Law of arbitration in India: An overview

Introduction:

The Arbitration and Conciliation Act 1996 (the “Act”) is the key law governing arbitration in India. The Indian Arbitration Act is based on the UNCITRAL Model Law on International Commercial Arbitration 1985 and the UNCITRAL Arbitration Rules 1976. The UNCITRAL Model Law was adopted in 1985 with the objective to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration. In the year 2006, the UNCITRAL Model Law was amended with the object to modernise the form requirement of an arbitration agreement to conform with international contract practices and establish a more comprehensive legal regime dealing with interim measures in support of arbitration. Accordingly, the General Assembly of the United Nations recommended that all countries give due consideration to the said Model Law, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international Commercial arbitration practice. In view of the recommendation, the Indian Legislature enacted the Arbitration and Conciliation Act in 1996 with the object to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards so as to define the law relating to conciliation and for matters connected therewith or incidental thereto.

Scheme of the Act:

The Arbitration Act is divided into four parts:

Part I sets out general provisions on domestic arbitration;
Part II addresses the enforcement of foreign awards (Chapter 1 deals with New York Convention awards and Chapter II with awards under the 1927 Geneva Convention);
Part III deals with conciliation; and
Part IV sets out certain supplementary provisions.

The Act is a composite piece of legislation. It provides domestic arbitration, international commercial arbitration, enforcement of foreign award and conciliation.

The more significant provisions of the Act are to be found in Part I and Part II thereof. Part I contains the provisions for domestic and international commercial arbitration in India. All arbitration conducted in India would be governed by Part I, irrespective of the nationalities of the parties. Part II provides for enforcement of foreign awards.

Part I is more comprehensive and contains extensive provisions based on the Model Law. It provides inter alia for arbitrability of disputes; non-intervention by courts; composition of the arbitral tribunal; jurisdiction of arbitral tribunal; conduct of the arbitration proceedings; recourse against arbitral awards and enforcement.

Part II on the other hand, is largely restricted to enforcement of foreign awards governed by the New York Convention or the Geneva Convention. Part II is thus, (by its very nature) not a complete code.

Important provisions contained in Parts I and II that include judicial review of domestic awards (section 8), judicial review of foreign awards (section 45), the power of courts to set aside an arbitral award (section 34), and the controversial “public policy” challenge to enforcing an award (section 48).

Subject matter of arbitration:

Any commercial matter including an action in tort if it arises out of or relates to a contract can be referred to arbitration. However, public policy would not permit matrimonial matters, criminal proceedings, insolvency matters, anti-competition matters or commercial court matters to be referred to arbitration. Employment contracts also cannot be referred to arbitration but director - company disputes are arbitrable (as there is no master servant relationship here). Generally, matters covered by statutory reliefs through statutory tribunals would be non-arbitrable.

Arbitration Agreement

The Act renders definition of Arbitration Agreement (Section 7). The essential ingredients of an arbitration agreement are as under:

  1. Agreement by the parties to submit to arbitration all or certain disputes;
  2. Dispute must have arisen in respect of a defined legal relationship (may or may not be contractual);
  3. Agreement can be (i) in form of arbitration clause or (ii) a separate agreement;
  4. Agreement must be in writing;
  5. Signed by both the parties.

Role of the court:

One of the fundamental features of the Act is that the role of the court has been minimised. Accordingly, it is provided that any matter before a judicial authority containing an arbitration agreement shall be referred to arbitration (Section 8 provided the non - applicant objects no later than submitting its statement of defense on merits). Further, no judicial authority shall interfere, except as provided for under the Act (Section 5).

In relation to arbitration proceedings, parties can approach the Court only for two purposes: (a) for any interim measure of protection or injunction or for any appointment of receiver etc.; or (b) for the appointment of an arbitrator in the event a party fails to appoint an arbitrator or if two appointed arbitrators fail to agree upon the third arbitrator. In such an event, in the case of domestic arbitration, the Chief Justice of a High Court may appoint an arbitrator, and in the case of international commercial arbitration, the Chief Justice of the Supreme Court of India may carry out the appointment.

A court of law can also be approached if there is any controversy as to whether an arbitrator has been unable to perform his functions or has failed to act without undue delay or there is a dispute on the same. In such an event, the court may decide to terminate the mandate of the arbitrator and appoint a substitute arbitrator.

