Proposed amendments to the Arbitration and Conciliation Act, 1996

Written by  //  August 20, 2010  //  Law & The Judiciary  //  10 Comments

Structure of my blog posts

While deciding to write on Law and Judiciary, I was faced with a dilemma – that of phrasing the post in such a way that it would be equally interesting to both a “legal” and “non-legal” audience. I use the term “legal audience” loosely – referring to readers who are interested in reading and analysing the developments I discuss in a fair amount of detail. For the readers in for a quick look, I have decided to include a section called “Highlights” at the end of each post which briefly elucidates the practical consequences of the legal development being discussed.

PROPOSED AMENDMENTS TO THE ARBITRATION AND CONCILIATION ACT, 1996

My first few blog posts relate to the many amendments to the Arbitration and Conciliation Act, 1996 (the “Act”) proposed in the recent Consultation Paper published by the Law Ministry. In my first blog post I address amendments proposed to rectify anomalies arising out of two highly controversial Supreme Court decisions- Bhatia International v. Bulk Trading S.A ((2002) 1 Arb LR 675) (“Bhatia”) and SBP Co. v. Patel Engineering (“Patel Engineering”) ((2005) 8 SCC 618).

Amendment to provision governing applicability of Part I of the Act to arbitrations conducted outside India

Part I of the Act lays down the principles governing the construction and validity of the arbitration agreement and the procedure of arbitration.

Section 2(2) of the Act provides that “This Part (i.e. Part I) shall apply where the place of arbitration is in India”. The Supreme Court (in Bhatia) has held that this does not mean that Part I shall apply only when the arbitration is conducted in India. The current position of law is that

a)      Part I mandatorily applies to all arbitrations held in India, and

b)      Part I applies to arbitrations conducted outside India unless it is expressly or impliedly excluded.

Consequently Indian Courts have exercised jurisdiction to provide interim relief pending arbitration, appoint arbitrators and set aside arbitral awards even if the arbitration is conducted outside India- interventions that violate the sacrosanct principle of judicial restraint applicable in case of arbitrations. These powers have been held to exist unless Part I is expressly or impliedly excluded. Courts have also been hesitant to readily read in an implied exclusion.

Following Bhatia, foreign parties may have to face litigation before Indian Courts even where the arbitration is conducted outside India, unless they expressly exclude the applicability of Part I of the Act.

The Law Ministry’s proposal

The Law Ministry, in the Consultation Paper suggests that Section 2(2) be amended to read as follows

“Section 2(2)- This Part shall apply only where the place of arbitration is in India.

Provided that provisions of Section 9 and Section 27 shall apply to international         commercial arbitration where the arbitration is not in India if an award made in such place is enforceable and recognized under Part II of this Act.”

This would result in Part I of the Act not applying to arbitrations conducted outside India. Indian Courts would however be competent to award interim relief in aid of such arbitrations and also assist in obtaining evidence in such cases.

Further clarification needed

The Supreme Court has held that Part I mandatorily applies when the arbitration is “held in India”, without defining the scope of the term “held in India”. The corresponding phrase in Section 2(2) of the Act is “where the place of arbitration is in India”. In the absence of a clear definition for this phrase it is unclear if the “place of arbitration” would be India in a number of scenarios. For instance, would the “place of arbitration” be in India if only a few hearings or a few stages of the arbitration (like the procedural hearing or jurisdictional hearing) are conducted in India? Where would the arbitration be “held” if it is conducted by way of video conferencing with one/ few of the arbitrators being located in India?

Perhaps the Law Ministry should define the term “place of arbitration” to be analogous to the concept of “seat of arbitration” which is clearly defined in the English Arbitration Act and relating to which there is sufficient common law jurisprudence.

Amendment to power of appointment of arbitrators

While parties have autonomy in appointing the arbitrators, where they are unable to amicably agree on the arbitral tribunal, the Chief-Justice of the High Court and the Chief-Justice of India (in the case of international commercial arbitrations) are granted the power to appoint the arbitrator(s) by Section 11(6) and (9) of the Act respectively (“the power of appointment”).

There has been a debate about whether this power of appointment is an administrative or judicial power. The primary implications of the power being judicial are twofold:

a)             the Chief-Justice would have to go into the arbitrability of the claim, validity of the arbitration agreement and other jurisdictional issues.

b)            the order passed by the Chief-Justice would be subject to an appeal before the Supreme Court under Article 136 of the Constitution of India.

