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17 Nov 2015

The recent Ordinance on Arbitration: a much-needed boost to dispute resolution in India

For many years, arbitration has been a commonly followed process to settle disputes in India, although with time, different custodians have been vested responsibility for dispute resolution.  For centuries, the heads of families helped amicably resolve issues even though many of them lacked formal legal training or indeed, any experience at all. Later, councils of “village elders” (Panchayats) were formed to facilitate resolution of disputes. The authority and powers vested in them made their decisions more binding.

The emergence of international frameworks such as the Geneva Protocol, 1923, and Geneva Convention, 1927 under the League of Nations brought into force the Arbitration (Protocol and Convention) Act, 1937. This was followed by Indian Arbitration Act, 1940 and Recognition and Enforcement of the Foreign Arbitral Award Act, which implemented the New York Convention of 1958. As disputes became more complex and involved technical and commercial matters, the need was felt in India for a more structured form of law. This need was fulfilled by the adoption of the Arbitration and Conciliation Act, 1996. A more modern piece of legislation, this Act helped India make considerable progress towards having a quick and a cost-effective mechanism for the settlement of commercial disputes.

Greater need for arbitration as a credible alternative to litigation

Opportunity costs are now higher than ever before. And as the underlying issues become more complex, Courts take longer to study the arguments and deliver their verdicts. This is why a growing need for alternative methods of dispute resolution, such as arbitration was felt within the business community.

Today, globalization has provided businesses with a more convenient environment and thus it is much easier to exercise movement of goods and facilitate provision of services across territorial borders. The commercial class is today more aware of the complexities in business models so they move forward with a more stringent approach to ringfence, if not completely avoid probable events that may adversely impact scheduled timelines towards completion of projects and/or discharge of agreed upon arrangements. Although agreements cannot always be watertight and hence disputes fully avoided, at such instances, arbitration affords parties with the possibility of saving time in the resolution of disputes and this is something that is not available in the litigation route through India’s Civil and Criminal courts.

Conventional legal proceedings are often very long-winded under the state run legal system whereas arbitration shortens the process because it can be arranged without resorting to the delays generally associated with litigation in courts. The strict rules applicable to court-based proceedings do not apply to arbitration procedures. For instance, the parties are free to mutually agree on the venue and the time to commence the proceedings. The choice of arbitrators too is left to the parties, who can mutually agree on who will arbitrate in their matter. Most critically, what arbitration offers is an opportunity for the parties to agree to a mutually acceptable arrangement that is based on meeting the expectations of the parties rather than on decisions based strictly on the laws of the land.

Lacunae in the existing arbitration laws and their detrimental impact

Although the Arbitration and Conciliation Act, 1996 repealed the 1940 Act with the intent to provide a prompt dispute resolution structure that would also boost the confidence of foreign investors, the new act did not adequately deliver on account of various loopholes. On various occasions, the mechanism of appointment of arbitrator by the Chief Justice (as provided under the erstwhile Act of 1996) has stood as a question before the Hon’ble Courts. It was upto the Courts to decide whether this was a judicial or administrative role and whether it was capable of being challenged under the Indian Constitution.

A key aim of the 1996 Act was to limit the intervention of the courts in the arbitral process and thus speed up the process of delivering justice. However, this objective too was not effectively achieved as the 1996 Act failed to specify a fixed period for concluding arbitral proceedings. Neither did it restrict intervention by Courts, as Section 34 of the erstwhile Act gave courts the right to intervene and the power to aside an arbitral award on grounds of ‘conflict with the public policy of India’. Importantly, what exactly constituted “public policy” was not clearly defined; this became a convenient loophole that parties exploited to prolong arbitral proceedings.

These gaps in the 1996 Act came in the way of India realizing its potential as a destination for foreign investment. There was also another, perhaps unintended, consequence. Over the past two decades, countries such as Singapore and Hong Kong have emerged as credible alternatives to London for arbitral proceedings. Although cheaper than conducting arbitral proceedings in London, having to go outside India for arbitral proceedings results in Indian companies having to spend valuable foreign exchange. Had a robust domestic option been available for arbitration, the money saved could perhaps been more gainfully deployed in the creation of productive assets within the country.

It is heartening that political dispensations have begun to realize the need to remedy this situation. This is a vital change, especially given our emergence as a digitally-driven, innovation-impelled global economy where competitive advantage is created and honed by agility. In this context, promulgation of “The Arbitration and Conciliation (Amendment) Ordinance, 2015” is a step aimed at making it easier to do business in India by providing a more robust dispute resolution mechanism within the country.

Salient features of the new Ordinance

  1. To rule out any form of impartiality by arbitrators, Section 12 is amended to mandate disclosure by the arbitrator in writing of certain information such as any direct or indirect interest in the subject matter in dispute thus precluding appointment of persons having specified relationship with any of the parties.
  2. The Act has also been made applicable on transactions and disputes where the seat of the arbitration is outside India and as an option the exercise of this is left at the discretion of the parties as they can avoid applicability by entering into an agreement to this effect.
  3. To speed up the process, a 12 month period has been specified for completion of arbitral proceedings. The award can be delayed by a maximum period of 6 months under special circumstances with all parties giving consent to such extension of time. Where the award is not made within the stipulated time period, the mandate of arbitrators shall automatically stand terminated.
  4. Insertion of sub-section in Section 11 to the effect that an application for appointment of an Arbitrator shall be disposed of by the High Court or Supreme Court as expeditiously as possible and best efforts should to be made to dispose of the matter within 60 days from the date on which the notice has been served on the opposite party.
  5. A provision for fast track procedure for conducting arbitration is introduced. Parties to the dispute may agree that their dispute be resolved through fast track procedure. Award in such cases shall be given in six months from the date when parties refer to Fast Track procedure.
  6. Section 17 is to be amended for empowering the Arbitral tribunal to grant all kinds of interim measures which the Court is empowered to grant and such orders shall be ‘enforceable in the same manner as if it is an order of Court”.
  7. Section 24 is amended to the effect that oral arguments as far as possible shall be heard by the arbitral tribunal on a day to day basis and no adjournments shall be granted without sufficient cause with a provision for imposition of cost on the party seeking adjournment without sufficient cause.
  8. Amendment of Section 34 relating to grounds for challenge of an arbitral award in violation of ‘Public Policy of India” and allowing such a challenge only in cases where award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with morality or justice. This is likely to significantly reduce the risk of frivolous delays caused by parties taking the “public policy” defence.
  9. Insertion of a new provision to provide that applications to challenge the award are to be disposed of by the Court within one year.
  10. Amendment to Section 36 to the effect that ‘Award’ can only be stayed where the Court has passed any specific order on an application filed by the party. Simple application to set aside an award under Section 34 shall not hold significance.
  11. Insertion of Section 31A provides specific provisions for costs to be awarded regime to reduce the risk of frivolous and meritless objections and litigation.

Prima facie, the approach and the structure of the new legislation does give the commercial/business community reason to believe that arbitration in India will finally be an easier, faster and more cost effective method of dispute resolution. But the proof of the pudding is in the eating, so only time will tell if this version of an arbitration framework will deliver.

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