Anu Shrivastava

The Supreme Court of India (“Court”) in an landmark decision titled “BCCI vs. Kochi Cricket Pvt. Ltd. (previously covered in a blog post) clarified the applicability of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Act”) to pending arbitration and court proceedings commenced under the Arbitration and Conciliation Act, 1996 (“1996 Act”). The Court held the following:

1. Subject to party autonomy, the amendments would not apply to “arbitral proceedings” that had commenced before the commencement of the 2015 Act.
2. The amendments would apply to court proceedings which have commenced, “in relation to arbitration proceedings”, on or after the commencement of the 2015 Act.

Exception: The amendments under the 2015 Act would apply to enforcement of an award under Section 36, even if the court proceedings relating thereto have been filed before the commencement of the 2015 Act.

Section 36 of the 1996 Act provides for enforcement of an arbitral award in the same manner as if it were a decree of a court in India.  The Court carved an exception to  Section 36 of the 1996 Act on the ground that enforcement proceedings are entirely procedural in nature, and could be applied retrospectively since no rights are vested in the parties seeking such enforcement. This post seeks to analyse the Court’s decision in carving out the exception for Section 36 and also to highlight practical problems which may arise in the aftermath of the decision.

Section 36 of the 1996 Act to apply retrospectively and no automatic stay on enforcement of the award – exception to the general rule.

The Court held that the 2015 Act was prospective in nature and would apply in relation to arbitration proceedings commenced after the commencement of the 2015 Act, i.e., 23 October 2015.  In the pre-amendment scenario, Section 36 provided for an automatic stay on the enforcement of an award until the expiry of the time limit for challenging the award, or until the disposal of such a challenge. Under the 2015 Act, there was no longer a provision for automatic stay on enforcement of an award and such stay could only be granted upon a request being made to the court.

The Court held that the amended Section 36 would apply to those applications for setting aside an arbitral award under Section 34 which had been filed after the commencement of the 2015 Act. Further, the amended Section 36 would apply retrospectively to Section 34 applications that had been filed prior to the commencement of the 2015 Act.

In declaring that Section 36 applies retrospectively, the Court analysed Section 6 of the General Clauses Act, 1897 which provides that the repeal of any enactment does not affect any right or privilege accrued or incurred under the repealed enactment. According to the Court, an automatic stay of awards could not be claimed as a vested right under Section 6 because enforcement is purely procedural and not substantive. Therefore, the provisions of the amended Section 36, being purely procedural, could apply retrospectively.  The operative portion of the judgment which concludes that Section 36 is purely procedural reads as follows:

“Since it is clear that execution of a decree pertains to the realm of procedure, and that there is no substantive vested right in a judgment debtor to resist execution, Section 36, as substituted, would apply even to pending Section 34 applications on the date of commencement of the Amendment Act”

In concluding so, the Court seems to have only considered precedents on execution of a decree, and not on enforcement of an award under Section 36. The Court did not consider if the un-amended Section 36 was also purely procedural or if there was a change in its nature due to the 2015 Act vis-à-vis substance and procedure. In arriving at the conclusion that Section 36 of the 1996 Act is purely procedural, the Court only considered the post-amendment scenario which does away with automatic stay on awards.

The essential issue which escaped the Court’s consideration is whether Section 36 could have been considered as purely procedural even before the amendments were introduced. Enforcement of an award, as provided for under Article 36 of the Model Law, does not only relate to procedural aspects but also contains substantive grounds of challenging an award.  Similarly, the Article V of the New York contains substantive objections to resist the enforcement of an award.  While such objections and grounds for setting aside a domestic award are provided for under Section 34 of the 1996 Act, perhaps the Court should have considered if Section 36 of the 1996 Act could be read in isolation from Section 34 of the 1996 Act. An argument was raised before the Court that Section 36 proceedings could not be considered as a proceeding which was independent of a proceeding under Section 34 of the 1996 Act. However, the Court considered it unnecessary to go into the “by-lane of forensic argument” about Section 36 standing independent of Section 34 of the Act.  Once the Court had decided that the 2015 Act was to apply prospectively, there should have been compelling reasons to the carve an exception to this general rule.

Practical considerations

The Court’s decision that Section 36 of the Act applies retrospectively because it is purely procedural may lead to further litigation on retrospective application of other similarly placed provisions which concern only procedural issues. The Court did not undertake a detailed analysis as to why the proceedings under Section 36 were not proceedings “in relation to arbitration”. This leaves room for further attempts at seeking retrospective applicability of other similarly situated provisions on the basis that they are purely procedural. For instance, what would be the fate of an interim order rendered by a tribunal under Section 17 of the Act? Section 17 of the 1996 Act is modelled on Article 17 of the UNCITRAL Model Law and confers powers upon an arbitral tribunal to issue interim measures. Before the amendments, Section 17 of the Act did not provide for any court assisted measure for enforcing an interim award. The 2015 Act has led to the insertion of Section 17(2) to provide that an interim order shall be enforceable as if it were an order of the court. On the basis of the Court’s decision, it may be possible to argue that enforcement of an award being procedural and “in relation to arbitration”, Section 17(2) should also apply retrospectively for enforcement of an interim award made before the enactment of the 2015 Act.

To consider another instance, an arbitration commences under the 1996 Act and a challenge is made to the appointment of one of the arbitrators on the ground of independence or impartiality. The tribunal decides under the 1996 Act as it stood before amendments, rejects the challenge and delivers the final award. After the amendments are introduced, a party approaches the Court under Section 34(2)(a)(v) of the 2015 Act for setting aside the award on the ground that the composition of the tribunal was improper. The 2015 Act led to the insertion of the Fifth Schedule which lists down the grounds which give rise to justifiable doubts as to the independence or impartiality of arbitrators. The tribunal while deciding under the 1996 Act would not have considered the grounds listed in the Fifth Schedule since it was inserted subsequently. However, the court while considering the Section 34 application under the 2015 Act would scrutinize the award on the basis of the Fifth Schedule. This would lead to different grounds being considered by the tribunal and the court in deciding the same issue.

The Court’s decision goes a long way in granting relief to award-debtors who have been waiting to enforce their awards,but has also caused it has also led to certain an uncertainty in the law of arbitrationies relating to the arbitration regime in India.The decision also runs contrary to the recommendations made by the Srikrishna Committee that the 2015 Act should not apply retrospectively lest it would result in inconsistency and uncertainty, and would cause prejudice to the parties.

The Arbitration and Conciliation (Amendment) Bill, 2018 (“2018 Bill”) tries to resolve these uncertainties and clarifies that the 2015 Act would not apply to arbitral proceedings and court proceedings (arising out of such arbitral proceedings) that have commenced before the 2015 Act.  The 2018 Bill further provides that the 2015 Act would only apply to arbitral and court proceedings which commence after the 2015 Act. It may be important to note that the provisions of the 2018 Bill were brought to the Court’s attention during the hearing for BCCI v. Kochi but the Court was not inclined to consider it.  The Court had observed that the amendments in the 2018 Bill would put all the important amendments of the 2015 Act on a “back-burner”.  Yet, the 2018 Bill has been passed by the Lower House of the Parliament without making any substantive modificationsin the same form, without making any changes. Once enacted, it will be interesting to see how courts interpret the 2018 Bill on applicability of the 2015 Act.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post BCCI v. Kochi – (Un)tangled Issues? appeared first on Kluwer Arbitration Blog.

Pranav Rai

YIAG

The lower house of the Indian Parliament recently passed the Arbitration and Conciliation (Amendment) Bill 2018 (“Bill”) to amend the arbitration law. If also passed by the upper house of Parliament, and upon receiving the President’s assent, this will become a law. It will then come into force when the Government so notifies.

The Law Minister termed this Bill as a historic moment. It is largely based on the report (“Report”) of a High Level Committee (“Committee”), which was given a mandate to identify the roadblocks to institutional arbitration (“IA”), examine issues which affect the arbitration landscape, and prepare a roadmap for making India a robust center for international and domestic arbitration.

This post argues that the Report has taken a myopic view of the problems and has made some suggestions which do not have a sound basis in policy. To be fair to the Committee, it was given a flawed mandate by the government – to implement rhetoric, disguised as an objective. The Report, however, instead of correcting this flawed objective, had a one-dimensional focus of improving IA. In this process it ignored the more importunate issues which plague Indian arbitration landscape. Below is an analysis of some important policy flaws in the Report which have crept into the Bill.

Making India a global arbitration hub – a wrong premise to start with

For some time now, statements made by the government on the issue of arbitration have contained more rhetoric than substance. One such rhetoric has been to make India a global arbitration hub (“Hub”). It is important to point out that, due to similarity of terms there is a scope of confusion over the meaning of the term Hub, especially at the government level. However, a reading of government statements, here and here, and an earlier Law Commission report suggests that the intent has indeed been to make India a Hub i.e. making India a globally preferred seat when both parties are foreign.

Consequent to such an objective, one of the aims of the Committee was to formulate a roadmap to achieve this. This, in my view, was an opportunity for the Committee to set the record straight by pointing out the impossibility of this objective (at least in the near future) and instead suggest a more modest objective with a clear roadmap and timelines. It however ended up presenting an ambiguous picture of this objective coupled with an equally ambiguous roadmap.

These are some fundamental flaws with the objectives which the Report fails to properly address.

a) All of the existing Hubs are cities or city states. It would be nothing short of a miracle if a country of India’s size becomes a Hub. As a proposition, this is a non-starter and the Committee should have advised the government accordingly. If the other flaws with such objective (explained below) could be resolved, the Report should have first suggested that some cities should be identified for this purpose. Priority should have been given to new smart cities such as GIFT City which would have complemented the larger plans of the government in the financial space. A model suitable in the Indian context should have then been applied to such cities, differently if necessary. But since neither of this was done, it is still not clear what will be the government’s objective going forward.

b) This idea of a Hub seems to have been developed by the government without a clear understanding of its rationale. The Report suggests that improving the arbitration landscape in India and making India a Hub will help in improving the ease of doing business and will also promote India as an investor-friendly country. While an improved arbitration landscape should help in the ease of doing business and should also promote India as an investor-friendly country, these are not plausible reasons to endeavor to become a Hub. Generally, it is the other way around – ease of doing business and being investor friendly are more like a pre-requisite to be a Hub. The case of Singapore and Hong Kong are good examples here. There are on the other hand several reasons for not aiming so high. Substantial costs for considerable period of time is one such reason. It would have been helpful if the Report could have included a cost-benefit analysis and financial feasibility study of this objective before even attempting to provide a solution.

c) None of the existing Hubs have directly become a Hub. A possible process which could have been followed here is – first improve upon the international arbitration landscape and identify the cities and arbitral institutions which need to be developed. Care should be taken so that the arbitral institutions are evenly spread across the cities and do not exceed beyond a point. An opportunity to be a regional or global player can only arise later once the arbitration system is well developed. The Report however did not provide any roadmap or timelines here, except for suggesting that an Arbitration Promotion Council should be set up to grade arbitral institutes and that as of now one arbitral institution has been identified for this purpose. With the aims so high the Report’s roadmap should have been more robust than this.

More immediate problems overlooked

The ambiguity surrounding the objectives of the Committee has also resulted in the more immediate problems being overlooked. For example, the Law Commission’s earlier report (see above) noted that the shortcomings in the arbitration law resulted in even the Indian parties preferring arbitration seat abroad. The judiciary has also been unable to resolve this issue and has instead given contradictory signals. This should have set the alarm bells ringing and, in my view, calls for a legislative fix. This was an achievable goal and should have been the first priority for the Report. But instead, the Report seems to suggest that IA is a general medicine which will cure all problems. These could have been resolved if the Committee would not have mixed all problems together and could have clearly prioritized its objectives.

One-dimensional focus on institutional arbitration

The Report and the Bill clearly favour IA at the cost of ad hoc arbitration (“ad hoc”). This is an important arbitration policy deviation because until now the arbitration law has been IA agnostic. Being an important deviation, the Report should have at least provided plausible reasons for favoring IA over ad hoc. But all it seems to suggest is that ad hoc should be discarded gradually as they are costly and cause delay. There was, however, one favourable change suggested in the Report – to provide model arbitration rules. Although this was not intended to directly benefit ad hoc, this could have been beneficial for ad hoc. These model rules, however, do not form part of the Bill.

The problem of ad hoc was not only with respect to cost and delay, as has been pointed out by the Report, but also of independence and impartiality along with the unique problem of unilateral clauses. However, all of these have to a large extent been resolved by the 2015 amendment, but the Report discounts this fact. This amendment inter alia made provisions for: a) reduction in arbitrators’ fee on account of delay; b) model fee; and c) adoption of a modified version of IBA Guidelines on Conflicts of Interest in International Arbitration. These problems are thus not inherent in the system and a cure is possible. Also, most of the problems are common to both IA and ad hoc, so if the Report suggests a resolution of the problems for IA then it is difficult to comprehend why cannot the same be done for ad hoc.

While the Committee was constantly looking at other models for inspiration, it could have also studied India’s history and culture of alternative dispute resolution. This culture continues even today and is also one possible reason why majority of Indian parties prefer ad hoc over IA. Some versions of Ramayana, for example, cite attempts by deities to settle the dispute between Rama and his twin sons, which is akin to modern day alternative dispute resolution. Informal arbitration proceedings have been conducted by the panchayats (village councils) since ancient times and there is some evidence to suggest that it is still preferred over litigation. This not only shows that ad hoc has been functioning reasonably well since ages, but this could have also been used as a model even today, with some modifications to suit the current day requirements. The Report completely ignored these indigenous sociocultural aspects of ad hoc.

In view of the above, rather than out rightly rejecting ad hoc, there was at least a case to improve the existing ad hoc systems and provide it an equal playing field in the domestic arbitration sphere.

Conclusion

The above analyses show that there are some vital flaws in the Report and consequently in the Bill. The legislature should thus reconsider this Bill. In its eagerness to make India a robust center for arbitration, the government is perhaps missing the point that all successful models of arbitration have their own uniqueness. Hence, instead of blindly following a foreign model, India should first weigh in all options to see which model suits best from an Indian context and how best to utilize India’s rich history and experience in this sphere.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post Proposed 2018 Amendments to Indian Arbitration Law: A Historic Moment or Policy Blunder? appeared first on Kluwer Arbitration Blog.

Shweta Sahu, Payel Chatterjee and Moazzam Khan

YSIAC

Independence and impartiality of arbitrators are the hallmarks of arbitration. The amendments to the Arbitration and Conciliation Act 1996 (“Act”) in 2015, which adopted the international best practices from the International Bar Association Guidelines on Conflict of Interest (“IBA Guidelines”), aimed to bolster not only the neutrality of arbitrators, but also the perception of neutrality.

This article attempts to explore and analyze these changes along with the Indian Supreme Court ruling in HRD Corporation v GAIL (Civil Appeal No. 11126 of 2017), a landmark case dealing with issues of arbitral conflicts.

Legislative Framework

Pre-amendment

Prior to the amendment, Section 12(3) of the Arbitration and Conciliation Act 1996 provided that:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.

(3) An arbitrator may be challenged only if-

(a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) He does not possess the qualifications agreed to by the parties.”

Post-amendment

The Arbitration and Conciliation (Amendment) Act 2015 (“Amendment Act”) further explained the circumstances under which such arbitral appointments may be challenged. Section 12(1) of the Arbitration and Conciliation Act 1996 was replaced with the following section:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —

(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and

(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular their ability to complete the entire arbitration within a period of twelve months.”

The Amendment Act also inserted a new Fifth Schedule, which lists the grounds and circumstances that would give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Additionally, Section 12(5) of the Arbitration and Conciliation Act was inserted:

“(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.”

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Analysis of the Post-Amendment Framework

Distinguishing “ineligibility” from “justifiable doubts as to independence and impartiality” of an arbitrator

While the Fifth Schedule (read with Section 12(1)(a)) lists the various instances giving rise to “justifiable doubts as to the independence and impartiality” of an arbitrator, the Seventh Schedule (read with Section 12(5)) of the Arbitration and Conciliation Act relates to instances which directly result in the “ineligibility” of a person from being appointed as an arbitrator unless the parties had expressly waived the applicability of the provision in writing after the agreement was entered into.

Appointment of employees of an arbitrating party as arbitrators

Courts in India have distinguished between serving and past officials of an organization, relying on Entry 1 of the Seventh Schedule for the former and Entries 2, 5, 9 and 12 of the Fifth Schedule for the latter. While the former would be de jure ineligible¹⁾ West Haryana Highways Projects Pvt. Ltd. v National Highways Authority of India (2017) 242 DLT 44; Orissa Concrete and Allied Industries Limited 2017 SCC OnLine Chh 904, the latter would not.²⁾ M/s. Voestalpine Schienen GMBH v Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 The distinction is done considering former employees are seen as neither related to a party as employees, consultants or advisors, nor do they have any other past or present business relationship with the party, as required under Entry 1 of the Seventh Schedule.³⁾ Reliance Infrastructure Ltd. v Haryana Power Generation Corporation Ltd Arbitration Case No. 166 of 2016 (O&M), decided on 27 October 2016 (“Reliance Infrastructure v HPGCL”)

This pertains to cases where technical expertise of such retired officials is sought, involving niche disputes. An appointment of a former employee may be subsequently challenged if certain situations arise, such as revelation of the involvement of the appointee with the project under dispute.⁴⁾ Afcons Infrastructure Ltd. v Rail Vikas Nigam Limited 2017 SCC OnLine Del 8675

The Indian Supreme Court recently reiterated the law by stating that, although prior to the Amendment Act the arbitrator being a current employee of any of the parties was ipso facto not a ground for disqualification, pursuant to the Amendment Act, such appointments would be illegal.⁵⁾ Aravalli Power Company Ltd. v Era Infra Engineering Ltd Civil Appeal No. 16727-16728 of 2017

Appointment of practising counsels (including those briefed by lawyers of either party) as arbitrators

In a recent judgment of the Bombay High Court,⁶⁾ Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 it was affirmed that a counsel’s acceptance of a brief from an attorney or law firm for a different client or for an unrelated matter does not amount to automatic disqualification or ineligibility to being an arbitrator in an arbitration in which the same attorney or law firm is acting. Under the Fifth and Seventh Schedules of the Act, for a connection to cause disqualification, there must be a sufficiently proximate relationship between the arbitrator-counsel and the litigant specifically.⁷⁾ Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68

Following the statutory amendments described above, the disputes before the Indian courts have primarily revolved around the appointment of former or serving employees as arbitrators, and whether there were “justifiable doubts as to independence and impartiality” and “ineligibility” of arbitrators. The Act does not lay down any conditions to identify the “circumstances” which may give rise to “justifiable doubts”. Thus, the threshold for disqualification of arbitrators continues to be highly subjective, even though the Schedules of the Act intended otherwise. In a recent judgment of HRD Corporation v GAIL, the Indian Supreme Court dealt with the appointment of former judges as arbitrators, who may be associated in previous disputes involving one or more parties to the arbitration.

