International Arbitration in India
International Arbitration with seat in India- In an Institutional Arbitration the agreement stipulates that in case of a dispute or differences arising shall be referred to and finally resolved by arbitration administered by the institution in accordance with their rules, which rules are deemed to be incorporated by reference in the arbitration clause. By this International arbitration allows the parties to avoid local court procedures.
Institutional Arbitration is more successful than Ad-Hoc. Parties may not be able to arrange and conduct everything on their own efficiently and productively as is done by the Institutions. They ensure timely disposal of matters and cost effectiveness. They have the right infrastructure and workforce to execute and actively administer the process.
The Arbitration and Conciliation Act, 1996 (Act) provides the framework for arbitration and conciliation in India. Drafted on the basis of the UNCITRAL Model Law, it is divided into four parts. Each part governs a different aspect of the arbitration and conciliation process:
Part 1 governs commercial arbitration;
Part 2 governs the enforcement of certain foreign awards;
Part 3 governs conciliation; and
Part 4 contains supplementary provisions (regarding the power of the court to make rulings, etc.).
The Act was amended in 2016 and recently in 2019 with an aim to make it more robust by plugging the lacunae that existed in the original legislation.
i Applicability of Part 1
Part 1 of the Act applies to all arbitrations. However, a distinction is drawn in the case of arbitration with its seat in India and international commercial arbitration with its seat located outside India. In the former case, the provisions of Part 1 (barring the derogable ones) are compulsorily applicable. In the latter case, parties to an arbitration may by express or implied agreement agree to exclude all or any of the provisions of Part 1 of the Act, and in such case the laws or rules selected by the parties would prevail.
An arbitration is considered to be an international commercial arbitration when it involves a dispute that is commercial in nature and involves a party who is either a foreign national or a person who habitually resides outside India, a company incorporated outside India, a company, body or association of individuals that is centrally managed and controlled outside India, or a foreign government. All other arbitration, by implication, is considered to be domestic arbitration.
ii Mandatory requirements of a valid arbitration agreement
Parties have the freedom to refer both current and possible future disputes arising out of legal or contractual relationships to arbitration. The substance of certain disputes, however, is recognised to be non-arbitral in nature, and is in the exclusive domain of specific tribunals and courts as a matter of public policy (e.g., landlord–tenant disputes, criminal proceedings, matrimonial matters, insolvency matters and competition disputes).
It is mandatory for an arbitration agreement to be in writing. It may be in the form of a clause in a contract or a separate agreement. An agreement is considered to be in writing when parties have entered into a written document and signed it, have exchanged written correspondence or telecommunications recording the agreement, or have exchanged pleadings in the form of a statement of claim and defence.
iii Jurisdiction and role of the court
One of the primary objectives of the Act was to reduce judicial intervention in arbitration. This was given effect to by the recognition of the principles of the separability doctrine and the doctrine of Kompetenz-Kompetenz. Further, there is a specific bar on judicial authorities interfering in arbitration proceedings unless specifically permitted. The Act also makes it mandatory for a court to refer matters to arbitration on an application by a party to any action before it that is the subject of an arbitration agreement (provided this application is made before the party has made its first submission on the substance of the dispute).
Courts are specifically permitted to intervene or assist in arbitration in the appointment of an arbitrator, interim relief, assistance in the gathering of evidence, hearing challenges to an award, as well as appeals from certain orders.
The court system in India is a complex single integrated hierarchical system based on territorial, pecuniary and special jurisdiction.
The structure of the Indian judicial system is as follows:
the Supreme Court of India is the highest court of appeal;
below the Supreme Court there are 24 high courts, located in different states, some of which have ordinary original jurisdiction, and all exercise appellate jurisdiction over the orders of subordinate courts;
underneath the high courts come the district courts, the highest court in each district; the principal court of civil jurisdiction in the district is that of the district and the sessions judge; and
there are many subordinate courts to the court of the district and sessions judge in a three-tier system – the civil judge (junior) division is the lowest court on the civil side.
A question often arises: which court in India does one approach for judicial intervention or assistance? After the 2016 amendments, the Act now draws a distinction between the jurisdiction of courts in the case of an international commercial arbitration and a domestic commercial arbitration.
In the case of domestic commercial arbitrations, a petition for judicial intervention or assistance must be made to a civil court of original jurisdiction, which would have jurisdiction to decide the questions forming the subject matter of the arbitration if the same had been the subject matter of a suit under the Civil Procedure Code 1908. This court must also not be inferior to a principal civil court.
