Monday, 25 August 2014

Fixing Indian Arbitration

The Law Commission of India’s Troubleshooter Report

It is no secret that for all the international jurisprudence establishing arbitration as an effective, cost efficient, prompt and necessarily independent system of resolving a wide range of disputes, the Indian experience has been rather different. Even after the Supreme Court’s decision in BALCO, India remains a jurisdiction where the Courts routinely read down the sacrosanct bar on judicial intervention, parties almost without exception challenge awards with significant success, high arbitrator fees and courts stifle arbitration and fairly non-committal towards institutional arbitration.  In its 246th Report the LawCommission of India has recommended amendments to the Arbitration and Conciliation Act 1996 (‘Act’) to address some of the concerns plaguing the law governing arbitration in India. In this post we discuss some of the salient suggestions. In the interest of brevity we have dispensed with a comprehensive section-by-section analysis.

I.                   Boost for Institutional Arbitration
In an attempt to boost institutional arbitration the Commission has recommended addition of Explanation 2 to Section 11(6A) to lay down a general mandate for Courts should encourage the adjudication of disputes by reference to institutionalized arbitration. In view of certain institutional rules such as those contained in Rule 26 and Schedule I the SIAC Rules 2013, the Commission has recommended widening of the definition of ‘arbitral tribunal’ to also include emergency arbitrator.

II.                Section 2
In another suggestion the Commission ,in complete endorsement of the decision in Chloro Controls (I) P. Ltd[1] in addition to its proposed amendment to Section 8, has recommended that all reference to ‘party ’ in the Act also includes persons who derives his interest from such party. Several other changes have been recommended to Section 2 in order to capture the import of the judgement in  BALCO.[2] Further, in what is set to be a point of great debate the Law Commission on page 39 of its report recommends:

“Also insert the following proviso [after subsection 2(2)] “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.”

Article 1(2) of the UNCITRAL Model Law which provides that “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." It would be over optimistic to expect that this will indeed clarify the law. With interim measures of foreign seated arbitrations back in the domain of the Indian Courts, albeit non-exclusively, the core issue of judicial overreach is likely to remain.

Interim Orders by a Foreign Court supervising Arbitration
The Commission could have tried to resolve the problem which exists insofar as there is no clarity as to the exact mode of enforcement of interim orders passed by a foreign court having supervisory jurisdiction over arbitration. Since an interim order is by nature not final and conclusive, lawyers have for long struggled to find a method of enforcing an interim measure issued by a foreign court in relation to an arbitration initiated under its jurisdiction. Any attempt to enforce such an interim order will fall foul of Section 44A of the CPC since the order will not qualify as a ‘judgement’ or ‘decree’. The other roundabout method for a party is to initiate contempt proceedings in the foreign court on the ground of non adherence to the initial interim order and subsequently attempt to enforce the judgement (not the underlying order but  the subsequent judgement holding contempt) under Section 13 and Section 44 of the CPC. Clearly, both these avenues are ineffective. While the Commission recognizes this problem, a clear remedy seems to have been left out. The Commission might have benefited by giving the issue more attention.

III.              Delay in the Arbitral Process
In its report the Commission seems to be generally concerned in Court based delays in arbitration matters, while particularly disturbed with the effect the decision by the Tribunal in White Industries[3] which exposed the far reaching consequences of inordinate delays in a jurisdiction with over 70 BITs most of which impose obligations of some variant of access to effective and prompt judicial process for investors. The Commission has therefore recommended some novel changes. In its opinion, restricting relevant ‘Court’ in case of international commercial arbitration involving foreign parties would be desirable owing to the expectation that commercially oriented judges would hear the matter expeditiously.  This would reduce what has been christened the “Investment Treaty risk.” While the concern is properly guided, there is no clarity as to how a change in the Court of supervision would directly reduce timelines in the backdrop of reports where where High Courts routinely perform below expectation due to a large number of pending cases. Policy measures such as training of judges to act with a heightened level of commercial orientation would perhaps be more effective. The Commission has however recognized that this suggested change cannot be a standalone remedy to counter the seemingly inherent malaise of delay so inherent in the current judicial process relating to arbitration. It has recommended that there is an urgent need to increase the threshold for judicial at both the pre and post award stage.

