Arbitration and Conciliation (Amendment) Act, 2015: Will Arbitration Become the Preferred Mode of Alternative Dispute Resolution?

Sharda Balaji
Sharda Balaji, Founder
Posted on Mon, 27 June 2016

With enhancing ease of doing business in India as its mantra, several measurers have been taken in the recent times to enhance the attractiveness of India as a business destination. The much anticipated amendments to the Indian arbitration law is one among many such initiatives taken. The Arbitration and Conciliation (Amendment) Act, 2015 (the “Amendment Act”), has been notified on January 1, 2016, primarily for enhancing the efficacy of the way arbitrations work in India and also to address the concerns of the international business community that often shy away from choosing India as a seat for international commercial arbitration. The Amendment Act brings about much needed changes to the Arbitration and Conciliation Act, 1996 (the “Act”) by offering clarity with respect to interim relief for foreign seated arbitrations, judicial intervention and independence of the arbitral tribunal; and introduction of measures to make arbitration in India time and cost efficient. The key amendments to the Act are highlighted below:

1) Jurisdiction of Indian courts in case of international commercial arbitration, seated in India

The amendment of Section 2(1)(e) of the Act provides a new definition to “Court” in case of international commercial arbitration seated in India. In such cases, all references to “Court” will now mean the Hon’ble High Court in exercise of its ordinary original civil jurisdiction having jurisdiction to decide the questions forming the subject matter of the arbitration or a High Court having jurisdiction to hear appeals from decrees of courts subordinate to that High Court, with respect to subject matter of arbitration. This amendment allows parties of an international commercial arbitration to approach High Courts directly, thereby having an access to qualified and experienced judges with commercial understanding of complex cross border disputes in the first instance itself. The only potential downside is that shifting more responsibility on to the High Courts, which are already extremely loaded with pending cases, which might cause potential delays, thereby putting at risk the time efficiency of arbitration processes in India, which is the absolute need of the hour.

2) Place of incorporation of a company is the deciding factor in assessing the residence of the company in an international commercial arbitration

The amendment of Section 2(1)(f) of the Act defines an international commercial arbitration, which is determined on the basis of criteria specified in the Section. From the criteria laid down in the Amendment Act, the reference to a company having management and control outside India has been revoked. This amendment has been introduced to make it clear that where a company is incorporated in India, it will not qualify as a party for the purposes of an international commercial arbitration, merely because its management and control is outside India. This amendment is in furtherance of the principle of ‘place of incorporation’ specified by the Hon’ble Supreme Court of India in 2008, in the case of TDM Infrastructure Private Limited v. UE Development India Private Limited, whereby the residence of a company is determined on the ‘place of incorporation’ rather than the place of ‘management or control’. However, missing is the criterion of subject matter of the contract, as relevant to determine whether an arbitration should be considered ‘international’. The Act had omitted that criterion while adopting the remaining definition from the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”). In light of the recent opening up of the Indian economy, which will lead to more and more international contracts executed by the Indian companies and particularly in light of the default position under private international law which considers ‘subject matter’ relevant, two Indian parties should be allowed to choose a foreign law and seat if the subject matter of the contract is not Indian. In absence of such a provision, the issue of two Indian parties’ having the freedom to choose a seat outside India, will be have to left open for judicial interpretation. Recently it has been allowed by the High Court of Madhya Pradesh in September 2015, in the matter of Sassan PowerLtd. vs. North American Coal Corporation India Pvt. Ltd, but a number of other High Courts have taken contradicting views in this matter. 

