Trinath Tadakamalla and Yamini Roy of Phoenix Legal assess recent amendments to Indian arbitration law and how they will affect commercial dispute resolution
The law on arbitration has been evolving in India and the recently amended (Indian) Arbitration and Conciliation Act 1996 (Act) is India's attempt to provide an effective tool for commercial dispute redressal.
When drawing up dispute resolution clauses in contracts, cost and time efficiency are prime factors that swing decisions in favour of, or against the application of particular rules in arbitration. Arbitration is a preferred path for steering clear of languishing Indian court ordeals and so parties also choose rules where court intervention is minimal but effective when required.
Against the backdrop of the changes to the Act and the already overburdened Indian judicial system, it seems more likely that an arbitral award can now, more or less, achieve the otherwise illusory status of being 'final and binding'.
Until recently, Indian arbitration practice was riddled with myriad pitfalls. Parties were frequently dragged back to courts, which was counter-intuitive to their decision to arbitrate.
In these circumstances and to address these issues, parliament passed the Arbitration and Conciliation (Amendment) Act, 2015 by replacing the Arbitration and Conciliation (Amendment) Ordinance, 2015, which later received presidential assent on December 31 2015.
Court interference in international commercial arbitration
The amended Act has finally put to rest the debate on the applicability of part I of the Act to international commercial arbitrations. Those being arbitrations where at least one party is a foreign citizen, a foreign government, a body corporate incorporated offshore, or an association or body of individuals whose management and control is offshore (foreign seated or otherwise).
The Act has harmonised the law between the Supreme Court's watershed decisions in Bharat Aluminium v Kaiser Aluminium Technical Services and Bhatia International v Bulk Trading, by providing that part I of the Act will not apply to foreign seated arbitrations and clarifying that parties in international commercial arbitrations can choose to opt out of the limited applicable provisions of part I. This includes provisions on interim relief from Indian courts pending arbitral proceedings, court assistance for the tribunal to take evidence, and appeals to courts from orders granting or refusing the grant of such interim measures.
Grounds for challenge
One of the remedies available to a losing party against whom a domestic award has been issued, is to apply for the setting aside of the award on the grounds that the award conflicts with the 'public policy of India'. The scope of this term had become wider as a result of several judgments.
For domestic awards, in Oil and Natural Gas Corporation v SAW Pipes, the Supreme Court of India widened the 'public policy' net to hold that an award is against public policy if it is 'patently illegal', meaning, where it is contrary to the statutory provisions of substantive law in force in India. For foreign awards, under Sri Lal Mahal v Progetto Grano Spa, the Supreme Court held that enforcing the award would contravene public policy only if it were in conflict with the fundamental policy of Indian law, the interests of India, or justice and morality.
The amended Act restricts the scope of 'public policy' and clarifies that an award (domestic or foreign) will conflict with the public policy of India only if: (a) the making of the award was induced or affected by fraud or corruption; (b) it conflicts with the most basic notions of morality or justice; or, (c) it contravenes the fundamental policy of Indian law which cannot entail a review on the merits of the dispute. However, it remains to be seen to what extent an Indian court would review the facts to ascertain whether or not an award violated fundamental policy of Indian law.
Further, to benefit disputing non-residents, the Act now specifically restricts the grounds of 'patent illegality' being argued for awards rendered in international commercial arbitrations. For resident parties with a domestic award, challenging the award on patent illegality cannot be based on claims of erroneous application of law or a call for re-appreciation of evidence.
Steps towards a utopian arbitration
Fast track procedure
Parties can now agree at any stage before, or at the time of appointment of the arbitral tribunal, to fast track the arbitration procedure which would result in receiving an award within six months of the reference. In this process, the arbitrator needs to decide the dispute based on documents filed without oral hearings, unless considered necessary by the arbitrator or on the parties' request.
Quick commencement of proceedings after interim relief
Arbitral proceedings need to commence within 90 days (or a further period as the court directs) from the date of grant of any interim protection under section 9 of the Act.
