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India set to amend its 1996 Arbitration and Conciliation Act.

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INDIA – Ministry of Law & JusticeSeeking to modernize, strengthen, and to further institutionalize the use of Arbitration in India, Law Minister of India, Hon. Veerappa Moily, published a consultation paper on a number of proposed amendments on arbitration.

Including annexes, the Consultation Paper contains 196 pages. The Consultation proper consists of 35 pages, rather loaded with case law to illustrate the need for reform.

Indian businesses and attorneys never liked the 1996 arbitration act to begin with. They never trusted the process and, worse, never really trusted arbitrators. The ink with which the Act was written didn’t dry and many professionals already voiced serious concerns. It has gotten to the point when even the Judiciary thinks the 1996 Act is convoluted and rather useless.

In fact, the Law Commission proposed an amendment back in 2003 that generated ample debate. In the end, the entire amendment was struck down because it was deemed not to bring any improvement, but additional confusion, additional litigation for no good reason.

Does India have a western-style arbitration tradition, never mind the 1940 Arbitration Act? No, it doesn’t, despite a strong Anglo-Saxon legal influence, despite the fact that Justices in this country write English as if they had been raised in Oxford. This comment does not mean that Indians are not predisposed to resolve their controversies out of court; it simply means that they appear not to trust binding arbitration as envisioned in the 1996 Act.

Why are Indians so disenchanted? Because it never ends; because the Act waters the seed of arbitrator abuse, and waters the seed of endless litigation on issues that parties, arbitrators and institutions should resolve themselves. Judiciaries are meant to help under any modern arbitration scheme; they are not meant to lend themselves to party-toying. Ultimately, Judiciaries are meant to uphold the end result (awards) of mutually acceptable binding ADR processes, and curb only gross misconduct.

What needs amending? The Law Minister sees a lot of issues that need amending. Sadly, some of these amendments will generate needless litigation.

On international arbitration, India tries to cover two distinct aspects: arbitration that is international but takes place in India on the one hand; arbitration that is international and takes place outside of India. The problem comes where the place of arbitration is not India; the Indian Judiciary just can’t agree on how to interpret aspects of Part I of the Act in combination with Chapter I of Part II and other supplementary provisions. There are conflicting views –all legitimate—but which hinder arbitration credibility in the country and abroad.

The cure: an amendment of Section 2(2) to apply “only” where the place of arbitration is India, and an amendment of Sections 9 (interim relief) and Section 27 (court assistance in taking evidence), where the place of arbitration is not India, but the award has to be recognized in India under Part II of the 1996 Act. This is a worthwhile amendment that should end conflicting judicial interpretations, hopefully.

For some reason, arbitrators appear to be not all that well regarded in India. Even the Supreme Court has stated that “arbitration has to stop being a week-end pastime”. That on the one hand. On the other hand, the Act today envisions an extraordinary level of court intervention regarding ad hoc arbitration where parties fail to nominate arbitrators, or when party-appointed arbitrators fail to nominate the presiding neutral.

On appointments, the proposed amendment has fourteen paragraphs. The essence is to make party-appointed processes less convoluted, less prone to litigation. The Paper proposes substituting “Chief Justice” as the nominator by “High Court”, and it proposes authorizing the courts to authorize existing arbitration institutions to nominate suitable arbitrators in their stead. Additionally, the amendment provides for no appeal on this matter.

Once appointed, trusting arbitrators becomes an issue the Law Minister wants definitive closure on. Examining comments from justices made over the years, comments made by a number of essayists, any foreign observer would conclude that some arbitrators in India have taken parties for everything they are worth. Is this a case of a few rotten apples infecting the entire basket of apples? Quite surely so, and so the many good, honorable arbitrators –and arbitration at large—suffer the consequences: mistrust.

If we read the Act as written, there is nothing that can cause alarm regarding independence and/or impartiality. Perhaps here is one aspect that should not even be there because it is cause for litigation: a challenge may be initiated if a party believes that arbitrator does not possess the qualifications as agreed to by the Parties [Section 12(3)(b)]. Does it refer to a mutual understanding on this issue? That is not what the specific rule says, and rarely does a standard arbitration clause go into this issue beyond an agreement of the parties as to the arbitrator being an attorney with a number of years of practice/experience.

The Law Ministry journeys dangerously into Codes of Ethics of some institutions to turn them into requirements on issues of “past or present relationships, direct or indirect, with any of the parties or any of their counsel, whether financial, professional, social or other kind.” It can actually get to the point that either you are a Martian attorney with no ties to planet Earth, or there might be some “relationship”, something to disclose, something to argue about.

The most disturbing aspect of this proposed amendment is the call upon the Central Government to issue guidelines on independence, impartiality, and disclosure. Will these guidelines become law? Some jurisdictions have opted to subject neutrals to guidelines they appear to hold dear. If they are dear, abide by them as if they were actual rules. Guidelines should NOT be incorporated into a law, not even by reference, or India will litigate these guidelines almost for sure. This amendment will prove to be a huge headache.