3) Flexibility for parties to approach Indian courts for interim reliefs in aid of foreign-seated arbitrations 

After years of debate and conflicting judgements, the question of applicability of Part I of the Act to foreign seated arbitrations was finally put to rest by the Supreme Court in 2012, in the matter of Bharat Aluminium Company v. Kaiser Aluminium Technical Services, by laying the rationale that Part I of the Act is not applicable to foreign seated arbitrations arising from arbitration agreements entered into/executed post 6th September 2012. Although, this verdict reduced interference of the Indian judiciary in foreign seated arbitral proceedings, it also restricted the ability of parties to seek interim reliefs in India. Inapplicability of Part I of the Act puts foreign seated arbitrations at a significant disadvantage as a party's only chance of interim relief in such case is limited to an order from the arbitral tribunal or an order from a court outside India and in both cases the enforceability and the actual relief available in India remains uncertain. This lacuna seems to have been recognised and remedied by the law makers in the Amendment Act, by making the provisions with respect to interim relief (Section 9), court assistance in taking evidence (Section 27) and appeal from an order of interim relief passed by a court (Section 37), under Part I of the Act, applicable to foreign seated arbitrations. This may go a long way in achieving an optimal balance with respect to minimum judicial intervention in India versus remedy available.

4) Supremacy of Arbitral Tribunals in granting interim reliefs

Before the Amendment Act came into effect, the Act conferred jurisdiction to both, courts as well as the arbitral tribunal, to pass orders for interim measures during the pendency of arbitral proceedings. Recognising the problems of delay that such parallel jurisdiction created, the Amendment Act prevents courts from accepting any application for interim measures once the arbitral tribunal is already constituted; with a caveat that the courts could exercise this power, if circumstances exist, which may not render the remedy provided by the arbitral tribunal efficacious. The Amendment Act also addresses the issue of enforceability of interim orders passed by the arbitral tribunal by clarifying that such orders shall be deemed to be an order of the court and would be enforceable accordingly.

5) Arbitration agreement can be concluded by electronic communication (Section 7)

In an attempt to bring Indian laws in conformity with the Model Law, going forward an arbitration agreement can be concluded by electronic communication.

6) Narrowing the power of the judicial authority and widening the meaning of “parties” to an arbitration agreement (Section 8)

Under the Act, a judicial authority is vested with the power to refer the parties to arbitration which is the subject matter of an arbitration agreement, provided such reference is sought not later than submission of the first statement on the substance of the dispute. Post the amendment, the position is such that the judicial authority has to refer the parties to arbitration, when there is a dispute which is squarely the subject matter of an arbitration agreement; unless it finds that prima facie no valid arbitration agreement exists. Further, the party to an arbitration agreement would include any person claiming through or under him for the purposes of making such reference. Thus, even non signatories to an arbitration agreement, in so far as domestic arbitration or Indian seated international commercial arbitration are concerned, can be part of the arbitration proceedings, as long as they are proper and necessary parties to the agreement.

7) Independence and impartiality of an arbitrator

The Fifth Schedule of the Amendment Act lists the grounds giving rise to justifiable doubts as to the independence or impartiality of arbitrators and the Seventh Schedule lists the relationships between an arbitrator and the parties or the counsel, that would make the arbitrator ineligible to be appointed as an arbitrator. Thus, the Amendment Act seeks to assist arbitrators and parties to ascertain the independence of arbitrators, and limit the scope of challenging their appointment, except when expressly waived by the parties after the dispute has arisen. This is based on international requirements as provided under the International Bar Association Guidelines on Conflicts of Interests in International Arbitrations. Further it is provided that, for international commercial arbitrations the Hon’ble Supreme Court, and not just the Chief Justice of India, and for domestic arbitrations (purely in an administrative capacity) the Hon’ble High Courts, of the respective states, and not just the Chief Justices thereof, shall have the power to appoint the arbitrators respectively, thereby shifting and balancing out the burden of appointing arbitrators.

