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The Asia-Pacific Arbitration Review 2018

India

Sweeping changes were introduced to the Arbitration and Conciliation Act 1996 through the enactment of the Arbitration and Conciliation (Amendment) Act 2015 (the Amendment Act) a little over a year ago. With inordinate delays, high costs, excessive interference by courts and misinterpretation of some of the provisions, there was an urgent need for an overhaul of the alternative dispute resolution mechanism in India. The law was finally amended by the promulgation of the Arbitration & Conciliation (Amendment) Ordinance 2015 (the Ordinance), which was subsequently replaced by the Amendment Act.

In the 2017 edition of the Asia-Pacific Arbitration Review, we analysed the key provisions of the Amendment Act and the impact that it would have on arbitration in India. At the time of writing the 2017 chapter, the amended Act had been in force for a couple of months and we could only speculate as to the ramifications of the new provisions. Now that the amendments have been in force for over a year, we consider in this chapter the challenges and benefits that practitioners have experienced as a result of the new amendments.

Salient features of the Amendment Act

The definition of court has been amended such that in all international commercial arbitrations seated in India, High Courts will be the exclusive forums for relief under the Act.1 This would save international parties, who may be unfamiliar with the lower judicial system in India, from approaching lower courts in remote parts of India to obtain relief.

The Amendment Act now requires the judicial authority, before referring parties to arbitration, to make a prima facie determination on whether there exists a valid arbitration agreement.2 The law as it stood previously made it mandatory for a judicial authority to refer the parties to arbitration, and the scope of any review was extremely limited.

The Amendment Act gives more strength to the tribunal’s power to grant interim relief by aligning the tribunal’s powers with that of the courts. The Amendment Act provides that an order of a tribunal granting interim relief shall be deemed to be an order of the court, and shall be enforceable under the Code of Civil Procedure 1908 in the same manner as if it were an order of the court.3 Further, once the tribunal has been constituted, the court shall not entertain an application for interim relief unless the court finds the remedy afforded by the tribunal inefficacious.4 It is also now mandatory for a party to commence arbitral proceedings within 90 days from the date of an order from a court granting interim relief, or within such further time as the court may determine.5

In a bid to curb delays, the Amendment Act provides that the Supreme Court or the High Court, as the case may be, has to endeavour to dispose of the application for appointment of arbitrator within 60 days from the date of service of notice on the other party.6 The Supreme Court or the High Court also has to seek disclosure in writing from the prospective arbitrator of the circumstances that are likely to affect the arbitrator’s ability to devote sufficient time to the arbitration proceeding, before making an appointment.7 Further, the Amendment Act has paved the way for courts to designate institutions or expert bodies as the appointing authorities for appointment of arbitrators in appropriate cases.

In order to tackle the issue of high costs involved in arbitrations, a provision has been introduced requiring high courts to formulate rules for the purpose of determining the fee of the arbitrators in ad hoc arbitrations.8

Following the amendments, an arbitral award has to be issued by the tribunal within 12 months, extendable for a period of six months if the parties so agree, from the date the tribunal is constituted.9 If the award is not rendered within the prescribed time period of 12 months, or within the mutually extended period of up to six months, the arbitration proceedings stand terminated - unless the period for completing the arbitration is extended by the court, on an application by either party, prior to or after the expiry of the period so specified.10 However, the courts are to allow the extension only for sufficient cause, and on such terms and conditions as may be imposed by the court. The courts are required to dispose of any such application on an expeditious basis and, in any event, within a period of 60 days from the date of service of notice on the opposite party.11 The court may also impose actual or exemplary costs on any of the parties responsible for delaying the arbitration process. Further, the Amendment Act rewards the tribunal with additional fees, as per the agreement of the parties, where the award is rendered within a period of six months from the date of constitution of the tribunal.12

The Amendment Act has also inserted a new provision providing for a fast-track procedure for arbitration.13 Under this provision, parties to an arbitration agreement may, before or at the time of the appointment of the arbitral tribunal, agree in writing to have their dispute resolved by a fast-track procedure. If parties do opt for a fast-track procedure, the dispute shall be decided on the basis of written pleadings, documents and submissions filed by the parties without any oral hearings. An oral hearing may be held only on a request made by all the parties, or if it is considered necessary by the tribunal to clarify certain issues. If an oral hearing is held, the tribunal may dispense with any technical formalities and adopt such procedure as deemed appropriate for expeditious disposal of the arbitration. In a fast-track arbitration an award is to be made within six months from the date on which the tribunal is constituted, failing which the consequences under section 29A would follow (see above).

