April 11, 2013

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Indian Arbitration Law : Long Road Ahead

- Zerick Dastur, Senior Associate [ J. Sagar Associates ]
- Sneha Sheth, Associate [ J. Sagar Associates ]

Zerick & Sneha

Arbitration as an alternate dispute resolution mechanism was intended to be an effective and speedy means for disposal of commercial disputes. Presently, arbitration in India is governed by the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

Before the passing of the Arbitration Act, the law on arbitration was largely contained in The Arbitration Act, 1940; the (Arbitration Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. However, the general law contained in these three statutes had become obsolete, and a need was felt for a law which was dynamic and met the requirements of the day, while acting as a comprehensive piece of legislation on the subject.

The new Arbitration Act repealed the Arbitration Act, 1940; the (Arbitration Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961, and provided for a complete code covering domestic and international commercial arbitration, conciliation and enforcement of foreign arbitral awards.

Speedy resolution of disputes was one of the principle driving forces behind the enactment of this law. As the saying goes, "Delay defeats equity", this, particularly in commercial contracts where huge sums are at stake and the outcome of a dispute could determine the course of business relationships between two partners. Since its enactment, the law has undergone sweeping changes, with Courts interpreting various provisions in an effort to throw light on the legislative intent. The Supreme Court has described the beneficial features of the Arbitration Act as providing for

(i) fair resolution of a dispute by an impartial tribunal without any unnecessary delay or expense;
(ii) party autonomy being paramount, only being subject to such safeguards as are necessary in public interest; and
(iii) the Arbitral Tribunal is enjoined with a duty to act fairly and impartially.

The Arbitration Act provides that the agreement to refer a dispute to arbitration has to be in writing. The Act does confer a certain degree of freedom on the parties to the contract to agree upon the procedural aspects of the proceedings. The parties to an arbitration agreement may also agree to an arbitration being conducted under the aegis of specialized institutions such as the International Chambers of Commerce and the Singapore International Arbitration Centre ("SIAC"). These institutions have their own set of rules governing the conduct of the arbitration proceedings.

This law is also of particular interest to transactional lawyers, in addition to being a matter of regular practice for litigating lawyers. Arbitration clauses are carefully crafted to cater to the needs and intent of parties entering into an arbitration agreement. Issues such as seat of arbitration, governing law, jurisdiction of courts, applicability of the Indian Arbitration Act to international commercial arbitrations, and provisions for seeking interim relief from courts are some of the issues that are carefully considered while drafting an arbitration clause. In this context, it may be interesting to look at some of the provisions of the Arbitration Act, which would be of particular interest to the legal fraternity as a whole.

One of the core issues which has been under judicial scrutiny is the applicability of Part I of the Arbitration Act to international commercial arbitrations. The Arbitration Act has two parts: Part I dealing with the arbitration proceedings and Part II dealing with enforcement of foreign arbitral awards in India.

Indian courts have repeatedly held that Part I of the Arbitration Act, will continue to apply in the case of international commercial arbitrations unless it is excluded by the parties expressly or by necessary implication. Hence it is common for parties to expressly exclude Part I of the Arbitration Act in the arbitration clause of the contract. In the landmark Supreme Court judgement in the matter of Bhatia International v. Bulk Trading S.A, it was observed that where arbitration is held in India, the provisions of Part I would compulsorily apply, and parties are free to deviate only to the extent permitted by the derogable provisions of Part I.

In cases of international commercial arbitrations 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. In that case, the laws or rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to, or excluded by that law or rules will not apply. An implied exclusion of Part I of the Arbitration Act could also result if the parties agreed to a foreign law as the governing law of the arbitration agreement.

