This article has been written by Pragati Yadav, pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
The Arbitration & Conciliation Act, 1996 (‘Act’) was recently revised in 2019 (‘2019 Amendments’). The intention of the legislature to introduce the 2019 amendments was to make India a hub of domestic and international arbitration through the implementation of legislative changes to enable faster resolution of commercial disputes.
Eighth Schedule (‘Eighth Schedule’) introduced under Section 43J sets out the qualifications and expertise of an arbitrator and stipulates that a person shall not be entitled to be an arbitrator until at least one of these criteria has been complied with. Out of the nine qualifications listed, neither account for the qualifications of foreign lawyers or professionals. Section 24 of the Advocates Act, 1961, also provides that only citizen of India can be enrolled under the Act as an advocate.
The aim of this article is to address the evolution of India’s stance on the appointment of foreign arbitrators in India seated arbitrations. The author also criticized the criteria pointed in section 43J, read with Eighth Schedule. This article has been divided into five parts, Part I of this article will provide the introduction of the Article. Part II of this Article provides the overview of the Appointment of arbitrators and Exclusion of foreign arbitrators in India seated arbitration. Part III provides the Position prior to the Amendment Act of 2019. Part IV of the Article discusses the future of foreign arbitrators in India. Finally, Part V will make the concluding remarks of the author.
Appointment of arbitrators and Exclusion of foreign arbitrators
Subject to some formal criteria, the parties will be free to agree on the procedure for the appointment of the arbitrator(s). Section 11(1) specifically stipulates that a person of any nationality may unless otherwise accepted by the parties, be appointed as an arbitrator. Accordingly, the Act expressly provides for the choice of the parties to appoint an arbitrator. Despite the 2019 changes, Section 11(1) remained unchanged.
Apart from undermining the autonomy of the parties and the freedom to appoint arbitrators, the Eighth Schedule is in direct conflict with section 11(1) of the Act. Despite this clause, the General Rules of the Eighth Schedule, the clear mandate that the arbitrator shall conversant with the Constitution of India means that only individuals with such knowledge can serve as arbitrators. In addition, the use of the word ‘shall’ mean that the requirement is mandatory and not a directory.
The other issue with the Eighth Schedule is that it is in conflict with Section 11(9) that ‘In the case of the appointment of a sole or third arbitrator in international commercial arbitration, the arbitrator may appoint by the Supreme Court, or by a person or institution designated by that Court, of a nationality other than that of the parties to which the parties are citizens of different nationalities.’ Therefore, the introduction of the Eighth Schedule makes Section 11(1) largely redundant.
If the parties do not agree to appoint an arbitrator or if there is a disagreement between the parties with respect to the same arbitrator, it is for the court to appoint an arbitrator pursuant to Section 11, the court shall be bound by the Eighth Schedule as the language set out in Section 43J specifies that the qualifications, experience and norms for the accreditation process of arbitrators “shall be as specified in the Eighth Schedule.” In order to limit the intervention of the court in such cases, Section 11(3A) was adopted to allow the Supreme Court to designate arbitral institutions, which may also appoint arbitrators eligible under Eighth Schedule only. Thus, Eighth Schedule attempts to completely wipe out the participation of international arbitrators in Indian-based arbitration.
The deterrent effect of this amendment is that institutions will also bound to comply with the Eighth Schedule when nominating arbitrators to Indian Seated Arbitration Rules, even though Rule 6.1 of the LCIA 2020 Arbitration Rules, Article 15 of the ICC Arbitration Rules, Article 17 of the SCC Rules 2017 clearly specifies that Unless otherwise agreed by the parties, the arbitrators shall not of the same nationality. In addition, several of the leading domestic arbitral institutions such as the MCIA (Rule 7.4), DIAC (Rule 8) and the ICADR (Rule 5(c)(iii)) also have similar rules mandating the neutral nationality of arbitrators. Effectively, the Eighth Schedule will cause unwanted legal controversy if one of the parties is Indian in the enforcement of the rules of those institutions and will also provide reasonable grounds for the opposition when the award is set aside. The Eighth Schedule, therefore, slows down formal arbitration instead of strengthening it.
