India adopted the UNCITRAL Model Law on International Commercial Arbitration, 1985 (Model Law) through the Arbitration and Conciliation Act, 1996 (1996 Act). The Indian legislature decided to have one statute governing domestic and international arbitration, enforcement of foreign awards, and conciliation. Other than the modifications necessary to adapt to this wider scope, the 1996 Act virtually imported the Model Law text with minor amendments. It was widely believed that this would ensure India’s entry into the international arbitration arena with a position of strength, coinciding with the economic reforms that were first initiated in 1991. However, as years rolled by, hope turned to despair.
Over the years, interpretation of certain provisions of the 1996 Act led to strange results, often prolonging the time parties spent in court. The general perception that awards will be considered final and not reviewed on merits was soon dispelled, at least in the case of domestic arbitration involving all Indian parties.1 As if this was not enough, India’s reputation in the international arbitration community suffered a severe setback when the Supreme Court of India allowed a foreign award to be challenged in Indian courts under the 1996 Act.2 India received a lot of flak in the international sphere and the general sentiment among foreign investors was a distrust of the dispute redressal mechanism under the 1996 Act.
However, the story of the 1996 Act, which remains a work in progress, has started to look more positive. The Supreme Court of India in the last five years has, slowly but surely, taken a clear stand in favour of arbitration. Through a number of decisions, the apex court has given effect to the policy intent of the 1996 Act of minimal court intervention. It has also reviewed and overruled some of its earlier decisions which had failed to take into account some of the axiomatic principles governing the concept of international arbitration. With the apex court at the wheels, and with able support from various High Courts, the 1996 Act is finally on course to achieve its original intent.
This chapter reviews some critical recent developments, including the 246th Report of the Law Commission of India (the LC Report), which has suggested significant amendments to the 1996 Act to further refine the robust pro-arbitration atmosphere which has been under construction for sometime now. If news reports are to be believed, the finished product will be revealed this year as the Indian government has promised to table the Bill for amendment at the earliest opportunity.
Death blow to challenge of foreign awards
If one was to identify the most damaging event derailing India’s attempt to build a pro-arbitration environment, the Supreme Court’s decision in Venture Global would be the clear choice. Over the years, international jurisprudence on arbitration developed to ensure that only the court of the seat of arbitration should have the jurisdiction to review and set aside an award. Therefore, foreign awards were considered to be beyond the reach of any court. Venture Global unsettled this position under Indian law, causing great uncertainty in the minds of foreign parties dealing with Indian businesses, as the threat of a potential challenge of a foreign award in India could not be ruled out despite a clear choice of foreign seat.
It did not take long for Indian courts to realise that probably Venture Global had overreached. Today, it is easier to find precedents of various Indian courts that distinguish Venture Global than those that have actually applied it. Through various decisions the apex court had virtually diluted the effect of the ratio in Venture Global.3 However, it remained a precedent to deal with in every case, and an excuse that allowed a recalcitrant party to file an application challenging a foreign award.
In September 2012, a five-judge constitutional bench of the Supreme Court in Bharat Aluminium v Kaiser Aluminium overruled Venture Global.4 The apex court for the first time recognised that seat was the centre of gravity for international arbitration and held that Indian courts would have no jurisdiction over any arbitration seated outside India. However, in light of earlier precedents which held sway for about 10 years, the overruling was made prospective – such that, the law as interpreted and declared in Bharat Aluminium would apply only to arbitration agreements entered after the date of the decision, namely 6 September 2012.
The Supreme Court explained that since parties ought to have acted on reliance of the law as declared by Bhatia International and Venture Global, to do complete justice, it ought to be allowed to apply to agreements entered prior to the date of the constitutional bench’s decision.
While Bharat Aluminium definitely was a watershed in establishing a pro-arbitration legal regime in India, the decision has brought in one negative corollary – no assistance of an Indian court can be sought in any foreign-seated arbitration. Therefore, Indian courts currently have no jurisdiction to grant interim relief or assist in collecting evidence in India under the 1996 Act.
The prospective overruling was seen as disappointing as it allowed a decision that the court recognised to be flawed to continue to exist as a precedent. However, it seems that disappointment was to be short-lived.
