Amendments to the Indian Arbitration Act now effective

The Indian Government has taken steps to implement long awaited arbitration reforms by promulgating an ordinance, the Arbitration and Conciliation (Amendment) Ordinance, 2015 (the "Ordinance"), amending the Arbitration and Conciliation Act 1996 (the "Act"). These amendments have been on the cards for almost a year and the Government was earlier contemplating following the usual route of obtaining legislative approval for amending the Act. However, in light of the Modi Government's agenda to improve the ease of doing business in India, it is not surprising that the Government has opted for introducing an ordinance. Although the Ordinance is effective immediately, it will need Parliamentary approval in the upcoming session.  The Ordinance largely follows the proposals set forth in a report of the Law Commission of India published last year.

Overview of the amendments

The key changes introduced by the Ordinance are as follows:

• Provisions for the granting of interim relief (section 9 of the Act) and collection of evidence (section 27 of the Act) by Indian courts have now been made applicable to international commercial arbitrations (i.e. commercial arbitrations where at least one party is not Indian) seated outside India. After the landmark decision of the Supreme Court of India in BALCO (discussed in an earlier blog post), a major lacuna in the context of offshore arbitrations was the bar on Indian courts to grant interim relief and assist in the collection of evidence. This anomaly has been resolved by the Ordinance.
• The definition of "court" in section 2 of the Act has been amended to refer only to High Courts in the context of international commercial arbitrations. Thus, parties to an international commercial arbitration will no longer have to approach lower courts (often in remote parts of the country) to seek relief.
• The Ordinance gives greater definition to the "public policy" ground for setting aside an award under section 34 and for refusing to enforce a foreign award under section 48. The public policy ground was given an expansive interpretation by the Supreme Court in ONGC v Saw Pipes. Limiting the scope for judicial interference, the Ordinance clarifies that this ground will only be applicable where (i) an award has been obtained by fraud or corruption; (ii) an award is in contravention with the fundamental policy of Indian law; or (iii) an award is in conflict with the most basic notions of morality or justice. Further, the Ordinance recognizes "patent illegality" as a ground for setting aside arbitral awards only in purely domestic arbitrations and also clarifies that an award should not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.
• Addressing one of the most criticised aspects of Indian arbitration – protracted timescales, the Ordinance seeks to impose strict time limits on the arbitral process. Under section 29A of the Act, an arbitral tribunal must render an award within 12 months from the date of appointment of arbitrators, which can be extended for a further period of 6 months by the parties. If an award is not made within such time period, the mandate of the arbitrators automatically terminates and any extension can only be granted by courts on sufficient cause being shown and on such terms and conditions as may be imposed.
• Parties can also choose a fast track procedure under section 29B for completing arbitration within a period of 6 months.
• The Ordinance has amended section 17 of the Act to provide an arbitral tribunal with the same power to make orders for interim measures as the court and an order of the arbitral tribunal under section 17 shall be enforceable under the Civil Procedure Code, 1908 in the same manner as if it were an order of the court.
• Section 11 of the Act confers upon the Supreme Court or High Court the power to appoint arbitrators in the event an application is made by one of the parties. The Ordinance states that the courts should endeavour to dispose of such applications within a period of 60 days.
• Other provisions for streamlining the arbitration process have been introduced, including empowering arbitral tribunals to impose exemplary costs on a party seeking frivolous adjournments, and requiring courts to dispose of applications to challenge arbitral awards within a period of one year from the date notice of such application is served to the other party.
• A comprehensive regime for costs has been introduced under section 31A codifying the "costs follow the event” or “loser pays” principle in order to disincentivise frivolous actions.
• Amending Section 36 of the Act, the Ordinance provides that mere filing of an application to set aside an arbitral award will not result in an automatic stay of enforcement proceedings.

Comment

By promulgation of this Ordinance, it is apparent that the Government seeks to address the problems which have caused concern in the past and instil confidence in investors who had been wary of choosing India as a seat of arbitration.

Though the Ordinance is definitely a step in the right direction, a potential issue is the absence of any transitory provision setting out the applicability of the amendments to ongoing arbitrations. The Law Commission had provided for the amendments to apply prospectively (with certain exceptions) but this has not been incorporated by the Ordinance, thereby creating ambiguity and scope for litigation. It is hoped that this is rectified in the bill which will be presented to the Parliament for approval.

The extent to which these amendments will be successful in minimising court interference is also questionable. By requiring court-sanctioned extensions for continuing arbitration beyond the prescribed 12 (or 18 month) period, there is likely to be a frequent need to involve the courts in ongoing arbitrations (at least in the onshore context), leaving the parties exposed to the vagaries of (at least) the court scheduling process. Perhaps recognising that this may put further pressure on the already overburdened Indian courts, the Government has also promulgated the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015 (the "Commercial Courts Ordinance") which confers jurisdiction on the (yet to be constituted) commercial courts in arbitration matters above a certain monetary threshold (currently INR 10 million, or approximately USD 170,000).

While it remains to be seen how these reforms will play out in practice, they are likely to be widely welcomed and will undoubtedly play a major role in shaping the arbitration landscape in India.

For further information, please contact Nicholas Peacock, Partner, Donny Surtani, Senior Associate or your usual Herbert Smith Freehills contact.

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