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7 July, 2016
The Arbitration & Conciliation Act, 1996:
The Arbitration & Conciliation Act of 1996 (the “Act”), was considered at the time it came into force, as a shot in the arm for a quick and cost effective form of dispute resolution in India through arbitration. The Act (modeled on the UNCITRAL Model Law on International Commercial Arbitration), updated the law of arbitration with the intention of making it more responsive to contemporary requirements. The Act was welcomed at the time of India’s liberalization in the 90’s where it sought to open its arms to foreign investment and hoped for increased globalization of trade and commerce. The Act sought to restrict the intervention of courts while envisaging co-operation between the judicial and arbitral process, in line with international norms.
Almost two decades later, Indian courts were still seen to be particularly interventionist, refusing to give up jurisdiction and entertaining applications even where the seat of arbitration was outside India. That apart, the gross delays of the judicial system meant that instead of being seen as a pro-arbitration jurisdiction, India was usually one of the last choices of an international commercial arbitration seat.
Several criticized decisions later (most importantly Bhatia International v Bulk Trading S.A & Anr.[1] and Venture Global Engineering v. Satyam Computer Services Ltd. & Anr.[2]), the landmark decision in Bharat Aluminum & Company & Ors. v. Kaiser Aluminum Technical Service Inc. & Ors.[3]), and the 20th Law Commission’s Report which proposed various amendments to the Act, finally culminated in the Arbitration and Conciliation (Amendment) Act, 2015, which had a fresh look at the various lacunae (in the Act and rulings of court), over the years, and put in place some long awaited and critical amendments to the Act. The Amendments apply to arbitral proceedings commenced after October 23, 2015, when the Amendments came into force, unless the parties otherwise agree.
The scheme of the Act is in three parts. Part I, which deals with arbitrations taking place in India, contains detailed provisions relating to arbitration agreements, conduct of the arbitration, procedure, interim relief and challenge and enforcement of awards. Part II relates to arbitrations under the New York Convention and the Geneva Protocol and Convention, and provides for referring parties to arbitration and enforcement of foreign awards. [Part III contains provisions dealing with conciliation].
The amendments:
Applicability of Part I:
One cannot comment on the Amendments without first explaining certain decisions of the Supreme Court, beginning with the well intentioned judgment (but much criticized), judgment in Bhatia International (supra). This decision was occasioned by an application filed by a foreign party for interim relief by way of an injunction (against disposal of certain assets), from an Indian court (under Part I of the Act), in respect of a foreign seated arbitration. The Supreme Court held that Part I of the Act would also apply to such arbitrations (and Indian courts would be entitled to exercise jurisdiction), unless excluded (either by express or implied intention), by the parties. Some of the factors that weighed in the mind of the court were that there is no distinction made between “international commercial arbitrations”[4] which take place in India and those which take place outside India; the Act does not provide that Part I does not apply to arbitrations which take place outside India[5]; and that if Part I were held to be not applicable, in the case of a foreign seated arbitration a party would have no access to Indian courts for the purposes of interim relief, leaving it remediless even though properties / assets may be located in India.[6] The Supreme Court thus noted that should Part I be held to be inapplicable, it could result in a party’s claim in the arbitration or the arbitration itself being frustrated and this could never have been the intention of the Legislature.
Sadly (and perhaps expectedly), the ruling in Bhatia International was used by Indian parties and Indian courts as an excuse to intervene in any arbitration notwithstanding a foreign seat. Venture Global carried the rationale several steps further by ruling that Indian courts could even entertain challenges to foreign awards on the basis that Part I was applicable. Not surprisingly, these decisions attracted widespread criticism from both the legal and business communities in India and abroad.
The decisions in Bhatia International, Venture Global and other cases, were referred to a Constitution Bench of five judges which culminated in the decision in Bharat Aluminum overruling the various decisions and holding that Part I of the Act was not applicable to foreign seated arbitrations (though it stated that the judgment would apply prospectively, i.e. from September 6, 2012, onwards). The Supreme Court noted that such a ruling excluded the jurisdiction of Indian courts and recourse by a party to Indian courts for interim relief, although it recognized that by doing so it may leave a party remediless.
Noting the lacuna in the Act by which the inability to access an Indian court could frustrate a claim or the arbitration itself, the new provisions have been included in Part I so that, unless the parties expressly agree to the contrary, the provisions for interim relief, court assistance in taking evidence, and appeals from decisions refusing to refer parties to arbitration, will also apply to international commercial arbitrations even if the seat is outside India (subject to the award being one which recognized and enforceable under the New York (or Geneva), Convention. [Note that there is no provision to appeal against any interim order granted by the Indian court and a party would have to directly apply to the Supreme Court for relief by way of a petition for special leave to appeal]. By virtue of this amendment, the Indian Legislature has ensured that parties are not forced to agree to an Indian seat merely because there was a fear that inability to obtain and enforce interim relief could, defeat a party’s rights pending the award. It is also a strong pro-arbitration approach and remedies the lacunae in the Act noted first by Bhatia International.
