Amendments To India’s Arbitration Act: An Analysis

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1. INTRODUCTION

Last month, the Government of India passed the Arbitration and Conciliation (Amendment) Ordinance, 2015 (the “Ordinance”) amending the Indian Arbitration and Conciliation Act, 1996 (the “Act”) with a view to generally restrict the courts from challenging an arbitration award. This article highlights the key provisions of the Ordinance and its likely effect on the dispute resolution landscape in India.

2. ORDINANCES

Normally, legislative changes are made through parliament. However, the President of India may promulgate an ordinance when the legislature is not in session and is as good as any other law in effect. However, it must be tabled and passed by the legislature within 6 (six) weeks of parliament reconvening.

In this context, it should be noted that the Indian legislature meets for 3 (three) sessions in a year, each being approximately one (1) month in duration. In effect, parliament sits for just 3 (three) months a year and arguably, with a long list of legislative amendments to push through, the parliamentary route of legislating is simply just not efficient enough to deal with the pressing need to reform.

The government, earlier this year resorted to the ordinance route to push through controversial changes to legislation that would otherwise have become entrenched before both houses of parliament. It should be noted that although the current government has a majority in the lower house, it lacks the same in the upper house. It is for this purpose that the government more often than not, is choosing the ordinance route to bring about quick reforms.

However an ordinance, if not subsequently passed by parliament, lapses and has to be either extended by the President of India or tabled afresh before the legislature. Ultimately, there is no escape from seeking upper house approval to legislative reform.

3. DEFICIENCIES WITH THE ACT

Arbitration in India is often criticized for being slow, expensive and ineffective. Taking into account the clamor for a complete overhaul of the Act, the Law Commission of India had submitted its 246th report to the Ministry of Law and Justice in August, 2014 (the “Report”) with its recommendations to amend the Act. The recommendations in the Report were intended to make the arbitration process quicker and cost effective, reduce the intervention of the courts and make the enforcement of arbitral awards easier.

Critics of the existing Act highlighted interpretive loop holes allowing substantial court intervention, thereby leaving the once thought to be expeditious mechanism, to be as time consuming as any other litigation. To stem this, the courts and the Government have in the recent past taken steps to ensure that arbitration once again becomes an expedited mechanism for resolving disputes. A few years ago, the Supreme Court of India in a landmark judgment (the Balco ruling discussed below) held that in case of international commercial arbitration, where the venue of arbitration is outside India, the Indian courts will not have any jurisdiction to intervene.

This however, posed a huge challenge for parties where interim relief was urgently required. The current Ordinance tries to address this issue amongst others, strengthening the effectiveness of the arbitration mechanism, re-instilled confidence in the process.

4. MAJOR AMENDMENTS BROUGHT BY THE ORDINANCE

4.1 Applicability to international commercial arbitration

Prior to Bharat Aluminum Company Limited vs. Kaiser Aluminum1 decided by the Indian Supreme Court (the “Balco Judgment”) even where the arbitration was held outside India, a party to the arbitration could approach the Indian courts for interim relief, if the applicability of Part I of the Act was not expressly or impliedly excluded.

This led to confusion as there was no clarity on the circumstances that excluded the Indian courts. However, post the Balco Judgment, it has been made clear that the Indian courts cannot intervene if the seat of arbitration is outside India.

Though this was widely regarded as a welcome move, it impeded the ability of parties to approach the Indian courts for relief, particularly when the assets of a party against whom orders are being sought, are situated in India.

The Ordinance addresses this issue by amending Section 2(2) of the Act, enabling the parties to an international commercial arbitration with the seat of arbitration outside India, to also approach the Indian courts and seeking interim relief, unless the parties have agreed to the contrary.

Consequently, parties can now have the option of retaining the right to approach Indian courts to seek interim relief which was not allowed post the Balco judgment, even if the seat of arbitration was outside India.

4.2 Interim relief

In order to further reduce the ability of the court to intervene in arbitration proceedings and to encourage the parties to approach the arbitrator for interim measures, the Ordinance has inserted two new clauses in Section 9 of the Act.