8) Time and Cost effective arbitration

One of the main concerns that parties have while deciding whether to subject their disputes to Indian arbitration is that arbitration in India is long-drawn and there is no time guarantee for resolution of disputes and it also then becomes extremely cost inefficient, which are the two very cornerstones on which the idea of alternative dispute resolution is based upon. The Amendment Act has introduced certain provisions to rectify this problem such as the applications for appointment of an arbitrator have to be disposed of expeditiously within a period of 60 days from the date of service of notice on the opposite party. Further, once a court passes an order for interim measures before the commencement of the arbitral proceeding, the arbitral proceeding ought to commence within 90 days from the date of the order. However, the court would have the discretion to determine a longer time for commencement of the arbitration. Further, the Amendment Act also requires an arbitral proceeding under Part I of the Amendment Act to complete and award to be passed within a period of 12 months from the date of receipt of notice of appointment by the arbitrators. This period can only be extended for a maximum period of up to 6 months, with the consent of the parties. Upon failure to pass an award within the time prescribed, the mandate of the arbitrators automatically terminates. A further extension can only be permitted by court for sufficient cause. But, given the intention to minimise court interference, requiring court approval for a further extension of time may hamper the efficient disposal of arbitration cases by increasing, rather than decreasing, court involvement in on-going arbitrations and considering the already overburdened Indian court schedules, this amendment may end up prolonging protracted Indian arbitration timelines. Also, there is nothing prescribed with regard to any penalty or punishment being imposed on the parties if they delay the arbitration proceedings. The Amendment Act also introduces a fast-track arbitration procedure to resolve disputes provided such option is exercised prior to or at the time of appointment of the arbitral tribunal. The award ought to be passed within 6 months from the date of reference. However, the Amendment Act does not deal with mandatory reference in cases of disputes involving smaller claims. A mandatory procedure for disputes below certain thresholds may work to reduce costs and thereby promote arbitration as an effective dispute resolution mechanism.

9) Arbitrator’s fees and monetary incentive

The Amendment Act has empowered the Hon’ble High Court to frame rules for determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal. A ‘model’ fees structure for arbitrators has been included in the Fourth Schedule to the Act for the consideration of the Hon’ble High Court. The Amendment Act links the arbitrator's fee to the time taken to pass the final award and entitles the arbitrators to additional fees, if the award is made within a period of 6 months, thereby incentivising arbitrators to make the process speedier. Further, the courts have also been empowered to order a reduction of fees if there is a delay beyond 18 months in passing the final award, for reasons attributable to the arbitrators.

10) Imposition of Costs

The internationally well-known cost regime ‘where costs follow the event’ has been bought into the enactment as Section 31A. Costs are not limited to legal fees, but also include travel expenses, witness expenses and so on. The imposition of costs also extends to every litigation arising out of an arbitration which has been addressed by virtue of the amendment. Further, it provides that an amount awarded by the arbitral tribunal will, unless otherwise specified by the arbitral tribunal, carry interest, which shall be 2% more than the current rate of interest per annum (the “current rate of interest” as per the Section 2(b) of the Interest Act, 1978), from the date of the award to the date of payment. 

11) Challenge and enforcement of the award

The grounds on which an arbitral award can be challenged in an international commercial arbitration have been narrowed down, in order to minimise judicial intervention. Interestingly, upon filing a challenge, there will not be any automatic stay on the execution of award – and more specifically, an order has to be passed by the court expressly staying the execution proceedings.

12) Prospective Application of the Amendment Act

Unless specifically made applicable by the parties through agreement, the Amendment Act applies only to arbitrations that commence after 23rd October 2015. Arbitrations that have commenced prior, would continue to be governed by and be subject to the provisions of the Act, as existed prior to the amendments. However, the Amendment Act does not indicate whether appeals from arbitral awards pronounced before 23rd October 2015 are subject to the provisions of the Act. It cannot be refuted that the amendments brought to the Act are certainly a positive step towards making arbitration expeditious, efficacious and a cost effective remedy. But, these amendments are only a first step towards making arbitration the preferred mode of dispute resolution. Various ambiguities in Act have not been answered and the legislators have failed to notice a few issues such as the arbitration cases come in a wide array of all shapes and sizes and setting a common timeline for all arbitrations ignores the vast range of variance in issues that may arise in arbitration, the Amendment Act could have expressly codified and addressed the issue pertaining to arbitrability of disputes involving fraud as was suggested by the 246th Law Commission Report in August, 2014 headed by Hon’ble Justice A.P. Shah (“LCR”), the Amendment Act also does not provide for and addresses the issue of “Emergency Arbitrator” which was proposed by the LCR under the definition of arbitral tribunal and most importantly it does not take into consideration the fact that there is a need to actively encourage institutional arbitration throughout India and the need to set up a specific body tasked with this role.   Authors: Saumya Kakar, Associate and Sohini Mandal, Junior Partner

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