A glance at the Law Commission Reports on amendments in Arbitration Law

The article has been authored by Ms. K. Yuganthara, a 5th-year law student from Sastra University, Thanjavur, Tamilnadu. She is currently interning with LatestLaws.com.

Abstract:

The objective of the Arbitration and Conciliation Act of 1996 as elucidated in the Act itself is to consolidate and amend the law relating to domestic and international arbitration and the enforcement of an arbitral award.

The first law on Arbitration i.e., the Indian Arbitration Act of 1899 was applicable only to the presidency town of Bombay, Calcutta and Madras. Later, in 1908 a separate Schedule was given to the Arbitration in the Civil Procedure Code. The Act of 1899 and the second Schedule were then repealed by the Arbitration Act of 1940. This Act was severely criticized by the Indian Judiciary because of the complex and time-consuming nature of the proceedings.

After this, the present Act of 1996 was enacted to eradicate all the lacunas of the previous Act. It aimed to focus on both domestic and international arbitration, curtail the delays in the arbitral process, ensure the minimum role of Courts and enforce the arbitral award as a civil decree.

However, with development in the field of Arbitration, there is a need to evolve the law with change in time. Many shortcomings and loopholes in the Act still need to be plugged in.

This Article aims to understand and examine the recommendations provided by the Law Commission of India in 2 major reports that led to some ground-breaking amendments in the Act.

176^th Law Commission of India Report:

There arose a necessity to review the functioning of the Arbitration and Conciliation Act, of 1996 to overcome its shortcomings.

The 1996 Act was based on the UNICITRAL Model laws[1] which intended for all the countries to have common laws for “International Commercial Arbitration”, but the 1996 Act was also made applicable to domestic cases as well. Further, it came to light that several judgments of various High Courts were conflicting in nature.

Due to difficulties being reported in the implementation of the Act, the Law Commission of India in its 176^th Report proposed several recommendations for bringing necessary amendments to the Act.

Summary of Recommendations:

• It was recommended to define the word “Court” under Section 2(1)(e), “domestic arbitration” under Section 2(1)(ea), “international arbitration” under Section 2(1)(eb), “judicial authority” under Section 2(1)(fa).
• Section 2(2) of the Act provided that Part I of the Act applies to arbitration in India. However, the UNICITRAL Model law allows Articles 8, 9, 35 and 36 to apply to arbitration outside India. But this was not considered in the 1996 Act. Thus, the Commission suggested that these Sections should be allowed to be invoked whenever the Arbitration is outside India. Therefore, the Commission proposed adding Section 2(2)(a)(b). Section 2(2)(a), Part I of the Act would be for domestic arbitrations and by Section 2(2)(b), Sections 8, 9, 35 and 36 would be extended to international arbitrations.
• To reduce the congestion of the Principal Courts, it recommended allowing the transfer of matters by the Principal Courts to Courts of coordinated jurisdiction.
• To add an explanation to Section 5 of the Act to exclude all remedies of revision or appeal under the Code of Civil Procedure or appeals under High Court, etc.
• Section 7(4)(b) was proposed to be amended. When a party receiving a communication does not send a reply, his silence would be treated as acceptance of the arbitration clause. This was made with the intent to bring within its ambit, the ‘broker-note’ cases containing arbitration clauses.
• Various Amendments were proposed to be made in Section 8 of the Act. It was suggested to allow the judicial authority to stay action, decide preliminary questions raised by the Respondent before filing a defence statement and determine preliminary issues.

Under the Scot v. Avery clause[2], it was opined that if there exists an arbitration clause, a party has to obtain an arbitration award as a condition precedent for filing an action before the judicial authority. But when the arbitration agreement is null and void, then there exists no need to obtain the award. Therefore, Section 8(6) was proposed to be added by stating the situations where the condition precedent in Scot v. Avery clause need not be complied with.

• Section 9 of the Act was restructured by bringing the wider power of the Court to the front and it also enumerated powers of the Court to the latter part of the Section, implying that the powers of the Court in the latter part are more limited than those in the earlier part. Sub-sections (4) to (6) were proposed to be added. It requires a Court while granting interim orders to direct the party to have an arbitral tribunal appointed under Section 11, failing to which the interim orders will stand vacated.
• For maintaining the impartiality of the Arbitrators appointed by a party, Section 10A was proposed to be introduced. It prohibited the parties from appointing an Arbitrator who is an employee, consultant or any person having a common interest.
• Further, several Amendments were proposed under Section 11 of the Act to make sure that the arbitration proceedings were conducted in a time-bound manner.  
• Section 12 of the Act was proposed to be amended stating that the Arbitrators need to disclose any past or present relationship with any of the parties which can give rise to justifiable doubts as to their independence.
• The Court may decide the quantum of fee payable to the Arbitrator in case the mandate of an Arbitrator is terminated as per Section 14 and a substitute Arbitrator needs to be appointed within 30 days as per Section 15 of the Act.
• Section 17 of the Act was amended by adding additional powers to the list of powers that can be exercised by the arbitral tribunal.
• Section 20 being in Part I of the Act implies that the place of Arbitration should be in India only.
• To expedite arbitration proceedings and to avoid parties or those who represent them agreeing and seeking unnecessary adjournments, the words in Section 23(1) which permitted the parties to lay down the procedure or schedule for filing the pleadings before the arbitral tribunal, were proposed to be deleted.
• Section 24A was proposed to be introduced by which the arbitral tribunal may pass orders striking out pleadings or imposing costs if the interim order passed under Sections 17, 23 or 24 is not being fulfilled. Section 24B was also proposed to be introduced by which the parties or arbitral tribunal may approach the Court for implementation of the interim orders of the aforementioned sections.
• The words “where the place of arbitration is situated in India” in Section 28(1) were proposed to be deleted, as it gave an impression that in a dispute between Indian nationals, foreign law could be applied to the dispute.
• Section 29A was proposed to be introduced to speed up the arbitral proceedings, the time limit was fixed up for passing arbitral awards.
• The application to set aside an arbitral award is given in Section 34 of the Act. For purely domestic arbitration, the parties may file an application to set aside the arbitral award, the additional grounds proposed in Section 34A of the Act :