In case the court passes an interim order, arbitration must begin within a period of ninety (90) days from the date of such order or within such other time as may be prescribed by the court. This provision is designed to curb the strategic practice of parties to obtain interim orders from the courts without initiating the arbitration process thereafter.

It should be noted that once the arbitral tribunal is constituted, the courts cannot entertain applications for interim measures unless there are circumstances where the interim award or the order passed by the arbitral tribunal may not render the remedy required.

4.3 Interim measures by the arbitral tribunal

The Ordinance gives the arbitral tribunal wide powers to grant interim relief for the preservation, custody or inspection of any property, securing the amount in dispute and for passing any other interim measure of protection as it may deem fit.

Under the Act, orders passed by the arbitral tribunal could not be directly enforced. The Ordinance however, clarifies that orders passed by the arbitral tribunal would have the same effect as that of an order passed by a court and would be enforceable.

Therefore, any party guilty of disregarding or disobeying the orders passed by the arbitral tribunal would be liable for contempt. This amendment vastly improves the existing regime, underlining the enforceability of interim relief granted by an arbitral tribunal.

4.4 Limited scope to refuse an arbitration request

It should be noted that the Ordinance has also limited the scope of a party refusing to refer a dispute to arbitration. Under the amended provisions, even if there is a judgment, decree or order of the Supreme Court or any court, the judicial authority must refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

4.5 Expeditious appointment of an arbitrator

Under the Act, if the parties failed to constitute the arbitral tribunal, they could approach the court. This process was plagued by delays and confusion created by several Indian court judgments on the scope of interference at the stage of constitution of the arbitral tribunal, thereby frustrating the very purpose of parties agreeing to resolve disputes through arbitration.

The Ordinance addresses this by inserting amendments that provide that the scope of examination must be restricted to the existence of an arbitration agreement.

Further, amendments have been made to ensure that a petition seeking constitution of an arbitral tribunal under Section 11 of the Act, be endeavored to be disposed of within a period of sixty (60) days from the date of service to the opposite party.

The new provision should ensure speedy constitution of arbitral tribunals and the commencement of the proceedings.

4.6 Disclosure of interest by the proposed arbitrator before appointment

Even though the Act provided for disclosures to be given by the arbitrator in case of a conflict of interest, the Ordinance provides for a much more detailed system of reporting. It now provides for disclosure by the arbitrator of the likely circumstances, which may be construed as conflict of interest.

It further provides that in case such circumstances exist then that person would be ineligible for appointment as an arbitrator unless expressly allowed by the parties through a written agreement.

4.7 Time bound proceedings

In order to make the arbitration process quicker, the Ordinance adds a new provision (the proviso to Section 24) to the Act, which provides that the arbitral tribunal shall hold oral hearings for evidence and oral argument on a day-to-day basis and not grant any adjournments unless sufficient cause is made out. The arbitral tribunal has been vested with powers to impose significant penalties on a party seeking adjournment without sufficient cause.

The Ordinance adds another new provision (Section 29A) to the Act with a view to making the to proceedings time bound.

In particular:

every award must be made within twelve (12) months from the date the arbitrator receives a written notice of appointment;
the parties may mutually decide to extend the time limit by not more than six (6) months;
if the award is not made within eighteen (18) months, only a court can extend the period as it may deem fit, upon an application filed by any of the parties;
further if, the court, while extending the time for making the award, finds that the delay was attributable to the tribunal, it may order a reduction in the arbitrator’s fee by an amount not exceeding 5 per cent for each month of such delay;
the court while extending a time limit, also has the right to change arbitrators as it may deem fit and can also impose certain conditions on the parties and the arbitrators;
an application to the court, should be disposed of by the court within sixty (60) days from the date the opposite party receives the notice; and
if an award is made within six (6) months, the arbitrators shall be entitled to receive such additional fees as the parties may agree.
Also a new sub-section 6 to Section 34 of the Act (relating to a challenge to an award) has been added to make appeal proceedings before the court time bound. Under this provision, an appeal challenging an award should be disposed of in any event within a period of one (1) year from the date on which notice is served upon the other party.

