"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, May 6, 2010

Guest Post on the Consultation Paper Proposing Amendments to the Arbitration Law in India

Mr. Bhushan Shah, a reader of this blog, has agreed to post a descriptive comment on the Consultation Paper published by the law ministry a month back on the proposed amendments to the Arbitration and Conciliation Act, 1996. Mr. Shah is an International Lawyer at Drew & Napier LLC, Singapore. You can find his comment on the Consultation Paper below:

Consultation Paper: Proposed Changes in Arbitration Law in India
Justice delayed is justice denied. Litigation in India is a prolonged process and it takes years for commercial disputes to be resolved before the courts. The Indian Parliament enacted the Arbitration and Conciliation Act, 1996 (‘Act’) with the objective to provide speedy disposal of the dispute with the least amount of intervention by the judicial system. However certain judgments by the High Courts and Supreme Court of India (collectively referred as ‘Courts’) allowed judicial intervention in arbitration proceedings and curtail party autonomy. These judgments have been widely criticized by practitioners world wide as it invites unnecessary interference from the courts and defeats the main objective of the Act.
The Union Ministry of Law and Justice (‘Law Ministry’) recently released a consultation paper (‘the Paper’) proposing key amendments to bring the Act into parity with international standards. The key amendments proposed in the Paper by the Law Ministry are as follows:-
  1. Application of Part I – Section 2(2) of the Act: Existing Section 2(2) in Part I of the Act reads as follows: This part shall apply where the place of arbitration is in India. There are conflicting views of the Courts about the applicability of Part I in respect of international commercial arbitration, where the seat of arbitration is not in India.
    1. Supreme Court in the case of Bhatia International v Bulk Trading [(2002) 4 SCC 105] held that in the absence of the word ‘only’ in Section 2(2), Part I of the Act would apply to arbitration held outside India, so long as the law of India governed the contract. Accordingly, the Supreme Court granted interim measures with respect of disputes which the parties had agreed to submit for arbitration to the International Chamber of Commerce in Paris.
    2. In Venture Global Engineering v Satyam Computer Services Limited [(2008) 4 SCC 190], the Supreme Court, following the Bhatia International decision, held that Part I of the Act does apply to foreign awards and parties may make an application under Section 34 of the Act to set aside such awards.
    In order to curtail interference from the Courts, the Paper proposes to amend Section 2(2) of the Act as follows:
        “(2) This part shall apply only where the place of arbitration is in India. Provided that provisions of section 9 and 27 shall also apply to international commercial arbitration where the place of arbitration is not in India, if an award made in such place is enforceable and recognized under Part II of this Act.”
    Thus, the proposed amendment seeks to exclude the applicability of all the provisions of Part I of the Act except for Section 9 (Application for interim reliefs) and Section 27 (Court Assistance in taking evidence) for arbitrations held outside India. Further, from the reading of the provision, it appears that Parties cannot contract out of Section 9 and Section 27 of the Act.
  1. Amendment of Section 11– Appointment of Arbitrators: Under the current Act, the power to appoint an arbitrator is vested in the Chief Justice of the Supreme Court (for international arbitration), or the Chief Justice of the High Court (for domestic arbitration). The Paper proposes to vest these powers in the Supreme Court and High Court itself, rather than to the Chief Justices of these institutions, as well as not allowing for appeal from the orders of these Courts. Further the Paper proposes to introduce the following two sub-sections:
    1. Sub-section 13 - Institutional Arbitration:  Making it mandatory for the Courts to refer the appointment of an arbitrator to an arbitration institution in respect of a commercial dispute of specific value. The proposed law aims to shift the focus from ‘ad hoc arbitration’ to ‘institutional arbitration’.
    2. Sub-section 14 – Appointment of an arbitrator within 60 days: The appointment of an arbitrator by the Courts shall be made as expeditious as possible and endeavour shall be made to dispose the matter within 60 days from the date of service of notice on the opposite party.  
  2. Amendment of Section 28 – Rule applicable to the substance of the dispute: Existing Section 28(3) of the Act provides that the arbitration tribunal shall decide the dispute in accordance with the terms of the contract and also after taking into account the usage of the trade applicable to the transaction. In ONGC v Saw Pipe Limited [(2003) 5 SCC 705], the Supreme Court held than an award that is contrary to the terms of the contract would be patently illegal and could be challenged under Section 34 of the Act. The Paper proposes to amend Section 28(3) as follows:-
