Consultation Paper on the Proposed Amendments to the Arbitration and Conciliation Act, 1996 and its Impact on the Appointment of Arbitrators: Some Comments
It is scarcely disputable that over the last fifteen years, arbitration has become the dominant form of international and transnational commercial dispute resolution. It was to provide an adequate legal framework for arbitration within India that the Arbitration and Conciliation Act, 1996, was passed. However, the judiciary’s treatment of the Act since then has led to widespread criticism, and it has been alleged that the very purpose of the Act has been defeated by the manner in which its important provisions have been interpreted. It is to remove the consequent “difficulties and lacunas in the Act so that ADR method may become more popular and object of enacting arbitration law may be achieved” that the Ministry of Law and Justice issued a Consultation Paper on the proposed amendments to the Act.
It is questionable, however, whether the recommendations of the Consultation Paper achieve this objective. In an earlier post, Mr. Anirudh Krishnan had made some pertinent observations about the proposals as a whole. (See http://www.criticaltwenties.in/lawthejudiciary/proposed-amendments-to-the-arbitration-and-conciliation-act-1996) In this post, I wish to focus specifically on the impact of the Paper’s recommendations on one very controversial area: the appointment of arbitrators under Section 11 of the Act
Readers will be aware that in Patel Engineering, a seven-judge bench of the Supreme Court put to rest a long-standing controversy relating to the function of the Chief Justice in appointing an arbitrator in the event that the parties were not in agreement. The Court held that the Chief Justice’s function was “judicial” in nature, i.e. he (or his designate) was empowered to look into the merits of the parties’ claim (subject to some reservations which need not here be dealt with).
The majority decision in Patel has been severely criticized. Two of the most important criticisms are: first, one of the reasons why arbitration was adopted as a method of alternative dispute resolution was because of concerns of swiftness and efficacy in disposing of proceedings, something of special importance to the international business community. The judgment defeats this objective; and secondly, the decision effectively nullifies the power of the arbitral tribunal to decide upon its own competence (kompetenz-kompetenz), something that is widely accepted to be one of the cornerstones of arbitration, and is embodied in S. 16 of the Act. Indeed, in a powerful dissent, Justice Thakker pointed out all these shortcomings with the majority judgment, and proposed that the scrutiny of the Court be limited to a prima facie examination of the validity of the arbitration agreement.
Subsequent to Patel, Courts that have been aware of its shortcomings, but nevertheless, been bound by its holding, have performed various contortions to narrow its scope. The Supreme Court in Boghara Polyfab, for instance, made a distinction between three types of scrutiny, one that the Court was bound to undertake (questions about the existence and validity of the agreement), one that it could undertake (e.g., whether the claim was live), and one that it was not permitted to undertake (the merits of the parties’ claim). This case, in turn, has been interpreted and modified by subsequent cases. The position of law, therefore, is rather uncertain, and ripe for clarification by the legislature.
It is therefore a matter of some perplexity that the Consultation Paper, after detailing and summarizing all the cases that ended with Patel Engineering, completely sidesteps the controversy described above. Instead, it chooses to focus on the impact of the decision on the functional of arbitral institutions! It specifies, as a preliminary point, that the purpose of the Act is to “encourage litigants to alternative dispute resolution mechanism by arbitration.” It is therefore extremely strange that it chooses to ignore the most significant fall-out of the Patel decision with respect to popularizing arbitration in India. The Consultation Paper goes into a lengthy analysis of the benefits of institutional arbitration, and then proposes that amendments be made in order to ensure that the Patel dictum notwithstanding, institutional arbitration is an option that can be had recourse to. Consequently, it proposes replacing “Chief Justice” with “High Court” or “Supreme Court” as the case may be, and making referral to arbitral institutions mandatory in cases of a “Commercial dispute of specified value”.
Apart from doing nothing to clarify the Patel situation, this proposal also has an unexpected fall-out. Readers who have closely followed the controversy relating to Patel will recall that one of the arguments made by counsel in that case turned upon the replacement of the word “Court” in the UNCITRAL Model Law with “Chief Justice” in the Arbitration Act. The Court rejected the argument on what many consider to be tenuous grounds; however, legislative substitution of “Chief Justice” with “Court” will only serve to entrench the majority’s decision, and undermine any future attempts – legislative or judicial – to overturn Patel. Of course, it may be argued, citing the UNCITRAL Secretariat’s explanatory note, that even the use of the word “Court” in the Model Law refers only to an administrative decision by that organ. Nevertheless, any argument against Patel will certainly be weakened if the crucial term being interpreted is “Court”, as opposed to “Chief Justice”.
Lastly, one amendment proposes to set a time limit (60 days) for the disposal of any application for appointment of arbitrators. However, even this is worded in the language of a recommendation (“endeavour shall be made…”), and consequently, may be toothless when employed in practice.
In sum therefore, the Consultation Paper has missed an important chance to clarify and improve a markedly unsatisfactory situation in the Arbitration Act. When compared with its proactive and laudatory proposal with respect to other controversies such as Bhatia International’s interpretation of the meaning “international commercial arbitration”, this section of the Paper provides more than a fair degree of disappointment.