Even prior to the Bharat Aluminium decision, various decisions of the Supreme Court had considered and distinguished Venture Global – such that challenging a foreign award in India continued to prove very difficult. However, a foot in the door remained. Two recent decisions of the apex court – in May 2014 and March 2015 – seem to have finally shut the door on any such attempts.
In Reliance Industries v Union of India,5 the apex court clarified that though Venture Global was overruled prospectively, the position of law as it stood prior to Bharat Aluminium would not allow Indian courts to interfere with foreign awards. The court remarked that it was too late in the day for anyone to contend that seat of arbitration did not amount to an exclusive jurisdiction clause. The court also dismissed attempts to justify Indian courts’ jurisdiction by reference to mandatory fiscal and other laws that applied to the issue in dispute by clarifying that grounds of challenge cannot be a consideration in deciding whether Indian courts have jurisdiction to entertain the challenge.
In Harmony Innovation Shipping Ltd v Gupta Coal India Ltd,6 the Supreme Court – while disagreeing with the High Court’s reliance on Bharat Aluminium to deny jurisdiction of Indian courts in a pre-September 2012 agreement – reached the same conclusion by applying the principles laid down in decisions prior to Bharat Aluminium and in Reliance Industries. The court effectively held that once it was determined that London was the seat of arbitration, it was clear that parties impliedly excluded application of part I of the 1996 Act leading to the conclusion that Indian courts would have no jurisdiction.
If there was any doubt about the intent of Indian courts, Reliance Industries and Harmony Shipping have dispelled them. It can now be confidently asserted that whether a foreign award is rendered before or after the prospective overruling of Venture Global, Indian courts will refuse to entertain any applications challenging it.
Allegations of fraud arbitrable
Across jurisdictions, the power of arbitrators to deal with certain types of dispute or with certain kinds of allegation or doubt as to their power to grant certain remedies has been debated with differing outcomes. Both the Model Law and the New York Convention provide grounds to challenge or oppose enforcement of awards if it be found that the subject matter of dispute is not capable of settlement by arbitration. One of the most controversial of these in both EU and the US has been matters concerning competition law.
In India as well, many such issues have arisen in the working of the 1996 Act. Some of the most controversial, or problematic, have been decisions relating to the arbitrator’s power to grant specific performance or to adjudicate allegations of fraud (in civil disputes).
It had been contended in many cases that the grant of specific performance is a discretionary remedy and the power to exercise such discretion lies exclusively with civil courts, and therefore arbitrators have no power to grant such relief. Divergent opinions were held by different High Courts, which were set to rest by the Supreme Court by confirming that such power was available to arbitrators.7
While that controversy was resolved, another one arose when the Supreme Court held that disputes involving serious allegations of fraud were not capable of adjudication by arbitration.8 It is not difficult to see why this would be a serious predicament. Allegations of fraud either in formation of contract or in the manner of performance is not uncommon in commercial disputes – the species of disputes that arbitration is most suited to. To carve out an exception on the basis of what allegations or contentions are taken up by parties sounds fundamentally flawed and is an invitation to allege fraud for anyone wishing to avoid an arbitration agreement. This is precisely what eventually happened, with courts having to deal with arguments of this nature more frequently. Courts reacted by distinguishing the Radhakrishnan decision on varying grounds to salvage parties’ agreement to arbitrate. However, this had its limits, and certain arbitration agreements were defeated. Eventually, the apex court, in a case relating to a foreign seated arbitration, held that allegations of fraud do not render a dispute non-arbitrable – distinguishing Radhakrishnan simply by reference to the fact that it related to a domestic arbitration and without commenting on it any further.9 This left arbitration agreements seated in India susceptible to attack on the ground that the dispute involved adjudication of allegations of fraud. A few months later, another Supreme Court bench went on to hold that Radhakrishnan was per incuriam certain earlier decisions of the apex court and was therefore not good law.10 There remains some issue concerning the precedential value of Swiss Timing, as a single-judge bench has held a division bench decision to be per incuriam.11
In the changes suggested by the Law Commission in the LC Report, it prefers to deal with the problem head-on by recommending addition of a sub-section to section 16 which will categorically provide that arbitral tribunal shall have the power to adjudicate a dispute notwithstanding ‘serious questions of law, complicated questions of fact or allegations of fraud, corruption etc’ being involved – borrowing directly from the language used by the Supreme Court in Radhakrishnan.
