"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, August 21, 2014

Part IV of the Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996"

In the last three posts on the topic (here here and here), we had discussed certain amendments proposed by the Law Commission on Indian Arbitration Law. In this post, we analyse the amendments pertaining to costs in arbitral proceedings.

In fact, we have been proposing change in the law on costs since 2008 (See, for instance, Public Policy and Setting Aside Patently Illegal Arbitral Awards in India (2008), Appeal Against the Order of the Chief Justice Under Section 11 of the Arbitration and Conciliation Act, 1996: An Empirical Analysis(2012)). In the 2012 paper, the lack of the power of the tribunal to award costs in respect of court proceedings in support of arbitration was noted:

"There is no provision in the Act for awarding costs in favour of the party successful in an application under section 11 of the Act. Although the arbitral institution appointing the tribunal would award costs in relation those commercial disputes of designated value, costs expended in proceedings under section 11 in cases that are not commercial disputes of designated value do not come within the purview of section 31(8). Therefore, the arbitral tribunal does not have the power to take such expenditure into consideration while awarding costs."

Therefore, it was suggested that courts should award costs in such proceedings before the Court. The Law Commission's notice was also drawn in a subsequent communication to these aspects. 

The Commission has proposed detailed provisions concerning Costs in the form of Section 6A. Following are the proposals:

1. Deletion of most of Section 31(8) except to state: "Unless otherwise agreed by parties the costs of an arbitration shall be fixed by the arbitral tribunal in accordance with Section 6A of this Act."

2. Inclusion of Section 6A primarily for two purposes: one, to provide expressly for allocation of costs depending upon the parties' relative sucess and failure in the arbitration; two, to make such regime applicable for both arbitration and arbitration related court litigation.

3. Section 6A provides that notwithstanding the CPC, the tribunal or the court in arbitration related court proceedings has the discretion to determine the costs and the party which must bear such costs.The new definition of costs is virtually lifted from the old definition under Section 31(8) except that costs shall also include "fees and expenses... of the courts...". This is a new addition but what does fees and expenses of the court? This may refer to court fee and other expenses but how would "expenses of the court" be determined. I think a new clause should be added to state that "fees and expenses incurred in court proceedings including court fee". The definition as is proposed may require slight modifications.

4. S. 6A(2) is proposed to provide that the unsuccessful party is liable to pay costs unless specified in writing otherwise supported by reasons. S. 6A(3) is proposed to provide an inclusive list of circumstances to be considered while passing an award/ order on costs. S. 6A(4) provides an inclusive list of possible variants of a cost award/ order.

5. S. 6A(5) is very interesting. It provides that a prior agreement that one party has to bear all or some of the costs is void if made prior to the dispute. The possibile justification to this amendment is that by agreement (especially agreements in which one party has an unequal bargaining provision) one party should not be saddled with the costs in the arbitration. There are two sides to this provision. The supporters of the amendment would say that it is necessary to protect a weaker party from being saddled with the arbitration costs. On the other hand, it would also be argued that such an amendment infringes on the contractual freedom of the parties. Naysayers to the amendment may argue that such costs agreement may be reached in consideration for another clause in the contract such as for having agreed to a seat proposed by the other party. There are two sides to this issue having valid arguments.

There is another possible justification for this provision- This clause seeks to do away with such a party's tactic of circumventing the costs follow the event provision and thereby circumventing the objective of the provision- to disincentivize frivilous litigation. If this is the objective, the clause may not seem to achieve its ends because the clause covers an agreement only on the "costs of the arbitration" and not of arbitration related litigation.

We are not entirely comfortable with having such a provision that seeks to interfere with the contractual freedom of the parties. But this is not to say that inclusion of such a provision will not have benefits.

Also, why has this provision been placed between Sections 6 and 7?

More on the other amendments in subsequent posts. 