Jurisdiction of the arbitrator:

The Act provides that the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. The arbitration agreement shall be deemed to be independent of the contract containing the arbitration clause, and invalidity of the contract shall not render the arbitration agreement void. Hence, the arbitrators shall have jurisdiction even if the contract in which the arbitration agreement is contained is vitiated by fraud and/or any other legal infirmity. Further, any objection as to jurisdiction of the arbitrators should be raised by as party at the first instance, i.e., either prior to or along with the filing of the statement of defence. If the plea of jurisdiction is rejected, the arbitrators can proceed with the arbitration and make the arbitral award.

Any party aggrieved by such an award may apply for having it set aside under Section 34 of the Act. Hence, the scheme is that, in the first instance, the objections are to be taken up by the arbitral tribunal and in the event of an adverse order, it is open to the aggrieved party to challenge the award.

Challenge to arbitrator:

An arbitrator may be challenged only in two situations. First, if circumstances exists that give rise to justifiable grounds as to his independence or impartiality; second, if he does not possess the qualifications agreed to by the parties.

A challenge is required to be made within 15 days of the petitioner becoming aware of the constitution of the arbitral tribunal or of the circumstances furnishing grounds for challenge. Further, subject to the parties agreement, it is the arbitral tribunal (and not the court - unlike under the old Act of 1940) which shall decide on the challenge. If the challenge is not successful the tribunal shall continue with the arbitral proceedings and render the award, which can be challenged by an aggrieved party at that stage. This is another significant departure from the Model Law, which envisages recourse to a court of law in the event the arbitral tribunal rejects the challenge.

Conduct of arbitration proceedings:

The arbitrators are masters of their own procedure and subject to parties agreement, may conduct the proceedings “in the manner they consider appropriate.” This power includes- “the power to determine the admissibility, relevance, materiality and weight of any evidence”.

The only restrain on them is that they shall treat the parties with equality and each party shall be given a full opportunity to present his case, which includes sufficient advance notice of any hearing or meeting. Neither the Code of Civil Procedure nor the Indian Evidence Act applies to arbitrations. Unless the parties agree otherwise, the tribunal shall decide whether to hold oral hearings for the presentation of evidence or for arguments or whether the proceedings shall be conducted on the basis of documents or other material alone. However the arbitral tribunal shall hold oral hearings if a party so requests (unless the parties have agreed that no oral hearing shall be held). Arbitrators have power to proceed exparte where the respondent, without sufficient cause, fails to communicate his statement of defence or appear for an oral hearing or produce evidence. However, in such situation the tribunal shall not treat the failure as an admission of the allegations by the respondent and shall decide the matter on the evidence, if any, before it. If the claimant fails to communicate his statement of the claim, the arbitral tribunal shall be entitled to terminate the proceedings.

Form and content of awards:

The arbitrators are required to set out the reasons on which their award is based, unless the parties agree that no reasons are to be given or if it arises out of agreed terms of settlement. The tribunal may make an interim award on matters on which it can also make a final award. Indian law provides for a very healthy 18% interest rate on sums due under an award. Thus, unless the arbitral tribunal directs otherwise, the award will carry interest at 18% per annum from the date of the award till the date of payment. The tribunal is free to award costs, including the cost of any institution supervising the arbitration or any other expense incurred in connection with the arbitration proceedings.

Limited Scope of Judicial Intervention:

One of the intrinsic objectives behind the enactment of Arbitration and Conciliation Act, 1996 was reducing the scope of judicial intervention. The Indian Legislature in conformity with Article 5 of the UNCITRAL Model Law on International Commercial Arbitration 1985 enacted Section 5 of the Act which eliminates the scope of judicial intervention and enumerates that no judicial authority shall intervene except where so provided by the Act.

In plethora of judgments, the Indian Judiciary has reaffirmed this settled principle of Law and stated that the Act under Section 5 intends to limit judicial intervention. Furthermore, Section 34 of the Act also restricts the scope of judicial intervention by Courts and provides an inclusive list of circumstances in which an Arbitral Award can be set aside by the Court. For instance, an Arbitral Award can be set aside by the Court when:

  1. A party is under some incapacity;
  2. Arbitration agreement in not valid under the Law;
  3. Party making the application was not given proper notice of appointment of arbitrator;
  4. The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration;
  5. The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
  6. When Court finds that the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force or Award is in conflict with the Public Policy of India

Section 8 of the Act also eliminates the scope of judicial intervention and states that a judicial authority before which an action is brought in a matter, which is the subject of an arbitration agreement shall refer the parties to arbitration. Hence, the scheme of the Act is such that Court intervention is minimal and commercial disputes are attempted to be resolved through the arbitration mechanism.

