This article has been written by Sushant Biswakarma, from Symbiosis Law School, Noida, and Ramya Kiranmayi Bhamidipati, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from lawsikho.com. This article deals with the recent amendments in the Arbitration & Conciliation Act, 1996.
In India, the Arbitration Proceedings are governed by the Arbitration & Conciliation Act, 1996 which is based on UNCITRAL Model Arbitration Rules, 1976 and UNCITRAL Model Law on International Commercial Arbitration.
The UNCITRAL Model Rules have been amended in order to meet the present-day requirements and resolve disputes more efficiently.
The Indian Arbitration Act also sought to make some changes in order to modernize it and standardize it with the international laws of arbitration.
This article analyzes the amendments that were made in 2019 along with their pros and cons.
Arbitration and Conciliation before the amendment
Arbitration is a way to settle disputes privately instead of going to court. It can be described as a process wherein the parties to a contract after having agreed upon to resolve the dispute without the aid of litigation, appear before a tribunal to seek remedies.
The arbitral tribunal has been defined in Section 2 of the Arbitration and Conciliation Act, 1996 as a panel of arbitrators.
An arbitrator is a person appointed to resolve the dispute. He is like a judge in the case. There can be one arbitrator or more, provided that the number remains odd.
Section 10 of the act gave the parties a free choice to determine the number of arbitrators for their proceedings as long as they are not in an even number.
The arbitral award is provided after the completion of the proceedings. Section 35 of the Act prescribes that the arbitral awards are binding on the parties and other claimants.
Similar to arbitration, Conciliation is a form of Alternate Disputes Resolution (hereinafter referred to as ADR).
In order to initiate conciliation, one party shall:
- Send a written invitation to conciliate, describing the issues to be discussed.
- When the other party accepts in writing the invitation, the proceeding of conciliation shall begin.
The parties may choose to appoint one – three conciliators.
Both parties together can appoint:
- One sole conciliator, or
- One conciliator each, or
- A third conciliator who shall act as a presiding conciliator as mentioned in Section 64 of the Act.
After the completion of the conciliation proceedings, the parties reach into a settlement agreement.
Section 73(3) says that the settlement agreement will be binding on the parties and other claimants.
Emerging need for Arbitration
As a result of Globalization, the scope of the business has widened and extended across the globe, ensuing many international trade and business, however, in such transactions resolving disputes has become an issue, due to complex legal systems in various countries. To avoid the prolonged Judicial System and expedite the settlement between the parties to the dispute. United Nations Commission on International Trade Law (UNCITRAL), subsidiary of U.N., has framed rules commonly called as ‘Model Law’ to harmonize and modernize the International trade and commerce, it also provided a comprehensive framework and procedure which the parties may be adopted for redressal of the disputes in cross-border transactions. Today most of the international trade agreements appeal to arbitration for dispute resolution. In India, The Arbitration and Conciliation Act, 1996 is framed in line with Model law.
Traditionally a dispute is resolved by referring to the jurisdictional court, however, this led to clogging of several cases in court across India and the resulting in prolonged litigation for resolving a minor conflict. Parties to the dispute have to wait for an unusually long time and due to which some of their financial interest is unresolved & blocked for several years. This situation is wrecked in case of cross border trade & commerce, also indicated laws have been a challenge to the parties. Also, on the introduction of Model law, many international players have pre-determined to refer disputes to arbitration form for a speedy, economical, and flexible procedure where the parties have the freedom to elect their arbitrator or judge who has experience in the relevant field. However, any conflict within the scope of the agreement can be referred to arbitration subject to the dispute resolution clause.
Invocation of Arbitration
In Commercial contracts, the ‘dispute resolution’ clause is vital, where parties agree to settle their dispute in a predetermined manner. Some drafters are considering a multi-tiered approach, where arbitration or litigation is called only after other ADR mechanisms have failed. Also, these days many commercial contracts, predominantly in international contracts, explicitly mention the dispute resolution clause; and arbitration is preferred forum for an easy and speedy resolution of their disputes, however, such clause shall clearly state the place and venue of arbitration. Also, Arbitration and Conciliation Act, 1996, has not expressly categorized certain disputes as non-arbitrable, however, courts have held that certain disputes cannot be adjudicated through arbitration forum. The following are the few disputes classified by the court as ‘non-arbitrable’:
- Disputes of criminal offenses (which are public in nature);
- Dispute arising out of illegal agreements;
- Determining guardianship;
- Nullity of marriage.
