Facts: Based on the arbitration agreement contained in a contract, Aircon Belbars FZE (Aircon) initiated arbitration against Heligo Charters Ptv Ltd (Heligo). As per the arbitration clause, the arbitration proceedings were conducted in Singapore in accordance with Singapore Law. The arbitration concluded in favour of Aircon with an award of approximately US$ 7 million (Rs. 46 Crore) for sale of a helicopter. The award was not challenged by Heligo and thus it became final.

Post award, Aircon approached the Bombay High Court (the Court), under Section 9 of the Act seeking injunctive /restraining orders against Heligo, in respect of Heligo’s asset: an Augusta Helicopter, the only significant asset that Heligo had in India. Aircon’s apprehension being that Heligo may remove from the jurisdiction of the Court, encumber, or sell the Augusta Helicopter.
Upon considering Aircon’s application, the Single Judge of the Court allowed the same, granting reliefs in favour of Aircon. Against this order, Heligo preferred an appeal before the Division Bench of the Court. Dismissing the appeal, the Division Bench of the Court confirmed the order of the Single Judge.
Contentions: It was contended on behalf of Heligo, that Section 9 of the Act has no application to a foreign award, which are governed by Part-II of the Act. This contention of Heligo was in two parts:
• First, there is an “agreement to the contrary” i.e. there is an agreement that excludes the application of Part-I of the Act: in view of arbitration being seated in Singapore and subject to Singapore Law i.e. it translates into implied exclusion of the Part-I of the Act.
• Second, even if there no such implied exclusion of Part-I of the Act, Section 9 of the Act cannot be invoked, unless the award made or to be made is enforceable and recognized under Part-II of the Act.
Judgment: Rejecting the first contention of Heligo, the Division bench confirmed the findings of the Single Judge. Notably, the amended proviso added to Section 2(2) reads as follows:
“2(2) Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.”(Emphasis Supplied)
Taking note of the above, the Court observed that the proviso clearly stipulates that the provision of Section 9 shall apply to International Commercial Arbitration even if the place of arbitration is outside India. Adverting to the recommendation of the Law Commission, in this regard, the Court observed that the operation of Section 9 cannot be excluded in absence of a specific agreement to the contrary.
On this aspect, the observations of the single judge clarify the position beyond doubt. The Single Judge observed that if the suggestion of Heligo is accepted: that a general arbitration agreement which provides venue and law of arbitration in effect impliedly excludes the application of Part I of the Act, it would render the section 2(2) and its proviso utterly otiose. Hence it is necessary that in order for the terms of exclusion of Part-I to be effective, they must in specific words state that Part I (or some section of Part I) will not apply to the arbitration between parties.
In support of the second contention, it was submitted by Heligo that Aircon cannot invoke the provision of Section 9 until the foreign award becomes enforceable and recognized under Part-II of the Act. That is to say that Section 9 cannot be invoked unless the foreign award passes the tests laid down in Section 48 of the Act. To suggest this, Heligo relied on the language used by the Legislature in amended proviso added to Section 2(2) of the Act, particularly the words, “enforceable and recognised under the provisions of Part II of this Act”. This contention of Heligo was also reject by the Division Bench.
On this aspect also, the division bench confirmed the findings of the Single Judge. It was observed by the Single Judge that actually what the proviso to amended section 2(2) seeks to do, is to make available a remedy or recourse under Section 9 to the parties holding a foreign award, pending the process contemplated under Section 48 of the Act is completed.
Section 48 of the Act basically enumerates various conditions (akin to Section 34 of the Act: Application for setting aside arbitral award) on which the foreign award is required to be tested, by a court in India, in order to be enforceable in India.
It was observed by the Single Judge that Section 2(2) enables the courts in India, to protect the assets (party against whom the foreign award is passed) from being diverted or dissipated, on application of the holder of foreign award under section 9. By virtue of Section 2(2) the court can ensure that the holder of a foreign award has an asset in India to proceed against, in case the enforceability of the foreign award succeeds the test laid down under section 48. Further, in a scenario where the foreign award fails the tests of Section 48 the protective order under section 9 will come to an end. In other words, by exercising power under Section 9 of the Act, the court can avoid deliberate frustration of the foreign award.
Conclusion: In view of the observations of Bombay High Court in Aircon’s case and as per the provisions of section 9 it can be concluded that the parties to an arbitration seated outside India can apply for interim reliefs to a court in India (where such assets are situated), before the invocation of the arbitration, during the continuance of the arbitration proceeding and after the award is passed till the award is executed, subject of course to the facts of the matter and subject to the provisions of Part I not being expressly excluded by the parties in the arbitration agreement.

(The content of this article is intended to provide a general guide to the subject matter and should not be construed as legal advice.)

Authors of the Article are:

Maneck Mulla – Partner at M Mulla Associates
Siidha Pamecha- Associate at M Mulla Associates

The post Parties To A Foreign Seated Arbitration Can Seek Interim Reliefs In India – Bombay High Court appeared first on Legal Desire Media and Insights.

Introduction

Justice Burroughs once described ‘public policy’ as an unruly horse; when once you get astride it you never know where it will carry you. The Indian position on ‘public policy’ as a ground for setting aside an arbitral award befits this description.

The scope and width of the concept of ‘public policy’ as a ground for setting aside an arbitral award has been the source of much debate across all jurisdictions, but India has been perceived to be a forerunner in stirring the debate. The two landmark decisions in Saw Pipe and Phulchand (which distinguished Renusagar) caused significant uproar in India and the international arbitral community. Perhaps as a result of the severe criticism received, there was an attempt by the Indian Courts in subsequent decisions to water down the effects of these decisions. Just when India was beginning to receive some praise for having ‘tamed the unruly horse’ the decision in Associate Builders and Western Geco have breathed new life in the debate. Also, post the 2015 amendment the decisions given in cases thereafter have narrowed down the scope of public policy.

In this article, would analyse these decisions and their impact on both domestic and foreign awards.

Doctrine of Public Policy:-

The Arbitration and conciliation Act, 1996 or the Contract Act, 1872 does not define the expression “Public Policy” or “opposed to public policy.” “Public Policy” is not the policy of a particular Govt. It connotes some matter which concerns the public good or the public interest. ‘Public Policy’ is equivalent to the “Policy of Law.” Therefore any acts that have a mischievous tendency so as to be injurious to the interest of the state or the public is stated to be against “Public Policy” or against the ‘Policy of Law.”

Doctrine of ‘Public Policy’ is somewhat open textured and elastic, and this elasticity has been the cause of judicial contempt of the doctrine. There is a general agreement that the courts may extend existing ‘Public Policy’ to new situations and the difference between extending on existing principle as opposed to creating a new one will often be wafer thin. ‘Public Policy’ is not absolute. In the broader view, the doctrine of “Public Policy” is equivalent to the “Policy of Law,” whatever leads to obstruction of justice or violation of a statute or is against the good morals when made the object of contract would be against ‘Public Policy of India” and being void, would not be susceptible to enforcement.

Though misconduct of Arbitral Tribunal or of the proceedings before an arbitral tribunal by themselves are not made as grounds for recourse against an arbitral award under section 34 of the 1996 Act. Interpreting the doctrine of public policy of India in its broader view, courts of law may intervene permitting recourse against an arbitral award based on irregularity of a kind which the court considers has caused or will cause substantial injustice to the applicant. Extreme cases where arbitral tribunal has gone so wrong in its conduct of arbitration that justice calls out for it to be corrected may justifiably fall within the ambit of the doctrine of ‘Public Policy of India” to enable courts of law in India to intervene under section 34 of the 1996 Act permitting recourse against arbitral award.

Judicial Pronouncements and Public Policy:

Renusagar Power Electric Company v. General Electric Company[1] –

A pre 1996 Act case involving an enforcement of an ICC Award. The SC held that the expression Public Policy in section 7 (1) (b) (ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961. The court stated that the term public policy has been used in narrow sense and in order to attract the bar of public policy the enforcement of the award must involve something more than the violation of the Indian Law. Applying the said criteria, enforcement of a foreign award would be refused on the ground of public policy if such enforcement would be contrary to:

• Fundamental Policy of Indian Law; or
• The interests of India; or
• Justice or morality.