In the case of Videocon Industries Limited Vs Union of India, where the contract between the parties was governed by Indian law but the parties had agreed that the arbitration agreement will be governed by the laws of England, it was held that the same would necessarily imply that the parties had agreed to exclude the provisions of Part I of the Arbitration Act. Similarly in the case of Dozco India P. Ltd. v. Doosan Infracore Co. Ltd., where the law governing the arbitration was Korean law and the seat of arbitration was fixed to be Seoul in Korea, it was held that the provisions of Section 11(6) of the Arbitration Act had no applicability.

In a recent Supreme Court judgement of Yograj Infrastructure Ltd vs Ssang Yong Engineering and Construction Co. Ltd, the parties had agreed to make Singapore the seat of arbitration and agreed that the arbitration proceedings are to be conducted in accordance with the SIAC Rules. Rule 32 of the SIAC Rules provided that the law of arbitration would be the International Arbitration Act, 2002, where the seat of arbitration is Singapore. Accordingly it was held that Part I of the Arbitration Act would have no application.

It is well settled that in the absence of any other stipulation in the arbitration clause as to which law would apply in respect of the arbitral proceedings, the law governing the contract would also be the law applicable to the arbitration proceedings. It is pertinent to note that, while drafting an arbitration clause excluding the applicability of Part I of the Arbitration Act, it is also common for parties to retain the applicability of Section 9 of the Arbitration Act, which empowers Indian Courts to grant interim reliefs before, during and after the conclusion of arbitration proceedings.

This enables a party to move an Indian Court and seek urgent interim reliefs/injunctions even before the arbitration proceedings are initiated in cases where the party apprehends that the counter party is planning or attempting to dispose off or alienate assets/property situated in India to the detriment of the party seeking the injunction. This was emphasized by the Supreme Court in the case of Sundaram Finance Ltd. v NEPC India Ltd, where the Supreme Court held that in order to give full effect to the words, "before or during arbitral proceedings" in Section 9 of the Arbitration Act, it would not be necessary that a notice invoking the arbitration clause must be filed.

The expression, "before arbitration proceedings" implies that arbitral proceedings are actually contemplated author or manifestly intended and positively going to commence within reasonable time. Another issue which may be of interest is the provision under the Arbitration Act dealing with the challenge and setting aside of arbitration awards. Section 34 of the Arbitration Act provides that an arbitration award may be challenged before a Court only on the grounds provided therein. These include challenges in connection with incapacity of a party to the proceedings, validity of an arbitration agreement, natural justice, scope of the reference or submission or the composition of the arbitral tribunal.

A Court may also set aside an arbitration award if the award is in conflict with public policy. The proposition of challenge to an arbitration award on the ground of public policy was put to the test before the Supreme Court in the matter of ONGC. Vs. Saw Pipes Ltd. In this case, an award was challenged on the ground that the arbitral tribunal had incorrectly applied the law of the land in rejecting a claim for liquidated damages. The Supreme Court’s judgement in this case expanded the concept of public policy to add that the award would be contrary to public policy if it was "patently illegal".

The judgement has substantially expanded the grounds on which an arbitration award may be challenged before a court. An appeal from an order setting aside or refusing to set aside an arbitration award may be made in terms of Section 37 of the Arbitration Act to a court authorized by law to hear appeals from original decrees of courts passing the order.

In 2001, the Law Commission took a comprehensive view of the working of the Arbitration Act and recommended many amendments to the Arbitration Act in its 176th Report. Though the Arbitration and Conciliation (Amendment) Bill, 2003 was introduced in the Parliament, the Standing Committee was of the view that the provisions of the Bill gave room for excessive intervention by the Courts in the arbitration proceedings and emphasized upon the need for establishing an institution in India which would measure up to international standards and for popularizing institutionalized arbitration.

In view of the large number of amendments recommended by the Committee and because many provisions of the Bill were contentious, the said Bill was withdrawn from the Rajya Sabha. Recently, the law ministry has come up with a consultation paper proposing major changes in the Arbitration Act. Efforts are indeed being made in the right direction to ensure that an effective mode of alternate dispute resolution is set up.

Disclaimer - The views expressed in this article are the personal views of the author

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