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Decoding the Arbitration Amendment

Decoding the Arbitration Amendment

The Arbitration and Conciliation (Amendment) Act 2015 seems to be an optimistic leap towards making India an investor friendly state.

India is moving towards reviving the infrastructure sector by encouraging investments by private players and reinvigorating the sector through Public-Private Partnership (PPP). The government is also providing the much-needed push by increasing the budgetary allocation to Rs.2.21 lakh crore for key infrastructure areas, such as roads, railways and ports. In order to infuse investments and ensure an efficient dispute resolution mechanism for disputes arising from PPP and various other infrastructure projects, both government and private players have favoured arbitration as a method of dispute resolution. In India, arbitration has been governed by the Arbitration and Conciliation Act, 1996. However, with the increase in complex infrastructure contracts, the entire arbitration management became fraught with delay, escalation in cost and increased judicial interference mirroring the procedure of courts. The investment and business climate in India suffered a huge setback when the international fraternity did not perceive India as a favourable investor state. Therefore, as a major step towards improving the ease of doing business in India, the present regime enacted two major commercial Acts, namely the Commercial Courts Act, 2015 and The Arbitration and Conciliation (Amendment) Act, 2015. The Arbitration and Conciliation (Amendment) Act, 2015 (referred to as the ´Amendment Act´) has been premised on speedy resolution of disputes, transparent and conflict-free appointment of arbitrator and minimising judicial intervention, thereby keeping up with international standards of arbitration. This amendment seems to be an optimistic leap towards getting India at par with the other arbitration jurisdictions as a preferred arbitration destination. Having said this, the following is an attempt to analyse the major aspects in the amendment that are a significant departure from the existing law and some of which are mere clarifications of the law as has evolved through courts.

Arbitration Agreement by Electronic Communication
The Amendment Act 2015 has newly introduced that arbitration agreement can be constituted by ´communication through electronic means´ if it provides a record of the agreement under Section 7(4)(b) of the Act. This would mean that an exchange of emails, text messages or other electronic communication which provides a record of the agreement will constitute an arbitration agreement. This amendment ensures that the Act is in consonance with judicial decisions that have held that electronic communication would constitute an arbitration agreement. Such an amendment will also make it easier for parties to enter into an arbitration agreement and will not require them to follow any rigid format for the purpose of constituting a valid arbitration agreement under the law.

Fixation of Arbitrator´s Fees
Under the Arbitration Act, 1996, there was no model schedule for arbitrator´s fees and there was no ceiling imposed upon the arbitrator´s fees. Thus, in practice the arbitrator´s fee was fixed arbitrarily and disproportionately and sometimes would even exceed the amount of the dispute or award. However under the Arbitration (Amendment) Act, 2015, the High Court is empowered to frame rules for the purpose of determination of fees of the arbitral tribunal and provides a model feel table under the Fourth Schedule. As per the model table, the fees may range from Rs.45,000 to a maximum of Rs.30,00,000, depending on the sum in dispute. For instance, for any dispute up to Rs.5,00,000, the model fee prescribed is Rs.45,000; for disputes above Rs.5,00,000 up to Rs.20,00,000, the fee prescribed is Rs.5,00,000 plus 3.5 per cent of the claim amount over and above Rs.5,00,000. In cases of a sole arbitrator, such arbitrator will be entitled to an additional amount of 25 per cent on the fee payable as per the model fee specified for the particular sum in dispute. However it is important to note that rules framed by the High Court will not apply to international commercial arbitration and institutional arbitration. Thus, in case of international commercial arbitration, the problem of high arbitrator fees can crop up again.

Timely adjudication and Fast-Track Proceedings
Under the earlier arbitration regime, arbitration proceedings had become a replica of court proceedings with frequent adjournments and ´date of sitting´ of arbitral tribunal spread over a long period. Under the 1996 Act, there was no timeline provided for ensuring timely adjudication. However, the Amendment Act, 2015 has tried to address this issue by providing a time limit of 12 months with which the arbitral tribunal is required to pass an award. This may be extended by a six-month period by consent of the parties. If an award is made within six months, the arbitral tribunal will receive additional fees. If it is delayed beyond the specified time because of the arbitral tribunal, the fees of the arbitrator will be reduced, up to 5 per cent, for each month of delay.

The amendment also provides that a challenge to an arbitral award shall be disposed of within a period of one year. It further ensures speedy settlement of dispute, by providing that an application for appointment of arbitrator before the Court (under Section 11) should be disposed of within a period of 60 days from the date of service of notice on the opposite party. It has also been laid down that no appeal, including Letters Patent shall lie against any order of the High Court or Supreme Court in relation to appointment of arbitrator under Section 11.

Furthermore, the Amendment Act, 2015 introduces fast track procedure for the first time, where the award would be granted within six months ensuring speedier settlement of dispute.