Post that we move to the judgement given in ONGC v. Saw pipes Limited [2] which widened the horizons of public policy .The facts of the said case – Oil and Natural Gas Commission had placed an order on Saw Pipes for supply of equipment for off shore exploration, to be procured from approved European manufacturers. The delivery was delayed due to general strike of steel mill workers in Europe. Timely delivery was the essence of the contract. ONGC granted extension of time, but it invoked the clause for recovery of Liquidated Damages by withholding the amount from the payment to the supplier. ONGC deducted from the payment $3,04,970.20 and Rs 15,75,557 towards customs duty, sales tax and freight charges. Saw pipes disputed the deduction and matter was referred to arbitration. While the arbitral tribunal rejected Saw Pipe’s defence of force majure, it required ONGC to lead evidence to establish the loss suffered by breach and proceed to hold, in absence of evidence of financial losses, that the deduction of Liquidated damages was wrongful. The award was challenged by ONGC; inter alia as being opposed to public policy. ONGC’s case was that the arbitral tribunal failed to decide the dispute by not applying the prevailing substantive law, ignoring the terms of the contract and customary practices of usage of trade in such transactions. ONGC challenged the award as being patently illegal. The single judge and division bench of Bombay High Court dismissed the challenge. The Supreme Court set aside an arbitration award directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated damages retained by it while making payment to the company.

The Court held that in case of an application u/s 34 to set an award aside, the role of the Court was similar to an appellate/revision court, therefore, it had wide powers. Further, the Court also added a new ground – patent illegality to the grounds enumerated in Renusagar Power Co. Ltd; under which the arbitral award could be set aside.

“Therefore, in our view, the phrase ‘Public Policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice.”

This opened a floodgate of litigation under S. 34 as every award where there was an alleged error of application statutory provisions could now be challenged.

Moving further, in Penn Racquet Sports v Mayor International, Delhi HC [3] the Delhi High Court held that the term ‘public policy’ in the context of enforcement of a foreign award under Section 48 is to be construed more narrowly than the context of setting aside under Section 34.

In 2011, the Supreme Court in Phulchand[4] while deciding the meaning of ‘public policy’ under Section 48 of the 1996 Act held that the test laid down in Saw Pipes must be followed in case of foreign awards as well, thereby allowing Indian Courts to deny enforcement of a foreign award on additional grounds of “patent illegality”. Notably however, the Supreme Court expounded no reasons for ignoring the distinction drawn between foreign awards and domestic awards in Saw Pipes itself or for departing from Renusagar which although dealt with a separate statute, had in fact interpreted a provision identical in text and intention to that of Section 48.

Phulchand came to be overruled by the Supreme Court in 2013 in Lal Mahal[5]. The Court reinstated the Renusagar position with respect to enforcement of foreign awards and confirmed that the Rensuagar test shall apply for refusal of enforcement of a foreign award on the grounds of conflict with public policy of India. The wider import of the term as laid down in Saw Pipes therefore ceased to apply to Section 48 and the possibility of an attack to a foreign award in India at the stage of enforcement was limited.

In 2014, the two Supreme Court decisions, Associate Builders and Western Geco, once again tangled the interpretation with respect to the meaning and scope of the term ‘public policy’ under Section 34 of the Act.

Western Geco[6]:

It was widely anticipated that the three-judge bench hearing this case, which had the opportunity of reviewing the interpretation of ‘public policy’ under S. 34 of the 1996 Act might overrule the wide interpretation given by Saw Pipes, which was a decision of the division bench. However, the larger bench of the Supreme Court referred to the Saw Pipes ratio, and went a few steps further to add additional vague terminologies.

In order to appreciate the decision, a brief factual background would be helpful. In this case, the Appellant (ONGC) invited offers for the upgrade of a seismic survey vessel for which one of the main items required were ‘steamers’ fitted with ‘hydrophones’. Western Geco (the Respondent) submitted a bid offering to supply steamers with hydrophones of U.S. origin. The Respondent did not deliver the vessel back to the Appellant by the due date and, notably, made an application for obtaining a licence from the U.S authorities for the sale of US origin hydrophones only after the due date. Due to certain problems with obtaining licence from U.S. authorities for the sale of the hydrophones, the Respondent intimated to the Appellant that it would not be able to supply U.S. origin hydrophones and proposed to replace the same with Canadian hydrophones a few months later. After several months of communication between both parties, the Appellant acceded to the replacement on the condition that the Appellant would deduct liquidated damages and damages for excess engagement of the vessel. The Appellant accordingly made deductions from the Respondent’s invoice on account of liquidated damages which the Respondent contended were inflated.

The arbitrator inter alia held that deductions made by the Appellant for delay after the intimation that Respondent was not seeking to pursue the request for licence before the U.S. authorities was unjustified. Aggrieved by the award, the Appellant challenged the award under section 34 of the 1996 Act before the Bombay High Court, which was rejected. The Appellant then preferred an appeal before the Supreme Court.

The Apex Court was required to decide whether the award violated the public policy of India. The Court while agreeing with ratio of Saw Pipes, went a step further to elaborate the meaning of ‘fundamental policy of Indian law’. It determined that three ‘distinct and fundamental juristic principles’ form a part and parcel of fundamental policy of Indian law: first, the court or adjudicating authority must adopt a ‘judicial approach’ when determining the rights of a citizen. This implies that it cannot act in an ‘arbitrary, capricious or whimsical manner’; second, the court or quasi-judicial authority must determine rights and obligations of parties in accordance with principles of natural justice which encompasses that the authority deciding the matter must apply its mind to the attendant facts; and third, a decision which is perverse or so irrational that a reasonable person could not have reached such a conclusion may not be sustained in a court of law.

On such expansive interpretation of the concept ‘fundamental policy of India’, the Court concluded that in the instant case the decision reached by the arbitrators could not have logically flowed from the proved facts, and that the tribunal erroneously clubbed the entire period since intimation for holding the Appellant responsible for the delay. The Court went on to reduce the period for which the deductions were held to be invalid, thereby partly allowing the Appellant’s contention.

Associate Builders[7]:

The latest decision concerning public policy, is the Associate Builders case by a division bench of the Apex Court. While on facts, the court reinstated the award set-aside by the lower court, the probably unnecessary and elaborate exposition of the law in this case has added further fuel to fire in what now seems to be an ever expanding scope of the public policy ground in India.

In this case, the Appellant entered into a works contract with the Respondent for construction of a residential colony. There was a delay in the completion of the project which the Appellant attributed to the Respondent. The arbitrator held that the entire delay of 25 months was attributable to the Respondent. Aggrieved by the decision, the Respondent challenged the award before a Single Judge of the High Court of Delhi where the application was dismissed. An appeal was preferred to the Division Bench where the judgment of the Single Bench was set aside. The Appellants then came before the Supreme Court in appeal against the order of the Division Bench.

The Court in Associate Builders not only referred to Saw Pipes and Renusagar, but also relied on the Western Geco decision. It further elaborated on the concept of fundamental policy of Indian law, interest of India, justice, morality and patent illegality as held in several prior decisions and in particular further expounded the position of law laid down in Western Geco. As a result, Associate Builder has accelerated the expansion of challenge jurisdiction, despite having upheld the award on facts.

The Court however, also stated that “while applying the public policy test to an arbitration award, it [the court] does not act as a court of appeal and consequently errors of fact cannot be corrected” and that “the arbitrator is the ultimate master of the quantity and quality of evidence relied upon when he delivers the arbitral award.” Whilst on one hand, the Apex Court held that the Division Bench had exceeded its jurisdiction by interfering with a possible view of the Arbitrator; on facts the Apex Court upheld the award based on its own assessment that the arbitrator’s views were indeed correct.

Impact on Foreign Awards

The Saw Pipes decision has been widely slammed in domestic and international arbitration circles for opening the door for courts to review an arbitral award on merits. By overruling Phulchand, the Supreme Court in Lal Mahal successfully saved at least the foreign awards from such scrutiny at the stage of enforcement by clarifying that the ‘patent illegality’ test of Saw Pipes was inapplicable. Therefore, the storm surrounding the concept of public policy which centered mostly on the concept of patent illegality came to be restricted only to domestic arbitrations.

However, Western Geco and Associate Builders have, by expanding the meaning of “fundamental policy of India”, given unruly litigants a fresh impetus to delay enforcement of foreign awards. By introducing judicial principles applicable in the sphere of public law into the concept of ‘fundamental policy of Indian law’, Western Geco has created more opportunities for parties to resist enforcement of an award under the ambit of public policy. This is further aggravated by the decision in Associate Builders where the Court has not only affirmed such an expansive interpretation to the words ‘fundamental policy of India’ but also elaborated and expanded the concepts of ‘justice’, ‘interest of India’ and ‘morality’.

Although Western Geco and Associate Builders are decisions under Section 34 of the 1996 Act , it would appear that they could apply with equal force to cases under Section 48 of the 1996 Act (enforcement of foreign award) which are now governed by the Renusagar test which inter alia includes ‘fundamental policy of India’.

Impact on Domestic Awards

The Parliament incorporated Section 34 of the Model Law without any changes into the 1996 Act. Unlike other statutes from several different jurisdictions which subject domestic awards to a different rigour of scrutiny from that of foreign awards, the 1996 Act makes no such distinction. Yet, by judicial pronouncements, and in particular, the Saw Pipes ‘patent illegality’ test, domestic awards came to be subject to a far greater review than was perhaps contemplated by the legislature.

