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Union Cabinet strengthens Alternative Dispute Resolution by clearing amendments to Arbitration and Conciliation Act,1996

August,7,2015: Seeking to ensure faster settlement of commercial disputes, Cabinet today cleared a proposal to amend the Arbitration Act which sets a fixed timeline for arbitrators to resolve cases.

Arbitration and Conciliation Act,1996
Arbitration and Conciliation Act,1996

Under the amendments to the Arbitration and Conciliation Act, 1996 cleared by the Union Cabinet, an arbitrator will have to settle the case within 18 months.

But after the completion of 12 months, certain restrictions have been put in place to ensure that the arbitration case does not linger on, sources said.

An ordinance cleared by the Cabinet in December last year, the timeline was fixed at nine months. But the formulation was changed after inter-ministerial discussions. The ordinance was cleared by the Cabinet but never sent to the President for his assent.

The amendments to the law comes amidst its keenness to attract the maximum foreign investment. But foreign companies were said to be hesitant to do business in India because of the long-drawn litigations.

Another amendment puts a cap on the fees of an arbitrator.

The arbitrator will also have to spell out if there is a conflict of interest in the case he or she is taking up.

The move to amend the law comes amid the government’s move to promote ‘ease of doing business’ in India, which is being highlighted by Prime Minister Narendra Modi.

In its report submitted last year, the Law Commission had also supported amendment to the arbitration law to help India become a favoured destination, after Singapore and London, for international arbitration.

Lawyers and Judges had perceived the ordinance to be impractical. The Government had then refused to send the ordinance for the President’s assent. This had in turn affected investor confidence both at home and abroad. Read the LiveLaw story here.

Keeping this in mind and paying heed to Attorney General Mukul Rohatgi’s suggestions, the Cabinet has cleared the changes.

The amendments seek to place a cap on the time as well as the arbitrator’s fee. An arbitrator will have to settle the case within 18 months.

But after the completion of 12 months, certain restrictions have been put in place to ensure that the arbitration case does not linger on, as per reports. Under the ordinance, the timeline was fixed at nine months. The arbitrator will also have to spell out if there is a conflict of interest in the case he or she is taking up.

Union Law Minister, D.V. Sadananda Gowda had also hinted on repeal of the law being on top of Government’s priority list, in order to attract foreign investments.

He had earlier informed the Lok Sabha that the Government was making an effort to move away from entering into adversarial litigation in inter-ministerial and departmental matters. In fact, in August, the Law Secretary had written to all ministry Secretaries to “desist” from going to courts, and instead determine discords through alternative dispute resolution mechanism like arbitration.

The 246th Law Commission of India Report titled, ‘Amendment to the Arbitration and Conciliation Act, 1996’, had earlier in August, suggested some major changes to the Arbitration and Conciliation Act.

The report had sought to find an appropriate path and balance between judicial intervention and judicial restraint.

It had also recommended a model schedule of fees and has empowered the High Court to frame appropriate rules for fixation of fees for arbitrators and for which purpose it may take the said model schedule of fees into account. Read the report and a list of all major suggestions here.

The Arbitration and Conciliation Act, 1996 is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. The working of the 1940 Act was also the subject of the 210th Report of the Public Accounts Committee of the Fifth Lok Sabha. The Law Commission of India also examined the working of the 1940 Act in its 76th Report.

The Commission had earlier recommended various amendments to the Act in its 176th Report on the ‘Arbitration and Conciliation (Amendment) Bill, 2001’, after which the Government decided to accept almost all such recommendations and accordingly, introduced the ‘Arbitration and Conciliation (Amendment) Bill, 2003’ in the Rajya Sabha on 22nd December, 2003.

In order to re-look into the provisions of the Act, the Ministry of Law and Justice issued a consultation paper on 08th April, 2010 inviting suggestions from eminent lawyers, judges, industry members, institutions and various other stakeholders.

The move to amend the law comes amid the government’s move to promote ‘ease of doing business’ in India, which is being highlighted by Prime Minister Narendra Modi.


