New Arbitration Law in India

Since mid-1991, India decided to move away from an apparent mixed economy stance to adopt market oriented reforms with the aim of integrating with the industrialized nations of the northern hemisphere. The more compulsive factor was the growth of Asian Tigers – a group of small nation-states beginning to rule the roost. Singapore, Hongkong, Taiwan, Vietnam, Indonesia, Malaysia et al became the role models for India. The impending evolvement of the new world order in year 2005 due to the WTO gave it a further charge

Opening up the country to direct foreign investment on such a massive scale was also prompted by India’s disastrous position on the foreign reserves front. When the liberalization commenced, India had just sufficient reserves to last a week’s imports and was on the verge of defaulting on its payment obligations

Foreign investment in India in the past faced typical Asian problems – political and country risk, graft and corruption, need of several licenses and permissions to do business, tariff and non-tariff barriers, labour problems and no exit policy, very poor infrastructure, a barrage of laws (several of them with evident socialist overtones) and an overburdened judiciary, with millions of pending cases

The investment thus got diverted to other neighbouring nations – this was inspite of several inherent advantages that India enjoyed – English as the business language, the legal system based on common law, a ready-made market, cheap and skilled labour force, rich natural resources base and the rule of law

One of the primary grievances of the foreign investor had always been the delay, cost and uncertainty involved in litigation in the ordinary courts of the country. None of it would be finally disposed of for atleast 10 years from commencement

The alternative was arbitration. India has bee a signatory to the Geneva and New York conventions and passed two legislations to enforce it. However, “marketing” of the nation with strengths was low on the government agenda. Apparent flaws in the arbitration laws and difficulty in enforcing foreign awards added to the confusion

An Arbitration Ordinance was promulgated mid-1995. But political change at the Federal level delayed the entire process of converting it into a statute

Beginning January 25, 1996, India has decided to give a further fillip to attracting overseas investment by adopting a new Arbitration law based on the UNCITRAL Model Law on International Commercial Arbitration. The Arbitration and Conciliation Ordinance 1996 (the Ordinance) has become effective from that date, which together with similar far-reaching changes in patents, corporate and tax laws should make India among the Big Emerging Markets. On-going arbitration proceedings will however continue to be governed by the previous law

It is the purpose of this write-up to highlight the salient features of this new law on Arbitration

Purpose and Repeal

The Ordinance consolidates and amends the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign awards and also defines the law relating to conciliation. It recognizes the recommendation of UNCITRAL that adoption of its Model Law shall ensure uniformity of law of arbitral procedures worldwide and produce the desired convenience to international commercial practice

Prior to the Ordinance, arbitration in India was governed by the Arbitration Act, 1940. The Geneva and New York conventions were implemented through the Arbitration (Protocol and Convention) Act, 1937 and Foreign Awards (Recognition and Enforcement) Act, 1961

The Ordinance seeks to repeal all the three legislations and unifies domestic and international commercial arbitration of all types

Reading the entire Ordinance does convey that it is a sincere and timely effort to make available a speedy, inexpensive and impartial alternative to litigation for resolving disputes, particularly involving a foreign element

Party autonomy, transparency and minimal court interference

The most important feature of the Ordinance is that it recognizes the autonomy or freedom of the parties in the conduct of the arbitration proceedings. It allows parties to resort to arbitration to resolve disputes in any matter arbitrable, save where a certain dispute or certain kinds of disputes cannot be submitted to arbitration. It is for the parties to agree on the place of arbitration. Failing such choice, the arbitral tribunal will decide the question, having regard to all the circumstances of the case

There is increased transparency by requiring the arbitrator to state reasons for his award, unlike under the previous law, where the arbitrator was not so obliged, unless required by the parties

Again, unlike in the past when the Arbitration Act contained about 15 instances in which the Court could interfere with arbitration, the new law reduces this to two cases only

Conciliation

The concept of conciliation as a formal means of resolving disputes, is for the first time sought to be introduced in India. If at the end of the conciliation, the conciliator feels that there exists elements of settlement which may be acceptable to the parties, he shall formulate the terms of such possible settlement and submit them to the parties for their observation. After receiving the observations, the conciliator may formulate the final terms – if the parties sign the settlement agreement it shall be binding on the parties and the persons claiming under them. The settlement agreement shall have the same effect and status as if it is an award on agreed terms

Appointment of Arbitrators

The new law gives maximum freedom to the parties – they may agree either on the number and procedure for appointment by themselves or agree to abide by an existing procedure for appointment. The parties may so decide, provided the number is not an even number, If there is no determination, the tribunal shall consist of a sole arbitrator. Where three arbitrators are to be appointed, one shall be appointed by each party and the two nominated arbitrators shall appoint the third arbitrator, who shall be the presiding arbitrator

Where a party fails to appoint an arbitrator within 30 days or the two appointed arbitrators fail to agree on the presiding arbitrator, any party may apply to the Chief Justice of the concerned High Court (of that State) to make the appointment