Two gems from the law commission
The LC Report, which has led to a draft amendment ready to be tabled in Indian parliament, has been the most noteworthy development in arbitral jurisprudence in India. Since the text of the draft amendment has not yet been made available, it is not clear what recommendations of the LC Report have been accepted and which have been rejected or paused. Reports suggest, however, that the Indian government has accepted most of the recommendations of the LC Report and the draft amendment will essentially reflect the draft prepared by the Law Commission.
Among the many changes, most of which are bound to have positive impact on the arbitration scenario in India, we assess below in some detail two issues we consider will have maximum practical impact on parties that deal with the process.
Ensuring independence and impartiality
The provisions relating to independence and impartiality of arbitrators are an axiomatic requirement for a successful regime of arbitration in any jurisdiction. Since the determination of arbitrators in the form of their award are without appeal and are supported by the force of state action (through enforcement), it is incumbent for the state to provide for adequate checks and balances to review the decision-making process. As a part of that right, legislations around the world provide that arbitrators must be independent and impartial.
One of the basic tenets of natural justice is that no man must be a judge in his own case. By extension of this principle, it is essential that arbitrators should not in any manner be related to parties or counsel of parties such that it gives rise to justifiable doubts as to their independence or impartiality. Such requirements are invariably also contained in all leading institutional rules.
Another facet of this same requirement is that there must be equality in appointment rights between parties. In other words, a unilateral right to appoint the arbitral tribunal with one of the parties to the dispute is prima facie contrary to the idea of a fair dispute resolution process. This right had been held to be important enough to set aside an award on grounds of public policy in France, a jurisdiction where setting aside of an arbitration award is a rarity. In the famous Dutco case, the French court held that equality of parties in the appointment of arbitrators is a matter of public policy that can only be waived after the dispute had arisen.12
Germany statutorily provides for such situation.13 It stipulates that if an arbitration agreement grants preponderant rights to one party with regard to the composition of the arbitral tribunal which places the other party at a disadvantage, that other party may (within two weeks from becoming aware of appointment of an arbitral tribunal) request the court to make the appointment in deviation from the agreed procedure.
In India, however, courts have given primacy to the binding nature of an agreed arbitration clause and refused to interfere with either agreed named arbitrator who are employees of one of the parties or procedure which gives one of the parties the unilateral right to appoint the arbitral tribunal.14 This practice started with government agencies and public sector units providing such clauses in their tenders or contracts, leaving no flexibility for any negotiation.
The LC Report rightly observes that ‘[t]he balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory’. It has, therefore, suggested some definitive changes to put an end to the practice of appointing employee arbitrators or arbitrators otherwise having a close link to the parties. It is also encouraging to see that the LC Report has put to good use the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines). The recommendations seek to remedy the problem of neutrality of arbitrators as follows:
- Every potential arbitrator is mandated to make a disclosure in the prescribed form inter alia disclosing existence of any relationship with either party or with the subject matter of dispute which is likely to give justifiable doubts as to his independence and impartiality. As a guide to the same, a Fourth Schedule to the 1996 Act is proposed which is an adaptation from the Orange List of the IBA Guidelines.
- A Fifth Schedule to the 1996 Act is proposed, which is an adaptation of the Red List of the IBA Guidelines and it is provided that any person whose relationship with parties, counsel, or subject matter falls in any category listed therein – such person would be ineligible to be appointed as an arbitrator notwithstanding a prior agreement to the contrary. However, parties are free to waive application of this provision subsequent to the disputes having arisen.
- If an arbitrator is appointed despite his ineligibility under the Fifth Schedule, he can be substituted by an application to the appropriate court under section 14 of the 1996 Act.
In our view, this does take care of the neutrality issue adequately and is bound to put to end the practice of appointing related arbitrators, in particular by state entities in India. There might be some concerns about possible abuse or delay insofar as it creates another opportunity for moving the court under section 14 of the 1996 Act. In the bargain between fairness and speed, this seems to be an acceptable compromise.
While the Commission has laudably addressed the concerns regarding neutrality of arbitrators, it stopped short of completing this circle by also addressing the problem of unilateral right of appointment with one of the parties.