HRD Corporation v. GAIL (Civil Appeal No. 11126 of 2017)

Overview of facts

The parties entered an agreement on April 1, 1999 for the supply of wax. Subsequently, disputes arose between the parties on the pricing and withholding of products. HRD Corporation (“Appellant”) invoked the arbitration clause, initiating a total of four arbitrations on the above issues.

The present dispute arises from the fourth arbitration. Two applications were filed by the Appellant under Sections 12(3), 12(5), 13 and 14 of the Act read with the International Centre for Alternative Dispute Resolution Rules 1999, seeking termination of Justice T.S. Doabia and Justice K.K. Lahoti due to an alleged prior association. The challenge was on the grounds that Justice Lahoti had previously given an opinion on a legal issue between GAIL and another public-sector undertaking in the year 2014; whereas Justice Doabia had previously rendered an award between the same parties in an earlier arbitration concerning the same disputes, but for an earlier period. These allegations were rejected by the arbitral tribunal.

While deciding the case, the Indian Supreme Court scrutinized the Schedules of the Act through an itemized comparison between the Fifth Schedule of the Act and the IBA Guidelines.

On the existence of justifiable doubts as to independence and impartiality, the Indian Supreme Court held that a broad common-sensical approach was to be adopted.

Regarding the Seventh Schedule of the Act, the Supreme Court held as follows:

Entries 1 and 2 of Seventh Schedule

Entries 1 and 2 refer to circumstances where the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party; and where the arbitrator represents or advises one of the parties or an affiliate of one of the parties.

Justice Lahoti was neither a serving employee nor a consultant nor an advisor to the party. He had only given a professional opinion (not emanating from any business relationship) to the Respondent which was unrelated to the present dispute. Therefore, disqualification under Entry 1 did not arise.

Furthermore, Entry 2 was inapplicable since it concerns “current” representation or advice rendered to the Respondent, which was inapplicable in this case.

With respect to Justice Doabia’s appointment, it was held that the appointment of a person as an arbitrator is not equivalent to a “business relationship.”

Entries 8, 15 and 16 of Seventh Schedule

Entries 8, 15 and 16 refer to circumstances where the arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom, where the arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties, and where the arbitrator has previous involvement in the case.

These entries were held to be inapplicable in the present case as no advice was rendered by Justice Lahoti to the Respondent on a regular basis.

Entry 15 was similarly inapplicable, because the Indian Supreme Court found that no legal advice or expert opinion was provided on the dispute in hand. Justice Lahoti’s legal opinion which was given way back in 2014 was in relation to another issue. Similarly, in Justice Doabia’s case, it was held that an award rendered by an arbitrator in a previous arbitration cannot be read as a grant of a legal opinion under this Entry.

Lastly, “previous involvement in the case” under Entry 16 was read as referring to previous involvement in the “present dispute”, rather than merely the same agreement. Consequently, despite Justice Doabia having previously been an arbitrator between the same parties, he would not be rendered ineligible under Entry 16.

Identical entries in the Fifth and Seventh Schedules

With respect to the presence of the same Entries 1 to 19 in both Schedules, the Indian Supreme Court explained that arbitrators would have to make disclosures of their independence and impartiality as per the entries in the Fifth Schedule, which would otherwise be unknown to the parties. Based on such disclosures, eligibility would be determined under the Seventh Schedule read with Section 12(5) of the Act.

Conclusion

With the avid usage of extrinsic aids to interpretation e.g. the IBA Guidelines, 246^th Indian Law Commission Report etc. and intrinsic aids like the headings in the Schedules, the Indian Supreme Court sought to decipher the exact meaning and intention of the relevant entries in the Schedules and adopt a purposive interpretation of the provisions. However, this exercise was limited to the extent of the contentions raised and referred to by the parties. It is yet to be seen whether the Indian courts would continue to upkeep the spirit of these amendments, especially that of the Schedules, in the years to come.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post Legitimacy of Arbitral Appointments in India appeared first on Kluwer Arbitration Blog.

Anirudh Lekhi

The Supreme Court of India (“SC”) in its recent decision M/s Lion Engineering Consultants v. State of M.P. & Ors. (“Lion”) has held that a party that had failed to raise a jurisdictional challenge before the arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996 (“Act”), would yet be permitted to raise such a challenge during setting-aside proceedings under Section 34 of the Act. The sole reason for this inference is that setting-aside proceedings are independent of proceedings before an arbitral tribunal. However, Lion’s observations are ostensibly against the scheme of Section 16, which allows jurisdictional challenges to be raised only before the arbitral tribunal. Additionally, the decision is in conflict with existing judicial precedents addressing the same issue.

In order to resolve this ensuing confusion, it is imperative to appreciate the distinct nature of each jurisdictional challenge and the objects underlying Section 16. In this light, I explore whether new jurisdictional challenges can be urged during setting-aside proceedings.

Anatomy of Section 16

The relevant part of Section 16 reads as follows:

16. Competence of arbitral tribunal to rule on its jurisdiction-

(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objection with respect to the existence or validity of the arbitration agreement…

(2) A plea that the tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence;

It is evident from the above that a tribunal may determine any objection to its jurisdiction on its own. The appearance of the word “including” in Section 16(1) denotes that jurisdictional challenges to the existence or validity of the arbitration agreement are merely illustrative and not exhaustive. Thus, various kinds of jurisdictional challenges are permissible under Section 16.  In order to appreciate the varying facets of jurisdictional challenges, it would be useful to refer to the International Arbitration Practice Guideline on Jurisdictional Challenges (“Practice Guideline”).

According to Article 2 of the Practice Guideline, most jurisdictional challenges arise in relation to whether—(i) the arbitration agreement exists; (ii) the parties to the dispute are the same as the parties to the arbitration agreement; (iii) the arbitration agreement is defective; (iv) the arbitration agreement was made in the required form; (v) the subject-matter falls within its scope; and (vi) the arbitrators have the necessary powers. Therefore, jurisdictional challenges akin to those envisaged in the Practice Guideline may also be raised before the arbitral tribunal under Section 16.

Further, as per Section 16(2), objections to the jurisdiction of the tribunal can only be raised prior to the submission of the statement of defense. The objectives of this provision are two-fold. First, it ensures that the tribunal determines its jurisdiction at the very threshold. This precludes belated adjudication on questions of jurisdiction and preserves time and expense of the parties. Second, the provision reduces the supervisory role of Courts if parties fail to raise jurisdictional challenges within the period prescribed under Section 16(2). Consequently, the inability of Courts to revisit certain questions of jurisdiction may encourage parties to raise jurisdictional challenges promptly. Any interpretation of Section 16 should not lose sight of these objects.

Conflict in judicial precedents

The SC’s observations in Lion are at odds with its previous decision in Narayan Prasad Lohia v. Nikunj Kumar Lohia & Ors. (“Lohia”). The jurisdictional challenge in Lohia pertained to the composition of the arbitral tribunal. It was not raised before the tribunal and urged for the first time during setting-aside proceedings. In this regard, the SC observed— “Such a challenge must be taken under Section 16(2), not later than the submission of the statement of defence…If a party chooses not to so object, there will be a deemed waiver under Section 4.” Therefore, Lohia opined that a party’s failure to raise a jurisdictional challenge before the arbitral tribunal would result in a waiver of its right to raise such challenge subsequently. Since Lohia and Lion have been decided by benches of equal strength (three judges), it is unclear which of the two decisions holds the ground.

The SC in Gas Authority of India Ltd. v. Keti Constructions (I) Ltd. (“GAIL”) also determined a similar issue. Negating a jurisdictional challenge during setting-aside proceedings, GAIL held that since the objective of the Act is to secure expeditious resolution of disputes, such challenges must be made before the arbitral tribunal itself. However, the SC qualified its conclusion by observing— “If a plea of jurisdiction is not taken before the arbitrator as provided under Section 16 of the Act, such a plea cannot be permitted to be raised in proceedings under Section 34 of the Act for setting aside the award, unless good reasons are shown.” Thus, GAIL permitted fresh jurisdictional challenges during setting-aside proceedings if good reasons were shown. However, GAIL was decided by a smaller bench of two judges and to that extent, its qualification appears to ignore Lohia.

Additionally, two decisions of the High Courts of Bombay and Allahabad have offered very compelling reasons for allowing parties to raise jurisdictional challenges for the first time during setting-aside proceedings. These decisions opine that an inherent lack of jurisdiction cannot be sanctified by the failure of a party to raise an objection promptly. Accordingly, since questions of jurisdictions go to the root of the matter, a party may raise a jurisdictional challenge at any stage.

Way Forward

It is true that the lack of a tribunal’s jurisdiction cannot be rectified by a party’s failure to raise a jurisdictional challenge. However, it is also essential to keep an unscrupulous party from delaying proceedings through frivolous challenges during setting-aside proceedings. Therefore, an intermediate view may be deduced by recalling the different kinds of jurisdictional challenges provided under the Practice Guideline.

These jurisdictional challenges can be classified into two categories—(i) challenges relating to a defect in the jurisdiction and (ii) challenges on account of a lack of jurisdiction. This classification is rooted in the decision of the Privy Council in Ledgard v. Bull, which postulates that though a consent or waiver may cure a defect in the jurisdiction, it cannot cure an inherent lack of it. Therefore, jurisdictional challenges raised due to a defect in the jurisdiction must be distinguished from those based on an inherent lack of it.

In this regard, a jurisdictional challenge that the subject matter is not arbitrable is an illustration of a ground based on an inherent lack of jurisdiction. For instance, an objection that the subject matter relates to penal laws should be permitted during setting aside proceedings under Section 34, even if it was not urged before the tribunal under Section 16. This is because a party’s failure to raise this challenge before the tribunal, cannot confer jurisdiction upon the tribunal when the claim itself is not arbitrable.

However, the same latitude may not be given to fresh jurisdictional challenges relating to defects in the jurisdiction. Since jurisdictional defects are capable of a cure, the Courts should permit fresh jurisdictional challenges relating to defects in jurisdiction only if “good reasons are shown”. For example, jurisdictional challenges questioning the constitution of an arbitral tribunal or the existence of an arbitration agreement are illustrations of challenges based on defects in the jurisdiction. In such cases, a party’s failure to raise a challenge before the tribunal under Section 16(2) may lead to a waiver of the right to object subsequently.

The SC in Prasun Roy v. Calcutta M.D.A considered a fresh challenge to the constitution of an arbitral tribunal during setting-aside proceedings and surmised—“The principle is that a party shall not be allowed to blow hot and cold simultaneously. Long participation and acquiescence in the (arbitral) proceedings precludes such a party from contending that the (arbitral) proceedings are without jurisdiction.” In this light, it appears that the conduct of a party and the time taken to raise a jurisdictional challenge may be considered by the Court to ascertain whether there was a waiver or not.

In view of the above, the Court’s inquiry into the existence of “good reasons” may also include a determination of whether there was a waiver of the right to object or not. This would be in keeping with the SC’s verdict in GAIL as well as the objectives of Section 16 as parties would now have to establish cogent reasons for raising new jurisdictional challenges during setting-aside proceedings.

Conclusion

The arbitral regime in India is clogged with decisions that do not appreciate the unique nature of each jurisdictional challenge. Evidently, decisions such as Lion and Lohia have painted every jurisdictional challenge with the same brush and yet reached plainly opposite conclusions. It is, therefore, crucial to distinguish jurisdictional challenges based on an inherent lack in the jurisdiction from those founded on defects in the jurisdiction. Their nature would determine whether a party would be precluded from raising such challenges or be allowed if “good reasons” so warrant. This intermediate approach may resolve the prevailing confusion and preclude parties from employing dilatory tactics.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post Blowing Hot and Cold: Assessing the Permissibility of Fresh Jurisdictional Challenges During Setting-Aside Proceedings appeared first on Kluwer Arbitration Blog.

Sharad Bansal

Background

The Indian Arbitration and Conciliation Act, 1996 (“Act”) provides, in Section 37(2)(b), for an ‘appeal’ from an arbitral tribunal’s order on interim/provisional measures (“interim order”). It, however, does not stipulate the standard of review that the court must apply while reviewing an interim order. Sans any prescribed legislative standard, courts have two alternatives available: test interim orders on the same grounds as those applicable for annulment of awards, laid down in Section 34 of the Act; or treat Section 37(2)(b) proceedings as an appeal and assess the legality of interim orders on merits.

Discussion on the applicable legal standard in court decisions rendered under Section 37(2)(b) is sparse and loose. While some judgments simply observe that the scope of courts’ interference in interim orders passed by arbitral tribunals is limited (Subhash Chander Chachra v. Ashwani Kumar Chachra), others have conducted a full-blown enquiry on merits to test the legality of the tribunal’s interim orders (Sanjay Gambhir v. BDR Builders and Developers Pvt. Ltd., Intertoll ICS Cecons O & M Co. Pvt. Ltd. v. National Highways Authority of India, NTPC Ltd. v. Jindal ITF Ltd.). A third category of decisions applies the same standard of review to Section 37(2)(b) proceedings as that applicable to appeals against a court’s order on provisional measures (A. Jayakanthan v. J.R.S. Crusher).

The Supreme Court’s Judgment in National Highways Authority of India v. Gwalior Jhansi Expressway Limited

Recently, the Supreme Court of India in National Highways Authority of India v. Gwalior Jhansi Expressway Limited dealt with a challenge to an interim order of an arbitral tribunal which was subsequently upheld by the High Court under Section 37(2)(b). As in the earlier decisions concerning ‘appeals’ against interim orders under Section 37(2)(b) of the Act, the Court did not dwell on the standard of review for interim orders. Even the parties’ submissions (as noted in the Court’s judgment) did not address this issue. The Court nevertheless set aside the interim order on the basis that the arbitral tribunal’s approach and ruling were in contravention of the fundamental policy of Indian law.

According to Explanation 1 to Section 34(2)(b)(ii) of the Act, introduced through a legislative amendment in 2015, ‘fundamental policy of Indian law’ constitutes one of the three elements of the public policy of India. As in other jurisdictions, breach of public policy is one of the grounds for setting aside an arbitral award. It may, therefore, be argued that the Supreme Court in Gwalior Jhansi Expressway Limited assessed the legality of the arbitral tribunal’s interim order on the same grounds as those applicable for setting aside of arbitral awards. The application of the ‘fundamental policy of Indian law’ standard necessarily excludes any possibility of review on merits, since Explanation 2 to Section 34(2)(b)(ii) mandates that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute”.

The appropriate standard of review for appeals against interim orders

The Supreme Court’s application of the ‘fundamental policy of Indian law’ standard cannot be said to conclusively resolve the issue, as the Court did not take into account the provisions of the Act while applying this standard. Nor did it comment on the other grounds available for setting aside an interim order under Section 37(2)(b). A party challenging an interim order under Section 37(2)(b) can rely on two textualist arguments in support of a broader standard of review: First, Section 37(2) uses the term ‘appeal’, as opposed to the phrase ‘setting aside’ used in Section 34 (for ‘awards’). Second, ‘appeal’ in Section 37(2) is common to Section 37(2)(a) and Section 37(2)(b). Section 37(2)(a) concerns an appeal against an order of an arbitral tribunal declining its jurisdiction, which would require a review on merits. Arguably, therefore, it should have the same connotation in Section 37(2)(b). Nonetheless, for reasons submitted below, it is submitted that the Court’s approach in Gwalior Jhansi Expressway Limited is preferable.

 A full review of an interim order by a court is an invitation to all losing parties to seek recourse under Section 37(2)(b) of the Act and is plainly against the objective behind the amendments made to Sections 9 (power of courts to grant interim reliefs) and 17 (power of an arbitral tribunal to order interim measures) of the Act in 2015.  Section 17(1) now empowers an arbitral tribunal to pass all orders which a court may pass and Section 17(2) provides teeth to a tribunal’s interim orders by making them enforceable in the same manner as an order of a court. Once an arbitral tribunal has been constituted, courts can grant interim relief under Section 9 only in exceptional circumstances. The Law Commission of India’s 246^th Report, which recommended these amendments, stated that the modifications were aimed at reducing the role of courts in the grant of interim measures once an arbitral tribunal is in place. The Supreme Court’s decision in Gwalior Jhansi Expressway Limited is aligned with this intent. Courts in subsequent cases can rely on purposive interpretation to follow this approach, notwithstanding the textualist arguments against it highlighted above.

