Reform of the Indian Arbitration and Conciliation Act

In the past few years there have been significant developments to the Indian arbitration law, bringing the Indian arbitration regime closer to global standards. These include ¹ : the restriction of the Indian court’s jurisdiction over foreign-seated arbitrations through the Supreme Court’s BALCO decision in 2012;² the restriction of the Indian court’s jurisdiction over foreign-seated arbitrations through the Supreme Court’s BALCO decision in 2012;³ the 2014 Law Commission report⁴ calling for extensive amendments to Indian arbitration law in light of the problems that “plague the present regime of arbitration in India”;⁵ and the announcement of the government’s intention to amend and reform the Arbitration and Conciliation Act 1996 (Act) in August 2015.⁶

Building on these developments, on 23 October 2015 the government promulgated an ordinance – the Arbitration and Conciliation (Amendment) Ordinance 2015⁷ (Ordinance) – to amend the Act with immediate effect. The Arbitration and Conciliation (Amendment) Bill, 2015 (Bill) was passed by the Lok Sabha (India’s lower house of parliament) on 17 December 2015 and the Rajya Sabha (India’s upper house of parliament) on 23 December 2015. It was held to come into force from 23 October 2015, the date of the Ordinance.

India’s aspirations to become a major international centre of arbitration have long been hindered by its arbitration laws and their judicial interpretation. These developments signal a welcome change in approach. The provisions of the Bill closely follow the recommendations of the Law Commission and go a long way towards reforming Indian arbitration law. Some of the major changes are outlined below.

Key changes

Appointment of arbitrators

• The Bill amends section 12 of the Act, which deals with the grounds for challenging the appointment of an arbitrator. It introduces significantly greater clarity and detail on the circumstances affecting the neutrality of arbitrators. It sets out a list of circumstances (set out in the newly inserted fifth schedule of the Act) which “give rise to justifiable doubts as to the independence or impartiality of arbitrators” and require written disclosure from a prospective arbitrator, along with a list of circumstances which render a person ineligible to be appointed as an arbitrator (set out in the newly inserted seventh schedule). These circumstances closely mirror the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration.
• Section 11 of the Act provides for the judicial appointment of arbitrators and was previously a major bar to the prompt conclusion of arbitration proceedings. Changes introduced by the Bill include: clarifying that delegation of the power of appointment is not a delegation of judicial power, thereby permitting delegation; providing that appointment decisions are final and not subject to appeal; restricting the scope of judicial scrutiny at this stage to determining the existence of an arbitration agreement; and, requiring courts to attempt to dispose of such applications within 60 days.

Reducing delays

• The Bill inserts a new provision into the Act (section 29A) requiring arbitral tribunals to render awards within 12 months, subject to a six month extension with the agreement of the parties, and upon showing sufficient cause, a further extension by the court. While extending this time period, courts may reduce the arbitrator’s fees by five per cent for each month of delay, and the parties may opt to pay the arbitrators additional fees for concluding the arbitration within the original six month period. Given that arbitration in India is currently extremely protracted, this is a welcome and significant development.
• The Bill introduces a fast-track arbitration procedure (section 29B) under which, at the discretion of the parties, there will be a single arbitrator, proceedings will be conducted through written submissions and awards will be announced in six months.
• The Bill amends section 34 of the Act, which deals with challenges to arbitral awards, so that challenges to awards must be disposed of by the courts within a year.

Interim measures

• Significant changes have been made to sections 9 and 17 of the Act, which deal with interim measures. Arbitral tribunals now have the same powers as courts with regard to interim measures, both in relation to their scope and their effect; courts cannot entertain applications for interim measures once the arbitral tribunal has been constituted; and, if a court orders interim relief before the commencement of arbitral proceedings, the arbitral proceedings must be commenced within 90 days.
• The Bill also clarifies that the powers to grant interim relief under Part I of the Act (dealing with domestic arbitration) also apply to international arbitration. This is a particularly valuable clarification in light of the BALCO decision, which held that Part I of the Act would not apply to international arbitration. Though this decision was welcome insofar as it reduced the scope for judicial interference in international arbitrations connected to India, it also ruled out any possibility for judicial relief in such cases. This clarification closes that loophole.

Enforcement of arbitral awards

• Section 34 of the Act, which, as set out above, deals with challenges to arbitral awards, provided for awards to be challenged based on public policy, which had been judicially interpreted to include patent illegality. This resulted in establishing a low threshold for successful challenges and was a major cause for concern, particularly in international arbitration. The Bill improves this scheme in two ways: firstly, it clarifies that patent illegality as an element of public policy applies only to domestic, and not international, arbitration; and secondly, it specifies that reviews under section 34 should not be reviews on merits.
• The Bill also amends section 36 of the Act, which permitted the stay of execution of arbitral awards upon any application to set aside the award. This had the effect of severely delaying enforcement efforts. The amended provision only allows for the execution to be stayed if the court has passed a specific order. This ensures that a stay of the arbitral award is not an automatic consequence of an application to set it aside.

Costs

• The Bill introduces a comprehensive costs regime (section 31A), including factors to be considered in awarding and calculating costs, and provides that the default position is for the losing party to pay the costs of the other party.

Definition of ‘court’

• For the purposes of international arbitrations, the definition of ‘court’ has been restricted to the High Courts. This excludes the lower first instance courts, which often took an anti-arbitration stance, and has the welcome effect of ensuring that any judicial intervention in international arbitration is restricted to the more arbitration friendly higher courts.

Conclusion

The Bill was accompanied by another bill passed on the same day – the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015 – which implements long-promised proposals to create specialised commercial courts. Commenting on these bills, DV Sadananda Gowda, India’s Minister of Law and Justice stated that they “reflect commitment of the government to improve investment climate and spur economic growth.”

There was some concern regarding the effect of these amendments on existing arbitrations, which, for the most part, was not addressed by the Ordinance. This issue was addressed by the insertion of a new section 25A, which clarifies that the Bill will not apply to arbitral proceedings retrospectively, unless agreed otherwise by the parties.

The Bill makes significant progress towards the Indian government’s stated goal of reforming arbitration law, which is considered to be a necessary step towards encouraging foreign investment in India. Some of the changes aimed at reducing delays are particularly unique and should be welcomed by the arbitration community. These changes will hopefully herald a bright new era for India, creating an arbitration friendly jurisdiction, where arbitration will be looked at favourably by all parties involved.

*Authors: Sherina Petit, Partner and Head of India Practice, Abhimanyu George Jain, Associate and Daniel Jacobs, Trainee Solicitor