A Close Look At India’s New Arbitration Ordinance

[The
following guest post is contributed by Sulabh
Rewari
, Partner at Keystone Partners and Poorvi Satija, LL.M. Candidate 2016 (Expected), Harvard Law School.
Views expressed are of the authors alone.]
The Indian Government has recently promulgated
the Arbitration and Conciliation (Amendment) Ordinance, 2015 (“Ordinance”). The key amendments made by
the Ordinance and their impact is analyzed below –
1.         Agreeing to a seat outside India
Following the decision of the Indian Supreme
Court in
Bharat Aluminium Co. v. Kaiser Aluminium Technical.
Services Inc.
(2012) 9 SCC 552 (“Kaiser”), Indian Courts could not grant interim relief in foreign seated
arbitrations. The Ordinance allows Indian Courts to grant interim relief
(Section 9) and assist in the taking of evidence (Section 27), even when the
seat of arbitration is outside India thanks to the proviso to section 2(2). It
also addresses one of the problems that the Indian Supreme Court set out to resolve
(albeit with disastrous consequences), in its infamous decision in
Bhatia
International v Bulk Trading S.A.
,
(2002)
4 SCC 105.
This provision can be excluded by an agreement
in writing. Therefore, the typical language that one would see in contracts
involving Indian parties, such as “Parties
agree that Part I shall stand excluded”
should no longer be retained. This language
will now have the unintended consequence of excluding access to interim relief
from Indian Courts.
Whether two Indian parties can agree to
arbitration outside India is still an open question, with a recent decision of
the Madhya Pradesh High Court[1] holding that two Indian
parties can agree to arbitration outside India. Significantly, the reference to
international commercial arbitration
in the proviso to Section 2 (2) implies that two Indian parties will not have
access to interim relief from Indian Courts, if they agree to a seat outside
India.
2.         Arbitration in India is now faster,
cheaper and more effective
Limiting intervention to higher Courts
In case of international commercial arbitrations
(where at least one party is foreign), petitions relating to arbitral
proceedings, such as under section 11 and section 34, can be made directly to
High Courts, which should aid faster disposal.

By
virtue of Section 10 of the Commercial
Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance,
2015
(“Commercial Courts Ordinance”)
(which has been concurrently notified in the official gazette), Court
proceedings related to all arbitrations involving commercial disputes of a
‘specified value’ (as may be notified by the Government from time to time, being
a sum of not less than INR 10 million), shall be heard by specially-designated
Commercial Courts (both at the District Court level and at the High Court
level). This should ensure that only trained and specialised judges would deal
with petitions and applications relating to arbitrations.
Time-lines
The Ordinance imposes strict timelines for
conduct of the arbitration (12 months from the date the arbitral tribunal
enters upon reference) under section 29A, and disposal of challenges to an
award in Court (12 months from serving of notice) under section 34(6), as well
as for other applications made to the Court.
The 12-month timeline for the conclusion of
arbitration can be extended by a period not exceeding 6 months by agreement of
parties. If the award is not made within the 12-month period (or the extended
18-month period), the mandate of the arbitral tribunal would come to an end unless
the Court further extends the time period for “sufficient cause” upon request by either party. Notably, this time
limit is also applicable to institutional arbitrations.
This provision is not without teeth – the Court
can replace any of the arbitrators, dock the fees of the arbitrators if they
are responsible for the delay, and/or impose actual or exemplary costs on
either of the parties. However, the requirement of approaching the Court will
only add another procedural bottleneck and probably lead to further delays.
It is unclear who is to bear costs if the
mandate of the arbitral tribunal ends due to the expiry of the time-period.
Further, Court intervention in arbitration proceedings is fairly common in
India and Section 29A does not clarify whether the time spent in litigation
would be included in computing the time limits.
It also bears emphasis that the setting of
time-lines, particularly under the provisions of the Code of Civil Procedure,
1908 have been interpreted by Indian Courts to be directory in nature, despite
the use of mandatory language (such as “shall”).
Also, the power of the Court to appoint
substitute arbitrator(s) under section 29A is problematic, insofar as it can defeat
the right of a party to appoint a replacement arbitrator. There is no exception
available for institutional arbitrations, and institutional rules will stand
superseded to that extent. Replacement arbitrator(s) appointed by the Court are
statutorily deemed to have received the evidence led in the arbitration
proceedings till their appointment and the arbitration proceedings are to continue
from the stage already reached.
