"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.

Monday, August 11, 2014

Part II of the Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996":

In the previous post, we analysed with about four amendments to the Arbitration & Conciliation Act, 1996 (1996 Act or Act). We continue to comment on certain other amendments in this post.

Deletion of References to "company" in S 2(1)(f)
In TDM Infrastructure v. UE Development (2008) 14 SCC 271, the Supreme Court had to decide whether arbitration between two Indian companies that were registered in India was domestic arbitration even though the Central Management of one of the parties was located outside India. The Court held that if neither of the bodies corporate were registered abroad, arbitration between them would not be international commercial arbitration. This implied that §§2(1)(f)(ii) and 2(1)(f)(iii) were incongruous in respect of companies registered in India but whose central management and control were outside India. The Court stated that a corporation is a "national of, or habitually resident in, any country other than India" when it is incorporated in any country other than India. According to the Court, a corporation cannot have two nationalities simultaneously; if registered in India, a corporation would be an Indian corporation and arbitration between two Indian corporations would not be international commercial arbitration notwithstanding whether the control or management or whether the seat of arbitration is outside India.

In order to obviate confusion, the Law Commission has deleted references to "company" in Section 2(1)(f)(iii). This amendment is a welcome move.

Definition of Party in S. 2(1)(h)

The Commission seeks to add the phrase "or any person claiming through or under such party" to the definition of "Party" in order to account for the Supreme Court's pro-arbitration decision in the Chloro-Controls case.

Comment: The Chloro Controls case had two elements in it- group of companies claiming through a party to the arbitration agreement and composite transation containing several agreements. While the above amendment looks at the first element, the second element is not dealt with in this amendment. Nothing wrong with this amendment per se.

Amendments Differentiating Seat and Venue:
Section 2(1)(h) has been inserted defining "seat" to mean the juridical seat of arbitration. Further, Section 20 has been amended to replace reference to "place" with "seat". Also, Section 20 is amended to provide that parties could agree on the venue of arbitration as well and that failing such agreement on the seat or venue, the tribunal could decide it as per Section 20.

Comment: Nothing wrong with this amendment except to state that the term "place" in arbitration has a history history. Article 16 of the UNCITRAL Arbitration Rules, 1976 used the term "place" to denote the legal seat of arbitration. While drafting the Model Law on International Commercial Arbitration, 1985, the Working Group wanted to retain the terminology used in the 1976 Rules. Hence, the term "place" was retained. Since the 1996 Act is based on the Model Law, the reference to "place" was retained. Even Article 18 of the UNCITRAL Arbtiration Rules employs the term "place" (see this post for the reason why UNCITRAL chose to retain "Place" in its 2010 Rules). However, it is time we replaced "place" with "seat" as it has only created immense confusion. Courts should however be careful while interpreting contracts negotiated prior to the coming into force of the proposed amendment which employ the term "place".

Amendments Relating to the BALCO decision:
The Commission has proposed two amendments relating to the Supreme Court's BALCO decision (link). The first amendment [Section 2(2)] clarifies that Part I of the Act shall apply only where the "seat" of arbitration is in India. This clarifies the position taken in BALCO.

The second amendment overrules a portion of BALCO in which it was held that the power to approach Indian courts in foreign seated arbitrations were not available. The proposed amendment seeks to introduce a proviso to Section 2(2) in the following manner:

"Provided that, subject to an express agreement to the contrary, the provisions of Sections 9, 27, 37 (1)(a) and 37 (3) shall also apply to international commercial arbitration even if the seat of arbitration is outside India, if an award made, or that which might be made, in such place would be enforceable and recognized under Part II of this Act".

Section 9 pertains to interim measures, Section 27 pertains to court assistance in taking evidence, section 37(1) and (3) pertain to the scope of appeal from an order under Section 9.

Even the UNCITRAL Model Law on ICA does not apply Section 27 to foreign arbitrations. From that perspective, this proposal appears to be a significant improvement. However, one must note the seriousness of the provision. It seeks to compel a person (including an woman) to travel abroad to appear before a tribunal in a foreign land [S. 27(2)(c)(i) r/w S. 27(3)]. Failure to comply with such an order will result in contempt of court [S. 28(5)]. Further, Section 32 of the Code of Civil Procedure empowers the Court to compel attendance of such a person by issuing a warrant, attach and sell his property, impose fine of up to Rs. 5000 or even commit him to civil prison.

Consequently, prior to enacting this amendment, detailed guidelines must be made concerning the compensation and expenses incurred by a person for complying with the order of a court under Section 27, especially in case of foreign arbitrations. Certain witnesses such as children, women, physically challenged may require the assistance of another person to accompany them. In such cases, such rules should also enable these aspects. Further, extending Section 27 to foreign arbitrations may also result in considerable loss of time to a witness. Therefore, to the extent possible, examination of witnesses should be done from within India through videoconferencing. If the same is not possible, examination of such witnesses should be fixed as per the convenience of such witnesses. Apart from expenses, reasonable compensation towards loss of time should also be paid. Expenses should be paid prior to undertaking travel considering the quantum of expenses required to travel abroad. So many other issues such as compensation for death/ injury to such a person during travel abroad under a court order, visa issues, etc. need to be taken into consideration.

Although a court under Section 27 is expected to take all these factors into consideration before issuing an order compelling the attendence of a person  as a witness in foreign arbitration, it is better to make detailed Rules on such aspects. A High Court is empowered under Section 82 to make Rules on these aspects. The existing Rules, however, do not consider these aspects in detail. Further, the Rules contained in the Code of Civil Procedure, 1908 (Order 16) appear to be too strict and does not seem to take into consideration travel abroad. Therefore, it is better to have Model Rules inserted in the Act in the form of a schedule which the High Courts can adopt.

More on the proposed amendments in the coming days.

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