Evolution of India’s Arbitration Law

Introduction

There is a growing concern and debate amongst investors about the efficacy of arbitrations in India and whether it should be a preferred mode of dispute resolution, like it is in other jurisdictions. The Arbitration and Conciliation Act, 1996 (“Act”) has evolved with time and attempted to keep pace with the changing global trend. The rapid and fast paced globalization almost certainly results in an increase in disputes, commercial or otherwise. Traditionally, Indian courts have been considered to be slow in their swiftness and an increase in disputes has only over-burdened these courts, resulting in an extremely slow adjudication. Over-burdened courts gave birth to their step-relative called Alternative Dispute Resolution (“ADR”). ADR mechanisms such as arbitration, mediation and conciliation gained popularity and became an integral part of commercial contracts. Parties preferred to opt for arbitration to stay outside the ambit of civil courts. However, the past decade has seen courts progressively expand the scope of the Act in a way that allows greater judicial intervention before obtaining a “real” finality of order.

In order to fix this lacuna, the Law Commission of India (“LCI”) recently released a consultation paper suggesting amendments in the existing Act. This bulletin briefly discusses some key amendments proposed by the LCI and whether, in fact, the spirit of arbitration will be preserved if the Act is amended.

1. Proposed Amendments

1.1 Seat of Arbitration and Application of Part I and II

Present provision: Section 2(2) – “This part shall apply where the place of arbitration is in India.”

Proposed amendment: Section 2(2) – “This part shall apply only where the place of arbitration is in India.

Provided that provisions of sections 9 and 27 shall apply to international commercial arbitrations where the arbitration is not in India, if an award made in such place is enforceable and recognized under Part II of this Act.”

Analysis: Divided into three parts,¹ the scope of the Act covers both domestic as well as international commercial arbitrations.² The present language of section 2(2) of the Act has led to conflicting views of the courts in deciding whether Part I of the Act will be applicable when the place of arbitration is outside India. In the landmark case of Bhatia

International v. Bulk Trading,³ the Supreme Court of India (“SC”) held that in absence of the word “only” in section 2(2), Part I will apply to arbitrations held outside India as long as Indian law governed the contract. The SC concluded that Part I will apply to all arbitrations where the seat of arbitration is outside India, unless the parties agree to exclude provisions of Part I. This view was again reiterated by the SC in Venture Global Engineering v. Satyam Computer Services.⁴

The proposed amendment will ensure that Part I of the Act will only apply to domestic arbitrations and, accordingly, it will have no application in international commercial arbitrations where the place of arbitration is outside India. In other words, it appears that going forward it may become immaterial whether the parties have or have not specifically excluded the applicability of Part I thereby negating the effect of the judgments referred to above. This amendment is expected to restore the spirit of the Act as it aims to cure the controversial ruling of the SC.

From the proposed changes, it appears that the LCI is of the opinion that if all provisions of Part I are made inapplicable to an international commercial arbitration where the seat of arbitration is outside India, some practical problems may arise. For instance, if the assets of one of the parties are situated in India, interim relief under section 9⁵ of the Act will not be made available to the other party. Further, the amendment also suggests that courts in India can assist the tribunal in obtaining evidence under section 27⁶ of the Act even if the place of arbitration is outside India.

Interestingly, ambiguity still surrounds as to when the “place of arbitration” is considered to be in India. If the seat of arbitration as per the arbitration agreement is outside India, but for the sake of convenience, some hearings take place in India with the consent of all parties, will Part I still apply? Another situation, though uncommon in India, is with respect to arbitrations that are likely to take place over a digital medium. Assuming this trend becomes popular in the coming years, will one or two hearings in India deem India as the “place of arbitration,” even though the arbitration clause provides for an online dispute resolution mechanism? These are some questions that the LCI ought to address before finalizing the amendments.

1.2 Grounds of challenge

Present provision: Section 12 – “Grounds for challenge (i) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstance likely to give rise to justifiable doubts as to his independence and impartiality.”

Proposed amendment: Section 12 – “Grounds for challenge (i) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstance-

• such as the existence of any past or present relationship, either direct or indirect, with any of the parties or any of their counsel, whether financial, business, professional, social or other kind or in relation to the subject matter in dispute, which are likely to give rise to justifiable doubts as to his independence or impartiality; and
• such other circumstances as may be provided in the Rules made by the Central Government in this behalf.”

Analysis: Through this proposal, the LCI has merely spelt out what “any circumstance likely to give rise to justifiable doubts” in the existing provision means. This will, like earlier, place the burden of disclosure on the arbitrator(s). However, instead of a general disclosure, the arbitrators may be required to give a specific disclosure in relation to all aspects enumerated in the proposed amendment. It appears that the intention of the LCI for proposing the amendment is to reduce challenges of appointment of arbitrators under section 12 and 13⁷ of the Act.