Monday, August 18, 2014

Part III of the Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996"

In the last two posts (here and here), we had commented on certain aspects of the amendments proposed by the Law Commission in its 246th Report. In the last two posts, we had dealt with about few amendments. We continue to do the same in the remainings posts on the topic. 

Prospective Overruling of BALCO:
We all know that the five judge Bench in Bharat Aluminium Co. v. Kaiser Aluminium Co. deemed it fit to overrule Bhatia International prospectively (details can be read here). While we in this blog have been supporters of such prospective overruling, the generally prevailing opinion seems to be that prospective overruling was bad (see, for instance here).

The Law Commission has discussed this issue in two places in the following manner:

"40. However, the decision in BALCO was expressly given prospective effect and applied to arbitration agreements executed after the date of the judgment."

"41. While the decision in BALCO is a step in the right direction and would drastically reduce judicial intervention in foreign arbitrations, the Commission feels that there are still a few areas that are likely to be problematic... (ii) While the decision in BALCO was made prospective to ensure that hotly negotiated bargains are not overturned overnight, it results in a situation where Courts, despite knowing that the decision in Bhatia 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."

On the basis of the above, the Commission has proposed the below amendment:

(2A) Notwithstanding any judgment/ decree to the contrary, the amendment to this sub-section (2) shall not apply to applications which are pending before any judicial authority on the date of such amendment, and which have arisen in relation to arbitrations where the date of the arbitration agreement is prior to 06.09.2012.”

From the above discussion, it is unclear if the Law Commission had a definitive opinion on that issue. Nevertheless, the Law Commission chose to abrogate the prospective overruling in BALCO of Bhatia International.  What is siginificant is the absence of a comprehensive discussion on the merits and demerits of the prospective overruling. In BALCO, the Supreme Court had stated the following in respect of the issue:

"201. The judgment in Bhatia International (supra) was rendered by this Court on 13th March, 2002. Since then, the aforesaid judgment has been followed by all the High Courts as well as by this Court on numerous occasions. In fact, the judgment in Venture Global Engineering (supra) has been rendered on 10th January, 2008 in terms of the ratio of the decision in Bhatia International (supra). Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter."

Thus, according to the Supreme Court, since Bhatia International and Venture Global were applied by numerous courts since 2002 and 2008 respectively, it was difficult to apply the same retrospectively. Against this, the Law Commission hardly countenances the reasoning of the Supreme Court except to state that it has resulted in a situation where courts apply Bhatia International in agreements concluded before 6 September 2012. What is surprising is that the Law Commission seems to agree with BALCO's reasoning ("While the decision in BALCO was made prospective to ensure that hotly negotiated bargains are not overturned overnight"). Would the mere fact that courts are to apply Bhatia International to agreements concluded prior to the said date be a ground for overruling the prospective overruling of Bhatia International? This blawgger is not convinced of the Law Commission's reasoning. The Supreme Court was correct in prospectively overruling Bhatia International. (For arguments in support thereof, see here and here). There are two sides to the issue. Irrespective of whether the Supreme Court was correct or not in prospectively overruling Bhatia International, the Law Commission could have at least analysed the merits and demerits of each side.

Following are some of the reasons why the Supreme Court was probably right in prospectively overruling Bhatia International:

  • The harm that would be done to the expectations of parties had Supreme Court not overruled Bhatia International prospectively to arbitration agreements entered into from the date of the judgement would have been worse. Criticisms against the same seek to sacrifice practicality at the altar of technicality.
  • Critiques point out that that BALCO puts claimants under arbitration agreements which were concluded prior to Bhatia International in a worse position for having relied on the right law as affirmed by BALCO than those who relied on the wrong position stated in Bhatia International is also not wholly correct for the following reasons: 
    • The contention that the “generally accepted view” in India prior to Bhatia International was that Part I of the 1996 Act was applicable only to domestic arbitrations and not foreign arbitrations is not wholly correct. There are several decisions of High Courts which have decided that Part I would apply even to foreign arbitrations.
    • Further, there are several cases where Bhatia International was applied to the claimants under arbitration agreements entered into prior to the judgement in Bhatia International.  Hence, the criticism that Bhatia International puts pre-Bhatia International parties to arbitration agreements in a worse position is not correct. Claimants under agreements entered into prior to Bhatia International virtually sail in the same boat as those under agreements entered into when Bhatia International held the field.
    • Even assuming the correctness of the contention that BALCO puts the pre-Bhatia International claimants in a worse position even though they relied on the correct position of law, the same would not become a “fit case” for review as was contended  considering the practical difficulties that parties who relied on Bhatia International and drafted their arbitration agreements would face, as was discussed above.
  • The criticism that BALCO should not have made the judgement prospectively applicable to agreements as Bhatia International and subsequent decisions did not affect the validity of arbitration clauses providing for the seat abroad but provided that in such  cases, Indian courts would have jurisdiction and consequently, that BALCO should have applied prospectively to commencement of proceedings and not to agreements ignores the fact that parties would have modelled their arbitration clauses based on the law as it existed during the Bhatia International regime. Applying BALCO even to such agreements would make affect the parties’ settled expectations as to their rights under the arbitration clauses.
While these aspects may not be accepted by the Law Commission, the least it could do is to discuss properly the merits and demerits of both approaches and then come to a conclusion. After all, the Law Commission's proposal is to overturn a judgement of the highest court in India, and that too, of a Bench consisting of five judges. 

More on the amendments in the next post. 

Monday, August 11, 2014

Part II of the Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996":

In the previous post, we analysed with about four amendments to the Arbitration & Conciliation Act, 1996 (1996 Act or Act). We continue to comment on certain other amendments in this post.

Deletion of References to "company" in S 2(1)(f)
In TDM Infrastructure v. UE Development (2008) 14 SCC 271, the Supreme Court had to decide whether arbitration between two Indian companies that were registered in India was domestic arbitration even though the Central Management of one of the parties was located outside India. The Court held that if neither of the bodies corporate were registered abroad, arbitration between them would not be international commercial arbitration. This implied that §§2(1)(f)(ii) and 2(1)(f)(iii) were incongruous in respect of companies registered in India but whose central management and control were outside India. The Court stated that a corporation is a "national of, or habitually resident in, any country other than India" when it is incorporated in any country other than India. According to the Court, a corporation cannot have two nationalities simultaneously; if registered in India, a corporation would be an Indian corporation and arbitration between two Indian corporations would not be international commercial arbitration notwithstanding whether the control or management or whether the seat of arbitration is outside India.

In order to obviate confusion, the Law Commission has deleted references to "company" in Section 2(1)(f)(iii). This amendment is a welcome move.

Definition of Party in S. 2(1)(h)

The Commission seeks to add the phrase "or any person claiming through or under such party" to the definition of "Party" in order to account for the Supreme Court's pro-arbitration decision in the Chloro-Controls case.

Comment: The Chloro Controls case had two elements in it- group of companies claiming through a party to the arbitration agreement and composite transation containing several agreements. While the above amendment looks at the first element, the second element is not dealt with in this amendment. Nothing wrong with this amendment per se.

Amendments Differentiating Seat and Venue:
Section 2(1)(h) has been inserted defining "seat" to mean the juridical seat of arbitration. Further, Section 20 has been amended to replace reference to "place" with "seat". Also, Section 20 is amended to provide that parties could agree on the venue of arbitration as well and that failing such agreement on the seat or venue, the tribunal could decide it as per Section 20.

Comment: Nothing wrong with this amendment except to state that the term "place" in arbitration has a history history. Article 16 of the UNCITRAL Arbitration Rules, 1976 used the term "place" to denote the legal seat of arbitration. While drafting the Model Law on International Commercial Arbitration, 1985, the Working Group wanted to retain the terminology used in the 1976 Rules. Hence, the term "place" was retained. Since the 1996 Act is based on the Model Law, the reference to "place" was retained. Even Article 18 of the UNCITRAL Arbtiration Rules employs the term "place" (see this post for the reason why UNCITRAL chose to retain "Place" in its 2010 Rules). However, it is time we replaced "place" with "seat" as it has only created immense confusion. Courts should however be careful while interpreting contracts negotiated prior to the coming into force of the proposed amendment which employ the term "place".

