Tuesday, May 4, 2010

Proposed changes in India's arbitration law: Part I


The Ministry of Law and Justice has recently released a Consultation Paper on Arbitration on ‘Proposed Amendments to the Arbitration & Conciliation Act, 1996’. We would like to thank Mr. Bhushan Shah for bringing this to our attention. In this post, I will briefly look at two of the main changes proposed; and some more changes will be examined in a second post.

1. The extent of Part I of the Act:

One of the main controversies in arbitration has been over the application of Part I of the Act in respect of international commercial arbitrations where the seat is not in India. Section 2(2) of the 1996 Act which deals with the applicability of Part I presently reads, ‘This part shall apply where the place of arbitration is in India.’ The judicial decisions on the point (Bhatia International v. Bulk Trading, Venture Global v. Satyam etc) have led to Part I being applied to such international commercial arbitrations. In Venture, the Court stated, “the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and to hold that where such arbitration is held in India, the provisions of Part-I would compulsorily extent permitted by the provisions of Part-I. IT is also clear that even in the case of international commercial arbitration held out of India provisions of Part-I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions.” This line of judicial reasoning has been widely criticized by practitioners of international commercial arbitration – for example, reference may be made to this note by Dipen Sabharwal.

One of the grounds behind the decision in Bhatia was the absence of the word ‘only’ in Section 2(2). To get over this line of argument, the Consultation Paper proposes amending Section 2(2) to read, ‘This part shall apply only where the place of arbitration is in India. Provided that provisions of Sections 9 and 27 shall also apply to international commercial arbitration where the place of arbitration is not in India if an award made in such place is enforceable and recognized under Part II of this Act.

Section 9 deals with interim relief by Courts, and Section 27 deals with Court assistance in taking evidence. Under the proposed amendment, only these two provisions will continue to apply in respect of international commercial arbitrations where the place of arbitration is outside India. Those are perhaps necessitated by practical difficulties – where the place of arbitration is outside India, parties might find it necessary, for instance, to move for interim relief in India (say, where the assets of the party are entirely in India).

2. Controversies over Section 11:

Section 11 is again an area of great controversy – Patel Engineering has meant that the position is (summarised in the Consultation Paper itself) that “the Chief Justice or the designated Judge will have the right to decide preliminary aspects as regards his own jurisdiction to entertain the request, existence of a valid arbitral agreement, the existence or otherwise of a live claim, the existence of the conditions for the exercise of the power and on the qualifications of the Arbitrator. The Chief Justice or the designated Judge would be entitled to seek the opinion of an institution in the matter nominating an Arbitrator but the order appointing an Arbitrator could be passed only by the Chief Justice or the designated Judge. Even designation of a District Judge as the authority under Section 11(6) of the Act was not warranted under the scheme of the Act. The order passed by the Chief Justice of the High Courts or by the designated Judge of that Court being a judicial order, is appealable under Article 136 of the Constitution to the Supreme Court but no such appeal would lie against the order made by the Chief Justice of India or a Judge of the Supreme Court designated by him… The decision of the Supreme Court has rendered the provisions contained in sub-section (4), (5), (7), (8) and (9) of Section 11 with regard to appointment of Arbitrators by any person or institution designated by the Chief Justice of India and totally ineffective… This is clearly contrary to the objective of the Act…

The amendment proposes substituting the words ‘by the Chief Justice or any person or institution designated by him’ with the words ‘by the High Court or any person or institution designated by it’.

Further, Section 11(7) presently reads, ‘(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justice or the person or institution designated by him is final.’ This Section is proposed to be substituted by the words, ‘A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the High Court or the person or institution designated by it shall be final and no appeal including a letter patent appeal shall lie against such decision.” Appeals under letters patent may well be barred – by including the words ‘High Court’ instead of ‘Chief Justice’ the amendment at first glance seems to reaffirm that the function of appointment of arbitrators is a judicial and not an administrative function. If that is the case, special leave petitions under Article 136 of the Constitution cannot be excluded. Whether this amendment will solve the problems created by Patel Engineering is not entirely clear. But two additional sub-sections are proposed to be included. Sub-section (13) recognises the role of arbitral institutions and allows courts to authorize arbitral institutions to make appointments for arbitrators.

The proposed sub-section reads, ‘(13) Notwithstanding anything contained in foregoing provisions in this Sections, where an application under this Section is made to the Supreme Court or High Court as the case may be for appointment of arbitrator in respect of ‘Commercial Dispute of specified value’, the Supreme Court or the High Court or their designate, as the case may be shall authorize any arbitration institution to make appointment for the arbitrator. Explanation:- For the purpose of this sub-section, expression ‘Commercial Dispute” and “specified value” shall have same meaning assigned to them in the Commercial Division of High Court Act, 2009.’ Why this is limited to cases of “specified value” is unclear. Perhaps, such authorization should be made permissible in all cases? Also, this provision allows Courts to refer applications to “any” arbitral institution. Given that this power is a wide one, perhaps it would be better to allow such delegation to approved arbitral institutions, with the power to maintain a list of approved institutions being delegated to the executive? 

The proposed sub-section (14) reads, ‘(14) An application made under this Section for appointment of arbitrator shall be disposed of by the Supreme Court or the High Court or their designate, as the case may be as expeditiously as possible and endeavour shall be made to dispose of the matter within sixty days from the date of service of notice on the opposite party.’ This is certainly welcome – one question may arise however. What about cases where a reference is made to an arbitral institution under clause (13)? Will this time limit be made applicable there too, or will the specific rules of each arbitral institution prevail? 

1 comment:

Mihir Naniwadekar said...

Additional discussions of the consultation paper are available in a series of posts on the Practical Academic Blog. Mr. Bhushan Shah's post is available at http://practicalacademic.blogspot.com/2010/05/guest-post-on-consultation-paper.html and another discussion is available at http://practicalacademic.blogspot.com/2010/05/review-of-consultation-paper-on.html