Review of the Consultation Paper on Proposed Amendments to the Arbitration and Conciliation Act, 1996 - Part I

On 8th April 2010, the Ministry of Law and Justice (“Ministry”) released a consultation paper on the proposal to amend the Arbitration Conciliation Act, 1996 ("ACA" or "Act"). The CP has identified the below areas of the ACA that require reforms. They are:

1. Applicability of Part I of the Act to international commercial arbitration (ICA) held outside India.
2. Inclusion of the framework of institutional arbitration in the procedure of appointment of arbitrators under Section 11 over what is already in existence.
3. Disclosure by an arbitrator of the existence of past/ present relationship with parties/ their counsel that are likely to give rise to justifiable doubts as to the arbitrator's independence or impartiality
4. Mandate on the arbitral tribunal to take into account the terms of the contract and trade usage applicable to the transaction.
5. Reduction in the Interest Rate that could be awarded by the arbitral tribunal
6. Nullification of the test of patent illegality in the ground of public policy under Section 34(2)(b)(ii) for setting aside arbitral award and insertion of Section 34A enabling a court to set aside a non-international commercial arbitral award on the ground of patent and serious illegality that has caused or is likely to case substantial injustice
7. Harmonisation of Section 34 with Section 13 and 16.
8. Insertion of an additional procedural step of filing an application to stay enforcement/ operation of an award by an applicant under Section 34.
9. Constitution of an arbitration division in the High Courts for dealing with applications for setting aside arbitral awards under Section 34.
10. Deemed arbitration clauses in high value commercial contracts

We had promised in this blog that we would be commenting on the same. This post briefly discusses the first of the ten proposals of the Consultation Paper (CP) and critically analyses the same.

Applicability of Part I of the Act to International Commercial Arbitration (ICA) held outside India:

The law as it stands today on the applicability of Part I of the Act to ICA held outside in India is this: Part I would be applicable to ICA held outside India. But parties could exclude the applicability of Part I expressly or impliedly.

The CP proposes to amend the law to ensure that:

• Part I applies only to arbitration held in India.
• However, Sections 9 (Interim measures, etc. by court) and 27 (Court assistance in taking evidence) would be applicable even if the seat of arbitration is a non-Indian territory in which, if an award is passed therefrom, it would be recognisable and enforceable under Part II of the Act.

The rationale for the said amendment seems to be the following:

• There exists a contradiction in the decisions in that certain decisions (Bhatia International, for example) hold that Part I would apply to international commercial arbitration held outside India (hereinafter “foreign arbitration”) while certain decisions [Shreejee Traco(I) Pvt. Ltd. Vs. Paper Line International Inc (2003) 9 SCC 79] hold otherwise.
• According to the widely accepted seat theory, the laws of the forum or the seat of arbitration govern the arbitration. Hence, Part I should not be applicable to arbitrations whose seat is not in India. However, the language of Part I does give rise to “practical problems” as it does not enable a court to grant interim orders in case the seat is outside India or the assistance of an Indian court to obtain evidence.
• Bhatia International was wrong in stating that Part I would apply to foreign arbitrations because a reading otherwise would mean that foreign arbitrations in non-convention countries are left without remedy under the Act because the said decision ignores the principle of reciprocity in international law as recognised by the Supreme Court in Badat & Co. v, East India Trading Co. (AIR 1964 SC 538: [1964] 4 SCR 19: MANU/SC/0011/1963)

In order to appreciate the changes suggested by the Ministry, it would do well to recap and see why the three Bench court in Bhatia International went around the language of Section 2(2) to hold that Part I of the Act would apply to foreign arbitrations. 