Why was the 2019 amendment required?
After the amendment of UNCITRAL Model Law in 2006, the UN General Assembly suggested all countries shape their laws relating to ADR accordingly, in order to achieve uniformity of arbitral procedures.
To make the process uniform
With the amendment, the government seeks to standardize the procedure of International Commercial Arbitration to make it at par with the international arbitration procedures.
Also, the process of domestic arbitration would become standardized for more efficiency.
To Promote Alternate Dispute Resolution
The Government of India is the biggest litigator in the country and it needed to promote a more cost-effective and faster way to resolve disputes.
The latest amendments seek to promote ADR and have formed a council that has been vested with the responsibility to do so.
With this amendment, we strive to make India a hub of domestic and international arbitration such as Singapore.
To reduce the burden of the courts
Courtroom litigation is still the most popular way people seek to resolve their disputes.
Even when people go for arbitration but cannot find an arbitrator, they approach a High Court or the Supreme Court for the appointment of Arbitrators.
The burden of the courts will be lifted to some extent with the presence of an Arbitration Council for the appointment of arbitrators.
To provide a faster remedy
The act provides that the proceedings of an Arbitration must be completed within 6 months from the date of appointing the arbitrators.
The arbitral award is to be given within 12 months from the date of appointment of arbitrators.
This will definitely speed up the entire procedure and provide a quicker remedy.
What are the key changes brought about by the amendment of 2019?
Definition of Arbitral Institution
Section 11 of the Arbitration and Conciliation prescribes the procedure for appointing arbitrators.
Prior to the amendment:
- Parties were free to choose arbitrators on their own.
- The number of arbitrators to be appointed could have been mentioned in the contract under the arbitral clause.
- A sole arbitrator could have been appointed by one party or together by both parties, or
- Each party could appoint one arbitrator each, and
- The appointed arbitrators shall appoint the third arbitrator.
After the amendment:
- Arbitral Institutions have been introduced for appointing arbitrators for cases excluding international commercial arbitrations.
- It has been defined in Section 2 of the Amendment Act of 2019 as an arbitral institution designated by the Supreme Court or a High Court as the case may be.
- In international commercial cases of arbitration, the arbitral institution designated by the Supreme Court will appoint arbitrators.
- In domestic arbitration, the same will be done by an arbitral institution designated by the concerned High Court.
- If any arbitral institution is not available, the Chief Justice of a High Court has to make a panel of arbitrators to work as an arbitral institution.
- The process of appointing arbitrators should be completed within a maximum of 30 days.
Eligibility of Arbitrators
An arbitrator is the most important person in an arbitration proceeding. He is like a judge who hears both parties and reaches a solution for settling the dispute between the parties.
The act had no eligibility criteria for an arbitrator prior to the amendment.
Section 11 stated the process of appointing arbitrators but did not mention any qualifications that may be required.
It was briefly mentioned in Section 11(8) that if any specific qualification is required for the arbitrator, then the party could make an agreement for the same before appointing one.
In order to maintain the quality of arbitrators, some qualifications and experience have been laid down in the 8th Schedule that the arbitrators are required to have.
The 8th Schedule states that in order to be an arbitrator, a person should be either:
- An advocate who has at least 10 years of experience in practising as an advocate; or
- A chartered accountant who has at least 10 years of experience; or
- A cost accountant with at least 10 years of experience; or
- A company secretary having at least 10 years of experience; or
- A former officer of the Indian Legal Service; or
- A law degree holder who has at least 10 years of experience in legal matters with the government, or public or private sector; or
- An engineering degree holder who has at least 10 years of experience as an engineer; or
- A former senior-level officer of the central or state government;
- A college graduate degree holder with at least 10 years of experience in specialized areas in the government, such as – telecom, information technology, intellectual property rights.etc.