Position prior to the Amendment Act of 2019
The Supreme Court in Bar Council v. A.K. Balaji (2018) decided that foreign lawyers had no absolute right to hold arbitration proceedings in India. However, this does not exclude them in situations where the rules of institutional arbitration apply or where the matter is regulated by the provisions of the Arbitration Act in the light of Sec 32 and 33 of the Advocates Act, 1961. They stipulates that the courts/ authorities can allow individuals who are not registered as advocates under the Advocates Act to appear before them.
The Supreme Court in Reliance Industries Ltd. & Ors v Union of India (2014) addressed a number of issues related with the appointment of foreign arbitrators when addressing the matter in the light of the appointment of the third (presiding) arbitrator if consensus on the appointment had not been reached by the parties. In order to maintain its neutrality in the matter, the court resolved the question of whether the nationality of the arbitrator should be different from that of the parties in the case. The court asserted that, as the seat of arbitration is in India, Indian law is the relevant law; it does not become the obligation of the Court to select the third arbitrator, who is an Indian national.
The Court also referred to the work of Redfern & Hunter and Gary Born in order to highlight the importance of the sole or third arbitrator being from a country other than the parties to the arbitration. The Court noted the following:
“In any case, the neutrality of an arbitrator is guaranteed by Section 11(1) of the Arbitration Act , 1996, which states that, unless otherwise decided by the parties, a person of any nationality can be an arbitrator. There was no agreement between the parties that an Indian national should actually be the third arbitrator. The Court also observed that Section 11(9) of the Arbitration Act explicitly empowers the CJI to appoint an arbitrator of a nationality other than the nationality of the involved parties in the case. The Court held, under the situations, that it was not impermissible for the Court to appoint an arbitrator who was not of Indian nationality.”
Future of foreign arbitrators in India
- Specialist Arbitrators
The choice of parties to appoint arbitrators is important, as certain disputes involve specialist arbitrators, specialisation in certain aspects of the dispute. The level of experience that these arbitrators have may mean that they are limited to a few countries. Section 11(1) of the Act takes account of this fact and allows the parties to appoint arbitrators of any nationality. however, with the exclusion of foreign experts from functioning as arbitrators, the parties to Indian-based arbitrations would be limited to the skill set and skills of Indian arbitrators, who may not always have the requisite technical expertise.
- Arbitration agreements entered into prior to the amendment
Probably one of the most damaging consequences of the implementation of the Eighth Schedule is the impact it would have on the arbitration agreements entered into before the amendment.
Arbitral tribunals constituted after the amendment would have to deal with challenges to the arbitrator at the expense of unenforceable awards. This will cause one of the parties to approach the courts, who will be bound by the Eighth Schedule which will lead to a vicious loop, allowing the arbitral proceedings to be prolonged and inefficient.
Though the amendment focuses on to make India a leading arbitration seat, the protectionist policy taken to do so will have the inverse effect. Although there are precedents confirming that the parties can nominate foreign nationals as arbitrators, the 2019 amendments implicitly precluded their appointment in India-seated arbitration. Contrary to its purposes, therefore, the 2019 Amendments have possibly decreased India’s chances of being a desirable seat for international arbitration.
Unfortunately, as is the case for most of these attempts in India, the amendment takes two steps forward and five steps backwards. The only redeeming feature of this Amendment might just be the current pending petition challenging the constitutionality of the Eighth Schedule where the court may take a broad and purposive interpretation from the precedent, which clearly and unequivocally allowed international lawyers to perform arbitration proceedings in India and the Court should held the Eighth Schedule unconstitutional. It would be recommended for the appropriate authorities to review the Eighth Schedule in order to explain this issue constructively.