Amendments Relating to the BALCO decision:
The Commission has proposed two amendments relating to the Supreme Court's BALCO decision (link). The first amendment [Section 2(2)] clarifies that Part I of the Act shall apply only where the "seat" of arbitration is in India. This clarifies the position taken in BALCO.

The second amendment overrules a portion of BALCO in which it was held that the power to approach Indian courts in foreign seated arbitrations were not available. The proposed amendment seeks to introduce a proviso to Section 2(2) in the following manner:

"Provided that, subject to an express agreement to the contrary, the provisions of Sections 9, 27, 37 (1)(a) and 37 (3) shall also apply to international commercial arbitration even if the seat of arbitration is outside India, if an award made, or that which might be made, in such place would be enforceable and recognized under Part II of this Act".

Section 9 pertains to interim measures, Section 27 pertains to court assistance in taking evidence, section 37(1) and (3) pertain to the scope of appeal from an order under Section 9.

Even the UNCITRAL Model Law on ICA does not apply Section 27 to foreign arbitrations. From that perspective, this proposal appears to be a significant improvement. However, one must note the seriousness of the provision. It seeks to compel a person (including an woman) to travel abroad to appear before a tribunal in a foreign land [S. 27(2)(c)(i) r/w S. 27(3)]. Failure to comply with such an order will result in contempt of court [S. 28(5)]. Further, Section 32 of the Code of Civil Procedure empowers the Court to compel attendance of such a person by issuing a warrant, attach and sell his property, impose fine of up to Rs. 5000 or even commit him to civil prison.

Consequently, prior to enacting this amendment, detailed guidelines must be made concerning the compensation and expenses incurred by a person for complying with the order of a court under Section 27, especially in case of foreign arbitrations. Certain witnesses such as children, women, physically challenged may require the assistance of another person to accompany them. In such cases, such rules should also enable these aspects. Further, extending Section 27 to foreign arbitrations may also result in considerable loss of time to a witness. Therefore, to the extent possible, examination of witnesses should be done from within India through videoconferencing. If the same is not possible, examination of such witnesses should be fixed as per the convenience of such witnesses. Apart from expenses, reasonable compensation towards loss of time should also be paid. Expenses should be paid prior to undertaking travel considering the quantum of expenses required to travel abroad. So many other issues such as compensation for death/ injury to such a person during travel abroad under a court order, visa issues, etc. need to be taken into consideration.

Although a court under Section 27 is expected to take all these factors into consideration before issuing an order compelling the attendence of a person  as a witness in foreign arbitration, it is better to make detailed Rules on such aspects. A High Court is empowered under Section 82 to make Rules on these aspects. The existing Rules, however, do not consider these aspects in detail. Further, the Rules contained in the Code of Civil Procedure, 1908 (Order 16) appear to be too strict and does not seem to take into consideration travel abroad. Therefore, it is better to have Model Rules inserted in the Act in the form of a schedule which the High Courts can adopt.

More on the proposed amendments in the coming days.

Thursday, August 7, 2014

Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996": Part I

The Law Commission's 246th Report titled "Amendment to Arbitration and Conciliation Act, 1996" was submitted to the Law Minister on 05.08.2014 proposing several changes to the Arbitration and Conciliation Act 1996 ("1996 Act" or "Act"). The Report was made available to public on 07.08.2014. The road to reforms on the 1996 Act is at least a decade old. In 2001, the Law Commission published the 176th Report proposing several amendments to the 1996 Act. But the Act remained, and remains, unamended. Subsequently, after reports by several bodies (including the BP Saraf Committee and the Departmental Related Standing Committee on Personnel, Public Grievances, Law and Justice). In 2010, the Ministry of Law and Justice came up with a Consultation Paper. Based on the same, conferences/ consultations were held. From the inputs derived from these, the Ministry prepared a Draft Note for the Cabinet. Subsequently, the Ministry requested the Law Commission to study the amendments proposed in the Draft Note for the Cabinet . The Law Commission has now come up with the 246th Report. In this post, we comment on the changes made by the Commisssion. 

