggests otherwise. For instance, a proposed amendment to s2(2) of the 1996 Act [Part I] seems to ensure that it applies only to arbitrations held in India, but immediately goes on to negate this by extending the applicability of the very widely worded s9 and s27 of the 1996 Act to an international commercial arbitration where the award would be enforceable under Part II of the 1996 Act.8 These amendments would, clearly, give license to the judiciary to intervene, even in international commercial arbitrations under the guise of protecting the subject matter of the arbitration, invoking powers under s9 and s27 of the 1996 Act.

While allegedly curtailing the scope of the phrase ‘public policy’ under s34(2)(b) of the 1996 Act, by giving it a restrictive definition and a definite scope, the consultation paper actually heightens the ambiguity that could be imparted in interpreting it. This has been done by permitting the court to consider a challenge to an arbitral award on the very nebulous grounds of ‘patent illegality’ or if it is ‘likely to cause substantial injustice to the applicant’. Such phrases, it could easily be argued, would be more responsive to an open and wide interpretation than ‘public policy’.

However, there are certain positive developments, like a proposed amendment to s36 of the 1996 Act, which lays out that the filing of an appeal would not automatically stay the execution of an award.9 However, this also serves to reinforce the extreme importance given to the role of the court, even in arbitrations. A wider amount of discretion is proposed to be granted to the court, by way of these amendments.

The consultation paper also suggests changes in respect of s11 of the 1996 Act, which provides for the appointment of arbitrators and envisages the appointment of an arbitrator by the High Court or any other person designated by it, and not by the Supreme Court. Also, when addressing the issue of transparency, it has been suggested that the arbitrator disclose any circumstances, such as the existence of any past or present relationship, either direct or indirect, with any of the parties or their counsel, or any financial, business, professional, social or other kind, or in relation to the subject matter in dispute, which are likely to give rise to justifiable doubts as to their independence or impartiality. Though this seems to be a welcome change, there are apprehensions that such disclosures might become another bone of contention between the parties, resulting in further delay. Another significant amendment, in view of the escalating costs of arbitration, is suggested in the form of a deemed arbitration clause in every commercial contract having a consideration of Rs5 crores or more (Rupees 50 million or more). This stipulation, however, is not mandatory and parties will be given the freedom to choose the mode of dispute resolution, including the intention of the parties to resort to an ad hoc arbitration.

Conclusion

The need for amending the 1996 Act has been echoing for a long time. However, at first cuff, these proposed amendments seem to point the 1996 Act in a direction opposite to the cornerstone of arbitration, which relies on party autonomy and is intended to serve as an alternative to adversarial litigation in courts. It remains to be seen how much, and in what form, these amendments are finally reflected in the 1996 Act. It is clear, however, that the executive and legislature echoes the sentiment of the judiciary, and has lent its support to the concept of more active judicial interference in arbitrations. These proposed amendments, if effected, would affix a big question mark on the successful resolution of disputes through alternate mechanisms in India.

[Disclaimer: The views expressed in this article are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.]

notes

  1. Section 9 of the Indian Arbitration and Conciliation Act 1996 (the 1996 Act) gives wide-ranging powers to courts to issue any interim measure, before, during arbitral proceedings or at any time after the making of the arbitral award prior to its enforcement.
  2. Sections 36 to 74 read with Order 21 of the Code of Civil Procedure (CCP) 1908 spell out procedure for execution of decrees and awards in India.
  3. Under s34 of the 1996 Act, by way of an appeal or application before the competent court.
  4. Reference may be made to Bhatia International v Bulk Trading SA [2002] 4 SCC 105, which has been followed and its scope widened in Venture Global Engineering v Satyam Computer Services Ltd & anor [2008] 4 SCC 190.
  5. See Bhatia International, where it was observed: ‘The provisions of Part I of the 1996 Act would be equally applicable to international commercial arbitrations held outside India, unless any of the said provisions are excluded by agreement between the parties expressly or by implication.’
  6. Broadly, under s34 of the 1996 Act, some of the grounds of challenge to an arbitral award are: (a) if the arbitration agreement, or (b) composition of the tribunal, was not in accordance with the agreement; (c) if a party suffered from some incapacity; (d) if the court finds that the dispute was not capable of being settled by arbitration; or (e) was in conflict with the public policy of India.
  7. See Renusagar Power Co Ltd v General Electric Co [1994] Supp 1 SCC 644; ONGC v Saw Pipes Ltd [2003] 5 SCC 705.
  8. Under s27 of the 1996 Act, the party may apply to the court for assistance in taking evidence.
  9. 9) Section 36 as it presently reads automatically stays the execution of an award, if there is a challenge to the same, under s34 of the 1996 Act.