With Western Geco having further expanded the test of ‘fundamental policy of India’ the problem is somewhat compounded. Western Geco is further damaging as a precedent since the court set aside the award on its own interpretation of the facts in issue. On the other hand in Associate Builders, although the Court acknowledged that examination of the facts is off-limits in a challenge proceeding, the Court saved the award on its de novo determination that the award was correct – a determination which the Court made based on its own assessment of the facts and arguments.

Western Geco has opened the floodgates for further review of domestic arbitral awards on merits by introducing well-established judicial principles having a long line of precedents in common law, into the concept of ‘fundamental policy of Indian law’.

Treatment to Public Policy issue in USA :

The approach of the US Court was summarised by the judgement in Seven Seas Shipping (UK) Ltd v Tondo Limitada[8]. The court stated that enforcement of an award could only be found contrary to public policy if “it would violate our most basic notions of morality and justice.” Only in extreme cases will the foreign award to be set-aside on public policy considerations. Stevens J. conveyed the same. When he dissented in Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc[9] that “Arbitrations awards are only reviewable for manifest disregard of the law and the rudimentary processes which make arbitration so desirable in the context of a private dispute often mean that the record is so inadequate that the arbitrator’s decision is virtually unreviewable. Absolute decision making of this kind is fine for parties who are willing to agree in advance to settle for a best approximation of the correct result in order to resolve quickly and inexpensively any contractual dispute, which may arise in an ongoing relationship.” In RAKTA Case[10] it was held that “In equating ‘national policy’ with United States ‘public policy’ the appellant misses the mark…this provision was not meant to enshrine the fervencies of international politics under the rubric of ‘public policy’. Rather a circumscribed public policy doctrine was contemplated by the Convention’s framers and every indication is that the United States, in acceding to the convention, meant to subscribe to this supranational doctrine.”

Changes made by THE ARBITRATION AND CONCILIATION (AMENDMENT) BILL, 2015

The Arbitration and Conciliation (Amendment) Act, 2015 made major changes to section 34. The changes were suggested by the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of August 2014 and the Supplementary to the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of February 2015. These changes were aimed at restricting Courts from interfering with arbitral awards on the ground of “public policy.” Accordingly, the amendment added “Explanation 2” to section 34(2) as well as Section 2A. Explanation 2 of section 34(2) states –

“For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian Law shall not entail a review on the merits of the dispute.”

Thus, this explanation significantly curtailed the scope of interpretation supplied in ONGC v Western GECO. Because of this amendment, Courts would no longer be able to interfere with the award passed by the arbitrator. The explanation makes it especially clear that in no way would a Court be entailed to review the award on merits of the dispute. Similarly, section 2A also curtails the scope of interpretation of “patently illegal” as propounded in ONGC v Saw Pipes. Section 2A states –

“An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiate by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of law or by reappreciation of evidence.”

Thus, Courts can no longer reappraise evidence or set aside awards merely because the Arbitral Tribunal has made errors when dealing with the same. It is interesting to note that the amendment did not make any changes to the interpretation of “justice and morality” as explained in Associate Builders.

Recent Trends in Interpretation of “Public Policy”

Since the amendment, Courts have refrained from giving a wide interpretation to “public policy” or interfering with the merits of the case. In the November2017 Supreme Court Judgment of Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors[11] the Court observed –

“The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the AAC Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor it can examine the merits of claim by entering in factual arena like an Appellate Court.”

A similar view was also taken in the judgment of Sutlej Construction v. The Union Territory of Chandigarh[12]

These judgments show that the recent trend of interpretation of “public policy” has been one where the Courts have refused to examine the arbitral awards on merits, thereby upholding the legislative mandate of “minimal intervention of the Courts in the arbitral process” as reflected by the changes brought by the Arbitration and Conciliation (Amendment) Act, 2015.

Conclusion :-

As is evident, the interpretation of ‘public policy’ has shuttled across various interpretations and in absence of proper laid down definition, the subordinate courts have given whimsical decisions as to its definitive meaning. There have been reported instances where mere violation of an Indian Law has been held to be against Public Policy. The ‘patent illegality’ test opened a pandora’s box for litigants as in multiple adjudications, after thorough examination by the arbitral tribunals, the courts again started sitting on the merits of the case which vitiated the whole purpose of arbitration. However, it is important at this juncture to point out that for domestic arbitrations, ‘patent illegality’ doctrine must be retained u/s 34 but nor for international arbitrations.

While there is a need for a developed and broad version of the concept of public policy in the realm of contractual relationships, the same may not be extended to the laws governing arbitrations. The process of arbitration is a method of alternate dispute resolution that has become increasingly popular in the settlement of commercial disputes. The process of arbitration centres on the guarantee of minimal interference by the judiciary. Thus, to further the object of arbitration and to increase its instances in the country, it is important that not only is the concept of public policy interpreted in a restrictive sense, but that it has clearly defined parameters, whose ambiguities do not lend them to conflicting interpretations. The recent amendments to the Arbitration and Conciliation Act 1996, are clearly in furtherance of this pro-arbitration stance and it is hoped that they will bear fruit in the years to come.

[1] [1994 SCC Supl. (1) 644]

[2] (2003) 5 SCC 705

[3] (2011) 1 ARBLR 244 (Delhi) 

[4](2011) 10 SCC 300

[5] Civil Appeal No. 5085 of 2013

[6] (2014) 9 SCC 263

[7] 2014 (4) ARBLR 307(SC)

[8] XXV YBCA 987 (2000) 989

[9] 473 U.S. 614; 105 S.Ct.3346; 87 L.Ed.2d. 444 (1985); 24 ILM 1064 (1985)

[10] Parsons & Whittemore Overseas Co, Inc v Societe Generale de l’Industrie de Papier, and Bank of America, 508 F.2d` + 969 (2d. Cir. 1974)

[11] 2017 SCC Online SC 1272

[12] [2017] 14 SCALE 240 (SC)

Author: 

Annie Agrawal, Student of 4th year , Amity Law School , Delhi (GGSIPU)

The post Analysis of Public Policy with respect to Arbitration and Conciliation Act, 1996 appeared first on Legal Desire Media and Insights.

In an attempt to make arbitration a preferred mode of settlement of commercial disputes and making India a hub of international commercial arbitration, the President of India on 23rd October 2015 promulgated an Ordinance (“Arbitration and Conciliation (Amendment) Ordinance, 2015) amending the Arbitration and Conciliation Act, 1996.

The Arbitration and Conciliation (Amendment) Bill, 2018 to further amend the Arbitration and Conciliation Act, 1996 was approved on 7 March 2018 by Cabinet of Ministers for introduction in ongoing session of the Parliament. These amendments in the Act set to promote institutional arbitration in India and further streamline the arbitration process by removing practical difficulties in applicability of the first round of amendments made by the Arbitration and Conciliation (Amendment) Act, 2015.

Need for The Arbitration and Conciliation (Amendment) Bill, 2015?

Arbitration in India has been riddled with issues including excessive cost, protracted proceedings leading to extensive delays. In order to remedy such issues and create greater confidence in parties to choose India as a seat for arbitration, the (Amendment) Act of 2015 was introduced, bringing into the realm several significant changes in the Arbitration & Conciliation Act, 1996. A noteworthy motive for it was to make arbitration a more preferred mode of settlement of disputes by making it cost effective and providing a fixed time period for disposal of disputes.

Pitfalls of The Arbitration and Conciliation (Amendment) Bill, 2015

The Amendment Act, 2015, however, failed to address certain issues including importance of institutional arbitrations at a time when international institutions such as ICC, LIAC, SIAC, HKIAC are playing key role in resolution of disputes through arbitration.

Another drawback of the Amendment Act, 2015, which was creating legal hurdles, was the question posed on its applicability to court proceedings, initiated pursuant to arbitrations invoked prior to 23.10.2015. Hence, a further amendment was absolutely imperative to clear the obscurities created by the amendments introduced in 2015.

In order to address above difficulties and issues, the cabinet has introduced, “The Arbitration & Conciliation (Amendment) Bill, 2018” and has approved the same. It is laudable that the laws of the Amendment Act, 2015 have been noticed early on and are now being proposed to be rectified.

THE ARBITRATION AND CONCILIATION (AMENDMENT) BILL, 2015[1]

The Arbitration and Conciliation (Amendment) Bill, 2015 was introduced in Lok Sabha on December 3, 2015.