The apex court in Bhatia International held that if Part I was held not applicable to foreign arbitrations:

• There would be no law governing arbitrations held in non-convention countries (Non-convention countries are those countries which are part of neither the Geneva Convention nor the New York Convention. Egs. Republic of Yemen, Belize, Comoros, East Timor, Eritrea, Ethiopia, Fiji, North Korea, Libya, Namibia, Somalia, Sudan, Tajikistan, Turkmenistan)
• it would lead to an anomalous situation where Part I would apply to Jammu & Kashmir in all ICA (including foreign arbitration) but for the rest of India Part I would not apply to foreign arbitration.
• Sections 2(4) and (5) would be in conflict with Section 2(2) of the Act
• a party would have no remedy to obtain interim relief even if the assets which are the subject matter of such application for interim relief is in India.

On the basis of the above, the court went on to hold:

“In cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to or excluded by that law or rules will not apply." (Paragraph 32)

Several practitioners had criticised the reasoning in Bhatia International as grossly erroneous. The CP rightly points out that the apex court failed to take note of the “well established principle” of reciprocity in enforcement of arbitral awards. The CP even points out that the Supreme Court has, in the past, recognised the said principle in Badat & Co. v, East India Trading Co. (AIR 1964 SC 538: [1964] 4 SCR 19: MANU/SC/0011/1963). Reciprocity is one of the fundamental principles of international law and the court should have taken the same into consideration. Even subsequent decisions, both by the High Courts and the later Benches of the Supreme Court have accepted the reasoning of Bhatia International and have considered non-applicability of the Act to arbitrations in non-convention countries as an error on the part of the drafters. It is submitted that the omission to consider arbitration in non-convention countries was deliberate and in accordance with sound principles of international law, which, unfortunately, the Indian judiciary did not and does not realise. For example, in Bharti Televentures Ltd. v. DSS Enterprises Prv. Ltd. [(2005(2) Arb. LR 561 (Delhi)], the Delhi High Court comments:

“[T]here may be instances where one of the parties is not of Indian nationality and is also not a citizen of a country which is not a signatory either of the New York Convention or the Geneva Conventions. In actuality the drafters have overlooked the possibility of an international arbitration between an Indian party and another from a `non-convention' country.” (Paragraph 5)

Against Bhatia International, the CP rightly points out:

“[I]t is well established that the awards rendered in countries with which India does not have reciprocal arrangements cannot be enforced in India as if it were a decree.”

They have to be brought before the civil court for enforcement. 

In fact, Sections 44 and 53 (both reproduced below) of Part II of the Act clearly recognise reciprocity.

Section 44: Definition. -In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960-
(a) In pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
(b) In one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.” (emphasis added)

Section 53: 

“Interpretation. -In this Chapter “foreign award” means an arbitral award on differences relating to matters considered as commercial under the law in force in India made after the 28th day of July, 1924, -
(a) In pursuance of an agreement for arbitration to which the Protocol set forth in the Second Schedule applies, and
(b) Between persons of whom one is subject to the jurisdiction of some one of such Powers as the Central Government, being satisfied that reciprocal provisions have been made, may, by notification in the Official Gazette, declare to be parties to the Convention set forth in the Third Schedule, and of whom the other is subject to the jurisdiction of some other of the Powers aforesaid, and
(c) In one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, may, by like notification, declare to be territories, to which the said Convention applies, And for the purposes of this Chapter an award shall not be deemed to be final if any proceedings for the purpose of contesting the validity of the award are pending in the country in which it was made.” (emphasis added) 

Hence, Bhatia International and the later courts were grossly wrong in ignoring the principle of reciprocity. Reciprocity means several things in International Law. However, in the context under discussion, reciprocity or reciprocal treatment by state ‘A’ refers to granting certain benefits (whether by virtue of a treaty or otherwise) to a state ‘B’ which has extended such or similar benefits to state ‘A’. Provisions of this nature are not specific to the 1996 Act. The Indian Legislature has, in the past, enacted laws affording a particular treatment to certain states which have granted same or similar treatment to India. See, for example, S 44 of the Designs Act, 2000; Ss. 105, 105L, Chapter VIIA of the Code of Criminal Procedure, 1973; S 7(1)(ic) of the Advocates Act, 1961; S. 14 of the Notaries Act, 1952; S. 10(4)(b) of the Dentists Act, 1948; S. 10 of the Indian Nursing Council Act, 1947, S. 118 of the Government of India Act, 1935.

In the context of Part II of the Act [as well as the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961], reciprocity meant that the special treatment (especially of treating an award as a decree) would be applicable to arbitral awards from states which are contracting parties to the respective Convention. In this regard, it may be noted that as per Article I(1) the Convention would apply to any “arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought”, which would include even a State not party to the Convention. However, Article I(3) of the New York Convention allowed signatories to make what is generally known as the “reciprocity reservation”. Article I(3) provides:

“When signing, ratifying or acceding to this Convention, or notifying extension under article X hereof, any State may on the basis of reciprocity, declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State. It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration.” (emphasis mine)

India has made the reciprocity reservation as well as the commercial reservation. Thus, the Executive (by taking the reciprocity reservation) and the Legislature (by enacting the same in Act) had intended to confer the benefits of the Conventions only to territories which have been signatories to one of the Conventions and have enacted reciprocal provisions to the satisfaction of the Central Government. But the Judiciary has abrogated this decision and has treated Non-Convention awards more favourably than even the Convention awards that could enforcement under Part II of the Act.

Theoretically, by imposing an additional requirement of compliance with S. 34, India may be in breach for the New York Convention because it adds an additional requirement of compliance of Section 34 on the basis of which a foreign award could be enforced. This was not envisaged in the New York Convention.

The second justification that Bhatia International puts forth is that if Part I is not held to apply to Foreign Arbitrations, it would lead to an anomalous situation where Part I would apply to Jammu & Kashmir in all ICA (including foreign arbitration) but for the rest of India Part I would not apply to foreign arbitration. There is no anomaly as feared by the court. Relevant portion of Section 1(2) of the Act provides:
"It extends to the whole of India:
Provided that Parts, I, III and IV shall extend to the State of Jammu and Kashmir only in so far as they relate to international commercial arbitration or, as the case may be, international commercial conciliation."

The Supreme Court’s justification was that if Part I can apply to Jammu & Kashmir as regards international commercial arbitrations held outside India, it would be absurd to contend that Part I would not apply to international commercial arbitrations held outside India. Such an interpretation is not in accord with the purpose behind which Proviso to Section 1(2) was enacted. The Supreme Court has assumed, wrongly, that Part I would apply to Jammu & Kashmir as regards international commercial arbitrations held outside India. The said proviso ought to be read in conjunction with Section 2(2) which provides that Part I would apply where the place of arbitration is in India. Section 2(2) reads:  “This Part shall apply where the place of arbitration is in India.” This would mean that Part I would apply to international commercial arbitrations held in Jammu and Kashmir and not to international commercial arbitrations held outside India. Further, the purpose of the proviso ought to be understood from the perspective of the Constitution of India. The Constitution of India (Article 370) empowers the Parliament of India to legislate only on certain matters in respect of Jammu & Kashmir. Consequently, on matters relating to domestic arbitration in the State of Jammu & Kashmir, Jammu & Kashmir has its own Arbitration law known as the Jammu and Kashmir Arbitration and Conciliation Act, 1997 (“J &K Act”). The Long Title provides:

An Act to consolidate and amend the law relating to domestic arbitration, to define the law relating to conciliation and for matters connected therewith or incidental thereto .

Since the matters relating to foreign relations and enforcement of treaties as per the Constitution of India are matters on which the State of Jammu and Kashmir is not competent to enact, laws Proviso to Section 1(2) has been made applicable to Jammu & Kashmir. Hence, this justification to extend Part I to ICA outside India falls flat.

The third justification that Bhatia offered was that if Part I is not made applicable to ICA outside India, Sections 2(4) and (5) would be in conflict with Section 2(2) of the Act. The Court held:

The words "every arbitration" in sub- section (4) of Section 2 and the words "all arbitrations and all proceedings relating thereto" in sub-section (5) of Section 2 are wide. Sub-sections (4) and (5) of Section 2 are not made subject to sub- section (2) of Section 2. It is significant that sub-section (5) is made subject to sub-section (4) but not to sub-section (2). To accept Mr. Sen's submission would necessitate adding words in sub-sections (4) and (5) of Section 2, which the Legislature has purposely omitted to add viz. "Subject to provision of sub-section (2)". However read in the manner set out hereinabove [i.e., reading Part I as applicable to arbitrations held outside India] there would also be no conflict between sub-section (2) of Section 2 and sub-sections (4) and/or (5) of Section 2.

Thus, according to the Supreme Court, the terms “every arbitration” in S. 2(4) and “all arbitrations” in S. 2(5) encompass all kinds of arbitration, whether within India or outside India. Such a view is wrong. The purpose of S. 2(4), reproduced below, was to apply 1996 Act to arbitration under other enactments and not for arbitrations whose seat was outside India.

(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provision of this Part are inconsistent with that other enactment or with any rules made thereunder;

Some examples of other statutes providing for resolution of disputes through arbitration are Electricity Act, 2003, S. 10A of the Industrial Disputes Act of 1947, etc. Thus S. 2(4) in no way warrants inclusion within its compass of arbitrations held outside India.

Section 2(5) provides:

Subject to the provisions of sub-section (4), and save in so far as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto.
The purpose of insertion of S. 2(5) in the statute needs to be seen. The corresponding provision in the UML, Article 1(1) was to make subject the law adopted from the UML to any treaty between the adopting nation and a foreign country.  S. 2(5) was intended to save a treaty/ law providing for contours of application of a treaty dealing with arbitration or conciliation [that is, treaties between India and other countries]. This view is reiterated by this lengthy quote from the Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration: Report of the Secretary-General on the corresponding Article 1(1) of the UML (A/CN.9/264) :

“9. According to paragraph (1) of article 1, "this Law" applies "subject to any multilateral or bilateral agreement which has effect in this State". [At that time (during the drafting of the Model Law), the text of Article 1(1) was slightly different from what was finally adopted in the UML as 1(1). Article 1(1) at that time read: “This Law applies to international commercial arbitration, subject to any multilateral or bilateral agreement which has effect in this State.” (emphasis supplied)] [This] has been retained as a useful declaration of the legislative intent not to affect the validity and operation of multilateral and bilateral agreements in force in State X.
10. The proviso would be of primary relevance with regard to treaties devoted to the same subject-matter as that dealt with in the Model Law. Prominent examples of such multilateral treaties are the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958; hereinafter referred to as the 1958 New York Convention), the European Convention on International Commercial Arbitration (Geneva, 1961; hereinafter referred to as the 1961 Geneva Convention), the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington, 1965; hereinafter referred to as the 1965 Washington Convention) and the Inter- American Convention on International Commercial Arbitration (Panama, 1975).
11. It should be noted, however, that the scope of the proviso is wider in that it also covers treaties which are devoted to other subject-matters but contain provisions on arbitration. An example would be the United Nations Convention on the Carriage of Goods by Sea, 1978 (Hamburg)...”

Hence, there seems to be no conflict between S. 2(2) on the one hand and Ss. 2(4) and (5) on the other.