In the case of international commercial arbitrations, the legislature has brought about a much-needed amendment wherein the jurisdiction of district courts has been curtailed. A petition for judicial intervention in such cases has to be made before either the state high court that has original jurisdiction if the subject matter of the award had been the subject matter of an ordinary civil suit or, in states where original jurisdiction is before a lower court, the petition is to be made to the high court that would have had jurisdiction to hear appeals from decrees of courts subordinate to that high court.
For a given cause of action, more than one court may entertain a suit. To prevent multiplicity of proceedings, the Act provides exclusive jurisdiction to the court that exercises jurisdiction first.
iv Appointment and challenge of arbitrators to the arbitral tribunal
Parties are free to determine the number of arbitrators if the number is not even. If parties fail to agree to an odd number, the tribunal will then comprise a sole arbitrator. Parties have the freedom to determine the nationality and qualifications of the arbitrators as well as set a procedure for appointing them.
If a party or the arbitrators fail to nominate an arbitrator or chair of the tribunal, a petition may be made to the chief justice to appoint an arbitrator. For an international commercial arbitration, the Supreme Court must be petitioned. In the case of a domestic arbitration, the petition would lie before the high court within whose local limits the principal civil court is located.
An arbitrator is obliged to disclose in writing any circumstances that are likely to raise justifiable doubts as to his or her independence or impartiality. The 2016 amendments to the Act have introduced an onus on the arbitrator to make a written declaration to this effect: the Act now even prescribes a format for such declaration; and prescribed guidelines about the circumstances that would provide guidance as to whether there are justifiable doubts as to the independence and impartiality of an arbitrator.
A party may challenge the appointment of an arbitrator if there are doubts or circumstances that have not been disclosed and waived by the parties, or if the arbitrator does not possess the qualifications agreed to by the parties. Such challenge must be made in writing to the tribunal within a period of 15 days of either the appointment or the receipt of knowledge of such circumstances. If a challenge to an appointment is unsuccessful, the arbitration must proceed, and the party challenging the appointment has the option to make an application to set aside the final award under Section 34.
v Procedure during the arbitration
Parties are given full autonomy to agree to the rules of procedure, the extent of pleadings to be adopted, the necessity of oral hearings, and the seat and language of the arbitration. Failing such agreement, the tribunal has the authority to determine these issues.
The arbitral tribunal is not bound by either the Civil Procedure Code 1908 or the Indian Evidence Act 1872. However, the Civil Procedure Code 1908 applies to court proceedings that arise in relation to arbitration.
The Indian Limitation Act 1963 applies to arbitrations as it applies to court proceedings. For the purposes of limitation, an arbitration is deemed to commence on the date referred to in Section 21, which specifies that (unless agreed otherwise) arbitration is deemed to have commenced on the date a party sends a request for arbitration.
After the recent 2016 amendments, arbitration in India was limited to a certain time frame of 12 months from the time the arbitral tribunal entered reference. Recognising the practical difficulties that this was causing both litigants as well as counsel, the recent 2019 amendments have relaxed the prescribed time frame, recognising the distinction between domestic and international commercial arbitrations.
The 2019 amendments amended the Act to now prescribe a period of six months (from the date the arbitral tribunal enters reference) for completion of pleadings.
In the case of an international commercial arbitration, the award is required to be made as expeditiously as possible, with an endeavour to dispose of the arbitration within 12 months from the completion of pleadings.
In arbitrations other than international commercial arbitrations, the award is required to be made within 12 months from the completion of pleadings.
This period may be extended with the consent of the parties for a maximum period of six months. Any further extension can only be done by way of an application to the court. The court in such instance may extend the period for sufficient cause. It also has the power to order a reduction of an arbitrator's fees by a sum not exceeding 5 per cent; substituting one or all of the arbitrators, with the arbitration continuing on the basis of the evidence and material already on record; and imposing actual or even exemplary costs on a party.
The Act also now provides for a fast-track procedure that may be entered into with the consent of the parties and that requires the arbitral tribunal to publish its award within a period of six months. The tribunal is required to decide the dispute based on written pleadings, documents and submissions of the parties without an oral hearing.
vi Expert witnesses and court assistance in gathering evidence
The tribunal is empowered to appoint its own expert to report directly to it on specific issues; parties are bound to fully cooperate in respect of relevant information and documents in this regard. Unless agreed otherwise, parties have the right to examine the report of the tribunal's expert and also examine such expert at the oral hearings, as well as presenting their own experts.