Background: 

The Government of India has under its consideration proposals for making Arbitration a preferred mode for settlement of commercial disputes by making it more user-friendly and cost effective. This will lead to expeditious disposal of cases. The Govt. of India is committed to improve its legal framework relating to Arbitration. The Law Commission of India in its 246th Report has recommended various amendments in the Arbitration and Conciliation Act, 1996, so that India may become a hub of International Commercial Arbitration. The Law Commission has also submitted a Supplementary to Report No. 246 on “Amendments to the Arbitration Act, 1996 on ‘Public Policy’- Developments post Report 246″, wherein the Law Commission taking into account subsequent decisions of the Supreme Court has recommended reformulation of amendment in Section 34(2)(b) of the Act.

• Salient features of the Amendment Act, 2015[2]:

1. Applicability of certain provisions to international commercial arbitration: 

Part I of the Act that included provisions related to interim orders by a court, order of the arbitral tribunal, appealable orders etc. only applied to matters where the place of arbitration was India. Under the Bill, these provisions would also apply to international commercial arbitrations even if the place of arbitration is outside India. This would apply unless the parties agreed otherwise.

The first and foremost welcome amendment introduced by the ordinance is with respect to definition of expression ‘Court’. The amended law makes a clear distinction between an international commercial arbitration and domestic arbitration with regard to the definition of ‘Court’. In so far as domestic arbitration is concerned, the definition of “Court” is the same as was in the 1996 Act, however, for the purpose of international commercial arbitration, ‘Court’ has been defined to mean only High Court of competent jurisdiction. Accordingly, in an international commercial arbitration, as per the new law, district court will have no jurisdiction and the parties can expect speedier and efficacious determination of any issue directly by the High court which is better equipped in terms of handling commercial disputes.

2. Amendment of Section 2(2):

A proviso to Section 2(2) has been added which envisages that subject to the agreement to the contrary, Section 9 (interim measures), Section 27(taking of evidence), and Section 37(1)(a), 37(3) shall also apply to international commercial arbitrations, even if the seat of arbitration is outside India, meaning thereby that the new law has tried to strike a kind of balance between the situations created by the judgments of Bhatia International and Balco v. Kaiser. Now Section 2(2) envisages that Part-I shall apply where the place of arbitration is in India and that 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 unless parties to the arbitration agreement have agreed to the contrary.

3. Amendment to Section 8: (Reference of parties to the dispute to arbitration):

In Section 8, which mandates any judicial authority to refer the parties to arbitration in respect of an action brought before it, which is subject matter of arbitration agreement. The sub-section(1) has been amended envisaging that notwithstanding any judgment, decree or order of the Supreme Court or any court, the judicial authority shall refer the parties to the arbitration unless it finds that prima facie no valid arbitration agreement exists. A provision has also been made enabling the party, who applies for reference of the matter to arbitration, to apply to the Court for a direction of production of the arbitration agreement or certified copy thereof in the event the parties applying for reference of the disputes to arbitration is not in the possession of the arbitration agreement and the opposite party has the same.

4. Amendment to Section 9 (Interim Measures):

The amended section envisages that if the Court passes an interim measure of protection under the section before commencement of arbitral proceedings, then the arbitral proceedings shall have to commence within a period of 90 days from the date of such order or within such time as the Court may determine. Also, that the Court shall not entertain any application under section 9 unless it finds that circumstances exist which may not render the remedy under Section 17 efficacious.

The above amendments to Section 9 are certainly aimed at ensuring that parties ultimately resort to arbitration process and get their disputes settled on merit through arbitration. The exercise of power under Section 9 after constitution of the tribunal has been made more onerous and the same can be exercised only in circumstances where remedy under Section 17, appears to be non-efficacious to the Court concerned.

5. Amendment to Section 11 (Appointment of Arbitrators)

In so far as section 11, “appointment of arbitrators” is concerned, the new law makes it incumbent upon the Supreme Court or the High Court or person designated by them to dispute of the application for appointment of arbitrators within 60 days from the date of service of notice on the opposite party.

As per the new Act, the expression ‘Chief Justice of India’ and ‘Chief Justice of High Court’ used in earlier provision have been replaced with Supreme Court or as the case may be, High Court, respectively. The decision made by the Supreme Court or the High Court or person designated by them have been made final and only an appeal to Supreme Court by way of Special Leave Petition can lie from such an order for appointment of arbitrator. The new law also attempts to fix limits on the fee payable to the arbitrator and empowers the high court to frame such rule as may be necessary considering the rates specified in Fourth Schedule.

6. Amendment to Section 12 (Grounds for Challenge) :

Amendment to Section 12, as per the new law makes the declaration on the part of the arbitration about his independence and impartiality more onerous. A Schedule has been inserted (Fifth Schedule) which lists the grounds that would give rise to justifiable doubt to independence and impartiality of arbitrator and the circumstances given in Fifth Schedule are very exhaustive. Any person not falling under any of the grounds mentioned in the Fifth Schedule is likely to be independent and impartial in all respects. Also, another schedule (seventh schedule) is added and a provision has been inserted that notwithstanding any prior agreement of the parties, if the arbitrator’s relationship with the parties or the counsel or the subject matter of dispute falls in any of the categories mentioned in the seventh schedule, it would act as an ineligibility to act as an arbitrator. However, subsequent to disputes having arisen, parties may by expressly entering into a written agreement waive the applicability of this provision. In view of this, it would not be possible for Government bodies to appoint their employees or consultants as arbitrators in arbitrations concerning the said Government bodies.

7. Amendment to Section 14 (Failure or Impossibility to Act):

Amendment of Section 14 aimed at filling a gap in the earlier provision, which only provided for termination of mandate of the arbitrator. If any of the eventualities mentioned in sub-section (1) arises. The new law also provides for termination of mandate of arbitration and substitution and his/her substitution by another one.

8. Amendment to Section 17 (Interim Measures by Arbitral tribunal):

The old Act had lacunae where the interim orders of the tribunal were not enforceable. The Amendment removes that lacunae and stipulates that an arbitral tribunal under Section 17 of the Act shall have the same powers that are available to a court under Section 9 and that the interim order passed by an arbitral tribunal would be enforceable as if it is an order of a court. The new amendment also clarifies that if an arbitral tribunal is constituted, the Courts should not entertain applications under Section 9 barring exceptional circumstances.

9. Amendment to Section 23 (Statement of claim & Defence):

The new law empowers the Respondent in the proceedings to submit counter claim or plead a set-off and hence falling within the scope of arbitration agreement.

10. Amendment to Section 24 (Hearings & Written Proceedings):

It requires the arbitral tribunal to hold the hearing for presentation of evidence or oral arguments on day to day basis, and mandates the tribunal not to grant any adjournments unless sufficient causes shown. It further empowers the tribunal the tribunal to impose exemplary cost where adjournment

11. Insertions of new Section 29A and 29B (Time limit for arbitral award and Fast Track Procedure):

To address the criticism that the arbitration regime in India is a long drawn process defying the very existence of the arbitration act, the Amended Act envisages to provide for time bound arbitrations. Under the amended act, an award shall be made by the arbitral tribunal within 12 months from the date it enters upon reference. This period can be extended to a further period of maximum 6 months by the consent of the parties, after which the mandate of the arbitrator shall terminate, unless the Court extends it for sufficient cause or on such other terms it may deem fit. Also, while extending the said period, the Court may order reduction of fees of arbitrator by upto 5% for each month such delay for reasons attributable to the arbitrator. Also, the application for extension of time shall be disposed of by Court within 60 days from the date of notice to the opposite party.

The Ordinance also provides that the parties at any stage of arbitral proceeding may opt for a fast track procedure for settlement of dispute, where the tribunal shall have to make an award within a period of 6 months. The tribunal shall decide the dispute on the basis of written pleadings, documents and submissions filed by the parties without oral hearing, unless the parties request for or if the tribunal considers it necessary for clarifying certain issues. Where the tribunal decides the dispute within 6 months, provided additional fees can be paid to the arbitrator with the consent of the parties.

12. Amendment to Section 25 (Default of a Party):

The new Act empowers the tribunal to treat Respondent’s failure to communicate his statement of defence as forfeiture of his right to file such statement of defense. However, the tribunal will continue the proceedings without treating such failure as admission of the allegations made by the Claimant.

13. Amendment to section 28 (Rules Applicable to Substance of dispute):

The new law requires the tribunal to take into account the terms of contract and trade usages applicable to the transaction. In the earlier law, the arbitral tribunal was mandated to decide disputes in accordance with the terms of the contract and to take into account the trade usages applicable to the transaction. To that extent, the new law seeks to relieve the arbitrators from strictly adhering to the terms of the contract while deciding the case. However, the arbitrator can still not ignore the terms of the contract. Therefore, the new amendment seems to bring in an element of discretion in favour of the arbitrators while making of an award.

