In Conversation with Law Commission Chairman, Justice AP Shah

The Law Commission of India, led by Chairman Justice Ajit Prakash Shah has come out with the 246th Report on Amendments to Arbitration and Conciliation Act, 1996. The Report has suggested large scale amendments to the Act to overhaul the arbitration system in India..In this interview with Bar & Bench, Justice AP Shah talks about the reforms suggested in the report and the need for these reforms including tackling issue of delays, institutional arbitration, costs, interim orders by arbitral tribunals, automatic stay of enforecement of arbitral awards amongst others..Bar & Bench: Could you please tell us why has the need for reforms arisen and what are the major problems with the present law?.Justice AP Shah: The present Act of 1996, which is founded on the UNCITRAL Model Law is a departure from the old Act of 1940. However, the present system is afflicted with various problems including those of high costs and delays, making it no better than either the earlier Act. Another problem faced is that as soon as an award is passed, it is challenged in Courts, making it inexecutable and such petitions remain pending for years. Therefore, there is an urgent need to reform the present law to deal with such problems frequenting the arbitral process..B&B: Can you enumerate the reforms suggested to tackle the issue of delays in arbitrations?.Justice AP Shah: The Law Commission has made various proposals to address this issue including that of raising the threshold for judicial intervention at various stages of the arbitral process. The Commission has recommended dedicated benches across the country to deal with arbitration related cases expeditiously. To restrict cases being instituted as a dilatory tactic, the Commission has sought comprehensive reforms to both arbitrations as well as related litigation in court by proposing Section 6-A which empowers arbitral tribunals and courts to award actual costs..A further amendment has been proposed to make the decision of the High Court non-appealable where an arbitrator has been appointed. Another proposed amendment requires the court to make an endeavor to dispose of Section 11 proceeding within sixty days from the service of notice..In case of petition/objections against an arbitral award under Section 34 and 48, a recommendation has been made that matters be mandatorily disposed in any event within one year from the date of service of notice..Further, in order to accelerate ongoing international commercial arbitration matters both in India and abroad, and to instill the confidence of foreign investors the Commission has proposed that the court which is competent to entertain proceedings out of arbitration agreement should be the High Court, even where such a High Court does not exercise ordinary original jurisdiction..The Commission has also suggested an amendment to Section 48 to provide for a period of limitation for filing objections against an arbitral award..B&B: It is said that the judgment in SBP and Co. wherein the power of appointment of arbitrators was declared a judicial power and the judgment in Saw Pipes giving wide interpretation to “public policy” have created several roadblocks. Have any suggestions been made on these issues?.Justice AP Shah: The LCI has recommended amendments to sections 8 and 11 of the Act. Regarding the nature of judicial intervention, it is recommended that if the Court is prima facie satisfied about the existence of an arbitration agreement, it shall appoint the arbitrator and/or refer the parties to arbitration and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal. The court would not refer the parties to arbitration only in the event it finds that there does not exist an arbitration agreement or that it is null and void..The LCI has also recommended the addition of section 34 (2A) to deal with purely domestic awards which may also be set aside if the court finds that such award is vitiated by patent illegality on the face of the award. To provide a balance and to avoid excessive intervention, it is clarified in the proposed proviso to the proposed section 34 (2A) that such “an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence.”.As regards the interpretation of “public policy”, the LCI has recommended the restriction of the scope of “public policy” in both sections 34 and 48 in order to bring the definition in line with the definition propounded by the Supreme Court in Renusagar Power Plant Co Ltd v General Electric Co. Therefore, the Commission has recommended that, an award can be set aside on public policy grounds only if it is opposed to the “fundamental policy of Indian law” or it is in conflict with “most basic notions of morality or justice”..B&B: Has the LCI dealt with the problems arising out of the prospective effect of BALCO?.Justice AP Shah: While the decision in BALCO was made prospective to ensure that bargains are not overturned overnight, it results in a situation where courts, despite knowing that the decision in Bhatia International is no longer good law, are forced to apply it whenever they are faced with a case arising from an arbitration agreement executed pre-BALCO..The Commission has therefore recommended that only pending applications will be protected. The Commission has also recommended that unless expressly excluded by agreement by Parties, Sections 9 and 27 will apply to even foreign seated arbitrations..B&B: How has the LCI dealt with the problems faced by an automatic stay of enforcement of the award upon admission of appeal? .Justice AP Shah: Section 36 of the Act makes it clear that an arbitral award becomes enforceable as a decree only after the time for filing a petition under section 34 has expired or after the section 34 