1. error which is apparent on the face of the arbitral award giving rise to substantial questions of law.

(2) the reasons required while giving an arbitral award were not given.

• Section 37A was proposed to be introduced to enable the Court to dismiss in limini, any application under Section 34(1), or any appeal before the notice is issued to the opposite party.
• Section 42 of the Act was to make the parties refer separately to the Court before which the subsequent applications have to be filed, in case the first of the applications are filed before the judicial authority under Section 8 or before any of the Courts referred to in Section 8 A or before the Supreme Court or the High Court under Section 11 seeking reference to arbitration. Further Section 42A and 42B was proposed to be introduced.
• Section 43(3) makes a clause in the contract to be void if the clause had the effect of extinguishing the right if a particular step is not taken by the party.
• Apart from that, to fast-track, an arbitration proceeding, Sections 43A to 43D and Schedule IV are proposed to be introduced in Part I of the Act. The arbitration would be by a single Arbitrator.

246^th Law Commission of India Report on the neutrality of the Arbitrators:

To increase the confidence and trust of parties in the Alternate Dispute mechanisms, it is imperative that the proceedings are conducted by an Arbitrator who is impartial, independent and unbiased.

Section 12(3) of the sets out the test for neutrality which states that “an arbitrator may be challenged only if circumstances exist that give rise to doubts as to his independence or impartiality.” The conditions to identify the “circumstances” were not laid down in the Act.

The contracts entered by the Government making a serving employee an arbitrator were considered to be valid and enforceable by the Government in a series of Supreme Court decisions[3]. In the case of Denel Proprietary Ltd. v. Govt. of India, Ministry of Defence[4]it was held that an arbitrator will be controlling or dealing authority if he is a direct subordinate to the officer whose decision is the subject matter in dispute.

A minimum level of independence and impartiality is required while appointing an arbitrator regardless of the agreement between the parties. A suggestion was made by Mr. P.K. Malhotra, the ex-officio member of the Law Commission that the State parties should have the exception to appoint employee arbitrators. But the commission opined that no distinction should be made between the State and the non-State parties in this regard. Party autonomy should not be stretched to a point where the very basis of impartiality is negated. Even if a prior agreement is made between the parties to appoint a said person as an Arbitrator, parties must appoint an impartial and independent adjudicator to uphold the principles of natural justice.

Various amendments were proposed to Sections 11, 12 and 14 of the Act by the Commission to address the fundamental issue of neutrality of Arbitrators. It was proposed that the Arbitrators need to make disclosures regarding any relationship or interest of any kind which is likely to give justifiable doubts at the stage of appointment itself. The fourth Schedule was proposed to be incorporated in the Act to draw the lists of IBA Guidelines on the Conflicts of Interest in International Arbitration which would be the “guide” to determine the circumstances which would amount to give rise to justifiable doubts. Thus, under Section 12(5) read with Fifth Schedule, the categories of persons proposed to be appointed as arbitrators to be ineligible for an appointment are laid down.

To put it in a nutshell, disclosure was required to be made by the Arbitrator concerning the broader list of categories set out in the Fourth Schedule, and the ineligibility to be appointed as an Arbitrator follows from a narrow set of situations set out in the Fifth Schedule of the Act.

However, the Commission was in the idea of setting out an exceptional scenario where the genuine party autonomy is respected and the categories of ineligibility outlined in the Fifth Schedule can be waived, for instance in the family Arbitrations. Thus, the proviso to Section 12(5) was proposed to be introduced where the parties may waive the applicability of Section 12(5) by an express agreement in writing.

Conclusion:

The Law Commission of India submitted the 246^th Report in the year of 2014. It was promulgated by the President in the year of 2015 through an ordinance. Ultimately it led to the enactment of the Arbitration and Conciliation (Amendment) Act, of 2015. The Act is largely in consonance with the Law Commission Report and is an impetus to the growth of India’s Arbitration regime.

Having said this, it is also to be noted that Arbitration in India is still in the developing stage and therefore, the road to constantly amend and reform the law to make India a global hub for Arbitration is a long one.

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