    “In all cases, the arbitration tribunal shall take into account the terms of the contract and trade usage applicable to the transaction.”
    Thus the Paper seeks to clarify that an arbitral tribunal only needs to take into account the terms of the contract. The proposed amendment should lead to less interference by the Courts on the ground that the award is against the terms of the contract.
  1. Amendment of Section 34 – Providing meaning to public policy: In the ONCG case, the Supreme Court under Section 34(2)(b)(ii) of the Act opined that the expression ‘public policy’ should be given a broader meaning and accordingly held that an arbitral award is patently illegal when it is contrary to the terms of substantive provisions of law, or a provision of the Act, or against the terms of the contract. To nullify the effect of this case, the Paper proposes to insert Explanation II to Section 34 and narrow the scope of public policy as a ground for setting aside an award. Accordingly, an award will be considered to be in conflict with public policy only when it conflicts with the following:
    1. the fundamental policy of India; or
    2. an interest of India; or
    3. justice / morality.
    The proposed amendment also seeks to harmonize Section 34 with that of Sections 13 and 16 of the Act. The Paper suggests an additional sub-clause under Section 34, one that provides a ground of challenge to an award on the basis of rejection of a plea of bias under Section 13 of the Act as well on the ground of lack of jurisdiction under Section 16.
  1. Insertion of new Section 34A- Additional ground of challenge an award on patent and serious illegality: The Paper proposes to insert an additional ground of ‘patent and serious illegality of a domestic arbitration award’. The proposed Section 34A clarified that while considering such a ground, the Court must be satisfied that such an illegality has caused or is likely to cause substantial injustice to the applicant. However, this author believes that the proposed section is unwarranted and may invite unnecessary intervention from the Courts.
  2. Substitution of Section 36 – Enforcement of the Award: The existing Section 36 of the Act provides that enforcement of the award will be automatically stayed once an application is made to set aside the award. However, this has led to an increase in the misuse of the provision whereby the party filing an application does so only for the purpose of delaying the execution of the award. In order to put a stop to this practice, the Paper proposes to substitute Section 36. The substituted section does not provide for an automatic stay on the enforcement of award unless a separate application is filed for grating the stay and the Court agrees to stay the award by recording its reasons. The substituted section further provides that while granting stay of the operation of the award, the Court may also grant interim measures to protect the interests of the party in whose favour the award is passed.
  3. Implied arbitration clause in commercial contracts of high consideration: Further, with a view to promote institutional arbitration and avoid pleas regarding validity of the arbitration agreement, the Paper proposes that with respect of commercial contracts of high threshold value (i.e. Rs 5 crore or more), there should be a deemed arbitration clause unless the parties expressly and in writing agree otherwise.
  4. The Paper also proposes following miscellaneous amendments:
    1. An amendment of Section 12- Disclosure of interest by the Arbitrator;
    2. An amendment of Section 31- Change in the interest rate from 18% to 1% higher than the current rate of interest fixed by the Reserve Bank of India; and
    3. An amendment to the definition of ‘Court’ in Section 2: A challenge against an arbitral award involving a commercial dispute shall lie before the Commercial Division of the High Court under Section 34 and an appeal against an order passed by the Commercial Division of the High Court shall lie directly before the Supreme Court.
  5. The Law Ministry has invited suggestions on the feasibility and necessity of the proposed amendments within 30 days of release of the Consultation Paper.
Comments
Speedy disposal of commercial disputes is one of the essential requirements for growth and development in the Indian economy. The proposed amendments to curtail Court intervention and to promote institutional arbitration are steps in the right direction. Lets us hope that the Law Ministry, after taking suggestions from industry and legal practitioners, quickly amends the Act to improve business confidence and certainty. 

- Bhushan Shah
[The author is working as an International Lawyer at Drew & Napier LLC, Singapore. The views expressed herein are his own.]

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