On reading the list, it is clear that no foreign lawyer or any equally qualified foreigner can be appointed as an arbitrator.
The amendment was made to promote international and domestic arbitration and make the process easier, fairer and more reliable.
But, the exclusion of foreigners is in opposition to the intent behind the amendment.
In matters of international arbitration, the foreign parties will not have the arbitrator of their choice because of his nationality. This might discourage them to opt for Arbitration proceedings in India.
This defeats the purpose of the amendment as the purpose of the amendment was to promote arbitration in India and make India a hub of Arbitration.
The new amendment has introduced a new independent body, known as the Arbitral Council of India. The council has been assigned a number of functions including promoting ADR and framing policies to make the Arbitration procedures more efficient.
Section 43C of the amendment act of 2019 says that the council will be headed by a Chairperson who will be either:
- A former Judge of the Supreme Court, or
- A former Chief Justice of a High Court, or
- A former Judge of a High Court.
The chairperson is required to have specialized in the field of arbitration and must be experienced in the conduct or administration of arbitration.
The council also includes other members who are:
- An eminent practitioner of arbitration who is knowledgeable and experienced in domestic as well as international arbitration.
- An eminent academician who specializes and professes ADR laws.
- The Minister of Law and Justice, or Secretary in the department of legal affairs.
- Secretary in the Department of Expenditure or in the Ministry of Finance.
- A representative of a government recognized body of commerce & industry, who will be on a rotational basis.
- Chief Executive Officer or a Secretary ex officio.
Duties and Powers of Arbitration Council
The main duties of the Arbitration Council are:
- To frame policies for grading Arbitral Institutions and authorizing arbitrators.
- Frame norms to maintain a good quality level of ADR.
- Promote institutional arbitration by strengthening arbitral institutions.
- Keeping records of arbitral awards granted in India and Abroad.
- And other duties that will be decided by the Government.
Grading of Arbitrators and Arbitral Institutions
The Arbitration Council of India has been assigned with the duty to grade Arbitrators and the Arbitral Institutions. Grading will be done on the basis of:
- Quality and capability of arbitrators;
- Meeting the time limits for disposal of domestic or international arbitral proceedings.
Time-limit for completing proceedings
Section 23 of the Act talks about Statements of claim and defence. Prior to the amendment, the time limit for statements of claim and defence could have been:
- Agreed upon by the parties; or
- Could have been decided by the arbitral tribunal.
After the amendment of 2019, a new subsection – Section 23(4) has been added to the section.
The new Section states that the statement of claim and defence should be completed within 6 months from the day when the arbitrator or all the arbitrators have been appointed.
Section 29(1) has been added which states that:
- The arbitral award must be given within 12 months from the date of completion of proceedings as prescribed under Section 23(4).
The proviso to the Section states that in cases of International Commercial Arbitration:
- The arbitral award must be given as quickly as possible;
- The arbitrators must try as hard as possible to give the award within 12 months from the date of completion of Arbitral Proceedings.
The intent behind this amendment of time limitation was to provide a faster remedy and save the parties their time and money.
But, earlier the parties had the freedom to decide the time limit of the proceedings that could match their schedule and fit them best, which cannot be done now.
The time limit puts a lot of pressure on the arbitrators to complete the proceedings quickly, it ignores the fact that international arbitration can be very complex at times and completing them within 6 months could not be possible.
Arbitrations can happen within multiple parties, that could make huge stacks of paperwork. Completing such proceedings within 6 months could not actually be possible.
An arbitral award is a judgment or decision made by the arbitrator or arbitration tribunal, issued in writing, based on the merits of the case in an arbitration proceeding. The arbitral award includes interim or interlocutory award passed by the tribunal or judge; also, interim orders are enforceable as a final order. Enforcement of an arbitral award is governed by Arbitration and Conciliation Act, 1996 and Civil Procedural Code, 1908, the domestic and foreign awards shall be enforced similar to a decree by an Indian court provided period to apply setting aside an award has lapsed. However, mere filing of the set-aside application shall not make an award unenforceable, unless an order is granted by the court in this regard.
The Contents of the arbitral award shall be:
- Reduced in a formal document and signed by the member of the arbitral tribunal.