The Amendment Act has introduced a whole new regime for awarding costs in arbitrations.14 Section 31-A vests the tribunal with the discretion to determine whether costs are to be paid by the losing party, the amount of such costs and when such costs are to be paid. Certain circumstances have been provided, such as conduct of parties, which ought to be considered when determining costs.15 Crucially, the Amendment Act incorporates the ‘cost follows event’ principle (ie, the unsuccessful party shall be ordered to pay the costs of the successful party). In cases of a different order, the reasons for the same have to be recorded in writing. The Amendment Act also amended the default rate of interest that may be awarded in an arbitration – it has been changed from 18 per cent to 2 per cent higher than the current rate of interest prevalent on the date of award.

Extensive changes to the provision for challenge of an arbitral award have been introduced through the Amendment Act. The explanation provided in the relevant provisions under the Act that defines ‘public policy’ has now been replaced with a new explanation that brings the legislation in line with judicial precedents in India.16 The explanation now states that an award would be in conflict with public policy if the award:

  • was induced or affected by fraud or corruption or in violation of section 75 (confidentiality in relation to conciliation proceedings or settlement agreement) or section 81 (non-admissibility of evidence, which is part of conciliation proceedings in other arbitral or judicial proceedings);
  • is in contravention with the fundamental policy of Indian law; or
  • is in conflict with the most basic notions of morality and justice.

A second explanation has also been added to the same subsection clarifying that no review on merits can be undertaken by a court for determining whether the award is in contravention with the fundamental policy of India.17 Another important amendment warrants that an application filed in court for setting aside the arbitral award would not, by itself, operate as a stay on the enforcement of the award.18 A party would be required to file a separate application before the court for stay of the enforcement, and the court may grant a stay subject to such conditions as it deems fit.19 Additionally, the courts have been vested with the the discretion to impose any conditions, such as depositing part of the monies awarded, prior to deciding an application for challenge of an arbitral award.

With respect to the applicability of the new provisions, the Amendment Act clearly stipulates that, unless otherwise agreed by the parties, it would be applicable only to those arbitral proceedings that were commenced after the Amendment Act came into effect.20 However, it is ambiguous on the prospective applicability of the Amendment Act to post-arbitration proceedings, such as proceedings for setting aside of the arbitral award.

One year on – challenges and benefits under the Amended Act

When the Ordinance was first passed, there was much excitement in the Indian arbitration community over the radical changes that had been effected to the Act. The possible consequences that these changes would have on the way arbitration and arbitration-related proceedings are conducted in India was extensively written about and discussed. Now more than a year after the Amendment Act came into force, we are in a better position to assess the impact the Act has had, and is likely to have, on arbitration law in the country. Some of our observations on the Amendment Act and its ramifications are as follows.

One of the issues that had arisen almost immediately on the passing of the Ordinance, and that we identified in the 2017 chapter, was the application of the new provisions to ongoing arbitration and arbitration-related proceedings. When the Ordinance was first passed, it did not contain any provision with respect to the date of applicability of the new provisions (ie, whether it would apply prospectively or would have retroactive application). This was somewhat remedied when the Amendment Act was passed, and a section was included setting out the applicability of the Amendment Act to arbitral proceedings.21 The said section addresses the applicability of the new provisions in two parts: first, it states that the Amendment Act is not applicable to arbitral proceedings that have already commenced prior to the commencement of the Amendment Act, unless parties agree otherwise; and second, it states that the Amendment Act shall, however, apply ‘in relation to’ arbitral proceedings commenced on or after the date of commencement of the Act. While courts are generally in agreement with the interpretation of the first part of section 26 (ie, that the Amendment Act would be applicable only to arbitration commenced after the amendments were effected), there is no consensus on the interpretation of the second part. Some High Courts in India have held that the phrase ‘in relation to’ used in the second part, which is absent from the first part, implies that the first part refers to arbitral proceedings, while the second part refers to court proceedings related to arbitral proceedings.22 Consequently, these High Courts have held that the new provisions will be applicable to all arbitration-related court proceedings initiated after the amendments, even if the award was passed prior to the passing of the Amendment Act. However, other High Court decisions have held to the contrary,23 in other words, that the provisions of the Amendment Act would not be applicable to any arbitration-related court proceeding in respect of an arbitration that was commenced before the Amendment Act came into effect. The issue is now before the Supreme Court in an appeal from a decision of the Bombay High Court and is still pending.24

The extensive amendments to section 9, which deals with interim relief, is already seeing a change in the way parties approach an application for interim relief. The amendments followed a two-pronged approach. First, barring parties from approaching the court for interim relief once the tribunal is constituted. Second, in giving greater strength to the tribunal’s powers by making the tribunal’s order granting interim relief equivalent to a decree of a court. This approach has resulted in more and more parties now approaching the tribunal under section 17 for relief, where they would have perhaps otherwise approached the courts under section 9.

