Proposed amendments to the Arbitration and Conciliation Act (the “Act”) (Part II)

Introduction

My previous post discussed the amendments to Sections 2(2) and 11 of the Act proposed by the Consultation Paper published by the Law Ministry (the “Consultation Paper”). This post discusses the other proposed amendments.

Amendment to provision relating to independence and impartiality of arbitrators

Section 12 of the Act contemplates that an arbitrator shall disclose to the parties “any circumstances likely to give rise to justifiable doubts as to his independence or impartiality”. The Parliament, with the aim of defining the scope of this obligation, has proposed that the arbitrator mandatorily disclose “any past or present relationship, either direct or indirect, with any of the parties or any of their counsel, whether financial, business, professional, social or other kind or in relation to the subject matter in dispute, which are likely to give rise to justifiable doubts as to his independence and impartiality”.

The amendment does not change the disclosure requirements of an arbitrator in any way- it merely spells out what “any circumstances” includes. The discretion to disclose only such information that is “likely to give rise to justifiable doubts as to his independence and impartiality” still lies with the arbitrator as indeed it should. An attempt to remove this discretion would give rise to frivolous challenges to the partiality of arbitrators based on non-disclosure of facts that may not have any bearing on the independence of the arbitrator.

One situation that ought to have been addressed is the case of bias in employer-employee arbitrations where the arbitrator is often a senior officer of the employer. Clauses providing for such appointments are often forced upon the employees (in standard form contracts). The employees would greatly benefit from a statutory prohibition of such clauses.  

Amendment to clause providing for adherence to terms of the contract

Section 28(3) of the Act provides that while deciding the case, 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”. The Supreme Court, in ONGC Ltd v. Saw Pipes Ltd. (“ONGC”) ((2003) 5 SCC 705), held that if the arbitral tribunal ignored a term of the contract, the award would fall foul of Section 28(3) and would be liable to be set aside under Section 34 (on the basis that it would be against public policy).

To overcome this situation, the Law Ministry has proposed to modify the language of Section 28(3) to require the arbitral tribunal only to “take into account” the terms of the contract.

The underlying reasoning behind the Law Ministry’s proposal is unclear. The Law Ministry seems to suggest that the tribunal may, so long as it takes into account the terms of the contract, choose not adhere to it.

Such an amendment would have undesired consequences. As the law currently stands, in case of conflict, the terms of the contract, when clear and unambiguous, prevail over trade usages. The proposed amendments would, however, place the terms of the contract on par with the trade usages and Courts will have discretion to ignore the former in the light of the latter. This would result in an infringement upon the freedom to contract.  

Amendment to provision relating to award of interest

Section 31(7) of the Act provides the arbitral tribunal the power to award interest on the sum for which the award is made. Unless otherwise stated in the award, the interest shall be calculated at 18% from the date of the award till the date of payment.

Despite the courts having little discretion to modify the interest payable, they have tended to interfere in the interest of justice and equity. Such intervention is often required, as a blanket provision deeming the default interest rate on the sum payable under an award to be 18%, notwithstanding the prevailing market conditions, is illogical. However such judicial intervention causes unpredictability and results in most parties challenging the interest awarded. 

The Law Ministry, with a view to solve this problem, has suggested that the default percentage of interest be modified from a fixed 18% to a varying interest rate, which would be one percent greater than the “current rate of interest” as defined in the Interest Act, 1978. This rational amendment is welcome.

Amendment to provision relating to setting aside an arbitral award (Section 34)

The Law Ministry has suggested two sets of amendments to Section 34.

1.      Limiting the scope of “public policy”

The power of the Courts to set aside an arbitral award was never meant to be a license to overturn an arbitral award on merits. The Courts were supposed to merely act as Courts of Review rather than as Courts of Appeal. Accordingly, “public policy was narrowly construed by the Supreme Court (Renusagar Power Co. Ltd. v. General Electric Co. (1994) 2 Arb LR 405). However, as a result of ONGC, such an interpretation was short lived. The Supreme Court, in ONGC declared that an award could be set aside if it was

(a) contrary to fundamental policy of Indian law; or

            (b) contrary to the interest of India; or

            (c) contrary to justice or morality, or

            (d) patently illegal.