On the surface, it may seem that once the problem of neutrality is addressed, the problem of unilateral appointments is solved indirectly – as even if a party has the sole right to appoint the arbitrator, it cannot appoint an individual who is biased. This is not the case if one reviews the practical issues surrounding the problem. It is not difficult for parties who are able to negotiate such unilateral rights in their favour to find individuals who appear neutral on any objective evaluation but are patronised by such parties to ensure a favourable tribunal. Given that this practice has been prevalent in India for some time, examples of such cases are numerous. Shockingly, even in employment contracts, many corporations today provide for such arbitration clauses.
Given that arbitration leads to a binding award not subject to appeal, it is imperative that equality in rights of appointment are guarded by legislation and made non-waivable prior to disputes. Allowing the stronger party to unilaterally set up a tribunal for rendering a binding decision on any dispute is ex facie unjust and unconscionable. In our view, therefore, an amendment must be proposed in section 11 on the lines of the German statute to provide that if an arbitration agreement grants preponderant rights to one party with regard to the composition of the arbitral tribunal which places the other party at a disadvantage, that other party may (within 30 days from becoming aware of appointment of an arbitral tribunal or invocation of arbitration agreement between parties) request the court to make the appointment in deviation from the agreed procedure. It could also be provided that parties are free to agree otherwise after disputes have arisen between them.
In India, traditionally, granting costs of litigation has been left to the discretion of the courts – with little assistance or guidance statutorily. The practice that developed was that either courts seldom granted costs or when they did, it would be nominal or in any case without any reference to actual costs incurred by the parties. Probably the reason such practice developed over the years was that courts considered costs to be a penalty for bringing a certain action. This can be deciphered from the cases where courts have traditionally allowed costs (albeit nominal), where most often cost orders are combined with negative remarks on the conduct of the party directed to pay.
The existing framework under the 1996 Act for awarding costs gives wide discretion to the arbitration tribunal under section 31(8). It also clarifies that costs includes arbitrators’ costs, witnesses’ costs, legal fees and any other expenses incurred in respect of the arbitration proceeding and arbitral award. Despite this, a robust regime has not yet developed in India for awarding actual costs of arbitration to the succeeding party, something common in most advanced jurisdictions. Most critical reason for this is that the traditional approach towards costs of litigation has rubbed off to some extent on arbitration in India as well.
While it has been held that courts would not interfere with award of costs unless it is shown that such award is ‘palpably incorrect’, as it is within the discretion of the arbitral tribunal,15 the Supreme Court has also observed that under section 31(8), what is awardable is not actual expenditure but reasonable costs.16
In the interaction of Indian users of the arbitration process with the international arbitration practices, one of the striking differences observed is the practice of awarding actual costs and its effect on how parties behave. The ‘cost follows the event’ regime applied invariably by international arbitration tribunals, on the one hand, gives the aggrieved party in a dispute the confidence to incur costs and, on the other, persuades a recalcitrant respondent to reconsider dilatory tactics. Very often, parties find it easier to reach a settlement and avoid not only incurring costs for pursuing the dispute but also being saddled with the other party’s costs.
Additionally, ability to award actual costs also strengthens arbitrators to partly award interim costs for any wasteful expenditure that may be caused due to unnecessary adjournments or extensions sought by either party. This acts as a strong deterrent against any party seeking to delay the proceedings.
Fortunately, the Commission has taken note of the benefits of the ‘cost follows event’ regime. It also has recognised that despite the current regime under section 31(8) of the 1996 Act not in any manner prohibiting arbitrators from adopting this principle, given the traditionally restrained approach of courts in granting costs, something more was needed to encourage awarding of actual costs by Indian arbitrators more frequently than presently being done.
To give more teeth to the provisions on costs, the Commission has recommended that section 31(8) be modified to simply provide that unless otherwise agreed between parties, the arbitral tribunal shall fix the costs of the arbitration. It then recommends the insertion of section 6A providing a regime for costs. Together, the modified provisions would create the following framework for awarding costs:
- The regime for costs under the 1996 Act will apply both to the arbitration proceeding itself and any related court proceeding that might be initiated. Therefore, courts will also follow this regime in awarding costs for all proceedings brought before it under provisions of the 1996 Act, notwithstanding anything contained in the Code of Civil Procedure, 1908 (CPC).