Testing the legality of an interim order and an arbitral award on the same grounds is also in consonance with the provisions of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). Although the Model Law does not provide any recourse against interim orders, it lays down the grounds on which recognition or enforcement of an interim order may be denied (Article 17I(1) of the Model Law). These grounds are identical to the grounds for refusal and enforcement of awards (a few additional grounds specific to interim orders are also included). In fact, Article 17I(2) of the Model Law specifically states that “[t]he court where recognition or enforcement is sought shall not, in making that determination, undertake a review of the substance of the interim measure”. Thus, one finds that under Model Law, the approach regulating review of awards and interim orders is consistent and an enquiry into the merits of the case is discouraged.

Conclusion

The issue concerning the applicable standard of review of an interim order assumes particular significance after the 2015 legislative amendments to the Act since, save in exceptional circumstances, parties are bound to approach the arbitral tribunal for seeking interim relief. National Highways Authority of India v. Gwalior Jhansi Expressway Limited takes the appropriate stance on this subject and is the latest addition to a series of judgments of the Supreme Court of India seeking to minimize court intervention in arbitration proceedings.

(The author would like to thank Mr. Sulabh Rewari for his comments on the piece.)

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post The Standard of Review of Interim Orders of an Arbitral Tribunal Seated in India: A Significant Step Towards Certainty appeared first on Kluwer Arbitration Blog.

Pranav Rai

YIAG

The proposed amendments (“Bill”) to the Indian arbitration law may soon get the force of law. The Bill is based on the report (“Report”) of a High Level Committee and suggests several changes which may have far-reaching negative effect.

In my earlier post, it was argued that the Report and the Bill have some fundamental policy flaws. It was accordingly suggested that the Bill be reconsidered by the legislature. This post endeavors to point out the major legislative flaws in the Bill, which, as a concept, have been proposed to be introduced for the first time in the Indian arbitration law. These new concepts, discussed below, relate to designation of arbitral institutions (“AI”), confidentiality obligations, and qualifications, experience and general norms for arbitrators.

Designation of Arbitral Institutions  

As a result of the Report’s focus on developing institutional arbitration in India, the Bill now makes a provision for the designation of AI by the Supreme Court (for international commercial arbitration) and the High Courts (for domestic arbitration). The Bill then provides that, in the absence of an agreed arbitration procedure between the parties, the AI (and not the appropriate court as per the current law) will be the appointing authority for arbitrator/s.

Although inspired from Singapore’s International Arbitration Act (“IAA”) and Hong Kong’s Arbitration Ordinance (“HKO”), this provision misses an important aspect which is present in both IAA and HKO. Only one AI is designated as the appointing authority under both IAA and HKO – Singapore International Arbitration Centre and Hong Kong International Arbitration Centre, respectively. Consequently, it also fails to construe an important reason for limiting such AI to only one – Quality.

In an ideal scenario, this number should have been one or possibly two – one for international commercial arbitration and another for domestic arbitration. The least which could have been done here is to put a cap on the number of such IA which can be so designated by the courts. The Bill does neither, but leaves it open for the courts (1 Supreme Court plus 24 High Courts) to start the designation process for an (infinite) number of AI.

Further, to be designated as such, the courts are only required to see if the AI has been “graded” by the Arbitration Promotion Council of India. There is no clarity (yet) on what grades will be considered good for this purpose.

So, on the whole, this provision leaves the designation aspect at the wisdom of the courts. This is however fraught with danger. There have been several instances in the past where the Indian courts have taken positions contrary to the legislative intent of the arbitration law (see here for an example). We can only imagine what can happen if even the legislative intent is not clear, as in the present case. Not to mention the plight of the parties negotiating the arbitration agreement, who will now have “too many” AI to choose from and agree to, even in domestic arbitration.

Confidentiality

The Report suggested a provision for explicit obligation of confidentiality in arbitral proceedings. The Bill incorporates this suggestion, with some deviations, and provides for confidentiality obligations upon the parties, the arbitrator and the AI. But, as we shall see, this provision raises some concerns.

First, although the Report correctly suggests that there is a divergence of views on this subject, it did not make any effort to find out the reasons for these divergent views. After a short (ten line) discussion on the position in Hong Kong (explicit confidentially obligations) on the one hand, and Singapore and UK (implied duty of confidentiality on parties through case law) on the other, it simply concluded that that an express confidentiality provision for arbitral proceedings is required. Also, during this process, the Report did not look into the nuances linked to this obligation or study other jurisdictions which have maintained position similar to India. One such jurisdiction clearly missed out is Australia, which had for long maintained a contrarian position on this issue (similar to India’s current position) and has only recently applied confidentiality provisions on an “opt-out” basis. Only if this aspect could have been studied holistically, with an effort to appreciate the reasoning adopted by these jurisdictions for the approach chosen, it would have served the cause better and could have provided concrete options to work with.

Secondly, the Report found inspiration for the explicit confidentiality provision from the HKO model, but surprisingly failed to capture or discuss the various aspects of the confidentiality dealt even by the HKO. The HKO does this very differently from what the Bill proposes, for it also: a) provides for confidentiality in court proceedings related to the arbitral proceedings; b) makes confidentiality obligations of the parties’ subject to the principle of party autonomy; and c) has several other nuances, for example, the various exceptions to confidentiality obligations (see Articles 16-18 of HKO).

Thirdly, the Report did not consider that such matters with respect to confidentiality could have also been taken care of by the AI and that there was at least a case for not providing for this explicitly in the legislation but leaving it at the judgement of the AI. This approach, if considered and adopted, would have been in sync with what most prominent AI do globally (for example, see Rule 39 – Confidentiality of SIAC Rules and Rule 30 – Confidentiality of LCIA Rules).

As a result, the Bill ends up providing for an express confidentiality provision applicable as a blanket obligation upon the parties, arbitrator and even the AI. It is devoid of the party autonomy principle and does not capture the various nuances which should be present if the legislation provides for this expressly. This is compounded by the inept drafting of even this binary form of confidentiality obligation which makes it impractical to be observed. To illustrate, there is no exception provided for non-disclosure of any “arbitral proceedings”, except for the arbitral awards. Even for the arbitral awards, the only exception provided is “where its disclosure is necessary for the purpose of implementation and enforcement of award.” There is no mention of other standard exceptions, such as, for challenging the award or when a disclosure is required to protect or pursue a legal right, although this was pointed out by the Report.

This is not to suggest that confidentiality obligations in arbitration should be rejected outright. But instead, this is to propose that any provision which is new to the arbitration law in India should be incorporated with more thought and study than has been done in the present instance. Particularly when such a provision also affects one of the important principles of arbitration – Party Autonomy.

Qualifications, experience and general norms for arbitrator

The Bill adds a new schedule. The first part of this schedule classifies certain professions and provides that persons outside of this list shall not be qualified to be arbitrators. The second part provides for certain general norms applicable to arbitrators. The legislative intent here appears to be to apply these only to the arbitrators on the panel of AI and not to ad hoc arbitration. However, due to ambiguity in drafting, even this cannot be said with certainty.

In the first part, regarding qualifications and experience for arbitrators, an exclusive list of professionals has been provided for and only they can be arbitrators. For example, an India qualified chartered accountant, having ten years of experience, is regarded as qualified for this purpose, but there is no mention of an architect or a company secretary or a cost accountant who may all do a perfectly fine job as an arbitrator in their respective spheres. No good reasoning for such classification can be found in the Bill or the Report.

Even within this exclusive list of professions, there is an unreasonable classification. So, while there is no experience requirement for certain persons (such as officers of Indian Legal Service), an experience of ten years is required for others (such as Advocates and Chartered Accountants). Undefined terms like “officer of the Indian Legal Service”, “senior managerial position” and “senior legal experience” make this even more difficult to decode.

The second part of this schedule, providing for the general norms applicable to arbitrator, is inordinately wide and eludes objectivity on almost all occasions. For example, it expects the arbitrator (for domestic or international commercial arbitration) to: be “conversant with labour laws”, have a “robust understanding of international legal system on arbitration” and not be involved in “any legal proceeding.” Here again, no effort has been made by the legislation to explain the reasoning of applying such widely worded norms upon arbitrators.

If this schedule becomes a part of the legislation then it would be a unique case. There are of course standards for admission to arbitration panels in almost all prominent AI, but making it a part of law in such wide and vague terms is unheard of. A prescription on these matters should have been best left to the wisdom of the AI, as it would have been in their own interest to self-regulate on matters such as these and they would have likely been more moderate and specific in their expectations.

Conclusion

An incoherent government policy on arbitration (discussed in the earlier post) was a problem in itself. There is then, on arbitration law and policy, a history of divergence in the views of the Indian judiciary on the one hand and legislative intent on the other. In such an environment, introduction of new legislative elements devoid of any reasonable justification and without even conducting a holistic study of the international arbitration environment (which the Report claims to rely upon) is fraught with complexities and pitfalls.

“Justice hurried is justice buried,” is a phrase often heard in the context of Indian judiciary. If the Bill, in its current form, becomes a law, a new phrase would need to be coined to reflect this realty – “legislation hurried is legislation buried.”

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post Proposed 2018 Amendments to Indian Arbitration Law: A Historic Moment or Legislative Blunder? appeared first on Kluwer Arbitration Blog.

Juhi Gupta

This blog previously carried a post (“previous post”) on the Indian Supreme Court’s (“SC”) progressive approach to binding non-signatories to an arbitration agreement in Ameet Lalchand Shah and Others v Rishabh Enterprises and Another (“Ameet Lalchand”). The present post briefly discusses another aspect of this approach in context of Cheran Properties Limited v Kasturi and Sons Limited and Others (“Cheran Properties”), which was incidentally decided just nine days prior to Ameet Lalchand.

In Cheran Properties, the SC held that an arbitral award can be enforced against a non-signatory based on facts and circumstances. The case involved a domestic arbitration under a share purchase agreement (“SPA”). The award was sought to be enforced against the appellant, Cheran Properties, which was not a signatory to the arbitration agreement contained in the SPA and was a nominee of one of the signatories, an individual by the name of KC Palanisamy (“KCP”). The SPA expressly recorded the right of KCP and/or his nominees to transfer their shareholding to any other person of their choice. Pursuant to the SPA, 95% of the shares was transferred to Cheran Properties. Prior to the dispute arising, KCP sent a letter to the opposite signatory party (“KSL”) as the authorised signatory of Cheran Properties, stating that in pursuance of the SPA, “our Group Companies, by themselves and/or by their nominees have agreed to purchase shares…” and requesting KSL to execute share transfer deeds “in the following names…[including Cheran Properties]”.

As in Ameet Lalchand, the SC in Cheran Properties took recourse to Chloro Controls India Private Limited v Severn Trent Water Purification Inc. (“Chloro Controls”), this time relying upon the ‘group of companies’ doctrine, which was recognised for the first time by the SC in Chloro Controls. To the best of the author’s knowledge, there appears to be no other reported decision where Indian courts have considered enforcing an arbitral award against a non-signatory on basis of this doctrine.

The SC noted that the doctrine facilitates fulfillment of a mutually held intention between parties, where circumstances indicate that the intention was to bind both signatories and non-signatories (affiliates) – “the effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory”.

The SC was cognisant of the exceptional nature of the doctrine and held that its application turns on construction of the arbitration agreement, and circumstances surrounding conclusion and performance of the parent contract. Applying the law to the facts, the SC found that Cheran Properties was conscious of and accepted the terms of the SPA, which specifically provided that KCP’s nominees would be bound by it. This would include the arbitration agreement contained in the very same agreement and therefore, Cheran Properties was bound by the arbitral award. It acted as KCP’s nominee at all material times and this was unequivocally confirmed by KCP’s letter to KSL in which KCP indicated, as its authorised signatory, that the group of companies agreed to purchase the shares.

While Ameet Lalchand focussed on identifying the principal/mother agreement in a network of agreements that contained an arbitration clause (which was similar to the facts in Chloro Controls), Cheran Properties focussed on identifying the mutual intention of parties to bind signatories and non-signatories that are related to each other in a corporate structure and where only one agreement is involved. The SC expressly clarified that interpretation of the Chloro Controls dictum could not be restricted to the parent-ancillary agreements situation.

The SC also clarified that the material legal provision in Cheran Properties was section 35 of the Arbitration Act, 1996, and not sections 8 or 45 as contended by Cheran Properties, since the case dealt with a post-award situation. Section 35 clearly stipulates that an arbitral award shall be final and binding on the parties and persons claiming under them. The expression “persons claiming under them” widens the net of those who are bound by an arbitral award – it is a “legislative recognition [that] an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings”. Cheran Properties derived its capacity or position from KCP and was therefore bound by the arbitral award.

It is not often that the group of companies doctrine is applied in the arbitration context. The doctrine must be distinguished from ‘piercing the corporate veil’, which arbitral tribunals and courts have often done and approved to bind non-signatories, such as shareholders, to arbitration agreements and awards. The doctrine, on the other hand, involves binding a distinct legal entity on account of it being a part of an undivided economic reality or being inseparable from the signatory such that its participation and acquiescence is deemed.

Perhaps the leading arbitration decision on the doctrine is Dow Chemical – here, an ICC interim award that was upheld by the Paris Court of Appeals permitted non-signatories to contracts containing arbitration agreements to raise claims along with the signatories. It was held that Dow Chemicals, one of the non-signatories, was the parent company of the signatories and had participated in the conclusion, performance and termination of the contracts. The arbitral tribunal and court affirmed existence of the mutual intention to bind the non-signatories and implied consent of the non-signatories to the disputed contracts. While a detailed analysis of the doctrine in case law is beyond the scope of this post, what can be deduced from Dow Chemical and subsequent decisions is that (1) willingness to bind non-signatories varies greatly across civil and common law jurisdictions (see previous posts on this blog here and here); and (2) when the doctrine is applied, mutual intention and consent (express or implied) of the non-signatory are vital touchstones.

In the limited repository of decisions on the doctrine in the arbitration context, where does Cheran Properties stand? Admittedly, the SC did not undertake much of a nuanced or principled analysis of the doctrine. Given KCP’s express nomination of Cheran Properties and language of “our Group Companies” in his letter, as well as the wording of section 35, the SC did not have to assess the relationship between KCP and Cheran Properties from a group company perspective or Cheran Properties’ conduct in the conclusion and performance of the SPA in much detail. Arguably, given Cheran Properties’ nominee status combined with section 35, did the SC have to refer to the doctrine at all? Likewise, if either or both of these factors were absent, would the SC have paid more attention to the group company aspect and potentially delineated some test or principles?

While these are academic questions worth pondering, they should not dilute the significance of a decision on a doctrine of limited and fairly reluctant acceptance in the arbitration context. In its limited discussion, the SC struck the right notes by emphasising the touchstones of mutual intention and implied consent of Cheran Properties to the SPA. The decision gives effect to the express stipulation in section 35 and has positive implications for reducing roadblocks to the enforcement of arbitral awards and consequently, upholding commercial contracts and agreements in India.

Interestingly, the Madras High Court subsequently applied the doctrine to refer non-signatories [SEI Adhavan (“Adhavan”) and SunEdison India] to a SIAC arbitration; however, no reference was made to Cheran Properties. The Court’s key observations were: (1) it was undisputed that the non-signatories and one of the signatories [SunEdison Holding (“SunEdison”)] constituted a single economic reality and all transactions pertained to a project undertaken by Adhavan; (2) “for the convenience sake, the group of companies divided the work between themselves to carry out different activities among which the project is one”; (3) the undertaking executed by SunEdison, which contained the arbitration clause, expressly reflected that Adhavan was its alter ego, evidenced by its appointment as SunEdison’s agent and other provisions; (4) the undertaking was prepared by SunEdison’s President who controlled all operations of Adhavan; and (5) the arbitration clause clearly envisaged the non-signatories and SunEdison in one basket. The Court referred to Chloro Controls, holding that it read the doctrine into section 45 of the Arbitration Act (referring parties to international arbitration). However, while the Court cited Ameet Lalchand on the point that Chloro Controls applies to section 8, (referring parties to domestic arbitration), in my opinion, Cheran Properties ought to have been cited given it is on the doctrine and would have aided the building of jurisprudence on the doctrine in India.

Nevertheless, the decision is a positive development and combined with Cheran Properties, bodes well for the application and acceptance of the doctrine in India. The decisions reinforce India’s progressive approach to binding non-signatories to arbitration agreements and awards, and to arbitration in general, and also reflect the commercially pragmatic and pro-arbitration attitude of Indian courts.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post India’s Tryst with the Group of Companies Doctrine: Harbinger or Aberration? appeared first on Kluwer Arbitration Blog.

Subhiksh Vasudev

India signed the Convention on the Recognition and Enforcement of Arbitral Awards, 1958, commonly known as the New York Convention (“the Convention”), on 10th June, 1958 and ratified it on 13th July, 1960. Often criticised as a “non-friendly” arbitration jurisdiction by the international community, this post analyses how India has fared in its obligations under the Convention on the occasion of its 60th anniversary.

Reciprocity Obligation Under Articles I(1) and I(3) of the Convention

Part II of the Indian Arbitration & Conciliation Act, 1996 (“the Act”) deals with Enforcement of certain foreign awards and Chapter I therein (Sections 44-52) deals particularly with Convention awards. As per Section 44(b) of the Act, a “foreign award” must be made in one of such territories as the Government of India, upon being satisfied of reciprocity, may by notification in the Official Gazette, declare to be the territory to which the Convention applies. However, there are two reasons why this gazetting requirement ought to be removed to bring India’s arbitration regime into sync with the Convention standards.

Firstly, the requirement of gazetting under the Act is more onerous than the reservation made by India in this regard at the time it acceded to the Convention, i.e. it will apply the Convention only to recognition and enforcement of awards made in the territory of another Contracting State. Secondly, this requirement is counter-productive to the object and purpose of Articles I(1) and I(3) of the Convention inasmuch as it creates unnecessary ambiguity in respect of enforcing awards made in countries which are Contracting States to the Convention but have not yet been notified in the Indian gazette.

In Transocean Shipping Agency (P) Ltd. vs. Black Sea Shipping, the Indian Supreme Court interpreted an award made in the year 1995 in Ukraine to be a “foreign award” under the Act although Ukraine was not a gazetted country. It held that India had recognized the USSR as a territory to which the Convention applies by way of a gazetted notification dated 7th February, 1972 and that on the said date, Ukraine formed part of the USSR. Thus, by implication, an award made in Ukraine was covered by the same notification. It is interesting to note that on the date of the award, Ukraine was not a part of the USSR. Ukraine was however, a signatory to the Convention since 1960 and continued to remain so even after the break-up of the USSR in 1991-92. This was definitely one of the key factors, if not the most important, which weighed with the Court to treat the award in question as a “foreign award” and which shows that in essence, the Court was inclined to read down and do away with the strict requirement of gazetting.

Unfortunately, neither the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) nor the proposed Arbitration and Conciliation (Amendment) Bill, 2018 deal with this provision.

Enforcement obligation under Article V of the Convention: Of non-binding and annulled awards

Section 46 of the Act states that any Convention award shall be treated as binding for all purposes. Some scholars and commentators¹⁾Anirudh Wadhwa & Anirudh Krishnan (eds.), Justice R.S. Bachawat’s Law of Arbitration & Conciliation, Sixth Edition, Volume 2 [LexisNexis (2018)] [hereinafter “Bachawat”] at pp. 2865 and 2872 argue that an award is binding under the Convention when there is no recourse on merits. This interpretation however, raises two concerns.

Firstly, the Act starts on an erroneous footing in defining “when” foreign awards are considered as binding. As a matter of law, all Convention awards are binding per se given the clear language of Article III of the Convention. Thus, enforceability of an award cannot be a pre-condition to its binding force. Not to forget, the parties enjoy the freedom to enter into an agreement that the arbitral award will be binding inter se. Therefore, to this extent, Section 46 is out of tune and needs to be amended.

Secondly, it gives rise to an unwarranted confusion between the concepts of ‘finality’ and ‘binding’ nature of an award. If an award can no longer be challenged on merits, it is final whereas it can remain binding from the time it was issued till the time it attains finality. Finality, therefore, cannot be the defining criterion to adjudge the binding nature of an award. Although Section 46 is unequivocal on this issue, yet the confusion is often caused in its interpretation by scholars and practitioners.

In so far as the issue of enforcement of annulled foreign awards is concerned, Indian Courts have to be satisfied that the award has been set aside in one of the two countries i.e. the country “in which the award was made” (the first alternative) or the country “under the law of which the award was made” (the second alternative), as held in Bharat Aluminium Company v Kaiser Aluminium Technical Services, Inc. The second alternative is treated as an exception only when courts of the first alternative had no power to annul the award under its national legislation. The discussion on this blog here also shows how the 2015 Amendment narrows down the scope of the public policy ground for setting aside arbitral awards and challenging enforcement.

This approach is in line with the Convention because while the annulment of a foreign award by the courts of primary jurisdiction is definitely a factor to be taken into consideration, the wording of the Convention clearly vests national courts with the discretionary power to enforce annulled awards. Although the blog post here raised concerns on exercise of such discretion in an unpredictable manner, there are three main scenarios where the Indian courts could exercise their discretion, namely (1) Public policy exception, (2) Annulment where basis of the award remains valid (i.e. when a mere procedural formality of the primary jurisdiction is not met; however such formality does not vitiate the arbitration process per se), and (3) Exercise of non-existent powers (i.e. when the court of annulment has exercised powers that it possesses under its local laws but that are not recognized under Indian law).²⁾ Bachawat at pp. 2868–2871

To infuse further clarity into the term “public policy”, the Indian legislature has taken some much-needed pro-active steps by introducing Explanations I and II to Section 48(2) of the Act through the 2015 amendment. This is a welcome change to prevent recalcitrant parties from delaying enforcement proceedings on “public policy” ground and to guard the courts to objectively assess the validity of such defence.

Section 48(1) of the Act contains the exact grounds as are under Article V(1) of the Convention on which enforcement of a foreign award “may be” refused. Section 48(1)(e) deals particularly with non-binding, annulled and suspended awards. The Delhi High Court in Glencore Grain Rotterdam BV vs. Shivnath Rai Harnarain (India) Co has interpreted the term “may be” to mean that the conditions for refusing enforcement are to be narrowly construed, and, as far as possible the Court may exercise its discretion in favour of enforcement. It has recently held in Cruz City 1 Mauritius Holdings vs. Unitech Ltd. that the word “may” cannot be read as “shall” and the court cannot be compelled to refuse enforcement even if any of the grounds under Section 48 are established.

Scholarly opinion also suggests that the Indian courts may in principle recognize or enforce a foreign award even if a ground for refusal of recognition and enforcement has been established.³⁾Kumar A., Upadhyay R., Jegadeesh A., Chheda Y, ‘Interpretation and Application of the New York Convention in India’ in: George A. Bermann. (eds.), ‘Recognition and Enforcement of Foreign Arbitral Awards’, Ius Comparatum – Global Studies in Comparative Law, Vol.23, pp.445-476 [Springer International Publishing (2017)] at p.457 This approach seems clearly in line with the spirit of the Convention because the Indian courts, such as in Fuerst Day Lawson Ltd. vs. Jindal Exports Ltd., also treat Section 48 as a self-contained order and the grounds mentioned in Section 48(1) as being exhaustive. The exercise of judicial discretion in dealing with annulled awards is thus, clearly pro-enforcement.

To conclude in the words of the Indian Supreme Court in Kandla Export Corporation & anr. vs. M/s. OCI Corporation & anr., enforcement of foreign awards should take place as soon as possible if India is to remain as an equal partner, commercially speaking, in the international community. This resonates with the growing need to bring the Indian practice in consonance with its Convention obligations under Article V of the Convention. As previously discussed on this blog, the arbitration framework in India post 2015 is a step forward towards a pro-enforcement regime, however, much needs to be done before India can truly claim its practice and procedures to be in conformity with the Convention standards.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post Has India Truly Delivered on Its Obligations Under Articles I and V of the New York Convention Over the Last 60 Years? appeared first on Kluwer Arbitration Blog.

Amrit Singh

International investment agreements (IIAs) are divided into two types: (1) bilateral investment treaties and (2) treaties with investment provisions. I would primarily focus on the first category i.e. bilateral investment treaties. A bilateral investment treaty (BIT) is an agreement between two countries regarding the promotion and protection of investments made by investors from one country to other country’s territory, and vice versa.

India is not particularly new to the concept of BIT as India had signed the first BIT with the United Kingdom (UK) in 1994 and since 1994, India has signed BITs with 84 countries. Now, the reason why India had entered into BITs with other countries was because India wanted to attract foreign investment. The early 90s was the beginning of the era of liberalisation, as the then Prime Minister Mr. Narasimha Rao, along with the financial minister Mr. Manmohan Singh initiated the economic liberalisation of 1991.

India had been entering into sundry BITs but the major problem with the provisions of those agreements was identified by India in 2011, when an arbitral tribunal found India liable of violating the India-Australia Bilateral Investment Treaty. It was only in 2011 that India faced its first adverse arbitral award arising out of a BIT in the White Industries case.

White Industries was an Australian mining company and it entered into a contract with Coal India Limited for the supply of certain equipment and development of a coal mine. The dispute relating to bonus, quality and penalty payments arose in 1999 between Coal India and White Industries. The latter commenced arbitration under the ICC Arbitration Rules and secured an award in its favour as the tribunal awarded to White Industries a compensation of USD 4.08 million.

Coal India applied to the Calcutta High Court to set aside the ICC award as per the Arbitration and Conciliation Act of 1996. Subsequently, White Industries approached the Delhi High Court to enforce the same award in India. However, to the dismay of both the parties, the proceedings were not completed in due time. Moreover, to White Industries’ surprise, the enforcement proceedings were stayed and therefore it filed an appeal to the Supreme Court of India. The matter couldn’t be decided until 2010 and thus finally, White Industries resorted to arbitration as it invoked the arbitration clause under the India-Australia BIT.

The contention of White Industries was that it had been denied “effective means” of enforcing its rights in relation to its investment, a protection incorporated into the India-Australia BIT by virtue of an MFN clause it contained. Thus, due to an ineffectual judicial (justice) system, India paid a huge price.

This proceeding signalled the start of a new decade for India, as this case was followed by a spate of proceedings against India. The major problem with India was that the whole BIT regime was more of an investor-friendly regime rather than a balanced one. Thus, India started working on a new model and hence, India signed just one BIT between 2011 and 2015 and that with the UAE. The draft on the new model BIT was subsequently approved by the Cabinet in December 2015.

The new model BIT has significantly departed from the earlier model as this time it follows a protectionist policy and does not favour the investors much. It is very evident that the new model BIT is a result of the backlash that India has faced in the past 7 years. It is to be noted that according to the World Investment Report 2016, India was one of the top 15 most frequent respondent states in 2015, which can certainly daunt the potential investors planning to set up a business enterprise in India. Therefore, it seems pretty clear that now India, instead of adopting a balanced approach towards the investors, has chosen to be on the defensive side.

The model BIT adopted in 2015 indicates that from now on, India would give precedence to the host state’s right to regulate over investment protection. This can be inferred from the various changes that have been introduced, amongst which some of them are: (1) narrowing down the definition of investment adopting an ‘enterprise-based’ definition of investment instead of an ‘asset-based’ definition; (2) providing for a number of actions which could not be decided by the arbitral tribunal; and (3) deleting the MFN clause, etc.

The MFN clause in a BIT aims to create a level-playing field for all foreign investors by prohibiting the host state from discriminating against investors from different countries. Majorly, foreign investors have preferred borrowing beneficial clauses and provisions from another BIT signed by the host state with other country. Now, it is to be noted that based on the previous model, India used to have a MFN provision in the BIT. But the MFN clause has been completely excluded in the new model BIT.

Moreover, it is not surprising that India has excluded the MFN provision due to the problems it faced in the White Industries case where Australia invoked the ‘effective means’ provision contained in the India-Kuwait BIT. Now it is very easy to conclude to the fact that India obviously did not want to grant the same remedy of effective means to Australia and that is why India formulated a balanced BIT.

However, it is also pertinent to note that the tribunals often import clauses of BITs entered into by a state with other countries even when that state had purposely not kept the same clause or provision. The reason why the tribunals resort to this approach is because the MFN clause aims to provide the benefit to a country and therefore in this particular case, India suffered a lot and hence finally removed the MFN provision from its new BIT.

It is highly debatable as to whether this move in the current context is favourable or not but the reason for doing that is clear to the arbitration community. India should have been cautious in adopting such a stand, as this would definitely restrict the number of investors in India as they longer could enjoy the right of having the same rights as of those investors of other nations. Moreover, the MFN clause is also important in order to ensure that every state/or investor is treated equally, without any kind of discrimination. Hence, India has definitely come forward with some new and impressive developments but with that there are also some major shortcomings which can act as an impediment to attracting foreign investments in India.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

The post Avoiding the MFN Clause: One Step Forward, Two Steps Back? appeared first on Kluwer Arbitration Blog.

Sugandha Batra

Introduction

Section 11 of the Arbitration and Conciliation Act of India, 1996 (the Act), demonstrates in detail the procedure for appointment of arbitrators. It empowers the court to examine the existence of an arbitration agreement while deciding the application for such appointment. The gravity and significance of such proceedings is vast, in both domestic and international arbitrations, as they ascertain that any inadvertent or conscious failure to constitute an arbitral tribunal does not hold up the commencement of arbitral proceedings.

With the Arbitration and Conciliation (Amendment) Bill, 2018 (the 2018 Bill), progeny of the Justice B.N. Srikrishna Committee (the Committee), the legislature proposes to bring about significant changes to Section 11, to augment the growth of institutional arbitration in India which also include doing away with the requirement of examination of the existence of an arbitration agreement by the courts. Certain amendments proposed at diminishing the role of the judiciary may, however, lead to counter-intuitive ramifications.

I attempt to reason here that some degree of judicial intervention, especially when it comes to the question of determining the existence of an agreement, is necessary to ensure that the dispute resolution process does not become unnecessarily protracted.

The scope of existing Section 11(6A)

Since the decision in SBP vs. Patel Engineering AIR 2006 SC 450, it was within the powers of the court to preliminarily decide its own jurisdiction to entertain the arbitration petition and also the existence of a live claim i.e. one not hit by limitation. Distinct categories of issues, which are within the domain and competence of the Court while exercising powers under Section 11, were discerned by the Supreme Court (the SC) in the subsequent case of National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267, vis-à-vis (i) issues which the Chief Justice or his designate is bound to decide i.e. decisions on the jurisdiction and existence of a valid arbitration agreement; (ii) issues which he can also decide i.e. whether the claims made by the parties are tenable., and (iii) issues which should be left to the Arbitral Tribunal to decide.

The position hereinabove was narrowed down altogether under the 2015 Amendment Act with the insertion of Section 11(6A) and the power of the court is now confined only to the examination of the existence of an arbitration agreement. While every other power of the Court under Section 11 was curtailed by the 2015 Act, the legislature thought it appropriate, and rather necessary, to insert clause 6A, leaving it to the court to decide on the existence of a valid arbitration agreement, no more and no less.

In the case of Duro Felguera, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729, one of the initial cases on Section 11 (6A), the SC succinctly analysed its scope and effect. While the factual matrix of the case was rather complex, involving disputes arising out of six agreements, the Court took a simplistic view in appointment of tribunals, limiting itself to deciding the existence of a valid arbitration agreement, strictly in terms of Section 11 (6A). Since there were six arbitrable agreements, each containing an arbitration clause, the SC appointed six separate tribunals.

The SC has, however, redefined the scope of Section 11 in a recent judgment in United India Insurance Co. Ltd. & Anr. vs. Hyundai Engineering and Construction Co. Ltd. & Ors. Civil Appeal No. 8146 of 2018, pronounced on 21.08.2018. The apex court elucidated on the ambit of Section 11(6A) and clarified that holding that no other enquiry (apart from that on the mere existence of an arbitration agreement) can be made by the Court while examining the arbitration agreement, would be misreading the decision in Duro Felguera and the amended provision. 

Recommendations of the Committee and the 2018 Bill

A cardinal recommendation of the Committee is the constitution of the Arbitration Council of India (the ACI) that would grade arbitral institutions in India and set benchmarks for their performance. The 2018 Bill has finally assigned the pivotal role of appointment of arbitrator(s) to arbitral institutions designated by the Supreme Court.

The 2018 Bill, while specifying that the appointment shall be made by the arbitral institution designated by the SC, proposes to delete Section 11(6A), taking away even, what can be termed, the residual powers of the Court to decide the question of the existence of an arbitration agreement. This recommendation is in consonance with the kompetence-kompetence principle of an arbitral tribunal ascertaining its own jurisdiction.

Who decides on the existence of an arbitration agreement?

The question which begs consideration now is, with the power to appoint an arbitrator being divested to arbitral institutions and the contemporaneous deletion of Section 11 (6A), will an arbitration commence without any decision as to the existence of a valid arbitration agreement on a mere reference to the arbitral institution?

Deciding on the existence of an arbitration agreement is, a small, but a significant power exercised by the Courts. Section 11 (6A) was inserted with the intent to provide relief against frivolous and misconceived actions by implementing a system for actual costs as is implemented in the UK and other jurisdictions. The decision of the Supreme Court in United India Insurance has further clarified that in order to avoid any prejudice being caused to a party, it is not only vital to determine the existence of an arbitration agreement, but it is also imperative that the arbitration clause and the dispute raised may be examined. The repeal of Section 11(6A) would entail automatic appointment of tribunals even for claims that are not legally arbitrable vis-a-vis tenancy, guardianship, insolvency, winding up of companies and various matters which cover rights in rem. The appointment may eventually be rendered futile if the arbitral tribunal were to ultimately conclude that there does not exist a valid arbitration agreement, leading to further delays.

Loopholes in the Committee’s recommendations

The Committee recognized that examining whether a valid arbitration agreement exists or not, could lead to delays as extensive evidence and arguments may be led on the same, and hence recommended the deletion of clause (6A). The committee, with an aim to reduce interference of the judiciary in the arbitration processes, drew inspiration from various regimes vis-à-vis Singapore, Hong Kong, United Kingdom etc., while recommending that similar systems be embraced in India as it would circumvent any delays and set the momentum for institutional arbitration in India.

The Committee has however ignored the provisions of Section 18 of the English Arbitration Act, 1996 (which is in consonance with Section 11 of the Indian Act) which requires that the party applying to the court for appointment of arbitrator must establish a “good arguable case” that a tribunal would have jurisdiction to hear the case, and emphasises that any jurisdictional arguments remain matters for the tribunal to decide in accordance with the principle of kompetenz-kompetenz. (Silver Dry Bulk Company Limited v Homer Hulbert Maritime Company Limited [2017] EWHC 44 (Comm). Thus, there is an initial threshold test that must be met in order for an application under section 18(3) to succeed. In the Indian context, with the proposed deletion of Section 11(6A), the requirement of meeting the initial threshold of the existence of a valid arbitration agreement has been done away with. The consequences of this could be precarious.

Conclusion

The recommendations of the committee, propounded at a) divesting the power of appointment of arbitrators entirely to the arbitral institutions and b) the omission of Clause 6(A) which necessitates a court seized to delve into the existence of an arbitration agreement before progressing with an application filed under Section 11, does carry with it an element of uncertainty and ambiguity. The most common problem likely to arise will be a party challenging the validity of the arbitration agreement as a counter-blast to one party filing an application under Section 11. Explicit rules and guidelines will have to be formed and implemented if the above task is to be deputed to arbitral institutions.

