Evolution of India's Arbitration Law: 1. Proposed Amendments 1.1 Seat of Arbitration and Application of Part I and II
Evolution of India's Arbitration Law: 1. Proposed Amendments 1.1 Seat of Arbitration and Application of Part I and II
Evolution of India's Arbitration Law: 1. Proposed Amendments 1.1 Seat of Arbitration and Application of Part I and II
Introduction
There is a growing concern and debate amongst investors about the efficacy of
arbitrations in India and whether it should be a preferred mode of dispute resolution, like it
is in other jurisdictions. The Arbitration and Conciliation Act, 1996 (“Act”) has evolved with
time and attempted to keep pace with the changing global trend. The rapid and fast paced
globalization almost certainly results in an increase in disputes, commercial or otherwise.
Traditionally, Indian courts have been considered to be slow in their swiftness and an
increase in disputes has only over-burdened these courts, resulting in an extremely slow
adjudication. Over-burdened courts gave birth to their step-relative called Alternative
Dispute Resolution (“ADR”). ADR mechanisms such as arbitration, mediation and
conciliation gained popularity and became an integral part of commercial contracts. Parties
preferred to opt for arbitration to stay outside the ambit of civil courts. However, the past
decade has seen courts progressively expand the scope of the Act in a way that allows greater
judicial intervention before obtaining a “real” finality of order.
In order to fix this lacuna, the Law Commission of India (“LCI”) recently released a
consultation paper suggesting amendments in the existing Act. This bulletin briefly discusses
some key amendments proposed by the LCI and whether, in fact, the spirit of arbitration
will be preserved if the Act is amended.
1. Proposed Amendments
Present provision: Section 2(2) - “This part shall apply where the place of arbitration is in
India.”
Proposed amendment: Section 2(2) - “This part shall apply only where the place of
arbitration is in India.
Analysis: Divided into three parts,1 the scope of the Act covers both domestic as
well as international commercial arbitrations.2 The present language of section 2(2) of the
Act has led to conflicting views of the courts in deciding whether Part I of the Act will be
applicable when the place of arbitration is outside India. In the landmark case of Bhatia
1 Part I is entitled “Arbitration” and consists of 10 chapters containing sections 2 to 43. Part II pertains to
arbitration
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Issue VIII | October 2010
International v. Bulk Trading,3 the Supreme Court of India (“SC”) held that in absence of the
word “only” in section 2(2), Part I will apply to arbitrations held outside India as long as
Indian law governed the contract. The SC concluded that Part I will apply to all arbitrations
where the seat of arbitration is outside India, unless the parties agree to exclude provisions
of Part I. This view was again reiterated by the SC in Venture Global Engineering v. Satyam
Computer Services.4
The proposed amendment will ensure that Part I of the Act will only apply to
domestic arbitrations and, accordingly, it will have no application in international commercial
arbitrations where the place of arbitration is outside India. In other words, it appears that
going forward it may become immaterial whether the parties have or have not specifically
excluded the applicability of Part I thereby negating the effect of the judgments referred to
above. This amendment is expected to restore the spirit of the Act as it aims to cure the
controversial ruling of the SC.
From the proposed changes, it appears that the LCI is of the opinion that if all
provisions of Part I are made inapplicable to an international commercial arbitration where
the seat of arbitration is outside India, some practical problems may arise. For instance, if the
assets of one of the parties are situated in India, interim relief under section 95 of the Act will
not be made available to the other party. Further, the amendment also suggests that courts in
India can assist the tribunal in obtaining evidence under section 276 of the Act even if the
place of arbitration is outside India.
Present provision: Section 12 - “Grounds for challenge (i) When a person is approached
in connection with his possible appointment as an arbitrator, he shall disclose in writing any
circumstance likely to give rise to justifiable doubts as to his independence and impartiality.”
or after the award is passed but before it is enforced, to obtain an interim relief
6 Under section 27 of the Act, the arbitral tribunal or a party to the arbitration, can seek the assistance of a
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Issue VIII | October 2010
(i) such as the existence of any past or present relationship, either direct or indirect,
with any of the parties or any of their counsel, whether financial, business,
professional, social or other kind or in relation to the subject matter in dispute,
which are likely to give rise to justifiable doubts as to his independence or
impartiality; and
(ii) such other circumstances as may be provided in the Rules made by the Central
Government in this behalf.”