- Date & place of arbitration (award shall be deemed to be determined at the place mentioned).
- Mention the reasons upon which award is passed unless the parties collectively agreed to specify any reason.
- In the matter of money payments, the award shall mention the total amount payable includes sum and interest for the period specified at a reasonable rate to be paid.
- The cost of arbitration shall be fixed by the arbitrational tribunal as per sec. 31A.
- A signed copy shall be delivered to the parties.
Arbitral awards can be appealed subject to the provisions of section 37 of Appealable orders. After such an appeal aggrieved party cannot refer for 2nd appeal, however, such a clause does not refrain a party to appeal the award to the Supreme Court.
Section 34 of the Act talks about setting aside an arbitral award. It says:
- The only remedy to a court against an arbitral award is to set aside the award by way of an application by a party.
- The party seeking to set aside an award must “furnish proof” that:
– The party did not have the capacity;
– The arbitration agreement was invalid;
– The party was unable to present his case properly;
– The main disputes are not addressed in the award.
In the latest amendment, the words “furnishes proof that” has been replaced with “establishes on the basis of the record of the arbitral tribunal that”, in order to elucidate that the parties seeking to set aside an award will have to establish their case solely relying upon the record before the arbitral tribunal.
Setting aside an arbitral award can be done by presenting a petition before a Court, and if the court is satisfied the award can be set aside.
If any petition under Section 34 is pending before the court, the arbitral award could not be enforced.
This was prescribed in Section 87 of the act which says that:
- There will be an “automatic stay” on awards if the same has been challenged and the petition is pending before the court.
- Which meant that even after receiving an arbitral award, the award holder party can not enforce his award while the petition of the other party that challenged the petition is pending before the court.
In the case of Hindustan Construction Company Ltd. v. Union of India, the Supreme Court was of the view that this section clogged the rights of a bona fide award holder and deprived him of enjoying his award.
The court also observed that this section leads companies into insolvency as it does not allow companies to pay their creditors with the amount received from the arbitral awards till the petition is bending.
It was the contention of the petitioner that companies such as the National Highway Authority of India (NHAI) were owed thousands of crores of rupees which was not paid due to the automatic stay on arbitral award. This automatic stay is putting such companies through insolvency.
The court said that any payment that the award holder is due to receive will not be processed because of the automatic stay of the arbitral award. That pushes such award holders to the rigours of the insolvency code.
The award holder may be able to get his award enforced only after years of litigation due to the automatic stay. While it defeats the purpose of ADR which was to provide speedy remedy.
The Supreme Court considered Section 87 to be defective and held that it leads companies towards insolvency. Also, award holders are deprived of enforcing their order.
Therefore, Section 87 was repealed by the Supreme Court.
Point of difference between court proceedings and arbitration
Point of difference
Nature of Litigation
Litigation can be both civil and criminal
It always deals with civil litigation
Judicial redress is formal, thereby the parties have to follow the procedure prescribed in Civil Procedure Code, 1908, and Criminal Procedure Code, 1973 for civil and criminal suits respectively.
In arbitration, the parties settle outside the court, the procedure adopted is at the discretion of the independent arbitrator. The arbitrator is not accustomed to abide by the code. Usually, Arbitration is tailor-made, However, the Arbitrator shall stick to the Arbitration and Conciliation Act, 1996
Judicial proceedings are public
As the arbitration is a private proceeding between the parties to the dispute, therefore confidentiality is maintained.
It is a time taking process because of statutory procedures also subject to availability of judge and court functioning
Matter can be referred to an arbitrator at any time and resolve the dispute at the earliest.
Parties Convenience and selection of judge
Suit shall be instituted at a court within the jurisdiction of the cause of action or such a place agreed by the parties, however, such suit can be instituted at court only. And the parties have no say in judge selection.
The seat and venue of the arbitration can be decided by the parties. And refer to such a person they mutually agree to elect as arbitrator.
Limited evidentiary process
Rules of evidence are allowed
It is expensive compared to arbitration as it involves attorney fees, court fees, security deposition, pre-trail costs.
The cost of arbitration is restricted to arbitration fees and attorney fees.