The status quo is insufficient and suffers from various infirmities. The 2018 Bill does not specifically detail the scope of the ACI’s role and its powers, which is rather indispensable if the ACI is to be entrusted with the responsibility of accreditation of institutions which will ultimately be designated by the Supreme Court and the High Court to appoint arbitrators, and may even be ascertaining the existence of a valid arbitration agreement (if so provided in the future). Furthermore, the course of action to be adopted in the event where a party is objecting to the validity of the arbitration agreement itself needs to be specified.

Repeal of Section 11(6A) of the Act is likely to result in more litigation and will rather defeat the aim of expeditiously resolving applications for appointment. In the absence of any legislative clarity on the above aspects, speedy resolution cannot be ensured.

While it is important to minimize intervention of the courts to achieve prompt and expeditious results through arbitration, in the absence of a coherent system in place, some amount of judicial interference is imperative to render a degree of certainty and reduce the number of appeals and challenges arising out of pre-arbitration decisions. One hopes that the Indian judiciary endeavours to provide the requisite clarity on the controversies which inundate the instant situation.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Michael Falck

In a marked departure from its usual closed-doors policy, the Swiss Federal Supreme Court (the “Supreme Court”) recently held public deliberations in two separate appeal proceedings concerning foreign investment arbitrations. In both cases, a public deliberation by all five judges of the first civil chamber was necessitated due to the lack of unanimity among the regular panel of three (Articles 20 and 58 of the Swiss Federal Tribunal Act). In both cases, the majority decided to uphold the decisions in the relevant UNCITRAL arbitrations that favored investment protection, with a dissenting minority advocating for a more restrained interpretation of the scope of application of the relevant bilateral investment treaties (“BITs”).

The first hearing, held on 16 October 2018, concerned two cases in which the Russian Federation sought to set aside the interim awards in two PCA-administered UNCITRAL arbitrations with seat in Switzerland for lack of jurisdiction (4A_396/2017 and 4A_398/2017, published on 16 November 2018). The disputes centered on the territorial scope of the Russia-Ukraine BIT of 27 November 1998 (the “R-U BIT”), namely on whether the Crimea was part of the host state territory from the perspective of a Ukrainian investor.

The Supreme Court confirmed the arbitral tribunal’s finding that the BIT extended to the Crimea, over which Russia exercised de facto control. As for the scope of investments covered by the BIT, the Supreme Court backed the arbitral tribunal’s finding that the term “investment” included investments initially located in the investor’s home state that ended up in the host state only subsequent to a change in territorial borders.

Judge Kathrin Klett, the lone dissenting judge, criticized the majority’s finding, arguing that the arbitral tribunal’s jurisdiction should have been declined for two reasons. For one, the investment notion under Article 1 (1) of the R-U BIT was in Klett’s view transaction-based, i.e. it only covered investments that were made by investors of one state in the territory of another state. Judge Klett argued that, by contrast, the majority wrongly based their assessment on an asset-based definition of investment, which she considered to be a definition more commonly used in recent BITs. Judge Klett found that her view was also in line with a systematic interpretation of the R-U BIT, which specifically mentions the need for a cross-border investment ab initio (based on the wording in Article 12 of the R-U BIT: “… investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party …”), thereby excluding investments that only become international later on. She further opined that her stance was supported by the BIT’s goal of attracting foreign investment. Secondly, Judge Klett criticized the majority’s approach as an impermissible supplementation of a lacuna in the BIT. In her view, Russia and Ukraine in 1998 did not consider the possibility that investments would change ‘nationality’ as a result of shifting borders and this gap in their agreement could not be filled by a judicial or arbitral body.

In the second hearing, held on 11 December 2018 and for which the reasoned judgement is still outstanding, the Supreme Court rejected India’s set-aside appeal to an interim arbitral award in a satellite telecommunications dispute with Deutsche Telekom. In the UNCITRAL arbitration with seat in Switzerland, the tribunal had rejected India’s jurisdictional objections and found the force-majeure repudiation of the contract by the Indian state-owned entity to be a violation of the fair and equitable treatment standard. The Supreme Court confirmed the arbitral tribunal’s finding that the subjective scope of the 1995 Germany India BIT (the “G-I BIT”) extended to both direct and indirect foreign investments and thus covered Deutsche Telekom’s Indian investment made through a Singaporean subsidiary.

The majority considered that the G-I BIT covered indirect investments despite not being mentioned explicitly in the text. It based its interpretation on the BIT’s purpose of promoting foreign investment. Christina Kiss, the presiding judge, explained that a state should not be allowed to restrictively interpret such a treaty to exclude the type of investment it intended to attract when entering into the BIT. The majority also found support for its position in the fact that the use of special purpose investment vehicles was common in foreign investment and should not be disallowed by way of a restrictive interpretation. By contrast, the two dissenting judges adhered to a more literal interpretation, with Judge Klett emphasizing that Deutsche Telekom’s investment was in Singapore and not in India. Judge Martha Niquille expressed the view that the treaty’s silence on indirect investments should be interpreted as a conscious omission by the treaty partners since some contemporary BITs explicitly included such investments.

While no assessment on the basis of a sample size of two can be conclusive, the two decisions nevertheless invite a joint assessment in light of the fact that their contested and, in the case of the Crimean decision, politically sensitive subject matter led both to be publicly deliberated in the space of only two months. Seen together, the two decisions betray the possibility of an ideological divide among the judges of the first civil chamber. In common terms, this divide would distinguish Judges Klett and Niquille as the more ‘conservative’ faction favoring a more restrictive interpretation of BITs’ scopes of application, which ultimately favors states’ sovereignty. By contrast, the majority seems to show a willingness to interpret the BITs brought before it based on their objective purpose, thereby maintaining their broad scope (as reflected e.g. in Article 2 of the G-I BIT by the phrase “all investments made”) and refusing to exclude investments that a more restrictive historical or literal interpretation of the BIT would not cover.

It remains to be seen whether this divide follows the described lines or even truly exists. In any case, the Supreme Court’s recent jurisprudence in investor-state dispute settlement disputes can still be said to reflect its customary and long-standing practice as a gate-keeper: it assiduously uses its broad power of review when assessing an arbitral tribunal’s legal reasoning on jurisdiction yet exercises the judicial restraint mandated by Article 190 (2) of the Swiss Private International Law Act on all other grounds of appeal. The result is a body of established precedents that is very consistently in favor arbitri, which is good for investor-state arbitrations with seat in Switzerland and good for business.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Pragya Chandak and Harsh Salgia

Section 16 (1) of the Arbitration and Conciliation Act, 1996 [“the Indian Act”] confers power upon the arbitral tribunal to decide on matters relating to its jurisdiction. Under section 16 (5), a decision accepting the plea of lack of jurisdiction shall be an appealable order; while decision rejecting the same plea can be challenged only with the final award. Though the term jurisdiction has not been defined, the courts in India have interpreted it to include inter alia scope of the arbitration agreement and arbitrability of disputes.

Recently, the Indian Supreme Court [“the Court”] in M/s Indian Farmers Fertilizers Co-operative Limited v. M/s Bhadra Products (Civil Appeal No. 824 of 2018) [“Bhadra Products”] restricted the scope of section 16 (1), declaring that issue of limitation is not covered under the primitive sense of the term ‘jurisdiction’. It is important to distinguish matters of jurisdiction from that of the merits of claims, as the former goes to the root of the dispute and absence of the same can render the ultimate decision null and infructuous. While relying heavily on English jurisprudence, the Court in Bhadra Products gave a very narrow interpretation to the term ‘jurisdiction’. It was held by the Court that similar to the Arbitration Act, 1996 [“the English Act”] matters of only substantive jurisdiction such as the validity of arbitration agreement and/ or of arbitral tribunal and arbitrability of disputes shall be considered within the scope of section 16(1) of the Indian Act. However, the reasoning is inaccurate on various fronts:

At first, the term jurisdiction derives its meaning from the context in which it is used. The Indian Act provides the tribunal with the power to pass a ruling on any issue that is related to its jurisdiction. In the case of National Thermal Power Corporation v Siemens Atkeingesellschaft ¹⁾ (2007) 4 SCC 451 , it was reasoned that any refusal to go into the merits of the claim lies within the realm of jurisdiction. Like any other issue of jurisdiction, the issue of limitation is decided without going into the merits of the particular claim. In other words, while determining the issue of limitation, the tribunal enquires only into the fundamental facts such as when the claim arose and the time period which has lapsed and nothing more.

Secondly, section 16 (1) of the Indian Act is wide enough to permit the tribunal to decide any matter, including any issue relating to jurisdiction which goes to the root of the matter.  In Pandurang Dhoni Chougule v. Maruti Hari Jadhav²⁾ AIR 1966 SC 153 , the Court held that plea of limitation is an issue that goes to the root of the matter and affects the jurisdiction of the tribunal conducting the proceedings. Applying the rationale in a case, the Bombay High Court determined that while ruling on the issue of limitation, the tribunal shall be ruling on its jurisdiction.

Thirdly, the English Act restricts the principle of Kompetenz-Kompetenz by using the term ‘substantive’ jurisdiction. However, the Indian Act has no such restriction and provides for wider amplitude as it reflects tribunal’s power to determine any issue relating to its ‘own’ jurisdiction. Further, it has been held in the case of Union of India v. East Coast Builders ³⁾ 1998 (47) DRJ 333 that guidance should not be taken from the English Act when the Indian Act expressly deviates from it. Therefore, issue of limitation must be construed as an issue of jurisdiction as provided under section 16(1) of the Indian Act.

Decision on limitation: Order or Interim award?

Section 31(6) of the Indian Act lays down that an interim award can be passed on any matter on which a final award can be passed. In Bhadra Products, the Court held that as issue of limitation is one of the matters raised by parties at dispute, a decision on the same would be an interim award. The Court arrived at this conclusion by wrongly interpreting the term ‘interim award’, as issue of limitation is not a matter on which a final award can be passed. Though the term interim award has not been defined in the Indian Act, the courts have consistently ruled that for a decision to be an interim award, it must finally settle one or few of the claims or issues of liability raised by the parties. For instance, a decision on breach of the contract can be an interim award on which a final award clearly specifying the amount of damages can be passed subsequently. However, adjudication on an issue of jurisdiction does not settle any claim or issue of liability and is a necessary step to be undertaken before determining the substantial relief sought by parties. It is for this reason that under the Indian Act, a ruling on jurisdiction has been classified as an order.

Anomaly based on a different decision on the issue of jurisdiction

A lot of confusion hovers around the tribunal’s decision with respect to its jurisdiction, that is, whether it is an award or an order. This arises primarily because the Indian Act is silent on this aspect. In other words, when an objection regarding tribunal’s lack of jurisdiction is accepted, it has been termed as an appealable order under section 37 of the Indian Act. However, the Indian Act does not expressly categorize the decision of the tribunal accepting its jurisdiction as an order. It is for this reason it had been argued various times that such decision shall be an interim award so that the court can be approached to set aside the same. However, such contention should be rejected for the basic reason that the order under section 16 cannot change its nature based on different outcome that is become an interim award if the tribunal rejects plea of no jurisdiction and is only appealable if plea of no jurisdiction is allowed.

Removing the discrepancy

Section 37 of the Indian Act does not provide a right to appeal against the order if the tribunal accepts its jurisdiction and it can be challenged only later with the ultimate final award. It is believed that such a distinction was created to reduce the role of the courts in the proceedings. But this can result in a waste of time and money in arbitral proceedings in case the court determines that tribunal did not have jurisdiction in the first place. To fill this gap, it is suggested that preferably an amendment should be introduced in section 37 wherein (i) any order whether accepting plea of lack of jurisdiction or rejecting the same shall be appealable and (ii) that the court should decide the matter expeditiously.

However, this might lead to a dilemma of whether the arbitral proceedings should continue or come to a standstill. In such a situation, the arbitral tribunal should have the prerogative to decide whether to continue with the proceedings or not. In this way, a balance can be attained between parties having right to appeal against the order and having an efficient arbitral proceeding.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Devansh Mohta

INTRODUCTION

It is fairly known that the Indian Limitation Act, 1963 (the Limitation Act) constitutes “general law” for Time Periods and its computation. Section 29(2) of the said Act contains the fundamental rule that provisions of Limitation Act would apply for computation of time period prescribed by any special law only to the extent it is not expressly excluded.

The relevance of time period

An application to challenge arbitral award is made under section 34 of the Indian Arbitration and Conciliation Act, 1996 (the Arbitration Act) within the “time period” prescribed in sub-section (3) of section 34, i.e., within three months from the receipt of the award after the expiry of which the Court can permit a party to make the application within 30 days “but not thereafter”. A “time period” has been regarded as necessary for certainty and to ensure expeditious and effective resolution of disputes between the parties.

Express Exclusion Test

Should a rule of computation of time periods contained in the Limitation Act apply to section 34(3) of the Arbitration Act, 1996? To answer this question the Supreme Court has generally resorted to the test of “express exclusion”. The article briefly sets out the legal position about the computation of time limits and analyzes the manner which the Court has applied the express exclusion test.

LEGAL POSITION

Starting Point (the first day)

The time period for challenging an award commences only upon its proper receipt. An award would be regarded as properly received only if it is delivered in the manner prescribed by section 31 (5). This means when a “signed copy” has been delivered to the party. The delivery of an award constitutes an important stage in the arbitral proceedings. The Supreme Court has held that “delivery of an arbitral award” is not a matter of formality but of substance; as it confers certain rights on the party. (see: Union of India v. Tecco Trichy (2005) 4 SCC 239)

“Within three months from……”

There is an ordinary rule that where statutes, while prescribing time period, uses the expression “from”, it is an indication that while computing the period so prescribed the rule would be “to exclude the first and include the last day”. (see: section 9 of the General Clauses Act). 

In the case of State of Himachal v. Himachal Techno (2010) 12 SCC 210, the Supreme Court extended this principle to section 34(3). Thus, the time period for filing an application under section 34 would commence “a day after the receipt of the award by the party.

The time in between

Once the time has begun to run, no subsequent disability or inability to institute a suit or make an application would “stop it”. This is a fundamental rule. (see: section 9 of the Limitation Act)

So after proper receipt of award, the time period for a challenge “begins to run”. Apart from the exception of section 33, it cannot be stopped. [section 34(3)]

The last day

The time period under section 34(3) expires after “three months”. The rule of construction of this period would be to not treat this period as 90 days, but actual period of calendar month. Thus, the period would expire in the third month on the date corresponding to the date upon which the period starts. In days it may mean “90 days or 91 days or 92 days or 89 days”. (State v. Himachal Techno (2010)12 SCC 210)

A rule for computation is that in case the last day of the time period expired on a day when the court is closed the proceedings will be instituted “on the day when the court reopens” (see: section 4 of the Limitation Act, 1963)

However, the Supreme Court has held that the benefit of this rule cannot be taken to prefer an application under section 34 after the expiry of the time period. (see: Assam Urban Water v. Subhash Projects & Marketing (2012)2 SCC 628)

The proviso to section 34(3): Additional 30 days

Section 34(3) proviso enables the party to make an application after the expiry of three months upon demonstrating that the applicant was “prevented by sufficient cause” from doing so. In such cases,  the statute has conferred upon the court discretion to entertain the application within a period of 30 days “but not thereafter”.

To “prevent” means to thwart; to hinder or to stop. Thus, while ‘time period’ would never stop under any circumstances but certain circumstances may stop an applicant from making the application. If the court found those circumstances constituted “sufficient cause” it would permit the party to make the application.

It is beyond cavil that the discretion of the court to permit an application beyond the original period cannot extend beyond 30 days being the statutory outer limit for exercise of discretion. (see: Union of India v. Popular Construction (2001)8 SCC 470)

The distinction between “extension of time” and “computation of time”

While time does not stop running, it can be excluded from the computation. The rule of computation  of time period recognizes the concept of “exclusion of time” under certain circumstances: and so far the Supreme Court has permitted parties, to take recourse to section 14 of the Limitation Act, 1963 and exclude from computation the time spent in bonafide litigious activity in other words “mistaken remedy” or “selection of a wrong forum”. (see:  Consolidated Engineers v. Principal Secretary (2008) 7 SCC 169)

However, when a party sought exclusion of time by taking recourse to the plea of fraudulent inducement available under section 17 of the Limitation Act, 1963. The Supreme Court held that once the party has properly received the award the right to challenge comes within their knowledge and no fraudulent act of another party can be made an excuse for excluding the time from computation.

Where fraud has been practised at the time of delivery the award would not be considered as having “properly received”. (see: P. Radhabai & v. P. Ashok Kumar (2018)13 SCALE 60)

THE PRINCIPLE OF “EXPRESS EXCLUSION”

The Supreme Court has applied the principle of express exclusion the following manner:

By reference to language of section 34(3) of the Arbitration Act

In Popular Construction (supra) the Supreme Court held that the expression “but not thereafter” found in proviso section 34(3) expressly excluded the applicability of section 5 of the Limitation Act.

In P. Radhabai (supra) the Supreme Court while emphasizing on the expression “had received the arbitral award” found that applicability of section 17 was “expressly excluded”. It also held that extending the benefit of section 17 of the Limitation Act would “do violence” to the provision of section 34 (3).