One of the most radical changes brought in through the Amendment Act is the introduction of a time limit of 12 months to conclude an arbitration. This amendment has already resulted in a shift in the way tribunals and parties are conducting proceedings. Tribunals are now giving parties much shorter deadlines at every stage, and strictly adhering to them. However, it is still too early to predict if tribunals will be able to conclude proceedings in 12 or 18 months, in spite of strict deadlines. Another consequence of this provision is that more and more arbitrators are now declining mandates if they feel their schedule cannot accommodate such rigid timelines for completion of the proceedings. The unintended and unfortunate consequence of this is that the already small pool of competent arbitrators has now shrunk further.

An important change that the Amendment Act brought in was with regard to ensuring independence and impartiality of arbitrators. The provisions of the Act with regard to independence and impartiality of arbitrators as it stood earlier were identical to the UNCITRAL Model Law. Despite this, it was common practice to appoint an ex-employee of one of the parties to the proceedings as an arbitrator, especially in proceedings involving public sector undertakings. The only restriction that the Supreme Court put on this was that the employee appointed as an arbitrator ought not to be involved in the contract in question.25 The Act now requires a prospective arbitrator to disclose in writing the existence of any past or present relationship with either of the parties, or the subject matter of the dispute, which is likely to give rise to justifiable doubts as to his or her independence and impartiality. The Amendment Act also introduces two schedules: the first sets out the grounds that shall serve as a guide in determining whether circumstances exists that give rise to justifiable doubts as to the independence or impartiality of an arbitrator,26 while the second sets out the grounds that would make a prospective arbitrator ineligible for appointment.27 These amendments have been made in accordance with the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines). Despite these elaborate provisions, there are now conflicting decisions of High Courts on whether an ex-employee can be appointed as an arbitrator. Schedule V of the Amendment Act specifies that if an ‘arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party’, it may give rise to justifiable doubts as to the independence and impartiality of the arbitrator. The Punjab and Haryana High Court has held in a recent decision28 that the bar is against a person who is, at the time of appointment, an employee, consultant or adviser of the party concerned, and there is no bar against a former employee, consultant or adviser. Additionally, the Court held that duty to disclose the past relationship as an employee, consultant or adviser arises only when such relationship is likely to give rise to doubts about the independence or impartiality of the arbitrator. If the past relationship as employee, consultant or adviser is inconsequential to the arbitration, no such disclosure is required. However, the Delhi High Court has held29 that, despite the arbitration clause calling for appointment of a present or retired employee of the respondent as arbitrator, in view of the amendments to section 12 read with Schedule V, the respondent cannot insist on appointment of a present or retired employee, as it would give rise to justifiable doubts as to their independence and impartiality. In light of these conflicting decisions, the Supreme Court will clarify the position in this regard in a judgment.

In a recent decision, the Bombay High Court seems to have relied on an expanded definition of ‘public policy’ and ‘fundamental policy of India’ with respect to grounds for refusal of enforcement of a foreign award. The Amendment Act introduced an explanation to section 48 elaborating on what would constitute ‘public policy’, which specifies that an award in contravention to ‘fundamental policy of India’ would be contrary to ‘public policy’, and is liable to be refused enforcement in India. Another explanation in the Amendment Act states that in deciding whether or not an award is in contravention to ‘fundamental policy of India’, the court must not go into the merits of the dispute. The Bombay High Court has, however, observed that these explanations inserted by the Amendment Act were only by way of a clarification regarding what the courts have already held in the decisions of Associate Builders v Delhi Development Authority30 and Oil and Natural Gas Corporation Limited v Western GECO International Limited.31 The issue that arises is that these decisions dealt with domestic awards, and ‘public policy’ and ‘fundamental policy of India’ were given a wider import. It has been previously held by the Supreme Court32 that the term ‘fundamental policy of India’ has to be interpreted in a much narrower sense when dealing with foreign awards. Although this decision was referred to by the Court, the Court ultimately observes that the meaning of the term is well settled in the cases of Associate Builders and Western GECO, and the new explanations inserted by way of the Amendment Act only brought into the statute what was already in existence. The Court then went on to assess whether the award was contrary to the fundamental policy of India based on the ratio in Associate Builders, and ultimately held that it was not a fit case for refusal of enforcement of the award.