- Courts and arbitral tribunals are granted the discretion to decide not only the amount but also the time when costs are to be paid, therefore specifically enabling interim order on costs even prior to conclusion of proceedings.
- As a rule, the unsuccessful party should be asked to bear the costs of the successful party unless a different order is made for reasons to be recorded in writing.
- As guidance, circumstances to consider while granting costs are also provided for – which includes conduct of parties and any reasonable settlement offers that might have been made.
- It categorically allows interests on costs from or until a certain date.
The effects of these provisions are far greater than they seem at first blush:
- Freeing the courts from the shackles of the CPC to order costs under this regime will ensure that parties are more careful and less trigger-happy in seeking intervention of courts even in the limited circumstances provided for under the 1996 Act. For example, often recalcitrant respondents simply hold back on nominating an arbitrator or agreeing to a sole arbitrator to delay initiation of proceedings. If courts under this provision grant actual costs, taking into account such conduct, the delay caused, add interest and order immediate payment – such strategy is bound to prove costlier than the benefits it might grant.
- Giving overriding effect to the new cost regime will make it easier for courts and arbitral tribunals to disregard the earlier precedents on rationale for awarding or denying costs and make the transition away from the traditional approach towards the transnational standard much smoother.
- The cost-follows-the-event rule will persuade parties to consider the merits of the dispute before deciding to take an unreasonable position simply to delay the inevitable.
- Specific mention of reasonable settlement offers among relevant circumstances to consider while awarding or ordering costs will see the culture of ‘without prejudice save as to costs’ offers being exchanged and seriously considered between parties – something that is common in many sophisticated arbitration jurisdictions. This will also inevitably lead to more settlements, saving costs, time, and often relationships between parties.
A robust regime on costs, as recommended by the Commission, would not merely compensate the party found to be on the right side of law on a case to case basis, but crucially, will shape the behaviour of stakeholders in the process of arbitration significantly and for the better.
For the last few years, arbitration jurisprudence in India has evolved faster than any other branch of the law. This has, until now, been led by decisions of the Supreme Court of India. However, there is a limit to what can be achieved through judicial interpretation. The time is ripe for this evolution to be consolidated through appropriate legislation. At the time of writing this, it seems inevitable that 2015 will finally see the first amendment to the 1996 Act.
The 1996 Act, by any fair analysis, has been a giant step in arbitral jurisprudence in India. After all, the 1996 Act was hardly an innovation – being a very slightly modified adaptation of the Model Law text. It is almost unanimously accepted that the Model Law has been an unprecedented success when compared to any other recommendation in the field of international legislative guidance. Probably, this was the reason why the Indian draftsmen had hardly tinkered with the Model Law text, and where they did, experience has shown it was not prudent.
One is reminded of Lord Bingham’s advice in an introduction to the 1996 English Arbitration Act, ‘[T]he success of the Act will depend on these tools being skillfully used to fashion the product for which they were designed. This means, above all, that they should be knowledgably used, with an understanding of their origin, and of why they were designed as they were.’17 Most, if not all, problems that were faced in the working of the 1996 Act over the last 18 years were creation of disjunctive interpretation by courts or abuse of the arbitral process by its users – litigants and lawyers alike. Courts in India, at least in the early part of this 18-year period, often approached the 1996 Act with scorn and the process of arbitration with distrust. Many of these have been, over a period of time, corrected through the process of judicial reconsideration.
Any suggestion that either the jurisprudence of arbitration or the acceptance of the process has not since 1996 grown in leaps and bounds in India is too pessimistic a view, disconnected from reality. The perception of India as an arbitration unfriendly jurisdiction has suffered huge setbacks in recent years – for which the Supreme Court of India and many other High Courts must be congratulated. With purposive interpretation, careful appreciation of legislative history and policy intent, readiness to refer to transnational standards, and a trusting attitude towards arbitration as a mechanism of dispute resolution – the apex court has in the last few years given effect to the aspirations of the draftsmen of the 1996 Act and the expectations of the users.