Where the arbitration is to be before a sole arbitrator and the parties fail to agree upon one within 30 days from receipt of request by any party for appointment, the same shall be made by the Chief Justice or any person or institution designated by him

There is thus a basis laid for institutional arbitration -by arbitral institutions – both by reference of the parties or when designated by the Chief Justice

In any of the above scenarios in case of an international arbitration, the appointment can be of an arbitrator of a nationality other than the nationalities of the parties, where the parties belong to different nationalities

Conduct of Arbitration proceedings

The arbitration tribunal as determined above shall commence the proceedings – the claimant shall file its statement of claim and the defendant shall file its defence and counter-claim, if any

The new law makes it very clear that the detailed rules found in the Code of Civil Procedure, 1908 regarding trial of suits and the provisions of the Indian Evidence Act, 1872 pertaining to rules relating to evidence adduced in courts regarding relevancy, proof, and examination of witnesses shall not apply to arbitration proceedings. Arbitrators shall however be governed by the general principles of fair play and natural justice

If a party wishes to dispute the jurisdiction of the tribunal, it must raise the plea not later than the submission of the statement of defence. If the tribunal rejects the plea, it shall continue with the proceedings. The aggrieved party, in such case, can apply to the concerned court to set aside the award passed by the tribunal. The party shall not be prevented from raising such plea merely because it has appointed, or participated in the appointment of an arbitrator

Detailed provisions are also laid down for the procedure to be followed by arbitrators, the manner in which the awards have to be passed and the method by which awards can be made rule of the court

The tribunal, in the arbitration proceedings, shall encourage settlement of the dispute through mediation or conciliation. If such settlement is arrived at, the tribunal shall give its award on the agreed terms – in such case, no reasons need be stated

The tribunal is entitled to make an interim award

Existence of the Arbitration Agreement

Under the new law, the arbitral tribunal may give its own ruling on its jurisdiction including the ruling on the validity of the arbitration. For this purpose, an arbitration clause forming part of the commercial contract shall be treated as an agreement independent of the other terms of the contract and a decision of the tribunal that the contract is null and void shall not make the arbitration clause invalid

Governing law of the Arbitration

In the absence of an agreement between the parties, the substantive law of India will be applicable in the case of an arbitration, other than an international commercial arbitration

In the latter case, the law agreed between the parties shall apply, failing which the tribunal shall apply the law that it considers appropriate. The tribunal shall also take into account, the trade usage applicable to the transaction

Costs and Interest as part of the Award

Where the award is for payment of money, the tribunal may award interest at such rate as it deems reasonable, for the whole or part of the period between the date of the cause of action and the date of the award. Unless otherwise directed in the award, the award amount shall carry interest at the rate of 18% p.a. from the date of award to the date of actual payment

The tribunal shall also be entitled to specify by whom and the amount of costs to paid. Such costs shall include the arbitrator(s)’ fees, legal fees and administrative costs (if any)

Setting aside of the Award

Under the prevailing, the grounds on which an award can be set aside by the court are several – and often under a quagmire of case law. Under the new legislation, these grounds have been substantially curtailed and are –

that a party to the arbitration agreement was under some incapacity

that the arbitration agreement is not valid under the law to which the parties have subjected it, or failing any indication thereof, under the law for the time being in force

that the party making the application was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case

that the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or that it contains decisions on matters beyond the scope of submission to arbitration

that the subject matter of the dispute is not capable of settlement by arbitration or the award is in conflict with the public policy of India (since there is uncertainty as to “public policy”, some clarification may become necessary)

A party seeking to set aside the award must apply to the court within three months of receipt of the award

If the court on such application does set aside the award, an appeal shall lie to the appellate court, but no second appeal lies from such order in appeal. A right to appeal to the Supreme Court of India however remains

If no application to set aside the award is made with the aforesaid period or it is rejected, the award becomes final and binding on the parties. Such final award shall be then enforceable as a decree of the court

Enforcement of Foreign Arbitral Awards

Though the new law repeals the two International conventions, there is no lack of continuity in the legislative provisions implementing them. In other words, there is no legal change in the legal position relating to enforcement of foreign awards in India. The schedules to new law reproduces these conventions

“Foreign Award” is defined to mean an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India

Enforcement of such awards may be refused in India only on any of the following grounds –

the arbitration agreement is not valid under the law of the country where the award was made

the party against whom the award is sought to be enforced was not given proper notice of the arbitrator’s appointment or of the arbitration proceedings, or was otherwise unable to present his case

the award deals with matters not submitted to arbitration

the award has been set aside or suspended by a competent authority of the country in which the award was made

the subject matter of difference cannot be referred to arbitration under the Indian law

the enforcement of the award would be contrary to the public policy of India

When the court is satisfied that the foreign award is enforceable, the award shall be deemed to be a decree of that court