The Supreme Court in a landmark decision in Patel Engineering, declared the power of appointment to be a judicial power. The Court therefore concluded that this power could not be exercised by a non-judicial authority and hence the power to delegate the power of appointment (which is statutorily provided) was restricted to delegating the power of appointment to another judge of the High Court/ Supreme Court. Such power could not even be delegated to a judge of the district court, the Court concluded.

As a result, the provisions in Sections 11(4), (5), (7), (8) and (9) which permit the Chief Justice (of the High Court and Chief Justice of India in case of Section 11(9)) to delegate their power to “a person or institution”, have, to the detriment of institutional arbitration been rendered nugatory. The Consultation Paper proposes to transfer the power of appointment to the High Court (and Supreme Court in the case of Section 11(9)) and grants the High Court the discretion to delegate the power to any person or arbitral institution.

Since this amendment would lead to a possible appeal from a Section 11 order before a Division Bench of the High Court, the Law Ministry has proposed the insertion of a provision stating that “no appeal including a letter patent appeal shall lie against such decision”. However, such a provision does not preclude a special leave petition before the Supreme Court under Article 136 of the Constitution of India since a mere statutory provision cannot take away a constitutional right.

Finally, the Consultation Paper also contains a proposal for automatic delegation of power of appointment to an arbitral institution in case of a “Commercial Dispute of specified value” (this phrase is defined in the Commercial Division of High Courts Bill, 2009).

There is also a proposal to include an obligation on the High Court/ Supreme Court/ delegate of the High Court or Supreme Court to exercise the power of appointment within 60 days. While this provision is welcome it may prove difficult to implement unless some modifications are made to the language. The language of the proposed clause is unclear enough to be interpreted to mean that the Courts may take upto 60 days to authorize an arbitral institution/ individual to make an appointment, which/who will necessarily require more time to make the appointment. In such a scenario, the delegate may be unable to dispose of the application within 60 days of the application first being filed before the Court. Perhaps, setting a time limit of say 30 days for the Court to delegate its power to an individual or an arbitral institution would be a step in the right direction, providing the delegate another 30 days to exercise its power.

The other important proposed amendments are discussed in subsequent posts.

HIGHLIGHTS

Proposed amendment Practical consequence if amendment is passed
Amendment to Section 2(2) – applicability of Part I to arbitrations conducted outside India
  1. Indian Courts will not have jurisdiction to interfere (except for providing interim relief) where the arbitration is conducted outside India. i.e. where the “place of arbitration” is  outside India, Indian Courts cannot appoint an arbitrator or set aside the award.

Suggestion– The term “place of arbitration” is ambiguous and ought to be defined.

Amendment to Section 11 – amendment to power of appointment of arbitrators
  1. The power of appointment of arbitrators (in case of failure of parties to amicably agree upon the tribunal) would now lie with the High Court (and Supreme Court in case of international commercial arbitration) rather than with the respective Chief-Justices as was earlier the case.
  2. The High Court can delegate this power to any individual/ arbitral institution.
  3. In cases of “Commercial Disputes of specified value” as defined in the Commercial Division of High Courts Bill, 2009, the power stands automatically delegated to an arbitral institution (presumably specified under rules framed under the Act).
  4. The power of appointment of arbitrators should be exercised within 60 days of the application being filed before the Court.

Suggestion– Specify a 30 day limit within which the power of appointment of arbitrators can be delegated to an individual/ arbitral institution, with additional 30 days for the delegate to exercise its power.

10 Comments on "Proposed amendments to the Arbitration and Conciliation Act, 1996"

  1. kfz versicherung vergleich October 21, 2010 at 3:41 am ·

    Very enlightening and beneficial to someone whose been out of the circuit for a long time.

    – Kris

  2. vswaminathan October 26, 2010 at 7:22 am ·

    Some points of controversy on the subject of ‘arbitration and conciliation’ that have lately surfaced are found highlighted in this article; so also in a more recent article– @ the link : Dosco India v Doosan: The Sequel to Citation Infowares. They make for, albeit an interesting, brain-teasing, reading. In that, the articles most cetyt6ainly, if not anything else, bring to a sharp focus the paradox that the legislation intended to provide a legal framework for conciliation through arbitration, as a preferred alternate to ‘court litigation’, should ITSELF have led to a series of court litigation.

