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
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.
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
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
and the consequent clarification in National Insurance Co. LTd v. Boghara Polyfab
Pvt Ltd.
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
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
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 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:
- Amendment
to Section 16 in order to counter the effect of the Apex Court’s decision in N Radhakrishnan v. Maestro Engineers
which restricted the authority of
the tribunal to rule on questions of fraud, corruption etc.
- 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.
- 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.
- 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.
Bharat Aluminium Company and Ors. etc. v. Kaiser Aluminium Technical
Service, Inc. and Ors. etc., (2012) 9 SCC 552]
