Law Commission of India proposes wide-ranging changes to the country's arbitration regime

The Law Commission of India has proposed major amendments to the Arbitration & Conciliation Act, 1996 (the "Arbitration Act") in order to remedy a number of perceived weaknesses and to stimulate growth in Indian arbitration as a platform for dispute resolution. Its full report is published here. Some of the highlights of the proposed amendments are as follows:

Encouraging Institutional Arbitration

Ad hoc arbitration continues to be the default option chosen by parties arbitrating in India – especially for domestic arbitrations. There are a number of limitations with choosing ad hoc arbitration – most significantly, its propensity to be subject to a much greater degree of judicial control and supervision. Against this background, the Law Commission has strongly endorsed and encouraged the spread of institutional arbitration in India.

Besides calling on the government to set up more institutions, and encouraging the High Courts and the Supreme Court to refer matters to institutional arbitration, the Law Commission has proposed legislative recognition to aspects of arbitration typical of institutional arbitration – such as by recognizing the concept of 'emergency arbitrators'. The Law Commission has also proposed the formation of an "Arbitral Commission of India" to be comprised of representatives from stakeholders involved in arbitration, to encourage the spread of institutional arbitration in India.

Court interference in Arbitration

Court interference in arbitrations is a significant concern undermining the advantages of arbitration in India, partly because of the time taken to dispose of arbitration-related applications and partly because of the sometimes inconsistent decisions resulting from different levels of the court. The Law Commission proposals strive to draw a balance between limiting interference while allowing courts to support the arbitration process. The proposals include:

• the creation of dedicated arbitration benches within the Indian courts to streamline and improve the consistency of decisions in arbitration-related matters. The Law Commission has also suggested designating the High Court in each State (as opposed to other lower courts) to consider all applications relating to international arbitrations;
• awarding actual costs of litigation (on a 'lower pays' basis) to limit frivolous actions rather than, as is currently the practice, impose nominal costs; and
• imposing strict time limits for initiation of and disposal of proceedings relating to setting aside arbitral awards and challenging enforcement of arbitral awards.

Appointment of Arbitrators

A significant cause for delay in ad hoc arbitrations in India is the appointment of arbitrators – which function is delegated under the Arbitration Act to the High Court/Supreme Court. In the case of SBP v Patel Engineering, the Supreme Court has taken the view that the appointment of arbitrators is a judicial (as opposed administrative) function, and therefore allowed the court to consider the validity and enforceability of an arbitration agreement – if challenged. This has resulted in parties regularly challenging arbitration agreements before the courts at the time of appointing arbitrators with the aim of using delays endemic in the court process to slow arbitration proceedings.

In an attempt to combat these delays, the Law Commission has proposed restricting the role of the High Court or the Supreme Court in such proceedings to carrying out a prima facie determination as to whether an arbitration agreement is null or void – leaving any complicated question relating to the validity or existence of the arbitration agreement to be determined by the arbitral tribunal. The Law Commission has also advocated adopting a similar approach in all pre-arbitration applications.

Streamlining the Arbitration Process

A common problem with arbitrations conducted in India is the practice to hold a number of short hearings with adjournments allowed routinely – thereby resulting in protracted timescales. The Law Commission has proposed measures (such as authorizing arbitral tribunals to impose exemplary costs) to discourage adjournments during hearings, and to ensure continuous sittings of the arbitral tribunal. This is accompanied by a proposal to empower arbitral tribunals, as well as courts, to award costs on a 'loser pays' basis to disincentivise frivolous claims.

The proposed reforms also attempt to make Indian arbitration more attractive to parties from an economic perspective. The Law Commission has recommended the establishment of a model schedule of fees for domestic and ad hoc arbitrations, based on the fee schedule set by the Delhi High Court International Arbitration Centre.

Neutrality of Arbitrators

An often-encountered practice – particularly in domestic arbitrations involving government entities – is the appointment of an employee of the government party as arbitrator. This practice has been criticized for compromising the neutrality of the arbitration process, albeit it has been upheld to date by the Indian courts.

The Law Commission has proposed that, save in exceptional circumstances, anyone who has been an employee, consultant or adviser to a party, or has had business with one of the parties, will not be allowed to sit as arbitrator in that case.

Interim Relief in Arbitration

The issue of interim relief in aid of arbitration has been a hotly-debated topic in recent times, most recently due to the decision of the Supreme Court in Bharat Aluminum where the court held that Indian Courts could not order interim relief in support of foreign-seated arbitrations. Since interim relief ordered by arbitral tribunals is not enforceable in India, this has left parties to international arbitrations seated outside India in difficulties where they need interim protection for assets situated in India.

In order to rectify this situation, the Law Commission has proposed a raft of measures such as:

• amending section 17 of the Arbitration Act to allow interim orders passed by an arbitral tribunal to be statutorily enforceable;
• recognizing and permitting enforcement of orders passed by emergency arbitrators; and
• expressly recognizing that Indian courts have the power to grant interim relief in support of foreign-seated arbitrations.

Setting Aside of Arbitral Awards

Perhaps the most serious criticism leveled by commentators against the court's intervention in arbitral proceedings in India is the court's use of its power to set-aside arbitral awards. In ONGC v Saw Pipes, the Indian Supreme Court adopted an interpretation of 'public policy' as a ground to set-aside arbitral awards which included where the award was found to be 'patently illegal'. This expanded definition of public policy has been used to encourage courts to re-open arbitral proceedings after an award has been rendered and re-assess the merits of the case. Besides the delay caused, this has also undermined the finality of arbitration proceedings. Recent decisions have limited the application of this decision to domestic arbitration, but there remains a risk that awards rendered in foreign-seated arbitrations could be subjected to similar scrutiny.

To address this, the Law Commission has proposed to recognize 'patent illegality' as a ground to set-aside awards only in purely domestic arbitrations seated in India. Even then, the Law Commission proposes that, an award cannot be set aside merely on the grounds of an erroneous application of law or by re-appreciating evidence.

Miscellaneous

The Law Commission has also proposed a number of other amendments – several of which are aimed at clarifying/limiting the impact of various decisions passed by the India courts. In particular:

• the definition of the term 'international arbitration' be clarified to ensure that arbitrations involving a company incorporated outside of India will be an international arbitration even if the central management and control of the company is in India;
• issues of fraud should be made expressly arbitrable;
• currently, filing of proceedings to set aside an arbitral award automatically suspends enforcement of the award. The Law Commission proposes an amendment that a mere filing of a setting-aside application does not suspend enforcement; and
• the Law Commission proposes to clarify the scope of powers of the arbitral tribunal to award compound interest on sums awarded and moving away from the existing regime of fixed interest rates to a market based determination.

Comments

The report is a welcome addition to the informed debate on improving arbitration in an Indian context, and represents a distillation of many of the views raised by practitioners, parties and judges (current and retired) in recent years.

Caution is needed to recognize that, whilst reform of the Arbitration Act may be on the Modi government's agenda, there is no guarantee of legislative changes in the near future. The government has a broad legislative programme and arbitration reform may not be an obvious priority. As recently as 2010, the previous government issued a consultation bill on proposed changes to the Arbitration Act, which did not however result in any legislation. That said, given the important influence that reform of courts and other dispute resolution will have promoting domestic economic growth and development, and encouraging foreign direct investment, it is hoped that the government will be able to bring forward reforms sooner rather than later.

For further information, please contact Nick Peacock, Partner, Vikas Mahendra, Associate, or your usual Herbert Smith Freehills contact.