Analysis: Through this proposal, the LCI has merely spelt out what “any circumstance
likely to give rise to justifiable doubts” in the existing provision means. This will, like earlier, place
the burden of disclosure on the arbitrator(s). However, instead of a general disclosure, the
arbitrators may be required to give a specific disclosure in relation to all aspects enumerated
in the proposed amendment. It appears that the intention of the LCI for proposing the
amendment is to reduce challenges of appointment of arbitrators under section 12 and 137
of the Act.
Present provision: Section 34(2)(b)(ii) - “An arbitral award may be set aside by the court
only if, the arbitral award is in conflict with the public policy of India.
Proposed amendment: Section 34(2)(b)(ii) - “An arbitral award may be set aside by the
court only if, the arbitral award is in conflict with the public policy of India.
Explanation II - For the purpose of this section “an award is in conflict with the
public policy of India” only in the following circumstances, namely when the award is
contrary to the (i) fundamental policy of India; or (ii) interests of India; or (iii) justice or
morality.”-
7 This section lays down the procedure to be followed while challenging the arbitrator’s independence or
qualification. Once this remedy is exhausted, the aggrieved party has to wait for the award to be passed before
making an application to set it aside under section 34 of the Act
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Issue VIII | October 2010
Analysis: The SC in ONGC v. Saw Pipes Ltd8 examined the scope of section
34(2)(b)(ii) and ruled that when an award is contrary to any one of the three points stated in
the proposed Explanation II above, such an award can be set aside on the ground of public
policy. Clearly, with the addition of the proposed amendment the ruling of the SC giving
“public policy” a wide interpretation will get legislative sanctity.
In addition to the points mentioned in the proposed amendment, the SC had also
considered a “patently illegal” award as contrary to public policy. The consultation paper
recommends a new section 34A to be inserted, which will allow a domestic arbitral award to
be set aside on the ground of a “patent and serious illegality.” At this stage it is not clear why the
provision pertaining to patent illegality is applicable only to domestic awards.
Proposed substitution of section 36 of the Act - The present language of section 36 provides
that an award will only be enforced when the time period to set-aside the award has either
expired or if an application made under section 34 has been disposed off. In essence, if an
application to set aside an award is made within time, enforcement of the award comes to a
halt. Aggrieved parties take advantage of this to file frivolous applications, which either delay
or impede enforcement proceedings. The proposed amendment9 in section 36 provides that
a section 34 application will not act as a bar to enforcement unless a separate application for
stay of enforcement is not filed. The court, however, while deciding upon a stay application,
will have to consider the grounds alleged for setting aside the award.
Analysis: A careful analysis of this proposed amendment will surface some already
prevailing concerns with the Act. Firstly, it will result in multiplicity of proceedings. This
itself can be a time consuming process and result in an additional financial burden on the
parties. Secondly, where the award is first enforced i.e. the application for grant of stay is
rejected, and thereafter it is set-aside, the successful applicant will have to return the disputed
quantum. This can potentially result in commercial difficulties for large corporations where
they are first granted the disputed amount, and then after a few years asked to return the
whole/part amount. This means that in effect, the court does not permit the successful
applicant to use the money till the section 34 application is not decided, thereby making the
rejection of grant of stay meaningless. Lastly, the proposed substitution may still not prevent
unsuccessful parties from filing frivolous applications as multiplicity of proceedings only
means that rejection of a grant of stay can be appealed. Till all appellate forums are not
exhausted, the application under section 34 may also just get delayed. This will, clearly,
facilitate evasion of enforcement.
Conclusion
Even though all proposed amendments have not been covered in this bulletin, the
intention of the LCI can be deciphered to some extent. The law makers appear to be of the
opinion that the present Act has lacunas which have defeated the very purpose of preferring
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice. © PSA
Issue VIII | October 2010
Authored by:
Dhruv Suri
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice. © PSA