Friday, August 22, 2014

Guest Post - Proposed Amendments to Arbitration Law: Part 1

[The following post is contributed by Prachi Narayan and Aditi Pal of Vinod Kothari & Company. They can be contacted respectively at and]


On August 5, 2014, the Law Commission submitted to the Law Minister its 246th report on “Amendment to the Arbitration and Conciliation Act, 1996.

There has been much back and forth with respect to the proposed amendments to be carried out in the existing Arbitration and Conciliation Act, 1996 (“Act”). The Government had earlier accepted the recommendations made by the Law Commission in its 176th Report on the same subject and had introduced the ‘Arbitration and Conciliation (Amendment) Bill, 2003’(‘Bill”) in the Rajya Sabha in December 2003.

Subsequently the Ministry of Law and Justice constituted the Justice Saraf Committee on Arbitration to study in depth the implications of the recommendations of the Law Commission of India contained in its 176th report. In the wake of the Saraf Committee recommendations, it was suggested that the Bill in its present form should be withdrawn and reintroduced since the provisions of the Bill were insufficient and contentious. The Bill was consequently withdrawn from Rajya Sabha and the Ministry of Law and Justice issued a consultation paper in April, 2010 inviting suggestions from eminent lawyers, judges, industry members, institutions and various other stakeholders.

On the basis of various comments and suggestions received, the Ministry prepared a “Draft Note from Cabinet ” and the Law Commission was asked to review the said draft notes. Following an extensive study of the draft note, the Law Commission submitted its latest 246th report.

Part III of the report contains the proposed amendments to the Act. This post is an attempt to enlist the proposed amendments in comparison to the existing provisions of the Act for easy perusal and reference. The brief highlights have been provided for understanding the intent behind the amendments.

Brief Highlights of the Proposed 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[1]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.

[Continued here]

- Prachi Narayan and Aditi Pal

[1]Law Commission Report on Amendments to Arbitration and Conciliation Act.

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