    A. Pre Judicial Intervention
In a concise manner the Commission expresses its disappointment that while the Supreme Court had the opportunity to clearly answer the question as to the scope and nature of permissible pre-arbitral judicial intervention, keeping in mind the bar under Section 5 of the Act, it framed the question in rather ineffective and infructuous manner focusing rather on the orthodox distinction between ‘judicial’ and ‘administrative’ power under Section 11 referring to a series of judgement culminating in SBP v. Patel Engineering[4] and the consequent clarification in  National Insurance Co. LTd v. Boghara Polyfab Pvt Ltd.[5] which divided this controversial matrix of precedent and laid down that the law in three distinct buckets, if you may. First, the category of issues which the CJI is obligated to decide. Under this category enquiry must be conducted as to whether the appropriate High Courts has been approached, whether there is an arbitration agreement and whether the party approaching the Court under Section 11 is party to such an agreement.  The second category includes issues such as whether the claim is a live claim and whether the parties concluded the transaction by satisfaction of rights and obligations. These issues in the second category are those over which the CJI/ designate may decide. The third category are those which must necessarily be left for the Tribunal to decide. These include questions of whether a claim is covered by an arbitration clause, and the merit of such claims.

The Commission simplistically refers to the desirability of extending these tests to Section 8 and Section 45 instead of restricting it only to Section 11. The Commission deserves merit to have pointed out that there exists no logical rationale to suggest that the scope and nature of judicial intervention on pre award stage should change on the fact that a party, which may intend to defeat the arbitration agreement refuses to appoint an arbitrator in terms of the agreement (covered by Section) or moves a proceeding before a judicial authority in spite of existence of such an arbitration agreement. (typically such cases in appear in relation to Section ). For a party intending to defeat the arbitration agreement, both the refusal to appoint arbitrator or initiation proceedings in Court serve the same purpose and therefore should not be subject to varying levels of judicial intervention. Therefore the Commission has recommended that Section 8 and Section 11

Section 8 and Section 11
The bar against bifurcation of claims under arbitration agreements so widely encompassed in  Sukanya Holdings[6] and so artfully skirted in Chloro Control is a valid subject of concern for the commission. To narrow down the effect of Sukanya Holding which stated that where all parties to a dispute are not parties to arbitration, the reference to the arbitration must be rejected. The Commission suggests adding of proviso to Section 8 stating that reference in such cases may only be rejected where all the parties are “necessary parties” to the action.  The term “necessary parties” has however not been defined.

The Commission also addresses the core question as to the depth of permissible judicial enquiry into the validity of the arbitration agreement. It recommends that if the authority is of the opinion that there is a prima facie arbitration agreement then it should refer the matter to the Tribunal and if the authority concludes that a valid agreement does not exist, such determination would be final and not prima facie. Similar amendments are proposed in Section 11 as well.  

Section 9 and Section 17
Perhaps the vehicle of abuse in many contracts containing arbitration, Section 9 of the Act per the recommendation of the Commission must be amended to have a 60 day limit to initiate arbitration proceedings where a party has obtained an injunction over subject matter covered by the arbitration agreement. Evidently, this is a legislative counter to the tendency of parties to obtain a Section 9 injunction and continue to take benefit of the same perpetually, without taking any steps taken to proceed with arbitration. However, the Commission is rather vague insofar as it recommends that the following clause be included

“(2) Where, before the arbitral proceedings, a Court grants any interim measure of protection under sub-section (1), the arbitral proceedings shall be commenced within 60 days from the date of such grant or within such shorter or further time as indicated by the Court, failing which the interim measure of protection shall cease to operate.