4.8 Fast Track Procedure

As an additional option to the parties, the Ordinance provides for a new section (29B), which provides for a fast track mechanism.

The following are the salient feature of the said mechanism:

the parties can agree in writing to a fast track procedure at any stage before, or at the time of appointment of the arbitral tribunal and while agreeing to the fast track procedure, the parties can also agree to a sole arbitrator;
the award shall be made within a period of six (6) months from the date the arbitral tribunal is constituted;
the dispute shall be decided based upon written pleadings, documents and submissions filed by the parties without any oral hearing;
oral hearing can be held only if all the parties request, or the arbitral tribunal considers it necessary for clarifying certain issues; and
the arbitral tribunal shall have the power to call for any further information that it may deem fit.
4.9 Expansive cost regime

The Ordinance has introduced a new under Section 31A of the Act, which gives wide powers to the arbitral tribunal to impose costs and the general rule of making the unsuccessful party pay costs to the successful party has been introduced.

The costs may include fees and expenses of the arbitrators, courts and witnesses; legal fees and expenses; administrative costs of the institution and any other costs incurred in relation to the arbitral or court proceedings and the arbitral award.

While awarding costs, the arbitral tribunal shall have regard to the circumstances including the conduct of parties, whether a party refused a reasonable offer to settle by the other party and if a party has made a frivolous claim. These amendments should ensure that the arbitration process is taken seriously by the parties and discourage vexatious claims.

4.10 Grounds to challenge the arbitral award

Historically, one of the grounds under which an arbitral award could be challenged was if the award was contrary to the “public policy of India”.

There have been several judgments interpreting the scope of the “public policy of India” leading to confusion. Some of the more recent judgments have expanded the scope and meaning of this term, enabling courts to reevaluate the evidence and set aside arbitral awards.

The Ordinance has narrowed the scope of “public policy” to include only awards that are: (i) induced or affected by fraud; or (ii) in contravention with the fundamental policy of India; or (iii) in conflict with the most basic notions of morality or justice.

Additionally, it should be noted that another provision of the Ordinance (amending section 2A of the Act) has been added to ensure that an arbitral award cannot be set-aside on the ground of an erroneous application of the law or by the re-evaluation of evidence.

These clarifications should go a long way to prevent frivolous litigation challenging arbitral awards.

4.11 Easier enforcement

Under the old regime, merely filing an appeal challenging the arbitral award resulted in an automatic stay of the award. This prevented the successful party from enforcing the award and delayed the execution process.

Under the Ordinance however, a mere filing of an appeal challenging the arbitral award does not amount to a stay of the award. A separate application for stay would have to be filed by the loosing party and the court will have to record its reasons in writing for granting a stay of the award and while doing so, the court has the power to direct the losing party to deposit amounts or provide reasonable security as a pre-condition for the grant of stay of the arbitral award.

5. CONCLUSIONS

It’s a well-known fact that India’s courts are already overly burdened with a volume of disputes, frustrating many on-going or proposed commercial projects. But if commercial disputes are resolved more swiftly through arbitration, it will hopefully encourage investments and fast track solutions to project disputes, rather than simply letting them stagnate.

Clearly, the intention behind these amendments brought in by the Ordinance is to ensure that arbitration remains a cost effective, reliable and swift mechanism to resolve contractual and commercial disputes, which is essential to promote the perception that India is becoming an easier place to do business.

However, a common criticism of arbitration in India is that there is too much reliance on the ad hoc approach, which inevitably leads to disputes about how the dispute will be managed and it remains to be seen whether the parties will agree to a more rigid timetable for dispute resolution, which, may not be in the interest of parties who are more likely to be future defaulters.

Footnote

[1] (2012)9SCC552

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Article was originally posted on 15 Dec 2015.