The next amendment concerns Section 28 (3), which currently reads as follows:

In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.

What is wrong with it? Nothing until you read the entire section and Supreme Court case law on this matter. It turns out that there is a mandate for arbitrators to decide a dispute in accordance with the substantive law in force in India at the time the decision is to be made. Not doing so causes a “patent ilegality”, contravening “the basic concept of Justice”, which leads almost necessarily to vacateur on public order grounds.

The cure? Amending Section 28(3) as follows:

In all cases, the arbitral tribunal shall take into account the terms of the contract and trade usage applicable to the transaction.

There is a basic problem with this issue. If an award can be vacated because the arbitrator purportedly misinterprets applicable law, there is a problem that can only be resolved though litigation. Some jurisdictions do not allow motions to vacate an award on grounds that the arbitrator misinterpreted the law because when parties choose arbitration, they chose that someone outside the Judiciary interpret the law at the parties’ own peril, with no recourse, no remedy. That is the point of arbitration. Some other jurisdictions allow “manifest disregard of the law” as grounds for vacateur. The short of it is there is no perfect provision anywhere in the world on this particular issue.

On interest, the amendment is rather simple. As per the 1996 Act, arbitrators must tag on interest on matters that require monetary relief. Interest is calculated at an astounding 18% from the date of delivery of the award to the date of payment. The amendment contemplates interest of 1% over the rate fixed by the Reserve Bank of India in effect at the time the award is delivered to the parties.

The next amendment tackles Public Policy issues as grounds to set aside arbitration awards. Again, different countries deal with this matter very, very differently.

India has rather sensible grounds for setting aside awards. They are:

  • incapacity of a party;
  • arbitration agreement being not valid;
  • the party making the application not being given proper notice of appointment of arbitrator or of the proceedings or otherwise unable to present his case;
  • the arbitral award dealing with the dispute not falling within the terms of submission to arbitration;
  • composition of the tribunal or the arbitral procedure being not in accordance with the agreement of the parties.

These grounds are party-driven, meaning that parties are left to advance them before a court of law having jurisdiction. However, courts may set aside awards on grounds that the dispute falls within a subject matter that cannot be subject to arbitration under the laws of India, and on grounds that the award is in conflict with the Public Policy of India, all of India.

The nightmare comes when you mix public order with the concept “patently illegal awards”, particularly when a “patently illegal award” is deemed to promote “injustice”, “harm”. Losing a case is more painful to the losing party, than it is harmful to SOCIETY, in general terms.

Vacateur on public policy grounds is a clear example of how the commendable search for justice can become a distraction, an expensive proposition for parties with an award.

Excess in award is cured by setting aside the excess leaving the rest of the award intact so long as the excess does not permeate throughout the entire award to the point of becoming an inextricable part of the award. Is excess a patent illegality contrary to the public order of India? It perhaps should not be, as Public Order should probably apply on very narrow constitutional grounds.

The proposed amendment will bring about litigation after the award is rendered. Attorneys on the losing end in domestic arbitrations will certainly invoke public policy grounds to set aside awards, each and every award rendered in India. Only the Supreme Court of the country can put an end to a myriad of interpretations on this delicate matter.

To be sure, setting aside an arbitration award found by the Judiciary to be contrary to the Public Order is a must in any arbitration legislation. Interpreting what it means for an award to be contrary to the interest of society at large is a daunting intellectual and moral exercise the Supreme Court of India should resolve, not the Legislature. Be that as it may, the amendment places an inquisitorial burden upon the Judiciary bound now to find out if the “applicant” has been harmed, instead of having to decide if India has been harmed.

Section 36 of the 1996 Arbitration and Conciliation Act regulates the process of enforcing awards in the country. While an award is a binding, enforceable instrument under the Law, an application to set aside stays compliance. This is a huge problem, particularly when motions of this nature are filed before overburdened Judiciaries.

What is being proposed? A hybrid. The Law is proposed to be amended to prevent an automatic stay when a motion to vacate is filed, but allows a separate application to stay. To deal with the separate application, the Court is allowed to stay and to grant interim measures against the applicant. Good idea? Hard to tell. However, it is easy to envision that additional litigation will take place as a result because (i) the prevailing party has to deal with that “separate application”, and (ii) will have to deal with what are considered to be appropriate interim measures throughout the duration of this process. If we add broad Public Order grounds, the prevailing party in arbitration will probably wish it had never agreed to arbitrate in the first place.

India is trying, and it is trying hard to institutionalize arbitration in the country. However, some of the proposed amendments simply do not cure the problems they intend to cure but, rather, place a new bandage to replace the old instead of administering either surgery, or some rather potent medication.

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