The Arbitration and Conciliation Act, 1996 (“1996 Act”) (in its original
formulation) leaves it to the arbitral tribunal to determine whether to repeat
hearings, and this discretion continues with the arbitral tribunal unless the
substitution of the arbitrator(s) is under section 29A (due to non-compliance
with the stipulated timeline). While the endeavor is to avoid delay and that is
laudable, parties may wind up with one tribunal member who can simply not
follow the proceedings. This problem is exacerbated in India, as live
transcription is rarely used in ad hoc
arbitrations.
Finally, the time limits contemplated are
wishful thinking. Indian Courts do not have the capacity or infrastructure to
dispose of challenges to arbitral awards in one year.
Wider powers for arbitral tribunals to grant interim relief
The
powers of arbitral tribunals to grant interim relief have been expanded and
such orders have been made enforceable. Correspondingly, the newly introduced
Section 9(3) whittles down the concurrent jurisdiction of Courts in relation to
interim measures of protection, once an
arbitral tribunal has been constituted. It is only in cases
where the remedy under Section 17 will not be “efficacious” that a Court may be
approached under the amended Section 9.
Limited grounds of challenge to awards
Grounds of challenge to awards, in arbitrations
seated in India, have been curtailed by limiting the meaning of public policy,
so as to exclude a review on merits.
In arbitrations between two Indian parties where
the seat of arbitration is in India, Courts can also set aside an award on
account of “patent illegality”. Patent illegality does not however extend to
erroneous application of law or re-appreciation of evidence. Practically, this could
lead to a situation where Courts will have enough leeway to examine the
substance of arbitral awards between Indian parties arising out of arbitration
proceedings with their seat in India. In the absence of professional
arbitrators, a specialist arbitration bar and credible domestic institutions,
it is unrealistic to insulate domestic arbitrations from judicial interference
as one could in jurisdictions with a more sophisticated practice of arbitration.
There is no change in the position for
arbitrations taking place outside India. Section 34 does not apply to foreign awards
(for agreements entered into post-Kaiser).
The grounds for refusing enforcement of a foreign award on the basis of “public
policy” have been reiterated (consistent with the position articulated in Shri Lal Mahal Ltd. v. Progetto
Grano Spa
,
(2014) 2 SCC 433),
with the added clarification that the test of contravention of fundamental
policy of Indian law will not entail a review on the merits.
No automatic stay of award
The Ordinance removes the provision for
automatic stay of an arbitral award once an application under Section 34 is
filed. The party challenging an arbitral award will now need to apply for a stay
of the arbitral award, and the Court will need to provide reasons if it grants
such a stay. Further, in an application for stay of arbitral awards for payment
of money, the Court has to have due regard to provisions for grant of stay of a
money decree under the Code of Civil Procedure, 1908 meaning that the Court may
order for deposit of money or security in lieu thereof and may refuse the stay
if such security is not furnished.       
Award of legal costs
The provisions for award of legal costs have
been detailed. The Ordinance provides that as a general rule, an unsuccessful
party must pay the costs of the successful party. The Court or arbitral
tribunal awarding costs is to take into account conduct of parties, subversive tactics
such as filing of a frivolous counter claim, and reasonable offers to settle.
This should discourage delay tactics and frivolous applications/pleas during
arbitral proceedings. Arbitration clauses that stipulate that parties will
share costs will not have any effect, as the Ordinance provides that agreements
assigning costs of proceedings to a party, will be valid only if executed after
the commencement of the dispute.  
However, it is unclear from the provision as to
whether an arbitral tribunal can award costs incurred by a party in
arbitration-related litigation (especially applications under Sections 8, 9 and
11). Also, the retention of the word “reasonable” in the provision is
problematic if the intention was to award costs on an indemnity basis. Indian
Courts have interpreted “reasonable
costs to mean that “actual
expenditure is not awardable under the un-amended section 31(8) of the 1996
Act.
