27 December, 2015
The Arbitration and Conciliation Act, 1996 (‘Act’) was enacted to modernize the arbitration law in India by following the UNCITRAL model law. However, due to certain judicial precedents, internationally, it is felt that arbitration in India suffers from excessive judicial intervention, which along with other factors makes it both time consuming and expensive. The Government of India (‘GoI’) promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015 (‘Ordinance’) effective from October 23, 2015. The object of the amendments contained therein is to expedite the arbitration process while minimizing judicial intervention.
The present Ordinance was promulgated to give effect to the amendments proposed to the Act in a report by an expert committee headed by Justice Mr. A.P. Shah (Retd.), former Chief Justice of the Delhi High Court (‘Report’). Pursuant to the Report, the Union Cabinet has also approved a new bill to amend the Act. The Ordinance will remain in force for a period of six weeks from the day the winter session of the Indian Parliament begins. If the Ordinance is not approved by the Parliament, it can be promulgated again at the instance of GoI until approved by the Parliament.
Analysis of amendments introduced under the Ordinance
The Ordinance amends the definition of ‘Court’ under Section 2(1)(e) of the Act. In case of an international commercial arbitration, the jurisdiction will lie exclusively with the appropriate High Court while for all other matters, the jurisdiction will lie with the principal Civil Court of original jurisdiction in a district or the High Court in exercise of its original jurisdiction, depending on the subject-matter of the arbitration. The amendment widens the scope of the jurisdiction of High Courts to deal with international commercial arbitration matters even in those States where the High Court lacks ordinary original civil jurisdiction.
Section 2(1)(f) of the Act defines an international commercial arbitration, which is determined on the basis of criteria specified in the Section. From these criteria, the Ordinance has now removed reference to a company having management and con- trol outside India. This amendment has been introduced to make it clear that where a company is incorporated in India, it will not qualify as a party for the purposes of an international commercial arbitration, merely because its management and control is outside India. This amendment is in furtherance of the principle of ‘place of incorpo- ration’ specified by the Supreme Court of India (‘SC’) in the case of TDM Infrastructure Private Limited v. UE Development India Private Limited 1 whereby the residence of a company is determined on the ‘place of incorporation’ rather than the place of ‘management or control’.
Subject to an agreement to the contrary, the Ordinance extends the application of a number of provisions of Part I of the Act to international commercial arbitrations even when the place of arbitration is not in India. These provisions are (A) Section 9, which deals with the grant of interim measures by the Court; (B) Section 27, which deals with Court assistance in taking evidence in an arbitration; (C) Section 37(1)(a), which refers to appeals against the orders granted under Section 9 of the Act; and (D) Section 37(3), which restricts a second appeal from an order passed under Section 37 of the Act. This means that the judgment of SC in Bharat Aluminium Company and Ors. v. Kaiser Aluminium Technical Service, Inc and Ors2, where the Court held that Part I of the Act does not apply to arbitrations where the place/seat of the arbitral tribunal is outside India, has now been watered down.
The Ordinance has specifically included ‘communication through electronic means’ for determining if an arbitration agreement is in writing. This amendment is in con- formity with the UNCITRAL Model Law on International Commercial Arbitration. The Ordinance however has not defined ‘electronic means’.
The Ordinance has amended Section 8 of the Act relating to power and procedure of the Court to refer the parties to arbitration. The Ordinance makes the following amendments (A) it empowers a person, who is claiming through a party to the arbi- tration agreement, to make the application for reference of the dispute to arbitration; (B) if the Court prima facie finds that there is no valid arbitration agreement between the parties, then the court will not be required to refer the dispute to arbitration; (C) allows a party making an application under this Section who does not have the duly certified copy of the arbitration agreement in his custody, to file the application with a copy of the arbitration agreement and a petition requesting the Court to call upon the other party to produce the original or the duly certified copy of the arbitra- tion agreement. This amendment endeavours to protect the parties to an arbitration agreement, wherein the original arbitration agreement is retained by the other party so that they are not prejudiced from making an application under this Section.
