By Advocate Khushbu Sahu
It is expected that the Arbitration Amendment Bill will be passed soon i.e., in the next session of the Parliament. Whether the Bill will bring about much awaited change or will it be whittled down by the rigours of parliamentary debate is yet to be seen but if the bill is not passed, then in the interest of the business and improving the ease of doing business in India, it will be expedient for the Government to bring the changes through the ordinance route.
The recent amendment in the Arbitration and Conciliation Act, 1996 is a bold attempt by the law makers of India which is going to make India a hub of International Commercial Arbitration. Now that the Act is in force, it is time to look back at the origin of this landmark amendment.
In the year 2001, the Government made a reference to the Law Commission to undertake a comprehensive review of the Arbitration and Conciliation Act, 1996 in view of the various shortcomings observed in its working and also various representations received by the Government in this regard.
The Commission considered such representations which pointed out that the UNCITRAL (United Nations Commission on International Trade Law) Model, on the basis of which the Arbitration and Conciliation Act, 1996 was enacted, was mainly intended to enable various countries to have a common model for ‘International Commercial Arbitration’, but the 1996 Act had made provisions of such a Model Law applicable also to cases of purely domestic arbitration between Indian nationals. Therefore, this was giving rise to some difficulties in the implementation of the Act.
The Government of India in order to improve its legal framework relating to Arbitration and therefore to ensure faster settlement of commercial disputes, introduced Arbitration and Conciliation Bill, 2015. The aforesaid bill was drafted taking into consideration various recommendations proposed by the Law Commission of India in its 246th Report which was submitted in August, 2014 to Government of India with a view to make India a hub of International Commercial Arbitration.
The Government of India is keen to make Arbitration as its preferred mode for the settlement of commercial disputes, by making it more user-friendly and cost effective which in turn will lead to expeditious disposal of cases. The amendments to the law come amidst its keenness to attract the maximum foreign investment as foreign companies were said to be hesitant to do business in India because of the long-drawn litigations.
The step to amend the law of arbitration is the result of government’s move to promote ‘ease of doing business’ in India, which is being highlighted by Prime Minister Narendra Modi.
This ordinance was cleared by the Cabinet last year in December, but the formulation was changed after inter-ministerial discussions. Therefore, though the ordinance was cleared by the Cabinet but it was never sent to the President for his assent.
Subsequently, the Law Commission also submitted a Supplementary Report No. 246 on ‘Amendments to the Arbitration Act, 1996 on Public Policy’, wherein the Law Commission has recommended reformulation of amendment in Section 34(2)(b) of the Act taking into account subsequent decisions of the Supreme Court in cases such as Associate Builders vs. Delhi Development Authority and Harmony Innovation Shipping Ltd. vs. Gupta Coal India Ltd. & Anr.
On August 26, 2015, the Union Cabinet chaired by the Hon’ble Prime Minister, Mr. Narendra Modi, gave its approval for amendments to the Arbitration and Conciliation Bill, 2015 taking into consideration the recommendations of Law Commission, and suggestions received from stakeholders.
This time the Government of India decided to amend the Arbitration and Conciliation Act, 1996 by introducing the Arbitration and Conciliation (Amendment) Bill, 2015 in the Parliament.
Based on the Law Commission’s review on the working of the Arbitration and the Conciliation Act 1996 (‘the Act’), certain amendments were proposed that aimed at removing the various deficiencies noted during the implementation of the Act. The salient features of the amendments are as under:
Section 7
It was suggested by the Law Commission that Section 7 of the Act be amended to include Sections 7(3A) and 7(3B), to bring the Indian law related to arbitration in conformity with the UNCITRAL Model Law.
Encouraging Institutional Arbitrations
The Law Commission greatly emphasised on the promotion and growth of institutional arbitration as an option to the parties to a dispute to amicably resolve their dispute, instead of the presently preferred regime of ad hoc arbitration, since it was of the opinion that institutional arbitrations could prove to be more systemic and can solve institutional malaise prevalent in the current scenario.
In addition to proposing the setting up of an ‘Arbitral Commission of India’, the Commission also aims at legislative sanction to the rules of an institutional arbitrator, which recognize the concept of an ’emergency arbitrator’.