The provision dilutes the efficacy of what could have been a strict legislative deadline for commencement of proceedings and retains judicial discretion, which if routinely exercised in the proper manner in the first place would have not given rise to the problem in the first place.

The Commission has also recognized in relation to Section 17, that in India interim orders of the Tribunal are routinely rendered ineffective. The proposed amendment would give the tribunal the same powers as a civil court in relation to the interim measures.  Read with the amendment in Section 9, parties would be left with no option but to approach only the tribunal once the tribunal is constituted. The proposed amendment would also grant the tribunal the authority to grant interim relief even after the award has been rendered.

  B. Post Award Judicial Intervention

Section 34 (Setting aside of an award)
The Commission recommends to resolve the seemingly age-old problem of the interpretation of the grounds stated in Section34 for the setting aside of an award.  It recommends amendments to counter the widening of the words “morality or justice” used in the otherwise clear judgement in Renusagar by replacing it with a higher threshold of  the award being in “in conflict with the most basic notions of morality or justice” In an additional explanation suggested the commission seeks to bar erroneous application of law and re-appreciation of evidence as grounds for setting aside of awards. These were the grounds used in Saw Pipes[7]  to successfully set aside an award

Section 36 (Enforcement of Award)
The Commission took a cue for the Apex Courts observations in National Aluminium Company Ltd v. Pressteel & Fabrications (P) Ltd and Anr[8] where the Court stated that amendments to Section 36 was necessary to ensure that parties intending to defeat the arbitration do not get an automatic stay on enforcement by the mere filing an application of Section 36.   

Section 37
There exists a bar on second appeal from orders appealed under Section 37. However, inconsistencies in relation to parties succeeding in filing letters patent appeal where the Letters Patent Act of various high courts have not been suitably amended to conform with the provision in Section 37. The Commission has therefore recommended that Section 37 be amended to also bar letters patent appeals in addition to ordinary second appeals.

IV.              Other Salient Recommendation of the Law Commission
The Law commission has recommended a variety of other changes some of which are as follows:

  1. Amendment to Section 16 in order to counter the effect of the Apex Court’s decision in N Radhakrishnan v. Maestro Engineers[9]  which restricted the authority of the tribunal to rule on questions of fraud, corruption etc.
  2.  Amendment to Section 20 to provide for parties to agree to the seat and venue of arbitration instead of the ambiguous “place of arbitration” The amendment would recognize the distinction between the legal seat of arbitration and the venue of arbitration.
  3. Amendment to  Section 23, by addition of  an Explanation which clarifies that the defence may set up a counter claim and such will be heard by the arbitral tribunal even if exceeds the terms of reference to the Tribunal as long as the claim is covered within the scope of the arbitration agreement.  The rationale for such a suggestion is self evident.
  4. Amendment in Section 24 requiring that hearings and presentation of evidence be done on continuous days to avoid parties seeking unnecessary adjournments which drive up the cost of arbitration.

A significant and perhaps underestimated change suggested by the Commission is the addition of Section 6A which would lay down a regime for costs with a higher than expected adherence to the ‘costs follow the event’ regime. The effect of this clause is most likely to invisible since the purport of this amendment would lie in its significant effect on legal strategy by parties, many of whom have until now benefited without consequence from tactics which inflate the costs of arbitration.  If the amendment is actually made, a significant decline in the filing of frivolous claims may also be expected.

Having delved into the recommendations of the Commission, one can only hope that at the least, the significant suggestions be adopted by means of relevant amendment to the Act.

[1] Chloro Controls (I) P. Ltd.v. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641
[2] Bharat Aluminium Company and Ors. etc. v. Kaiser Aluminium Technical Service, Inc. and Ors. etc., (2012) 9 SCC 552]
[3] White Industries Australia Ltd v. Republic of India, UNCITRAL, Final Award (November 30,2011)
[4] (2005) 8 SCC 618
[5] (2009) 1 SCC 267
[6] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr., (2003) 5 SCC 531
[7] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
[8] (2004) 1 SCC 540
[9] (2010) 1 SCC 72)

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