Arbitration and Conciliation Act: Are the 2018 proposed amendments sufficient?

Bar & Bench June 6 2018
Payal Chawla on Domestic Arbitrations

Payal Chawla

The one area that the judiciary and Government are remarkably aligned on - is ensuring that India becomes the next arbitral destination. The Supreme Court, in particular, seems to be working at this with a sense of urgency.

From a perusal of recent judgments, the intent of the Supreme Court to promote arbitrations is evidently clear. It also distinctly appears that the Supreme Court has one eye on filling the crevices in the Arbitration and Conciliation Act, 1996 (“Act”), taking some interpretative latitude with the Act. Perhaps even giving the subtle message to the Government to amend the Act accordingly.

Section 42 is Redundant:

The Supreme Court in Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd. [(2017) 7 SCC 678] expressly stated that ss.16-21 of the Code of Civil Procedure, 1908 (“CPC”) has no application, and once ‘seat’ is designated and the court of the ‘seat’ alone shall have supervisory jurisdiction over the arbitration.

Recently, in the matter of Sundaram Finance Limited vs. Abdul Samad [(2018) 3 SCC 622] it was held that s.36 no longer has any application to s.42. From a conjoint reading of Indus Mobile and Sundaram Finance, the law now appears to be that supervisory jurisdiction will follow the ‘seat’ and enforcement can be filed anywhere in the country where the Award (being a decree) is capable of being executed, making s. 42 redundant.

I must hasten to add, this, of course, would be subject to the continuance and on the assumption that Indus Mobile would continue to be good law. Legally, it remains unclear how the court arrived at a finding that ss.16-21 of the CPC had no application to arbitrations.

But despite criticism surrounding the legal soundness of the Indus Mobile judgment, the same is widely accepted as a step in the right direction and perceived as a judgment that will have a wide impact on reducing litigation around jurisdictional aspects.

The legislature should also consider specifically stating that ss. 16-21 of the CPC shall have no application to arbitration. This will have the effect of legislatively overruling Swastik Gases Pvt. Ltd. v. Indian Oil Corporation Ltd. [(2013) 9 SCC 32] to this extent, which currently stands in the way of Indus Mobile.

Related Amendments:

The Constitution Bench in BALCO v. Kaiser Bharat Aluminum Company [(2012) 9 SCC 552] also interpreted s.20 of the Act and had stated that s. 20(1) & 20(2) would mean ‘seat’ and S. 20(3) would mean ‘venue’. The aforesaid meaning assigned did not find their way into the amended Act, despite the recommendations of the 246th Law Commission, leaving it to the Court in Indus Mobile to reiterate the position.

 The 246th Law Commission Report had also recommended the insertion of a definition of ’seat of arbitration’, ‘so as to make it clear that seat of arbitration is different from venue of arbitration’. Like many other recommendations, this recommendation too was not incorporated.

Having said this, each of these amendments, are more pertinent to carry out, now, in the wake of the issue of seat and venue, having been referred to a larger bench in the matter of Union of India v. Hardy Exploration and Production (India) Inc.  [2018 SCC OnLine SC 474].

Amend definition of ‘party’ to include non-signatories:

Recently, the Supreme Court in the matter of Ameet Lalchand Shah v. Rishabh Enterprises [2018 SCC OnLine SC 487] referred non-signatories to arbitration using judicial determination, in a domestic arbitration in the context of s.8, holding that all the agreements were an integral part of the main agreement.

The court relied extensively on the observations of the 246th Law Commission Report in the context of amendments qua non-signatories in s.8. It is respectfully submitted that the court omits to consider that no amendment (despite the recommendation of the Law Commission) was made to the definition of ‘party’ in S.2(1)(h), which continues to mean ‘party to an arbitration agreement’. In the absence of such amendment, from a perusal of s.8, only ‘parties’ can be referred to an arbitration and not non-signatories.

That said, I recognise that a reading of s.8, in the manner suggested by me, would render the amendments made to s.8 nugatory. But it must, however, be borne in mind that the 246th Law Commission, suggested amendments to s.8 on the assumption that the consequent changes recommended to s.2(1)(h) would also be made. The intent was to bring s.8 in line with s.45, where the words ‘persons claiming through or under’ was given meaning to include non-signatories in the matter of Chloro Controls India Private Ltd. vs. Severn Trent Water Purification Inc. [(2013) 1 SCC 641].