Judicial Intervention in Arbitration
In order to curtail the judicial intervention in the process of arbitration, the Commission proposed an amendment to Sections 8 and 11 of the Act. This amendment took into account that the judicial intervention is limited to circumstances where the arbitration agreement is null and void.
Arbitrability of Fraud and Complicated Issues of Fact
Another issue that has emerged on various instances is that of the arbitrability of fraud. After a series of judgments giving conflicting views on the matter, the High Courts declared that a mere ‘allegation of fraud’ would be arbitrable, while serious issues of fraud would not be arbitrable. However, the controversy continues to exist.
Hence, in light of the Supreme Court Judgment in the case of N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72, the Committee suggested an amendment to Section 16 of the Act, to the effect that the arbitral tribunal shall not have the power to make an award on ‘a serious question of law, complicated questions of fact or allegations of fraud, corruption etc.’
Costs
The Law Commission sought extensive reforms to the presently prevalent costs regime, by suggesting an addition of Section 6-A to the Act, which would enable the arbitral tribunal as well as courts to decide the costs on the basis of rational and realistic criterion.
This amendment would ensure that arbitration ceases to be as expensive a proposition as litigation. In addition to this, the Commission also suggested an amendment to Section 31 of the Act, so as to provide a clarification as to the scope of the arbitral tribunal to award compound interest as well as to take a step away from the current rate of 18%, to a market-based determination, which was in accordance with the reality of the commercial sector.
New Section 31A – Comprehensive Provisions for Costs Regime
A new Section 31A was proposed to be added for providing comprehensive provisions for costs regime. It is applicable both to arbitrators as well as related litigation in Court. The object was to avoid frivolous and meritless litigation/arbitration.
Streamlining the Arbitration Process
In order to prevent Counsels from seeking frivolous hearings with extraneous evidence as well as frivolous adjournments, the Commission proposed the addition of the second proviso to Section 2(1) to ensure continuous sittings of the Arbitral Tribunal for the purposes of arguments and recording evidence.
Neutrality of Arbitrators
It was also proposed to amend Section 12 of the Act, to ensure neutrality of arbitrators that is when a person is to be appointed as arbitrator, he shall disclose in writing about existence of any relationship or interest of any kind, which is likely to give rise to justifiable doubts.
Further, if a party has any specified relationship, he shall be ineligible to be appointed as an arbitrator. In the light of the criticism faced by the arbitrations conducted across the country, the Commission recommended that anyone who has been an employee, consultant or adviser to a party, or has had business with one of the parties, shall not be allowed to sit as arbitrator in that case.
Insertion of New Sub-Section in Section 11 – Appointment of Arbitrators
Keeping in mind the large amount of time spent by parties in appointing an Arbitrator in cases where an application under Section 11 of the Act is pending before the court, the Commission proposed that the power of appointment of arbitrators should be vested in the Supreme Court and the High Court instead of the Chief Justice of such Court and suggested that the process of appointment should be a non-judicial act, so as to entice the Courts to delegate the power of appointment to specialized institutions and persons.
An amendment to Section 11(7) was recommended by the Commission, to the effect that the decisions of the High Court, when an arbitrator has been appointed, are non-appealable and final. In addition to this, the Commission proposed that an additional sub-section be added to Section 11, placing a mandate on the courts to dispose a matter relating to the appointment of an Arbitrator within 60 days from the date on which the notice was served upon the opposite party.
Amendment to Section 17 – Interim Measures
Section 17 was proposed to be amended for empowering the Arbitral tribunal to grant all kinds of interim measures which the Court is empowered to grant, under Section 9 such order shall be ‘enforceable in the same manner as if it is an order of Court’.
Award within a Period of 12 Months
Insertion of a new provision was also proposed ensuring that the Arbitral Tribunal shall make its award within a period of 12 months. With the consent of the parties such period may be extended up to six months, but thereafter, it can only be extended by the Court, on sufficient cause.
If in case it comes to the knowledge of the court that the proceedings have been delayed for reasons attributable to the arbitral tribunal the Court while extending the period may also order to reduce the fees of arbitrator upto five percent for each month of delay. Arbitrator may get awarded with additional fees if the award is made within a period of six months.
Provision for Fast Track Procedure
It was also proposed to insert a provision for fast track procedure for conducting arbitration. Parties to the dispute may agree that their dispute be resolved through fast track procedure. Award in such cases shall be given in six months period.