The fourth, and the most telling, justification that the court afforded in Bhatia International was that Part I did not provide for interim measures in international commercial arbitrations held outside India. This, it may be noted, was the chief question that confronted the court in Bhatia International. Prior to Bhatia International, there was discordance between the High Courts on the power of a court to order interim measures of protection in ICA held outside India. Some High Courts held that the statute afforded no power for awarding interim measures of protection in such cases, while others held that since Part I was applicable even to ICA outside India, a court could, under S. 9, order interim measures to be taken in such cases. In Bhatia International, it was argued that since Article 1(2), of the UML which allowed for interim measures of protection even if the seat of arbitration was not in the country where the application for such measures is sought, was not adopted in India, it was the legislative intent not to extend the power of court to order interim measures in case of arbitrations held outside India. Though this was emphatically rejected by the Supreme Court, there is tremendous force in this contention. Contrary to the judiciary’s opinion that the Act was not a well drafted legislation, it is submitted that the 1996 Act is a carefully crafted legislation. Though the said law is an adoption of UML, any standard text book on arbitration will tell you that there are several small but pro-arbitration changes which were meant to ensure speedy and efficient arbitration. Such a carefully drafted law not providing for interim measures might not have been an unintended or erroneous omission. The lacuna may have been deliberate. By not providing for interim measures for ICA held outside India, the drafters might have intended to encourage, albeit forcefully, parties to choose India as the seat of arbitration. The motive of the drafters might have been to aid Indian parties to avoid costly arbitration outside India, and to develop the arbitration industry in India.  

In any case, Post-Bhatia International, it has been the recommendation of many that the law ought to be amended to restrict the applicability of Part I to limited provisions, primarily in respect of the power of courts to order interim measures of protection in ICA held outside India. 

The CP was right in contending that Bhatia International ignores the seat theory of arbitration, which is the prevailing norm in international commercial arbitration worldwide. The Model Law was based on the seat theory and so is the Act. The seat theory holds that the seat of the arbitration is the lex arbitri as regards the arbitration. Lex arbitri is the law that “grants the parties or the arbitrators the freedom to set the rules, which may also impose some restrictions on them, and which-even more importantly- will control the use of that freedom and sanction any abuses by setting aside the award." [Gabrielle Kaufmann-Kohler, Identifying and Applying the Law Governing the Arbitration Procedure - The Role of the Law of the Place of Arbitration; Kluwer]. Lex arbitri is a very important aspect of ICA because it gives the “legal touch” to the arbitration, which may at times be decided without reference to any law at all. When the lex arbitri recognises an arbitral award to be valid, if the seat is in a country which is the party to, say, New York Convention, on satisfaction of the conditions specified in the New York Convention, it could be afforded the status of a decree in another New York Convention country. The seat theory has been recognised in New York Convention. Even the UNCITRAL Model Law recognizes this expressly. According to Article 1(2):

"The provisions of this Law, except articles 8, 9, 35 and 36 apply only if the place of arbitration is in the territory of this State."

The UNCITRAL in its analytical commentary to the Model Law on ICA makes note of the dilemma of the drafters as to whether to make the place of arbitration as the determinative factor for the applicability of the law. Another possibility was to recognize the parties’ freedom in selecting a law other than that of the place of arbitration and to cover all arbitrations taking place in state X (the place of arbitration), unless the parties chose the law of another state, as well as those “foreign” arbitrations for which parties select the law of X. The drafters chose the first solution giving express recognition to the territoriality principle, providing also that Ss. 8, 9, 35 and 36 “are intended to cover arbitration agreements or awards without regard to the place of arbitration or any choice of procedural law. By adding an additional requirement of compliance with S. 34 in case of foreign awards, Bhatia and Venture have put the fabric of international commercial arbitration vis-a-vis India into disarray.  

The CP seeks to amend the law, not in accordance with the Law Commission's 2001 report but in accordance with (atleast in substance, though not in form) the Report by Justice Saraf Committee on Arbitration, 2005. The changes suggested are welcome. But one question, raised in Venture, remains unanswered: 

If a party seeks to enforce outside India, an award made in international commercial arbitration held outside India, and such enforcement outside India has the effect of evading Indian legal and regulatory provisions to which the transaction forming the subject of the award is subject to, what is the recourse? [modified after posting]

Should it leave it to the discretion of the foreign court where such enforcement application is made? The Consultation Paper has suggested the easy answer to the easy question [as to whether it was right to extend Part I to ICA held outside India], but is conspicuously silent on the tougher one.