The arbitral tribunal has also been empowered under the Act to seek assistance in gathering evidence from witnesses or documents from the court, which must be made in a prescribed form.
vii Interim measures
A party seeking interim measures may approach the arbitral tribunal seeking such measures of protection (unless agreed otherwise by the parties). The tribunal is empowered under the Act to require a party to provide security as appropriate in aid of such measure.
Alternatively, a party may seek interim measures from the court. An application to the court may be made before the commencement of an arbitration. These measures may only be for the reasons and in the instances set out in Section 9 of the Act. Where a court passes protective measures as sought, the arbitral proceedings are required to be commenced within a period of 90 days.
Furthermore, and after the 2015 amendment, once an arbitral tribunal is constituted, the courts are required not to entertain any application for interim measures unless there are exceptional circumstances that may not render the remedy provided efficacious.
Prior to the 2019 amendments, a tribunal was empowered to provide interim relief even after an award had been rendered. This power has now been curtailed, and a party must approach the court for interim relief once an award has been finally passed.
viii Appealable orders
An appeal would lie from orders of the court that grant or refuse to grant relief for interim measures and that refuse to set aside an arbitral award.
Similarly, an appeal will lie from orders of the arbitral tribunal that grant or refuse to grant interim measures, and from findings in favour of parties who have challenged the tribunal's jurisdiction or authority.
ix Challenge and enforceability
An award must be a reasoned award unless agreed otherwise by parties. Any party aggrieved by the award may challenge it under Section 34 of the Act within a period of 90 days from receipt of it. Prior to the 2019 amendments, courts in India could set aside an award 'if satisfactory proof' is furnished by the party challenging the award that:
it was somehow incapacitated;
the arbitration agreement was invalid under the law the parties had subjected it to or the applicable law, as the case may be;
it was not given proper notice of the arbitration and appointment of the arbitrator, or was unable to present its case;
the award deals with disputes beyond the reference to arbitration provided that, if feasible, the court can separate and set aside only those issues where jurisdiction was exceeded;
the composition of the tribunal or the procedure was not as agreed between the parties;
the court finds that the substance of the disputes was not capable of being settled by arbitration; or
the award is against the public policy of India.
Following the 2019 amendments, a party challenging the award must establish these grounds of challenge only 'on the basis of the record before the arbitral tribunal', and is not able to introduce fresh evidence to support its challenge.
The judgment of the Supreme Court of India in ONGC v. Saw Pipes Ltd had attracted a great deal of criticism from the international arbitration community. The Supreme Court examined the scope and ambit of the jurisdiction of the court under Section 34 of the Act. The Court first held that an award is patently illegal if it is contrary to the substantive laws of India. It then went on to expand the meaning of the phrase public policy of India, citing that the phrase needed to be given a wider meaning, and that the concept of public policy connotes some matter that concerns the public good and the public interest. It further held that an award that is patently in violation of statutory provisions could not be said to be in the public interest. Furthermore, the Court held that an award could be set aside if it were contrary to the fundamental policy of Indian law, the interests of India, or justice or morality, or is patently illegal. This holding of the Supreme Court has been severely criticised as it has opened the floodgates, giving parties a wider scope for challenging arbitral awards.
The 2015 amendment of the Act has narrowed down the wide import of the term public policy, and the manner in which matters were virtually being heard de novo on the merits to examine whether they violated the fundamental policy of Indian law.
By way of introduction, Explanation No. 1 to Section 34 clarifies that an award is said to be in conflict with the public policy of India only if the making of the award was induced or affected by fraud or corruption, or was in violation of Section 75 or 81; it contravened the fundamental policy of Indian law; or it is in conflict with the most basic notions and morality of justice.
The legislature has also clarified by way of the introduction of Explanation No. 2 to Section 34 that the test as to whether there is a contravention of the fundamental policy of Indian law shall not entail a review on the merits of a dispute.
A peculiarity of the Act prior to the recent amendment was that once an award was challenged under Section 34, the award remained unenforceable under Part 1 of the Act pending the outcome of the challenge. The recent amendment to the Act has sought to address this issue. A party seeking to challenge and set aside an award is now bound to obtain a stay on the execution of the award from the court, failing which the award holder may seek execution of the award. This is a welcome change and will enable courts to impose terms on parties requiring them to put up security towards the monies awarded under the award, like when a party appeals from a money decree.