14. Amendment to Section 31(Form & Contents of Arbitral Award) :

This provides for levy of future interest in the absence of any decision of the arbitrator, on the awarded amount @2% higher than current rate of interest prevalent on the date of award. The current rate of interest has been assigned the same meaning as assigned to the expression under Clause (b) of Section 2 of the Interest Act, 1978.
In addition, the new Act lays down detailed parameters for deciding cost, besides providing that an agreement between the parties, that the whole or part of the cost of arbitration is to be paid by the party shall be effective only if such an agreement is made after the dispute in question had arisen. Therefore, a generic clause in the agreement stating that cost shall be shared by the parties equally, will not inhibit the tribunal from passing the decision as to costs and making one of the parties to the proceedings to bear whole or as a part of such cost, as may be decided by the tribunal.

15. Amendment of Section 34 (Limiting the gamut of Public Policy of India):

As per the new amendment, an award passed in an international arbitration, can only be set aside on the ground that it is against the public policy of India if, and only if, – (i) the award is vitiated by fraud or corruption; (ii) it is in contravention with the fundamental policy of Indian law; (iii) it is in conflict with basic notions of morality and justice. The present amendment has clarified that the additional ground of “patently illegality” to challenge an award can only be taken for domestic arbitrations and not international arbitrations. Further, the amendment provides that the domestic awards can be challenged on the ground of patent illegality on the face of the award but the award shall not be set aside merely on the ground of an erroneous application of law or by re-appreciation of evidence. The new Act also provides that an application for setting aside of an award can be filed only after issuing prior notice to the other party. The party filing the application has to file an affidavit along with the application endorsing compliance with the requirement of service of prior notice on the other party. A time limit of one year from the date of service of the advance notice on the other parties has been fixed for disposal of the application under Section 34. Significantly, there is no provision in the new Act which empowers the court or the parties to extend the aforesaid limit of one year for disposal of the application under Section 34.

16. Amendment to Section 36 (Stay on enforcement of award):

The Ordinance provides that an award would not be stayed automatically by merely filing an application for setting aside the award under Section 34. There has to be a specific order from the Court staying the execution of award on an application made for the said purpose by one of the parties. The Ordinance aims to remove the lacunae that existed in the previous Act where pending an application under Section 34 for setting aside of arbitral award, there was an automatic stay on the operation of the award. The new law also empowers the Court to grant stay on operation of arbitral award for payment of money subject to condition of deposit of whole or a part of the awarded amount.

17. Amendment to Section 37 (Appealable Orders):

Under Section 37(1), the new law makes provision for filing of an appeal against an order of judicial authority refusing to refer the parties to arbitration under Section 8. As regards enforcement of certain foreign awards, the new law seeks to add explanation of Sections 48 and 57 thereby clarifying as to when an award shall be considered to be in conflict within public policy of India. The parameters are the same as are provided under Section 34. Similarly, the expression “Court” used in Sections 47 and 56 have been defined to mean only the High Court of competent jurisdiction.

 Conclusion

The amendment brought to the 1996 Act is certainly a positive step towards making arbitration expeditious, efficacious and a cost effective remedy. The new amendments seek to curb the practices leading to wastage of time and making the arbitration process prohibitively a costly affair. The new law also makes the declaration by the arbitrator about his independence and impartiality more realistic as compared to a bare formality under the previous regime. Making the arbitrator responsible for delay in the arbitration proceedings, for the reasons attributable to him, would ensure that the arbitrators do not take up arbitrations, which are beyond their capacities. Such a deterrent would imbibe self-discipline and control amongst the arbitrators. It can be said that the present amendments certainly travel an extra mile towards reducing the interference of the Court in arbitration proceedings that has been a consistent effort of the legislature since passing of the 1996 Act.

Further Amendments submitted by (High Level Committee) to the Amendment Bill, 2015[3]

The Arbitration and Conciliation Act, 1996, was amended by the Arbitration and Conciliation (Amendment) Act, 2015 in order to make arbitration process user friendly, cost effective and ensure speedy disposal and neutrality of arbitrators. However, to give a boost to institutional, arbitration vis-a-vis ad hoc arbitration and to remove some practical difficulties in applicability of the Arbitration and Conciliation (Amendment) Act, 2015, a High Level Committee (HLC) under the Chairmanship of Justice B. H. Srikrishna, Retired Judge, Supreme Court of India, was constituted by the Central Government, The HLC was given the mandate

• to examine the effectiveness of existing arbitration mechanism by studying the functioning and performance of Arbitral Institutions in India;
• to devise a road map to promote institutionalized arbitration mechanisms in India;
• to evolve an effective and efficient arbitration eco-system for commercial dispute resolution and submit a Report on suggested reforms in the statute.

The HLC submitted its Report on 30^th July, 2017 and has recommended for amendments in the Arbitration and Conciliation Act, 1996. The proposed amendments are as per the recommendations of the High Level Committee.

THE ARBITRATION AND CONCILIATION (AMENDMENT) BILL, 2018[4]

The Arbitration and Conciliation (Amendment) Bill, 2018 amendments which, when passed will apply to the Arbitration and Conciliation Act, 1996 are pursuant to the Srikrishna Committee Report released in July, 2017, recommending further amendments on the back of the 2015 amendments, primarily to improve on or clarify various provisions.

At the very outset, the proposed Bill clarifies that the objective of the amendments is to promote institutional arbitration by creating an independent, statutory body to govern the entire process of Arbitration in India right from the stage of appointment of arbitrator. It further proposes to create a robust eco system for commercial arbitration to flourish and thrive in India.

Primarily, following are the amendments proposed by the aforesaid Bill[5]:

1. Establishment of a statutory body called Arbitration Council of India “ACI”, for promoting institutional arbitrations;
2. Amendment in Section 29A of the Act;
3. Introduction of Section 42A & 42B;
4. Introduction of Section 87;
5. Amendment in Section 11 of the Act

• Arbitration Council of India

The above amendments are quite significant as the same cater to the practical difficulties being faced by the parties as well as the arbitrators.

“Most significantly, the Bill suggests the creation of a separate, independent, statutory body called the Arbitration Council of India (“ACI”) to be presided over by a Judge of the Supreme Court or Chief Justice or Judge of any High Court or any other eminent person, which would include an eminent academician etc. and other government nominees as well”. This Council will frame norms for alternate dispute resolution and evolve professional guidelines. This is a positive step to ensure the quality of arbitral institutions. The Council will also maintain an electronic depository of arbitral awards that can be used to analyse how the jurisprudence has evolved.

ROLE OF ACI:-

It includes grading arbitral institution and accrediting arbitrators by laying down certain rules and norms and to promote and encourage arbitration and other ADR Mechanisms. For the aforesaid purpose, ACI is to formulate appropriate policy and guidelines for the establishment, operation and maintenance of uniform professional standards in respect of all matters relating to arbitration and ADR mechanism. In this regard, the ACI’s role may further expand to facilitate the speedy appointment of arbitrators through designated arbitral institutions by the Supreme Court or the High Court.

• Length of the Arbitral Proceeding

For instance, the Amendment Act, 2015 introduces a time limit of 12 months for conclusion of arbitral proceedings including making the award, from the date when an arbitrator enters into reference. The aforesaid period is found to be too less as subsequent to an arbitrator entering into reference, completion of pleadings consumes substantial period. This makes it practically impossible for an arbitrator to record evidence, wherever necessary, hear arguments and make the award within 12 months only. In majority of the cases especially those involving complex issues and where number of claims are high, parties are required to approach the Court for extending the time for making the award.

To overcome these obstacles,

“The Amendment Bill, 2018, introduces an amendment in Section 29A, thereby suggesting that 12 month period shall begin to run from the date when pleadings are complete. The Bill further suggests to exclude International Arbitration from the restricted timeline of making the arbitral award”.

• Confidentiality

Statutory recognition of confidentiality in arbitration has been suggested (the Act mandates confidentiality only for conciliation proceedings). However, the Amendment Bill, 2018 proposes to introduce a new section 42A, requiring arbitrators and arbitral institution to keep proceedings confidential (except the award). This provision will have to be carefully drafted to exclude any order or award that may be challenged in a court including Section 17 orders.

Importantly, the Act did not contain any express provision regarding confidentiality of the proceedings and the Amendment Act, 2015 was also silent on the issue.

• Arbitrator Immunity

The Amendment Bill, 2018 also provides for a new Section 42B which aims to protect the Arbitrator or arbitral tribunal from being dragged into unnecessary legal proceedings by the parties for any action or omission done in good faith. This will afford comfort to the arbitrators & ensure that the arbitrator is able to exercise her function without any fear of proceedings ensuing therefrom. Arbitrator immunity provisions are present in many foreign statutes and international institutional rules, and MCIA Rules.

• Section 87

 One of the major legal hurdles faced while implementing the Amendment Act, 2015 was regarding the applicability of the same to court proceedings arising out of arbitrations, invoked prior to the amended Act coming into force.

