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India Ushers In Reforms In Arbitration Law (Finally!)

Published on Mon, Oct 26,2015 | 22:42, Updated at Mon, Oct 26 at 22:42Source : 

By: Krishnayan Sen, Partner, VERUS

Yes, it has finally happened. The Arbitration and Conciliation (Amendment) Ordinance, 2015 was passed on 23 October 2015 ushering in a slew of much anticipated arbitration reforms. The reforms broadly seek twin objectives – (i) instil investor confidence in international arbitrations, where the seat is in India; or when enforcement of a foreign award is sought in India; and (ii) weed out the deep-rooted malaise that had crept into the domestic arbitrations, particularly problems associated with ad-hoc arbitrations including delays before, during and after arbitrations, inadequate disclosure norms by arbitrators, arbitrary and exorbitant fees of arbitrators, award of costs and interest and lack of professionalism by arbitrators. The central theme of the reforms is quite evident; and the salient features are discussed below:

I. International Arbitrations in India: One important criticism of the earlier law was that international arbitrations, when held in India, would be subject to the same level of judicial scrutiny as domestic arbitrations – thereby derailing the entire arbitration process. The present reforms seek to make several important changes in this regard:

(a) Higher judiciary only: Jurisdiction to hear all questions relating to international commercial arbitrations in India, except for appointment of an arbitrator, would now be mandatorily vested in a High Court; and not be heard by any lower court. Therefore, all questions pertaining to grant of interim relief, assistance in taking evidence and challenge of an award would now mandatorily be heard by the High Court. However, for appointment of an arbitrator in an international commercial arbitration, such issue will only be heard by the Supreme Court.

(b) Fees of Arbitral Tribunal: A schedule of fees for arbitrators has been laid down for all ad hoc arbitrations, except for international arbitrations. What it implies, is that, for international arbitrations, in India, the said statutorily prescribed fees would not apply. This exclusion recognises the fact that international arbitrations ordinarily involve much higher stakes and complexities and, therefore, requires leading international arbitrators to be appointed as arbitrators. Therefore, any prescription or regulation of fees in such cases would be counter-productive and act as a deterrent to leading international arbitrators from accepting appointments in India.

(c) Limiting the ground of “Public Policy of India”: The Supreme Court in its famous ruling in ONGC v Saw Pipes (2003) had held that an award can be set aside on grounds of public policy if the award suffers from a “patent illegality ”. In so laying down, Saw Pipes had added a fourth test to the public-policy challenge to the three tests laid down in the earlier judgment of National Thermal Power Corporation v Singer Company (1992) viz. (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality. In view of this additional fourth test of “patent illegality”, many well-fought, hard-won international awards were getting set aside by the Indian courts mainly on grounds of erroneous application of law, thereby, severely eroding the investors’ faith in the Indian judicial system to honour and uphold such awards often passed by distinguished tribunals. Addressing the said concerns, the present amendment has rightly clarified that the ground of “patently illegality” to challenge an award can only be taken for domestic arbitrations and not international arbitrations held in India. An award, passed in an international arbitration held in India, can only be set aside on the ground that it is against the public policy of India if, and only if, – (i) the award is vitiated by fraud or corruption; (ii) it is in contravention with the fundamental policy of Indian law; (iii) it is in conflict with basic notions of morality and justice. While the said three sub-grounds are themselves quite vague and open-ended; what is clear is that an award passed, in an international arbitration in India, can no longer be challenged merely on the ground that there has been a misapplication of law or an erroneous appreciation of evidence.

II. Interim reliefs in foreign arbitrations - reconciling Bhatia and Balco: For those familiar with the contentious Bhatia vs. Balco debate will breathe a sigh of relief as the amendments seek to end the prevailing dual-regime, post the Balco verdict, with respect to Indian court’s jurisdiction over international arbitrations outside India. The Supreme Court, in the Balco judgment (2012), had overruled its earlier decision in Bhatia International (2002) and held that Part-I of the Arbitration Act (dealing with arbitrations held in India) would not apply to arbitrations held outside India. However, Balco held that it will only apply to agreements that are executed after the date, i.e. 6 Sep 2012, of the said judgment. The Balco judgment thereby, unfortunately, created a dual regime wherein disputes arising from all agreements entered before the date of the Balco judgment, i.e. 6.9.2012, would continue to be governed by the earlier Bhatia International judgment—which had held that Part-I of the Arbitration Act (dealing with arbitrations held in India) would equally apply to arbitrations held outside India unless such application has been excluded—either expressly or by necessary implication. While the Balco judgment was general well-received by the arbitration and investor community which had become wary of over-interventionist Indian courts setting aside hard-fought awards, there were two significant limitations in the Balco judgment –that is, there as no scope for enforcement of any interim orders, if either party needed any interim protection; and there was no scope to seek court’s assistance in taking evidence if needed. Since Indian courts’ jurisdiction was entirely excluded for foreign arbitrations, parties were neither able to enforce interim directions or orders passed by the foreign tribunal nor could it approach the Indian courts seeking interim measures or assistance in taking evidence. The present amendment, insertion of new proviso to sub-section (2) of Section 2, seeks to address that lacuna by reverting, in part, to the Bhatia principle; that is, only two provisions in Part-I of the Act - pertaining to court’s power to grant interim reliefs (Section 9) and render assistance in taking evidence (Section 27), along with their respective appeal provision - would apply to international arbitrations held outside India, unless where parties, by agreement, have excluded the applicability of such provisions. Therefore, unless parties specifically excludes the application of Section 9 and Section 27 of the Act in the arbitration agreement, the Indian courts will continue to have jurisdiction to pass interim relief or assist in taking evidence, even in international arbitrations outside India. This, therefore, addresses the problems posed post Balco, and also ends the anomalous dual-regime that was prevalent. The objective of the provision appears to provide an enabling clause to parties who might require an Indian court’s assistance in aid of an international arbitration outside India.

Practitioner’s dilemma - to exclude or not to exclude: Practitioners need to carefully consider at the time of drafting an arbitration clause, where the seat is outside India, on whether to exclude the applicability of Section 9 and Section 27 in the clause; for failing to do so would imply that Indian courts would retain jurisdiction to grant interim reliefs and assist in taking evidence, as now inserted in proviso to sub-section 2 of Section 2. Needless to add, that this only in those cases where there is some Indian-element in the dispute (i.e. either one of the parties is an Indian entity, or the subject matter of the dispute is in India) and where Indian courts would otherwise, but for the arbitration clause, have jurisdiction.

III. Domestic arbitrations: making arbitrators faster and efficient: The Government had clearly done its homework on the reasons and practices that crippled India’s arbitration regime and the same is reflected on the robust reforms that have been introduced in the administration of arbitrations in India. Some of the broad themes are:

(a) Speed is the essence: The primary criticism of the Indian arbitration regime has been that arbitrations, especially ad-hoc arbitrations which continue to form majority of domestic arbitrations, were unduly protracted affairs which nullified the very reasons why parties chose an alternate dispute resolution mechanism in the first place. The reforms seek to address this problem by (i) setting time limits (a 12-month period) when arbitrations need to be concluded and award needs to be delivered; (ii) putting the onus on the arbitral tribunal to conclude the arbitration; (iii) if award is not made within 12 months (or a further extended period of 6 months – if parties consent), then the arbitrator’s mandate shall automatically stand terminated; (iv) after the period of 12 months (or extended period of 6 months – if parties consent), only courts can extend the timeline for completion the arbitration; (iv) prescribing for day-to-day hearings (as opposed to after-court sessions of just few hours), no routine adjournments, and providing for imposition of exemplary costs on any party to punish for any delay; (v) rewarding arbitrators, by additional fees, for completing arbitrations within 6 months, and punishing arbitrators, by fee reduction or even substitution of the arbitrators, for undue delay in arbitrations.