An award, the Court observed, would be patently illegal if it violated any statutory provision. Hence Courts now have the power to go into the merits of an award to adjudicate on patent illegality, contrary to what was intended.

The Consultation Paper seeks to make amends by defining the term “public policy” to include (a), (b) and (c) above but exclude “patent illegality”.

However, for reasons best understood by the Law Ministry, “patent illegality” is specifically included as a ground for setting aside domestic arbitral awards.   

2.      Incorporating grounds based on unsuccessful applications under Sections 13 and 16

Where an unsuccessful challenge is made to the appointment of an arbitrator under Section 13 on the grounds that the agreed procedure was not followed or to the competence of the arbitral tribunal to hear the case under Section 16, there exists a statutory right for the unsuccessful party to challenge the award. This right is, however, not reflected in Section 34. For this purpose, the Law Ministry, has proposed to include a clarificatory provision in Section 34 to incorporate these grounds of challenge.

Amendment to provision relating to enforcement of a domestic award (Section 36)

The Supreme Court (in National Aluminium Co. Ltd. v. Pressteel and Fabrications (P) Ltd. (2004) 1 SCC 540) has held that pending an application for setting aside the award under Section 34 of the Act, the award cannot be enforced. This has led to the losing party filing frivolous applications under Section 34 to impede enforcement proceedings.

To overcome this problem, the Consultation Paper proposes that a Section 34 application will not act as a stay on the enforcement of the arbitral award unless the applicant under Section 34 files a separate application for a grant of a stay. The separate application would be decided after taking into consideration the merits of the Section 34 application.

This provision may cause more mischief than that sought to be remedied. This provision would result in an extra set of judicial proceedings. Moreover, where a stay is not granted there could be situations where the successful party would enforce the award and subsequently the award already enforced would be set aside. Such a situation would render redundant the relief obtained by the successful applicant under Section 34.

However, the problem of frivolous applications is a reality. One solution may be to disincentivize filing of frivolous application by awarding heavy costs.

Arbitration relating to commercial disputes of specified value

Pursuant to the Commercial Division of High Courts Bill, 2009, an application under Section 34 relating to “commercial disputes” of a specified value (Rs 5 crores) would lie before the commercial division of the High Court. All appeals from a Section 34 application (under Section 37 of the Act) would lie before the Supreme Court.

Implied arbitration agreement in commercial contracts of high consideration value

It is proposed that all “commercial contracts” with a consideration of value Rs 5 crores or more shall be deemed to contain an implied arbitration clause (“implied agreement”) which states:

“All disputes (except (here specify the excepted disputes, if any) arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of (here specify the name of the approved arbitral institution) by one or more of the arbitrators appointed in accordance with the said Rules”.

Such a clause would be implied in the absence of an express exclusion of it. Any different arbitration clause between the parties would be modified in the lines of the above clause.

The rationale behind such a clause is

a)      to reduce the number of instances where parties litigate on the validity of the arbitration agreement.

b)      to promote institutional arbitration.

However, this provision is a recipe for more litigation. A “commercial contract” is defined to mean “every contract involving exchange of goods or services for money or money’s worth and includes carriage of goods by road, rail, air, waterways, banking, insurance, transactions in stock exchanges and similar exchanges, forward markets, supply of energy, communication of information, postal, telegraphic, fax and Internet services, and the like.” This definition reflects the wording used by the Supreme Court, in Atiabari Tea Company Ltd. v. State of Assam (AIR 1961 SC 232), to explain the term “commerce” used in the context of Article 302 of the Constitution of India.

The term “the like” makes the definition wide. Numerous disputes are likely to arise regarding the scope of the term “commercial contract”. For instance will an employment contract be a commercial contract?

When the term “commercial”, used in Section 2(i)(f) of the Act (in the definition of “international commercial arbitration”) where it refers to those legal relationships “considered as commercial under the law in force in India”, has been non-controversial, there is no necessity to try and statutorily define the term “commercial contract”.

It is also highly debatable whether India, as of today, possesses the infrastructure and institutional support required to sustain the enormous growth in arbitrations that this amendment will lead to.

Conclusions

While some of the proposed amendments address the main problems faced by arbitration in India, a few of the amendments are potentially controversial and could result in more litigation.