Interestingly in Himachal Techno (supra) the Supreme Court emphasized on the expression “from the date” found in section 34(3) applied the presumptive rule of interpretation found in section 9 of the General Clauses Act. It therefore held that that the Arbitration Act did not exclude the application of section 12 of the Limitation Act, 1963 which is similar to section 9 of the General Clauses Act. However, the Supreme Court failed to notice the expression “period of limitation” found in that section, which necessarily restricts the applicability of section to those periods which are prescribed by schedule to the Limitation Act, 1963.

By reference to the Limitation Act

In Assam Urban Water Supply (supra) the Supreme Court refused to extend that benefit of section 4 of the Limitation Act on the ground that the section was meant only for the time period prescribed by the Limitation Act and time period under section 34(3) stood outside its purview. To arrive at this conclusion the Supreme Court resorted to the definition “period of limitation” found in section 2(j) of the limitation act.

It is noteworthy that the above decision was delivered two years after the judgment in Himachal Techno (supra).

Principles of equity

It is pertinent to note that in Consolidated Engineers (supra) the Supreme Court laid on two factors: first was the distinction between extension of time and exclusion of time, as explained above and secondly on the principle of equity. On these scores the Supreme Court held that section 34(3) did not excluded applicability of section 14 of the Limitation Act, 1963.

CONCLUSION

It is clear that where the Supreme Court has applied the express exclusion principle with reference to the language of section 34(3) and Limitation Act the answer about applicability has been in the negative. On two occasion- while applying section 12 and section 14- the Supreme Court has answered the question affirmatively. It would be in consonance with the object of arbitration law- efficient and expeditious adjudication of disputes- to avoid calling in aid the principle “underlying the provisions” of the Limitation Act and read into fixed time periods of section 34(3); benefits of principle of computation found in the Limitation Act.

After all the Supreme Court in Yeshwant Deora v. Walchand AIR 1951 SC 16 had held that “rules of equity have no application where there are definite statutory provisions specifying the grounds on the basis of which alone suspension or stoppage of running of time can arise. While courts are necessarily astute in checkmating or fighting fraud, it should equally borne in mind that statutes of limitation are statues of repose”.

This is a noteworthy principle.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Badrinath Srinivasan

A legal regime which asks the victim of a frivolous legal proceeding to subsidise the costs of the perpetrator is unjust and is bound to provide incentives for more frivolous proceedings. For a long time, Indian arbitration law had been providing such incentives for a party to make frivolous objections to the arbitration agreement or the arbitral award. The Law Commission of India sought to change this state of affairs through its 246^th report and recommended certain changes to the Arbitration and Conciliation Act, 1996 (“1996 Act”). Pursuant to the recommendations, the Indian legislature enacted the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Act”) attempting to update the law on costs in line with the best international practices.

This post argues that even after the 2015 amendments, there has not been a marked change in the way in which courts award costs following best international practices such as the principle that costs follow the event.

Statutory Provisions on Costs in Arbitration

Section 31(8) of the 1996 Act as originally enacted dealt with costs in arbitration proceedings. Precedents that evolved therefrom led to a dissatisfied state of affairs regarding the regime on costs allocation in arbitration and arbitration related court proceedings (See, Ernst & Young LLP, Emerging Trends in Arbitration in India, p. 20). The chief complaint was that the provision was too open textured and allowed unnecessarily enormous discretion in awarding of costs. In most cases, tribunals and courts failed to award costs and provide reasons for their decision. An empirical survey suggested that in about 90% of the arbitrations, the parties had to bear either their own costs or half of the total arbitration costs, irrespective of the outcome of the arbitration.

Consequently, the winning party lost substantial money towards costs incurred due to the arbitral proceedings and was not compensated for considerable expenses incurred in arbitration related court proceedings such as proceedings relating to appointment of arbitrators, application for interim measures, and so on. Frequent judicial interference in arbitration also provided incentives for a party to delay or frustrate efficient settlement of disputes. A party so delaying or frustrating the proceedings was not made to bear the costs expended by the winning party and the winning party was not fully compensated for the costs incurred owing to the censurable conduct of the losing party.

This state of affairs was incongruent with best international arbitration practices. After numerous calls for reforms, the Law Commission of India in its 246^th Report sought an overhaul of the existing provision on costs.

Law Commission’s Recommendations on Costs

The Law Commission of India submitted its 246^th report, where it specifically pointed out the need for amending the law on costs. The Commission noted the potential for significant increase in costs in arbitration proceedings, which, according to the Commission necessitated the law on allocation of costs to be clear and predictable. For these reasons, the Commission recommended that the loser-pays principle should be normally followed by tribunals and courts hearing arbitration related court proceedings while allocating costs.

Primarily, two justifications were offered for by the Commission for this recommendation: One, it is only just that the losing party which dragged the other party to court/ arbitration or which set up unjust defences compensates the winning party for the losses incurred in resolving the issue in courts or before the tribunal. The second justification offered by the Commission was that from an economic point of view, the loser-pays principle provided an “efficient deterrence against frivolous conduct and furthers compliance with contractual obligations.” (Para 23)

Further thereto, the Law Commission recommended insertion of Section 6A to the 1996 Act containing a detailed provision on costs. Thus, it would appear that the objective of the Law Commission’s recommendations on costs was to introduce a “costs follow the event” regime and that in all arbitration related proceedings, the tribunal or the court, as the case may be, should ordinarily adhere to this principle. However, the manner in which Section 6A is a cause for concern (as will be seen in the later part of this post).

Section 31A of the 1996 Act (as amended in 2015)

Based on the recommendation of the Law Commission and an ordinance, the Indian Parliament enacted the Arbitration and Conciliation (Amendment) Act, 2015, and the same was brought into force with effect from 23 October 2015.

The amended Act contains detailed provisions on costs in Section 31A, which is similar to Section 6A suggested by the Law Commission. Section 31A(1) empowers the court or arbitral tribunal, as the case may be, to award costs in relation to any proceeding under the 1996 Act. It reads:

“In relation to any arbitration proceeding or a proceeding under any of the provisions of this Act pertaining to the arbitration, the Court or arbitral tribunal, notwithstanding anything contained in the Code of Civil Procedure,1908, shall have the discretion to determine— (a) whether costs are payable by one party to another; (b) the amount of such costs; and (c) when such costs are to be paid…”

The wordings of Section 31A(1) is a cause for concern. The use of the word “discretion” could be construed to mean that the Court or the tribunal has the option to choose not to pass any order on costs.

Similar is the case of Section 31A(2) as well. It reads:

“If the Court or arbitral tribunal decides to make an order as to payment of costs,— (a) the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party; or (b) the Court or arbitral tribunal may make a different order for reasons to be recorded in writing.”

This sub-section begins with the term “if” as if to suggest that making an order as to payment of costs is a matter of choice of the Court or the arbitral tribunal, as the case may be. This construction is incongruent to the purpose for which the new regime on costs was introduced, as noted by the Law Commission.

A perusal of the decisions in the post-2015 suggest that there has not been a change, especially by the courts, in awarding of costs. This leads to the inference that the introduction of Section 31A was a pointless exercise.

The recent decision of Larsen and Toubro Limited Scomi Engineering BHD vs. Mumbai Metropolitan Region Development Authority (03.10.2018 – SC): MANU/SC/1151/2018 is a typical example where the court did not even deal with costs in a petition for constituting the tribunal. The petition was ultimately dismissed on the ground that the arbitration was not an international commercial arbitration warranting constitution of the arbitral tribunal by the apex court rather than by the relevant High Court.

Proposed Amendments

The Arbitration and Conciliation Bill, 2018, which is now under consideration in the Indian Parliament does not seek to address this issue.

Therefore, it is suggested that amendments to Section 31A should be made in the current round of reforms to provide the following:

• The Court or the tribunal shall make an order as to payment of costs.
• The general rule for the tribunal and the Court should be that the unsuccessful party should be ordered to pay costs of the successful party.
• The Court or the tribunal may depart from the above general rule for reasons to be recorded in writing.

Towards this end, a new sub-section in the form of Section 31A(1A) has to be introduced along the following lines: “The Court or arbitral tribunal shall make an order as to payment of costs while making a determination under this Act: Provided that the Court or arbitral tribunal shall have the discretion to postpone the order as to payment of costs at the time end of the proceedings before it.”

Consequently, the phrase “If the Court or arbitral tribunal decides” at the beginning of Section 31A(2) should be amended to read: “Where the Court or arbitral tribunal decides”.

Closing Remarks

International practice suggests that arbitral tribunals and courts hearing arbitration related matters award reasonable costs in favour of the winning party. In some countries, courts award costs on indemnity basis in respect of unsuccessful challenges to arbitration agreements and arbitral awards and also in unsuccessful petitions for refusal to recognise or enforce awards. Indemnifying the winning party for costs incurred in such cases makes sense.

Unfortunately, Indian courts and tribunals not only fail to award indemnity costs in deserved cases but do not even award reasonable costs in favour of the winning party as provided under the statute book. Hence, it is important that the 2018 Amendment Bill clarifies the intent behind the enactment of Section 31A by amending the law as suggested above. This will ensure that the legal costs of the party initiating frivolous legal proceedings stalling the arbitration process is not subsidised by the victim of such proceedings.

In order for India to achieve the objective of becoming a prominent global centre for dispute resolution, it is of fundamental importance that courts and the arbitral tribunals allocate costs in accordance with best international practices.

This post is based on the ideas that were mooted in a paper presented at a conference in 2017 and can be accessed from here.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Saniya Mirani and Mihika Poddar

Arbitration of IP disputes has inherent advantages of saving time and costs and ensuring confidentiality while also maintaining long-term business relations (see here). In India, arbitration will be especially useful in light of the enormous pendency of judicial cases.

However, arbitrability of any subject-matter is dictated by a country’s public policy. In India, what forms part of arbitrable subject-matter is determined as per the test laid down in the Booz Allen Case, expanded upon by the Ayyasami Case. The following two categories of disputes are thereby inarbitrable in nature:

1. Disputes involving the adjudication of actions in rem as opposed to actions in personem, such as, disputes relating to criminal offences, guardianship matters etc. (hereinafter, the first test of arbitrability);
2. Disputes arising out of a special statute, which are reserved for exclusive jurisdiction of special courts, such as, matters reserved for small causes courts¹⁾ Natraj Studios Private Ltd v. Navrang Studios & Another, 1981 AIR 537 (hereinafter, the second test of arbitrability). (See here and here)

These tests evince that arbitrability is dependent upon the nature of the claim made in a dispute, i.e., whether the claim is in rem or statutory in nature. This principle should guide the arbitrability of IP disputes too.

The IP Regime in India: A Primer

Before understanding the arbitrability of IP disputes, it is essential to understand the functioning of IP regime in India. The scope of this article is limited to analysing arbitrability of patent, copyright and trademark regimes. These regimes allow a “statutory monopoly” to be given to the creator of an intangible asset, conferring an exclusive right to exploit it. There are corresponding statutory remedies to enforce this right. For instance, there exist statutory remedies for infringement of copyright, trademark and patent.²⁾ See, Chapter XII, Copyright Act, 1957; Section 135, Trade Marks Act, 1999; Chapter XVIII, Patents Act, 1970. As per the statute, these remedies must be granted by civil courts. The statutory mention of courts, as a forum to grant these remedies, creates the first hurdle in arbitrating IP disputes.

Lack of a Supreme Court precedent settling the issue

The Supreme Court of India has not conclusively settled the issue of arbitrability of IP disputes. In the Ayyasami Case, patents, trademarks and copyrights were listed in the category of inarbitrable disputes. However, the main issue before the court was of arbitrability of fraud (discussed here and here). Thus, categorization of IP disputes as inarbitrable was only obiter dictum. Therefore, this decision cannot be read to bar arbitrability of IP disputes.

Different positions of Indian High Courts

Both the aforementioned tests of arbitrability have been used to hold IP disputes inarbitrable. In the Mundipharma Case, the issue was whether a claim of ‘copyright infringement’ was arbitrable. The Delhi High court held the dispute to be inarbitrable given that infringement of copyright is a statutory claim, having definite statutory remedies that are to be granted exclusively by civil courts. This ruling thus seems to echo the second test of arbitrability that bars arbitrability of disputes arising out of special statutes which are reserved exclusively for civil courts.

Subsequently, in the SAIL Case [Suit No. 673/2014], a claim of ‘trademark infringement’ was held to be inarbitrable by Bombay High Court reasoning, “the rights to a trademark and remedies in connection therewith are matters in rem and by their very nature not amenable to the jurisdiction of a private forum chosen by the parties”. Accordingly, the dispute was held to be inarbitrable on the basis of the first test of arbitrability that makes actions in rem inarbitrable.

The Eros Case brought about the first winds of change to this negative trend. The Respondent was granted a copyright license to distribute the Petitioner’s films. The license contained an express negative covenant which prohibited the use of copyrighted films upon termination of contract. Respondent violated this term. Thus, the Petitioner initiated arbitration for ‘violation of the contractual covenant’ – a claim although sourced purely in contract, still required an infringement of copyright to be established.

The Bombay High Court held for the first time that it would be too broad, impractical and against all commercial sensibilities to hold that the entire realm of IP disputes is inarbitrable. Accordingly, the case rightly noted the nuance that that IP disputes arising purely out of contracts are arbitrable because they are actions in personam, i.e. “one party seeking a specific particularized relief against a particular defined party”. Thus, the case applied the first test of arbitrability. The court went a step ahead to state that, a finding of infringement had to be made for proving such a contractual breach and that an arbitrator was empowered to make such a finding of infringement as ‘infringement’ can only be in personam. Thus, an infringement claim could now be determined by arbitration.³⁾ Note that this ratio had been upheld by an earlier case from the same high court called Eurokids International Media Ltd. v. Bhaskar Vidyapeeth Shikshan Sanstha (2015) 4 Bom CR 73. However, Eurokids case was never referred to by EROS, as should have been done in light of the precedential system followed by India.

However, even when the dispute is in personam, the second test of arbitrability can be applied, to hold the disputes arising out of special statutes as inarbitrable. This test was refuted in EROS reasoning that the statute nowhere provides that the court is an ‘exclusive’ forum, and thus, arbitration should be allowed. We argue that the holding of inapplicability of the second test was correct. The second test is applied where there is an underlying public policy objective in keeping disputes in the hands of courts. For instance, labour disputes are made inarbitrable by Industrial Disputes Act, 1947, for the reason that a public fora can address the power imbalance prevalent between employers and employees in labour disputes. However, in such IP disputes, similar considerations are not always in play. Thus, the EROS decision rightly refuted the second test of arbitrability.

Since the Eros and Euro Kids cases, other IP disputes that are purely born out of such negative covenants in contracts have also been upheld as being arbitrable.⁴⁾ Deepak Thorat v. Vidli Restaurant Limited, 2017 SCC OnLine Bom 7704

Analysis and conclusion

In earlier cases of Munidpharma and SAIL, where arbitrability of IP disputes was tested, the petitioners raised statutory claims of infringement of copyright/trademark, and expected statutory or public law-based remedies in return. Thus, the only gamut of IP disputes whose arbitrability had been tested hitherto were those that were purely born out of IP statutes. However, IP disputes are not merely statutory, but can be contractual as well.⁵⁾ In some cases, an entire contract may be about an IP right. For instance, license agreements, joint research and development agreements, etc. In other cases, the IP rights may form a part of a larger commercial transaction, such as, mergers, acquisitions, distribution agreements. With increase in quantum and complexity in commercial transactions, the arbitrability of purely contractual IP disputes arose very recently in recently in the EROS and Eurokids cases. These cases have rightly not applied SAIL’s holding about the inarbitrability of purely statutory I.P. claims to contractual IP claims.

Thus, as per the current position in India, there is no blanket bar on arbitrability of IP disputes. Instead, arbitrability is determined on the basis of nature of claims raised. Disputes of royalty, geographical area, marketing and other terms of the license agreements, which are purely contractual, would be arbitrable. Parties in India can and should freely arbitrate such disputes. However, a dispute of validity/ownership of an IP right should be decided by the court/assigned public administration, for the dispute would result in a judgement affecting the general public’s right to use the respective asset.

The position of infringement claims is dependent upon each case. Statutory infringement simpliciter would not be arbitrable in accordance with the Mundipharma and SAIL cases; while infringement arising purely out of contract will be arbitrable in accordance with EROS, Euro kids cases. However, often as is the case, if a counter-claim about the validity of IP right is raised against an infringement claim, the counter-claim needs to be resolved by the court for it would then be an action in rem. Pending such resolution, the arbitration may be stayed.

This position on arbitrability will ensure a balance of rights between inventor/author and the general public, with inventor/author retaining the right to arbitrate contractual rights and courts retaining jurisdiction over claims that affect the general public. Such a balance is desirable for effective functioning of the IP regime as well. The possibility of easy dispute resolution would encourage inventors. Retaining the courts’ jurisdiction over matters where the public’s right to use copyrighted works and patented inventions is affected, would also ensure a robust public domain and safeguard public interest.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Siddharth S. Aatreya

Introduction

The Delhi High Court’s recent judgment in Union of India v. Khaitan Holdings (Mauritius) marks the third instance of an Indian court adjudicating upon issues related to arbitration under an international investment treaty. Within these three judgments, courts have fundamentally disagreed on a crucial point – the applicability of the Arbitration and Conciliation Act, 1996 (“Act”) to such arbitrations. While the Calcutta High Court in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures proceeded under the assumption that the Act applies to such arbitrations, the Delhi High Court in Khaitan Holdings and Union of India v. Vodafone Group plc assumed the opposite, holding that the Act only applies to commercial arbitrations.

An oft-ignored (and perhaps unintended) consequence of this disagreement is grave uncertainty on the enforceability of investment arbitral awards in India. Crucially, India is not a party to the ICSID Convention and is consequently under no obligation to recognise any investment arbitral awards like final judgments of its own courts, as provided for by Art. 54. It has also availed of the commercial reservation provided for in Art. I(3) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Accordingly, Sec. 44 of the Act restricts the New York Convention’s applicability in India to foreign awards arising out of legal relationships “considered as commercial under Indian law”. As this post will show, interpretations of this term by Indian courts are likely to exclude investment arbitral awards from its scope.