Brief Highlights of the Amendments
Institutionalization of Arbitration Proceedings: Arbitration may be conducted ad hoc or under institutional procedures and rules. Institutional arbitration as the name suggests refers to arbitrations conducted in accordance with the rules and procedure of an arbitration institution, this being opposed to ad-hoc arbitration that includes arbitration where the parties may choose on their own to devise and agree upon a tailored arbitral process or alternatively to incorporate existing rules of procedure. The institutions provide arbitration services as well as other general business functions and in some cases assist in the administration of the arbitration through its infrastructure. Some examples of institutional arbitration are the ICC based in Paris; the London Court of International Arbitration, the Dubai International Arbitration Centre (DIAC) created in 1994; and the Bahrain Chamber for Dispute Resolution (BCDR) created on 10 January 2010. In India, however the concept of institutional arbitration is limited to the Delhi High Court International Arbitration Centre; The Punjab & Haryana High Court Arbitration Centre; Indian Council of Arbitration (ICA); Nani Palkhivala Arbitration Centre in Chennai. With a view to promote the culture of institutional arbitration, the commission has recommended the following:
– Amendment of section 11 of the Act so as to encourage parties to refer disputes to arbitration.
– Introduction of the concept of emergency arbitrator by broadening the definition of arbitral tribunal.
– Formation of new arbitration centres for trade bodies and commerce chambers with their own rules, which can be modeled on the rules of the more established centers.


Fees for Arbitrators: One of the major constraints for effective ad-hoc arbitration in India is high cost associated with arbitrary, unilateral and disproportionate fixation of fees by several arbitrators. The Commission suggested that rationalization of fees for arbitrators would prove beneficial in achieving a cost effective solution for dispute resolution. The Commission has thus suggested a model schedule of fees empowering the High Court to frame appropriate rules for fixation of fees for arbitrators.


Conduct of Arbitral Proceedings: Chapter V of the Act deals with provisions relating to conduct of arbitral proceedings. However, despite existing provisions in the Act, arbitration in India has been largely inadequate and disappointing for all stakeholders. The proceedings primarily have become replica of court proceedings, rooted with unnecessary and frequent adjournments. There have been numerous rulings by the High Courts and the Supreme Court wherein the arbitrators have been nudged to hear and decide matters expeditiously, and within a reasonable period of time. Similarly, counsel for parties must refrain from seeking repeated adjournments or insisting upon frivolous hearings or leading long-winded and irrelevant evidence. The Commission thus recommended the following:
– Addition of the second proviso to section 24 (1) to the Act, discouraging the practice of frequent and baseless adjournments, and to ensure continuous sittings of the arbitral tribunal for the purposes of recording evidence and for arguments.
– Addition to the preamble of the Act, which does not directly affect the substantive rights and liabilities of parties, but however does serve as guidance for arbitral tribunals and courts to interpret and work the provisions of the Act.


Judiciary and Arbitration: The judicial machinery was intended to provide essential support to arbitration process. However, time and again the arbitration proceedings have been frustrated in the ambush of judicial machinery. There is strikingly an imbalance between the judicial machinery and arbitration proceedings. In the words of Lord Mustill “It is equally important that the balance is maintained by a recognition by the courts that just as arbitration exists only to serve the interests of the community, so also their own powers are conferred only to support, not supplant, the extra-judicial process which the parties have chosen to adopt”. The Commission has strived to adopt a middle path to find an appropriate balance between judicial intervention and judicial restraint. In order to combat delays due to intervention of judicial machinery the Commission has suggested the following:
– The existing scheme of the power of appointment being vested in the “Chief Justice” to be changed that to the “High Court” and the “Supreme Court” and has expressly clarified that delegation of the power of “appointment” shall not be regarded as a judicial act.
– Amendment to section 11 (7) of the Act, so that decisions of the High Court (regarding existence/nullity of the arbitration agreement) are final and non-appealable where an arbitrator has been appointed.
– Addition of section 11 (13) to the Act, so that the Court endeavors to dispose of the matter within sixty days from the service of notice on the opposite party.
– Addition of sections 34 (5) and 48 (4) to the Act, that would help an application under such sections be disposed off expeditiously and in any event within a period of one year from the date of service of notice.
– A time limit under section 48 (3) of the Act has been introduced, which is aimed at ensuring that parties take their remedies under this section seriously and approach a judicial forum expeditiously and not by way of an afterthought.