    A considered view may go to suggest that, for deciding on the steps to amend the extant statute in any manner as contemplated, it would necessarily be prudent to bear in mind the following most fundamental aspects:
    1. The underlying primary, rather sole, objective of an ‘arbitration clause’ in a contract agreement, to which the special enactment has given a formal sanctity, in essence, aims at providing a legal framework for its parties to have recourse to the ‘arbitration and conciliation’ procedure; in preference to ‘court litigation’. That is so because of the inescapable reality that ‘court litigation’ in any related or connected dispute is, by its very nature, bound to prove a long –drawn as well as an inconclusive affair.
    2. It might be worthwhile for everyone really concerned to accord a serious thought and decide as to how best the extant law could be simplified (in its profound sense), particularly keeping in mind the recent controversies, so that the basic objective of the law is preserved but at the same time made more effective and foolproof.
    3. According to a view, there is a striking similarity between – the subject points of controversy on the one hand, and those, which, not long before, came up for judicial scrutiny in the matter of interpretation of ‘tax treaties’ on the other. Courts are noted to have elucidated their well-considered views, and on the grounds thereof, enunciated certain principles requiring to be followed in interpreting any of the provisions of a tax treaty. In any arbitration related or connected matter also, therefore, it would only be logical not to overlook but scrupulously follow the same views and principles as propounded by courts in those tax treaty cases. For, any agreement evidencing a commercial transaction between two, same way as a tax treaty which is also a contract agreement entered unto between two parties, except that the latter happens to be between two sovereign states.

    KEY NOTE: In the context herein, it might not but be quite apt to recall what late N A Palkhivala, an outstanding legal luminary and a noted expert on international law, though himself being a reputed member of the legal fraternity, had to say on the subject of international commercial arbitration:

    It was several decades ago that the International chamber of commerce at Paris started offering the services of its Court of Arbitration, and businessmen in different countries found it convenient to avail themselves of that facility. In course of time that convenience became a preference and the preference has now ripened into a necessity. As one who has had some experience of the working of force of law in India and abroad, and also of international commercial arbitration, let me bear testimony to the incalculable advantages of International Court of Arbitration as compared to litigation in ordinary courts of law.

    In Britain, in 1985, Michael Joseph, a qualified solicitor published a book under the embarrassing but appropriate title- Lawyers can seriously damage your health. There can be no doubt that litigation in ordinary courts of law can seriously damage the health of international commerce.

    In the USA no less explicit is this criticism. In that country there has been an explosion of lawyer stimulated litigation – more than millions new law suits filed every year taking the federal, State, and local courts together. The burgeoning costs, and demoralizing delays of litigation courts of law are so devastating that litigants have no hope of coming out of the ICU. Unavoidably under the present system, litigation in civil courts continues to be lawyer dominated. In India the judicial system is on the verge of collapse.

    International Commercial Arbitration has four factors to commend it – speed, finality, cheapness and justice.
    A court of law is a Rolls Royce of 1907 vintage, stately and solemn; whereas International Court of Arbitration is a 1987 Honda car which will take you to the same destination with far greater speed, higher efficiency and dramatically less fuel consumption.

  3. vijay M vaghela January 24, 2011 at 4:54 pm ·

    Respected Sir,
    Arbitration and conciliation Act 1996 is good on paper and it is best for decorative purpose. But, in Reality-it is too much expensive and not giving the justice to the parties to the litigation. My experience is too bad under the arbitration matters conducted by me before the Retired High court Judges of bombay high Court-where-they-the Arbitrators only earns.
    In any way-our law is very Rich. It would be just fit and proper for us[ Indians] to consider that 80%of our population gives respect to Judicial system. What We need -is to appoint More Judges[ say One Judge for Every 200 cases],make every senior Advocates to Act as Civil Judge- and to accept- about fifteen cases in year. Please tell them [ Senior Advocates] to give free services to such litigants-matters. Definitely, judicial system shall survive. Kindly Discarge the Arbitration and conciliation Act 1996 and improve direct judicial system of our country. vijay m vaghela- [advocate since 3/12/1987].

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Trackbacks for this post

  1. Proposed Reform to the Arbitration and Conciliation Act (the “Act”) (Part II) | Critical Twenties
  2. Consultation Paper on the Proposed Amendments to the Arbitration and Conciliation Act, 1996 and its Impact on the Appointment of Arbitrators: Some Comments | Critical Twenties
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