Is the New Arbitration and Conciliation (Amendment) Ordinance, 2015 Prospective or Retrospective?

Readers may be aware that the President of India has promulgated a new Ordinance amending the Arbitration and Conciliation Act, 1996. For those who are coming across this news for the first time, please read this post. Many of the reforms of the Law Commission of India have been incorporated while many have not been retained in the Ordinance.

One such provision which has not been retained in Section 85A (Transitory Provisions). Section 85A as suggested by the Law Commission's 246th Report reads as below:

"Transitory provisions .—(1) Unless otherwise provided in the Arbitration and Conciliation (Amending) Act, 2014, the provisions of the instant Act (as amended) shall be prospective in operation and shall apply only to fresh arbitrations and fresh applications, except in the following situations -
(a) the provisions of section 6-A shall apply to all pending proceedings and arbitrations. 
Explanation: It is clarified that where the issue of costs has already been decided by the court/tribunal, the same shall not be opened to that extent.
(b) the provisions of section 16 sub-section (7) shall apply to all pending proceedings and arbitrations, except where the issue has been decided by the court/tribunal.
(c) the provisions of second proviso to section 24 shall apply to all pending arbitrations.
(2) For the purposes of the instant section,—
(a) "fresh arbitrations" mean arbitrations where there has been no request for appointment of arbitral tribunal; or application for appointment of arbitral tribunal; or appointment of the arbitral tribunal, prior to the date of enforcement of the Arbitration and Conciliation (Amending) Act, 2014.
(b) "fresh applications" mean applications to a court or arbitral tribunal made subsequent to the date of enforcement of the Arbitration and Conciliation (Amending) Act, 2014."

Note that the aforesaid provision was clear in its retrospective operation. Hypothetically assuming Section 85A was inserted by Ordinance, if one were to pose a question whether the restricted ground of setting aside a domestic award not arising out of an international commercial arbitration would apply to pending proceedings, one would state that the Ordinance would apply only to fresh applications, that is those applications (including for setting aside such an award) which have been filed subsequent to 23 October 2015 (date of the ordinance).

Unfortunately, Section 85A has not been incorporated in the Ordinance. If so, what are the consequences? Would the restricted ground of setting aside a domestic award not arising out of an international commercial arbitration apply to pending applications?

This is really a hard case. Arguments in the affirmative and in the negative are equally convincing. But the following may be worth noting:

• Section 1(2) of the Act states that the Ordinance shall come into force immediately. 
• There are certain aspects which the Ordinance itself states it will not affect. For instance, arbitrators previously appointed (S. 9 of the Ordinance amending Section 12 of the Act). 
• In respect of most other provisions there is no express mention. 
• Considering the need for urgent reforms, one could reasonably argue that the provision is intended to apply to even to pending proceedings and applications, wherever the language of the Ordinance suggests. For instance, Section 18 of the Ordinance CLARIFIES that patent illegality would not be a ground for setting aside foreign awards. The language supports even pending applications (and possibly appeals against such applications?)
• Similarly 18(II) eliminates error of law or of fact as a ground to set aside arbitral awards. There is no mention regarding prospectivity. Even in such cases, the courts would (should) apply the Ordinance even to pending applications. The policy argument is the need for reforms and the urgency with which the same has been promulgated especially without incorporating a provision akin to Section 85A. The logical corollary of this would be that in case the language of a provision does not support application to pending proceedings, then it cannot be (and should not be) extended. For instance, 18(III) inserts the requirement that an application shall be filed only after issuing prior notice. Obviously, the act of filing an application to set aside an award would have been an accomplished fact in pending applications.

Of course, there is this well established principle of statutory interpretation that unless an Act expressly/ clearly provides for retrospective operation, it is prospective in nature. 

This issue is likely to result in different views from different courts.  Ideally, if the language of the Ordinance supports application of a provision to proceedings/ applications, it should apply notwithstanding the pendency unless it would result in manifest injustice. If the language does not support application to pending proceedings/ applications, it should apply prospectively. 