petition has been dismissed. Therefore, Admission of a section 34 petition, virtually paralyzes the process for the winning party/award creditor..In order to rectify this, amendments have been suggested to section 36 of the Act, which provide that the award will not become unenforceable merely upon the making of an application under section 34. The Applicant Party will have to apply for a stay and while granting stay, the Court would keep in mind the principles of a money decree..B&B: There are repeated issues faced about the unenforceability of orders under Section 17. What are your views and suggestions on this?.Justice AP Shah: Under Section 17, the arbitral tribunal has the power to order interim measures of protection. However, there is a lack of a statutory mechanism for the enforcement of such interim orders of the arbitral tribunal. Therefore, the LCI has suggested that the arbitral tribunal should have the same powers as a civil court in relation to grant of interim measures. Such Order of the Tribunal shall be deemed to be an order of the court for all purposes..B&B: Has the LCI given its views regarding the powers of the Arbitrator to determine the issue of Fraud?.Justice AP Shah: There exist conflicting decisions of the Supreme Court on the issue of arbitrability of fraud. However, very recently, the Supreme Court in its judgment in Swiss Timing Ltd v Organising Committee, Arb. Pet. No. 34/2013 dated 28.05.2014, clarified the issue and held that the arbitrator can look into the issue of fraud. Therefore, in order to remove any confusion, the Commission has suggested that this issue of determination of fraud be made expressly arbitrable and therefore an amendment has been proposed to section 16..B&B: Neutarlity of Arbitrators is also a recurring concern in some cases. Has the LCI suggested any reforms in this regard?.Justice AP Shah: Neutrality of arbitrators is critical to the arbitral process. Therefore, even reasonableness cannot permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by one party, even if this is what the parties agreed..The LCI has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a “guide” to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, it is proposed that the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary..However, the Parties may remove this remove this condition after the occurrence of a dispute by a specific agreement in writing..B&B: What are the reforms suggested for strengthening institutional arbitration in India?.Justice AP Shah: The spread of institutional arbitration is minimal in India and has unfortunately not really kick-started. The changes suggested by the Commission however, attempt to encourage the culture of institutional arbitration in India..The Commission has recommended that the High Courts and the Supreme Court, under section 11 of the Act will take steps to encourage the parties to refer their disputes to institutionalised arbitration..The LCI seeks to give legislative sanction to rules of institutional arbitration which recognise the concept of an “emergency arbitrator” – and the same has been done by broadening the definition of an “arbitral tribunal”..The Commission also believes it is important for trade bodies and commerce chambers to start new arbitration centres with their own rules. The Government can also help by providing land and funds for establishment of new centres..One of the main complaints against arbitration in India, especially ad hoc arbitration, is the high costs associated with the same – including the arbitrary, unilateral and disproportionate fixation of fees by several arbitrators..In order to provide a workable solution to this problem, the Commission has recommended a model schedule of fees and has empowered the High Court to frame appropriate rules for fixation of fees for arbitrators and for which purpose it may take the said model schedule of fees into account..B&B: Questions are raised about the manner in which the arbitral proceedings are conducted in India. Your views?.Justice AP Shah: Arbitral proceedings in India are becoming a replica of court proceedings. Arbitrators must avoid purely formal sittings, which are meant only for compliances..Counsel for parties must similarly refrain from seeking frivolous adjournments or insisting upon frivolous hearings or leading long and irrelevant evidence..According to the LCI, a conscious use of technology, like tele-conferencing, video-conferencing etc., should also be encouraged and the same can easily replace the need for purely formal sittings and thereby aid in a smoother and more efficient conduct of arbitral proceedings..In this context, the Commission has made proposals to discourage the practice of frequent and baseless adjournments, and to ensure continuous sittings of the arbitral tribunal for the purposes of recording evidence and for arguments..B&B: What are the other significant amendments proposed by the LCI?.Justice AP Shah: The definition of the word “party” in the Act refers to a “party” to mean “a party to an arbitration agreement.” This cannot be read restrictively to imply a mere “signatory” to an arbitration agreement, since there are many situations and contexts where even a “non-signatory” can be said to be a “party” to an arbitration agreement. The LCI has gone into the issue where “non-signatories” could be said to be bound by the arbitration agreement, including in cases of inter-related contracts, group of companies doctrine etc..The LCI has also recommended amendments to section 31 to clarify the scope of powers of the arbitral tribunal to award compound interest, as well as to rationalize the rate at which default interest ought to be awarded and move away from the existing rate of 18% to a rate of 2% above the RBI rate.