Fees of arbitral tribunal
The fees of the arbitrators are now linked to
the amount in dispute and arbitrators cannot charge for each session. This will
lead to fewer physical hearings and promote efficiency in the conduct of
arbitral proceedings. In general, the fees of arbitrators will be reduced and
it has been left to the High Courts to frame rules to determine the fees of an
arbitral tribunal and the manner of its payment, taking into consideration the
rates specified in the Fourth Schedule to the Ordinance. As an unintended
consequence, arbitrators in India may have lesser incentive to take up ad hoc arbitrations between two Indian
parties.
These provisions do not apply to arbitrations in
which either party is foreign or to institutional arbitration.
3.         Arbitration in India should be
‘cleaner’
Stricter rules on bias and conflict of interest have
been introduced by the Ordinance. These rules were much needed, and
practitioners would agree that self-regulation on this front has failed in
India.
The Ordinance sets out as guidance circumstances
that give rise to justifiable doubts as to the independence and impartiality of
arbitrators in the Fifth Schedule to the Ordinance.
The Seventh Schedule to the Ordinance sets out
circumstances that will render a person ineligible to be appointed as
arbitrator. The applicability of this provision can only be waived by parties
by an agreement in writing after disputes have arisen. This amendment is
commendable and will lead to discontinuance of the prevalent practice of state
entities nominating their employees as sole arbitrators.
Both the schedules described above are modelled on
the IBA Guidelines on Conflict of Interest in International Arbitration. The
efficacy of ‘freezing’ soft law in this manner can be questioned. These
standards will evolve, particularly for the Fifth Schedule, and legislative
amendments will once again be required to update them. This is especially
problematic, given how long it has taken to introduce reform in this area of
law.  
Further, these standards could have been
customized for cultural context and local practice. For example, two differences
between India and ‘arbitration-friendly’ jurisdictions which could have been
taken into account in drawing up the Fifth Schedule are the limited pool of
professional arbitrators and the near absence of arbitrators from law firms in
India. 
4.         Other changes
– The
Ordinance introduces a fast track arbitration procedure which can be utilized
for routine contracts. An award must be made within six months in a fast track
arbitration. An oral hearing is unnecessary, and the dispute can be decided on
the basis of written pleadings.
– An Indian company with central
management and control outside the country cannot result in an arbitration falling
within the definition of “international
commercial arbitration
”. This was the position following the Indian Supreme
Court’s decision in TDM Infrastructure Private Limited
v. UE Development India Pvt. Ltd.
(2008) 14 SCC 271, but could have
been liberalized in the Ordinance.
– Section
8 of the 1996 Act has been amended to stipulate that a judicial authority
should refer parties to arbitration unless it determines, on a prima facie basis, that there is no
arbitration agreement. This determination was previously held by judicial
pronouncements to require a final determination as to the existence and
validity of an arbitration agreement. The provision has also been expanded to
include not only a party to an arbitration agreement, but also any person
claiming through or under it.
– Sub-sections
(4) (5) and (6) of Section 11 have been amended and the references therein to
the “Chief Justice or any person or
institution designated by him”
have changed to “the Supreme Court or, as the case may be, the High Court or any person
or institution designated by such Court”
. 
The intent seems to be to move away from the debate on whether the
exercise of such a power is a judicial one or an administrative one and the
focus is simply on the examination of the existence of the arbitration
agreement. Interestingly, this examination of the existence of the arbitration
agreement, is not limited to a prima
facie
standard, unlike under the amended Section 8.
– Finally,
the Ordinance merely states that “it
shall come into force at once
”. It does not specify whether any of its
provisions operate retrospectively. Absent such a stipulation, it is likely
that the provisions of the Ordinance will not apply to arbitral proceedings
that are underway and Court proceedings that have arisen, or are yet to arise
in relation to pending arbitral proceedings.
Overall, the Ordinance successfully captures the
orientation of decreasing court interference in arbitration in India and
incorporates many of the suggestions of the 246th Law Commission
Report. However, in leaving out other changes suggested by the Law Commission
Report, particularly the provisions clarifying on the emerging role of an
emergency arbitrator, and the arbitrability of fraud in India, the Ordinance
does miss some opportunities for reform.
– Sulabh Rewari & Poorvi Satija



[1] FA 310 of 2015 – Sasan Power Limited v.
North American Coal Corporation India Private Limited (Madhya Pradesh High
Court), http://indiankanoon.org/doc/88948563/

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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