Time limit for arbitrator appointment
Courts must endeavour to appoint arbitrators within 60 days from the date of service of notice on the opposite party in the case of an application for appointment.
Robust conflict rules
Arbitrators now need to disclose if they have been in any financial, business, professional, or other relationship with the parties or the subject matter of the dispute, and the grounds for disqualification of arbitrators are quite robust. The Act also now provides two schedules that list the grounds for challenging appointments which raise justifiable doubts on impartiality or independence. Notably, the Act also restricts parties' employees (existing or former) from being appointed as arbitrators.
Expedited arbitral award
An award now needs to be passed within 12 months (extendable by parties mutually by six months) from the date of reference. Extensions beyond this period are subject to court consent and courts may reduce the arbitrator's fee by up to five percent for each month of delay and substitute one or all the arbitrators forming part of the tribunal. Arbitrators are also incentivised with an 'additional fee' as may be agreed by the parties, if an award is rendered within six months.
Expedited proceedings for arbitral challenge
An application for setting aside a domestic award needs to be disposed of expeditiously within a year of the date of service of notice to the opposite party.
New regime for costs
The Act provides detailed provisions on costs and stipulates that the courts/arbitrator can only order reasonable costs for legal fees, witness attendance, institution fees, and so on. Further, the default rule is for an unsuccessful party to bear costs and the court/arbitrator is free to order to the contrary for reasons recorded in writing and after considering circumstances such as conduct of parties, frivolous counter-claims, reasonable settlement offers, and so on. Arbitrators can also impose exemplary costs for an adjournment without sufficient cause.
Definition of 'court'
The Act now clarifies that a 'court', in the context of an international commercial arbitration, means the relevant High Court having subject matter jurisdiction, causing lesser non-resident award holders to struggle with local vernacular, dilatory and procedurally cumbersome proceedings before district courts. Enforcement of foreign awards should improve, as the High Court is likely to view procedural objections and oppositions during enforcement more severely and with a keener eye and may decide the objections faster than a lower court.
Restriction on courts in interim relief applications
To reduce judicial intervention in the arbitral process, civil courts can only deal with applications for interim relief if they are convinced that the arbitrator will be unable to provide the relief sought.
Rationalising domestic arbitration fee structure
The amended Act has attempted to rationalise arbitrators' fees and provides a model fee structure for arbitrators (to be regulated by the High Courts) between INR 45,000 and INR 3 million ($680 and $45,000) based on the dispute sum, with sole arbitrators being entitled to 25% more. This structure is not applicable to international commercial arbitrations and institutional arbitrations.
Stay of domestic award execution pending challenge
The Act clarifies that a domestic arbitral award will not become unexecutable merely upon the lodging of an application challenging the award. Execution will be stayed if the court grants an order of stay based on a separate application filed by a party. The court is required to consider the (Indian) Code of Civil Procedure, 1908 in respect of the granting of a stay of a money decree which, among other things, requires a court to obtain security from, or impose conditions on a judgment debtor.
The amended Act is in its nascent stage of implementation. Due to the substantial amendments, certain friction is arising from continuing arbitral and court proceedings as regards how they are treated, but this should be ironed out in time. However, it can be said that the changes have made the law of arbitration in India effective by making standard dilatory and browbeating measures heavy on both party and arbitrator pockets. This is a very welcome step and has paved the way for faster and more efficient arbitrations being established in the country, when applying the new rules of the game.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Trinath Tadakamalla is a partner at Phoenix Legal who focuses on contentious matters. He represents some of the top players in the energy and infrastructure sector on complex regulatory issues and high-value disputes before domestic courts and international arbitral tribunals across the world, including conflict zones.
Tadakamalla's recent representations are:
About the author
Yamini Roy is a principal associate at Phoenix Legal. Yamini primarily focuses on energy, resources, projects and construction, and advises on M&A transactions and corporate matters, including restructuring and exits (contentious or otherwise). She frequently advises foreign investors and multinational corporations on a wide array of legal issues and assists them in their contentious matters and related settlements.
Roy has represented: