Monthly Archives: November 2015

The Arbitration Ordinance, 2015 – Less isn’t always more. [Part I]

Aakanksha Kumar*

The President of India promulgated the Arbitration and Conciliation Amendment Ordinance, 2015 (‘Ordinance’) to amend the Arbitration and Conciliation Act 1996 (‘Act’), on October 23, 2015, after the Union Cabinet had given its approval for the same on October 21, 2015. It is interesting though, that the Ordinance was promulgated a little over three weeks before the winter session of the Parliament is scheduled to begin, wherein the Ordinance will have to be tabled before the Houses for their final say.

While the Ordinance is based largely on the 246th Report of the Law Commission, there are some very glaring lacunae that haven’t still been addressed, and are conspicuous in their absence from the amendment.  This post shall attempt to highlight a few of the major changes brought about by the Ordinance and point out the unfortunate shortcomings.

  1. Definition clause and scope of the Act:

While the Law Commission had proposed several amendments to S. 2(1) of the Act, the Ordinance does very little. While some of the proposals might have been considered premature, or may even have been perceived as say, irrelevant in the Indian context (such as that of including an emergency institutional arbitrator within the definition of an arbitral tribunal), the omission of the definition of seat of the arbitration and non inclusion of  “any person claiming through or under such party” to the definition of  “party” under S. 2(1)(h) are a cause of concern. While the Law Commission used the Chloro Controls decision to justify this latter insertion,[1] judicial opinion on this question for Part I of the Act, is not enough of a guideline to identify whether non-signatories could be made parties to domestic arbitrations, and if so, when. Nonetheless, S.8(1) has been amended, such that a judicial authority is empowered to hear an application made by  “a party to an arbitration agreement or any person claiming through or under him.” This does offer some consolation.

As for the former, the constant tussle between the meanings of the words ‘palce’, ‘seat’ and ‘venue’ of arbitration is aggravated due to a multitude of factors. First, due to India’s adaptation of the UNCITRAL Model Law for both domestic as well as international arbitrations, inspite of the Model Law categorically providing that the same applies to ‘international commercial arbitrations’, second, the problem created by the continued existence of  both the Bhatia International and BALCO decisions – the so called ‘implied exlusion’ test, and, third the ‘seat versus venue’ conundrum is only aggravated by diverse court decisions.[2], Thus, a clear provision for  clarifying the same is required within the legislation itself, putting the debate to rest once and for all. Highly unfortunately, this very apparent problem has gone unnoticed in the Ordinance. This omission reflects further on more lacunae still present in other sub-sections of S.2, discussed later in this post.

However, the Ordinance amends S. 2(1)(e) for ‘court’, retaining language from the Act as the meaning applicable to purely domestic arbitration. Sub-clause (ii) creates a somewhat vague provision, such that, if purposively read, the meaning of ‘court’ for Part I of the Act is thus:

  • In purely domestic arbitration – Principal civil court of original jurisdiction, including an HC in exercise of original civil jurisdiction that also would’ve had subject-matter jurisdiction, by virtue of S. 2(1)(e)(i); and also an HC having jurisdiction to hear appeals from decrees of subordinate courts, by virtue of S.2(1)(e)(ii)
  • In domestic international arbitration – HC in exercise of its original civil jurisdiction that would’ve had subject matter jurisdiction, by virtue of S.2(1)(e)(ii)

This amendment doesn’t take into account the Law Commission proposal of defining the court that would have jurisdiction to hear S.9 matters from arbitrations with their seat outside India, considering that the Law Commission had also proposed that S. 2(2) be amended with a proviso to make sections 9, 27, 37(1)(a) and 37(3) applicable to even foreign seated arbitrations.  While this proviso does feature (albeit differently worded due to retention of the word ‘place’ instead of ‘seat’) in the amendment, it is surprising there is no corresponding amendment to the definition of ‘court’. Further, this proviso refers to an arbitral award “enforceable and recognised under the provisions of Part II of this Ordinance”. Obviously this Ordinance does not have a Part II.  It seems as if the drafters did a “Ctrl+F” and then used the “Replace” function to put “Ordinance” wherever the word “Act” had been used – a slip-up we learn to spot as  academics accustomed to grading and evaluating projects and assignments!

Moreover, the proviso makes the Part I provisions available to only ‘international commercial arbitration’ seated outside India. This creates another problem: with there being no distinction between ‘domestic’ and ‘international’ arbitrations for Part II of the Act, inserting such a distinction into this proviso makes the interpretation of Part II even more complicated. The ‘internationality’ of an arbitration is understood in accordance with a corresponding provision in the lex arbitri, which will be the law of arbitration at the seat (the seat theory). So, an arbitration between two Indians seated in Singapore, is an international commercial arbitration under the Singaporean International Arbitration Act, 2012. However, two Indians in an arbitration agreement qualify as purely domestic arbitration if it was seated in India. And after the decisions in Sasan Power and M/s Addhar Mercantile Private Limited v. Shree Jagadamba Agrico Exports Pvt. Ltd., [3], two Indians may chose to seat their arbitration outside India. (see also an earlier ArbiterDictum post by Vinayak Panikkar on this issue here). So, do we use the S.2(1)(f) criteria, from Part I of the Act, to identify whether a Part II arbitration is an ‘international commercial arbitration’? How is that even a workable idea? This question remains unaddressed and unanswered.

The Ordinance also amends the definition of ‘international commercial arbitration’ under S.2(1)(f), in line with the apex court decision in TDM Infrastructure and the corresponding Law Commission Report suggestion. The provision now excludes “a company” from S.2(1)(f)(iii). As Mr. Promod Nair has pointed out, this is not a very desirable change, given the constant criticism that surrounded the said apex court opinion, and present day commercial realities and factors influencing the effective nationality of a company.

The Law Commission had suggested the insertion of sub-section (2A) to deal with the problem of prospective overruling of the Bhatia International decision. This has not been taken into account, as the Ordinance doesn’t further address the Bhatia-BALCO ‘dichotomy’, except that the new proviso to S.2(2). Further S. 2(2) has also not been amended accordingly to otherwise explicitly restrict the applicability of Part I to ONLY where the seat is in India.

  1. Amendment to S. 7 (Arbitration Agreement)

The Ordinance incorporates “electronic means” as an acceptable means to evidence an arbitration agreement in writing, by amending S.7(4)(b).  This was not proposed by the Law Commission report as is, but does somewhat fall in line with Option I of Art.7 of the Model Law as it stood amended after 2006. This was instead proposed by the Law Commission as new sub-sections (3A) and (3B).  This is a welcome change, following that any material that provides a ‘record’ of the agreement in writing should be acceptable as a substantiation that the writing requirement was complied with.

  1. S.8 findings only prima facie.

The Ordinance has amended S.8(1) such that “notwithstanding any judgment, decree or order of the Supreme Court or any court”, the judicial authority shall refer the parties to arbitration “unless it finds that prima facie no valid arbitration agreement exists.” Further, a proviso has been added to S. 8(2) that somewhat falls in line with one of the Law Commission’s proposals, that a party not in possession of the original copy of the arbitration agreement, is to file a S.8 application along with a copy of the arbitration agreement and a petition praying for the court to call upon the other party to produce the original. This discrepancy – usage of the term ‘judicial authority’ in sub-section (1) that is of wider import, than the term ‘court’, as used in the proviso to sub-section (2) evidences legislative over-sight and is just one of the examples of shoddy drafting that this Ordinance is plagued with. Again as Mr. Nair too has pointed out, this is inexplicable and needs, “tidying up”.

The more glaring drafting botch up is in the amended S.8(1). It seems as if the drafters, in their enthusiasm to do away the complexities created by case law decided under both sections 8 and 11 (and S. 45 for Part II of the Act), came up with a provision that they didn’t really, respectfully so, understand.  The Law Commission had categorically explained that,:

Proviso (ii) of the amendment contemplates a two-step process to be adopted by a judicial authority when considering an application seeking the reference of a pending action to arbitration. The amendment envisages that the judicial authority shall not refer the parties to arbitration only if it finds that there does not exist an arbitration agreement or that it is null and void. If the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal. However, if the judicial authority concludes that the agreement does not exist, then the conclusion will be final and not prima facie. The amendment also envisages that there shall be a conclusive determination as to whether the arbitration agreement is null and void.”[4]

However, the Ordinance reverses this logic via convoluted drafting, that seems to suggest that a finding of invalidity and/or non existence of the arbitration agreement would be prima facie. This leads to absurdity in the working of the provision. The following two situations thus may arise:

  • The judicial authority hearing a S.8 application finds that a valid arbitration agreement does exist. This should ideally be only a prima facie finding, given that S.8(1) now requires a referral to be made, in spite of  any contrary judicial opinion existing on the subject. This should further mean that the question of substantive arbitrability (that is a question of validity of the arbitration agreement), is to only be answered as a prima facie determination, and it is further open for being readdressed at the S.16 stage before the arbitral tribunal, who shall make a final determination. The author has reservations over this really being a desirable change, especially in light of the fact that this amendment essentially nullifies the judgment of the Supreme Court in Radhakrishnan v Maestro Engineers on substantive inarbitrability of allegations of  fraud and also effectively renders the distinctions between arbitrable and inarbitrable subject matter, as highlighted in the Booz Allen decision, redundant.
  • If the language of the amended S.8(1) is literally followed, a finding by the judicial authority hearing a S.8 application that a valid arbitration agreement does not exist, or that the agreement itself is invalid, is also prima facie. That is not how the provision works. As explained by the Law Commission, a negative finding, is not prima facie, as there will not be any referral to an arbitral tribunal for the question to be readdressed. If such a finding is only prima facie, parties will have no recourse available to them via the S.16 route.  The only recourse then lies in appeal made possible by an amendment to S.37(1)(a) that enables an appeal from the order of a judicial authority refusing to refer the parties to arbitration under S.8. This too however, is not a conclusive determination of the issue if the provision is literally interpreted in its current, amended form. Then where do the parties go for getting a final, conclusive determination on the question of validity and existence of their arbitration clause?

While it is well settled that that normally the courts will have to follow the rule of literal construction which rule enjoins the court to take the words as used by the legislature and to give it the meaning which naturally implies, however, there are exceptions to this rule. Benion, in his book on Statutory Interpretation (5th Ed., 2008) calls this the ‘Construction Against Absurdity’, that while engaging in legislative interpretation, the court presumes that the Parliament does not intend ‘absurd’ consequences to flow from the application of its Act.  He further mentions that this presumption is meant to avoid a construction that is unlikely to have been the object, and thus courts are enabled to include within this absurdity, any result that is unworkable or impracticable, inconvenient, anomalous or illogical, futile or pointless etc. In India, the apex court has also pointed out this exception to the rule of literal interpretation. In Molar Mal v. Kay Iron Works (P) Ltd., the Supreme Court  reiterated that that courts will have to follow the rule of literal construction. However, the court further held that:

“…exception comes into play when application of literal construction of the words in the statute leads to absurdity, inconsistency or when it is shown that the legal context in which the words are used or by reading the statute as a whole, it requires a different meaning.”

Here too, the courts will have to proffer an interpretation to the provision, that does away with the absurdity that arises from a literal interpretation, and give effect to the “two-step process” as clarified by the Law Commission.

  1. Interim Measures – S.17 powers expanded, S.9 powers reduced.
  • If a S.9 remedy was sought before commencement of the arbitration, an arbitration must be commenced within 90 days from the date of the S.9 order. However, this 90 day period is a minimum standard, and this can be extended further by the Court. This is a deviation from the Law Commission proposal of a 60 day minimum leeway. However, it does provide a definitive legislative guideline to an otherwise vague guideline of ‘within reasonable time’ laid down by the apex court.
  • Further, in keeping with the Law Commission proposal, an application filed after commencement of arbitration, shall be entertained by the court only if it is convinced that the arbitration tribunal will be unable to provide effective relief under S.17.
  • S. 17 on the other hand has been amended in line with the Law Commission’s proposals, and powers of the arbitral tribunal have been expanded to coincide with those given to a court under S.9 of the Act. However, as Mr. Nair very succinctly points out in his comment, the power under S. 17 remains available even after the making of the award, thus creating another exception to the functus officio doctrine that brings the life of an arbitral tribunal to an end once the award is made, by virtue of S.32 of the Act, which doesn’t feature a corresponding amendment. Generally the exceptions to the functus officio rule are only when clerical errors are to be corrected, or when additional awards are requested for, or when the court itself sends the award back to the tribunal during the pendency of a S.34 proceeding, if it is felt that the infirmities that may render an award open for being set aside, can be removed by the tribunal itself. It is, interesting, to say the least, that the drafters envisaged a situation where-in a tribunal can now be ‘revived’ for a post award interim measure.
  1. Appointment of arbitrators and scope of enquiry under S. 11

The following significant changes have been made to S. 11

  • The usage of the words “Chief Justice or any person or institution designated by him” has been done away with. Instead, the words “the Supreme Court, or as the case may be, the High Court or any person or institution designated by such court” have been inserted, thus doing away with the complications that arose from having to identify the true nature of the order of the Chief Justice under S. 11.
  • Further, it has been clarified that the designation of any person or institution doesn’t mean judicial power exercised while appointing an arbitrator, has been delegated.
  • A new sub-section (6A) has been inserted that restricts the S.11 enquiry to a mere ‘existence’ of arbitration agreement finding, unlike the broader S.8 enquiry that looks at both – the existence as well as validity questions. This falls in line with the distinction created between the scope of enquiry under sections 8 and 11 by the apex court, through its decisions in SBP, Booz Allen, Boghara Polyfab and Arasmeta Mr. Nair in his comment has pointed out that – “providing for different standards of judicial review in complementary sections is incongruous.” I beg to differ here. By their very nature, S. 8 and S. 11 are inherently different. The remedy sought by both applications is also different. Hence the scope of enquiry conducted at both stages can remain different. Nonetheless, the ‘nature’ of these determinations should be prima facie only if there is a positive determination of existence of the arbitration clasue.
  • The court in S. 11 shall seek a disclosure from the arbitrator so appointed, in accordance with S. 12(1)
  • Applications under S.11 shall be disposed off within 60 days from the date of service of notice on the other party
  • A Fourth Schedule has been inserted, which is the guideline for determination of fees payable to the arbitral tribunal. The court making the appointment under S. 11 of the Act, may look to this schedule. However, this provision does not apply to international commercial arbitrations.
  • As regards the Fourth Schedule, a new S.11A has been inserted, that empowers the Central Government to amend the schedule if it is satisfied that it is necessary and expedient to do so.

[More on this shall be updated by next week.]

* The author is an Assistant Professor at NLU Jodhpur, and Executive Director of  CARTAL, NLU Jodhpur

The inputs of Dr. Ajay Sharma, Assistant Professor, NLU Jodhpur are greatly appreciated.

[1] The author believes that this reasoning too was flawed, considering that the said decision explains S. 45 of the Act, which follows Art. II of the New York Convention and is thus in Part II of the Act, and it in itself contains a specific reference to “a party or any person claiming through or under him”, thus being of little relevance for interpretation of Part I

[2] Enercon (India) Ltd. and Ors.v. Enercon GMBH and Anr. AIR 2014 SC 3152; Reliance Industries Ltd. v. Union of India AIR 2014 SC 3218; Carzonrent India Pvt Ltd v Hertz International Ltd , Delhi HC decision of 30 June, 2015

[3] Arbitration Application 197/14 along with Arbitration Petition No. 910/13, 12.06.15, High Court of Judicature at Bombay.

[4] Report 246 at pp. 42-43.

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