Changing The Arbitration Law In India

28 September, 2015

 

The Government of India has been working hard to enhance India's image as a destination for foreign investment. Among the proposed legal and regulatory reforms, the Government is trying to improve arbitration in India. Ben Giaretta and Akshay Kishore describe the changes that are contemplated.

 

Background

 

The first arbitration law in India was issued in 1899. Since then, various updates to the law have been made, the latest being via the Arbitration and Conciliation Act, 1996. Based on the UNCITRAL Model Law on International Commercial Arbitration, it was hoped this Act would transform arbitration in India.

 

There were two problems, however. Firstly, the Act followed the Model Law too closely, without adapting it enough to the local environment in the way that laws in other countries, such as Singapore and Hong Kong, have done. Secondly, the Act did not distinguish clearly enough between domestic arbitration (which may attract greater oversight by the courts) and international arbitration.

 

This has led to judgments rendered in relation to domestic arbitration also being applied, inappropriately, to international arbitration.

 

These problems came to light in several court judgments in the years that followed the introduction of the Act. Arbitration was becoming burdened by applications to the courts, making the whole process lengthy and expensive. As a result, efforts to amend the law started as early as 2001. A new draft law was introduced in 2003 – but was abandoned shortly afterwards because it did not go far enough.

In 2010, the Government restarted the process, issuing a consultation paper, and asking the Law Commission of India to review the arbitration law.

 

The Law Commission Report

 

The Law Commission of India issued a report in August 2014. This gave a comprehensive overview of the problems with Indian arbitration and suggested various changes, including:

 

• encouraging institutional arbitration in India;
• introducing a schedule of fees for arbitrators in ad hoc arbitration (to avoid the "disproportionate" fees being charged by some Indian arbitrators);
• issuing guidance that hearings should be heard in continuous sittings, to avoid the "culture of frequent adjournments where arbitration is treated as secondary … to court matters";
• imposing time limits by which courts must appoint arbitrators and deal with challenges to awards;
• requiring that applications arising from international arbitration only be made to a High Court and not to a lower court;
• requiring that the courts refer disputes to arbitration as long as they are prima facie satisfied that there is a valid arbitration agreement;
• restricting the use of "public policy" when challenging an award or resisting enforcement;1  empowering the courts to grant interim relief in support of a foreign-seated arbitration, and to enforce interim measures issued by tribunals;
• regulating more closely disclosure requirements for arbitrators, to avoid conflicts of interest;
• expanding the definition of a "party" to an arbitration beyond the signatories to an arbitration agreement (to cover successors, etc.); and
• allowing tribunals to award compound interest, and clarifying the rules on costs both in arbitrations and in related court applications.

 

The Arbitration Amendment Bill

 

The Government responded to the Law Commission report quickly. It first proposed amending the arbitration law along the lines recommended in the report by issuing an ordinance, in December 2014. This would have avoided delays in Parliament. However, the Government encountered difficulties with this route, so it decided instead to add reform of the arbitration law to the other reforms going through Parliament. In August 2015, the Government announced that it would introduce an Arbitration Amendment Bill in Parliament.

The full text of this Bill is not yet available, but the Government has issued a press release describing the proposed changes.2 It appears that the Bill follows the Law Commission report closely and will introduce the amendments that are described above. There also appear to be some significant additions, including:

 

• a requirement that arbitrations must be completed within 12 months of the appointment of the tribunal, extendable by parties by up to six months, and thereafter only by a court order (and in issuing such an order, the courts may reduce the tribunal's fees for every month of delay if the delay is attributable to the tribunal); and 

• introduction of fast-track arbitrations which must be completed within six months. 

 

On the other hand, the Bill appears to omit some of the other recommendations of the Law Commission, such as allowing enforcement of an award of an emergency arbitrator.

 

Comment

 

The Law Commission in its report observed that "Litigating in courts in India is a time-consuming and expensive exercise, and justice usually eludes both parties to an action", and that arbitration in India has been going the same way, being "afflicted with … high costs and delays". Hopefully, the Bill will mark a change in direction and will make Indian arbitration, as well as any related court proceedings, more efficient and effective.

 

The proposed Bill is a positive step forward, therefore, and should be welcomed by foreign investors. If passed, enforcement of commercial contracts in India by arbitration should be easier – both arbitration in India itself, and arbitration seated elsewhere which leads to an award that is enforced in India.

 

Of course, the details of the Bill will need to be reviewed carefully once available. There is also still a chance that this Bill may suffer the same fate as the draft law that was introduced in 2003 and then withdrawn. However, the indications are more positive this time, suggesting that the Bill will be approved.

 

The biggest risk is in the Indian parliamentary process. There are a number of other significant reforms currently being considered by Parliament, and the Arbitration Amendment Bill may be pushed down the agenda. It is already unlikely that Parliament will look at the Bill this year. The timeline for these amendments taking effect is therefore uncertain.

 

Endnotes 

 

1  The Law Commission issued a supplement to its report in February 2015 about the "public policy" issue, in light of certain cases that were decided after its report. See our briefing on this here. 

2  The press release can be found here.