Setting Aside of Arbitral Award:

Section 34 of the Act provides for setting aside of an Arbitral Award by the Court. The Act provides a comprehensive list of circumstances under which an Arbitral Award can be set aside by the Court and they are:

  1. The party is under some incapacity;
  2. Arbitration agreement between the parties is not valid;
  3. Lack of notice of appointment of arbitrator or of holding of arbitral proceeding;
  4. Arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or it contains decisions on matters beyond the scope of submission of arbitration;
  5. Composition of arbitral tribunal or arbitral procedure was not in accordance with the agreement of the parties;
  6. The Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the Law;
  7. The Award is in conflict with the Public Policy

Setting Aside Award On The Grounds Of Public Policy:

The provision to set aside an Award by the Court if it is in conflict with the public policy gives wide powers to the Courts and thereby encroaches upon the very essence of ADR i.e. limiting the scope of judicial intervention.

In plethora of judgments, the Indian Judiciary has time and again widened the purview of public policy. In a recent verdict, the Delhi High Court while determining a petition filed under Section 34 for setting aside an arbitral award held that, the only ground besides the technical grounds enumerated in Section 34 on which the Court has been empowered to set aside an arbitral award, is the ground of the arbitral award being in conflict with the public policy of India. The expression “public policy of India” has been held to mean fundamental policy of Indian law, justice and morality

Recent Significant Developments:

Although these alterations to the Indian arbitration law framework are too recent to have begun yielding measurable results, they are likely to be extremely impactful.

The Arbitration and Conciliation (Amendment) Act 2015

The Arbitration and Conciliation Act, 1996 has been amended by the Arbitration and Conciliation (Amendment) Ordinance, 2015 (“Ordinance”), promulgated by the President of India on October 23, 2015.

The Ordinance has introduced significant changes to the Act and seeks to address some of the issues, such as delays and high costs, which have been affecting arbitrations in India.

The Ordinance is an attempt to make arbitration a preferred mode for settlement of commercial disputes and to make India a hub of international commercial arbitration. With the amendments, arbitrations in India are sought to be made more user-friendly and cost effective. The major changes brought about by the Ordinance are summarized as follows:

  1. International arbitration disputes will be filed directly in high courts; domestic arbitration disputes may be filed in high courts having appropriate (original) jurisdiction.
  2. Certain provisions of Part I will apply to international commercial arbitrations regardless of whether the venue is in India or not, unless the parties agree otherwise.
  3. Courts shall have a duty to refer parties to arbitration unless there is a finding that the arbitration agreement is not valid.
  4. Courts will only provide interim relief where the parties cannot obtain similar relief from the arbitral tribunal. After any such interim order, the parties will be time-bound to complete the arbitration proceedings.
  5. The statutory definition of “public policy” was expanded to conform more closely with the case law (discussed previously).
  6. General time periods were introduced with options to extend, requiring all arbitrations to be completed within 12 months, and similarly requiring all court cases to be disposed of within one year.
  7. The Ordinance gives foremost importance to the impartiality of an arbitrator. Original Section 12 of the Act necessitated an arbitrator to disclose in writing circumstances likely to give rise to justifiable doubts as to his independence or impartiality. The Ordinance specifies in elaborate detail the circumstances which may lead to such justifiable doubts. The newly inserted fifth schedule of the Act lists 34 (thirty four) such grounds which shall act as a guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. It is now important to see how proximate the arbitrator is to a party to the proceeding and/or the party’s lawyer.
  8. The Ordinance introduced a fast track arbitration proceeding. Newly introduced section 29B of the Act provides for an option whereby the parties to an arbitration agreement may mutually decide to appoint a sole arbitrator who decides the dispute on the basis of written pleadings, documents and submissions. Oral hearing and technical formalities may be dispensed with for the sake of an expeditious disposal. An award has to be rendered within a period of 6 (six) months of entering into a reference.
  9. In a very significant step, the Ordinance provides a cap on the fees to be paid to an arbitrator, barring international commercial arbitrations and institutional arbitrations. The amendment to Section 11 of the Act empowers the concerned High Court to frame rules to determine the fees of the Arbitral Tribunal and the mode of such payment. The rates specified in the newly inserted fourth schedule have to be considered.