Scope and nature of pre-arbitral judicial intervention: The Act recognizes situations where the intervention of the Court is envisaged at the pre-arbitral stage, i.e. prior to the constitution of the arbitral tribunal, which includes sections 8, 9, 11 in the case of Part I arbitrations and section 45 in the case of Part II arbitrations. Such sections directly affect reference to arbitration and thereafter constitution of arbitral tribunals. There have also been many deliberations over scope and nature of permissible pre-arbitral judicial intervention and whether such power constitutes a “judicial” or “administrative” power. The Commission has suggested amendments to sections 8 and 11 of the Act. With respect to the scope of the judicial intervention, it has suggested that the same be restricted to situations where the Court/Judicial Authority finds that the arbitration agreement does not exist or is null and void. In so far as the nature of intervention is concerned, it is recommended that in the event the Court/Judicial Authority is prima facie satisfied against the argument challenging the arbitration agreement, it shall appoint the arbitrator and/or refer the parties to arbitration, as the case may be.


Setting aside of domestic awards and recognition/enforcement of foreign awards: Section 34 of the Act deals with setting aside a domestic award and a domestic award resulting from an international commercial arbitration whereas section 48 deals with conditions for enforcement of foreign awards. Currently, the Act treats all three types of awards in a similar way i.e. judicial intervention where awards even have been made by a foreign judicial body. In order to legitimate the judicial intervention with respect to domestic awards resulting from an international commercial arbitration and enforcement of foreign awards, the Commission has proposed amendments that would deal with purely domestic awards, including setting aside by the Court if the Court finds that such award is vitiated by “patent illegality appearing on the face of the award”, subject to that “an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence.” Further, time and again courts have set aside awards on grounds of “public policy”. The Commission has suggested restriction of the scope of “public policy” and that an award be set aside on such grounds only if it is opposed to the “fundamental policy of Indian law” or is in conflict with “most basic notions of morality or justice”.


Judicial Intervention in foreign- seated arbitrations: Part I of the Act, states that “This Part shall apply where the place of arbitration is in India”. The Supreme Court in this regard has held that Part I mandatorily applied to all arbitrations held in India, however, Part I also applied to arbitrations conducted outside India unless it was expressly or impliedly excluded. Further, there have been many deliberations with regard to seat and venue of arbitration. The Commission has therefore, has suggested amendments to sections 2(2), 2(2A), 20, 28 and 31 of the Act.


Automatic stay of enforcement of the award upon admission of challenge: The scheme of Act is such that the pendency of a section 34 application renders an arbitral award unenforceable. This virtually paralyzes the process for the winning party/award creditor and frustrates the very objective of alternate dispute mechanism. The Supreme Court with regard to such an anomaly has opined “the moment an application challenging the said award is filed under section 34 of the Act leaving no discretion in the court to put the parties on terms, in our opinion, defeats the very objective of the alternate dispute resolution system to which arbitration belong”. Therefore, in order to rectify this mischief, the Commission has suggested certain amendments to section 36 of the Act that would provide that the award would not become unenforceable merely upon the making of an application under section 34 of the Act.


Powers of Tribunal and interim measures: Section 17 of the Act provides that the arbitral tribunal has the power to order interim measures of protection, unless the parties have excluded such power by agreement However, the Apex Court has held that the even though the tribunal is empowered to pass interim orders, the same cannot be enforced as orders of court as it is only section 9 of the Act, that expressly provides for courts’ powers to pass interim measures in case of arbitration. In light of the same, the Commission thus suggested amendments to section 17 that would not only provide teeth to interim orders of the arbitral tribunal but also provide for the due recognition and enforcement as “Court Orders”.


Arbitrability of fraud and complicated issues of fact: The issue of arbitrability of fraud has arisen on numerous occasions and there exist conflicting decisions of the Supreme Court on this issue. One set of decisions of the Supreme Court hold fraud and serious issues of allegations as “non-arbitrable”, while the others recently have in the interest of justice and equity expressly held them to be arbitrable. In the absence of a clear provision of the Act as to what constitutes an arbitrable issue and what does not and in order to rest the controversies, the Commission has suggested amendments to section 16 of the Act thereby making issues of fraud expressly arbitrable.