Contradictory Assumptions on the Applicability of the Act to Investment Arbitrations

Loius Dreyfus, decided by the Calcutta High Court in 2014 was the first Indian case to deal with investment arbitration. It concerned a request for an anti-arbitration injunction by the Kolkata Port Trust, preventing Louis Dreyfus from continuing proceedings against it before an investment arbitral tribunal constituted under the India-France BIT. The court granted the injunction, observing that the Kolkata Port Trust had been wrongly identified as a Respondent in the arbitration since only the Republic of India was a party to the arbitration agreement in the BIT.

Interestingly, the application for this anti-arbitration injunction was made under Sec. 45 of the Act. When justifying its power to issue an anti-arbitration injunction, in this case, the court simply assumed that the Act applied to this investment arbitration, just like it does to foreign-seated commercial arbitrations. It, therefore, discussed the position on anti-arbitration injunctions under Sec. 45 (as applied to commercial arbitrations) and held that it would interfere in foreign-seated investment arbitrations in rare circumstances only, applying the same standard it applies when considering interference in commercial arbitrations under this section.

Following this, the Delhi High Court decided on another request for an anti-arbitration injunction in Vodafone. Here, the Union of India requested that Vodafone Group plc be barred from proceeding with an arbitration under the India-UK BIT since another arbitration under the India-Netherlands BIT had already been initiated by its Dutch holding company, based on the same cause of action. In denying the request, the court made the opposite assumption, observing that the investment arbitration in question was “not a commercial arbitration governed by the Arbitration and Conciliation Act, 1996”. It, therefore, created its own standard, holding that an Indian court could intervene in an investment arbitration and grant an anti-arbitration injunction only if the arbitration is “oppressive, vexatious, inequitable or constitutes an abuse of the legal process”. In Khaitan Holdings, the Delhi High Court adopted this standard and made the same assumption again, cementing a fundamental disagreement between the two High Courts on the Act’s applicability to investment arbitrations.

Comparison with the UK and Implications for India

As a previous post on this blog observed, the Calcutta High Court’s position would have significant benefits when an investment arbitral award is brought for enforcement to India, since the enforcement mechanism in Part II of the Act would be applicable to it. This is in line with standard practice in the United Kingdom. In Occidental Exploration and Production Company v Republic of Ecuador, [2005] EWCA Civ 1116, a challenge to an investment arbitral award was made under Sections 67 and 68 of the English Arbitration Act, 1996, which otherwise applies to commercial arbitrations. The court affirmed that English courts have jurisdiction to consider challenges to investment arbitral awards under these provisions, even if they arise out of treaties to which the UK is not a party. Indeed, in GPF GP S.à.r.l. v Republic of Poland, the England and Wales High Court affirmed this position in setting aside a London-seated investment arbitral tribunal’s Award on Jurisdiction.

By contrast, the Delhi High Court’s position leaves no option open to parties seeking enforcement of an investment arbitral award in India. Indeed, even if the Delhi High Court’s holding in Vodafone on the principles of India’s Civil Procedure Code applying to investment arbitrations is applied, it will not help parties at the enforcement stage since only decrees of foreign courts (and not tribunals) can be enforced under that legislation.

The Impact of India’s Commercial Reservation to the New York Convention

In China, the New York Convention’s application to relationships between ‘foreign investors and the host government’ has been explicitly precluded through its adoption of the commercial relationship reservation under Art. I(3) of the Convention.¹⁾ Notice of the Supreme People’s Court Regarding the Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Acceded to by China [1987] Fa Jing Fa No. 5 (10 April 1987) While not provided explicitly, the interpretation of the reservation in Sec. 44 points to a high likelihood of a similar position being adopted in India.

In RM Investment & Trading Co. v. Boeing Company, India’s Supreme Court observed that the New York Convention intends to facilitate the speedy settlement of disputes arising out of international trade through arbitration and that consequently, “the expression commercial should be construed broadly, having regard for the manifold activities that are an integral part of international trade today”. It, therefore, held that a contract for consultancy services fell within the reservation’s scope and an award rendered in that regard could be enforced in India under the Convention.

While seemingly broad in its scope, this interpretation of the reservation has still been limited to relationships between individuals. Thus, in Union of India v. Lief Hoegh Co., the Gujarat High Court held that ‘commercial relationships’ in this context would include “all business and trade transactions in any of their forms, including the transportation, purchase, sale and exchange of commodities between the citizens of different countries”.

However, investment arbitral awards arise out of a relationship between the investor and the state created and governed by treaties under Public International Law, and not a relationship between private citizens. Furthermore, claims in investment arbitrations look to redress a state’s breach of its treaty obligations and not terms of a commercial relationship. Thus, while the Delhi High Court provided no concrete basis for the exclusion of the entire Act from the scope of investment arbitrations, a brief survey of Indian precedent on the issue suggests that this position is likely to prevail. While it would result in a “pro-investment arbitration” outcome that would serve investor interests best, there is, unfortunately, no clear basis on which the Calcutta High Court’s assumption on the Act’s applicability to investment arbitrations can be extended to the applicability of the New York Convention at the enforcement stage.

Conclusion – Solutions to the Present State of Affairs

While the application of the Convention to investment arbitrations has been explicitly precluded in China, there is still no clarity on the exact position in this regard in India. Arguments like the one made presently are merely speculative. The unpredictability of Indian courts’ response to this issue is only compounded by the lack of analysis in the Calcutta and Delhi High Court decisions that hold that Act to be either applicable or inapplicable to investment arbitrations, making it impossible for one to suggest that subsequent courts may prefer one High Court’s approach over the other based on the strength of their reasoning. Given that some foreign investors have already been successful in obtaining investment arbitral awards against India and many others have very large claims against India pending before investment arbitral tribunals, the likelihood of Indian courts having to grapple with the enforceability of these awards in India soon is high. Since courts seem very likely to deny enforceability of these awards, these investors can seek easy enforceability only if the Indian Parliament amends Sec. 44 of the Arbitration and Conciliation Act and explicitly includes investment arbitral awards within the scope of India’s commercial relationship reservation to the New York Convention. Unfortunately, all one can say with any degree of certainty is that parties seeking enforcement of an investment arbitral award in India will face a long, complex battle before Indian courts, which they are ultimately likely to lose.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Anna Howard

“Conversation – respectful, engaged, reciprocal, calling forth some of our greatest powers of empathy and understanding – is the moral form of a world governed by the dignity of difference.” Lord Rabbi Jonathan Sacks, The Dignity of Difference, quoted by Ian Macduff in “Signs of hope”

Following on from yesterday’s post, this second post offers a brief summary of, and a link to, each of the posts on the Kluwer Mediation Blog in March. Topics addressed include the Singapore Mediation Convention (including posts on the implementation of the convention in each of China and the EU), recent decisions of the Supreme Court of India regarding mediation, and the current consultation in Romania on the development of public policies on mediation. We hope you find these useful.

In “Singapore Convention Series – Harmonization of China’s legal system with the Convention: suggestions for the implementation of the convention in China”, in the first of a two-part series, Wei Sun explains how China’s current legal system needs to be adapted to the Singapore Mediation Convention in order to ensure the successful enforcement of settlement agreements covered by the convention in China. Wei Sun identifies potential problems in implementing the convention in China and suggests how such issues might be addressed.

In “The value of mediation in times of crisis”, in light of the recent tragic collapse of a dam in the Brazilian town of Brumadinho, Andrea Maia explains how mediation may be an effective tool for dealing with the needs of victims in times of crisis. In particular, Andrea describes a project, Programa de Indenização Mediada (Mediate Indemnification Programme), established following an earlier dam collapse in Brazil and under which a foundation was created to act as a third party and mediate between victims and the dam company.

In “I Ching and mediation (no, not meditation)”, Rick Weiler describes how he has often, before the arrival of the participants to the mediation, performed the ancient divination ritual of casting the I Ching (and which can nowadays be performed virtually on the internet).  Rick explains how at the core of the I Ching is a set of 64 hexagrams – six stacked lines, broken or unbroken – said to represent every possible situation. The hexagram, once complete, links to a message from the text of the I Ching. Rick shares with the reader some of these wise messages and acknowledges how performing this ritual has been beneficial to him in his practice of mediation.

In “Open source public consultation tool to support the development of public policies in the field of mediation”, Constantin-Adi Gavrila and Marin Padeanu explain the current public consultation regarding alternatives to the current public policies in the field of mediation in Romania. The purpose of the consultation is twofold: to gather useful information for the design of public policies in the field of mediation and to also increase the transparency of the decision-making process regarding such policies. The consultation is open until October 2019.

In “Singapore Convention Series – harmonization of China’s legal system with the Convention: suggestions for the implementation of the Convention in China (Part 2)”, in the second of a two-part series and building on the first of his series of posts, Wei Sun identifies further potential problems in implementing the Singapore Convention in China and suggests how such issues might be addressed.

In “Singapore case note: interpretation of MSAs and inadmissibility of evidence from mediation”, Nadja Alexander and Shou Yu Chong examine a recent 2019 decision of the Singapore High Court, Jumaiah bte Amir and Another v Salim bin Abdul Rashid. Nadja and Shou Yu explain how this case is directly relevant to the drafting of mediated settlement agreements and how it is indicative of the Singapore courts’ approach to mediation confidentiality. Nadja and Shou Yu also identify four lessons learned for those engaging in mediation under Singaporean law.

In “Singapore Convention Series: A plea for the adoption of the Singapore Mediation Convention by the EU”, Haris Meidanis provides a detailed review of the EU legislative framework on mediation and the cross-border enforcement of mediated settlement agreements. Haris also identifies the changes which the Singapore Mediation Convention would bring to the current system for the enforcement of mediated settlement agreements in the EU and argues that the EU should adopt the Singapore Mediation Convention.

In “Welcome to the future: showcasing the next generation of mediators stepping up and stepping out”, Rosemary Howell explains how, following the Intergenerational Roundtable discussions at the ICC Mediation Competition, she has continued to think about what she could do to support the next generation of mediators. In this post, as part of her continued efforts to support the next generation, Rosemary interviews three new entrants to mediation to reveal their stories and to share some lessons which other young mediators might find helpful.

In “On the benefits of mediation training, and in getting things wrong. An interview with Eva Chye”, Greg Bond explains his skepticism about one-week forty-hour mediation courses leading to accreditation. He then shares an interview with Eva Chye, who some years ago took part, together with Greg, in a one-week mediation training programme. Eva does not work as a mediator, but she uses mediation skills in her work. In their interview, Eva shares with Greg the sustainable effects which that mediation training has had, including the significance of active listening, self-reflection, and respect.

In “Signs of hope” drawing on the aftermath of the ghastly recent attacks in Christchurch, New Zealand, Ian Macduff identifies a few mediation-linked observations and reflects on what might be the next steps for his country. In particular, Ian notes that in responding to conflict and threat, it’s clear that leadership and tone matter. Ian also notes that much work is still to be done – to have those hard and challenging conversations about who ”we” are, beyond the declarations that this is “not us”.

In “What does good mediation look like? A consumer’s eye-view”, Charlie Irvine asks what does good mediation look like and, expanding on this slightly, what do expert mediators do and say, and how do they work their magic? To address these questions, Charlie draws on insights he has gained from mediation users during his PhD study of mediation parties. Charlie identifies the following “four faces” of good mediation: trust, setting, word choice and preparation, and considers each of these in detail in his post.

In “A renewed interest in mediation in India”, Mridul Godha addresses two recent key developments from decisions of the Supreme Court of India which have engaged the Indian community in discussions regarding a greater use of mediation in the country. The developments addressed by Mridul are the Supreme Court’s proposal for an Indian Mediation Act and the referral to mediation by the Supreme Court of the highly sensitive Ayodhya dispute which has brought the mediation process to the attention of Indian citizens.

As the Kluwer Mediation Blog welcomes more and more readers from across the globe, the editorial team would like to take this opportunity to thank all of our writers who, as the summaries in these two posts demonstrate, offer a wonderfully diverse and engaging selection of posts.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Tarun Krishnakumar

For a country with a significant corpus of the world’s personal data, India’s data protection framework is notoriously deficient. Improperly scoped, imprecisely drafted, and with no real enforcement culture, the extant framework¹⁾as contained within the Information Technology Act, 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011. often tends to create more problems than it solves.

With a view towards overhauling this framework, the Government of India, in July 2017, constituted a Committee of Experts (‘CoE’) under the Chairmanship of Justice (Retd.) BN Srikrishna to recommend a new data protection framework for India. After a year of deliberations, the CoE released the Personal Data Protection Bill (‘Draft Bill’), along with a detailed report, in July 2018. After further consultations, the Draft Bill was to be introduced in Parliament for enactment. However, ongoing General Elections have put these plans on hold.

Partially modeled along the lines of the GDPR, the Draft Bill proposes an omnibus framework which includes detailed obligations relating to the manner of processing personal data²⁾‘Personal data’ is defined at Clause 3(29) of the Draft Bill., grounds on which such data may be processed³⁾ ‘Processing’ is defined at Clause 3(32) of the Draft Bill., data principal⁴⁾ ‘Data principal’ is defined at Clause 3(14) of the Draft Bill. rights, accountability measures, and the constitution of a Data Protection Authority. While this progress is welcome, there are concerns that several provisions of the Draft Bill are unclear, excessively burdensome, or impractical in their current form.

Alongside other gaps, there is no clarity on the applicability of the proposed framework to alternative dispute resolution mechanisms such as arbitration. While data protection frameworks typically exempt judicial proceedings from compliance, it is critical to examine if these exemptions equally apply to arbitration. This is as a significant amount of personal data is likely to be processed in the course of a typical commercial dispute. If arbitration is not exempt, compliance concerns arise not only for parties processing personal data (as part of pleadings, evidence, or arguments) but also for the tribunal in collecting and storing it. Despite the significant overhead that data protection compliance could bring to arbitration, no discussions have begun on this interplay.

Arbitration in context of the Draft Bill

A key issue in the Indian context is whether the proposed framework applies to arbitral proceedings at all. The Draft Bill, in Chapter IX, contains a suite of processing activities which are exempted from compliance with all or parts of the proposed framework. In this regard, the question is whether the exemption granted to ‘Processing for the purpose of legal proceedings’ would extend to cover arbitration-related processing. The relevant provision (Clause 44(1)) provides that:

“Where disclosure of personal data is necessary for enforcing any legal right or claim, seeking any relief, defending any charge, opposing any claim, or obtaining any legal advice from an advocate in any impending legal proceeding such processing shall be exempted from the following provisions of this Act— (a) Chapter II, except section 4;  (b) Chapter III; (c) Chapter IV; (d) Chapter V; (e) Chapter VI; and (f) Chapter VII, except section 31. ”

The import of this provision depends on whether arbitration would be considered as being a proceeding to ‘enforce [a] legal right or claim’, ‘defend any charge’, or ‘oppose any claim’. While arbitration is, no doubt, a mechanism to resolve disputes between parties by adjudicating upon their rights, its core nature is controversial.

Specifically, it is unclear if arbitration may be described as being for the purpose of enforcing a legal right or claim. While courts ultimately enforce arbitral awards, it would be wrong to suggest that all responsibilities for enforcing legal rights lie solely with the judiciary. In many cases, arbitral tribunals are empowered to determine disputes and the legal rights implicated by them.

In contrast, it is relatively easier to conclude that arbitration is a type of proceeding where parties ‘seek any relief’ or ‘oppose any claim’ – terms which are sufficiently broad to include stages of almost any dispute resolution mechanism. While a detailed examination of the nature of arbitration is beyond the scope of this post, it would seem prima facie that arbitration would be covered under Clause 44(1) of the Draft Bill.

What are ‘Legal Proceedings’?

Further the Supreme Court has interpreted ‘legal proceedings’, the term used in the section heading to Clause 44, to include arbitral proceedings. Albeit in a different context, the generality of the Court’s observation provides useful guidance. In General Officer Commanding v. CBI⁵⁾(2012) 6 SCC 228 (at Para 29)., the Court observed that:

The phrase ‘legal proceeding’…is not synonymous with the ‘judicial proceedings’. Every judicial proceeding is a legal proceeding but not vice-versa, for the reason that there may be a ‘legal proceeding’ which may not be judicial at all, e.g. statutory remedies like assessment under Income Tax Act, Sales Tax Act, arbitration proceedings etc. So, the ambit of expression ‘legal proceedings’ is much wider than ‘judicial proceedings’.

Even if this were not conclusive, it may be noted that Clause 44(2) of the Draft Bill exempts processing related to judicial functions. By necessary implication, this indicates that Clause 44(1) was intended to cover non-judicial and quasi-judicial legal proceedings such as arbitration.

Implications of exempting arbitration under the Draft Bill

If arbitration is indeed exempt under Clause 44, most obligations under the proposed framework would not apply to its conduct. This would include the standards for processing in Chapter II, the requirement for legal grounds to process personal data in Chapter III, data principal rights in Chapter VI, and all but one of the transparency/accountability measures in Chapter VII. However, two significant caveats exist:

• The exemption under Clause 44(1) only applies where disclosure of data is necessary for “enforcing any legal right or claim, seeking any relief…”. Therefore, where personal data that is not strictly necessary for such purpose is disclosed in an arbitration, it will likely not be covered by this exemption.
• The following obligations continue to apply regardless of the exemption:
  • Fair and Reasonable Processing: Personal data must be processed in a fair and reasonable manner that respects the privacy of the data principal.
  • Security Safeguards: Data fiduciaries and processors⁶⁾‘Data fiduciary’ and ‘Data processor’ are defined by Clauses 3(13) and 3(15) of the Draft Bill. must implement (and periodically review) security safeguards including: (a) methods such as de-identification and encryption; (b) steps to protect the integrity of personal data; and (c) steps to prevent misuse, unauthorised access to, modification/destruction, disclosure of personal data. These safeguards must be risk-based considering the nature, scope and purpose of processing, and the likelihood and severity of harm that may result from such processing.
  • Data Transfers: Restrictions on cross-border transfers of data (contained in Clauses 40 and 41) would also continue to apply.