(b) Fast-Track Procedure: The amendment introduces an entirely new expedited or fast track- mechanism, akin to many institutional arbitration rules, for completing arbitrations within a period of 6 months. This essentially gives parties the option to adopt for an expedited resolution mechanism where the disputes can be decided based on documentary evidence alone. The tribunal may call upon the parties for oral hearings, if necessary. However, the main purpose of having this new provision is to quickly resolve the disputes between the parties where an elaborate trial is not necessary.

(c) Limited role of court in granting interim reliefs; primacy rests with Tribunal: The court’s role in granting interim reliefs has been reduced and transferred to the arbitral tribunal. The amendments provide for constitution of the tribunal within ninety days from date of any interim order passed by the court. This seeks to address a malpractice that had crept into the system, wherein parties would seek interim orders from Courts and, having received the same, would deliberately delay in commencing the arbitration process. The amendments also stipulate that once the arbitrator is appointed, the courts would, ordinarily, not entertain any application for interim reliefs. This practice is, in fact, already being followed by many High Courts, like the High Courts of Delhi and Bombay, where a direction is given to the arbitrator to treat the Section 9 application as an application under Section 17 (which confers power on arbitral tribunal to pass interim directions and orders).

Interestingly, the amendment introduces an entirely new Section 17 which now confer powers on the arbitral tribunal consider applications for interim reliefs, not only during the arbitral process but also after the award is made but before it is presented for enforcement. This departs from the long held position that the arbitral tribunal shall be functus officio and its mandate shall stand terminated with the delivery of the final award. Unfortunately, there appears to have been an oversight by the draftsman in as much as Section 32 (3) of the Act – which provides that the arbitrator’s mandate shall stand terminated with the rendering of the award – has not been suitably modified or amended to allow for and save the arbitrator’s power to pass interim directions even after the final award is made.

(d) Disclosure obligations on the arbitrator: In terms of sheer space, the maximum amendments have been introduced in providing for a detailed laundry-list of disclosure obligations on the arbitrator. There are two new Schedules which have been introduced – (i) Schedule 5 sets out the grounds that could give rise to justifiable doubts as to the impartiality and independence of the arbitrators; and (ii) Schedule 6 sets out the disclosure certificate which the arbitrator is required to furnish to confirm that there is not conflict in acting as an arbitrator. Schedule 5 sets out the grounds under key heads such as – (i) arbitrator’s relationship with the parties or counsel; (ii) relationship of the arbitrator to the dispute; (iii) arbitrator’s direct or indirect interest in the dispute; (iv) previous services for one of the parties or other involvement in the case; (v) relationship between an arbitrator and another arbitrator or counsel; (vi) relationship between arbitrator and party and others involved in the arbitration; (vii) other circumstances like when the arbitrator holds shares with one of the parties or the arbitrator holds a position in the arbitrations institution which is the appointing authority over the dispute. While the draftsman may have generously borrowed the conflict-principles from the leading arbitrations institutions—what is significant is that the entire objective is to ensure greater credibility on the independence, impartiality and neutrality of the arbitral tribunal; and thereby instil confidence in end-users. The law also recognises, for the first time, the influence, contribution and role of ‘law firms’ in the arbitration process. It recognises law firms and arbitrators as vital stakeholders in the arbitration process and which, in my view, is essential if the alternative dispute resolution process were to flourish in India.

(e) Regulating Arbitrator’s fees: The law now lays down detailed guidelines, in newly introduced Schedule - 4, on the prescribed fees of the arbitrators. While this may call for some level of criticism from the arbitrator community – this will certainly bring in a degree of certainty, and relief, amongst users who are often left to the complete mercy of arbitrators, often retired Supreme Court and High Court judges, charging exorbitant fees under different heads. Consequently, arbitrations in India were neither quick nor cost effective. Parties, in fear of inviting an adverse decision from the arbitrator, were in no position whatsoever to discuss or negotiate fees with the arbitrators. Therefore, costs of arbitrations, including venue and secretarial costs, would often run up to unusually high, almost extortionate, levels. It is important to note that this prescription of fees is not applicable to international arbitrations and administered / institutional arbitrations.