Section 9 of the Act, which provides for interim measures that can be passed by a Court with respect to an ongoing or contemplated arbitration, has been amended. The Ordinance provides that where arbitral proceedings have not yet commenced, they must commence within 90 days of a Court granting interim measure of protec- tion. This amendment has been inserted to ensure timely initiation of arbitration pro- ceedings. Further, the Ordinance restricts the Court from entertaining an application under Section 9 of the Act for interim measures once the arbitral tribunal has been constituted, unless the Court is satisfied that circumstances exist that would render interim measures ordered by the arbitral tribunal under Section 17 of the Act inef- ficacious. This restriction has been put in place, ostensibly because the Ordinance expands the power of an arbitral tribunal under Section 17 to grant interim measures such that it is now at par with that of a Court under Section 9 of the Act. The Ordinance also provides that an order of the arbitral tribunal granting such interim measures under Section 17 will be deemed to an order of the Court and will be enforceable under the Code of the Civil Procedure, 1908, in the same manner as an order of a Court.
In Section 11 of the Act, which sets out the process of appointment of arbitrators, the Ordinance has replaced the words ‘Chief Justice or any person or institution desig- nated by him’ with ‘Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court’. The effect of this amendment is to empower the relevant Court instead of the Chief Justice in exercising the power in relation to appointment of arbitrators. The Ordinance provides finality to the deci- sions on matter of appointment of arbitrator by the SC or the High Court and, there- fore, there is a restriction on the appeal including Letters Patent Appeal against such decision.
However, the Court must confine itself to the examination of existence of an arbitration agreement while deciding on an application for appointment of arbitra- tor. The Ordinance provides that an application under this Section will be disposed of as speedily and expeditiously as possible within a period of 60 (Sixty) days from the date of service of notice on the opposite party.
The Ordinance empowers the High Court to frame rules for the purpose of deter- mination of fees of the arbitral tribunal and the manner of its payment to the arbi- tral tribunal. Such rules will not apply to international commercial arbitration and in arbitrations where parties have agreed for determination of fees as per the rules of an arbitral institution. In the Fourth Schedule to the Ordinance, a model fee table has been provided, under which the fees range from ¤45,000 to a maximum of ¤3,000,000, depending on the sum in dispute. In the event that the arbitral tribunal comprises a sole arbitrator, such arbitrator will be entitled to an additional amount of 25% on the fee payable as per the model fee specified for the particular sum in dis- pute. By a new Section, i.e. Section 11A, the Ordinance empowers the Central Government to amend the Fourth Schedule. If High Courts across Indian States notify a fee chart in line with the Fourth Schedule of the Ordinance, it is expected to streamline costs towards the arbitrators’ fees.
In order to address situations wherein an arbitrator may be conflicted, the Ordinance has specified an elaborate list of grounds that can give justifiable doubts as to the independence or impartiality of the arbitrator, and if any of these grounds apply, the arbitrator is required to make a disclosure in writing to this effect. A disclosure will be required to be made if there is any past or present relationship with or interest in any of the parties or in relation to the subject matter in dispute, whether financial, business, professional or other kind, whether direct or indirect, which is likely to give rise to justifiable doubts as to his independence or impartiality of the arbitral tribu- nal.
The Sixth Schedule to the Ordinance provides for a specific format for such dis- closures. In Section 12(5), the Ordinance provides that if pursuant to any prior agree- ment to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute, falls under any of the categories specified in the Sev- enth Schedule, such person will be ineligible to be appointed as an arbitrator. Parties, however, have been empowered to waive the applicability of this sub-section by an express agreement in writing subsequent to the dispute having arisen. The amend- ments will have a prospective effect and will not be applicable to arbitral tribunals already constituted before the commencement of this Ordinance. Written disclosures will be made with respect to circumstances that are likely to affect the ability of ar- bitrators to devote time towards the arbitration and in particular the ability to com- plete the entire arbitration within a period of 12 months.