Referring parties to arbitration and non-signatories:
The Amendments permit a party to the arbitration agreement or any person claiming through or under him, to apply that a dispute be referred to arbitration and such reference shall be made unless the judicial authority concerned finds prima facie that there is no valid arbitration agreement in existence. Thus, a ‘party’ does not mean only the actual signatory to an arbitration agreement but, in an appropriate context, also persons “claiming through or under” such signatory – for instance, successors-of-interest, alter-ego (such a holding or subsidiary companies in certain cases) of such parties, and cases of multiple and multi-party agreements.
Interim relief:
The arbitral tribunal now has the power to grant the same kind of reliefs as a court and accordingly, once the tribunal has been constituted, the court shall not entertain any application for interim relief unless it finds that circumstances exist which may not render the remedy granted by the tribunal, efficacious. Negating the possibility of a party obtaining interim relief prior to constitution of a tribunal and then effectively sitting back with an injunction or other order in place, the Amendments require that the party obtaining such order must commence arbitration within a period of 90 days. The power of the tribunal to grant interim relief can be exercised even post passing of the award and pending any challenge.
Jurisdiction in international commercial arbitrations:
The Amendment now confers on the relevant High Courts in each State (as opposed to district courts), the jurisdiction to entertain proceedings relating to international commercial arbitrations. Where the dispute is a ‘commercial dispute’ of the ‘specified value’, the application will be heard by the Commercial Division of the respective High Court (more on that later). Purely domestic arbitrations continue to be governed by the relevant district court or High Court (if it exercises original jurisdiction).
Applications for appointment of an arbitrator in an international commercial arbitration are required to be made to the Supreme Court, while for other arbitrations they must be made to the High Court.
These changes ensures that the higher judiciary, which generally tends to take a commercial, business-minded and a distinctly pro-arbitration stance in most matters, is given the power to adjudicate on commercial matters involving foreign parties.
Appointment of arbitrators and avoiding conflict of interest:
New provisions have been introduced to govern conflict of interest and ensure transparency of the arbitrators who are appointed. These have been drawn from the best-practices guidelines of the IBA on Conflict of Interest and are quite comprehensive, avoiding ambiguity over the grounds on which a challenge may or may not be maintained. Certain relationships are specified which the arbitrator might have with the parties, counsels or the subject matter, as making a person ineligible for appointment as an arbitrator, and grounds which might give rise to a justifiable doubt as to the arbitrator’s independence or impartiality.
Speeding up the process:
Recognizing the delays that have crept into the system, several measures have been put in place to make arbitration more time efficient. Notably, the time limit for passing the award is 12 months, extendable by a further 6 months by the parties, after which any extension must be sought from the court. In granting an extension, the court is empowered to impose exemplary costs on parties for any delay, remove or substitute arbitrators and also order a reduction in the arbitrators’ fee (upto 5% for each month’s delay) if the delay is caused by the arbitrators.
Other time limits have been imposed for disposal of applications. For instance, an application to set aside an award must be disposed of expeditiously, and in any event, within a period of 1 year.
New provisions have been included for a fast-track arbitration procedure under which the tribunal is bound to deliver its award within 6 months from entering upon reference. No oral hearings are envisaged and the tribunal will base its decision only on the pleadings and documents filed by the parties.
Challenge to the award:
There are limited grounds on which an award may be set aside, the intent being that the arbitrator is the final arbiter of disputes and a court is not permitted to re-open the award or examine it on merits. The grounds on which an award may be challenge relate to defects in procedure or violation of natural justice, i.e. an award can be set aside only if:
- a party was under some incapacity;
- the arbitration agreement was not valid under the governing law;
- a party was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings;
- the award deals with a dispute not contemplated by or not falling within the terms of submissions to arbitration or it contains decisions beyond the scope of the submissions;
- the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
- the subject matter of the dispute is not capable of settlement by arbitration;
- the arbitral award is in conflict with the public policy of India (it is clarified that a conflict with public policy is limited to instances where, (i)the making of the award was induced or affected by fraud or corruption or was in violation of confidentiality provisions or admissibility of evidence provisions in the Act; (ii) it is in conflict with the most basic notions of morality or justice; or (iii) it is in contravention with the fundamental policy of Indian law);
- only in the case of a domestic arbitration, without any international element, if the award is vitiated by patent illegality appearing on the face of the award. Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence, establishing that the court does not sit in appeal over the decision of the arbitrator.