However here does lie the problem – the expression ‘persons claiming through or under’ was given meaning to include non-signatories by deriving an inextricable linkage of s.45 read with the expression “in respect of a defined legal relationship, whether contractual or not” appearing in s.44, which words are absent in s.8. While the words are present in s.7, the same cannot be linked to s.8 without correspondingly amending s.2(1)(h). Albeit, the Law Commission recognised that the expression “persons claiming through or under”, in the appropriate context, includes ‘successors-of-interest of such parties, alter-ego’s of such parties etc.’, but was acutely aware of the interconnection between s.45 and s.44, and therefore recommended the amendment to s. 2(1)(h).

Lately, in Cheran Properties Limited vs. Kasturi and Sons Limited [2018 SCC OnLine SC 431] the Supreme Court recognizing that the “expression ‘persons claiming under them’ is a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings”, thereby extended the Chloro Controls doctrine to enforcement under s.35 of the Act, since the expression “persons claiming through or under” appears therein.

And yet ironically, the words “persons claiming through or under” are anomalously absent from several important sections including ss. 7, 9, 11 & 34.  Potentially, non-signatories who might have been referred to arbitration may be remediless under the aforestated provisions. In fact, the Law Commission being cognizant that the expression “persons claiming through or under’ was ‘absent in the other relevant provisions’, and to ‘cure this anomaly, the Commission propose(d) an amendment to the definition of “party” under section 2(1)(h) of the Act’.

It is therefore imperative to amend s.2(1)(h) as recommended by the Law Commission.

Amendments recommended by the Supreme Court

The Supreme Court has in a recent judgment also proposed certain amendments to be carried out the Act. In the matter of Indian Farmers Fertilizers Co-operative Limited v. Bhadra Products [(2018) 2 SCC 534] the Court advised the Parliament to consider amending s.34 in a manner whereby interim awards can be consolidated with the final award, so that piecemeal challenges to awards are avoided.

In the matter of Board of Control for Cricket in India Vs. Kochi Cricket Private Limited [2018 SCC OnLine SC 232] the Supreme Court has also advised the Government in regard to the ‘Repeal and savings” provision which was the cause of much litigation since the promulgation of the 2015 amendments.

The language of s.26 of the Arbitration and Conciliation (Amendment) Act, 2015 did not clarify whether the court proceedings that had been filed after the coming into effect of the amended Act (i.e. on 23.10.2015) ‘in relation to’ arbitration that had commenced prior to the amendments taking effect, would continue to be governed by the un-amended Act or by the amended Act, resulting in various litigations around the country.

Putting an end to these disputes, the Supreme Court held that any court proceedings filed after 23.10.2015 i.e. the effective date of the amendments, even in relation to arbitrations commenced prior to the said date, would be governed by the amended Act.

It appears that during the course of the hearing, the proposed 2018 amendments were brought to the attention of the Court. The proposed amendments had incorporated a ‘Repeal and savings’ provision different from the interpretation the Supreme Court had in mind and in the judgement the Supreme Court has advised the Government to reconsider the language of the proposed amendment, and to bring the same in line with the judgment passed by the court in the aforesaid matter.

Sounding a word of caution, the court observed - that the immediate effect of the amendment as proposed by the Government would be ‘to put all important amendments made by the Amendment Act on a back-burner” and would result in the ‘increase in interference of courts in arbitration matters’.

It is hoped that the Government will incorporate the recommendations of the Supreme Court in the amendments.

The problem of ‘patent illegality’ and domestic arbitration

The legislature must consider replacing the expression ‘International commercial arbitration” with ‘institutional arbitration’ in s.34 (2A) and s.2(1)(e)(ii).  it is imperative to consider that this would give the necessary impetus to institutional arbitration and would have some impact on retaining our domestic arbitration which we are currently losing to Singapore.

Additionally, the legislature should also consider incorporating the other amendments recommended by the 246th Law Commission, which were not incorporated into the Act, including s.16(7) with regard to arbitrability or fraud. Last but not the least, legitimising third-party funding also requires consideration, which will help India keep pace with the amendments around the world.

 

Payal Chawla is the founder of JusContractus, a Delhi based full-service law firm, with primary focus on arbitrations. The author recognises the assistance of Ms. Hina Shaheen, an advocate at JusContractus.

For feedback, contact payalchawla@juscontractus.com.

This article is for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. Readers are advised to seek independent legal advice with their peculiar facts and circumstances.