In other words,One of the most contentious issues in recent times has been the correct interpretation of Section 26 of the Amendment Act and whether the amendments apply to court proceedings:

• filed after the amendments came into force in 2015, but in respect of arbitrations commenced before the amendments;
• court proceedings which were pending at the time the amendments came into effect but were decided thereafter. In this context there were conflicting decisions of various courts.

Application of the 2015 Amendments post 2018 Amendment Bill

In order to address this issue, a new Section 87 has been proposed in the Amendment Bill, 2018 to clarify that unless parties agree otherwise the Amendment Act, 2015 shall not apply to the following:

• arbitral proceedings that have commenced prior to the Amendment Act, 2015 coming into force i.e. prior to 23.10.2015.
• court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Amendment Act, 2015.
• The Supreme Court recently passed a judgment in the matter of:

                                                                           BCCI
v.

                                         Kochi Cricket Pvt. Ltd. And Etc.[6]

It ruled that the 2015 amendments would apply to all court proceedings filed after the amendments came into effect (October 23, 2015), regardless of when the arbitration was commenced.

“Crucially, it was also held that the 2015 amendments would apply to pending proceedings that may have been filed prior to the amendments but were pending at the time amendments came into force.”

The 2018 amendments however provide that the 2015 amendments will apply only to proceedings actually filed after October 23, 2015.

Being so, the Supreme Court has directed that its aforesaid judgment be transmitted to the Law Ministry and the Attorney General to take note of its interpretation.

Analysis of the Judgement

The judgment itself raises questions. Assuming a petition were filed to challenge an award prior to the 2015 amendments but was pending on the date of the amendments, by virtue of the judgment, an automatic stay that was earlier effective would no longer apply. It would then be open to the award-creditor to apply for enforcement and the award-debtor would have to file a separate application for a stay (in which case a deposit of the award amount would be probable), thus taking away a benefit that a party had prior to the 2015 amendments.

It remains to be seen whether the Government takes note of the Supreme Court’s interpretation and effects amendments in consonance.

The amendments are a welcome development in the field of arbitration and when implemented will assist further in India being seen as an arbitration friendly jurisdiction.

• Appointment of Arbitrators

Section 11 will be amended so that instead of having to go through court for appointment of an arbitrator, the Supreme / High Court may designate specific arbitral institutions that will make the relevant appointments. This obviates the need to file a formal application for appointment in court, thus speeding up the process by taking away some part of the burden from the court.

The Report had recommended that such appointments should be made without the requirement of the Supreme Court or High Courts determining the existence of an arbitration agreement. This is in line with the kompetence-kompetence principle of an arbitral tribunal itself determining its own jurisdiction.

On a related note, the present Section 11 (6A) of the 2015 Act mandates that the Court in a Section 11 proceeding should confine its examination to the existence of the arbitration agreement. Prior to its amendment, the power under Section 11 was held to be wider in scope and included an examination of whether claims could be referred to arbitration etc. The Cabinet’s press release does not deal with this aspect in its recommendation.

Conclusion

While the proposed bill appears to fill in some lacunae created by the recent amendment, the extent of it successfully plugging all the loopholes is still debatable. It is germane to point out the practical difficulties and challenges that are faced by parties and lawyers with regard to the law governing arbitration in India. Some of these seem to be overlooked by lawmakers and require consideration by them, which more often than not, is a protracted process. The following are some of the loopholes, still left for debate in Courts:

1. With respect to the introduction of the ACI, it would be crucial for the Amendment to clearly define the scope of the ACI’s role and its powers.
2. Pertinently, the question arises whether in view of establishment of an institution like ACI, for securing speedy appointment of the arbitrators, Section 11 of the Act becomes redundant. Further, where a party is objecting to the validity of the arbitration agreement itself, what is the course of action to be adopted in such circumstances.
3. Further, the Amendment Bill, 2018 could have provided clarification on the issue, whether two Indian parties can agree for a foreign seated arbitration, despite being bound by the Indian Law.
4. Similarly, with regards to the section containing confidentiality, it is not clear whether the confidentiality remains even when the proceedings have progressed to the Court under Section 34 of the Act and the Court requisitions the arbitral record.

Thus, while the Amendment Bill, 2018 proposes many welcome changes, there are still certain grey areas, which are required to be addressed by the legislature before the Act can be said to be complete and all-encompassing legislation. It is quite possible that some of the issues highlighted by us have been addressed in the text of the Bill, which is presently not available.

[1] http://www.prsindia.org/uploads/media/Arbitration/Arbitration%20and%20Conciliation%20bill,%202015.pdf (last accessed on 25^th  June,2018).

[2]http://www.mondaq.com/india/x/448666/Arbitration+Dispute+Resolution/Highlights+Of+Amendment+To+The+Arbitration+And+Conciliation+Act+1996+Via+Arbitration+Ordinance+2015  (last accessed on 20^th June,2018).

[3] http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf  (last accessed on 21^st  June, 2018).

[4]http://www.prsindia.org/uploads/media/ND%20International%20Arbitration/ND%20International%20Arbitration%20Centre%20Bill,%202018.pdf (last accessed on 26^th  June,2018).

[5] https://corporate.cyrilamarchandblogs.com/2018/03/supreme-court-2015-amendments-cabinet-2018-arbitration-amendments-good-india/#more-2340 (last accessed on 23rd June, 2018).

[6] AIR 2018 SC 1549

Author:

Archit Sehgal is a fourth year Law student from Vivekananda Institute of Professional Studies (VIPS), GGSIPU, Delhi

The post An Insight into the 2015 (Amendment) Act & 2018 (Amendment) Bill [Arbitration & Conciliation Act, 1996] appeared first on Legal Desire Media and Insights.

The amendment provides for creation of the Arbitration Council of India (ACI) which will grade arbitral institution and accredit arbitrators by laying down norms and take all such steps as may be necessary to promote and encourage arbitration, conciliation, mediation and other ADR mechanism.

For this purpose, the ACI will also evolve policy and guidelines for the establishment, operation and maintenance of uniform professional standards in respect of all matters relating to arbitration and ADR mechanism.

The Council shall also maintain an electronic depository of all arbitral awards.

The ACI shall be a body corporate. The Chairperson of ACI shall be a person who has been a Judge of the Supreme Court or Chief Justice or Judge of any High Court or any eminent person. Further, the other members would include an eminent academician etc. besides other government nominees.

It is proposed to amend sub section (1) of section 29A by excluding International Arbitration from the bounds of timeline and further to provide that the time limit for arbitral award in other arbitrations shall be within 12 months from the completion of the pleadings of the parties.

A new section 42A is proposed to be inserted to provide that the arbitrator and the arbitral institutions shall keep confidentiality of all arbitral proceedings except award. Further, a new section 42B protects an Arbitrator from suit or other legal proceedings for any action or omission done in good faith in the course of arbitration proceedings.

A new section 87 is proposed to be inserted to clarify that unless parties agree otherwise, the Amendment Act 2015 shall not apply to (a) Arbitral proceedings which have commenced before the commencement of the Amendment Act of 2015, (b) Court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Amendment Act of 2015 and shall apply only to Arbitral proceedings commenced on or after the commencement of the Amendment Act of 2015 and to court proceedings arising out of or in relation to such Arbitral proceedings.

The Arbitration and Conciliation Act, 1996, was amended by the Arbitration and Conciliation (Amendment) Act, 2015.

A High Level Committee (HLC) under the Chairmanship of Justice B. H. Srikrishna, Retired Judge, Supreme Court of India, was constituted by the Central Government to remove some practical difficulties in applicability of the Arbitration and Conciliation (Amendment) Act, 2015.

The HLC was given the mandate to examine the effectiveness of existing arbitration mechanism by studying the functioning and performance of Arbitral Institutions in India, to devise a road map to promote institutionalized arbitration mechanisms in India, to evolve an effective and efficient arbitration eco-system for commercial dispute resolution and submit a report on suggested reforms in the statute.

In the report submitted on July 30, 2017, the committee recommended for amendments in act and the proposed are as per the HLC’s recommendations.

The post Cabinet approves Arbitration and Conciliation (Amendment) Bill to setup Arbitration Council of India appeared first on Legal Desire Media and Insights.

The author have analyzed Section 3 of the Stamp Act read with Article 12 of the Schedule to the Indian Stamp Act, 1899 which lays down the stamp duty payable on ‘arbitration awards’ in the light of Section 17 of the Registration Act, 1908 which requires every non-testamentary document to be compulsorily registered.

The authors go on to discuss the judgment of the Madras High Court and the inherent flaws in the recommendations. The authors have relied on the suggestions made in the Law Commission Report on the matter to correct the mechanism of verification. Finally, they conclude that the corrective mechanism as per the Arbitration and Conciliation (Amendment) Act of 2003 is pending for the approval before the parliament.