His role is to file a case, gather evidence and put a motion
Attorney(s) presents the case before an arbitrator, however, his role is restricted.
Binding effect and appeal of an order
The decision taken by the court can be appealed to a higher court by the aggrieved party.
The decision taken by the arbitrator is final and binding on the parties, also further appeal cannot be made subject to sec. 37 of the Arbitration and Conciliation Act.
On 09th August 2019, Arbitration and Conciliation (Amendment) Act, 2019 was published on Official Gazette of India, this amendment has made India to embrace arbitration-friendly friendly states and to ease the arbitration process feasible, time-bound and affordable. Following are the key highlights of the Amendment:
In the case of BCCI v. Kochi Cricket Pvt. Ltd the parties had initiated arbitration proceedings in 2011 and two arbitral awards were given in 2015 after the aforementioned Section 87 came into force by way of 2015 amendment.
The respondents went for getting their awards enforced while the applicants filed a petition challenging the awards.
The respondents were not allowed to get their orders enforced due to the pendency of a petition before the court. Even though the concept of automatic stay did not exist when the cause of action arose and the parties went to settle their dispute.
Section 87 was introduced much after the proceedings had initiated. A single-judge bench in Bombay High Court said that automatic stay would apply in this situation. Giving the amendment act a retrospective effect.
However, when the case went to the Supreme Court, it was held that the act will not have a retrospective effect and automatic stay shall not be applicable in cases where the proceedings began prior to when the amendment came into force.
In the 2019 amendment, a new Section 87 has been inserted in the Act. The section states that:
- The amendment of 2019 will be applicable to proceedings that were initiated after the amendment of 2015 came into force.
- It shall not apply to court proceedings that arose out of arbitral proceedings that have been initiated before or after the amendment of 2015.
This newly inserted section is contrary to the judicial ruling in the BCCI case. It gives the amendment a retrospective effect for up to 2015. This section needs judicial interpretation, or should be repealed.
Powers of the Court to refer matters
Under Section 45 of the Act, the courts have been vested with the power to refer any matter to the arbitration clause if:
- There there is an arbitration clause in the agreement,
- One of the parties or any claimant requests for arbitration.
The court would reject the request if the court finds the agreement to be null and void.
This section has been amended to replace the words “unless it finds” to “unless it prima facie finds”.
Prima facie is a legal maxim which translates to ‘on the face of it’. Meaning, at first glance.
Prior to the amendment, a court proceeding would take place in order to find that the agreement is null and void. The parties would argue and establish their case.
Post amendment, if the court can see that the agreement is null and void, the request can be rejected without any proceeding on that matter.
Any proceeding of arbitration and conciliation must be confidential in order to protect any information of the parties being leaked.
Section 75 of the act states that:
- Any conciliation proceeding is to be kept confidential notwithstanding anything contained in any other law.
- The settlement agreement shall remain confidential unless they need to be disclosed for purposes of implementation and enforcement of awards.
While the statute mandated a conciliation proceeding to be kept confidential, there was no such statute regarding an arbitration proceeding.
Keeping that in mind, a new Section 42A has been inserted in the act – that says:
- The arbitrator, arbitral institution and all the parties should keep the proceedings confidential.
- The information anyhow needs to be disclosed if needed for the purpose of implementation and enforcement of the award.
This was a much-required change brought upon by the new amendment.
Restriction on setting-aside an award
Act as restrictive grounds to set-aside an award according to the proofs submitted by the parties, whereas the 2019 amendment Act has further narrowed down the scope of court interference, expressing that court can rely on the submissions filed before the relevant arbitral tribunal
The intent behind the amendments might have been good but the execution is not flawless.
The process regarding the grading of the arbitrators is not very clear. The exclusion of foreign arbitrators discourages foreign parties who wish to commence arbitration in India.
The amendment is a step in the right direction and with some more amendments, India may be able to become a Hub for Arbitration.
- The Arbitration and Conciliation (AMENDMENT) Act, 2019
- The Arbitration and Conciliation Act, 1996
- UNCITRAL Model Arbitration Rules, 1976
- UNCITRAL Model Law on International Commercial Arbitration.