Section 23 of the Act was amended to include Clause 2A, which states that the re- spondent, in support of his case, may also submit a counter claim or plead a set-off, which will be adjudicated upon by the arbitral tribunal, if such counterclaim or set- off falls within the scope of the arbitration agreement. While in practice arbitral tri- bunals have permitted a respondent to set up a counter claim, the amendment has the effect of making it clear that it is permissible for a respondent to proceedings, to file a counterclaim, without a need for initiating a separate arbitration, thereby ensuring final settlement of disputes.
In an effort to make arbitrations expeditious, Section 24 has been amended to pro- vide that the arbitral tribunal will hold oral hearings for production of evidence or for arguments thereof on a day-to-day basis. The Ordinance states that no adjourn- ments will be granted unless sufficient cause is shown and if adjournments are sought without any such cause, costs are liable to be imposed upon the party.
The Ordinance amends Section 25(b) of the Act stating that if the respondent fails to file a statement of defence in time, his right to do so will stand forfeited.
As per the amendment made to Section 28(3), the arbitral tribunal has a duty to take into consideration the terms of the contract and the pertinent trade usages applica- ble to the transaction at hand while deciding and making an award. The effect of this amendment is that an award may not be rendered automatically illegal upon challenge, merely because it was not passed strictly in accordance with terms of the contract.
In order to ensure expeditious disposal of matters, the Ordinance has set forth time limits for granting an arbitral award by amending Section 29A of the Act. The Ordinance provides that an arbitral award will be made within 12 months from the date of entry of the arbitral tribunal upon reference. The parties have been empowered by this Ordinance to extend this time period by consent, up to a maximum of 6 months. The Ordinance also provides for the payment of additional fees to the tribunal if an award is made within 6 months. The mandate of the arbitral tribunal will be deemed to be terminated if the award is not made within a specified period, unless extended by the Court. If it is found that the delay was attributable to the tribunal, then 5% of the arbitrator’s fees may be reduced by the Court for every such month of delay while extending the period of award. The amendment further provides that the prerogative of the Court may be exercised to substitute any arbitrator where the period of award has been extended as mentioned above, and in such case, the relevant proceedings will continue from the same stage as had already reached and with respect to the evi- dence and materials on record. Exemplary costs may be imposed on any of the par- ties under this Section. The amendment aims at creating efficiency in the functioning of arbitral tribunals. However, its impact on existing arbitral proceedings is unclear, especially such proceedings where the total permitted period of 18 months has al- ready expired. It is possible, therefore, that parties to such arbitrations may have to apply to the relevant Court for extending the period of making the award.
The Ordinance introduced fast track procedure under Section 29B of the Act, where- in the parties may agree in writing to have their dispute resolved only on the basis of written pleadings, documents and submissions filed by the parties, and without con- ducting any oral hearing. It will, however, be permissible for parties to agree to oral hearing, provided the arbitral tribunal finds it appropriate for expeditious disposal of the case. The award in such fast track arbitration is to be made within a period of 6 months from the constitution of the arbitral tribunal.
Section 31 of the Act has been amended to state that the interest on the sum directed to be paid by the arbitral award should be determined at a rate that is two percent higher than the rate of interest prevalent at the time of making the award. Earlier, the interest was to accrue at a rate of 18% per annum, unless otherwise specified. The amendment further provides that the ‘current rate of interest’ will have the same meaning as assigned to it under the Interest Act, 1978.
A new Section 31A has been incorporated, which expressly permits an arbitral tribunal to determine costs and direct a party to pay such costs. ‘Costs’ have been defined by this Section to mean reasonable costs relating to the fees and expenses of the ar- bitrators, Courts, witnesses, legal fees and expenses, any administration fees of the institution supervising the arbitration and any other expenses incurred in connec- tion with the arbitral or Court proceedings and the arbitral award. The Ordinance provides that in determining the costs, the Court or arbitral tribunal will have regard to all the circumstances including the conduct of all parties, whether a party has suc- ceeded partly in the case, whether the party had made a frivolous counter claim lead- ing to delay in the disposal of the arbitral proceedings and whether any reasonable offer to settle the dispute is made by a party and refused by the other party.