Accordingly the authors have given their suggestions to deal with the situation more effectively. These suggestions are aimed at reducing the burden on the courts and arbitrators and simultaneously affording greater convenience to the parties for enforcement of the Award.

Introduction

Under Section 31 (5) of the new Arbitration and Conciliation Act, 1996, the arbitral tribunal shall communicate a ‘signed’ copy of the award to the parties. Thereafter, the parties are entitled to file applications for setting it aside, under Section 34 (1), or for its enforcement, under Section 36, by annexing the copy of the arbitral award.

In its 194^th report, the Law Commission draws our attention to the problem that if only a copy of the award is to be filed along with the said applications under the new Act of 1996, the court will not be in a position to ascertain whether the original award is duly stamped, or where it is required to be compulsorily registered, whether the same has been complied with.

It is in this context that the Madras High Court, on 17^th December, 2003, formulated an interim solution to solve the problem. In fact, it was in this case that the legislative machinery was set in motion as per the recommendations of the Law Commission.

The Law Commission did not find this interim solution satisfactory as it could cause serious hardship to the parties where the stamp duty would be of a heavy amount. Moreover, this solution does not solve the problem pertaining to registration.

Hence, the first part of this Article talks about the various aspects and the required form of the arbitral award for its enforcement under the Arbitration and Conciliation Act, 1996. Thereafter, the authors discuss the obligation on the courts to verify whether the stamp duty is duly paid or where required, whether it is duly registered or not. Then the third part contains the discussion on mechanism for the courts to verify as suggested by the Madras High Court and the inherent flaws in the solution. Lastly, the authors discuss the Law Commission Report and the recommendations in the report. Finally, the authors conclude that recommendation number (5) is the most suitable solution out of the proposed and that an amendment shall be brought to that effect in the Arbitration and Conciliation Act 1996.

Form And Requirement Of Arbitral Award Under New Arbitration Act

Arbitration comes into being as a result of an arbitration agreement. Parties submit their dispute to the Arbitral Tribunal, which passes a binding award with reasons. Hence, an award is the judgment by the arbitrator on the merits of the case. The tribunal can also give an interim award under Section 17 of the Arbitration and Conciliation Act, 1996[1] and the definition of Arbitral Award includes interim award.[2]

However, Indian law does not impose any legal requirement as to the form of a valid arbitral award. The only requirement prescribed by the legislation is that it should be in writing and should be signed by the sole arbitrator or by a majority of the members of the arbitral tribunal as the case may be. Apart from this, there are other basic requirements as regards the content of the award like the name of the parties, date and place of the award declared, signatures of the arbitrators, certainty of the award, etc.

The procedure for enforcing foreign awards is prescribed in Part II of the new Act and as it incorporates the Geneva Convention of 1927 and the New York Convention of 1958, the parties seeking to enforce a foreign award must produce the original award or a duly authenticated copy thereof. Hence, the courts have been placed in position to examine all the documents to verify the form of the award for its enforcement. Hence, the scope of this article is limited to enforcement of domestic arbitral awards.

The arbitrator is required to give the signed copy of the award to the parties.[3]  After receiving the signed copy of the award, the concerned party has to apply to the Court to execute the award and obtain relief. The court will issue notice to the judgment debtor on the basis of the signed copy of the arbitral award.

An award can be enforced as such because it is now equated with a decree of the Court.  A party who wishes to enforce the award can file it before the Court and it will be treated as a decree unless set aside in an application under Section 34.[4]

However, under Stamp Act and Registration Act, there are some  prerequisites for any award to be enforced.

Under Section 3 of the Stamp Act, every instrument mentioned in the schedule is chargeable with duty of the amount indicated therein. Article 12 of the Schedule to the Indian Stamp Act, 1899 contains a specific provision mentioning the stamp duty payable on ‘arbitration awards’.

Also, every non-testamentary document is to be mandatorily registered under Section 17 of the Registration Act, 1908. An award falling within Section 17 (1) (b) of the Registration Act, 1908has to be registered. Section 17 (1) (b) makes it mandatory for non-testamentary instruments to be registered which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, to or in immovable property. Therefore, after an arbitral award is passed by the arbitral tribunal, the question arises whether the original arbitral award passed by the arbitral tribunal under the Arbitration and Conciliation Act, 1996 has been duly stamped or duly registered and which authority to ensure compliance of the same.

Courts Duty To Verify Under Stamp Act And Registration Act

The structure of the Government as defined in our Constitution is trifurcated as the Executive, the Legislature and the Judiciary. Collection of Revenue is primarily the function of the Executive. The State actors[5] have to help the executive in ensuring that revenue is duly paid by an individual, which will assist the state machinery to finance its activities. The Courts forming the judiciary   have the duty to ensure the collection of revenue. Hence, the courts are duty bound to check whether an individual has duly paid the revenue that he is entitle to pay through stamp duty under the Stamp Act, 1899. The same applies where any instrument is required to be compulsorily registered under the Registration Act, 1908.

Section 2(14) of the Stamp Act defines the word “Instrument” which covers every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Therefore, it cannot include those documents by which no such right or liability arises. Further, Section 3 of the Stamp Act states that every instrument mentioned in the schedule is chargeable with duty of the amount indicated therein. Article 12 of the Schedule to the Indian Stamp Act, 1899 contains a specific provision mentioning the stamp duty payable on ‘arbitration awards’.

The courts have the right to impound any instrument produced before it for execution, if not duly stamped, for which the courts shall have the power to examine such instrument.[6] Hence, the Courts draw their right to examine every instrument produced before it during execution under Section 33 (2) of the Stamp Act, 1899[7].

In addition to the above, Section 35 of the Indian Stamp Act, 1899 directs that documents which are required to be stamped, are not stamped, or are inadequately stamped, they will not be admissible in evidence ‘for any purpose’.

However, it is the courts that are entitled to record evidence from the documents presented, and hence it is the duty of the courts to check the admissibility of the documents presented before it under Section 35 of the Stamp Act, 1899.

It is undisputed that an arbitral award given by the arbitrator is an instrument as defined under Section 2(14) of the Stamp Act, which shall be executed[8] and stamped.[9]

Also, every non-testamentary document is required to be compulsorily registered under Section 17 of the Registration Act, 1908. An award is required to be registered if it falls within Section 17(1) (b) of the Registration Act, 1908 and in the circumstances if it is not registered, it is not a valid document and cannot affect immovable property.[10]

Accordingly it was held by the Full Bench of Andhra Pradesh High Court in M. Venkataratnam v. M. Chelamayya[11] that a binding arbitral award passed by an Arbitral tribunal, if affecting immovable property, must be registered in the manner mentioned in Section 17(1) (b) of the Registration Act, otherwise it will be invalid.

Hence, in view of the provisions of Section 35 of the Stamp Act, 1899, the award which requires to be stamped is not stamped or is inadequately stamped, is inadmissible for “all purposes” and an award which requires to be registered, if it falls within Section 17(1) (b) of the Registration Act, 1908 and if it is not registered, is not a valid document and cannot be treated as affecting immovable property.

The authors further discuss the Madras High Court’s decision wherein the mechanism to be adopted by the courts to determine whether the Arbitral award is duly stamped or duly registered was laid down. This issue arose because in the Arbitration and Conciliation Act, 1996 there is no mention of the mechanism to ensure compliance of the same. The Division Bench of the court made certain recommendations and further referred the matter to the Law Commission.

Mechanism Suggested By The Madras High Court

The Madras High court faced the problem of mechanism and hence, it suo moto took the matter of Verification of Stamp Duties and Registration of Arbitral Awards in the Judgment by the Division Bench of the Madras High Court[12] and asked the Law Commission for its opinion on the matter and that on  a proposed legislative amendment.

The Madras High Court, in the above Judgment, while observing that a legislative amendment is necessary, formulated an interim working solution under which the applicant could be directed by the Registry of the Court to file fresh stamp papers in the Court of the required value or to deposit the money-value of the required stamp duty, along with the application under Section 34(1) or Section 36 of the Arbitration and Conciliation Act 1996 by annexing a copy of the arbitral award, with a right to obtain refund thereof, in case the original is thereafter found by the Court to have been duly stamped.

The Court held that in view of Section 31 (5), the copy of the award signed by the arbitrators could be treated as a counterpart as done in Jayarama Iyer v. Ramanatha Iyer[13] within Section 62 of the Evidence Act, 1872 and that the copy does not fall within Section 63 of that Act and hence a copy is chargeable to stamp duty under Article 25 of Schedule I of the Stamp Act. However, it is upto the Court to ask for the original to be produced in such a contingency unless the fact of payment of such duty has been endorsed therein.