Concluding Remarks

Based on the above, it would appear prima facie that arbitration-related data processing would be exempt from most compliance under the Draft Bill. However, several niggling uncertainties remain. For instance, neither the preliminary White Paper nor the final Report of the CoE makes any reference to arbitration in discussions of Clause 44.

In fact, in commenting on Clause 44(1), the Report (p.136) notes that disclosure of personal data “in pursuance of a legal claim” would occur where data is required to be produced “in connection with any legal proceeding”. However, in apparent disconnect, the Draft Bill adopts a different, narrower standard: exempting disclosure where necessary for “enforcing any legal right or claim, seeking any relief, defending any charge, opposing any claim, or obtaining any legal advice”. It is this unexplained narrowing of scope that raises questions concerning Clause 44(1) and its applicability to arbitration.

Further, the Report lists the ‘Arbitration and Conciliation Act, 1996’ as a legislation that would be impacted by the passage of the Draft Bill⁷⁾Annexure C, Point E(1) at Page ‘i’ of the Report of the CoE. However, no elaboration is provided on this point.

Lastly, like much of the Draft Bill, Clause 44(1) itself proves difficult reading. As extracted above, this exemption applies where “disclosure of personal data is necessary”. However, the second part of this provision exempts “such processing”. This inconsistency creates avoidable doubt if only disclosure (and not other types of processing) is covered by this exemption.

Despite these inconsistencies and lack of clarity, on balance, it is likely that arbitral proceedings will be covered under the present framing of Clause 44(1) and, therefore, be exempt from compliance with significant portions of India’s proposed data protection framework. However, whether such a broad exemption is in the interests of privacy, cybersecurity, and transparency remains to be seen. While there is nothing to suggest that significant changes are likely to be made to the current text of the Draft Bill, a Government looking to establish India as a ‘global arbitration hub’ should take this opportunity to clarify and definitively settle this issue from the get-go.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Chahat Chawla

Modern day arbitration agreements usually contain provisions that require parties to take certain steps before the commencement of arbitration. Such clauses, often described as “multi-tiered” clauses, set out a sequence for invoking the arbitration agreement. Typically, pre-arbitration steps include procedures such as time-bound mediations, amicable settlements, cooling-off periods, and other forms of non-binding determinations.

Despite being a recurrent feature in dispute resolution clauses, the legal character of pre-arbitration procedures in India is unclear. An overview of the judgments shows that the courts have addressed this issue on numerous occasions, often rendering conflicting decisions. Broadly, the courts have taken two views. A majority of the courts have given effect to the plain meaning of the arbitration clause (on a case-by-case review) and have held that pre-arbitration procedures are mandatory and go to the jurisdiction of tribunals. Other courts (the minority view) have characterized (as a matter of general principle) pre-arbitration steps as optional and non-mandatory.

The majority view – mandatory and jurisdictional nature of pre-arbitration procedures

Supreme Court

In M.K. Shah Engineers, the Supreme Court of India (SCI) considered whether an award could be set aside if certain “procedural pre-requisites” were not achieved. The arbitration clause in this case required the parties to initially submit their disputes to the “Superintending Engineer”, and thereafter to arbitration in the event a party was dissatisfied with the decision of the Superintending Engineer. The SCI formulated the issue in the following terms: “[t]he principle issue for decision is what is the effect of absence of decision by the Superintending Engineer proceeding the demand for reference and commencement of the arbitration proceedings”. Giving effect to the text of the clause, the SCI held that such conditions were “essential” and necessarily had to be observed. However, eventually it was found that the parties had, by conduct, waived this procedural pre-condition.

A similar view was taken by the SCI in S.K. Jain.¹⁾Also see decision of the SCI in Rajesh Construction.In this case, the tribunal refused to assume jurisdiction on the basis that the appellant had not complied with certain “mandatory requirements”. The petition against the tribunal’s decision was dismissed on the basis that the language of the arbitration clause required prior satisfaction of certain conditions.

Recently, in Oriental Insurance Company and in United India Insurance Co. Ltd., the SCI took the view that arbitration clauses must be construed “strictly”, therefore requiring completion of the “pre-conditions” to arbitration. In these cases, the disputes arose out of certain insurance claims. The arbitration clauses stipulated that disputes could not be referred to arbitration if the insurance company disputed its liability under the applicable policy. The SCI in United India Insurance Co. Ltd., found that the arbitration agreement was “hedged with a conditionality” and the non-fulfilment of the “pre-condition” rendered the dispute “non-arbitrable”. However, even though the existence of an arbitration agreement was not disputed, the SCI found that the arbitration agreement could be “activated” or “kindled” upon the competition of the pre-conditions, and the same was “sine qua non for triggering the arbitration clause”.

The appointing authority in Demerara Distilleries took a different approach. In this case, the language of the clause required parties to engage in mutual discussions, followed by mediation. In the absence of a resolution, the parties had the option of referring their disputes to arbitration. In the circumstances, the SCI found that objections relating to the appointment application being “pre-mature” did not merit “any serious consideration”. It was held that various correspondence between the parties indicated that any mutual discussions or mediation would be an “empty formality”.

It appears that in some situations (like in Demerara Distilleries), the SCI, other than being guided by the parties’ intentions (i.e., by the language of the arbitration clause), may also consider the likelihood of success of pre-arbitration procedures. Interestingly, in disputes involving the Indian state or its entities, the courts may also test the constitutional validly of the prescribed pre-conditions. For instance, the SCI in Icomm Tele Ltd struck down a pre-condition requiring a deposit of 10% of the claimed amount as it found this obligation to be “arbitrary”, making the process “ineffective” and “expensive”.

Bombay High Court

A full bench of the Bombay High Court in S Kumar Construction had to decide whether prior compliance with pre-arbitration procedures was mandatory. After reviewing previous decisions on this issue, the Court answered this question in the negative.  The Bombay High Court found that the cases which held such procedures to be compulsory were decided on the basis of a differently worded arbitration clause, and thus could be distinguished on facts. Importantly, the Bombay High Court did not pronounce that as a general rule all pre-arbitration procedures are optional. Instead, it was held that such procedures could be mandatory and go to the jurisdiction of the tribunal depending on the language of the arbitration clause. Similarly, the Bombay High Court in Atlanta Infrastructure declined to set aside an award on the ground of violations of pre-arbitral steps as it found that the satisfaction of such procedures was not mandatory under the dispute resolution clause.²⁾Similar view was taken by the Bombay High Court in Johnwin Manavalan.

The other view – Delhi High Court

In contrast, the Delhi High Court has adopted a distinct position. In Ravindra Kumar Verma, the Court held that prior requirements before referring a dispute to arbitration are “only directory and not mandatory”. The Ravindra Kumar Verma Court followed earlier decisions of the Delhi High Court in Sikand Construction and Saraswati Construction Company which held that “the procedure/pre-condition has to be only taken as a directory and not a mandatory requirement”.

Following Ravindra Kumar Verma, the Delhi High Court in Baga Brothers, Siemens Limited, and Sarvesh Security Services has reaffirmed that pre-arbitration procedures are not mandatory.

Comment

In view of the above, it is difficult to ascertain with certainty whether pre-arbitration procedures are enforceable. However, a reasonable approach is to proceed on the basis (with the exception of the Delhi High Court decisions) that courts in India are likely to interpret arbitration clauses strictly and give effect to the language of clause. The courts however have not expressly examined this question (of pre-conditions to arbitration) as a matter of “admissibility” or “jurisdiction” or “procedure”.  The distinction between these concepts has been discussed in Professor Jan Paulsson’s article here, and Professor Gary Born’s article here.

The proper forum to determine if pre-arbitration steps have been satisfied and the consequences

It is also noteworthy that the 2015 Amendments have considerably limited the extent of court intervention whilst making arbitrator appointments. Previously, Indian courts exercised wide jurisdiction at the appointment stage and could decide on a host of issues at this juncture which lead to considerable delays. Accordingly, the amended arbitration act introduced a statutory limitation on the scope of a court’s enquiry at the appointment stage to the “examination of the existence of an arbitration agreement”. The legislative intent behind the amendments was to confine the court’s jurisdiction, and to make the arbitral tribunal the appropriate forum for the determination of such controversies. Accordingly, the SCI in Duro Felguera, held that at the appointment stage, the courts can only “see whether an arbitration agreement exists – nothing more, nothing less”. However, despite these legislative reforms, and the decision in Duro Felguera, a larger Bench of the SCI (three-judge bench in United India Insurance Co. Ltd.) went into the question of whether arbitration “pre-conditions” were met at the pre-constitution stage. With respect, this decision may be inconsistent with the recent legislative effort to designate the arbitral tribunal as the proper forum to determine such questions. Further, there is little clarity regarding the standard of judicial review to be applied whilst making these determinations.

Suggested approach

As a middle path, the Indian courts could consider adopting a similar approach taken by the Singapore Court of Appeal in International Research Corp PLC v Lufthansa Systems where the Court took the view that if the pre-conditions are defined with sufficient clarity and specificity, they are mandatory in nature whereas if they are vague and general in nature, they cannot be mandatorily enforced.

Further, the courts could offer clarity on the standard of compliance needed to satisfy the pre-arbitration conditions. Similar to the ruling in International Research Corp PLC, the Indian courts could also require “actual compliance” (or strict compliance) of the pre-conditions as opposed to “substantial compliance”. These determinations could be made on a case-by-case basis and with an underlying objective to uphold the parties’ intentions.

A clear statement of law would also enable parties to achieve a greater understanding on their pre-arbitration obligations and prompt them to make bona fide efforts to comply with the same. This could result in successful settlements in some cases and truly achieve the rationale behind pre-arbitration mechanisms, which is to save time and costs by voluntary settlement.

Finally, legal certainly would be particularly useful in the Indian context where the respondents routinely resist applications for the appointment of arbitrators and raise jurisdictional objections on the basis that certain “pre-conditions” (such as mediation) have not taken place. Clarity on this subject would discourage respondents from advancing unmeritorious objections thereby accelerating arbitrator appointments and the arbitration process as a whole.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Juhi Gupta and Gracious Timothy Dunna

In Part I of the post, we discussed the position of law on the “existence” test under Section 11(6A) of the Act. In Part II, we aim to provide context to the developments relating to the provision and understand the larger picture of the judicial trend. But first, on the basis of the decisions discussed in Part I, we have taken the liberty to restate the law below. We acknowledge that this restatement is not watertight but nevertheless, it may be a useful reference that could be revised as the law develops on this point.

§1: The court, when deciding a petition under Section 11 of the Act for the appointment of an arbitrator(s), shall confine to the examination of the existence of the arbitration agreement

§2: When examining the existence of an arbitration agreement, the court may find:

§2-1: whether the arbitration agreement exists in fact (factum of existence); and

§2-2: whether the arbitration agreement exists in law (legal existence), that is:

§2-2-1: whether an arbitration agreement exists that pertains to the dispute(s) which has arisen between the parties to the contract; or

§2-2-2: whether the arbitration agreement is null and void.

§3: Provided, the scope of enquiry of legal existence shall be narrow and that except in an open-and-shut case or when there is no obvious or apparent doubt, all jurisdictional questions of scope remain in the domain of the arbitral tribunal. Further, provided that the scope of enquiry of legal existence under §2-2-2 shall be prima facie.

§4: When appointing an arbitrator(s), the court shall do so on a prima facie satisfaction that an arbitration agreement exists, leaving the final determination to the arbitral tribunal. Such decision is final and no appeal, including Letters Patent Appeal, shall lie against such decision. Except, if the court determines that no arbitration agreement exists as per §2-1 or §2-2, then the determination of the court shall be final and not barred from appeal.

Here, an interesting observation may be made when comparing the pre-2015 Amendment position with the present position. Pre-2015 Amendment, it was generally considered that through SBP and Boghara, the door was left wide open for the court to decide many preliminary aspects, which ordinarily, should have been left to the tribunal. These included the existence of a valid arbitration agreement, existence of a live claim, and whether parties concluded the underlying contract with satisfaction of their mutual rights and obligations. As for issues of the scope of the arbitration agreement and the merits of any claim, these were to be left exclusively to the tribunal.

In comparison, the shift in the present law is remarkable. Post-2015 Amendment, courts have not only determined the factual existence of an arbitration agreement but also its scope, i.e. whether an arbitration agreement is “relatable” to or “pertains to” the dispute(s), while adopting a narrow standard of enquiry (see NCC Ltd.). In addition, courts determine threshold issues of enforceability (i.e. null and void) of the arbitration agreement (see Garware and United India).

We think that the courts have taken a consistent and valid approach vis-à-vis Sections 5 and 16 of the Act. Some may argue that the legislature’s use of the term “existence” in Section 11(6A) was to be understood as confining the court’s examination to the bare factum of existence of an arbitration agreement, while leaving issues of scope, validity, and time-barred claims to the arbitral tribunal. Such a view, however, possibly neglects various other provisions of the Act. Section 7(1), for instance, defines an arbitration agreement as:

“an agreement by the parties to submit … disputes which may arise between them in respect of a defined legal relationship …”

Thus, finding “existence” should not only mean finding the bare factum of the arbitration agreement but also whether it is an agreement by parties to submit disputes in respect of the contract. This explanation also resonates with Section 16, which empowers the tribunal to “rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement.” There is no inclusion of the term “scope,” presumably because “existence” covers issues of scope too, an indication of which appears in Section 16(3) that refers to jurisdictional pleas that the tribunal is exceeding the scope of its authority.

Moreover, where the court makes an appointment under Section 11, the court would have to do so on a prima facie satisfaction that an arbitration agreement exists, leaving the final determination to the arbitral tribunal and only after a narrow standard of enquiry, would a court determine that no arbitration agreement exists. Thus, whichever way it goes, it remains compatible with Sections 5 and 16.

As far as the examination of whether an arbitration agreement is null and void is concerned, we are ambivalent in our opinion. At one level, it makes sense that if the arbitration agreement is undoubtedly null and void, it would be futile to appoint an arbitrator only to arrive at the same conclusion, at the expense of time and cost. Similarly, in this context, the pending decision from the larger bench referred to in Vidya on the inclusion of subject matter arbitrability in the “existence” enquiry is significant. However, we also recognise that giving the court such power, even if the standard is narrow, could be a double-edged sword, which recalcitrant parties may try and abuse. This is coupled by the fact that “null and void” was never introduced by the 2015 Amendment, and if the legislature so intended, it would have introduced the phrase as it did in Sections 16(1)(b) and 45 of the Act. It would seem that the SC may have gone overboard with the introduction of “null and void” in the enquiry into the existence of an arbitration agreement.

Be that as it may, the present position is far away from what Section 11 of the Act may possibly be amended to in the near future. In fact, it was the Justice B.N. Srikrishna Committee, which was set up in 2017 to review the institutionalisation of arbitration in India, which recommended that “to ensure speedy appointment of arbitrators, section 11 may be amended to provide that the appointment of arbitrator(s) under the section shall only be done by arbitral institution(s)…, without the [courts] being required to determine the existence of an arbitration agreement.” This reflects in the Arbitration & Conciliation (Amendment) Bill, 2018 (“Bill”), which repeals Sections 11(6A) and 11(7) (the Bill has been passed by the Lower House of Parliament and is currently in the Upper House).

If, and when, this Bill is passed, it will eliminate judicial supervision under Section 11 and direct all power to the arbitral tribunal, without any judicial determination of any threshold issue of existence. This is problematic in our opinion. Primarily, it would lead to extinguishing justified cases where no arbitration agreement exists, whether factually or legally, including situations where the arbitration agreement is prima facie null and void or pertains to a non-arbitrable subject matter.

We believe that such gateway issues should remain in the quarters of judicial determinations, in order to ensure that there is some balance between courts and arbitral tribunals, which could be achieved through Section 11(6A). Rather than removing Section 11(6A), a better course of action could be improving its import and application through the introduction of an explanation, perhaps on the lines of the one envisaged by the 246^th Law Commission. The complete absence of Section 11(6A) could have significant consequences, including unnecessary expenditure of time and costs, and forcing a party to go through an arbitration proceeding, or any part of it, even when the party had a genuine case against arbitration that was determinable by a court at the threshold stage all along. Referring parties to arbitration has serious civil consequences procedurally and substantively and thus, court supervision under Section 11 is an essential parameter that must not be removed.

So, is Section 11(6A) suffering from an ‘existential’ crisis? Keeping aside the fact that the provision may not exist at all if the 2018 Bill is passed in its current form, it is evident that the seemingly innocuous term “existence” in the context of judicial appointment of arbitrators has provided much food for thought. Indian courts have been responsible for steering the development of the country’s arbitration law and providing much-needed guidance, especially in the recent past; however, when it comes to the scope of judicial intervention under Section 11, the courts may not have offered as much clarity or consistency with international practice as one desires. While we have been able to reconcile the courts’ decisions after Duro and believe they have a common thread, differing views exist and whether our analysis is an accurate reflection of the judicial intention is anyone’s guess. To conclude, Section 11(6A) has proven to be troublesome and fascinating, and its future, both legislative and judicial, is definitely worth observing.

More from our authors:

Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185