Major Commercial Law Reforms Introduced in India

The President of India has promulgated two ordianances bringing into force sweeping amendments to the Arbitration and Conciliation Act, 1996 and introducing Commercial Courts (see our previous post on the previous Commercial Divisions Bill) in every District in India. The Ordinances can be accessed from here and here. If these amendments are passed subsequently in the Winter Session of the Parliament, these developments are likely to go a long way in reforming commercial dispute resolution in India. Once reforms on procedural law are in place and effective, India can look at reforming its substantive contract law. An extremely interesting period for Indian commercial law.

Golden Opportunity to Reconsider HPHUDA v RS Rana Lost

Followers of Indian arbitration and readers of this blog (here) would be well aware of the decision of the Supreme Court in HPHUDA v RS Rana (2012) where the court held that if the award amount (which is the subject of challenge under Section 34 of the Arbitration and Conciliation Act, 1996) or under Section 37 of the said Act) where the court held that deposit of the Award Amount in the court amounted to payment to the Respondent and hence, the party challenging the arbitral award was not obligated to pay post-award interest from the date of deposit in case if the challenge proceedings ultimately failed.

Recently, the Supreme Court had the occasion to consider a similar plea as made in HPHUDA in the case of Union of India v. MP Trading & Investment Rac. Corp. Ltd. (28.09.2015). In the course of challenge proceedings, the High Court directed the Award Debtor to deposit the award amount in court. On deposit of the same, the Award Holder applied to the court that the deposit be converted into fixed deposit. The Court passed directions as prayed for.

Before the Court, Union of India relied on HPHUDA and argued that once the amount was deposited and interest accrued on the fixed deposit, the Respondent was not entitled to any interest. The Court agreed in principle with Union of India and held that the Award Holder was entitled to interest as per award from the date of award till date of deposit and "shall be entitled only to the interest accrued on the principal amount in terms of the Fixed Deposit made as per the direction of the High Court."

There was a subsidiary point that the Award Debtor did not deposit the entire amount in court, for which the Supreme Court held that the Award Holder would be entitled to interest as per the award for that amount.  

In holding so, the Supreme Court has lost a golden opportunity to reconsider the law as held by the Supreme Court in HPHUDA case. HPHUDA was decided wrongly for the following reasons:

a) Allowing the Award Debtor to save on post-award interest by permitting him to deposit the Award Amount or a part thereof in the court would be unjust on the Award Holder as the latter would be denied the benefit of the Award Amount till the challenge is ultimately decided.

b) The court in HPHUDA created a legal fiction whereby deposit of the Award Amount in the court even without the amount reaching the Award Holder amounted to payment. This legal fiction is without backing of statute or precedent.

c) Since HPHUDA denies the Award Holder the fruits of the Award for the period of challenge, it is contrary to the objective of award of interest: to compensate the claimant for the unjustified retention of money. The Award Debtor may simply deposit the Award Amount in court and keep at the challenge thereby denying the benefit of the Award Amount to the Award Holder for several years.

d) Interest also acts as a negative incentive on the Award Debtor to challenge to the award unnecessarily or on flimsy grounds. Such a negative incentive will cease to exist if no interest is imposed on deposit till the challenge proceedings come to an end. This would provide fillip to unnecessary challenge to arbitral awards and would lead to results antagonistic to the concept of finality of arbitration, which is one of the chief characteristics of arbitration.

For the aforesaid reasons, HPHUDA needs to be reconsidered. The Supreme Court has lost a golden oppportunity in reconsidering the correctness of HPHUDA. For the aforesaid reasons, it should, if at all such an issue arises in future.

For critiques of HPHUDA, see here and here.

 

[There is a typographical error in the MP Trading Judgement- In the second para, it reads "Arbitration and Conciliation Act, 1956" when it should read as "1996".]