Importantly, in a bid to provide finality to awards and curb difficulty and delay in enforcement, going forward, there is no automatic stay of the enforcement of the arbitral award merely because an application has been made to set it aside. Prior to the amendments, the mere filing of a challenge to an arbitral award resulted in an automatic stay of the said award. This meant that a successful party was often unable to enforce its award for the years taken by the court to decide the challenge. From October 2015, a party challenging the award will have to make a formal application for a stay of the award, which may be granted by the court on such conditions as it deems fit, including furnishing of security by the applicant.
Enforcement of an award:
Insofar as an award passed in India under Part I are concerned, once it has achieved finality, or where no stay of the award is granted although it has been challenged, such award shall be enforced in accordance as if it were a decree of the court. Insofar as awards passed under Part I but in the case of international commercial arbitrations are concerned, the ‘patent illegality’ challenge is not available to them. These amendments ensure that the threshold for judicial intervention in relation to international commercial and foreign awards is far more stringent than for domestic awards.
India being a signatory the New York Convention, foreign awards meeting the following conditions will be enforced by an Indian court under Part II of the Act:
- an arbitral award which is in relation to differences arising out of legal relationships considered commercial under Indian law;
- in pursuance of an agreement in writing to which the New York Convention applies;
- in a territory notified by the Central Government as a reciprocating territory.
It is important to note that the requirement for a ‘notification’ is particular to India. A territory needs to be not just a signatory to the New York Convention, but also should be notified by India as such. Till date, approximately 47 territories have been notified.
Enforcement of a foreign award may be refused on the same grounds as challenges to a domestic award (save for the ‘patent illegality challenge’), and additionally if:
i) the award has been set aside, or suspended by a competent authority of the country in which it was made;
ii) the subject matter of dispute cannot be settled by arbitration under Indian law;
iii) the enforcement of the award would be in conflict with the public policy of India.
Costs:
New provisions have been introduced to emphasise the rule of ‘costs follow the event’ which, though recognized in principle, is not always followed by Indian courts and arbitral tribunals. By expressly stating that as a general rule the unsuccessful party shall be ordered to pay the costs of the successful party (unless otherwise ordered for reasons to be recorded in writing), it is hoped that filing of frivolous claims and applications will be curbed and delays disincentivized.
Commercial Courts and Divisions:
The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 was passed to set up Commercial Courts at the district level and Commercial Divisions within High Courts exercising original jurisdiction to try matters relating to Commercial Dispute of a Specified Value arising within the territory over which they have territorial jurisdiction. Appellate Divisions and Courts will also be set up to hear appeals from the decisions of the Commercial Courts and Divisions.
These specialized courts are expected to ensure efficient disposal of a wide range of Commercial Disputes, a term which is widely defined to include inter alia ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, export and import of merchandise or service, admiralty and maritime law, carriage of goods, infrastructure contracts, infringement of Intellectual Property Rights, joint venture and shareholder disputes etc., subject to the claim meeting the threshold Specified Value amount of INR 10 million.
In relation to proceedings that are filed in commercial courts, new provisions and amendments have also been made to the Indian Code of Civil Procedure, such as the inclusion of simplified procedures for filing suits, the option for a summary hearing on the basis of only pleadings and documentary evidence, and the imposition of stricter timelines. New provisions for costs also mandate that that the unsuccessful party would be expected to pay the costs of the successful party, based on certain factors, including the conduct of parties, any attempts to delay or file a frivolous applications and reasonable offers of settlement having been made and refused.
With the aforesaid amendments to the Arbitration Act and the Code of Civil Procedure and the establishment of commercial courts, the Indian legislature aims to ensure speedy and efficient disposal of cases, thereby working towards improving the ease of doing business in India. Prior to the amendments, cases at the district level were usually heard by a court subordinate to the District Judge level. These cases will now be heard by a more experienced judge and the decision can be challenged only before the High Court. This has the effect of streamlining the dispute resolution process as well as cutting down the time for which a dispute may be pending in the system.
[1] (2002) 4 SCC 105
[2] AIR 2010 SC 3371
[3] (2012) 9 SCC 552
[4] Defined in Section 2(1)(f) of the Act
[5] Section 2(2) – which provides that Part I applies where the place of arbitration is in India
[6] There is no provision in the Act or the Code of Civil Procedure, 1908 (the “CPC”), for enforcement of an interim order from a foreign court or arbitral tribunal.
For further information, please contact:
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas
cyril.shroff@cyrilshroff.com
Shaneen Parikh, Partner, Cyril Amarchand Mangaldas
shaneen.parikh@cyrilshroff.com