Amendments to the Preamble:
The Commission has noted that the para should be added in the Preamble to reiterate the Act's commitment to fairness, speed and economy in dispute resolution:

"And WHEREAS it is further required to improve the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation, in order to provide a fair, expeditious and cost-effective means of dispute resolution;

The Commission was of the view that such an amendment may not "directly affect the substantive rights and liabilities of the parties", the amendment would form "basis for  Arbitral Tribunals and Courts to interpret" the Act in consonance with the aforesaid objectives.   

Comments: Why should domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards be specified separately? Wouldn't it have sufficed to simply state "...to improve the law relating to arbitration as also to define..."? 

We are slightly sceptic of this amendent as there were enough such signals in the Act which were wholly ignored by the judiicary and the Act was construed at their whim and fancy. Nevertheless, the Commission probably felt that since BALCO (2012) and the subsequent changes to the judiciary's approach to arbitration, it is important to provide such signals to ensure that courts consider these objectives while dealing with the Act. It is important to clearly state what the Legislature wants out of arbitration in India. Considering this, the amendment's unambiguous statement of the object of the enactment is in the right direction. 

Amendments to Section 2:
Arbitral Tribunal Includes Emergency Arbitrator:
The Commission seeks to include "emergency arbitrator" to the the definition of arbitral tribunal in S. 2(1)(d). 

Comment: Several institutions such as the International Chamber of Commerce, Singapore International Arbitration Centre, Stockholm Chamber of Commerce provide for an arbitrator appointed prior to the constitution of the arbitral tribunal for the sake of emergency interim relief. The amendment seeks to recognise  emergency arbitrator under the Rules. 

Apart from the above-said amendment, there is nothing else in the amendment on the Emergency arbitrator. Two aspects are worth noting here: 

1) In a jurisdiction which consists predominantly of ad hoc arbitration, shouldn't the Commission have thought of a court appointed emergency arbitrator parallel to court based interim measures? Such an appointment should be based merely on an application by a party and the standards of entering into jurisdiction by such emergency arbitrator should be the same as that of an emergency arbitrator under the institutional Rules. An aspect probably worth examining by the Law Commission.

2) Legal recognition to such measures ordered by the emergency arbitrator should be made express. Further, institutional Rules, such as the ICC Rules, may not be clear on whether such orders by the emergency arbitrator are enforceable and the means of enforcing them. The Commission could have perhaps clarified where and how the emergency arbitrator's order would fit in in the scheme of interim measures ordered by the tribunal, its appealability and enforcement. 

Court for the Purposes of International Commercial Arbitration:
"Court" for the purposes of International Commercial Arbitration would mean the High Court. Thus, the District Court is being divested of the power to deal with International Commercial Arbitrations. 

Comments: The Commercial Division Bill proposed to constitute a Bench of the High Court to deal with all matters pertaining to challenge and execution of arbitral awards. This amendment departs from the previous stand by letting the District Court deal with all matters pertaining to domestic arbitration while emasculating the jurisdiction to deal with International Commercial Arbitration. An appropriate move as past records show that even the Supreme Court has struggled to deal with choice of law doctrine clearly. Hence, this amendment is a good move. In restrospect, the Commercial Division Bill perhaps went far too ahead in further burdening the already burdened High Court in dealing with domestic arbitrations as well. 

In the next few days, we will be commenting on all the amendments proposed by the Law Commission. For now, we leave the readers to ponder over the amendments and the comments provided above. 
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