Period to Dispose of Application Challenging the Award
A new provision was also added to provide that application to challenge the award is to be disposed of by the Court within one year.
Amendment to Section 36
Amendment was also provided to Section 36 of the Act stating that mere filing of an application for challenging the award would not automatically stay execution of the award. Award can only be stayed where the Court passed any specific order on an application filed by the party.
Grounds for Challenge of an Arbitral Award
Another proposed amendment was in Section 34 relating to grounds for challenge of an arbitral award, to restrict the term ‘Public Policy of India’ as a ground for challenging the award by explaining that only where making of award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian law or is in conflict with the most basic notions of morality or justice, the award shall be treated as against the Public Policy of India.
The part of the Arbitration and Conciliation Act, 1996 that has come to scrutiny the most are the powers conferred upon the court to set aside an arbitral award. What brought the attention of many towards this issue was the decision given by the Court in ONGC vs. Saw Pipes, where it was held that ‘public policy’ was a ground to set aside an arbitral award, in case it was found to be ‘patently illegal’.
This not only causes an unnecessary delay, but questions the very finality of the Arbitral process, thus shaking the confidence of domestic and foreign investors in the arbitration process of the country.
In light of the same, the Commission has suggested restricting the scope of the concept of ‘patent illegality’, not to include the ‘interests of India’, but as a basis to challenge an arbitral award only if it is opposed to the ‘fundamental policy’ or it is in conflict with ‘most basic notions of morality or justice’. The Commission has further suggested that ‘patent illegality’ shall be a ground for setting aside awards in domestic arbitrations seated in India only.
Setting Aside of Arbitral Awards
A challenge to an arbitral award remains pending before the court for a long time and in the light of the same, it has been suggested by the Commission that an appeal challenging an arbitral award be disposed of within one year from the date of the notice.
The Commission proposed a time limit under Section 48(3) of the Act, ensuring that appeals to the court are made in a diligent manner. In order to curtail the delays in the arbitral process, the Committee suggested that a new Explanation be added to Section 23 of the Act, ensuring that counter claims are decided by the arbitrator, without seeking a new or additional reference.
International Arbitration
The Commission also proposed to alter the definition of the term ‘international arbitration’ to ensure that arbitrations involving a company which has been incorporated outside India will be an international arbitration, regardless of the fact that the control and management of the company lies in India.
International Commercial Arbitrations
With a view to boost the belief of foreign investors in the arbitration framework of the country and avoid substantial potential liabilities, it was suggested by the Commission that in the case of international commercial arbitrations, the High Court should be empowered with the competence to adjudicate disputes arising out of the arbitration agreement, whether the High Court exercises ordinary civil jurisdiction in the matter or not.
Judicial Intervention in Foreign-Seated Arbitrations
The Supreme Court of India, in the BALCO judgment, declared that Part I and Part II of the Arbitration and Conciliation Act to be exclusive of each other and this decision was given a prospective effect.
Following this decision of the Supreme Court, the Commission made a few recommendations in order to reduce the judicial intervention in foreign-seated arbitrations, which include amendments to Sections 2(2), 2(2A), 20, 28 and 31 of the Act.
The Supreme Court in the Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. case ruled that Indian courts are not empowered to grant interim relief in foreign-seated arbitrations. This created complications for the parties involved in arbitrations outside the country.
In order to redress this situation, the Commission suggested an amendment to Section 17 of the Act, to the effect that Indian courts are endowed with the power to grant interim relief in the case of international or foreign-seated arbitrations and that the orders passed by an arbitral tribunal should be statutorily enforceable. In addition to this, the Committee also recommended the recognition and enforcement of the interim orders granted by emergency arbitrators.
Miscellaneous
Lastly, the Law Commission of India suggested an amendment to Section 25(b) of the Act, where on the default of the Respondent in communicating his statement of defence, the arbitral tribunal shall also have the discretion to treat the right of such respondents to file a statement of defence as having been forfeited.
Conclusion
The new Act ushers a new life in a somewhat disappointing Arbitration scene in the Country. It can be said to be a welcome measure to ensure that the litigation process is managed well and the parties are able to settle the disputes as expeditiously as possible thus, overall improving the business and investment sentiments in the country.