1. 3 Challenges to Enforcement and Impact on the scope of Public Policy

Present provision: Section 34(2)(b)(ii) – “An arbitral award may be set aside by the court only if, the arbitral award is in conflict with the public policy of India.

Explanation – Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.”

Proposed amendment: Section 34(2)(b)(ii) – “An arbitral award may be set aside by the court only if, the arbitral award is in conflict with the public policy of India.

Explanation I – Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.

Explanation II – For the purpose of this section “an award is in conflict with the public policy of India” only in the following circumstances, namely when the award is contrary to the (i) fundamental policy of India; or (ii) interests of India; or (iii) justice or morality.”-

Analysis: The SC in ONGC v. Saw Pipes Ltd⁸ examined the scope of section 34(2)(b)(ii) and ruled that when an award is contrary to any one of the three points stated in the proposed Explanation II above, such an award can be set aside on the ground of public policy. Clearly, with the addition of the proposed amendment the ruling of the SC giving “public policy” a wide interpretation will get legislative sanctity.

In addition to the points mentioned in the proposed amendment, the SC had also considered a “patently illegal” award as contrary to public policy. The consultation paper recommends a new section 34A to be inserted, which will allow a domestic arbitral award to be set aside on the ground of a “patent and serious illegality.” At this stage it is not clear why the provision pertaining to patent illegality is applicable only to domestic awards.

1.4 Limitation and Enforcement

Proposed substitution of section 36 of the Act – The present language of section 36 provides that an award will only be enforced when the time period to set-aside the award has either expired or if an application made under section 34 has been disposed off. In essence, if an application to set aside an award is made within time, enforcement of the award comes to a halt. Aggrieved parties take advantage of this to file frivolous applications, which either delay or impede enforcement proceedings. The proposed amendment⁹ in section 36 provides that a section 34 application will not act as a bar to enforcement unless a separate application for stay of enforcement is not filed. The court, however, while deciding upon a stay application, will have to consider the grounds alleged for setting aside the award.

Analysis: A careful analysis of this proposed amendment will surface some already prevailing concerns with the Act. Firstly, it will result in multiplicity of proceedings. This itself can be a time consuming process and result in an additional financial burden on the parties. Secondly, where the award is first enforced i.e. the application for grant of stay is rejected, and thereafter it is set-aside, the successful applicant will have to return the disputed quantum. This can potentially result in commercial difficulties for large corporations where they are first granted the disputed amount, and then after a few years asked to return the whole/part  amount.  This  means  that  in  effect,  the  court  does  not  permit  the  successful applicant to use the money till the section 34 application is not decided, thereby making the rejection of grant of stay meaningless. Lastly, the proposed substitution may still not prevent unsuccessful parties from filing frivolous applications as multiplicity of proceedings only means that rejection of a grant of stay can be appealed. Till all appellate forums are not exhausted, the application under section 34 may also just get delayed. This will, clearly, facilitate evasion of enforcement.

Conclusion

Even though all proposed amendments have not been covered in this bulletin, the intention of the LCI can be deciphered to some extent. The law makers appear to be of the opinion that the present Act has lacunas which have defeated the very purpose of preferring

arbitrations as a method of dispute resolution. The proposed amendments also, to some extent, appear to harmonize the text of the Act with the prevailing judicial precedents. According to us, further modifications have to be made to the Act to make it more “effective.” With the growing number of arbitrations, it is important that minimal court interference be permitted and special dedicated benches be set up to hear applications under section 34 of the Act. We hope that the consultation paper introduced by the LCI receives comments and suggestions from a diverse group of people.

Authored by: Dhruv Suri

1 Part I is entitled “Arbitration” and consists of 10 chapters containing sections 2 to 43. Part II pertains to “Enforcement of foreign awards” and Part III deals with “Conciliation”
2 Those arbitrations where at least one part is a foreign national is referred to as an international commercial arbitration
3 (2002) 4 SCC 105
4 (2008) 4 SCC 190
5 Section 9 of the Act gives a party the right to approach court, either before or during the arbitral proceedings or after the award is passed but before it is enforced, to obtain an interim relief
6 Under section 27 of the Act, the arbitral tribunal or a party to the arbitration, can seek the assistance of a court in taking evidence
7 This section lays down the procedure to be followed while challenging the arbitrator’s independence or qualification. Once this remedy is exhausted, the aggrieved party has to wait for the award to be passed before making an application to set it aside under section 34 of the Act
8 AIR 2003 SC 2629
9 The text of the proposed amendment is large and, therefore, has not been mentioned in the bulletin