The Court appreciated the difficulty caused to an applicant for stay of the original award on the Court insisting for the production of the original award not being available with the applicant especially when irreparable loss may be caused to him by its enforcement. Though Section 36 of 1996 Act states that enforcement of the award is not to be permitted if an application for setting aside the award is pending, it is possible for the opposite party to contend that there is no valid application under Section 34 as the signed copy of the award does not disclose that the original award bears the required stamp or that it is duly registered. Likewise, the execution of the award may be objected by the other party relying on non-compliance of the requirement of production of the original award or proof of the original being stamped or registered.

In para. 25 of the judgment, the Madras High Court proposed the following amendment to Section 31 (1) of 1996 Act to ascertain whether the stamp duty has been collected or not

The present provision in Section 31 (1) reads:

“31 (1) An arbitral award shall be made in writing and shall be signed by the members of the arbitral tribunal.”

The proposal by the Madras High Court is to substitute the following sub-section for the present Section31 (1). The following proposal was forwarded by the Court:

“31 (1) An arbitral award shall be made in writing, duly stamped and shall be signed by the members of the arbitral tribunal.”

The Court specifically observed that the Law Commission may consider the above proposal and make appropriate recommendations.

By the subsequent second order of Madras High Court order dated 30^th January, 2004, the Court stated that the earlier directions given by them for deposit of the stamp duty (i.e. filing of stamp papers and later refunding the same) could cause hardship and result in problems in granting refund. This problem arises because there is a separate procedure under the Stamp Act, 1899 in Section 54 for seeking refund . The High Court, therefore, slightly modified its earlier order dated 17^th December, 2003 to the following effect, permitting cash deposit.

The author opines that the court by suggesting such mechanism is overburdening the judiciary. Also, this recommendation takes away the benefit of quick adjudication afforded by arbitration by introducing time consuming procedures.

Flaws In Madras High Court’s Recommendations

There are certain inherent flaws in the Madras High court’s judgment as also observed by the Law Commission.

First, the proposal of the Madras High Court deals only with the question whether the original award is ‘duly stamped’ and not whether the award is ‘duly registered’.

Second, the view of the Madras High Court’s recommendation to deposit the requisite stamp papers or payment of cash equivalent of the stamp duty payable on the original award, serious hardship would be caused in several cases. If the parties had already provided the necessary stamp papers to the arbitrator for engrossing the award on stamp paper, to ask them to deposit fresh stamp papers or cash equivalent would, in our view, amount to an unnecessary burden.

For example, in a case where an award was passed in Delhi in a claim of Rs 500 crores, the parties deposited stamp papers worth Rs 50 lakhs and the award was indeed engrossed on such papers. If in such a case, the original award is retained with the arbitrators and one of the parties files an application under Section 34 or Section 36 of 1996 Act, to direct that party to again deposit cash of Rs 50 lakhs would be a great hardship. Hence, this interim working solution may, in a large number of cases, be not a satisfactory solution.

Mechanism To Verify: Recommendations By Law Commission

On reference by the Madras High Court, the Law Commission examined several alternative solutions and submitted the 194^th report to Sri. H.R. Bhardwaj, then Minister for Law & Justice on 7^th June, 2005. The Commission found solutions (3) and (5) (as suggested by the Commission) of the report as acceptable.

Solution (3) proposes an amendment to be brought to the 1996 Act laying down that the original award should be filed in the Court within whose jurisdiction the award is passed, i.e. just as it was being done under the 1940 Act. The advantage here is that the Court will then have in its possession, the original award itself and it can verify whether or not the requirements of stamp duty and registration have been complied with by the arbitrators.

However, in our view, this is not the proper solution since the Arbitrators can pass only one award and there can be only one copy of the original award. Now which party shall keep the original award copy is the question. Also, if the Arbitrators submit the original arbitral award to the court within whose jurisdiction the award is passed, then what if the parties has to enforce this award in some other  jurisdiction? This procedure will create a lot of technical difficulty and delay in the enforcement of awards and in case some party needs an immediate enforcement of the award. Generally arbitrators enquire as to how long they should keep the original award with them, particularly, if no party files an application under Section 34 or Section 36? However, submitting the same with the Court would lead to unnecessary piling of the records. Hence, the author opines that this solution is not appropriate for solving the problem and that a mechanism is required that is neither a burden on the Court nor on the Arbitrators.

Solution (5) of the Law Commission Report provides an alternative solution which requires amendment of Section 31(1) and Section 31(5) thereby making it the responsibility of the arbitral tribunal to get the original arbitral award duly stamped and if the award requires compulsory registration under Section 17(1) (b) of the Registration Act, 1908, to have it duly registered and to send photocopies of such original award to the parties..

Further, the word ‘duly stamped’ can create some doubts and it will be difficult for the Court in which the copy is filed by the parties with such an endorsement, to find out if the stamp papers on which the original is engrossed are sufficient in value as prescribed by law. Therefore, the arbitral tribunal should be required to specify in the endorsement, the value of the stamp duty paid on the original award so that the courts can initiate proceedings under Section 40 and Section 42 of the Indian Stamp Act, 1899. Also, under Section 35 of the Indian Stamp Act, 1899, the award to be admissible as evidential decree, needs to be duly stamped.

The Commission also voices its consent to solution (5), which would require the arbitral tribunal to make an endorsement on the photocopy of the award (which is sent to the parties) as to whether the original award is duly stamped (and specifying the value of the stamp duty paid) and specifying whether the original award is duly registered (where it requires compulsory registration).

Hence the suitable amendment to the Arbitration and Conciliation Act 1996 is Section 31(1) of the new Act shall be replaced by the following:

“(1) An arbitral award shall be made in writing and shall be signed by the members of the arbitral tribunal after having the award duly stamped and having it duly registered, where it requires compulsory registration.” and

Section 31(5) of the new Act shall be replaced by the following:

“(5) After the arbitral award is made, a signed photocopy thereof shall be delivered to each party with an endorsement signed by the members of the arbitral tribunal that the original award is duly stamped and mentioning the value of the stamp duty paid, and where it compulsorily requires registration, that it has been duly registered.”

Conclusion

Hence we reach the conclusion that the most suitable solution to the problem is to get the arbitral award endorsed by the tribunal itself so that the courts can verify the compliances required under the Stamp Act and the Registration Act. This procedure does not cause any serious hardship to the arbitrators or the parties. As the new Arbitration and Conciliation (Amendment) Bill, 2003 remains pending before the Standing Committee of Parliament; the Law Commission has recommended this solution to be incorporated into the Amendment Bill.

Suggestions

The burden of the Arbitrators may be further reduced by shifting the responsibility of endorsement to the Collector. Since it is the duty of the Collector to see that the revenue is collected for all the services provided by the governmental machinery, he shall be under the duty to acknowledge the receipt of the revenue and endorse the original award thereby.

It is suggested that the Collector shall endorse along with the original award, the photocopy of the award, which has to be delivered to the parties for the enforcement of the award. Hereby, the courts will be certain of the payment of stamp duty or registration of award wherever required since the endorsement is directly from the concerned authority for the revenue collection.

[1] Interim measures ordered by arbitral tribunal.

[2] S. 2 (1) (c) of Arbitration and Conciliation Act, 1996.

[3] S. 31(5), Arbitration and Conciliation Act, 1996.

[4] S. 34 of the Arbitration and Conciliation Act, 1996 provides for an application to the Court for setting aside an award.

[5] Duty is cast upon various “Public Offices”, through giving powers to “Officer incharge of such Public Offices”. Under S. 33 (3) of the Stamp Act, the State Government determines as to what offices shall be deemed to be public offices. Courts are considered as “public office” under Clause 17, S. 2 of Civil Procedure Code, 1908 as stated in the judgment of  M/s. Deepak Corporation v. Pushpa Prahlad Nanderjog, AIR 1994 Bom 337.

[6] S. 33 (1) of Stamp Act, 1899: Examination and impounding of instruments:-

    (1) Every person having by law or consent of parties authority to receive evidence, and every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance in his functions shall, if it appears to him that such instrument is not duly stamped, impound the same.

[7]S. 33 (2) of Stamp Act, 1899: For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain whether it is stamped with a stamp of the value and description required by the law in force in India when such instrument was executed or first executed…

[8] The term ‘executed’ of ‘execution’ as defined in S. 2 (12) of the Stamp Act which means “signed” and “signature” Thus, for the purpose of stamp duty, the arbitral award shall be an instrument executed by the arbitrator.

[9] M/s. Wilson & Company Private Limited etc. v. K.S. Lokavinayagam, AIR 1992 Mad 100 (Decided by Lakshmanan, J).

[10] M. Chelamayya v. M. Venkataratnam, AIR 1972 SC 1121.

[11] AIR 1967 AP 257 (Full Bench).

[12] O.P.D. 27597/02 dated 17.12.2003 (modified on 30.1.2004).

[13] (1976) 1 MLJ 135.

Author:

Dr. Vaibhav Goel Bhartiya, Dean & Principal, Subharti Institute of Law

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