(f) No automatic stay on enforcement of awards: Another important, though expected, amendment is the lifting of the automatic stay on enforcement of awards upon filing of a challenge to the award. No other provision has been abused more than this blanket immunity which the losing party would enjoy upon filing an application for setting aside the award. The winning party after winning a long hard-fought and well-reasoned arbitral award would routinely languish for years without any hope for the award’s enforcement waiting for the challenge to the award to be disposed of; and then suffer multiple–level of appeal. It would frustrate the winning parties to no ends often to the delight of the losing party—who used the said legal quagmire to either make ridiculous ‘settlement’ offers or further protract. I would argue that this one provision had rendered the entire arbitration mechanism a farce; and it is incredible that it took us this long to finally amend it. Under the new reforms, the mere filing of a challenge would not grant an automatic stay of the enforcement of the award; but the losing party would have to file an application for stay of the award and satisfy the court that a stay be granted. The court may also order to secure the awarded amount by directing the losing party to make a full deposit of the awarded amount in court to obtain a stay on enforcement of the award.

(g) Other important changes: Amongst the other significant amendments, are (i) an entire new regime of costs, new Section 31A, has been provided - essentially adopting the loser pays or costs-follow-the-award principle – wherein tribunal is empowered to make a detailed ruling on awarding costs upon the parties; (ii) the award shall carry, unless the award otherwise direct, an interest at the rate of 2% higher than the current rate of interest prevalent on the date of the award, payable from the date of the award to the date of payment; (iii) the words “Chief Justice” in Section 11, i.e. the provision for appointment of arbitrator in default of the parties, has been replaced by “Supreme Court” and “High Court” to avoid the needless confusion that the intended role of the Chief Justice’s had created and which was finally put to rest by the Supreme Court in the Patel Engineering case in 2005; (iv) it has been clarified that the ground of “patent illegality” cannot be used to set aside awards merely on the ground of an erroneous application of law or by re-appreciation of evidence. I am, however, not very excited about this since courts would have to amplify and expound as to what, then, would construe a “patent illegality”. It is submitted that there needs to be more objective tests setting out what events would be construed to be a patent illegality; for otherwise, we would only see a repeat of a line of puzzled case-laws setting out, on ad-hoc basis, as to what constitutes patent illegality.

IV. Concluding remarks
My concluding remarks are in the nature of certain unresolved questions. The amendments do not clearly provide as to what will happen to the thousands of ongoing arbitrations which are at different stages of completion and almost certainly would have gone beyond the prescribed timelines. Would the parties need to immediately approach the court to seek further directions? What would happen to those arbitrations where the arbitrator’s fees are much higher than the prescribed fees? Would the directions passed by the Tribunal regarding timelines and arbitrator’s fees be needed to be modified? What would be the fate of the pending applications before various lower courts involving international arbitrations which would now need to be heard by the respective High Courts. More importantly, what would happen to the various arbitration agreements, executed after the Balco judgment, where parties, believing that the Balco principle would continue apply, had not excluded the applicability of Part - I (particularly Section 9 and 27) in the arbitration clause. After the Balco ruling, parties no longer required to exclude Part - I in their arbitration clause – since Balco held that Part – I of the Act would not apply to arbitrations outside India. In the absence of any saving clause in the Amendment Ordinance, the Indian courts would now exercise jurisdiction in grant of interim reliefs in all those arbitration clauses, executed after Balco ruling, even though the parties had originally intended that there would be no interference from Indian courts.

While we hope to get some clarity on the above questions, it is certainly a watershed moment for Indian arbitration jurisprudence in as much as it lays down the foundations of building a progressive and vibrant statutory ecosystem to resolve business disputes in a speedy and efficacious manner.

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