An award passed under Part 1 of the Act may be enforced as a decree of the court as per the Civil Procedure Code 1908.
A 2019 amendment has introduced a statutory obligation by way of a new Section 42a upon arbitrators, arbitral institutions and parties to an arbitration to maintain the confidentiality of all proceedings except where the disclosure of an award is necessary for the purpose of the implementation and enforcement of the award.
xi Part 2 of the Act: recognition of foreign awards
India is a signatory to both the New York Convention 1958 and the Geneva Convention 1927, and Part 2 of the Act is the legislation adopted by India to implement its commitments under the Conventions. India's accession to the New York Convention was dependent on it recognising only those awards that were made in Convention countries, which the central government of India has declared to be a reciprocating territory in the Official Gazette. Thus, an award does not enjoy the benefit of Part 2 of the Act if it is passed in a Convention country that is not a reciprocating country.
Scenarios in which challenges to the enforcement of an award may be entertained under Part 2 correspond to Article V of the New York Convention. Section 48(2), however, provides two additional reasons to refuse enforcement, namely when the subject matter of the dispute is not capable of settlement by arbitration in India, and where the enforcement of the award results in the contravention of India's public policy.
If an award is recognised as per the prescribed procedure in Part 2, it may be enforced as a decree of the court under the Civil Procedure Code 1908.
Prior to the recent amendments, any application for recognition and enforcement of an award would have to be made to the court that had jurisdiction over the territory where the assets of the award holder were located. This meant that in many cases such applications were filed in remote district courts, and sometimes before judges who were not familiar with the New York Convention. This naturally slowed down the recognition and enforcement procedure.
The recent amendments to the Act have brought a welcome change, and any such application now has to be made before either the state high court that has original jurisdiction if the subject matter of the award has been the subject matter of an ordinary civil suit or, in states where original jurisdiction is before a lower court, the petition is to be made to the high court that would have had jurisdiction to hear appeals from decrees of courts subordinate to that high court.
xii Institutional arbitration
While the Act recognises institutional arbitration and permits parties to allow an institution to administer the arbitration, historically arbitration in India, and especially in all government contracts, has been of an ad hoc nature. However, there has been a paradigm shift in recent years in the outlook of parties and the legal community, who have slowly started accepting the many added benefits of arbitration being administered by an institution.
This has been reflected in the positive steps being taken by international arbitration institutions, which have been investing in the Indian market in bringing about awareness of the benefits of institutional arbitration. The ICC recently appointed its first regional director for South Asia, and the SIAC has opened two representative offices in India. The LCIA has also been extremely active and popular in India.
The 2019 amendments introduce a very welcome provision by granting powers to the Chief Justice of the Supreme Court of India and the chief justices of the high courts to designate arbitral institutions to appoint arbitrators pursuant to Section 11 (i.e., instances when a party or the arbitrators fail to nominate an arbitrator or chair of the tribunal). This appointment is to be made within a period of 30 days. This is a welcome move as it will greatly reduce the time taken by the courts, which due to their heavy caseload could take anywhere up to a year to make such appointments under Section 11.
The oldest local arbitration institution is the Indian Council of Arbitration (ICA), which was established in 1965. It is the largest arbitral organisation at the national level. The ICA is allied to both the Federation of Indian Chambers of Commerce and Industry and the International Centre for Alternative Dispute Resolution. To provide arbitration services under the rules of foreign arbitral organisations, the ICA has entered into international mutual cooperation agreements with important foreign arbitral institutions in more than 40 countries. Notwithstanding this, during the ICA's existence over the past 45 years, a significant majority of arbitrations have been ad hoc.
In late 2016, the Mumbai Centre for International Arbitration (MCIA) was launched, with the adoption of the MCIA Rules. These Rules provide for international best practices like those adopted by international arbitration institutions, including those for the appointment of arbitrators and an emergency arbitrator, and the submission and review of draft awards. The MCIA has also provided much-needed local physical infrastructure by creating a vital local state-of-the art arbitration facility as a venue to hold arbitrations.
While private Indian parties have been open to arbitration administered by both international arbitration institutions such as the ICC, LCIA, SIAC and the American Arbitration Association as well as local arbitration institutions like the ICA and the MCIA, public sector undertakings and public sector companies continue to be less open to arbitration, still preferring to adopt ad hoc clauses in their standard form contracts.