Under such a procedure, the dispute shall be decided on the basis of written pleadings, documents and submissions filed by the parties, dispensing with the requirement of oral pleadings. Parties can also mutually agree to adopt the fast track procedure for existing disputes.

For the purpose of facilitating speedy disposal of arbitral proceedings, the amendment also provides for some other changes, such as: allowing the respondent to submit counter-claim or set-off, if it falls within the scope of the arbitration agreement; excluding the need to file separate arbitration proceedings; embargo on the granting of adjournments without sufficient cause; and awarding exemplary cost for frivolous adjournments. The arbitral tribunal also has the discretion to forfeit the right of respondent to file a statement of defence in case it is not filed in time. Even though the amendment tries to expedite the arbitration proceedings, it is unclear as to impact of the proceedings when the permitted period of 18 months has passed. It is possible, therefore, that parties to such arbitrations may have to apply to the relevant court for extending the period of making the award. The timeline of 12 months has also received criticism for being impractical and over-ambitious as 18 months is the norm for completion of efficient international arbitrations. In case of complicated disputes, it usually takes 24 months to come to a settlement.

Costs and Interest
Before the amendment, the interest on the sum was awarded at the rate of 18 per cent which was not in tune with prevalent market rates. This issue has been addressed by the amendment which states that the interest on the sum directed to be paid by the arbitral award should be determined at a rate that is 2 per cent higher than the rate of interest prevalent at the time of making the award. The amendment further provides that the ´current rate of interest´ will have the same meaning as assigned to it under the Interest Act, 1978.

As far as the cost regime goes, an entire new section has been added following the ´cost follows the event´ principle of English Law. This amendment introduces the actual cost regime where the Court or arbitral tribunal determines the cost after taking into account all circumstances including the conduct of all parties, whether a party has succeeded partly in the case, whether the party had made a frivolous counter-claim leading to delay in the disposal of the arbitral proceedings and whether any reasonable offer to settle the dispute is made by a party and refused by the other party. This is a welcome move as traditionally the Indian courts have not granted actual costs to the parties.

Under the 1996 Act, there was no clarity with respect to the rules relating to apportionment and recovery of costs and actual costs were not imposed by the arbitrator. However, the amendment has defined ´Costs´ under Section 31A to mean reasonable costs relating to the fees and expenses of the arbitrators, courts, witnesses, legal fees and expenses, any administration fees of the institution supervising the arbitration and any other expenses incurred in connection with the arbitral or court proceedings and the arbitral award. The amendments in relation to the cost regime will disincentivise the parties from delaying the proceedings by mala fide conduct and will ensure speedy settlement of disputes.

Minimising judicial Intervention
Under the 1996 Act, the bar for judicial intervention had been set at a low threshold and judicial intervention delayed the arbitration proceedings. This issue has been addressed by empowering the Arbitral Tribunal to grant interim relief which shall be judicially enforceable under Section 17. Under the 1996 Act, the Arbitral Tribunal did not have the power to grant judicially enforceable interim relief and the parties had to approach the court for interim relief. However now, under the amendment, the parties can approach the court for interim measures only before the commencement or after the conclusion of the arbitral proceedings.

The Indian judiciary had also set a low threshold with respect to pre-arbitral judicial intervention in relation to an application for reference to arbitration (under Section 8) and appointment of the tribunal (under Section 11). The Amendment Act, 2015 has tried to address this issue by providing that the court will confine itself to the examination of prima facie existence of a valid arbitration agreement and not determine the validity of the arbitration agreement, when the courts are approached for referring the matter to arbitration or for appointing the arbitrator.

Applicability of Part I
In 2012, the apex court in the Balco judgment held that Part I of the Arbitration Act which deals with domestic arbitration would not apply to arbitrations seated outside India. This left the foreign parties to International Commercial Arbitration remediless, when it came to enforcing an interim order against the assets of the opposite party situated in India. Domestic courts were prevented from granting interim relief in Foreign Seated Arbitrations. With a view to overcome this drawback, a new proviso to sub-section (2) of Section 2 has been inserted by the amendment Act which makes the provisions relating to interim measures (Section 9), assistance of court in taking evidence (Section 27) and appeals from orders [Section 37 (1) (a) and Section 37 (3)] applicable to foreign seated arbitration.

Direct Access to High Court
Under the Amendment, High Courts have been made an exclusive forum for reliefs in case of international commercial arbitrations. This is a welcome change as earlier the foreign parties had to approach District Courts for any relief and were are not accustomed to the district level legal system. They would also have to go to remote interiors of the country to litigate. This amendment will also ensure a better decision in the first instance by the higher judiciary. However, such an amendment will increase the workload of the High Courts, which are already burdened with pending cases and this might cause potential delay in the proceedings.

No automatic stay of execution
Under the 1996 Act, upon admission of challenge under Section 34, there used be automatic stay of enforcement of the award under Section 36, which was problematic. This issue has been addressed by the Amendment Act, 2015 and it has been provided that enforcement of arbitration award will be stayed only when the court orders for the stay made in accordance with the provisions of Code of Civil Procedure, 1908, which requires demonstration of sufficient cause for stay.