A New Model BIT Law

In the past few years, several multinational corporations have claimed against the Indian government for violating its obligations under various Bilateral Investment Treaties (BITs), including Vodafone, Nokia and, recently, Cairn Energy. In response, Indian authorities released a draft BIT law in early 2015, and a final version was recently published, which will serve as a basis for ongoing and future BIT-related negotiations. Although the draft BIT law sought to contain, as much as possible, the rights of foreign investors, the model BIT law affords better protection, though perhaps not enough. Notably, the Model BIT Law contains a broad definition of “investment,” affording protection to a wider spectrum of investment-related activities; a narrow definition of “investor,” limiting protection to entities having significant business activity in the country; non-discrimination obligations for states with regard to indemnification or compensation of losses suffered due to war, civil strife or natural disaster; a nonactionable obligation on states to publish laws in a timely manner; and, notoriously, vague investor obligations pertaining to corruption, disclosure and maintenance of records.

The Arbitration and Conciliation (Amendment) Bill, 2018

The Arbitration and Conciliation (Amendment) Bill, 2018 was introduced in Lok Sabha on July 18, 2018. It seeks to amend the Arbitration and Conciliation Act, 1996.  The Act contains provisions to deal with domestic and international arbitration, and defines the law for conducting conciliation proceedings.  Key features of the Bill are:

  • Arbitration Council of India: The Bill seeks to establish an independent body called the Arbitration Council of India (ACI) for the promotion of arbitration, mediation, conciliation and other alternative dispute redressal mechanisms.  Its functions include: (i) framing policies for grading arbitral institutions and accrediting arbitrators, (ii) making policies for the establishment, operation and maintenance of uniform professional standards for all alternate dispute redressal matters, and (iii) maintaining a depository of arbitral awards (judgments) made in India and abroad.
  • Composition of the ACI: The ACI will consist of a Chairperson who is either: (i) a Judge of the Supreme Court; or (ii) a Judge of a High Court; or (iii) Chief Justice of a High Court; or (iv) an eminent person with expert knowledge in conduct of arbitration.  Other members will include an eminent arbitration practitioner, an academician with experience in arbitration, and government appointees.
  • Appointment of arbitrators: Under the 1996 Act, parties were free to appoint arbitrators.  In case of disagreement on an appointment, the parties could request the Supreme Court, or the concerned High Court, or any person or institution designated by such Court, to appoint an arbitrator.

Under the Bill, the Supreme Court and High Courts may now designate arbitral institutions, which parties can approach for the appointment of arbitrators. For international commercial arbitration, appointments will be made by the institution designated by the Supreme Court.  For domestic arbitration, appointments will be made by the institution designated by the concerned High Court.  In case there are no arbitral institutions available, the Chief Justice of the concerned High Court may maintain a panel of arbitrators to perform the functions of the arbitral institutions.  An application for appointment of an arbitrator is required to be disposed of within 30 days.

  • Relaxation of time limits: Under the 1996 Act, arbitral tribunals are required to make their award within a period of 12 months for all arbitration proceedings.  The Bill proposed to remove this time restriction for international commercial arbitrations.
  • Completion of written submissions: Currently, there is no time limit to file written submissions before an arbitral tribunal.  The Bill requires that the written claim and the defence to the claim in an arbitration proceeding, should be completed within six months of the appointment of the arbitrators.

  • Confidentiality of proceedings: The Bill provides that all details of arbitration proceedings will be kept confidential except for the details of the arbitral award in certain circumstances.  Disclosure of the arbitral award will only be made where it is necessary for implementing or enforcing the award.
  • Applicability of Section 26 of Arbitration and Conciliation Amendment Act, 2015: The Bill clarifies that the Section 26 of 2015 Act shall only apply to arbitral proceedings which started on or after October 23, 2015.

Conclusion: The Future of Arbitration in India

India has in place a modern, an efficient Arbitration Act. India cannot sustain its quest for global credibility and endeavor to be an attractive destination for foreign investment if it is believed to be an unreliable venue for enforcing foreign arbitration awards. A combination of experience and need have driven the Indian legislature to pass laws giving effect to the global standards for enforcement of arbitral awards, wherever they may be rendered. It remains to be seen whether these changes will be fully respected by Indian courts and whether they will be enough to overcome the difficulties in the current framework.

 

PEER 
on 08 May 2019
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