Conclusion

Many of the amendments made to the 1996 Act by way of the Amendment Act were long overdue. High costs and inordinate delays were slowly eroding parties’ and practitioners’ faith in arbitration as a dispute resolution mechanism in India. Fortunately, it appears that the Amendment Act is not an isolated attempt by lawmakers at providing some impetus to arbitration in India. The legislature has also enacted the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015, by which arbitration-related court proceedings above a specified value will be heard by a separate commercial court or division, in the hope that it will facilitate speedy disposal of matters as envisaged by the Amendment Act. Additionally, the Ministry of Law and Justice has constituted a High Level Committee, headed by a former judge of the Supreme Court, Justice (retd) B N Srikrishna, to review the state of institutional arbitration in India. It is no secret that in India, contrary to global practice, ad hoc arbitrations are far more common than institutional arbitrations. By constituting the Committee it seems that the government hopes to come out with a strategy to promote institutional arbitration, which may help make arbitration more attractive in terms of costs, timescale and procedural rules. The Committee has released a working paper and has invited comments from stakeholders on certain crucial issues.33 All the steps taken in the past couple of years in India show that arbitration as a dispute resolution mechanism is still evolving in India, and a concerted effort in keeping the law updated and in line with global practices, appointing additional judges to commercial courts for speedy disposal of cases, building a strong institutional arbitration culture in India so that parties are encouraged to opt for the same in appropriate cases, and creating more awareness among parties, lawyers, arbitrators and judges on the best practices followed in arbitration globally, will ensure that the Amendment Act is not merely a flash in the pan.

Notes

  1. Section 2(1)(e), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  2. Section 8(1), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  3. Section 17(2), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  4. Section 9(3), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  5. Section 9(2), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  6. Section 11(13), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  7. Section 11(8), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  8. Section 11(14), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  9. Section 29-A, Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  10. Section 29-A(4), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  11. Section 29-A(9), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  12. Section 29-A(2), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  13. Section 29B, Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  14. Section 31-A, Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  15. Section 31A(3), Arbitration and Conciliation Act, 1996, as amended by the Amendment Act.
  16. Explanation 1 to section 34(2)(b), Arbitration and Conciliation Act, 1996, as amended by the Amendment Act.
  17. Explanation 2 to section 34(2)(b), Arbitration and Conciliation Act, 1996, as amended by the Amendment Act.
  18. Section 36(2), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  19. Section 36(3), Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  20. Section 26 of the Amendment Act.
  21. Id.
  22. BCCI v Kochi Cricket Pvt Ltd, Chamber Summons No. 1530 of 2015 in Execution Application (L) No. 2481 of 2015, Bombay High Court; New Tirupur Area Development Corporation Ltd v Hindustan Construction Co Ltd, Arb. Ptn. 7674 of 2015 in OP No. 931 of 2015, Madras High Court; Indiabulls Housing Finance Ltd v Leema Mary Rose, CRP (NPD) No. 1079 to 1081 of 2016, Madras High Court; Union of India v A Cube Associates, SB Civil Writ Petition No. 5649 OF 2016, Rajasthan High Court; Sri Tufan Chatterjee v Sri Rangan Dhar, FMAT No. 47 of 2016, Calcutta High Court.
  23. Electrosteel Castings Ltd v Reacon Engineers (India) Pvt Ltd, Arb. Ptn. No. 1710 of 2015, Calcutta High Court; Nitya Ranjan Jena v Tata Capital Financial Services Ltd, Arb Ptn No. 15 of 2016, Calcutta High Court; Reliance Capital Ltd v Chandana Creations, GA 1406 of 2016, Calcutta High Court; and Ardee Infrastructure Pvt Ltd v Ms Anuradha Bhatia, Delhi High Court, FAO (OS) No. 221 of 2016 (this case held that the amended provisions, which are only procedural in nature and do not affect any accrued right, would be applicable).
  24. BCCI v Kochi Cricket Pvt Ltd, Special Leave Petition (Civil) 19545 -19546 of 2016, Supreme Court of India.
  25. Indian Oil Corporation Ltd v Raja Transport Pvt Ltd, (2009) 8 SCC 520
  26. Fifth Schedule, Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  27. Seventh Schedule, Arbitration and Conciliation Act 1996, as amended by the Amendment Act.
  28. Reliance Infrastructure Limited v Haryana Power Generation Corporation Limited, (2016) Arb Case No.166 of 2016(O&M) (Punjab & Haryana HC).
  29. Assignia-Vil JV v Rail Vikas Nigam Ltd, Arb Petn No. 677/2015, Delhi High Court.
  30. (2015) 3 SCC 49.
  31. (2014) 9 SCC 263.
  32. Shri Lal Mahal Ltd v Progetto Grano SPA (2014) 2 SCC 433.
  33. Available at: http://legalaffairs.gov.in/sites/default/files/HLC%20Working%20Paper%20%20on%20Arbitration.pdf.