Neutrality of Arbitrators: One of the basic ingredients of any judicial or quasi-judicial adjudication is that it must be in accordance with principles of natural justice and fairness. In the context neutrality of adjudicating authorities including those of arbitrators, viz. their independence and impartiality, is critical and vital to the entire process of adjudication. Section 12(3) of the Act, provides that “An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality…”. However, the test is to identify such circumstances that lead or give rise to justifiable doubts with respect to conduct of the arbitrator in the arbitration proceedings. Further, there has been plethora of judgments of the Supreme Court on this subject matter saying that the independence of the arbitrators cannot be compromised at any stage of proceeding. The Commission has suggested, “There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties’ apparent agreement.” With a view to combat this issue, the Commission has suggested the following:
– Requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts.
– Incorporation of a Schedule that would serve guide to determine whether circumstances exist which give rise to such justifiable doubts.
– Situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective “justifiable doubts” regarding his independence and impartiality.


Amendment to definition of "party": Arbitration is a consensual form of dispute resolution, with the arbitral tribunal deriving powers and authority on the basis of the “contract” or the “agreement” between the parties. Parties cannot invoke arbitration unless there exists an agreement between them. Further, this gives rise to a widespread consequence – it takes away the right of the party to the arbitration agreement to avail its remedies in a traditional courts for disputes covered by the arbitration agreement; and makes the consequent award binding, with a limited right of recourse. It is further noted here that the parties to the agreement are the ones bound by the award of the arbitrators and thus excludes from within its purview that are connected and are essential to the dispute. Taking a narrow interpretation of the term “party” to the agreement would not be satisfactory and thus the Commission has proposed to amend the definition of “party” accordingly.


Costs and Interest on sums awarded: Litigation in India is an expensive proposition and arbitration is no such exception to it. However, in order to fine-tune the same, the Commission recommended a new section to empower arbitral tribunals to award costs that are rational and realistic.
The issue on whether arbitral tribunals are authorized to award future interest is payable not only on the principal sum but also on the interest accrued till the date of the award has been a controversial one in absence of any express and clear provision/intent under the Act. The Commission has thus made efforts to clarify the scope of powers of the arbitral tribunal to award compound interest, in as much as to rationalize the default rate from the existing rate of 18% to a market based determination in line with commercial rates.


Other amendments
Place of Incorporation: An amendment has been proposed to the definition of “international commercial arbitration so that the test for determining the residence of a company is based on its place of incorporation and not the place of central management/control.


Definition of “Arbitration Agreement”:  The Commission has proposed that the arbitration agreement in question or dispute must envisage a “subject matter capable of settlement by arbitration.” This is done so as to give statutory recognition to the doctrine of arbitrability. Further amendments are suggested to extend the scope and bring within the purview those arbitration agreements also that are accomplished by way of electronic communication/means.


Forfeiture of statement of defence: Adjudication of disputes is delayed many a times due to dilatory tactics of the Respondent in communicating its statement of defence. In order to prevent this, the Commission has proposed amendments to section 25 (b) to include within the power of the arbitral tribunal the discretion to forfeit such a right of the respondent and proceed as undefended.


Conclusion
The Arbitration and Conciliation Act, 1996, even though in force for almost two decades, has failed in terms of its intrinsic deliverables due to inconsistencies and infirmities including those of high costs and delays. These inordinate delays as opposed to the basic objective of the Act of speedy justice put the alternative dispute regime at par with the traditional judicial regime. Even though traditional courts have to a major extent been pivotal in upholding the inherent objective of the Act, however, it often happens that arbitration related proceedings get caught up and lost in the huge list of pending cases, thereby frustrated the very object of quick alternative disputes resolution.
In order to straighten these infirmities and get in line with the international practices the amendments to the Act were indispensable and once enacted hope to surface and uphold real intent behind the alternative dispute resolution legislation.

Links to Bare Acts at LatestLaws.com-

 

Read Full Text of Law Commission Report- 

 

Law Commission of India 246th Report

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