Prospective and Retrospective – Into an era of certainty and uncertainty: Amendments to the Arbitration Act

Vikas Mahendra and Pradeep Nayak

A division bench of the Hon’ble Supreme Court in Board of Control for Cricket in India v Kochi Cricket Pvt. Ltd., has held that the amendments to the Arbitration and Conciliation Act 1996 that came into effect on October 23, 2015, are prospective, but will have a significant impact even on court proceedings relating to arbitrations commenced before the coming into force of the amendments.

The policy rationale underlying the decision is welcome and signifies a pro-arbitration stance that has been the pillar of most recent decisions coming from the Supreme Court. However, the reasoning leaves much to be desired.

Background

A number of significant amendments were introduced to the Arbitration and Conciliation Act, 1996 (the “Act”) in 2015. S. 26 of the amendment act, which dealt with the applicability of the amendments was poorly drafted, leading to confusion as to whether the amendments would apply to existing proceedings.

The court was seized of the matter in the face of conflicting decisions from various High Court across the country, particularly on the question of whether in respect of arbitrations commenced prior to the coming into force of the amendments, there would be an automatic stay on enforcement of an award upon filing a setting aside application (which was the position that prevailed pre amendment), or whether a party is required to furnish sufficient security and make a separate application seeking stay upon filing a setting aside application (which is the position under the amended Act).

Decision

A summary of key findings has been lucidly set out in another article published here. In short:

• arbitration proceeding commenced after the coming into force of the amending Act will be governed by the amended Act. Older arbitrations can be governed by the amended Act if the parties so agree;
• court proceedings initiated after the coming into force of the amending Act will be governed by the amended Act, even if they relate to arbitrations that were commenced prior to the amended Act coming into force; and
• an application seeking deposit of the award amount as a condition to the grant of stay on enforcement of the award, can be made under S. 36 of the Act (as amended) even in proceedings under S. 34 of the Act initiated prior to the coming into force of the amended Act.

Analysis

The decision was eagerly awaited because of the complete lack of certainty on a critically important aspect of the legislation. The decision provides some respite by providing this clarity, but it is likely that this will be short-lived. But before that, a few positives:

The underlying policy objectives that persuaded the court are laudable. The court has clearly signaled its commitment to take a pro-arbitration approach even in border-line cases. This becomes particularly evident in the last portions of the judgment where the court, in parting, took notice of the Press Note released by the government setting out proposed amendments to the Arbitration and Conciliation Act.

The proposed amendments seek to introduce a new Section 87 to the Act which would make the amendments of 2015 only applicable to: arbitrations commenced after 23 October 2015; and court proceedings initiated in relation to arbitrations, if the arbitration was itself commenced after 23 October 2015.

The court heavily critiqued the proposed amendments on the ground that the amendments, if approved, would result in the 2015 amendments not applying to a very substantial chunk of arbitrations which can benefit from the progressive regime adopted by the 2015 amendments. The court went so far as directing that its judgment be forwarded to the Law Ministry for a more thorough consideration on these matters.

The decision of the court, particular on S. 36 of the Act, is also praiseworthy as it is likely to increase voluntary compliance by parties who have suffered an adverse arbitral award – even in respect of arbitrations initiated prior to the coming into force of the amendments. This is because, if a party is anyway required to deposit the value of the award in court, then the motivation to delay enforcement of an award by fighting a setting aside application is lost, in all but such cases where the award debtor genuinely believe that there are valid reasons to set aside the award.

Despite these positives, there are some very serious issues that continue to be a matter of concern, particularly as relates to the court’s finding that the amended Act would apply to court proceedings initiated after the coming into force of the amendments, irrespective of the date on which the arbitration itself was commenced.

Firstly, the decision leaves much to be desired in terms of statutory interpretation. The fulcrum of the court’s decision was the distinction it drew between the terms “arbitration proceedings” and “in relation to arbitration proceedings”. The court held that the former of the terms refers to the actual proceedings before a tribunal, while the latter term applies to all aspects of the arbitration, except the arbitration proceeding itself. On the basis of this distinction the court interpreted the rest of the section to conclude that the date of commencement of arbitration proceedings is irrelevant to proceedings “in relation to arbitration proceedings”. Therefore, in-effect, retrospectively applying the amended regime to court proceedings that related to pre-amendment arbitrations.

This interpretation is problematic because it is plainly contrary to the interpretation provided to the exact same phrase by a coordinate bench of the Supreme Court in the case of Thyssen Stahlunion v. Steel Authority of India, (1999) 9 SCC 334 where the court held that the term “in relation to arbitration proceedings” was of wide amplitude and includes within its ambit the arbitration proceedings also. Further, the same expression “in relation to arbitration proceedings” as used in other parts of the Act (such as for instance Section 31A) clearly indicates that the expression has a different meaning to that now provided by the court.

Secondly, the court fails to have taken into consideration the impact its decision is likely to have on other aspects of the Act where applying the amended Act to court proceedings relating to arbitration proceedings commenced prior to the coming into force of the Act, can result in absurd results. For instance, will an award rendered by an arbitrator who is an employee of a company, prior to coming into force of the act (which would, under the then prevailing regime have been perfectly legal and acceptable), be set aside if a challenge is mounted in court after the amendments came into force (when there is a clear bar to such arbitrators serving as arbitrators)? It seems only inevitable that questions like these will force the Supreme Court to reconsider its decision in the near future.

The decision is also likely to create significant confusion if the Government refuses to accept the recommendations of the court and proceeds to make the Act wholly prospective. In such a situation, there may be a whole range of permutations and combinations of laws that would apply, depending on the date of commencement of arbitration; date of commencement of court proceedings; the stage of the proceedings in court; the nature of application filed before court etc. This uncertainty is antithetical to the pro-arbitration approach that the court desperately wanted to adopt while passing this decision.

Vikas Mahendra and Pradeep Nayak are Partners at Keystone Partners.