The Ordinance amends Section 34, which governs the challenging of an award passed in India. The amended Explanation 1 to Section 34(2) provides instances of what con- stitutes a conflict with the public policy of India as a ground to set aside the award, namely – (A) where making of an award was induced by fraud or corruption or was in violation of (i) confidentiality provisions agreed among the parties; or (ii) admis- sibility of evidence in other proceedings; or (B) where an award is in conflict with the fundamental policy of Indian law; or (C) where an award is in conflict with the most basic notions of morality and justice. This amendment is based on the judgment of SC in the case of Renusagar Power Co. Ltd. v. General Electric Co.3 thereby intending to set a standard for setting aside arbitral award in both domestic as well as interna- tional commercial arbitrations. The Ordinance further incorporates the ground of ‘patent illegality’ for setting aside arbitral awards in domestic arbitrations. The pro- viso to this clause states that an award will not be set aside merely on the ground of an erroneous application of law or by re-appreciation of evidence. The Ordinance sets a time limit of 1 year from the date on which the notice is served upon the other party, for disposing an application under this Section.
Filing of an application for setting aside an arbitral award under Section 34 of the Act will no longer prevent a party from filing enforcement of award under Section 36 of the Act, unless there is an order by the Court staying operation of the arbitral award in question. An order for stay will need to be made in accordance with the provisions of Code of Civil Procedure, 1908, which requires demonstration of sufficient cause for stay. This amendment is expected to cause a party filing a challenge under Section 34 of the Act to pursue it expeditiously, instead of delaying decision on a challenge.
The scope of appealable orders under Section 37 of the Act has been expanded by the Ordinance. In addition to the earlier orders, which were appealable to the Court, an order refusing to refer parties to arbitration under Section 8, has now been added.
In relation to enforcement of foreign awards under the New York Convention and Geneva Convention in Part II of the Act, the Ordinance has defined ‘Court’ by add- ing an explanation to Section 47 and Section 57 of the Act and it states that Court will mean High Court in all matters where it exercises ordinary original jurisdiction and in other matters it will also mean to be a High Court exercising appellate jurisdiction.
The Ordinance has further amended the Sections of the Act relating to the condi- tions for enforcement of foreign awards from reciprocating territories covered by the New York Convention for enforcement of foreign awards. In a manner similar to the amended Explanation 1 to Section 34(2), Explanation 1 to Section 48(2) also provides instances of what constitutes a conflict with the public policy of India as a ground to refuse enforcement of a New York Convention award, namely – (A) Where making of the award was induced by fraud or corruption or was in violation of confidentiality or with admissibility of evidence in other proceedings; or (B) where the award is in conflict with the fundamental policy of Indian law; or (C) where the award is in con- flict with the most basic notions of morality and justice. However, unlike the amend- ment to Section 34(2), patent illegality is not a ground to refuse enforcement of a foreign award under this Section.
The overall impact of the Ordinance appears to be positive, and a detailed analysis of the Ordinance demonstrates that the main aim of the GoI is to make the arbitral process fast, ef- ficacious and more transparent. It comes at a time of significant development in arbitration jurisprudence in India. A most welcome impact of the Ordinance will be the ability of parties to apply for interim relief, even in arbitration proceedings having their seat outside India, provided that the relevant contract does not contradict or restrict such ability.
It is not clear how some aspects of the amendment will work in practice. For instance, the impact of the time limit for making the award is unclear with respect to arbitrations that have already commenced.
1 (2008) 14 SCC 271
2 (2012) 9 SCC 552
3 1994 Supp (1) SCC 644
For further information, please contact:
Zia Mody, AZB & Partners
zia.mody@azbpartners.com
