2019 Amendment to Arbitration Law: Foreign Arbitrators in Indian Seated Arbitrations

[Ajar Rab is a partner and Ankit Singh an associate at Rab & Rab Associates LLP, Dehradun]

The Indian arbitration legal regime is often a subject of criticism, and the government has tried to plug the loopholes by bringing in several policy changes including amendments to the Arbitration and Conciliation Act 1996 (“Act”).  The most recent amendment passed in August 2019 (“Amendment”) was geared towards providing a fillip to institutional arbitration in India. Unfortunately, as is the case with most such endeavours in India, the Amendment takes two steps forward, and five steps backwards. While several issues require discussion, the most alarming change is the misplaced emphasis on the qualification of arbitrators stemming from an understanding of purely Indian law. Such a requirement, in effect, renders it impossible or at least impractical for non-Indian nationals, or persons unfamiliar with the Constitution of India, labour laws etc., to act as arbitrators in Indian seated arbitrations.

A critique of the requirements mentioned in section 43J read with Schedule VIII (“Eighth Schedule”) of the Act has been previously covered here. Hence, this post aims to highlight the practical problems that will arise when section 43J is brought into force as it results in several inconsistencies within the Act which destroy the objective of fostering institutional arbitration and instead create new hurdles.

The most glaring inconsistency introduced after the Amendment is with respect to the appointment of arbitrators. Apart from undermining party autonomy and the freedom to choose arbitrators, the Eighth Schedule directly conflicts with section 11(1) of the Act which states explicitly that a person of any nationality may be an arbitrator. Despite this provision, the clear mandate in the general norms of the Eighth Schedule that “the arbitrator shall be conversant with the Constitution of India” means that only persons with such knowledge can act as an arbitrator. Furthermore, the use of the word ‘shall’ suggests that the requirement is mandatory and not directory.

The other problem with the Eight Schedule is that it runs afoul of article 11(5) of the UNCITRAL Model Law and section 11(9) of the Act, which require a court to take into account the nationality of the arbitrators. The illogical result is that when a party approaches the court to appoint an arbitrator under section 11, the court shall be bound by the Eight Schedule as the language in section 43J states that the qualification, experience and norms for accreditation of arbitrators “shall be as specified in the Eighth Schedule.” Therefore, the language again suggests that deviation from the Eight Schedule is not possible, and hence, the introduction of the Eight Schedule renders section 11(1) mostly redundant.

The chilling effect of this Amendment is that institutions would also be bound to comply with the Eight Schedule when appointing arbitrators in Indian seated arbitrations even though rule 6.1 of LCIA 2020 Arbitration Rules, article 15, ICC Arbitration Rules, article 17, SCC Rules 2017, articles 11.2 and 11.3 of HKIAC Rules 2018 clearly stipulate that arbitrators shall not be of the same nationality unless otherwise agreed by the parties. Effectively, whenever, one of the parties is Indian, the Eight Schedule will create unnecessary legal controversy in the implementation of the rules of such institutions and also provide possible grounds for the challenge at the time of setting aside of the award. Hence, the Eight Schedule throttles institutional arbitration instead of bolstering it. The only bright side (if any) for Indian nationals would be that arbitral institutes would require an increased number of Indian nationals as arbitrators on the panel of each institute.

Perhaps, one of the most devastating results of the introduction of the Eight Schedule is the effect it will have on arbitration agreements entered into before the Amendment, especially, in negotiated arbitration agreements providing for the nomination of an arbitrator by virtue of her office or designation, such as the secretary of a chamber of commerce. Arbitral tribunals constituted after the Amendment will have to deal with arbitrator challenges at the risk of unenforceable awards. This will then lead one of the parties to approach the courts, which will be bound by the Eight Schedule leading to a vicious cycle, causing delay and inefficiency of the arbitral process.

Further, from a practical point of view, in an Indian seated arbitration, two foreign parties may not be able to appoint arbitrators who are familiar with legal and cultural backgrounds of the parties, depriving parties of one of the critical advantages of arbitration in a transnational dispute. Therefore, where the governing law is not Indian law or is the law of a civil-law jurisdiction, the CISG or the UNIDROIT, Indian seated arbitrations would certainly be dis-favoured because of the Eighth Schedule. This may also escalate the costs of arbitration on account of having documents translated.

The only saving grace to this ill-fated Amendment may be the current pending petition challenging the constitutionality of the Eighth Schedule where the court may take an expansive and purposive interpretation of the judgment of the Supreme Court in Bar Council of India v. A.K. Balaji, which categorically permitted foreign lawyers to conduct arbitration proceedings in India and hold the Eighth Schedule unconstitutional. However, even such an interpretation may not save arbitration in India as an Amendment after the judgement unequivocally represents a contrary legislative intent.

As is with most policy changes in India, the recommendations of the High-Level Committee (“HLC”) to recognise accreditation bodies such as the CIArb, SIArb etc. have been turned on their heads reiterating that arbitration in India is far from ready to take on the world.

Ajar Rab and Ankit Singh

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