Challenge to the Arbitral Award
Under the 1996 Act, there was ambiguity with respect to the meaning of ´public policy´ which was a ground for challenging arbitral award. This allowed parties to challenge the award under the ambiguous ground of ´public policy´ and this caused delay in the settlement of arbitral proceedings. The amendment has tried to address this issue by clearly defining ´public policy´ to include: (i) fraud or corruption or violation of confidentiality and admissibility of evidence provisions in the Act; or (ii) in contravention with the fundamental policy of Indian Law or (iii) conflict with the notions of morality or justice. In order to ensure speedy settlement, it has been clarified that the court will not entail review of the merits of the dispute in determining whether the award violates the fundamental policy of India. Furthermore, to reduce the confusion of whether ´patent illegality´ is included within the meaning of ´public policy´, it has been provided that while ´patent illegality´ is a ground for challenging purely domestic awards, it is not a ground for refusing enforcement of foreign award. This amendment will ensure easier enforcement of foreign award and shall facilitate speedy settlement of the dispute.

Impartiality of Arbitrator
Under the Arbitration Act 1996, the test for neutrality as laid down under s. 12(3) is not of actual bias but whether the circumstances in question give rise to any justifiable apprehensions of bias. However the judiciary has carved out an exception for state parties to appoint employee arbitrators even though it may give rise to justifiable apprehensions of bias . In order to adhere to the international arbitration regime, the International Bar Association guidelines on Conflict of Interest in International Arbitration have been adopted by the Amendment Act. A list of relationships has been appended to the Amendment Act under the Fifth Schedule that provide for relations that might raise reasonable doubt as to the impartiality of the arbitrator. For example, any ex-employee, employee, consultant, advisor, director or part of the management among others will now be considered to raise justifiable doubts with regard to the independence of the arbitrator.

Furthermore, the categories specified under the Seventh Schedule make the arbitrator automatically ineligible. However, the parties may waive the applicability of the Seventh Schedule by a written agreement subsequent to the disputes arising. An interesting amendment regarding termination of the arbitrator reads that once the arbitrator is terminated under Section 14, the court shall automatically appoint another arbitrator. The parties need not file another application under Section 11 for the appointment for a new arbitrator, which was the case under the earlier regime.

Conclusion
The amendments brought about are favourable and a much required move towards India becoming a preferred destination for dispute resolution and investment. The onus now seems to be on the courts for interpretation to be in sync with the underlying objective of the amended Act. The intention behind the amendment being noble, it is expected that the arbitral proceedings shall be conducted at par with international standards. Such an amendment will surely help in resolving infrastructure disputes expeditiously.

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  • Arbitration Agreement can now be contained in ´Communication through electronic means´.
  • Model Fee Table of Arbitrator´s fees has been provided under Fourth Schedule to curb arbitrary fixation of arbitrator´s fees.
  • Time-line has been provided to prevent delay in arbitral proceedings and provision for Fast Track Arbitral Proceedings has been introduced for the first time.
  • Disposal of Arbitral Proceedings: 12 months and further extended by six months in case of sufficient cause.
  • Fast Track Procedure: completed within six months
  • Challenge to Arbitral Award: one year
  • Introduces actual cost regime where the conduct of the parties will be considered when deciding the costs, and levies a post-award interest at a rate that is 2 per cent higher than the prevalent interest rate.
  • Judicial intervention minimised: Courts to grant interim relief only during the period pre and post of arbitral proceedings. Arbitral Tribunal to have the power to grant judicially enforceable interim relief.
  • The threshold of judicial intervention has also been reduced as courts to deliberate only on the prima facie existence of the arbitration agreement for the purpose of reference to arbitration and appointment of arbitrator, and not decide upon the validity of the arbitration agreement.
  • Part I applicable to Foreign Seated Arbitration: Domestic courts to have power to grant interim relief in case of Foreign Seated Arbitration.
  • Higher Judiciary, i.e., High Court, to have jurisdiction over matters relating to International Commercial Arbitration.
  • No automatic stay of execution proceedings upon challenging the merits of the award.
  • Higher Judiciary, i.e., High Court, to have jurisdiction over matters relating to International Commercial Arbitration.
  • The meaning of ´public policy´, which is a ground for challenging arbitral awards, has been clarified. It has also been provided that ´patent illegality´ is a ground for challenging a domestic award but is not a ground for refusing the enforcement of foreign award.
  • Ensures impartiality of arbitrator by listing out the ´circumstances which give rise to justifiable doubts´ as to the impartiality or independence of the arbitrator under Fifth Schedule.

This article has been authored by Krishan Singhania, Partner, Singhania and Company, and Toshika Katare, Senior Associate, Singhania and Company.

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