While the LC Report has done a commendable job of dealing with some of the most important problems faced in the conduct of arbitration in India, we believe it has taken an unkind view in judging the 1996 Act as a total failure. This has, probably, led it to suggest a bit too many changes to the text of the 1996 Act.
Amending legislation, except when the job is to adapt it to a change in policy, must remain an exercise in restraint. In that sense, legislative amendments must remain a Ptolemisation and not a Copernican revolution.18 Particularly under the common law system, legislation has a life of its own – it evolves through judicial expositions over time.
Any tinkering with the language of a piece of legislation, however insignificant it might appear to the draftsmen, can unsettle years of guidance available by way of precedent – leading, more often than not, to unintended consequences, or at the minimum, to an avoidable period of uncertainty. Therefore, amendments to the 1996 Act should be limited to correction of problems faced and well identified or to fill gaps between the legislation and the new developments in the international arbitration arena. Any amendment that seeks to modify provisions that have not until now caused any significant problems and have otherwise attained settled interpretations, will invariably have the collateral effect of creating doubt in the minds of the users. Judging from that perspective, many recommendations in the LC Report deserved to be reconsidered and ideally to be rolled back – even though they are well intended. However, we will need to wait to see whether this has been accounted for in the final draft that the Indian government intends to table in the parliament.
In the final analysis, India is set to start a new chapter in its arbitration jurisprudence, which we believe ties in well with its declared intent of creating a favourable investment environment and improving the ease of doing business.
- See Oil & Natural Gas Corporation v Saw Pipes (2003) 5 SCC 705.
- Venture Global Engineering v Satyam Computer Services Ltd (2008) 4 SCC 190.
- See, eg, Dozco India Pvt Ltd v Doosan Infracore Co Ltd (2011) 6 SCC 179; Videocon Industries v Union of India (2011) 6 SCC 161; Yograj Infrastructure Ltd v Ssangyong Engineering and Construction Co Ltd (2011) 9 SCC 735.
- (2012) 9 SCC 552.
- Reliance Industries Ltd v Union of India (2014) 7 SCC 603.
- 2015 SCC Online SC 190.
- Olympus Superstructures Pvt Ltd v Meena Vijay Khetan (1999) 5 SCC 651.
- N Radhakrishnan v Maestro Engineers (2010) 1 SCC 72
- World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd (2014) 11 SCC 639.
- Swiss Timing v Organizing Committee, Commonwealth Games (2014) 6 SCC 677.
- Subsequently, in Avitel Post Studioz Ltd v HSBC Pl Holdings (Mauritius) Ltd (2014) SCC Online 929, the Bombay High Court noted that it was bound by Swiss Timing and not Radhakrishnan.
- Decision of the French Court of Cassation in Siemens AG and BKMI Industrienlagen GmbH v Dutco Construction Company (Dubai) (7 January 1992 – XV Yearbook Com. Arb. (1992) 124 et seq.) (arose out of a multiparty arbitration under ICC Rules. As per the then existing rules, both respondents (Siemens and BKMI) were asked to appoint one arbitrator between themselves, whereas Dutco got to appoint the other arbitrator independently. Respondents objected but under threat that ICC would in default appoint the arbitrator, agreed while reserving rights to challenge the appointment procedure. Post-Dutco, almost all institutional rules were amended to provide for a more fair and voluntary system of appointment of arbitrators in multiparty arbitration).
- Section 1034(2) German Code of Civil Procedure.
- See, eg, Indian Oil Corporation Limited v Raja Transport (P) Ltd (2009) 8 SCC 520.
- Vidyawati Construction Company v Union of India (2009) 17 SCC 403.
- Sanjeev Kumar Jain v Raghubir Saran Charitable Trust (2012) 1 SCC 455.
- See The Rt. Hon The Lord Bingham of Cornhill, Lord Chief Justice of England, Foreword to Bruce Harris, Rowan Planetrose, & Jonathan Tecks, The Arbitration Act 1996: A Commentary (1st edn., Blackwell Science, 1996.
- See Slavoj Zizek, The Sublime Object of Ideology, at xi (Verso, 2008) (Zizek calls change or supplement of a discipline within its current framework as a process of Ptolemisation, inspired by Ptolemy’s earth-centered astrology; and a process that seeks to change the basic framework itself is referred to as Copernican revolution).